-----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, K5w783sTelmKBs+H2mDQKM9B8y3N3OU81wv3ijrtqJftbu9d6+gIl7AOY5EmS9qW qtOYhRXkTe6efxdQZetIGA== 0000092122-03-000074.txt : 20030310 0000092122-03-000074.hdr.sgml : 20030310 20030310115327 ACCESSION NUMBER: 0000092122-03-000074 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 35 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAVANNAH ELECTRIC & POWER CO CENTRAL INDEX KEY: 0000086940 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580418070 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05072 FILM NUMBER: 03597419 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSISSIPPI POWER CO CENTRAL INDEX KEY: 0000066904 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 640205820 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11229 FILM NUMBER: 03597420 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 2288641211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGIA POWER CO CENTRAL INDEX KEY: 0000041091 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580257110 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06468 FILM NUMBER: 03597422 BUSINESS ADDRESS: STREET 1: 241 RALPH MCGILL BOULEVARD CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045066526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA POWER CO CENTRAL INDEX KEY: 0000003153 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 630004250 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03164 FILM NUMBER: 03597423 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052571000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580690070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03526 FILM NUMBER: 03597416 BUSINESS ADDRESS: STREET 1: 270 PEACHTREE ST CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4045065000 MAIL ADDRESS: STREET 1: 270 PEACHTREE STREET CITY: ATLANTA STATE: GA ZIP: 30303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN POWER CO CENTRAL INDEX KEY: 0001160661 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 582598670 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-98553 FILM NUMBER: 03597417 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST. CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 4045067146 MAIL ADDRESS: STREET 1: 241 RALPH MCGILL BLVD STREET 2: NE BIN 10116 CITY: ATLANTA STATE: GA ZIP: 30308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF POWER CO CENTRAL INDEX KEY: 0000044545 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590276810 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-02429 FILM NUMBER: 03597421 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 BUSINESS PHONE: 8504446111 MAIL ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 10-K 1 form10k2002.txt =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. - ----------- ------------------------------------ ------------------ 1-3526 The Southern Company 58-0690070 (A Delaware Corporation) 270 Peachtree Street, N.W. Atlanta, Georgia 30303 (404) 506-5000 1-3164 Alabama Power Company 63-0004250 (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35291 (205) 257-1000 1-6468 Georgia Power Company 58-0257110 (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111 001-11229 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 333-98553 Southern Power Company 58-2598670 (A Delaware Corporation) 270 Peachtree Street, N.W. Atlanta, Georgia 30303 (404) 506-5000 =============================================================================== Securities registered pursuant to Section 12(b) of the Act:1 Each of the following classes or series of securities registered pursuant to Section 12(b) of the Act is registered on the New York Stock Exchange. Title of each class Registrant - ------------------- ---------- Common Stock, $5 par value The Southern Company Company obligated mandatorily redeemable preferred securities, $25 liquidation amount 7 1/8% Trust Originated Preferred Securities 2 6.875% Cumulative Quarterly Income Preferred Securities 3 7.125% Trust Preferred Securities 4 --------------------------------------------------- Class A preferred, cumulative, $25 stated capital Alabama Power Company 5.20% Series 5.83% Series Senior Notes 7 1/8% Series A 7% Series C 7% Series B 6.75% Series J --------------------------------------------------- Senior Notes Georgia Power Company 6 7/8% Series A 6 5/8% Series D 6.60% Series B Company obligated mandatorily redeemable preferred securities, $25 liquidation amount 6.85% Trust Preferred Securities 5 7 1/8% Trust Preferred Securities 6 --------------------------------------------------- Company obligated mandatorily redeemable Gulf Power Company preferred securities, $25 liquidation amount 7.625% Cumulative Quarterly Income Preferred Securities 7 7.00% Cumulative Quarterly Income Preferred Securities 8 7.375% Trust Preferred Securities 9 --------------------------------------------------- =============================================================================== - ----------------------------- 1 As of December 31, 2002. 2 Issued by Southern Company Capital Trust IV and guaranteed by The Southern Company. 3 Issued by Southern Company Capital Trust V and guaranteed by The Southern Company. 4 Issued by Southern Company Capital Trust VI and guaranteed by The Southern Company. 5 Issued by Georgia Power Capital Trust IV and guaranteed by Georgia Power Company. 6 Issued by Georgia Power Capital Trust V and guaranteed by Georgia Power Company. 7 Issued by Gulf Power Capital Trust I and guaranteed by Gulf Power Company. 8 Issued by Gulf Power Capital Trust II and guaranteed by Gulf Power Company. 9 Issued by Gulf Power Capital Trust III and guaranteed by Gulf Power Company. Depositary preferred shares, Mississippi Power Company each representing one-fourth of a share of preferred stock, cumulative, $100 par value 6.32% Series 6.65% Series Company obligated mandatorily redeemable preferred securities, $25 liquidation amount 7.20% Trust Originated Preferred Securities 10 --------------------------------------------------- Company obligated mandatorily redeemable Savannah Electric and Power Company preferred securities, $25 liquidation amount 6.85% Trust Preferred Securities 11 Securities registered pursuant to Section 12(g) of the Act: 12 Title of each class Registrant - ------------------- ----------- Preferred stock, cumulative, $100 par value Alabama Power Company 4.20% Series 4.60% Series 4.72% Series 4.52% Series 4.64% Series 4.92% Series ---------------------------------------------------------- Preferred stock, cumulative, $100 stated value Georgia Power Company $4.60 Series (1954) ---------------------------------------------------------- Preferred stock, cumulative, $100 par value Gulf Power Company 4.64% Series 5.44% Series 5.16% Series ---------------------------------------------------------- Preferred stock, cumulative, $100 par value Mississippi Power Company 4.40% Series 4.60% Series 4.72% Series 7.00% Series ---------------------------------------------------------- =============================================================================== - -------- 10 Issued by Mississippi Power Capital Trust II and guaranteed by Mississippi Power Company. 11 Issued by Savannah Electric Capital Trust I and guaranteed by Savannah Electric and Power Company. 12 As of December 31, 2002. Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Indicate by checkmark if the registrants are accelerated filers as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes X (except for Southern Power Company) No___ Aggregate market value of voting and non-voting stock held by non-affiliates of The Southern Company at June 28, 2002: $19.4 billion and at February 28, 2003: $20.3 billion. Each of such other registrants is a wholly-owned subsidiary of The Southern Company. A description of registrants' common stock follows:
Description of Shares Outstanding Registrant Common Stock at February 28, 2003 - ---------- -------------- -------------------- The Southern Company Par Value $5 Per Share 718,075,975 Alabama Power Company Par Value $40 Per Share 6,000,000 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635 Southern Power Company Par Value $0.01 Per Share 1,000
Documents incorporated by reference: specified portions of The Southern Company's Proxy Statement relating to the 2003 Annual Meeting of Stockholders are incorporated by reference into PART III. In addition, specified portions of the Information Statements of Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company relating to each of their respective 2003 Annual Meeting of Shareholders are incorporated by reference into PART III. This combined Form 10-K is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company and Southern Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies. ===============================================================================
Table of Contents Page PART I Item 1 Business The SOUTHERN System.................................................................................. I-2 Operating Companies.................................................................................. I-2 Southern Power....................................................................................... I-2 Other Business....................................................................................... I-3 Mirant Corporation................................................................................... I-3 Risk Factors......................................................................................... I-4 Construction Programs................................................................................ I-9 Financing Programs................................................................................... I-11 Fuel Supply.......................................................................................... I-12 Territory Served by the Operating Companies.......................................................... I-13 Competition.......................................................................................... I-17 Regulation........................................................................................... I-18 Rate Matters......................................................................................... I-21 Employee Relations................................................................................... I-22 Item 2 Properties............................................................................................. I-24 Item 3 Legal Proceedings...................................................................................... I-28 Item 4 Submission of Matters to a Vote of Security Holders.................................................... I-32 Executive Officers of Southern Company................................................................. I-33 Executive Officers of Alabama Power.................................................................... I-34 Executive Officers of Georgia Power.................................................................... I-35 Executive Officers of Gulf Power....................................................................... I-36 Executive Officers of Mississippi Power................................................................ I-37 PART II Item 5 Market for Registrants' Common Equity and Related Stockholder Matters.................................. II-1 Item 6 Selected Financial Data................................................................................ II-2 Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition.............................................................................. II-2 Item 7A Quantitative and Qualitative Disclosures about Market Risk............................................. II-3 Item 8 Financial Statements and Supplementary Data............................................................ II-4 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. II-5 PART III Item 10 Directors and Executive Officers of the Registrants................................................... III-1 Item 11 Executive Compensation................................................................................ III-5 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................................................... III-12 Item 13 Certain Relationships and Related Transactions........................................................ III-15 Item 14 Controls and Procedures............................................................................... III-15 PART IV Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................................................... IV-1 Signatures and Certifications......................................................................... IV-2
i DEFINITIONS
When used in Items 1 through 5 and Items 10 through 15, the following terms will have the meanings indicated. Term Meaning AEC........................................... Alabama Electric Cooperative, Inc. AFUDC......................................... Allowance for Funds Used During Construction Alabama Power................................. Alabama Power Company AMEA.......................................... Alabama Municipal Electric Authority Clean Air Act................................. Clean Air Act Amendments of 1990 Dalton........................................ City of Dalton, Georgia DOE........................................... United States Department of Energy EMF........................................... Electromagnetic field Energy Act.................................... Energy Policy Act of 1992 Energy Solutions.............................. Southern Company Energy Solutions, Inc. EPA........................................... United States Environmental Protection Agency FERC.......................................... Federal Energy Regulatory Commission FPC........................................... Florida Power Corporation FP&L.......................................... Florida Power & Light Company Georgia Power................................. Georgia Power Company Gulf Power.................................... Gulf Power Company Holding Company Act........................... Public Utility Holding Company Act of 1935, as amended IBEW.......................................... International Brotherhood of Electrical Workers IPP........................................... Independent power producer IRP........................................... Integrated Resource Plan IRS........................................... Internal Revenue Service ISA........................................... Independent System Administrator JEA........................................... Jacksonville Electric Authority MEAG.......................................... Municipal Electric Authority of Georgia MESH.......................................... Mobile Energy Services Holdings Mirant........................................ Mirant Corporation Mississippi Power............................. Mississippi Power Company Moody's....................................... Moody's Investors Service, Inc. NRC........................................... Nuclear Regulatory Commission OPC........................................... Oglethorpe Power Corporation operating companies........................... Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Savannah Electric and Power Company PPA........................................... Power Purchase Agreement PSC........................................... Public Service Commission RFP........................................... Request for Proposal RTO........................................... Regional Transmission Organization RUS........................................... Rural Utility Service (formerly Rural Electrification Administration) S&P........................................... Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies
ii
DEFINITIONS (continued) Savannah Electric............................. Savannah Electric and Power Company SCS........................................... Southern Company Services, Inc. (the system service company) SEC........................................... Securities and Exchange Commission SEGCO......................................... Southern Electric Generating Company SEPA.......................................... Southeastern Power Administration SERC.......................................... Southeastern Electric Reliability Council SeTrans....................................... A proposed regional transmission organization consisting of eleven public and private companies, including Southern Company, located in eight southeastern states SMEPA......................................... South Mississippi Electric Power Association Southern Company.............................. The Southern Company Southern Company GAS.......................... Southern Company Gas LLC Southern LINC................................. Southern Communications Services, Inc. Southern Management Development............... Southern Management Development, Inc. Southern Nuclear.............................. Southern Nuclear Operating Company, Inc. Southern Power................................ Southern Power Company SOUTHERN system............................... Southern Company, the operating companies, Southern Power, SEGCO, Southern Nuclear, SCS, Southern LINC, Southern Management Development, Southern Company GAS and other subsidiaries Southern Telecom.............................. Southern Telecom, Inc. Super Southeast............................... Southern Company's traditional service territory, Alabama, Florida, Georgia and Mississippi, plus the surrounding States of Kentucky, Louisiana, North Carolina, South Carolina, Tennessee and Virginia TVA........................................... Tennessee Valley Authority
iii CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains forward-looking and historical information. Forward-looking information includes, among other things, statements concerning the strategic goals for Southern Company's wholesale business, estimated construction expenditures and Southern Company's projections for energy sales and its goals for future generating capacity, dividend payout ratio, equity ratio, earnings per share and earnings growth. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. Southern Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations; current and future litigation, including the pending EPA civil actions against certain Southern Company subsidiaries; the effects, extent and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate; the impact of fluctuations in commodity prices, interest rates and customer demand; state and federal rate regulations; political, legal and economic conditions and developments in the United States; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries; the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due; the effects of, and changes in, economic conditions in the areas in which Southern Company's subsidiaries operate, including the current soft economy; the direct or indirect effects on Southern Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the timing and acceptance of Southern Company's new product and service offerings; the ability of Southern Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports filed from time to time with the SEC. iv PART I Item 1. BUSINESS Southern Company was incorporated under the laws of Delaware on November 9, 1945. Southern Company is domesticated under the laws of Georgia and is qualified to do business as a foreign corporation under the laws of Alabama. Southern Company owns all the outstanding common stock of Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric, each of which is an operating public utility company. The operating companies supply electric service in the states of Alabama, Georgia, Florida, Mississippi and Georgia, respectively. More particular information relating to each of the operating companies is as follows: Alabama Power is a corporation organized under the laws of the State of Alabama on November 10, 1927, by the consolidation of a predecessor Alabama Power Company, Gulf Electric Company and Houston Power Company. The predecessor Alabama Power Company had had a continuous existence since its incorporation in 1906. Georgia Power was incorporated under the laws of the State of Georgia on June 26, 1930, and admitted to do business in Alabama on September 15, 1948. Gulf Power is a corporation which was organized under the laws of the State of Maine on November 2, 1925, and admitted to do business in Florida on January 15, 1926, in Mississippi on October 25, 1976, and in Georgia on November 20, 1984. Mississippi Power was incorporated under the laws of the State of Mississippi on July 12, 1972, was admitted to do business in Alabama on November 28, 1972, and effective December 21, 1972, by the merger into it of the predecessor Mississippi Power Company, succeeded to the business and properties of the latter company. The predecessor Mississippi Power Company was incorporated under the laws of the State of Maine on November 24, 1924, and was admitted to do business in Mississippi on December 23, 1924, and in Alabama on December 7, 1962. Savannah Electric is a corporation existing under the laws of the State of Georgia; its charter was granted by the Secretary of State on August 5, 1921. In addition, Southern Company owns all of the common stock of Southern Power which is also an operating public utility company. Southern Power is the primary growth engine for Southern Company's competitive wholesale market-based energy business. Southern Power is a corporation which was organized under the laws of Delaware on January 8, 2001, and admitted to do business in Alabama, Florida and Georgia on January 10, 2001 and in Mississippi on January 30, 2001. Southern Company also owns all the outstanding common stock of Southern LINC, Southern Company GAS, Southern Nuclear, SCS, Southern Management Development, Southern Telecom, Southern Company Holdings and other direct and indirect subsidiaries. Southern LINC provides digital wireless communications services to Southern Company's operating companies and also markets these services to the public within the Southeast. Southern Company GAS, which began operation in August 2002, is a competitive retail natural gas marketer serving communities in Georgia. Southern Nuclear provides services to Alabama Power's and Georgia Power's nuclear plants. SCS is the system service company providing, at cost, specialized services to Southern Company and its subsidiary companies. Southern Management Development focuses on new and existing programs to enhance customer satisfaction, efficiency and stockholder value. Southern Telecom provides wholesale fiber optic solutions to telecommunication providers in the Southeastern United States. Southern Company Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products and an energy services business. Alabama Power and Georgia Power each own 50% of the outstanding common stock of SEGCO. SEGCO owns electric generating units with an aggregate capacity of 1,019,680 kilowatts at Plant Gaston on the Coosa River near Wilsonville, Alabama, and Alabama Power and Georgia Power are each entitled to one-half of SEGCO's capacity and energy. Alabama Power acts as SEGCO's agent in the operation of SEGCO's units and furnishes coal to SEGCO as fuel for its units. SEGCO also owns three 230,000 volt transmission lines extending from Plant I-1 Gaston to the Georgia state line at which point connection is made with the Georgia Power transmission line system. Reference is made to Note 12 to the financial statements of Southern Company in Item 8 herein for additional information regarding Southern Company's segment and related information. The registrants' Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are made available, free of charge, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Southern Company's internet address is http://www.southerncompany.com. The SOUTHERN System Operating Companies The transmission facilities of each of the operating companies are connected to the respective company's own generating plants and other sources of power and are interconnected with the transmission facilities of the other operating companies and SEGCO by means of heavy-duty high voltage lines. (For information on Georgia Power's integrated transmission system, see Item 1 - BUSINESS - "Territory Served by the Operating Companies" herein.) Operating contracts covering arrangements in effect with principal neighboring utility systems provide for capacity exchanges, capacity purchases and sales, transfers of economy energy and other similar transactions. Additionally, the operating companies have entered into voluntary reliability agreements with the subsidiaries of Entergy Corporation, Florida Electric Power Coordinating Group and TVA and with Carolina Power & Light Company, Duke Energy Corporation, South Carolina Electric & Gas Company and Virginia Electric and Power Company, each of which provides for the establishment and periodic review of principles and procedures for planning and operation of generation and transmission facilities, maintenance schedules, load retention programs, emergency operations and other matters affecting the reliability of bulk power supply. The operating companies have joined with other utilities in the Southeast (including those referred to above) to form the SERC to augment further the reliability and adequacy of bulk power supply. Through the SERC, the operating companies are represented on the National Electric Reliability Council. An intra-system interchange agreement provides for coordinating operations of the power producing facilities of the operating companies and Southern Power and the capacities available to such companies from non-affiliated sources and for the pooling of surplus energy available for interchange. Coordinated operation of the entire interconnected system is conducted through a central power supply coordination office maintained by SCS. The available sources of energy are allocated to the operating companies and Southern Power to provide the most economical sources of power consistent with good operation. The resulting benefits and savings are apportioned among the operating companies and Southern Power. SCS has contracted with Southern Company, each operating company, Southern Power, various of the other subsidiaries, Southern Nuclear and SEGCO to furnish, at direct or allocated cost and upon request, the following services: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures; and other services with respect to business and operations and power pool transactions. Southern Management Development, Southern Company GAS, Southern LINC and Southern Telecom have also secured from the operating companies certain services which are furnished at cost. Southern Nuclear has contracts with Alabama Power to operate the Farley Nuclear Plant and with Georgia Power to operate Plants Hatch and Vogtle. See Item 1 - BUSINESS - "Regulation - Atomic Energy Act of 1954" herein. Southern Power Southern Power is an electric wholesale generation subsidiary that is the primary growth engine for Southern Company's competitive wholesale market-based energy business. Southern Power constructs, acquires and owns generating facilities and sells the output under long-term, fixed-price capacity contracts both to unaffiliated wholesale purchasers as well as the operating companies (under PPAs approved by the respective PSCs). Southern Power's wholesale I-2 generating assets are not placed in the operating companies' rate bases, and Southern Power is only able to recover costs based on the terms of its PPAs. Southern Power has attempted to insulate itself from significant fuel supply, fuel transportation and electric transmission risk by making such risks the responsibility of the counterparties to the PPAs. However, Southern Power's overall profit will depend on the parameters of the wholesale market and its efficient operation of its wholesale generating assets. Southern Power is a party to the intra-system interchange agreement and shares in the benefits and burdens of such arrangement. By the end of 2005, Southern Power plans to have approximately 6,600 megawatts of available generating capacity in commercial operation. At December 31, 2002, Southern Power had 2,400 megawatts of generating capacity in commercial operation. Other Business On June 3, 2002, Southern Company formed a wholly-owned subsidiary, Southern Company GAS. Southern Company GAS operates as a retail gas marketer in the State of Georgia. On July 19, 2002, Southern Company GAS completed its acquisition out of bankruptcy from The New Power Company (New Power) of approximately 210,000 retail natural gas customers located in the State of Georgia, representing a 15% market share. Southern Company GAS also purchased from New Power proprietary risk management software and hardware systems, natural gas inventory and accounts receivable. The total purchase price was approximately $60 million. In 2001, Energy Solutions changed its name to Southern Management Development. Southern Management Development then created a separate entity, Southern Company Energy Solutions LLC (SCES LLC), for its energy services business which was contributed to Southern Company Holdings. SCES LLC provides energy related services and products. Southern Management Development focuses on new and existing programs to enhance customer satisfaction, efficiency and stockholder value. Southern Company Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases and alternative fuel products, in addition to SCES LLC. In 1996, Southern LINC began serving Southern Company's operating companies and marketing its services to non-affiliates within the Southeast. Its system covers approximately 127,000 square miles and combines the functions of two-way radio dispatch, cellular phone, short text and numeric messaging and wireless internet access and data transfer. These continuing efforts to invest in and develop new business opportunities offer potential returns exceeding those of rate-regulated operations. However, these activities also involve a higher degree of risk. In 1999, MESH, a subsidiary of Southern Company, filed a petition for Chapter 11 bankruptcy relief in the U.S. Bankruptcy Court. In August 2000, MESH filed a proposed plan of reorganization with the U.S. Bankruptcy Court. The proposed plan of reorganization was most recently amended on December 13, 2001. Southern Company expects that approval of a plan of reorganization would result in termination of Southern Company's ownership interest in MESH but would not affect Southern Company's continuing guarantee obligations. Reference is made to Item 3 - "Legal Proceedings" and Note 3 to the financial statements of Southern Company in Item 8 herein under the heading "Mobile Energy Services' Petition for Bankruptcy" herein for additional information relating to this matter. Mirant Corporation In April 2000, Southern Company announced an initial public offering of up to 19.9 percent of Mirant and its intention to spin off the remaining ownership of Mirant to Southern Company stockholders within 12 months of the initial stock offering. On October 2, 2000, Mirant completed its initial public offering of 66.7 million shares of common stock priced at $22 per share. This represented 19.7 percent of the 338.7 million shares outstanding. On February 19, 2001, Southern Company's board of directors approved the spin off of its remaining ownership of 272 million Mirant shares. On April 2, 2001, the tax-free distribution of Mirant shares was completed at a ratio of approximately 0.4 shares for every share of Southern Company common stock held on the record date. As a result of the spin off, Southern Company's financial statements reflect Mirant's results of operations, balance sheets and cash flows as discontinued operations. I-3 Southern Company is involved in various matters being litigated. Reference is made to Item 3 - "Legal Proceedings" and to Note 3 to the financial statements of Southern Company in Item 8 herein for information regarding material issues that could possibly affect future earnings. Risk Factors In addition to the other information in this Form 10-K, the following factors should be considered in evaluating Southern Company and its subsidiaries. Such factors could affect actual results and cause results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Southern Company and/or its subsidiaries. Some or all of these factors may apply to Southern Company and/or its subsidiaries. Risks Related to the Energy Industry - ------------------------------------ Southern Company is subject to substantial governmental regulation. Compliance with current and future regulatory requirements and procurement of necessary approvals, permits and certificates may result in substantial costs to Southern Company. Southern Company is subject to substantial regulation from federal, state and local regulatory agencies. Southern Company and its subsidiaries are required to comply with numerous laws and regulations and to obtain numerous permits, approvals and certificates from the governmental agencies that regulate various aspects of their businesses, including customer rates, service regulations, retail service territories, sales of securities, asset acquisitions and sales, accounting policies and practices, and the operation of fossil-fuel, hydroelectric and nuclear generating facilities. For example, the rates charged to wholesale customers by the operating companies and by Southern Power must be approved by the FERC. In addition, the respective state PSCs must approve the operating companies' rates for retail customers. Southern Company believes the necessary permits, approvals and certificates have been obtained for its existing operations and that its business is conducted in accordance with applicable laws; however, Southern Company is unable to predict the impact on its operating results from future regulatory activities of these agencies. Southern Company is also subject to regulation by the SEC under the Holding Company Act. The rules and regulations promulgated under the Holding Company Act impose a number of restrictions on the operations of registered utility holding companies and their subsidiaries. These restrictions include a requirement that, subject to a number of exceptions, the SEC approve in advance securities issuances, acquisitions and dispositions of utility assets or of securities of utility companies, and acquisitions of other businesses. The Holding Company Act also generally limits the operations of a registered holding company to a single integrated public utility system, plus additional energy-related businesses. The Holding Company Act requires that transactions between affiliated companies in a registered holding company system be performed at cost, with limited exceptions. The impact of any future revision or changes in interpretations of existing regulations or the adoption of new laws and regulations applicable to Southern Company or any of its subsidiaries cannot now be predicted. Changes in regulation or the imposition of additional regulations could influence Southern Company's operating environment and may result in substantial costs to Southern Company. General Risks Related to Operation of Southern Company's Utility Subsidiaries - ----------------------------------------------------------------------------- The regional power market in which Southern Company and its subsidiaries compete has changing transmission regulatory structures, which could affect the ownership of these assets and related revenues and expenses. The operating companies currently own and operate transmission facilities as part of a vertically integrated utility. Transmission revenues are not separated from generation and distribution revenues in their approved retail rates. Federal governmental authorities are advocating the formation of RTOs and are proposing the adoption of new regulations that would impact electric markets, including the transmission regulatory structure. Under this new transmission regulatory structure, the operating companies would transfer functional control (but not ownership) of their transmission facilities to an independent third party. Because it remains unclear how RTOs will develop or I-4 what new market rules will be established, Southern Company is unable to assess fully the impact that these developments may have on its business. Southern Company's revenues, expenses, assets and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Recent events in the energy markets that are beyond Southern Company's control have increased the level of public and regulatory scrutiny in the energy industry and in the capital markets. The reaction to these events may result in new laws or regulations related to Southern Company's business operations or the accounting treatment of its existing operations which could have a negative impact on Southern Company's net income or access to capital. As a result of the energy crisis in California during the summer of 2001, the filing of bankruptcy by Enron Corporation and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and ratings agencies also have increased their level of scrutiny. This increased scrutiny could lead to substantial changes in laws and regulations affecting Southern Company, including new accounting standards that could change the way Southern Company is required to record revenues, expenses, assets and liabilities. These types of disruptions in the industry and any resulting regulations may have a negative impact on Southern Company's net income or access to capital. Deregulation or restructuring in the electric industry may result in increased competition and unrecovered costs which could negatively impact Southern Company's earnings. Increased competition which may result from restructuring efforts could have a significant adverse financial impact on Southern Company and its operating companies. Increased competition could result in increased pressure to lower the cost of electricity. Any adoption in the territories served by the operating companies of retail competition and the unbundling of regulated energy service could have a significant adverse financial impact on Southern Company and its subsidiaries due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Southern Company cannot predict if or when it will be subject to changes in legislation or regulation, nor can Southern Company predict the impact of these changes. Additionally, the electric utility industry has experienced a substantial increase in competition at the wholesale level, caused by changes in federal law and regulatory policy. As a result of the Public Utility Regulatory Policies Act of 1978 and the Energy Act, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, wholesale power marketers and brokers, and due to the trading of energy futures contracts on various commodities exchanges. In 1996, the FERC issued new rules on transmission service to facilitate competition in the wholesale market on a nationwide basis. The rules give greater flexibility and more choices to wholesale power customers. Also, in July 2002, the FERC issued a notice of proposed rulemaking (which has not yet been adopted) related to open access transmission service and standard electricity market design. As a result of the changing regulatory environment and the relatively low barriers to entry (which include, in addition to open access transmission service, relatively low construction costs for new generating facilities), Southern Company expects competition to steadily increase. This increased competition could affect Southern Company's load forecasts, plans for power supply and wholesale energy sales and related revenues. The effect on Southern Company's net income and financial condition could vary depending on the extent to which: (i) additional generation is built to compete in the wholesale market; (ii) new opportunities are created for Southern Company to expand its wholesale load; or (iii) current wholesale customers elect to purchase from other suppliers after existing contracts expire. I-5 Risks Related to Environmental Regulation - ----------------------------------------- Southern Company's costs of compliance with environmental laws are significant. The costs of compliance with future environmental laws and the incurrence of environmental liabilities could harm Southern Company's cash flow and profitability. Southern Company and its subsidiaries are subject to extensive federal, state and local environmental requirements which, among other things, regulate air emissions, water discharges and the management of hazardous and solid waste in order to adequately protect the environment. Compliance with these legal requirements requires Southern Company to commit significant expenditures for installation of pollution control equipment, environmental monitoring, emissions fees and permits at all of its facilities. These expenditures are significant and Southern Company expects that they will increase in the future. For example, construction expenditures for achieving compliance with Phase I and Phase II of Title IV of the Clean Air Act totaled approximately $400 million. Construction expenditures for compliance with one-hour ozone non-attainment standards in Atlanta and Birmingham are expected to total approximately $980 million when completed in 2003. If Southern Company fails to comply with environmental laws and regulations, even if caused by factors beyond its control, that failure may result in the assessment of civil or criminal penalties and fines against Southern Company. The EPA has filed civil actions against Alabama Power, Georgia Power and Savannah Electric alleging violations of the new source review provisions of the Clean Air Act. The EPA has also issued notices of violation to Gulf Power and Mississippi Power. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could require payment of substantial penalties. Existing environmental laws and regulations may be revised, or new laws and regulations seeking to protect the environment may be adopted or become applicable to Southern Company. Revised or additional laws and regulations could result in additional operating restrictions on Southern Company's facilities or increased compliance costs which may not be fully recoverable from Southern Company's customers and would therefore reduce Southern Company's net income. Risks Related to Southern Company and its Business - -------------------------------------------------- Southern Company may be unable to meet its ongoing and future financial obligations and to pay dividends on its common stock if its subsidiaries are unable to pay upstream dividends or repay funds to Southern Company. Southern Company is a holding company and, as such, Southern Company has no operations of its own. Southern Company's ability to meet its financial obligations and to pay dividends on its common stock at the current rate is primarily dependent on the earnings and cash flows of its subsidiaries and their ability to pay upstream dividends or to repay funds to Southern Company. Prior to funding Southern Company, Southern Company's subsidiaries have financial obligations that must be satisfied, including among others, debt service and preferred stock dividends. Southern Company's financial performance may be adversely affected if its subsidiaries are unable to successfully operate their electric generating facilities. Southern Company's financial performance depends on the successful operation of its subsidiaries' electric generating facilities. Operating electric generating facilities involves many risks, including: o operator error and breakdown or failure of equipment or processes; o operating limitations that may be imposed by environmental or other regulatory requirements; o labor disputes; o fuel supply interruptions; and o catastrophic events such as fires, earthquakes, explosions, floods or other similar occurrences. A decrease or elimination of revenues from power produced by the electric generating facilities or an increase in the cost of operating the facilities would reduce Southern Company's net income and could decrease or eliminate funds available to Southern Company. I-6 Changes in technology may make Southern Company's electric generating facilities less competitive. A key element of Southern Company's business model is that generating power at central power plants achieves economies of scale and produces power at relatively low cost. There are other technologies that produce power, most notably fuel cells, microturbines, windmills and solar cells. It is possible that advances in technology will reduce the cost of alternative methods of producing power to a level that is competitive with that of most central power station electric production. If this were to happen and if these technologies achieved economies of scale, Southern Company's market share could be eroded, and the value of its electric generating facilities could be reduced. Changes in technology could also alter the channels through which retail electric customers buy power, which could reduce Southern Company's revenues or increase expenses. Operation of nuclear facilities involves inherent risks, including environmental, health, regulatory, terrorism and financial risks that could result in fines or the closure of Southern Company's nuclear units, and which may present potential exposures in excess of Southern Company's insurance coverage. As of December 31, 2002, Southern Company owns six nuclear units through Alabama Power (two units) and through Georgia Power, which holds undivided interests in, and contracts for operation of, four units. These six nuclear units are operated by Southern Nuclear and represent approximately 3,680 megawatts, or 10.1% of Southern Company's generation capacity. Southern Company's nuclear facilities are subject to environmental, health and financial risks such as on-site storage of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities and the threat of a possible terrorist attack. Southern Company maintains decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks; however, it is possible that damages could exceed the amount of Southern Company's insurance coverage. The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. Recent NRC orders related to increased security measures and any future safety requirements promulgated by the NRC could require Southern Company to make substantial operating and capital expenditures at its nuclear plants. In addition, although Southern Company has no reason to anticipate a serious nuclear incident at its plants, if an incident did occur, it could result in substantial costs to Southern Company. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit. Southern Company's nuclear units require licenses that need to be renewed or extended in order to continue operating beyond their initial forty-year terms. As a result of potential terrorist threats and increased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that are difficult or impossible to predict. Southern Company's generation and marketing operations are subject to risks, many of which are beyond its control, that may reduce Southern Company's revenues and increase its costs. Southern Company's generation and marketing operations are subject to changes in power prices or fuel costs, which could increase the cost of producing power or decrease the amount Southern Company receives from the sale of power. The market prices for these commodities may fluctuate over relatively short periods of time. Southern Company attempts to mitigate risks associated with fluctuating fuel costs by passing these costs on to customers in its PPAs. Among the factors that could influence power prices and fuel costs are: o prevailing market prices for coal, natural gas, fuel oil and other fuels used in Southern Company's generation facilities, including associated transportation costs, and supplies of such commodities; o demand for energy and the extent of additional supplies of energy available from current or new competitors; o liquidity in the general wholesale electricity market; o weather conditions impacting demand for electricity; I-7 o seasonality; o transmission or transportation constraints or inefficiencies; o availability of competitively priced alternative energy sources; o natural disasters, wars, embargos, acts of terrorism and other catastrophic events; and o federal, state and foreign energy and environmental regulation and legislation. Certain of these factors could increase Southern Company's expenses. For the operating companies, such increases may not be fully recoverable through rates. Other of these factors could reduce Southern Company's revenues. Southern Company may not be able to obtain adequate fuel supplies, which could limit its ability to operate its facilities. Southern Company purchases fuel from a number of suppliers. Disruption in the delivery of fuel, including disruptions as a result of, among other things, weather, labor relations or environmental regulations affecting Southern Company's fuel suppliers, could limit Southern Company's ability to operate its facilities, and thus, reduce its net income. Demand for power could exceed Southern Company's supply capacity, resulting in increased costs to Southern Company for purchasing capacity in the open market or building additional generation capabilities. Southern Company is currently obligated to supply power to regulated retail and wholesale customers. At peak times, the demand for power required to meet this obligation could exceed Southern Company's available generation capacity. Market or competitive forces may require that Southern Company purchase capacity on the open market or build additional generation capabilities. Because regulators may not permit the operating companies to pass all of these purchase or construction costs on to their customers, the operating companies may not recover any of these costs or may have exposure to regulatory lag associated with the time between the incurrence of costs of purchased or constructed capacity and the operating companies' recovery in customers' rates. Under Southern Power's long-term, fixed price PPAs, it would not have the ability to recover any of these costs. Southern Company's operating results are affected by weather conditions and may fluctuate on a seasonal and quarterly basis. Electric power generation is generally a seasonal business. In many parts of the country, demand for power peaks during the hot summer months, with market prices also peaking at that time. In other areas, power demand peaks during the winter. As a result, Southern Company's overall operating results in the future may fluctuate substantially on a seasonal basis. In addition, Southern Company has historically sold less power, and consequently earned less income, when weather conditions are milder. Unusually mild weather in the future could reduce Southern Company's revenues, net income, available cash and borrowing ability. Risks Related to Market and Economic Volatility - ----------------------------------------------- Southern Company's business is dependent on its ability to successfully access capital markets. Southern Company's inability to access capital may limit its ability to execute its business plan or pursue improvements and make acquisitions that Southern Company may otherwise rely on for future growth. Southern Company relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flow from its operations. If Southern Company is not able to access capital at competitive rates, its ability to implement its business plan or pursue improvements and make acquisitions that Southern Company may otherwise rely on for future growth will be limited. Southern Company believes that it will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of Southern Company's credit rating may increase its cost of borrowing or adversely affect its ability to raise capital through the issuance of securities or other borrowing arrangements. Such disruptions could include: o an economic downturn; o the bankruptcy of an unrelated energy company; o capital market conditions generally; o market prices for electricity and gas; I-8 o terrorist attacks or threatened attacks on Southern Company's facilities or unrelated energy companies; o war or threat of war; or o the overall health of the utility industry. Southern Company is subject to risks associated with a changing economic environment, including Southern Company's ability to obtain insurance, the financial stability of its customers and Southern Company's ability to raise capital. Due to the September 11, 2001 terrorist attacks and the resulting ongoing war against terrorism by the United States, the nation's economy and financial markets have been disrupted in general. Additionally, the bankruptcy of Enron Corporation and events related to the California electric market crisis have both limited the availability and increased the cost of capital for Southern Company's businesses and that of Southern Company's competitors. The insurance industry has also been disrupted by these events. The availability of insurance covering risks Southern Company and its competitors typically insure against may decrease, and the insurance that Southern Company is able to obtain may have higher deductibles, higher premiums and more restrictive policy terms. The continuation of the current economic downturn and disruption of financial markets could also constrain the capital available to Southern Company's industry and could reduce Southern Company's access to funding for its operations, as well as the financial stability of its customers and counterparties. These factors could adversely affect Southern Company's subsidiaries' ability to achieve energy sales growth, thereby decreasing Southern Company's level of future earnings. Construction Programs The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. Construction additions or acquisitions of property during 2003 through 2005 by the operating companies, Southern Power, SEGCO, SCS, Southern LINC, and other subsidiaries are estimated as follows: ------------------------------------------------------------ 2003 2004 2005 -------------------------------- (in millions) Alabama Power $ 643 $ 787 $ 948 Georgia Power 759 781 806 Gulf Power 108 150 156 Mississippi Power 76 86 75 Savannah Electric 41 51 44 SEGCO 13 22 5 SCS 22 25 20 Southern LINC 28 22 22 Southern Power 377 381 278 Other 8 3 - ------------------------------------------------------------ Southern Company system $2,075 $2,308 $2,354 ============================================================ I-9 Estimated construction costs in 2003 are expected to be apportioned approximately as follows: (in millions)
---------------------------------------------------------------------------------------------------------------------------------- Southern Alabama Georgia Gulf Mississippi Savannah Southern Company Power Power Power Power Electric Power system* ------------------------------------------------------------------------------------------------- New generation $ 377 $ - $ - $ - $ - $ - $377 Other generating facilities including associated plant substations 508 238 176 60 17 4 - New business 359 129 183 23 13 11 - Transmission 357 122 200 7 12 16 - Joint line and substation 52 - 43 2 7 - - Distribution 177 82 58 9 20 8 - Nuclear fuel 106 39 67 - - - - General plant 139 33 32 7 7 2 - ------------------------------------------------------------------------------------------------- $2,075 $643 $759 $108 $76 $41 $377 =================================================================================================
* SCS, Southern LINC and other businesses plan capital additions to general plant in 2003 of $22 million, $28 million and $8 million, respectively, while SEGCO plans capital additions of $13 million to generating facilities. (See Item 1 - BUSINESS - "Other Business" herein.) The construction programs are subject to periodic review and revision, and actual construction costs may vary from the above estimates because of changes in such factors as: business conditions; environmental regulations; nuclear plant regulations; FERC rules and transmission regulations; load projections; the cost and efficiency of construction labor, equipment and materials; and cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. By the end of 2005, Southern Power plans to have approximately 6,600 megawatts of available generating capacity in commercial operation. At December 31, 2002, 2,400 megawatts were in commercial operation. Significant construction of transmission and distribution facilities and upgrading of generating plants will also be continuing, including expenditures to meet environmental compliance requirements. Under Georgia law, Georgia Power and Savannah Electric each are required to file an Integrated Resource Plan for approval by the Georgia PSC. Under the plan rules, the Georgia PSC must pre-certify the construction of new power plants and new PPAs. (See Item 1 - BUSINESS - "Rate Matters - Integrated Resource Planning" herein.) See Item 1 - BUSINESS - "Regulation - Environmental Statutes and Regulation" herein for information with respect to certain existing and proposed environmental requirements and Item 2 - PROPERTIES - "Jointly-Owned Facilities" herein for additional information concerning Alabama Power's, Georgia Power's and Southern Power's joint ownership of certain generating units and related facilities with certain non-affiliated utilities. I-10 Financing Programs The amount and timing of additional equity capital to be raised in 2003, as well as in subsequent years, will be contingent on Southern Company's investment opportunities. Equity capital can be provided from any combination of public offerings, private placements and Southern Company's stock plans. The operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from internal sources and by the issuances of new debt and preferred equity securities, term loans and short-term borrowings. However, the type and timing of any financings -- if needed -- will depend on market conditions and regulatory approval. In recent years, financings primarily have been unsecured debt and trust preferred securities. Southern Power will use both external funds and equity capital from Southern Company to finance its construction program. External funds are expected to be obtained from the issuance of unsecured senior debt and commercial paper or through existing credit arrangements from banks. Short-term debt is often utilized as appropriate at Southern Company, the operating companies, SEGCO and Southern Power. The maximum amounts of short-term and/or term-loan indebtedness authorized by the appropriate regulatory authorities and, in the case of Southern Power, long-term debt which also falls under Southern Power's regulatory authority, are shown in the following table: Amount Outstanding at Authorized December 31, 2002 -------------- ------------------ (in millions) Alabama Power $1,000(1) $ 37 Georgia Power 3,200(2) 358 Gulf Power 300(1) 28 Mississippi Power 500(1) - Savannah Electric 120(2) 28 Southern Power 2,500(3) 955 Southern Company 2,000(1) 435 ----------------------------------------------------- Notes: (1) Alabama Power's authority is based on authorization received from the Alabama PSC, which expires December 31, 2004. No SEC authorization is required for Alabama Power. Gulf Power, Mississippi Power and Southern Company have received SEC authorization to issue from time to time short-term and/or term-loan notes to banks and commercial paper to dealers in the amounts shown through December 31, 2003, March 31, 2006 and December 31, 2004, respectively. (2) Georgia Power and Savannah Electric have received SEC authorization to issue from time to time short-term and term-loan notes to banks and commercial paper to dealers in the amounts shown through March 31, 2006. Authorization for term-loan indebtedness is also required by the Georgia PSC. Savannah Electric has $16 million remaining authority for long-term debt and term loans expiring December 31, 2003. Georgia Power has $837 million remaining authority for long-term debt expiring December 31, 2004. Georgia Power also has authority for up to $1.765 billion for borrowings under the term loan provisions of its credit facilities. (3) Southern Power has been authorized by the SEC to enter into various financing arrangements, including short-term loans, through June 30, 2005, which in the aggregate may not exceed $2.5 billion. Reference is made to Note 8 to the financial statements for Southern Company and Gulf Power, Note 7 to the financial statements for Alabama Power and Mississippi Power, Note 6 to the financial statements for Savannah Electric and Note 9 to the financial statements for Georgia Power under the heading "Bank Credit Arrangements" and Note 7 to the financial statements for Southern Power under the heading "Long-Term Debt" in Item 8 herein for information regarding the registrants' bank credit arrangements. I-11 Fuel Supply The operating companies' and SEGCO's supply of electricity is derived predominantly from coal. Southern Power's supply of electricity is primarily fueled by natural gas. The sources of generation for the years 2000 through 2002 are shown below: Coal Nuclear Hydro Gas Oil % % % % % --------------------------------------------- Alabama Power 2000 72 19 3 6 * 2001 64 18 6 12 * 2002 62 19 6 13 * Georgia Power 2000 76 21 1 1 1 2001 75 23 1 1 * 2002 78 21 1 * * Gulf Power 2000 98 ** ** 2 * 2001 99 ** ** 1 * 2002 82 ** ** 18 * Mississippi Power 2000 83 ** ** 17 * ** 2001 59 ** ** 41 * 2002 57 ** ** 43 * Savannah Electric 2000 88 ** ** 8 4 2001 93 ** ** 6 1 2002 91 ** ** 8 1 SEGCO 2000 100 ** ** * * 2001 100 ** ** * * 2002 100 ** ** * * Southern Power 2000 ** ** ** ** ** 2001 ** ** ** 100 * 2002 ** ** ** 100 * Southern Company system*** 2000 78 16 2 4 * 2001 72 16 3 9 * 2002 69 16 3 12 * - ------------------------------------------------------------------ *Less than 0.5%. **Not applicable. *** Amounts shown for the Southern Company system are weighted averages of the operating companies, Southern Power and SEGCO. The average costs of fuel in cents per net kilowatt-hour generated for 2000 through 2002 are shown below: 2000 2001 2002 ------------------------------- Alabama Power 1.54 1.56 1.47 Georgia Power 1.39 1.38 1.44 Gulf Power 1.68 1.76 2.08 Mississippi Power 1.80 1.89 2.03 Savannah Electric 2.28 2.16 2.44 SEGCO 1.51 1.44 1.50 Southern Power - 4.07 2.81 Southern Company System* 1.51 1.56 1.61 - -------------------------------------------------------------- * Amounts shown for the Southern Company system are weighted averages of the operating companies, Southern Power and SEGCO. I-12 The operating companies have long-term agreements in place from which they expect to receive approximately 84% of their coal burn requirements in 2003. These agreements cover remaining terms up to 8 years. In 2002, the weighted average sulfur content of all coal burned by the operating companies was 0.76% sulfur. This sulfur level, along with banked sulfur dioxide allowances, allowed the operating companies to remain within limits as set forth by Phase II of the Clean Air Act. As more and more strict environmental regulations are proposed that impact the utilization of coal, the fuel mix will be monitored to insure that sufficient quantities of the proper type of coal or natural gas are in place to remain in compliance with applicable laws and regulations. See Item 1 - BUSINESS - "Regulation - Environmental Statutes and Regulation" herein. The operating companies, Southern Power and Southern Company GAS also have long-term agreements in place for their natural gas burn requirements. For 2003, the operating companies and Southern Power have contracted for 200 billion cubic feet of natural gas supply. These agreements cover remaining terms up to 4 years. In addition to gas supply, the operating companies, Southern Power and Southern Company GAS have contracts in place for both firm gas transportation and storage. Management believes that these contracts provide sufficient natural gas supplies, transportation and storage to ensure normal operations of the Southern Company system's natural gas generating units. Changes in fuel prices are generally reflected in fuel adjustment clauses contained in rate schedules. See Item 1 - BUSINESS - "Rate Matters - Rate Structure" herein. Alabama Power and Georgia Power have numerous contracts covering a portion of their nuclear fuel needs for uranium, conversion services, enrichment services and fuel fabrication. These contracts have varying expiration dates and most are short to medium term (less than 10 years). Management believes that sufficient capacity for nuclear fuel supplies and processing exists to preclude the impairment of normal operations of the Southern Company system's nuclear generating units. Alabama Power and Georgia Power have contracts with the DOE that provide for the permanent disposal of spent nuclear fuel. The DOE failed to begin disposing of spent fuel in January 1998, as required by the contracts, and the companies are pursuing legal remedies against the government for breach of contract. Sufficient pool storage capacity is available at Plant Farley to maintain full-core discharge capability until the refueling outages scheduled for 2006 and 2008 for units 1 and 2, respectively. Sufficient pool storage capacity for spent fuel is available at Plant Vogtle to maintain full-core discharge capability for both units into 2014. At Plant Hatch, an on-site dry storage facility became operational in 2000. Sufficient dry storage capacity is believed to be available to continue dry storage operations at Plant Hatch through the life of the plant. Procurement of on-site dry storage capacity at Plant Farley is in progress, with the intent to place the capacity in operation in 2005. Procurement of on-site dry storage capacity at Plant Vogtle will begin in sufficient time to maintain pool full-core discharge capability. The Energy Act required the establishment of a Uranium Enrichment Decontamination and Decommissioning Fund, which is funded in part by a special assessment on utilities with nuclear plants, including Alabama Power and Georgia Power. This assessment is being paid over a 15-year period which began in 1993. This fund will be used by the DOE for the decontamination and decommissioning of its nuclear fuel enrichment facilities. The law provides that utilities will recover these payments in the same manner as any other fuel expense. Territory Served by the Operating Companies The territory in which the operating companies provide electric service comprises most of the states of Alabama and Georgia together with the northwestern portion of Florida and southeastern Mississippi. In this territory there are non-affiliated electric distribution systems which obtain some or all of their power requirements either directly or indirectly from the operating companies. The territory has an area of approximately 120,000 square miles and an estimated population of approximately 11 million. Alabama Power is engaged, within the State of Alabama, in the generation and purchase of electricity and the distribution and sale of such electricity at retail in over 1,000 communities (including Anniston, Birmingham, Gadsden, Mobile, Montgomery and Tuscaloosa) and at wholesale to 15 municipally-owned electric distribution systems, 11 of which are served indirectly through sales to AMEA, and two rural distributing cooperative associations. Alabama Power also I-13 supplies steam service in downtown Birmingham. Alabama Power also sells, and cooperates with dealers in promoting the sale of, electric appliances. Georgia Power is engaged in the generation and purchase of electricity and the distribution and sale of such electricity within the State of Georgia at retail in over 600 communities, as well as in rural areas, and at wholesale currently to OPC, MEAG, Dalton and the City of Hampton. Gulf Power is engaged, within the northwestern portion of Florida, in the generation and purchase of electricity and the distribution and sale of such electricity at retail in 71 communities (including Pensacola, Panama City and Fort Walton Beach), as well as in rural areas, and at wholesale to a non-affiliated utility and a municipality. Mississippi Power is engaged in the generation and purchase of electricity and the distribution and sale of such energy within the 23 counties of southeastern Mississippi, at retail in 123 communities (including Biloxi, Gulfport, Hattiesburg, Laurel, Meridian and Pascagoula), as well as in rural areas, and at wholesale to one municipality, six rural electric distribution cooperative associations and one generating and transmitting cooperative. Savannah Electric is engaged, within a five-county area in eastern Georgia, in the generation and purchase of electricity and the distribution and sale of such electricity at retail and, as a member of the Southern Company system power pool, the transmission and sale of wholesale energy. For information relating to kilowatt-hour sales by classification for each registrant, reference is made to "Management's Discussion and Analysis-Results of Operations" in Item 7 herein. Also, for information relating to the sources of revenues for the Southern Company system, each of the operating companies and Southern Power, reference is made to Item 6 herein. A portion of the area served by the operating companies adjoins the area served by TVA and its municipal and cooperative distributors. An Act of Congress limits the distribution of TVA power, unless otherwise authorized by Congress, to specified areas or customers which generally were those served on July 1, 1957. The RUS has authority to make loans to cooperative associations or corporations to enable them to provide electric service to customers in rural sections of the country. There are 71 electric cooperative organizations operating in the territory in which the operating companies provide electric service at retail or wholesale. One of these, AEC, is a generating and transmitting cooperative selling power to several distributing cooperatives, municipal systems and other customers in south Alabama and northwest Florida. AEC owns generating units with approximately 840 megawatts of nameplate capacity, including an undivided ownership interest in Alabama Power's Plant Miller Units 1 and 2. AEC's facilities were financed with RUS loans secured by long-term contracts requiring distributing cooperatives to take their requirements from AEC to the extent such energy is available. Two of the 14 distributing cooperatives operating in Alabama Power's service territory obtain a portion of their power requirements directly from Alabama Power. Four electric cooperative associations, financed by the RUS, operate within Gulf Power's service area. These cooperatives purchase their full requirements from AEC and SEPA (a federal power marketing agency). A non-affiliated utility also operates within Gulf Power's service area and purchases its full requirements from Gulf Power. Alabama Power and Gulf Power have entered into separate agreements with AEC involving interconnection between their respective systems. The delivery of capacity and energy from AEC to certain distributing cooperatives in the service areas of Alabama Power and Gulf Power is governed by the Southern Company/AEC Network Transmission Service Agreement. The rates for this service to AEC are based on the negotiated agreement on file with the FERC. See Item 2 - PROPERTIES - - "Jointly-Owned Facilities" herein for details of Alabama Power's joint-ownership with AEC of a portion of Plant Miller. Mississippi Power has an interchange agreement with SMEPA, a generating and transmitting cooperative, pursuant to which various services are provided, including the furnishing of protective capacity by Mississippi Power to SMEPA. SMEPA has a generating capacity of 1,947 megawatts and a transmission system estimated to be 1,570 miles in length. I-14 There are 43 electric cooperative organizations operating in, or in areas adjoining, territory in the State of Georgia in which Georgia Power provides electric service at retail or wholesale. Three of these organizations obtain their power from TVA and one from other sources. OPC has a wholesale power contract with the remaining 39 of these cooperative organizations. OPC utilizes self-owned generation, some of which is acquired and jointly-owned with Georgia Power, megawatt capacity purchases from Georgia Power under power supply agreements, and other arrangements to meet its power supply obligations. Pursuant to the latest agreement entered into in April 1999, OPC will purchase 250 megawatts of steam capacity through March 2006. There are 65 municipally-owned electric distribution systems operating in the territory in which the operating companies provide electric service at retail or wholesale. AMEA was organized under an act of the Alabama legislature and is comprised of 11 municipalities. In October 1991, Alabama Power entered into a power sales contract with AMEA entitling AMEA to scheduled amounts of additional capacity (up to a maximum 80 megawatts) for a period of 15 years. Under the terms of the contract, Alabama Power received payments from AMEA representing the net present value of the revenues associated with the respective capacity entitlements. (See Note 5 to Alabama Power's financial statements under the heading "Alabama Municipal Electric Authority (AMEA) Capacity Contracts" in Item 8 herein for further information on this contract.) Forty-eight municipally-owned electric distribution systems and one county-owned system receive their requirements through MEAG, which was established by a Georgia state statute in 1975. MEAG serves these requirements from self-owned generation facilities, some of which are acquired and jointly-owned with Georgia Power, power purchased from Georgia Power and purchases from other resources. In 1997, a pseudo scheduling and services agreement was implemented between Georgia Power and MEAG. Since 1977, Dalton has filled its requirements from self-owned generation facilities, some of which are acquired and jointly-owned with Georgia Power, and through purchases from Georgia Power pursuant to their partial requirements tariff. Beginning January 1, 2003, Dalton has entered into a new power supply agreement pursuant to which it will purchase 136 megawatts from Georgia Power for a fifteen-year term. One municipally-owned electric distribution system's full requirements are served under a market-based contract by Georgia Power. (See Item 2 - PROPERTIES - "Jointly-Owned Facilities" herein.) Georgia Power has entered into substantially similar agreements with Georgia Transmission Corporation (formerly OPC's transmission division), MEAG and Dalton providing for the establishment of an integrated transmission system to carry the power and energy of each. The agreements require an investment by each party in the integrated transmission system in proportion to its respective share of the aggregate system load. (See Item 2 - PROPERTIES - "Jointly-Owned Facilities" herein.) In June 2002, Southern Power executed PPAs to coordinate the existing generating resources and meet the load growth and resource-retirement capacity requirements (Requirements Agreements) of 11 Georgia Electric Membership Corporations (EMCs). These Requirements Agreements were entered into pursuant to market-based tariff arrangements and are subject to filing and acceptance by the FERC. No state PSC approval is required. Under the terms of the agreements, both the loads and the resources of the EMCs will be integrated into the Southern Company system power pool as obligations and resources of Southern Power. Southern Power will fulfill the load requirements of the EMCs by utilizing the EMCs' entitlements to capacity resources owned by OPC and other capacity purchase contracts. In January 2003, Southern Power entered into contracts with North Carolina Municipal Power Authority 1 (North Carolina) and Dalton. Under the North Carolina contract, Southern Power will be responsible for supplying North Carolina's capacity and energy needs in excess of North Carolina's existing resources and disposing of North Carolina's surplus energy. The contract term is January 1, 2003 through December 31, 2004. Under the Dalton contract, Southern Power is responsible for supplying Dalton's requirements for capacity and energy in excess of Dalton's existing resources. The contract term is for 15 years, beginning January 1, 2003, with a customer option to convert to a fixed capacity purchase at the end of year 10. I-15 SCS, acting on behalf of Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric, also has a contract with SEPA providing for the use of those companies' facilities at government expense to deliver to certain cooperatives and municipalities, entitled by federal statute to preference in the purchase of power from SEPA, quantities of power equivalent to the amounts of power allocated to them by SEPA from certain United States government hydroelectric projects. The retail service rights of all electric suppliers in the State of Georgia are regulated by the 1973 State Territorial Electric Service Act. Pursuant to the provisions of this Act, all areas within existing municipal limits were assigned to the primary electric supplier therein on March 29, 1973 (451 municipalities, including Atlanta, Columbus, Macon, Augusta, Athens, Rome and Valdosta, to Georgia Power; 115 to electric cooperatives; and 50 to publicly-owned systems). Areas outside of such municipal limits were either to be assigned or to be declared open for customer choice of supplier by action of the Georgia PSC pursuant to standards set forth in the Act. Consistent with such standards, the Georgia PSC has assigned substantially all of the land area in the state to a supplier. Notwithstanding such assignments, the Act provides that any new customer locating outside of 1973 municipal limits and having a connected load of at least 900 kilowatts may receive electric service from the supplier of its choice. (See also Item 1 - BUSINESS - "Competition" herein.) Under and subject to the provisions of its franchises and concessions and the 1973 State Territorial Electric Service Act, Savannah Electric has the full but nonexclusive right to serve the City of Savannah, the Towns of Bloomingdale, Pooler, Garden City, Guyton, Newington, Oliver, Port Wentworth, Rincon, Tybee Island, Springfield, Thunderbolt and Vernonburg, and in conjunction with a secondary supplier, the Town of Richmond Hill. In addition, Savannah Electric has been assigned certain unincorporated areas in Chatham, Effingham, Bryan, Bulloch and Screven Counties by the Georgia PSC. (See also Item 1 - BUSINESS - "Competition" herein.) Pursuant to the 1956 Utility Act, the Mississippi PSC issued "Grandfather Certificates" of public convenience and necessity to Mississippi Power and to six distribution rural cooperatives operating in southeastern Mississippi, then served in whole or in part by Mississippi Power, authorizing them to distribute electricity in certain specified geographically described areas of the state. The six cooperatives serve approximately 300,000 retail customers in a certificated area of approximately 10,300 square miles. In areas included in a "Grandfather Certificate," the utility holding such certificate may, without further certification, extend its lines up to five miles; other extensions within that area by such utility, or by other utilities, may not be made except upon a showing of, and a grant of a certificate of, public convenience and necessity. Areas included in such a certificate which are subsequently annexed to municipalities may continue to be served by the holder of the certificate, irrespective of whether it has a franchise in the annexing municipality. On the other hand, the holder of the municipal franchise may not extend service into such newly annexed area without authorization by the Mississippi PSC. Long-Term Power Sales Agreements The operating companies have long-term contractual agreements for the sale of capacity to certain non-affiliated utilities located outside the Southern Company system service area. These agreements are related to specific generating units and the availability of energy at those units. Because the energy is generally provided at cost under these agreements, profitability is primarily affected by capacity revenues. Mississippi Power and Southern Power have contractual agreements with non-affiliated companies for the sale of capacity from certain generating units. Reference is made to "Management's Discussion and Analysis - Future Earnings Potential" in Item 7 herein of Mississippi Power and Southern Power for information on a customer for such capacity that is experiencing liquidity problems and has had its credit rating reduced below investment grade. Unit power from specific generating plants is currently being sold to FP&L, FPC and JEA. Under these agreements, approximately 1,500 megawatts of capacity is scheduled to be sold annually unless reduced by FP&L, FPC and JEA for the periods after 2002 with a minimum of three years notice, until the expiration of the contracts in 2010. Reference is made to Note 5 to the financial statements for Southern Company, Alabama Power and Southern Power, Note 6 to the financial statements for Gulf Power and Note 7 to the financial statements for Georgia Power under I-16 the heading "Long-Term Sales Agreements" and Note 5 to the financial statements for Mississippi Power under the heading "Long-Term Sales and Facility Agreements" in Item 8 herein for additional information regarding contracts for the sales and lease of capacity and energy to non-territorial customers. Competition The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the early primary agents of change was the Energy Act. The Energy Act allows IPPs to access a utility's transmission network in order to sell electricity to other utilities. This enhanced the incentive for IPPs to build power plants for a utility's large industrial and commercial customers and sell energy generation to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities as well as selling foreign and domestic electric infrastructure assets. Southern Company has not experienced any material financial impact regarding its limited energy trading operations and recent generating capacity additions. In general, Southern Company only constructs new generating capacity after entering into long-term capacity contracts for the new facilities or to meet requirements of Southern Company's regulated retail markets. Although the Energy Act does not provide for retail customer access, it was a major catalyst for recent restructuring and consolidations that took place within the utility industry. Numerous federal and state initiatives that promote wholesale and retail competition are in varying stages. Among other things, these initiatives allow customers to choose their electricity provider. Some states have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. While various restructuring and competition initiatives have been discussed in Alabama, Florida, Georgia, and Mississippi, none have been enacted. Enactment would require numerous issues to be resolved, including significant ones relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. As a result of that crisis, many states, including those in Southern Company's retail service area, have either discontinued or delayed implementation of initiatives involving retail deregulation. Continuing to be a low-cost producer could provide opportunities to increase market share and profitability in markets that evolve with changing regulation and competition. Conversely, if Southern Company's electric utilities do not remain low-cost producers and provide quality service, then energy sales growth could be limited, and this could significantly erode earnings. Reference is made to Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric, "Management's Discussion and Analysis - Future Earnings Potential" in Item 7 herein for further discussion of rate matters. To adapt to a less regulated, more competitive environment, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, acquisitions involving other utility or non-utility businesses or properties, internal restructuring, disposition of certain assets, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations and financial condition of Southern Company. (See Item 1 - - BUSINESS - "Southern Power" and "Other Business" herein.) The Energy Act amended the Holding Company Act to facilitate acquisitions of interest in exempt wholesale generators, which sell electricity exclusively for resale. Southern Company is working to maintain and expand its share of wholesale energy sales in the Southeast. In January 2001, Southern Company formed Southern Power. This subsidiary constructs, owns, and manages wholesale generating assets in the Southeast. Southern Power is the primary growth engine for Southern I-17 Company's competitive wholesale market-based energy business. Reference is made to Item 1 - BUSINESS - "FERC Matters" herein for information relating to Southern Company's RTO filing with the FERC. Alabama Power currently has cogeneration contracts in effect with 11 industrial customers. Under the terms of these contracts, Alabama Power purchases excess generation of such companies. During 2002, Alabama Power purchased approximately 169.3 million kilowatt-hours from such companies at a cost of $4.8 million. Georgia Power currently has contracts in effect with nine small power producers whereby Georgia Power purchases their excess generation. During 2002, Georgia Power purchased 16.7 million kilowatt-hours from such companies at a cost of $384 thousand. Georgia Power has PPAs for electricity with two cogeneration facilities. Payments are subject to reductions for failure to meet minimum capacity output. During 2002, Georgia Power purchased 867 million kilowatt-hours at a cost of $75 million from these facilities. Reference is made to Note 4 to the financial statements for Georgia Power in Item 8 herein for information regarding purchased power commitments. Gulf Power currently has agreements in effect with four industrial customers pursuant to which Gulf Power purchases "as available" energy from customer-owned generation. During 2002, Gulf Power purchased 199 million kilowatt-hours from such companies for $5 million. During 2002, Savannah Electric purchased energy from six customer owned generating facilities. Five of the six provide only excess energy to Savannah Electric and are paid Savannah Electric's avoided energy cost. These five customers make no capacity commitment and are not dispatched by Savannah Electric. Savannah Electric does have a contract for five megawatts of dispatchable capacity and energy with one customer. During 2002, Savannah Electric purchased a total of 23.6 million kilowatt-hours from the six suppliers at a cost of approximately $730 thousand. The competition for retail energy sales among competing suppliers of energy is influenced by various factors, including price, availability, technological advancements and reliability. These factors are, in turn, affected by, among other influences, regulatory, political and environmental considerations, taxation and supply. The operating companies have experienced, and expect to continue to experience, competition in their respective retail service territories in varying degrees as the result of self-generation (as described above) and fuel switching by customers and other factors. (See also Item 1 - BUSINESS - "Territory Served by the Operating Companies" herein for information concerning suppliers of electricity operating within or near the areas served at retail by the operating companies.) Regulation State Commissions The operating companies are subject to the jurisdiction of their respective state regulatory commissions, which have broad powers of supervision and regulation over public utilities operating in the respective states, including their rates, service regulations, sales of securities (except for the Mississippi PSC) and, in the cases of the Georgia PSC and Mississippi PSC, in part, retail service territories. (See Item 1 - BUSINESS - "Rate Matters" and "Territory Served by the Operating Companies" herein.) Holding Company Act Southern Company is registered as a holding company under the Holding Company Act, and it and its subsidiary companies are subject to the regulatory provisions of said Act, including provisions relating to the issuance of securities, sales and acquisitions of securities and utility assets, services performed by SCS and Southern Nuclear and the activities of certain of Southern Company's other subsidiaries. While various proposals have been introduced in Congress regarding the Holding Company Act, the prospects for legislative reform or repeal are uncertain at this time. Federal Power Act The Federal Power Act subjects the operating companies, Southern Power and SEGCO to regulation by the FERC as companies engaged in the transmission or sale at I-18 wholesale of electric energy in interstate commerce, including regulation of accounting policies and practices. Alabama Power and Georgia Power are also subject to the provisions of the Federal Power Act or the earlier Federal Water Power Act applicable to licensees with respect to their hydroelectric developments. Among the hydroelectric projects subject to licensing by the FERC are 14 existing Alabama Power generating stations having an aggregate installed capacity of 1,600,750 kilowatts and 18 existing Georgia Power generating stations having an aggregate installed capacity of 1,074,696 kilowatts. Georgia Power filed a relicensing application with the FERC for the Middle Chattahoochee project in December 2002. This project consists of the Goat Rock, Oliver and North Highlands facilities. Georgia Power also started the relicensing process for the Morgan Falls Project in 2003. Alabama Power initiated the relicensing process in 2002 for its seven projects on the Coosa River (Weiss, Henry, Logan Martin, Lay, Mitchell, Jordan and Bouldin) and the Smith and Bankhead Projects on the Warrior River. The FERC licenses for all of these nine projects expire in 2007. Georgia Power and OPC also have a license, expiring in 2027, for the Rocky Mountain Plant, a pure pumped storage facility of 847,800 kilowatt capacity which began commercial operation in 1995. (See Item 2 - PROPERTIES - "Jointly-Owned Facilities" herein.) Licenses for all projects, excluding those discussed above, expire in the period 2007-2033 in the case of Alabama Power's projects and in the period 2005-2039 in the case of Georgia Power's projects. Upon or after the expiration of each license, the United States Government, by act of Congress, may take over the project or the FERC may relicense the project either to the original licensee or to a new licensee. In the event of takeover or relicensing to another, the original licensee is to be compensated in accordance with the provisions of the Federal Power Act, such compensation to reflect the net investment of the licensee in the project, not in excess of the fair value of the property taken, plus reasonable damages to other property of the licensee resulting from the severance therefrom of the property taken. Atomic Energy Act of 1954 Alabama Power, Georgia Power and Southern Nuclear are subject to the provisions of the Atomic Energy Act of 1954, as amended, which vests jurisdiction in the NRC over the construction and operation of nuclear reactors, particularly with regard to certain public health and safety and antitrust matters. The National Environmental Policy Act has been construed to expand the jurisdiction of the NRC to consider the environmental impact of a facility licensed under the Atomic Energy Act of 1954, as amended. NRC operating licenses currently expire in June 2017 and March 2021 for Plant Farley units 1 and 2, respectively, and in January 2027 and February 2029 for Plant Vogtle units 1 and 2, respectively. In January 2002, the NRC granted Georgia Power a 20-year extension of the licenses for both units at Plant Hatch which permits the operation of units 1 and 2 until 2034 and 2038, respectively. Applications are currently being prepared to request extension of the Plant Farley units 1 and 2 licenses until 2037 and 2041, respectively. Reference is made to Notes 1 and 10 to Southern Company's financial statements, Notes 1 and 9 to Alabama Power's financial statements and Notes 1 and 5 to Georgia Power's financial statements in Item 8 herein for information on nuclear decommissioning costs and nuclear insurance. Additionally, Note 3 to Georgia Power's financial statements contains information regarding nuclear performance standards imposed by the Georgia PSC that may impact retail rates. FERC Matters In December 1999, the FERC issued its final rule on RTOs. The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company has submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2001, Entergy Corporation and Cleco Power joined the SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans' sponsors petition for a I-19 declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on Southern Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposed rule have been submitted by Southern Company. Any impact of this proposal on Southern Company and its subsidiaries will depend on the form in which final rules may be ultimately adopted; however, Southern Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Environmental Statutes and Regulations Southern Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for Southern Company. For additional information about the Clean Air Act and other environmental issues, including the litigation brought under the New Source Review provisions of the Clean Air Act, reference is made to each registrant's "Management's Discussion and Analysis - Environmental Matters" in Item 7 herein. Also see Item 3 - "Legal Proceedings," herein for information about lawsuits brought on behalf of the EPA or by citizen's groups with respect to environmental compliance matters. The operating companies', Southern Power's and SEGCO's estimated capital expenditures for environmental quality control facilities for the years 2003, 2004 and 2005 are as follows: --------------------------------------------------------- 2003 2004 2005 ------------------------------- (in millions) Alabama Power $100 $157 $234 Georgia Power 106 64 51 Gulf Power 38 64 55 Mississippi Power 11 6 - Savannah Electric 1 5 3 Southern Power - - - SEGCO 1 4 3 --------------------------------------------------------- Total $257 $300 $346 ========================================================= The foregoing estimates are included in the current construction programs. (See Item 1 - BUSINESS - "Construction Programs" herein.) Additionally, each operating company and SEGCO have incurred costs for environmental remediation of various sites. Reference is made to each registrant's "Management's Discussion and Analysis - Financial Condition" in Item 7 herein for information regarding the registrants' environmental remediation efforts. Also, see Note 3 to Southern Company's and Georgia Power's financial statements in Item 8 herein for information regarding the identification of sites that may require environmental remediation by Georgia Power. The operating companies and SEGCO are unable to predict at this time what additional steps they may be required to take as a result of the implementation I-20 of existing or future quality control requirements for air, water and hazardous or toxic materials, but such steps could adversely affect system operations and result in substantial additional costs. The outcome of the matters mentioned above under "Regulation" cannot now be determined, except that these developments may result in delays in obtaining appropriate licenses for generating facilities, increased construction and operating costs or reduced generation, the nature and extent of which, while not determinable at this time, could be substantial. Rate Matters Rate Structure The rates and service regulations of the operating companies are uniform for each class of service throughout their respective service areas. Rates for residential electric service are generally of the block type based upon kilowatt-hours used and include minimum charges. Residential and other rates contain separate customer charges. Rates for commercial service are presently of the block type and, for large customers, the billing demand is generally used to determine capacity and minimum bill charges. These large customers' rates are generally based upon usage by the customer and include rates with special features to encourage off-peak usage. Additionally, the operating companies are allowed by their respective PSCs to negotiate the terms and compensation of service to large customers. Such terms and compensation of service, however, are subject to final PSC approval. Alabama Power, Georgia Power, Mississippi Power and Savannah Electric are allowed by state law to recover fuel and net purchased energy costs through fuel cost recovery provisions which are adjusted to reflect increases or decreases in such costs as needed. Gulf Power also recovers from retail customers costs of fuel, net purchased power, energy conservation and environmental compliance through provisions approved by the Florida PSC which are adjusted annually to reflect increases or decreases in such costs. Revenues are adjusted for differences between recoverable costs and amounts actually recovered in current rates. Reference is made to "Management's Discussion and Analysis - Future Earnings Potential" in Item 7 and to Note 3 to the financial statements in Item 8 herein for Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric for a discussion of rate matters. Integrated Resource Planning Georgia Power and Savannah Electric must file plans with the Georgia PSC that specify how each intends to meet the future electrical needs of its customers through a combination of demand-side and supply-side resources. The Georgia PSC must certify these new resources. Once certified, all prudently incurred construction costs and purchase power costs will be recoverable through rates. In July 2001, the Georgia PSC approved Georgia Power's 2003/04 certification request for approximately 1,800 megawatts of purchased power and 12 megawatts of upgraded hydro generation. This certification request included a seven-year PPA with Southern Power for two gas-fired combined cycle units that will be constructed at Plant Franklin. The first unit will be for 570 megawatts starting in 2003, with approximately 250 megawatts made available in June 2002. The second unit will be for 610 megawatts starting in 2004, with approximately 300 megawatts being available by June 2003. Also, an upgrade of 12 megawatts was approved for the existing Goat Rock hydro Units 1 and 2. In addition, this certification request included a seven-year PPA with Southern Power for 615 megawatts of gas-fired combined cycle generation at Plant Harris in Alabama. Based on an agreement with the Georgia PSC, the seven-year term was modified to be 15 years. In December 2002, the Georgia PSC approved Georgia Power's and Savannah Electric's plans to expand their electricity generating capacity starting in 2005 through PPAs. Beginning in June 2005, Georgia Power and Savannah Electric will purchase 1,040 and 200 megawatts of capacity, respectively, from the planned combined-cycle plant at Plant McIntosh, to be built and owned by Southern Power under a 15-year PPA. Beginning June 1, 2005, Georgia Power will also buy 620 megawatts of capacity from a Murray County plant owned by Duke Energy Trading and Marketing under a seven-year PPA. The Georgia PSC also approved the retirement of 415 megawatts from 11 units at Georgia Power Plants Arkwright, Atkinson, and Mitchell. Savannah Electric also plans to retire a 102 I-21 megawatt peaking facility in May 2005. Reference is made to Georgia Power's and Savannah Electric's "Management's Discussion and Analysis - Future Earnings Potential" in Item 7 herein for information regarding these PPAs and retirements. In December 2002, Georgia Power issued an RFP for 600 to 800 megawatts of capacity to serve 2007 needs in accordance with the updated IRP that was filed during the 2005 certification with the Georgia PSC. Georgia Power and Savannah Electric will file a new IRP with the Georgia PSC in January 2004. Environmental Cost Recovery Plans In 1993, the Florida Legislature adopted legislation for an Environmental Cost Recovery Clause (ECRC), which allows Gulf Power to petition the Florida PSC for recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. Such environmental costs include operation and maintenance expense, emission allowance expense, depreciation and a return on invested capital. This legislation was amended in 2002 to allow recovery of costs incurred as a result of an agreement between Gulf Power and the Florida Department of Environmental Protection for the purpose of ensuring compliance with ozone ambient air quality standards adopted by the EPA. In 1992, the Mississippi PSC approved Mississippi Power's Environmental Compliance Overview Plan (ECO Plan). The ECO Plan establishes procedures to facilitate the Mississippi PSC's overview of Mississippi Power's environmental strategy and provides for recovery of costs (including costs of capital associated with environmental projects approved by the Mississippi PSC). Under the ECO Plan, any increase in the annual revenue requirement is limited to 2 percent of retail revenues. However, the ECO Plan also provides for carryover of any amount over the 2 percent limit into the next year's revenue requirement. 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. Mississippi Power recovers such costs under the ECO Plan as they are incurred, as provided for in Mississippi Power's 1995 ECO Plan order. Mississippi Power filed its 2003 ECO Plan in January 2003, which, if approved as filed, will result in a slight increase in customer prices. Employee Relations The Southern Company system had a total of 26,178 employees on its payroll at December 31, 2002. ---------------------------------------------------------- Employees at December 31, 2002 --------------------- Alabama Power 6,715 Georgia Power 8,837 Gulf Power 1,339 Mississippi Power 1,301 Savannah Electric 550 SCS 3,499 Southern Nuclear 3,295 Southern Power * Other 642 ---------------------------------------------------------- Total 26,178 ========================================================== * Southern Power has no employees. Southern Power has agreements with SCS and the operating companies whereby employee services are rendered at cost. The operating companies have separate agreements with local unions of the IBEW generally covering wages, working conditions and procedures for handling grievances and arbitration. These agreements apply with certain exceptions to operating, maintenance and construction employees. Alabama Power has agreements with the IBEW on a three-year contract extending to August 14, 2004. Upon notice given at least 60 days prior to that date, negotiations may be initiated with respect to agreement terms to be effective after such date. Georgia Power has an agreement with the IBEW covering wages and working conditions, which is in effect through June 30, 2005. Gulf Power has an agreement with the IBEW on a three-year contract extending to August 15, 2005. Mississippi Power has an agreement with the IBEW on a four-year contract extending to August 16, 2006. I-22 Savannah Electric has four-year labor agreements with the IBEW and the Office and Professional Employees International Union that expire April 15, 2003 and December 1, 2003, respectively. Savannah Electric began negotiations with the IBEW in February 2003. Southern Nuclear has agreements with the IBEW on a five-year contract extending to August 15, 2006 for Plant Farley and an agreement with the Security, Police and Fire Professionals of America on a three-year contract extending to September 30, 2004 for Plant Hatch. Upon notice given at least 60 days prior to these dates, negotiations may be initiated with respect to agreement terms to be effective after such dates. Southern Nuclear is currently in negotiations with the IBEW at Plants Hatch and Vogtle. The prior contract with the Local 84 of the IBEW which extended to June 30, 2002 was not terminated, so the terms of the existing agreement have continued while a new agreement is under negotiation. The parties will have the opportunity to terminate the agreement 60 days prior to June 30, 2003 if no agreement is reached prior to that time. The agreements also subject the terms of the pension plans for the companies discussed above to collective bargaining with the unions at either a five-year or a ten-year cycle, depending upon union and company actions. I-23 Item 2. PROPERTIES Electric Properties - The Electric Utilities The operating companies, Southern Power and SEGCO, at December 31, 2002, owned and/or operated 34 hydroelectric generating stations, 33 fossil fuel generating stations, three nuclear generating stations and eight combined cycle/cogeneration stations. The amounts of capacity for each company are shown in the table below. --------------------------------------------------------------- Nameplate Generating Station Location Capacity (1) --------------------------------------------------------------- (Kilowatts) Fossil Steam Gadsden Gadsden, AL 120,000 Gorgas Jasper, AL 1,221,250 Barry Mobile, AL 1,525,000 Greene County Demopolis, AL 300,000 (2) Gaston Unit 5 Wilsonville, AL 880,000 Miller Birmingham, AL 2,532,288 (3) --------- Alabama Power Total 6,578,538 --------- Bowen Cartersville, GA 3,160,000 Branch Milledgeville, GA 1,539,700 Hammond Rome, GA 800,000 McDonough Atlanta, GA 490,000 McManus Brunswick, GA 115,000 Mitchell Albany, GA 125,000 Scherer Macon, GA 750,924 (4) Wansley Carrollton, GA 925,550 (5) Yates Newnan, GA 1,250,000 --------- Georgia Power Total 9,156,174 --------- Crist Pensacola, FL 1,045,000 Lansing Smith Panama City, FL 305,000 Scholz Chattahoochee, FL 80,000 Daniel Pascagoula, MS 500,000 (6) Scherer Unit 3 Macon, GA 204,500 (4) ----------- Gulf Power Total 2,134,500 --------- Eaton Hattiesburg, MS 67,500 Sweatt Meridian, MS 80,000 Watson Gulfport, MS 1,012,000 Daniel Pascagoula, MS 500,000 (6) Greene County Demopolis, AL 200,000 (2) ----------- Mississippi Power Total 1,859,500 ----------- ------------------------------------------------------------------- Nameplate Generating Station Location Capacity ------------------------------------------------------------------- (Kilowatts) McIntosh Effingham County, GA 163,117 Kraft Port Wentworth, GA 281,136 Riverside Savannah, GA 102,278 ----------- Savannah Electric Total 546,531 ----------- Gaston Units 1-4 Wilsonville, AL SEGCO Total 1,000,000 (7) ----------- Total Fossil Steam 21,275,243 ----------- Nuclear Steam Farley Dothan, AL Alabama Power Total 1,720,000 ----------- Hatch Baxley, GA 899,612 (8) Vogtle Augusta, GA 1,060,240 (9) ----------- Georgia Power Total 1,959,852 ---------- Total Nuclear Steam 3,679,852 ----------- Combustion Turbines Greene County Demopolis, AL Alabama Power Total 720,000 ----------- Atkinson Atlanta, GA 78,720 Bowen Cartersville, GA 39,400 Intercession City Intercession City, FL 47,667 (10) McDonough Atlanta, GA 78,800 McIntosh Units 1,2,3,4,7,8 Effingham County, GA 480,000 McManus Brunswick, GA 481,700 Mitchell Albany, GA 118,200 Robins Warner Robins, GA 160,000 Wansley Carrollton, GA 26,322 Wilson Augusta, GA 354,100 ----------- Georgia Power Total 1,864,909 - --------- Lansing Smith Unit A Panama City, FL 39,400 Pea Ridge Units 1-3 Pea Ridge, FL 15,000 --------- Gulf Power Total 54,400 --------- Chevron Cogenerating Station Pascagoula, MS 147,292 (11) Sweatt Meridian, MS 39,400 Watson Gulfport, MS 39,360 --------- Mississippi Power Total 226,052 --------- ------------------------------------------------------------------- I-24 ------------------------------------------------------------------ Generating Station Location Nameplate Capacity ------------------------------------------------------------------ (Kilowatts) Boulevard Savannah, GA 59,100 Kraft Port Wentworth, GA 22,000 McIntosh Units 5&6 Effingham County, GA 160,000 ------- Savannah Electric Total 241,100 ------- 241,100 Dahlberg 756,000 (12) -------- Southern Power Total 756,000 ------- Gaston (SEGCO) Wilsonville, AL 19,680 (7) ----------- Total Combustion Turbines 3,882,141 ----------- Cogeneration Washington County Washington County, AL 123,428 GE Plastics Project Burkeville, AL 104,800 Theodore Theodore, AL 236,418 ----------- Alabama Power Total 464,646 ----------- Combined Cycle Barry Mobile, AL Alabama Power Total 1,070,424 --------- Smith Gulf Power Total 619,650 ------- Daniel (Leased) Pascagoula, MS Mississippi Power Total 1,070,424 --------- Franklin 538,900 (12) Wansley 1,073,000 (12) --------- Southern Power Total 1,611,900 --------- Total Combined Cycle 4,372,398 --------- Hydroelectric Facilities Weiss Leesburg, AL 87,750 Henry Ohatchee, AL 72,900 Logan Martin Vincent, AL 128,250 Lay Clanton, AL 177,000 Mitchell Verbena, AL 170,000 Jordan Wetumpka, AL 100,000 Bouldin Wetumpka, AL 225,000 Harris Wedowee, AL 135,000 Martin Dadeville, AL 154,200 Yates Tallassee, AL 32,000 Thurlow Tallassee, AL 60,000 Lewis Smith Jasper, AL 157,500 Bankhead Holt, AL 54,000 Holt Holt, AL 46,000 ----------- Alabama Power Total 1,599,600 ----------- ------------------------------------------------------------------ Generating Station Location Nameplate Capacity ------------------------------------------------------------------ (Kilowatts) (Kilowatts) Barnett Shoals (Leased) Athens, GA 2,800 Bartletts Ferry Columbus, GA 173,000 Goat Rock Columbus, GA 26,000 Lloyd Shoals Jackson, GA 14,400 Morgan Falls Atlanta, GA 16,800 North Highlands Columbus, GA 29,600 Oliver Dam Columbus, GA 60,000 Rocky Mountain Rome, GA 215,256 (13) Sinclair Dam Milledgeville, GA 45,000 Tallulah Falls Clayton, GA 72,000 Terrora Clayton, GA 16,000 Tugalo Clayton, GA 45,000 Wallace Dam Eatonton, GA 321,300 Yonah Toccoa, GA 22,500 6 Other Plants 18,080 ----------- Georgia Power Total 1,077,736 ----------- Total Hydroelectric Facilities 2,677,336 ----------- Total Generating Capacity 36,351,616 =========== ------------------------------------------------------------------ Notes: (1) For additional information regarding facilities jointly-owned with non-affiliated parties, see Item 2 - PROPERTIES - "Jointly-Owned Facilities" herein. (2) Owned by Alabama Power and Mississippi Power as tenants in common in the proportions of 60% and 40%, respectively. (3) Excludes the capacity owned by AEC. (4) Capacity shown for Georgia Power is 8.4% of Units 1 and 2 and 75% of Unit 3. Capacity shown for Gulf Power is 25% of Unit 3. (5) Capacity shown is Georgia Power's portion (53.5%) of total plant capacity. (6) Represents 50% of the plant which is owned as tenants in common by Gulf Power and Mississippi Power. (7) SEGCO is jointly-owned by Alabama Power and Georgia Power. (See Item 1 - BUSINESS herein.) (8) Capacity shown is Georgia Power's portion (50.1%) of total plant capacity. (9) Capacity shown is Georgia Power's portion (45.7%) of total plant capacity. (10)Capacity shown represents 33-1/3% of total plant capacity. Georgia Power owns a 1/3 interest in the unit with 100% use of the unit from June through September. FPC operates the unit. (11)Generation is dedicated to a single industrial customer. (12)In connection with various PPAs, Southern Power conducts unit testing to set contract capacity availability. At December 31, 2002, such capacity was as follows: 810,000 kilowatts - Dahlberg 561,300 kilowatts - Franklin 1,134,500 kilowatts - Wansley (13)Capacity shown is Georgia Power's portion (25.4%) of total plant capacity. OPC operates the plant. I-25 Except as discussed below under "Titles to Property," the principal plants and other important units of the operating companies, Southern Power and SEGCO are owned in fee by the respective companies. It is the opinion of management of each such company that its operating properties are adequately maintained and are substantially in good operating condition. Mississippi Power owns a 79-mile length of 500-kilovolt transmission line which is leased to Entergy Gulf States. The line, completed in 1984, extends from Plant Daniel to the Louisiana state line. Entergy Gulf States is paying a use fee over a 40-year period covering all expenses and the amortization of the original $57 million cost of the line. At December 31, 2002, the unamortized portion of this cost was approximately $32.1 million. The all-time maximum demand on the operating companies, Southern Power and SEGCO was 32,355,000 kilowatts and occurred in July 2002. This amount excludes demand served by capacity retained by MEAG and Dalton and excludes demand associated with power purchased from OPC and SEPA by its preference customers. The reserve margin for the operating companies, Southern Power and SEGCO at that time was 13.3%. For additional information on peak demands, reference is made to Item 6 - SELECTED FINANCIAL DATA herein. Alabama Power and Georgia Power will incur significant costs in decommissioning their nuclear units at the end of their useful lives. (See Item 1 - BUSINESS - "Regulation - Atomic Energy Act of 1954" and Note 1 to the financial statements of Southern Company, Alabama Power and Georgia Power under the heading "Depreciation and Nuclear Decommissioning" in Item 8 herein.) Jointly-Owned Facilities Alabama Power and Georgia Power have sold and Georgia Power has purchased undivided interests in certain generating plants and other related facilities to or from non-affiliated parties. The percentages of ownership resulting from these transactions are as follows:
Percentage Ownership ------------------------------------------------------------------------------- Total Alabama Georgia Capacity Power AEC Power OPC MEAG DALTON FPC -------------- ------------------------------------------------------------------------------- (Megawatts) Plant Miller Units 1 and 2 1,320 91.8% 8.2% -% -% -% -% -% Plant Hatch 1,796 - - 50.1 30.0 17.7 2.2 - Plant Vogtle 2,320 - - 45.7 30.0 22.7 1.6 - Plant Scherer Units 1 and 2 1,636 - - 8.4 60.0 30.2 1.4 - Plant Wansley 1,779 - - 53.5 30.0 15.1 1.4 - Rocky Mountain 848 - - 25.4 74.6 - - - Intercession City, FL 143 - - 33.3 - - - 66.7 -------------------------------------------------------------------------------------------------------------------------------
Alabama Power and Georgia Power have contracted to operate and maintain the respective units in which each has an interest (other than Rocky Mountain and Intercession City, as described below) as agent for the joint owners. In addition, Georgia Power has commitments regarding a portion of a 5 percent interest in Plant Vogtle owned by MEAG that are in effect until the later of retirement of the plant or the latest stated maturity date of MEAG's bonds issued to finance such ownership interest. The payments for capacity are required whether any capacity is available. The energy cost is a function of each unit's variable operating costs. Except for the portion of the capacity payments related to the 1987 and 1990 write-offs of Plant Vogtle costs, the cost of such capacity and energy is included in purchased power from non-affiliates in Georgia Power's Statements of Income in Item 8 herein. Additionally, jointly-owned facilities also include Southern Power's 65% undivided interest in Stanton Unit A and related facilities jointly owned with the Orlando Utilities Commission, the Kissimmee Utility Authority and the I-26 Florida Municipal Power Agency. Currently under construction near Orlando, Florida, this project will be a 610 megawatt combined cycle unit and is scheduled for commercial operation in October 2003. Titles to Property The operating companies', Southern Power's and SEGCO's interests in the principal plants (other than certain pollution control facilities, one small hydroelectric generating station leased by Georgia Power, Mississippi Power's combined cycle units at Plant Daniel and the land on which five combustion turbine generators of Mississippi Power are located, which is held by easement) and other important units of the respective companies are owned in fee by such companies, subject only to the liens of applicable mortgage indentures of Alabama Power, Gulf Power, Mississippi Power and Savannah Electric and to excepted encumbrances as defined therein. The operating companies own the fee interests in certain of their principal plants as tenants in common. (See Item 2 - - PROPERTIES - "Jointly-Owned Facilities" herein.) Properties such as electric transmission and distribution lines and steam heating mains are constructed principally on rights-of-way which are maintained under franchise or are held by easement only. A substantial portion of lands submerged by reservoirs is held under flood right easements. I-27 Item 3. LEGAL PROCEEDINGS (1) United States of America v. Alabama Power (United States District Court for the Northern District of Alabama) On November 3, 1999, the EPA brought a civil action in the U.S. District Court in Georgia against Alabama Power. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to coal-fired generating facilities at Alabama Power's Plants Miller, Barry and Gorgas. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued a notice of violation relating to these specific facilities, as well as Plants Greene County and Gaston. On August 1, 2000, the U.S. District Court granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia. On January 12, 2001, the EPA re-filed its claims against Alabama Power in federal district court in Birmingham, Alabama. Alabama Power's case has been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the TVA. The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power, Alabama Power is a party to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. Alabama Power believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. (2) United States of America v. Georgia Power and Savannah Electric (United States District Court for the Northern District of Georgia) On November 3, 1999, the EPA brought a civil action in the U.S. District Court in Georgia against Georgia Power. The complaint alleges violation of the New Source Review provisions of the Clean Air Act with respect to coal-fired generating facilities at Georgia Power's Plants Bowen and Scherer. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. On March 27, 2001, the U.S. District Court granted the EPA's motion to amend its complaint to add the alleged violations at Savannah Electric's Plant Kraft and to add Savannah Electric as a defendant. The EPA concurrently issued a notice of violation relating to these two Georgia Power plants and Savannah Electric's Plant Kraft. The cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the TVA. The TVA appeal involves many of the same legal issues raised by the actions against Georgia Power and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Georgia Power, Georgia Power has been a party to that case as well. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the I-28 Item 3. LEGAL PROCEEDINGS (Continued) motion at a later date, which he EPA has not done at this time. Georgia Power and Savannah Electric believe that they complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome of these matters could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. (3) Cooper et al. v. Georgia Power, Southern Company, SCS and Energy Solutions (Superior Court of Fulton County, Georgia) On July 28, 2000, a lawsuit alleging race discrimination was filed by three Georgia Power employees against Georgia Power, Southern Company, and SCS in the Superior Court of Fulton County, Georgia. Shortly thereafter, the lawsuit was removed to the United States District Court for the Northern District of Georgia. The lawsuit also raised claims on behalf of a purported class. The plaintiffs seek compensatory and punitive damages in an unspecified amount, as well as injunctive relief. In August 2000, the lawsuit was amended to add four more plaintiffs. Also, an additional subsidiary of Southern Company, Energy Solutions (now Southern Management Development), was named a defendant. In October 2001, the district court denied the plaintiffs' motion for class certification. The plaintiffs filed a motion to reconsider the order denying class certification, and the court denied the plaintiffs' motion to reconsider. In December 2001, the plaintiffs filed a petition in the United States Court of Appeals for the Eleventh Circuit seeking permission to file an appeal of the October 2001 decision. In March 2002, the Eleventh Circuit denied the plaintiffs' petition. After discovery was completed on the claims raised by the seven named plaintiffs, the defendants filed motions for summary judgment on all of the named plaintiffs' claims. The parties await the court's ruling on the seven motions for summary judgment. The final outcome of the case cannot now be determined. (4) Georgia Power Potentially Responsible Party Georgia Power has been designated as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation and Liability Act. In addition, in 1995 the EPA designated Georgia Power and four other unrelated entities as potentially responsible parties at a site in Brunswick, Georgia that is listed on the federal National Priorities List. Georgia Power has contributed to the removal and remedial investigation and feasibility study costs for the site. Additional claims for recovery of natural resource damages at the site are anticipated. The final outcome of these matters cannot now be determined. Reference is made to Note 3 to Southern Company's and Georgia Power's financial statements in Item 8 herein under the headings "Georgia Power Potentially Responsible Party Status" and "Other Environmental Contingencies," respectively. (5) In re: Mobile Energy Services Company, LLC; In re: Mobile Energy Services Holdings, Inc. (U.S. Bankruptcy Court for the Southern District of Alabama) In August 2000, MESH filed a proposed plan of reorganization with the U.S. Bankruptcy Court. The proposed plan of reorganization was most recently amended on December 13, 2001. Southern Company expects that I-29 Item 3. LEGAL PROCEEDINGS (Continued) approval of a plan of reorganization would result in a termination of Southern Company's ownership interest in MESH but would not affect Southern Company's continuing guarantee obligations discussed earlier. The final outcome of this matter cannot now be determined. Reference is made to Note 3 to Southern Company's financial statements in Item 8 herein under the heading "Mobile Energy Services' Petition for Bankruptcy." (6) Gordon v. Southern Company et al. (United States District Court for the Southern District of California) and (7) Pier 23 Restaurant v. Southern Company et al. (United States District Court for the Northern District of California) Prior to the spin off of Mirant, Southern Company was named as a defendant in two lawsuits filed in the superior courts of California alleging that certain owners of electric generation facilities in California, including Southern Company, engaged in various unlawful and anticompetitive acts that served to manipulate wholesale power markets and inflate wholesale electricity prices in California. One lawsuit naming Southern Company, Mirant and other generators as defendants alleged that, as a result of the defendants' conduct, customers paid approximately $4 billion more for electricity than they otherwise would have and sought an award of treble damages, as well as other injunctive and equitable relief. The other suit likewise sought treble damages and equitable relief. The allegations in the two lawsuits in which Southern Company was named seemed to be directed to activities of subsidiaries of Mirant. In the fall of 2001, the plaintiffs voluntarily dismissed Southern Company without prejudice from the two lawsuits in which it had been named as a defendant. Prior to being dismissed, Southern Company had notified Mirant of its claim for indemnification for costs associated with the lawsuits under the terms of the master separation agreement that governs the spin off of Mirant. Mirant had undertaken the defense of the lawsuits. Plaintiffs would not be barred by their own dismissal from naming Southern Company in some future lawsuit, but management believes that the likelihood of Southern Company having to pay damages in any such lawsuit is remote. (8) California Electricity Markets Investigation Southern Company has received a subpoena to provide information to a federal grand jury in the Northern District of California. The subpoena covers a number of broad areas, including specific information regarding electricity production and sales activities in California. Southern Company's former subsidiary, Mirant, participated in energy marketing and trading in California during the period relevant to the subpoena. Southern Company has produced documents in response to the subpoena and is fully cooperating in the investigation. (9) In re: Mirant Corporation Securities Litigation (United States District Court for the North District of Georgia) In November 2002, Southern Company, along with certain former and current senior officers of Southern Company and 12 underwriters of Mirant's initial public offering, were added as defendants in a class action lawsuit that several Mirant shareholders originally filed against Mirant and certain Mirant officers in May 2002. The original lawsuit against Mirant and its officers was based on allegations related to alleged improper energy trading and marketing activities involving the California energy market. Several other similar lawsuits filed subsequently were consolidated into this litigation in the United States District Court for the Northern District of Georgia. The November 2002 amended complaint I-30 Item 3. LEGAL PROCEEDINGS (Continued) is based on allegations related to alleged improper energy trading and marketing activities involving the California energy market, alleged false statements and omissions in Mirant's prospectus for its initial public offering and in subsequent public statements by Mirant, and accounting-related issues previously disclosed by Mirant. For more information, see Note 11 to the financial statements of Southern Company in Item 8 herein. The lawsuit purports to include persons who acquired Mirant securities on the open market or pursuant to an offering between September 26, 2000, and September 5, 2002. The amended complaint does not allege any improper trading and marketing activity, accounting errors, or material misstatements or omissions on the part of Southern Company but seeks to impose liability on Southern Company based on allegations that Southern Company was a "control person" as to Mirant. On February 14, 2003, Southern Company filed a motion seeking to dismiss all claims against Southern Company. However, the final outcome of this matter cannot now be determined. (10) Sierra Club, et al v. Georgia Power (United States District Court for the Northern District of Georgia) On December 30, 2002, the Sierra Club, Physicians for Social Responsibility, Georgia ForestWatch, and one individual filed a civil suit in U.S. District Court in Georgia against Georgia Power for alleged violations of the Clean Air Act at Plant Wansley. The complaint alleges Clean Air Act violations at both the existing coal-fired units and the new combined cycle units. Specifically, the plaintiffs allege (1) opacity violations at the coal-fired units, (2) violations of a permit provision that requires the combined cycle units to operate above certain levels, (3) violation of nitrogen oxide emission offset requirements, and (4) violation of hazardous air pollutant requirements. The civil action requests injunctive and declaratory relief, civil penalties, a supplemental environmental project, and attorneys' fees. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. On January 27, 2003, Georgia Power filed a response to the complaint. Georgia Power also filed a motion to dismiss the allegations regarding emission offsets and hazardous air pollutants. While Georgia Power believes that it has complied with applicable laws and regulations, an adverse outcome could require payment of substantial penalties. The final outcome of this matter cannot now be determined. (11) Right of Way Litigation In 2002, certain subsidiaries of Southern Company, including Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Telecom (collectively, defendants), were named as defendants in numerous lawsuits brought by landowners regarding the installation and use of fiber optic cable over defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs' properties, and that such actions by defendants exceed the easements or other property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment. The plaintiffs seek compensatory and punitive damages and injunctive relief. Defendants believe that the plaintiffs' claims are without merit. An adverse outcome in these matters could result in substantial judgments; however, the final outcome of these matters cannot now be determined. (12) Jerry A. Carter v. Gulf Power On January 28, 2003, a jury in Escambia County, Florida returned a verdict of $3 million against Gulf Power arising out of an alleged electrical injury sustained by the plaintiff in January 1999 while inside his apartment. If the verdict is not overturned, the plaintiff will also be I-31 Item 3. LEGAL PROCEEDINGS (Continued) entitled to recover attorney's fees. Gulf Power intends to seek a new trial; however, if it is not successful in obtaining a new trial, Gulf Power intends to pursue an appeal. The ultimate outcome of this matter cannot now be determined, but is not expected to have a material impact on Gulf Power's financial statements. Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company and its subsidiaries are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against Southern Company and its subsidiaries cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the financial statements of Southern Company and its subsidiaries. See Item 1 - BUSINESS - "Construction Programs," "Fuel Supply," "Regulation - - Federal Power Act" and "Rate Matters" as well as Note 3 to each registrant's financial statements in Item 8 herein for a description of certain other administrative and legal proceedings discussed therein. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. I-32 EXECUTIVE OFFICERS OF SOUTHERN COMPANY (Identification of executive officers of Southern Company is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2002. H. Allen Franklin Chairman, President, Chief Executive Officer and Director Age 58 Elected Director in 1988 and Chief Executive Officer effective March 1, 2001. Previously served as President and Chief Operating Officer of Southern Company from June 1999 to March 2001; and as President and Chief Executive Officer of Georgia Power from January 1994 to June 1999. Dwight H. Evans Executive Vice President Age 54 Elected in 2001. Previously served as President and Chief Executive Officer of Mississippi Power from March 1995 to May 2001. David M. Ratcliffe Executive Vice President Age 54 Elected in 1999. He also has served as President and Chief Executive Officer of Georgia Power since June 1999. Previously served as Executive Vice President, Treasurer and Chief Financial Officer of Georgia Power from March 1998 to June 1999; and Senior Vice President of Southern Company from March 1995 to March 1998. Leonard J. Haynes Executive Vice President and Chief Marketing Officer Age 52 Elected in 2001. Previously served as Senior Vice President of Georgia Power from October 1998 to May 2001; and Vice President of Georgia Power from October 1992 to October 1998. G. Edison Holland, Jr. Executive Vice President Age 50 Elected in 2001. Previously served as President and Chief Executive Officer of Savannah Electric from 1997 until 2001. Gale E. Klappa Executive Vice President, Chief Financial Officer and Treasurer Age 52 Elected in 2001. Previously served as Financial Vice President, Chief Financial Officer and Treasurer from March 2001 to May 2001; Senior Vice President and Chief Strategic Officer of Southern Company from October 1999 to March 2001; President of Mirant's North America Group and Senior Vice President of Mirant from December 1998 to October 1999; and as President and Chief Executive Officer of Western Power Distribution, a subsidiary of Mirant located in Bristol, England, from September 1995 to December 1998. Charles D. McCrary Executive Vice President Age 51 Elected in 1998. He also serves as President and Chief Executive Officer of Alabama Power since October 2001 and Executive Vice President of Southern Company since February 2002. Previously served as President and Chief Operating Officer of Alabama Power from April 2001 to October 2001; Vice President of Southern Company from February 1998 to April 2001; and as Executive Vice President of Alabama Power from 1994 through February 1998. W. Paul Bowers Executive Vice President of SCS and President and Chief Executive Officer of Southern Power since May 2001 Age 45 Elected in 2001. Previously served as Senior Vice President of SCS and Chief Marketing Officer of Southern Company from March 2000 to May 2001; President and Chief Executive Officer of Western Power Distribution, a subsidiary of Mirant located in Bristol, England, from December 1998 to 2000; and Senior Vice President of Retail Marketing for Georgia Power from 1995 to 1998. W. G. Hairston, III President and Chief Executive Officer of Southern Nuclear since 1993. Age 58 The officers of Southern Company were elected for a term running from the first meeting of the directors following the last annual meeting (May 22, 2002) for one year until the first board meeting after the next annual meeting or until their successors are elected and have qualified. I-33 EXECUTIVE OFFICERS OF ALABAMA POWER (Identification of executive officers of Alabama Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2002. Charles D. McCrary President, Chief Executive Officer and Director Age 51 Elected in 2001. Served as President and Chief Operating Officer of Alabama Power from April 2001 to October 2001 and Vice President of Southern Company from February 1998 to April 2001. Previously served as Executive Vice President of External Affairs at Alabama Power from April 1994 through February 1998. William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer Age 59 Elected in 1991. Served as Treasurer since 1998 in addition to Executive Vice President and Chief Financial Officer since 1994. C. Alan Martin Executive Vice President Age 54 Elected in 1999. Served as Executive Vice President of External Affairs from January 2000 to April 2001. Previously served as Executive Vice President and Chief Marketing Officer for Southern Company from 1998 to 1999; and Vice President of Human Resources for Southern Company from May 1995 to March 1998. Steven R. Spencer Executive Vice President Age 47 Elected in 2001. Served as Senior Vice President of External Affairs from July 2000 to April 2001. Previously served as Vice President of Southern Company's external affairs organization from 1998 to 2001. Jerry L. Stewart Senior Vice President Age 53 Elected in 1999. Served as Senior Vice President of Fossil and Hydro Generation since 1999. Previously served as Vice President of SCS from 1992 to 1999. The officers of Alabama Power were elected for a term running from the last annual meeting of the directors (April 26, 2002) for one year until the next annual meeting or until their successors are elected and have qualified. I-34 EXECUTIVE OFFICERS OF GEORGIA POWER (Identification of executive officers of Georgia Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2002. David M. Ratcliffe President, Chief Executive Officer and Director Age 54 Elected as an Executive Officer in 1998 and as Director in 1999. Served as President and Chief Executive Officer since June 1999. Previously served as Executive Vice President, Treasurer and Chief Financial Officer of Georgia Power from 1998 to 1999; and as Senior Vice President of Southern Company from March 1995 to March 1998. William C. Archer, III Executive Vice President Age 54 Elected in 1995. Served as Executive Vice President of External Affairs since 1995. Allen L. Leverett Executive Vice President, Treasurer and Chief Financial Officer Age 36 Elected in 2002. Previously served as Vice President and Treasurer of SCS and Assistant Treasurer of Georgia Power from 2000 to 2002; and as Vice President, Financial Planning & Analysis from 1997 to 2000. Judy M. Anderson Senior Vice President Age 54 Elected in 2001. Served as Senior Vice President of Charitable Giving since 2001. Previously served as Vice President and Corporate Secretary of Georgia Power from 1989 to 2001. Ronnie L. Bates Senior Vice President Age 48 Elected in 2001. Served as Senior Vice President, Planning, Sales and Service since 2001. Previously served as Vice President, Transmission from 2000 to 2001; and as General Manager, Transmission and Construction from 1995 to 2000. Mickey A. Brown Senior Vice President Age 55 Elected in 2001. Served as Senior Vice President of Distribution since 2001. Previously served as Vice President, Distribution from 2000 to 2001; and as Vice President, Northern Region from 1993 to 2000. James K. Davis Senior Vice President Age 62 Elected in 1993. Served as Senior Vice President of Corporate Relations since 1993, with Employee Relations being added to his responsibilities in 2000. Leslie R. Sibert Vice President Age 40 Elected in 2001. Served as Vice President, Transmission since 2001. Previously served as Decatur Region Manager from 1999 to 2001; and as Assistant to Senior Vice President, Southern Wholesale Energy from 1996 to 1999. Christopher C. Womack Senior Vice President Age 44 Elected in 2001. Served as Senior Vice President of Fossil and Hydro since 2001. Previously served as Vice President and Chief People Officer of Southern Company from 1998 to 2001; and as Senior Vice President of Public Relations and Corporate Services at Alabama Power from 1995 to 1998. The officers of Georgia Power were elected for a term running from the last annual meeting of the directors (May 15, 2002) for one year until the next annual meeting or until their successors are elected and have qualified, except for Mr. Leverett, whose election was effective May 25, 2002. I-35 EXECUTIVE OFFICERS OF GULF POWER (Identification of executive officers of Gulf Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2002. Thomas A. Fanning President, Chief Executive Officer and Director Age 45 Elected in 2002. Previously served as Executive Vice President, Treasurer and Chief Financial Officer of Georgia Power from 1999 to 2002; and as Senior Vice President of SCS and Chief Information Officer for Southern Company from 1995 to June 1999. Francis M. Fisher, Jr. Vice President Age 54 Elected in 1989. Served as Vice President of Power Delivery and Customer Operations since 1996. John E. Hodges, Jr. Vice President Age 59 Elected in 1989. Served as Vice President of Marketing and Employee/External Affairs since 1996. Ronnie R. Labrato Vice President, Chief Financial Officer and Comptroller Age 49 Elected in 2000. Previously served as Comptroller and Chief Financial Officer from 2000 to 2001 and Controller from 1992 to 2000. Warren E. Tate Vice President, Secretary/Treasurer and Regional Chief Information Officer Age 60 Elected in 2000. Served as Vice President since 2001, also serves as Secretary/Treasurer and Regional Chief Information Officer since 1996. Gene L. Ussery, Jr. Vice President Age 53 Elected in 2002. Served as Vice President of Power Generation since May 2002. Also serves at Mississippi Power as Vice President of Power Generation and Delivery from September 2000 to present. Previously served as Northern Cluster Manager at Georgia Power for Plants Hammond, Bowen and McDonough-Atkinson from July 2000 to September 2000; and Manager of Plant Bowen at Georgia Power from 1997 to 2000. The officers of Gulf Power were elected for a term running from the last annual meeting of the directors (May 17, 2002) for one year until the next annual meeting or until their successors are elected and have qualified. I-36 EXECUTIVE OFFICERS OF MISSISSIPPI POWER (Identification of executive officers of Mississippi Power is inserted in Part I in accordance with Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of December 31, 2002. Michael D. Garrett President, Chief Executive Officer and Director Age 53 Elected in 2001. Previously served as Executive Vice President - Customer Service of Alabama Power from January 2000 to May 2001; Executive Vice President of External Affairs of Alabama Power from March 1998 to January 2000; and Senior Vice President of External Affairs of Alabama Power from February 1994 to March 1998. H. E. Blakeslee Vice President Age 62 Elected in 1984. Served as Vice President of Customer Services and Retail Marketing since 1984. Don E. Mason Vice President Age 61 Elected in 1983. Served as Vice President of External Affairs and Corporate Services since 1983. Michael W. Southern Vice President, Treasurer and Chief Financial Officer Age 50 Elected in 1995. Previously served as Vice President, Secretary, Treasurer and Chief Financial Officer from 1995 to 2001. Gene L. Ussery, Jr. Vice President Age 53 Elected in 2000. Served as Vice President of Power Generation and Delivery since September 2000 and Vice President of Power Generation at Gulf Power since May 2002. Previously served as Northern Cluster Manager at Georgia Power for Plants Hammond, Bowen and McDonough-Atkinson from July 2000 to September 2000; and Manager of Plant Bowen at Georgia Power from 1997 to 2000. The officers of Mississippi Power were elected for a term running from the last annual meeting of the directors (April 24, 2002) for one year until the next annual meeting or until their successors are elected and have qualified. I-37 PART II Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The common stock of Southern Company is listed and traded on the New York Stock Exchange. The stock is also traded on regional exchanges across the United States. High and low stock prices, per the New York Stock Exchange Composite Tape, during each quarter for the past two years were as follows: ------------------------------------------------------- High Low -------------- -------------- 2002 First Quarter $26.78 $24.49 Second Quarter 28.39 25.65 Third Quarter 29.02 23.89 Fourth Quarter 30.85 25.17 2001 First Quarter $21.65 $16.15 Second Quarter 23.88 20.89 Third Quarter 26.00 22.05 Fourth Quarter 25.98 22.30 ------------------------------------------------------- There is no market for the other registrants' common stock, all of which is owned by Southern Company. On February 28, 2003, the closing price of Southern Company's common stock was $28.21. (b) Number of Southern Company's common stockholders of record at December 31, 2002: 141,784 Each of the other registrants have one common stockholder, Southern Company. (c) Dividends on each registrant's common stock are payable at the discretion of their respective board of directors. The dividends on common stock declared by Southern Company and the operating companies to their stockholder(s) for the past two years were as follows: --------------------------------------------------------- Registrant Quarter 2002 2001 --------------------------------------------------------- (in thousands) Southern Company First $ 234,272 $ 228,320 Second 236,154 229,611 Third 242,850 231,192 Fourth 244,309 232,935 Alabama Power First 107,750 101,200 Second 107,750 97,600 Third 107,750 97,600 Fourth 107,750 97,500 Georgia Power First 135,725 134,500 Second 135,725 130,900 Third 135,725 130,900 Fourth 135,725 131,000 Gulf Power First 16,375 13,500 Second 16,375 13,300 Third 16,375 13,300 Fourth 16,375 13,175 Mississippi First 15,875 12,800 Power Second 15,875 12,500 Third 15,875 12,500 Fourth 15,875 12,400 Savannah First 5,675 5,500 Electric Second 5,675 5,400 Third 5,675 5,400 Fourth 5,675 5,400 --------------------------------------------------------- Southern Power did not pay a dividend in 2002 or 2001. The dividend paid per share by Southern Company was 33.5(cent) for each quarter of 2001 and the first two quarters of 2002 and 34.25(cent) for the two remaining quarters in 2002. The dividend paid on Southern Company's common stock for the first quarter of 2003 was 34.25(cent) per share. II-1 The amount of dividends on their common stock that may be paid by the subsidiary registrants (except Alabama Power, Georgia Power and Southern Power) is restricted in accordance with their respective first mortgage bond indenture. See Notes 7 of Southern Company and Mississippi Power, Note 8 of Gulf Power and Note 6 of Savannah Electric to the financial statements in Item 8 herein for additional information regarding these restrictions. The amounts of earnings retained in the business and the amounts restricted against the payment of cash dividends on common stock at December 31, 2002 were as follows: ---------------------------------------------------------- Retained Restricted Earnings Amount ------------------ ------------- (in millions) Alabama Power $ 1,250 $ - Georgia Power 1,945 - Gulf Power 162 127 Mississippi Power 196 118 Savannah Electric 110 68 Southern Power 62 - Consolidated 4,875 313 ---------------------------------------------------------- Item 6. SELECTED FINANCIAL DATA Southern Company. Reference is made to information under the heading "Selected Consolidated Financial and Operating Data," contained herein at pages II-53 and II-54. Alabama Power. Reference is made to information under the heading "Selected Financial and Operating Data," contained herein at pages II-93 and II-94. Georgia Power. Reference is made to information under the heading "Selected Financial and Operating Data," contained herein at pages II-134 and II-135. Gulf Power. Reference is made to information under the heading "Selected Financial and Operating Data," contained herein at pages II-171 and II-172. Mississippi Power. Reference is made to information under the heading "Selected Financial and Operating Data," contained herein at pages II-210 and II-211. Savannah Electric. Reference is made to information under the heading "Selected Financial and Operating Data," contained herein at pages II-246 and II-247. Southern Power. Reference is made to information under the heading "Selected Financial and Operating Data," contained herein at page II-275. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Southern Company. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-9 through II-23. Alabama Power. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-58 through II-70. Georgia Power. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-98 through II-110. Gulf Power. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-139 through II-151. Mississippi Power. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-176 through II-188. Savannah Electric. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-215 through II-227. Southern Power. Reference is made to information under the heading "Management's Discussion and Analysis of Results of Operations and Financial Condition," contained herein at pages II-251 through II-259. II-2 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to information in Southern Company's "Management's Discussion and Analysis - Market Price Risk" in Item 7 herein and to Notes 1 and 8 to Southern Company's financial statements under the heading "Financial Instruments" contained herein on pages II-17, II-35 and II-47, respectively. Reference is also made to "Management's Discussion and Analysis - Exposure to Market Risks" in Item 7 of Alabama Power, Georgia Power, Gulf Power, Savannah Electric and Southern Power contained herein at pages II-64, II-104, II-144, II-220, and II-257, respectively. Reference is also made to "Management's Discussion and Analysis - Market Price Risk" in Item 7 of Mississippi Power contained herein at page II-182. Further reference is made to Note 1 to the financial statements in Item 8 herein for the operating companies and Southern Power, also Note 7 to the financial statements of Alabama Power and Southern Power and Note 9 to the financial statements of Georgia Power under the headings "Financial Instruments." II-3 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO 2002 FINANCIAL STATEMENTS
Page The Southern Company and Subsidiary Companies: Independent Auditors' Report............................................................................................ II-8 Report of Independent Public Accountants................................................................................ II-8 Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000.................................. II-24 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.............................. II-25 Consolidated Balance Sheets at December 31, 2002 and 2001............................................................... II-26 Consolidated Statements of Capitalization at December 31, 2002 and 2001................................................. II-28 Consolidated Statements of Common Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-30 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-30 Notes to Financial Statements........................................................................................... II-31 Alabama Power: Independent Auditors' Report............................................................................................ II-57 Report of Independent Public Accountants................................................................................ II-57 Statements of Income for the Years Ended December 31, 2002, 2001 and 2000............................................... II-71 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........................................... II-72 Balance Sheets at December 31, 2002 and 2001 ........................................................................... II-73 Statements of Capitalization at December 31, 2002 and 2001 ............................................................. II-75 Statements of Common Stockholder's Equity for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-77 Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-77 Notes to Financial Statements........................................................................................... II-78 Georgia Power: Independent Auditors' Report............................................................................................ II-97 Report of Independent Public Accountants................................................................................ II-97 Statements of Income for the Years Ended December 31, 2002, 2001 and 2000............................................... II-111 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........................................... II-112 Balance Sheets at December 31, 2002 and 2001............................................................................ II-113 Statements of Capitalization at December 31, 2002 and 2001 ............................................................. II-115 Statements of Common Stockholder's Equity for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-116 Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-116 Notes to Financial Statements........................................................................................... II-117 Gulf Power: Independent Auditors' Report............................................................................................ II-138 Report of Independent Public Accountants................................................................................ II-138 Statements of Income for the Years Ended December 31, 2002, 2001 and 2000............................................... II-152 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........................................... II-153 Balance Sheets at December 31, 2002 and 2001 ........................................................................... II-154 Statements of Capitalization at December 31, 2002 and 2001 ............................................................. II-156 Statements of Common Stockholder's Equity for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-157
II-4
Page Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-157 Notes to Financial Statements........................................................................................... II-158 Mississippi Power: Independent Auditors' Report............................................................................................ II-175 Report of Independent Public Accountants................................................................................ II-175 Statements of Income for the Years Ended December 31, 2002, 2001 and 2000............................................... II-189 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........................................... II-190 Balance Sheets at December 31, 2002 and 2001 ........................................................................... II-191 Statements of Capitalization at December 31, 2002 and 2001 ............................................................. II-193 Statements of Common Stockholder's Equity for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-195 Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-195 Notes to Financial Statements........................................................................................... II-196 Savannah Electric: Independent Auditors' Report............................................................................................ II-214 Report of Independent Public Accountants................................................................................ II-214 Statements of Income for the Years Ended December 31, 2002, 2001 and 2000............................................... II-228 Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000........................................... II-229 Balance Sheets at December 31, 2002 and 2001 ........................................................................... II-230 Statements of Capitalization at December 31, 2002 and 2001 ............................................................. II-232 Statements of Common Stockholder's Equity for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-233 Statements of Comprehensive Income for the Years Ended December 31, 2002, 2001 and 2000............................................................................... II-233 Notes to Financial Statements........................................................................................... II-234 Southern Power: Independent Auditors' Report............................................................................................ II-250 Statements of Income for the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001 .............................................................. II-260 Statements of Cash Flows for the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001............................................................... II-261 Balance Sheets at December 31, 2002 and 2001 ........................................................................... II-262 Statements of Common Stockholder's Equity for the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001........................................... II-264 Statements of Comprehensive Income for the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001....................................... II-264 Notes to Financial Statements........................................................................................... II-265
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Previously reported by each registrant, except for Southern Power, in separate Current Reports on Form 8-K dated March 28, 2002. II-5 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES FINANCIAL SECTION II-6 MANAGEMENT'S REPORT Southern Company and Subsidiary Companies 2002 Annual Report The management of Southern Company has prepared -- and is responsible for -- the consolidated financial statements and related information included in this report. These statements were prepared in accordance with accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 the accounting records reflect only authorized transactions of the company. Limitations exist in any system of internal controls, however, based on a recognition that the cost of the system should not exceed its benefits. The company believes its system of internal accounting controls maintains an appropriate cost/benefit relationship. The company's system of internal accounting controls is evaluated on an ongoing basis by the company's 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 five independent directors, 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 consolidated financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of Southern Company and its subsidiary companies in conformity with accounting principles generally accepted in the United States. /s/H. Allen Franklin H. Allen Franklin Chairman, President, and Chief Executive Officer /s/Gale E. Klappa Gale E. Klappa Executive Vice President, Chief Financial Officer, and Treasurer February 17, 2003 II-7 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Southern Company We have audited the accompanying consolidated balance sheet and consolidated statement of capitalization of Southern Company and Subsidiary Companies as of December 31, 2002, and the related consolidated statements of income, comprehensive income, common stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of Southern Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Southern Company and Subsidiary Companies as of December 31, 2001, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph that described a change in the method of accounting for derivative instruments and hedging activities in their report dated February 13, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements (pages II-24 to II-52) present fairly, in all material respects, the financial position of Southern Company and Subsidiary Companies at December 31, 2002, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 THE FOLLOWING REPORT OF INDEPENDENT ACCOUNTANTS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE COMPANY'S 2001 ANNUAL REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. SEE EXHIBIT 23(a)2 FOR ADDITIONAL INFORMATION. To Southern Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Southern Company (a Delaware corporation) and subsidiary companies as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 consolidated financial statements (pages II-19 through II-42) referred to above present fairly, in all material respects, the financial position of Southern Company and subsidiary companies as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, effective January 1, 2001, Southern Company changed its method of accounting for derivative instruments and hedging activities. /s/Arthur Andersen LLP Atlanta, Georgia February 13, 2002 II-8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Southern Company and Subsidiary Companies 2002 Annual Report RESULTS OF OPERATIONS - --------------------- Overview of Consolidated Earnings and Dividends Earnings Southern Company's financial performance in 2002 was very strong and one of the best in the electric utility industry. This performance reflected our goal to deliver solid results to stockholders and to provide low-cost energy to more than 4 million customers. Net income of $1.3 billion increased 17.6 percent over income from continuing operations reported in 2001. Net income from continuing operations was $1.1 billion in 2001 and $994 million in 2000. This was a 12.7 percent and 8.6 percent increase in 2001 and 2000, respectively. Basic earnings per share from continuing operations in 2002 were $1.86 per share, $1.62 in 2001, and $1.52 in 2000. Dilution -- which factors in additional shares related to stock options -- decreased earnings per share by 1 cent in 2002 and 2001 and had no impact in 2000. In April 2000, Southern Company announced an initial public offering of up to 19.9 percent of Mirant Corporation (Mirant) and intentions to spin off its remaining ownership of 272 million Mirant shares. On April 2, 2001, the tax-free distribution of Mirant shares was completed. As a result of the spin off, Southern Company's financial statements and related information reflect Mirant as discontinued operations. Therefore, the focus of Management's Discussion and Analysis is on Southern Company's continuing operations. The following chart shows earnings from continuing and discontinued operations: Basic Earnings Per Share -------------------------- 2002 2001 2000 - -------------------------------------------------------------- Earnings from -- Continuing operations $1.86 $1.62 $1.52 Discontinued operations - 0.21 0.49 - -------------------------------------------------------------- Total earnings $1.86 $1.83 $2.01 ============================================================== Dividends Southern Company has paid dividends on its common stock since 1948. Dividends paid per share on common stock in 2002 were $1.355 and $1.34 in 2001 and 2000. The quarterly dividend was increased in September 2002 to 341/4 cents per share - -- or $1.37 annually -- from 331/2 cents. In January 2003, Southern Company declared a quarterly dividend of 341/4 cents per share. This is the 221st consecutive quarter that Southern Company has paid a dividend equal to or higher than the previous quarter. Our goal for the dividend payout ratio is a range of 70 to 75 percent and the payout ratio was 72.8 percent for 2002. Southern Company Business Activities Discussion of the results of continuing operations is focused on Southern Company's primary business of electricity sales by the operating companies -- Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric -- and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rates. The remaining portion of Southern Company's other business activities includes alternative fuels, energy-related products and services, leveraged leasing activities, and the parent holding company. A condensed income statement for the other businesses is shown later. Electricity Businesses Southern Company's electric utilities generate and sell electricity to retail and wholesale customers in the Southeast. A condensed income statement for the six companies that make up the regulated retail and wholesale and competitive generation business is as follows: Increase (Decrease) Amount From Prior Year -------- ----------------------- 2002 2002 2001 2000 - -------------------------------------------------------------- (in millions) Operating revenues $10,206 $ 300 $ 46 $735 - -------------------------------------------------------------- Fuel 2,786 209 13 236 Purchased power 449 (269) 41 268 Other operation and maintenance 2,751 262 19 40 Depreciation and amortization 989 (155) 9 89 Taxes other than income taxes 555 22 1 11 - -------------------------------------------------------------- Total operating expenses 7,530 69 83 644 - -------------------------------------------------------------- Operating income 2,676 231 (37) 91 Other income, net (17) (32) 51 2 Interest expenses and other, net 585 (24) (25) 29 Income taxes 778 76 (1) 28 - -------------------------------------------------------------- Net income $ 1,296 $ 147 $ 40 $ 36 ============================================================== II-9 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Revenues Details of electric operating revenues are as follows: 2002 2001 2000 - -------------------------------------------------------------- (in millions) Retail -- prior year $ 8,440 $8,600 $8,090 Change in -- Base rates 33 23 (36) Sales growth 98 61 115 Weather 158 (177) 95 Fuel cost recovery and other (1) (67) 336 - -------------------------------------------------------------- Total retail 8,728 8,440 8,600 - -------------------------------------------------------------- Sales for resale -- Within service area 389 338 377 Outside service area 779 836 600 - -------------------------------------------------------------- Total sales for resale 1,168 1,174 977 - -------------------------------------------------------------- Other electric operating revenues 310 292 283 - -------------------------------------------------------------- Electric operating revenues $10,206 $9,906 $9,860 ============================================================== Percent change 3.0% 0.5% 8.1% - --------------------------------------------------------------- Retail revenues increased $288 million in 2002, declined $160 million in 2001, and rose $510 million in 2000. The significant factors driving these changes are shown in the table above. Electric rates -- for the operating companies -- include provisions to adjust billings for fluctuations in fuel costs, the energy component of purchased power costs, and certain other costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses -- including the fuel component of purchased energy -- and do not affect net income. Sales for resale revenues within the service area of $389 million for 2002 were near the same level as 2000, which reflected closer to normal weather-adjusted sales. The same sales for resale category in 2001 was $338 million, down 10.2 percent from the prior year. This sharp decline resulted primarily from the mild weather experienced in the Southeast during 2001, which significantly reduced energy requirements from these customers. Sales for resale within the service area for 2000 were up from the prior year as a result of additional demand for electricity during the hot summer. Revenues from energy sales for resale outside the service area were down 7.1 percent in 2002 after having increased 39 percent in 2001 and 27 percent in 2000. The decline in 2002 resulted from the expiration of certain short-term energy sales contracts in effect in 2001. Revenues from outside the service area have increased $306 million since 1999 as a result of growth driven by new longer-term contracts. As Southern Company increases its competitive wholesale generation business, sales for resale outside the service area should reflect steady increases over the near term. Recent wholesale contracts with market-based capacity and energy rates have shorter contract periods than the traditional cost-based contracts entered into in the 1980s. The older contracts are principally unit power sales to Florida utilities. Capacity revenues reflect the recovery of fixed costs and a return on investment under the unit power sales contracts, and energy is generally sold at variable cost. The capacity and energy components of the unit power contracts and other long-term contracts were as follows: 2002 2001 2000 - -------------------------------------------------------------- (in millions) Unit power -- Capacity $175 $170 $177 Energy 198 201 178 Other long term -- Capacity 100 112 42 Energy 306 353 203 - -------------------------------------------------------------- Total $779 $836 $600 ============================================================== Capacity revenues for unit power contracts in 2002, 2001, and 2000 varied slightly compared with the prior year as a result of adjustments and true-ups related to contractual pricing. No significant declines in the amount of capacity are scheduled until the termination of the contracts in 2010. See Note 5 to the financial statements for additional information. Energy Sales Changes in revenues are influenced heavily by the volume of energy sold each year. Kilowatt-hour sales for 2002 and the percent change by year were as follows: Amount Percent Change (billions of ------ --------------------------- kilowatt-hours) 2002 2002 2001 2000 - -------------------------------------------------------------- Residential 48.8 9.5% (3.6)% 6.5% Commercial 48.2 2.8 1.5 6.6 Industrial 53.9 1.8 (6.8) 1.0 Other 1.0 2.3 0.7 2.7 ----- Total retail 151.9 4.5 (3.2) 4.3 Sales for resale -- Within service area 10.6 12.9 (2.0) 1.5 Outside service area 21.9 2.7 24.4 33.0 ----- - Total 184.4 4.7 (0.5) 6.4 ============================================================== II-10 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Residential energy sales in 2002 reflected a substantial increase compared with 2001 as a result of weather and a 1.6 percent increase in new customers. Commercial sales continued to show steady growth while industrial sales increased somewhat over the depressed results of recent years. In 2001, retail energy sales registered a 3.2 percent decline. This was the first decrease since 1982 and was driven by extremely mild weather and the sluggish economy, which severely impacted industrial sales. In 2000, the rate of growth in total retail energy sales was very strong. Residential energy sales reflected an increase as a result of hotter-than-normal summer weather and an increase in customers served. Also in 2000, commercial sales continued to reflect the strong economy in the Southeast. Energy sales to retail customers are projected to increase at an average annual rate of 1.9 percent during the period 2003 through 2013. Sales to customers outside the service area under more recent long-term contracts increased kilowatt-hour sales by 1.0 billion, 3.9 billion, and 2.2 billion in 2002, 2001, and 2000, respectively. These sales reflected the expansion of the competitive wholesale generation business discussed earlier. Unit power energy sales decreased 3.3 percent in 2002, increased 2.7 percent in 2001, and increased 21 percent in 2000. These changes are influenced by fluctuations in prices for oil and natural gas. These are the primary fuel sources for the unit power sales customers. However, these fluctuations in energy sales under long-term contracts have minimal effect on earnings because the energy is generally sold at variable cost. Expenses Electric operating expenses in 2002 were $7.5 billion, an increase of $69 million over 2001 expenses. Electricity production costs exceeded last year's cost by $88 million as a result of increased electricity sales. Non-production electricity operation and maintenance costs also increased in 2002 by $109 million. This increase was driven by additional maintenance projects in 2002 as compared to 2001. Taxes other than income taxes increased $22 million in 2002. Depreciation and amortization declined by $155 million in 2002 primarily as a result of Georgia Power's 2001 rate order to reverse and amortize over three years $333 million that had been previously expensed related to accelerated depreciation under a previous rate order. This amortization reduced depreciation expense in 2002 by $111 million. For more information regarding this rate action, see Note 3 to the financial statements under "Georgia Power Retail Rate Orders." In 2001, electric operating expenses of $7.5 billion increased only $83 million compared with the prior year. The moderate increase reflected flat energy sales and tighter cost containment measures, which included lower staffing levels and reductions in certain non-critical expenses. The costs to produce electricity in 2001 increased $96 million. However, non-production operation and maintenance expenses declined by $23 million. In 2000, operating expenses of $7.4 billion increased $644 million compared with the prior year. The costs to produce electricity in 2000 increased by $498 million to meet higher energy requirements. Non-production operation and maintenance expenses increased $46 million in 2000. Depreciation and amortization expenses in 2000 increased $89 million, of which $50 million resulted from additional accelerated amortization by Georgia Power. Fuel costs constitute the single largest expense for the six electric utilities. The mix of fuel sources for generation of electricity is determined primarily by system load, the unit cost of fuel consumed, and the availability of hydro and nuclear generating units. The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated -- within the service area -- were as follows: 2002 2001 2000 - -------------------------------------------------------------- Total generation (billions of kilowatt-hours) 183 174 174 Sources of generation (percent) -- Coal 69 72 78 Nuclear 16 16 16 Gas 12 9 4 Hydro 3 3 2 Average cost of fuel per net kilowatt-hour generated (cents) 1.61 1.56 1.51 - -------------------------------------------------------------- Fuel and purchased power costs to produce electricity were $3.24 billion in 2002, a decrease of $60 million or 1.8 percent below the prior year costs. An II-11 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report additional 8.9 billion kilowatt-hours were generated in 2002, at a slightly higher average cost; however, this lowered requirements to purchase more expensive electricity from other utilities. In 2001, fuel and purchased power costs of $3.3 billion increased $54 million. Continued efforts to control energy costs, combined with additional efficient gas-fired generating units, helped to hold the increase in fuel expense to $13 million in 2001. Total fuel and purchased power costs increased $504 million in 2000 as a result of a 10.6 billion increase in kilowatt-hours being sold compared with 1999. This increased demand was met by purchasing some 2.5 billion additional kilowatt-hours and using generation with higher unit fuel cost than in 1999. Total interest charges and other financing costs in 2002 declined by $24 million as a result of much lower interest rates on short-term debt and continued refinancing of higher-cost long-term securities. Total interest charges and other financing costs in 2001 decreased $25 million from amounts reported in the previous year. The decline reflected substantially lower short-term interest rates that offset new financing costs. Total interest charges and other financing costs in 2000 increased $29 million, reflecting some additional external financing for new generating units. Other Business Activities Southern Company's other business activities include the parent company -- which does not allocate operating expenses to business units -- telecommunications, energy services, leasing, alternative fuels, and natural gas marketing. These businesses are classified in general categories and may comprise one or more of the following subsidiaries. Southern LINC provides digital wireless communications services to the integrated Southeast utilities and also markets these services to the public within the Southeast; Southern Telecom provides fiber optics services; and Southern Company Energy Solutions provides energy services, including energy efficiency improvements, for large commercial and industrial customers, municipalities, and government entities. Southern Company GAS is a retail gas marketer serving Georgia. Southern Company Holdings invests in alternative fuel projects and leveraged lease projects, which currently receive tax benefits that contribute significantly to the economic results of these investments. A condensed income statement for Southern Company's other business activities is shown below: Increase (Decrease) Amount From Prior Year ------- ----------------------- 2002 2002 2001 2000 - -------------------------------------------------------------- (in millions) Operating revenues $ 343 $ 94 $ 43 $ 14 - -------------------------------------------------------------- Operation and maintenance 378 106 29 6 Depreciation and amortization 58 29 (7) (57) Taxes other than income taxes 2 - (2) 2 - -------------------------------------------------------------- Total operating expenses 438 135 20 (49) - -------------------------------------------------------------- Operating income (95) (41) 23 63 Equity in losses of unconsolidated subsidiaries (92) (39) (31) (6) Leveraged lease income 58 (1) (2) 30 Other income, net - (10) 5 (3) Interest expenses 99 (36) (62) 80 Income taxes (250) (106) (29) (39) - -------------------------------------------------------------- Net income $ 22 $ 51 $ 86 $ 43 ============================================================== Operating revenues reflect Southern LINC's increased revenues of $32 million, $12 million, and $32 million in 2002, 2001, and 2000, respectively, as a result of increased wireless subscribers. Southern Company GAS began operations in August 2002 and recorded revenues of $68 million for the year. Revenues for 2001 also increased $30 million from the operations of a subsidiary formed in April 2001 that provides services related to alternative fuel products. The increase in revenues for 2000 was partially offset by a $19 million decrease in Southern Company Energy Solutions' revenues from the prior year, which included the impact of several major contracts. The $106 million increase in operating and maintenance expense in 2002 was driven primarily by Southern Company GAS' natural gas purchases and other operating expenses of $60 million, increases in expenses of $19 million at Southern LINC as a result of their additional subscribers, and a $30 million increase in expenses related to alternative fuel product services. The changes in depreciation expense for all three periods were primarily a result of asset write downs. The 2002 increase reflects a $16 million charge at Southern Company Energy Solutions related to the impairment of assets under contracts to certain customers, as well as the impact of property additions at II-12 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Southern LINC. The 2001 and 2000 decreases relate to investment write offs in 2000 and 1999, as discussed in Note 3 to the financial statements under "Mobile Energy Services." The increases in equity in losses of unconsolidated subsidiaries reflect the results of additional investments in alternative fuel partnerships that produce operating losses. These partnerships also claim federal income tax credits that offset these operating losses and make the projects profitable. These credits totaled $108 million in 2002, $71 million in 2001, and $23 million in 2000. Interest expense changes from the prior year reflected lower interest rates and lower amounts of debt outstanding for the parent company in 2002 and 2001. The increase in 2000 was related to additional borrowings. Effects of Inflation The operating companies and Southern Power are subject to rate regulation and long-term contracts, respectively, that are based on the recovery of historical costs. In addition, the income tax laws are also based on 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 Southern Company because of the large investment in utility plant with long economic lives. Conventional accounting for historical cost 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 securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed in the operating companies' approved electric rates. Future Earnings Potential General The results of continuing operations for the past three years are not necessarily indicative of future earnings potential. The level of Southern Company's future earnings depends on numerous factors. A major factor is the ability of the operating companies to maintain a stable regulatory environment and to achieve energy sales growth while containing costs. Another major factor is the profitability of the competitive market-based wholesale generating business. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new short and long-term contracts with neighboring utilities, energy conservation practiced by customers, the price elasticity of demand, and the rate of economic growth in the service area. The operating companies operate as vertically integrated companies providing electricity to customers within the service area of the southeastern United States. Prices for electricity provided to retail customers are set by state public service commissions under cost-based regulatory principles. Retail rates and earnings are reviewed and adjusted periodically within certain limitations based on earned return on equity. See Note 3 to the financial statements for additional information about these and other regulatory matters. Southern Power currently has general authorization from the Federal Energy Regulatory Commission (FERC) to sell power to nonaffiliates at market-based prices. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As with any seller that has been authorized to sell at market-based rates, the FERC retains the authority to modify or withdraw Southern Power's market-based rate authority if it determines that the underlying conditions for having such authority are no longer applicable. In that event, Southern Power would be required to obtain FERC approval of rates based on cost of service, which may be lower than those in negotiated market-based rates. In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers' Accounting for Pensions, Southern Company recorded non-cash pension income, before tax, of approximately $117 million in 2002. Future pension income is dependent on several factors including trust earnings and changes to the plan. Current estimates indicate a reversal of recording pension income to recording pension expense by as early as 2005. Postretirement benefit costs for Southern Company were $99 million in 2002 and are expected to continue to trend upward. A portion of pension income and postretirement benefit costs is capitalized based on construction-related labor charges. For the operating companies, pension income and postretirement benefit costs are a component of the regulated rates and do not have a significant effect on net income. For more information regarding pension and postretirement benefits, see Note 2 to the financial statements. II-13 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Southern Company currently receives tax benefits related to investments in alternative fuel partnerships and leveraged lease agreements for energy generation, distribution, and transportation assets that contribute significantly to the economic results for these projects. Changes in Internal Revenue Service interpretations of existing regulations or challenges to the company's positions could result in reduced availability or changes in the timing of such tax benefits. The net income impact of these investments totaled $62 million, $52 million, and $28 million in 2002, 2001, and 2000, respectively. See Note 1 to the financial statements under "Leveraged Leases" and Note 6 for additional information and related income taxes. Mississippi Power and Southern Power have capacity sales contracts with subsidiaries of Dynegy Inc. (Dynegy). Dynegy is currently experiencing liquidity problems, and its credit rating is now below investment grade. Minimum capacity revenues under these contracts average approximately $13 million annually through May 2005 for Southern Power and $21 million annually for Mississippi Power through May 2011. Dynegy has provided letters of credit expiring in April 2003 totaling $20 million -- approximately 18 months of capacity payments -- to Southern Power and $26 million -- approximately 15 months of capacity payments - -- to Mississippi Power. In addition, two one-year letters of credit totaling $50 million -- approximately 14 months of capacity payments -- were provided in April 2002 as security for obligations of Dynegy affiliates under the Plant Franklin Unit 3 purchase power agreement beginning in 2005. These letters of credit can be drawn in the event of a default under the purchase power agreement or the failure to renew the letters of credit prior to expiration. In the event of such a default, and if Mississippi Power and Southern Power are unable to resell that capacity into the market, future earnings could be affected. See Note 5 to the financial statements for additional information. The outcome cannot now be determined. In November 2002, Mirant announced that it had identified accounting errors in previously issued financial statements primarily related to its risk management and marketing operations and that its net income for January 1999 through 2001 was overstated by $51 million. Although the impact on specific quarters has not yet been determined, Mirant's new independent auditors are reauditing 2001 and 2000 financial statements. This reaudit is not expected to be completed until Mirant files its Form 10-K for the year ended December 31, 2002. If the reaudit of Mirant's financial statements results in adjustments prior to Southern Company's spin off of Mirant, Southern Company's earnings from discontinued operations for such periods could be affected. The impact of any such adjustments would not affect Southern Company's 2002 or any future financial statements. Based on the nature and amount of Mirant's announced accounting errors, Southern Company's management does not currently anticipate that a reaudit of its financial statements will be necessary. Proposed nuclear security legislation is expected to be introduced in the 108th Congress. The Nuclear Regulatory Commission is also considering additional security measures for licensees that could require immediate implementation. Any such requirements could have a significant impact on Southern Company's nuclear power plants and result in increased operation and maintenance expenses as well as additional capital expenditures. The impact of any new requirements would depend upon the development and implementation of the regulations. Southern Company is involved in various matters being litigated. See Note 3 to the financial statements for information regarding material issues that could possibly affect future earnings. Compliance costs related to current and future environmental laws and regulations could affect earnings if such costs are not fully recovered. The Clean Air Act and other important environmental items are discussed later under "Environmental Matters." Industry Restructuring The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the early primary agents of change was 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 enhanced the incentive for IPPs to build power plants for a utility's large industrial and commercial customers where retail access is allowed and to sell energy to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign II-14 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report and domestic electric infrastructure assets. Southern Company has not experienced any material financial impact regarding its limited energy trading operations and recent generating capacity additions. In general, Southern Company only constructs new generating capacity after entering into long-term capacity contracts for the new facilities or to meet requirements of Southern Company's regulated retail markets, which are both supplemented by limited energy trading activities. Although the Energy Act does not provide for retail customer access, it was a major catalyst for recent restructuring and consolidations that took place within the utility industry. Numerous federal and state initiatives that promote wholesale and retail competition are in varying stages. Among other things, these initiatives allow retail customers in some states to choose their electricity provider. Some states have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. While various restructuring and competition initiatives have been discussed in Alabama, Florida, Georgia, and Mississippi, none have been enacted. Enactment could require numerous issues to be resolved, including significant ones relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. As a result of that crisis, many states, including those in Southern Company's retail service area, have either discontinued or delayed consideration of initiatives involving retail deregulation. Continuing to be a low-cost producer could provide opportunities to increase market share and profitability in markets that evolve with changing regulation and competition. Conversely, if Southern Company's electric utilities do not remain low-cost producers and provide quality service, then energy sales growth could be limited, and this could significantly erode earnings. To adapt to a less regulated, more competitive environment, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, acquisitions involving other utility or non-utility businesses or properties, internal restructuring, disposition of certain assets, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations and financial condition of Southern Company. The Energy Act amended the Public Utility Holding Company Act of 1935 (PUHCA) to facilitate acquisitions of interests in exempt wholesale generators, which sell electricity exclusively for resale. Southern Company is working to maintain and expand its share of wholesale energy sales in the Southeast. In January 2001, Southern Company formed a new subsidiary -- Southern Power Company. This subsidiary constructs, owns, and manages wholesale generating assets in the Southeast. Southern Power is the primary growth engine for Southern Company's competitive wholesale market-based energy business. By the end of 2005, Southern Power plans to have approximately 6,600 megawatts of available generating capacity in commercial operation. At December 31, 2002, 2,400 megawatts were in commercial operation. FERC Matters In December 1999, the FERC issued its final rule on Regional Transmission Organizations (RTOs). The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company has submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2001, Entergy Corporation and Cleco Power joined the SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans' sponsors petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on Southern Company's financial statements; however, the outcome of this matter cannot now be determined. II-15 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company. Any impact of this proposal on Southern Company and its subsidiaries will depend on the form in which final rules may be ultimately adopted; however, Southern Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Accounting Policies Critical Policy Southern Company's significant accounting policies are described in Note 1 to the financial statements. The company's only critical accounting policy involves rate regulation. The operating companies are subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of a company's operations is no longer subject to these provisions, the company would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if any other assets have been impaired. See Note 1 to the financial statements under "Regulatory Assets and Liabilities" for additional information. New Accounting Standards Derivatives - ----------- Effective January 2001, Southern Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-03. In October 2002, Southern Company prospectively adopted the EITF's requirements to reflect the impact of certain energy trading contracts on a net basis. This change had no material impact on the company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on Southern Company's current accounting treatment. Asset Retirement Obligations - ---------------------------- Prior to January 2003, Southern Company accrued for the ultimate cost of retiring most long-lived assets over the life of the related asset through depreciation expense. FASB Statement No. 143, Accounting for Asset Retirement Obligations establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. For more information regarding the impact of adopting this standard effective January 1, 2003, see Note 1 to the financial statements under "Regulatory Assets and Liabilities" and "Depreciation and Decommissioning." Guarantees - ---------- In 2002, the FASB issued Interpretation No. 45, Accounting and Disclosure Requirements for Guarantees. This interpretation requires disclosure of certain direct and indirect guarantees as reflected in Note 9 to the financial statements under "Guarantees." Also, the interpretation requires recognition of a liability at inception for certain new or modified guarantees issued after December 31, 2002. The adoption of Interpretation No. 45 in January 2003 did not have a material impact on the consolidated financial statements. FINANCIAL CONDITION - ------------------- Overview Southern Company's financial condition continues to remain strong. At December 31, 2002, each of the operating companies were within their allowed range of return on equity after receiving base rate increases during the year. Also, earnings from the competitive generation business and the other business activities made a solid contribution. II-16 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Gross property additions to utility plant from continuing operations were $2.7 billion in 2002. The majority of funds needed for gross property additions since 1999 has been provided from operating activities. The Consolidated Statements of Cash Flows provide additional details. Off-Balance Sheet Financing Arrangements At December 31, 2002, Southern Company has one financing arrangement that was not required to be recorded on the balance sheet. In May 2001, Mississippi Power began the initial 10-year term of an operating lease agreement signed in 1999 with Escatawpa Funding, Limited Partnership, a special purpose entity, to use a combined-cycle generating facility located at Mississippi Power's Plant Daniel. The facility cost approximately $370 million. The lease provides for a residual value guarantee -- approximately 71 percent of the completion cost -- by Mississippi Power that is due upon termination of the lease in certain circumstances. Recently, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. If the Escatawpa financing arrangement is not restructured, this interpretation would require Mississippi Power to consolidate the assets and liabilities associated with Escatawpa by July 2003 and to record a cumulative adjustment to income that is not expected to be material. See Note 9 to the financial statements under "Operating Leases" for additional information regarding this lease. Credit Rating Risk Southern Company and its subsidiaries do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral - -- but not accelerated payment -- in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity sales, fixed-price physical gas purchases, and agreements covering interest rate swaps and currency swaps. At December 31, 2002, the maximum potential collateral requirements under the electricity sale contracts were approximately $422 million. Generally, collateral may be provided for by a Southern Company guaranty, a letter of credit, or cash. At December 31, 2002, there were no material collateral requirements for the gas purchase contracts or other financial instrument agreements. Market Price Risk Southern Company is exposed to market risks, including changes in interest rates, currency exchange rates, and certain commodity prices. To manage the volatility attributable to these exposures, the company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the company's policies in areas such as counterparty exposure and hedging practices. Company policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average rate on variable long-term debt outstanding at December 31, 2002, was 1.9 percent. If Southern Company sustained a 100 basis point change in interest rates for all variable rate long-term debt, the change would affect annualized interest expense by approximately $29 million at December 31, 2002. To further mitigate exposure to interest rates, the company has entered into interest rate swaps that have been designated as cash flow hedges. The company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. For further information, see notes 1 and 8 to the financial statements under "Financial Instruments." Due to cost-based rate regulations, the operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power's exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the operating companies and Southern Power enter into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into similar contracts for gas purchases. Southern Company GAS also enters into fixed price contracts for gas purchases to mitigate its exposure to price volatility. Also, the operating companies have implemented fuel-hedging programs at the instruction of their respective public service commissions. Georgia Power's program became effective in January 2003. II-17 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report The fair value of changes in derivative energy contracts and year-end valuations were as follows at December 31: Changes in Fair Value - -------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------- (in millions) Contracts beginning of year $ 1.3 $ 1.7 Contracts realized or settled (32.2) (1.4) New contracts at inception - - Changes in valuation techniques - - Current period changes 78.2 1.0 - -------------------------------------------------------------- Contracts end of year $ 47.3 $ 1.3 ============================================================== Source of Year-End Valuation Prices - -------------------------------------------------------------- Maturity Total --------------------- Fair Value Year 1 1-3 Years - -------------------------------------------------------------- (in millions) Actively quoted $47.3 $53.5 $(6.2) External sources - - - Models and other methods - - - - ------------------------------------------------------------- Contracts end of year $47.3 $53.5 $(6.2) ============================================================= Unrealized gains and losses from mark to market adjustments on contracts related to fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the operating companies' fuel cost recovery clauses. In addition, unrealized gains and losses on electric and gas contracts used to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on contracts that do not represent hedges are recognized in the income statement as incurred. At December 31, 2002, the fair value of derivative energy contracts was reflected in the financial statements as follows: Amounts - -------------------------------------------------------------- (in millions) Regulatory liabilities, net $37.1 Other comprehensive income 8.7 Net income 1.5 - -------------------------------------------------------------- Total fair value $47.3 ============================================================== A $5 million loss and $9 million gain were recognized in income in 2002 and 2001, respectively. Southern Company is exposed to market price risk in the event of nonperformance by parties to the derivative energy contracts. Southern Company's policy is to enter into agreements with counterparties that have investment grade credit ratings by Moody's and Standard & Poor's or with counterparties who have posted collateral to cover potential credit exposure. Therefore, Southern Company does not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see notes 1 and 8 to the financial statements under "Financial Instruments." Capital Structure During 2002, Southern Company issued $2.7 billion of senior notes and $1.3 billion in trust preferred securities. The issuances were used to refund $1.4 billion of long-term debt and $1.2 billion of trust preferred securities and to finance $575 million of Southern Power's new generating facilities. The remainder was used to reduce short-term debt and fund Southern Company's ongoing construction program. Southern Company also issued 16 million new shares through the company's stock plans and 2 million treasury shares of common stock in 2002. Proceeds of $451 million were used to reduce short-term debt and for capital contributions. At the close of 2002, the market value of Southern Company's common stock was $28.39 per share, compared with book value of $12.16 per share. The market-to-book value ratio was 233 percent at the end of 2002, compared with 222 percent at year-end 2001. Capital Requirements for Construction The construction program of Southern Company is currently estimated to be $2.1 billion for 2003, $2.3 billion for 2004, and $2.4 billion for 2005. Actual construction costs may vary from this estimate because of changes in such factors as: business conditions; environmental regulations; nuclear plant regulations; FERC rules and transmission regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Southern Company has approximately 4,100 megawatts of new generating capacity scheduled to be placed in service by 2005. The additional new capacity will be dedicated to the wholesale market and owned by Southern Power. Significant construction of transmission and distribution facilities and upgrading of generating plants will also be continuing. Other Capital Requirements In addition to the funds needed for the construction program, approximately $2.8 billion will be required by the end of 2005 for maturities of long-term debt. Also, the subsidiaries will continue to retire higher-cost debt and preferred stock and replace these obligations with lower-cost capital if market conditions permit. II-18 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report As a result of requirements by the Nuclear Regulatory Commission, Alabama Power and Georgia Power have established external trust funds for nuclear decommissioning costs. For additional information, see Note 1 to the financial statements under "Depreciation and Nuclear Decommissioning." As discussed in Note 2 to the financial statements, Southern Company provides postretirement benefits to substantially all employees and funds trusts to the extent required by the subsidiaries' respective regulatory commissions. The capital requirements, lease obligations, purchase commitments, and trust requirements -- discussed in the financial statements -- are as follows: 2003 2004 2005 - ------------------------------------------------------------- (in millions) Senior and other notes $1,639 $ 692 $ 432 Leases -- Capital 11 9 7 Operating 125 114 99 Purchase commitments -- Fuel 2,211 1,735 1,296 Purchased power 116 136 171 Long-term service agreements 50 45 43 Trusts -- Nuclear decommissioning 29 29 29 Postretirement benefits 15 16 34 - ------------------------------------------------------------- Environmental Matters New Source Review Enforcement Actions In November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S. District Court in Georgia against Alabama Power, Georgia Power, and the system service company. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, which includes the five facilities mentioned previously. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation, and to add Gulf Power, Mississippi Power, and Savannah Electric as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal-burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted the system service company's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add Savannah Electric as a defendant, but it denied the motion to add Gulf Power and Mississippi Power based on lack of jurisdiction over those companies. As directed by the court, the EPA refiled its amended complaint limiting claims to those brought against Georgia Power and Savannah Electric. Also, the EPA refiled its claims against Alabama Power in the U.S. District Court in Alabama. It has not refiled against Gulf Power, Mississippi Power, or the system service company. The Alabama Power, Georgia Power, and Savannah Electric cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. Southern Company believes that its operating companies complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. II-19 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Environmental Statutes and Regulations Southern Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations has been and will continue to be, a significant focus for the company. The Title IV acid rain provisions of the Clean Air Act, for example, required significant reductions in sulfur dioxide and nitrogen oxide emissions. Compliance was required in two phases -- Phase I, effective in 1995 and Phase II, effective in 2000. Construction expenditures associated with Phase I and Phase II compliance totaled approximately $400 million. Some of the expenditures required to comply with the Phase II acid rain requirements also assisted the company in complying with nitrogen oxide emission reduction requirements under Title I of the Clean Air Act, which were designed to address one-hour ozone nonattainment problems in Atlanta, Georgia and Birmingham, Alabama. The states of Alabama and Georgia have adopted regulations that will require additional nitrogen oxide emission reductions from plants in and/or near those nonattainment areas, beginning in May 2003. Seven generating plants in the Atlanta area and two plants in the Birmingham area will be affected. Construction expenditures for compliance with these new rules are currently estimated at approximately $980 million, of which $140 million remains to be spent. To help bring the remaining nonattainment areas into compliance with the one-hour ozone standard, the EPA issued regional nitrogen oxide reduction rules in 1998. Those rules required 21 states, including Alabama and Georgia, to reduce and cap nitrogen oxide emissions from power plants and other large industrial sources. Affected sources, including five of the company's coal-fired plants in Alabama, must comply with the reduction requirements by May 31, 2004. However, for Georgia, the EPA must complete a separate rulemaking before the requirements will apply. The EPA proposed a rule for Georgia in 2002 and expects to issue a final rule in 2003. The proposed rule requires compliance by May 1, 2005. Additional construction expenditures for compliance with these new rules are currently estimated at approximately $305 million, of which $295 million remains to be spent. In July 1997, the EPA revised the national ambient air quality standards for ozone and particulate matter. These revisions made the standards significantly more stringent. In the subsequent litigation of these standards, the U.S. Supreme Court found the EPA's implementation program for the new ozone standard unlawful and remanded it to the EPA for further rulemaking. The EPA is expected to propose implementation rules designed to address the court's concerns in 2003 and issue final implementation rules in 2004. The remaining legal challenges to the new standards, which were pending before the U.S. Court of Appeals, District of Columbia Circuit, have been resolved. The EPA plans to designate areas as attainment or nonattainment with the new eight-hour ozone standard by April 2004, based on air quality data for 2001 through 2003. Several areas within the Southern Company's service area are likely to be designated nonattainment under the new ozone standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as 2007. Those state plans could require further reductions in nitrogen oxide emissions from power plants. If so, reductions could be required sometime after 2007. The impact of any new standards will depend on the development and implementation of applicable regulations. The EPA currently plans to designate areas as attainment or nonattainment with the new fine particulate matter standard by the end of 2004. Those area designations will be based on air quality data collected during 2001 through 2003. Several areas within the company's service area will likely be designated nonattainment under the new particulate matter standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as the end of 2007. Those state plans will likely require reductions in sulfur dioxide emissions from power plants. If so, the reductions could be required sometime after 2007. Any additional emission reductions and costs associated with the new fine particulate matter standard cannot be determined at this time. II-20 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report The EPA has also announced plans to issue a proposed Regional Transport Rule for the fine particulate matter standard by the end of 2003 and to finalize the rule in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. If issued, this rule would likely modify other state implementation plan requirements for attainment of the fine particulate matter standard and the eight-hour ozone standard. It is not possible at this time to determine the effect such a rule would have on the company. Further reductions in sulfur dioxide could also be required under the EPA's Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. The company has a number of plants that could be subject to these rules. The EPA's Regional Haze program calls for states to submit State Implementation Plans in 2007 and 2008 that contain emission reduction strategies for achieving progress toward the visibility improvement goal. In 2002, however, the U.S. Court of Appeals, District of Columbia Circuit, vacated and remanded the BART provisions of the federal Regional Haze rules to the EPA for further rulemaking. Because new BART rules have not been developed and state visibility assessments are only beginning, it is not possible to determine the effect of these rules on the company at this time. The EPA's Compliance Assurance Monitoring (CAM) regulations under Title V of the Clean Air Act require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. The regulations require certain facilities with Title V operating permits to develop and submit a CAM plan to the appropriate permitting authority upon applying for renewal of the facility's Title V operating permit. Four of Southern Company's operating companies -- Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric -- will be applying for renewal of their Title V operating permits between 2003 and 2005, and a number of the plants will likely be subject to CAM requirements for at least one pollutant, in most cases particulate matter. The company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, the company cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements. Actual ongoing monitoring costs are expensed as incurred and are not material for any period presented. In December 2000, having completed its utility studies for mercury and other hazardous air pollutants (HAPS), the EPA issued a determination that an emission control program for mercury and, perhaps, other HAPS is warranted. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. The EPA currently plans to issue proposed rules regulating mercury emissions from electric utility boilers by the end of 2003, and those regulations are scheduled to be finalized by the end of 2004. Compliance could be required as early as 2007. Because the rules have not yet been proposed, the costs associated with compliance cannot be determined at this time. In December 2002, the EPA issued final and proposed revisions to the New Source Review program under the Clean Air Act. In February 2003, several northeastern states petitioned the D.C. Circuit Court for a stay of the final rules. The proposed rules are open to public comment and may be revised before being finalized by the EPA. If fully implemented, these proposed and final regulations could affect the applicability of the New Source Review provisions to activities at the company's facilities. In any event, any final regulations must be adopted by the states in the company's service area in order to apply to the company's facilities. The effect of these proposed and final rules cannot be determined at this time. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002, proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the last Congress. Similar bills have been, and are anticipated to be, introduced this year. The Bush Administration's Clear Skies Act was recently reintroduced, and President Bush has stated that it will be a high priority for the administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. The cost impacts of such legislation would depend upon the specific requirements enacted. Domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and specifically the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. The Bush Administration does not support U.S. II-21 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation and has instead announced a new voluntary climate initiative which seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. Southern Company is involved in a voluntary electric utility industry sector climate change initiative in partnership with the government. Because this initiative is still under development, it is not possible to determine the effect on the company at this time. Southern Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste and releases of hazardous substances. Under these various laws and regulations, the subsidiaries could incur substantial costs to clean up properties. The subsidiaries conduct studies to determine the extent of any required cleanup and have recognized in their respective financial statements the costs to clean up known sites. Southern Company expensed $4 million, $1 million, and $4 million in 2002, 2001, and 2000, respectively. The subsidiaries may be liable for a portion or all required cleanup costs for additional sites that may require environmental remediation. See Note 3 to the financial statements for information regarding Georgia Power's potentially responsible party status at sites in Georgia. Under the Clean Water Act, the EPA is developing new rules aimed at reducing impingement and entrainment of fish and fish larvae at cooling water intake structures that will require numerous biological studies and, perhaps, retrofits to some intake structures at existing power plants. The new rule was proposed in February 2002 and will be finalized by August 2004. The impact of any new standards will depend on the development and implementation of applicable regulations. Also, under the Clean Water Act, the EPA and state environmental regulatory agencies are developing total maximum daily loads (TMDLs) for certain impaired waters. Establishment of maximum loads by the EPA or state agencies may result in lowering permit limits for various pollutants and a requirement to take additional measures to control non-point source pollution (e.g., storm water runoff) at facilities discharging into waters for which TMDLs are established. Because the effect on Southern Company will depend on the actual TMDLs and permit limitations established by the implementing agency, it is not possible to determine the effect on the company at this time. The EPA and state environmental regulatory agencies are reviewing and evaluating various other matters including limits on pollutant discharges to impaired waters, hazardous waste disposal requirements, and other regulatory matters. The impact of any new standards will depend on the development and implementation of applicable regulations. Several major pieces of environmental legislation are periodically 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; the Toxic Substances Control Act; the Emergency Planning & Community Right-to-Know Act; and the Endangered Species Act. Compliance with possible additional federal or state legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could also significantly affect Southern Company. The impact of any new legislation, or changes to existing legislation, could affect many areas of Southern Company's operations. The full impact of any such changes cannot, however, be determined at this time. Sources of Capital Southern Company intends to meet its future capital needs through internal cash flow and externally through the issuance of debt, preferred securities, and equity. The amount and timing of additional equity capital to be raised in 2003 - -- as well as in subsequent years -- will be contingent on Southern Company's investment opportunities. The company does not currently anticipate any equity offerings in 2003. Equity capital can be provided from any combination of the company's stock plans, private placements, or public offerings. The operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from internal sources. However, the type and timing of any financings - -- if needed -- will depend on market conditions and regulatory approval. In recent years, financings primarily have utilized unsecured debt and trust preferred securities. Southern Power will use both external funds and equity capital from Southern Company to finance its construction program. External funds are expected to be obtained from the issuance of unsecured senior debt and commercial paper or through existing credit arrangements from banks. II-22 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Company and Subsidiary Companies 2002 Annual Report Southern Company's current liabilities exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of long-term debt. Subsequent to December 31, 2002, the operating companies have issued $545 million of new securities with the proceeds being used primarily to retire current maturities and to reduce short-term debt. An additional $414 million of securities has been issued to retire long-term debt and for other corporate purposes. To meet short-term cash needs and contingencies, Southern Company has various internal and external sources of liquidity. At the beginning of 2003, Southern Company and its subsidiaries had approximately $273 million of cash and cash equivalents and $3.9 billion of unused credit arrangements with banks, as shown in the following table. In addition, Southern Company has substantial cash flow from operating activities and access to the capital markets to meet liquidity needs. Cash flows from operating activities were $2.8 billion in 2002 and $2.4 billion in both 2001 and 2000. Bank credit arrangements are as follows: Expires ---------------------------- 2004 Total Unused 2003 & Beyond - -------------------------------------------------------------- (in millions) $4,261 $3,856 $2,981 $875 - -------------------------------------------------------------- Approximately $2.6 billion of the credit facilities expiring in 2003 allow for the execution of term loans for an additional two-year period. See Note 8 to the financial statements under "Bank Credit Arrangements" for additional information. Cautionary Statement Regarding Forward-Looking Information Southern Company's 2002 Annual Report includes forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning the strategic goals for Southern Company's wholesale business, estimated construction expenditures and Southern Company's projections for energy sales and its goals for future generating capacity, dividend payout ratio, equity ratio, earnings per share, and earnings growth. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. Southern Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, and also changes in environmental and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations; current and future litigation, including the pending EPA civil actions against certain Southern Company subsidiaries; the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries; the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due; the effects of, and changes in, economic conditions in the areas in which Southern Company's subsidiaries operate, including the current soft economy; the direct or indirect effects on Southern Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the timing and acceptance of Southern Company's new product and service offerings; the ability of Southern Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed from time to time by Southern Company with the Securities and Exchange Commission. II-23
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001, and 2000 Southern Company and Subsidiary Companies 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) Operating Revenues: Retail sales $ 8,728 $ 8,440 $ 8,600 Sales for resale 1,168 1,174 977 Other electric revenues 310 292 283 Other revenues 343 249 206 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 10,549 10,155 10,066 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Fuel 2,831 2,577 2,564 Purchased power 449 718 677 Other operations 2,123 1,899 1,861 Maintenance 961 862 852 Depreciation and amortization 1,047 1,173 1,171 Taxes other than income taxes 557 535 536 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 7,968 7,764 7,661 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Income 2,581 2,391 2,405 Other Income and (Expense): Allowance for equity funds used during construction 22 22 27 Interest income 22 27 29 Equity in losses of unconsolidated subsidiaries (91) (52) (21) Leveraged lease income 58 59 59 Interest expense, net of amounts capitalized (492) (557) (643) Distributions on capital and preferred securities of subsidiaries (175) (169) (169) Preferred dividends of subsidiaries (17) (18) (19) Other income (expense), net (62) (26) (86) - ----------------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (735) (714) (823) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings From Continuing Operations Before Income Taxes 1,846 1,677 1,582 Income taxes 528 558 588 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings From Continuing Operations Before Cumulative Effect of Accounting Change 1,318 1,119 994 Cumulative effect of accounting change -- less income taxes of less than $1 - 1 - - ----------------------------------------------------------------------------------------------------------------------------------- Earnings From Continuing Operations 1,318 1,120 994 Earnings from discontinued operations, net of income taxes of $93 and $86 for 2001 and 2000, respectively - 142 319 - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Net Income $ 1,318 $ 1,262 $ 1,313 =================================================================================================================================== Common Stock Data: Earnings per share from continuing operations - Basic $1.86 $1.62 $1.52 Diluted 1.85 1.61 1.52 Earnings per share including discontinued operations - Basic $1.86 $1.83 $2.01 Diluted 1.85 1.82 2.01 - ---------------------------------------------------------------------------------------------------------------------------------- Average number of shares of common stock outstanding - (in millions) Basic 708 689 653 Diluted 714 694 654 - ----------------------------------------------------------------------------------------------------------------------------------- Cash dividends paid per share of common stock $1.355 $1.34 $1.34 - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
II-24
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001, and 2000 Southern Company and Subsidiary Companies 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) Operating Activities: Consolidated net income $ 1,318 $ 1,262 $ 1,313 Adjustments to reconcile consolidated net income to net cash provided from operating activities -- Less earnings from discontinued operations - 142 319 Depreciation and amortization 1,158 1,358 1,337 Deferred income taxes and investment tax credits 172 (22) 97 Equity in losses of unconsolidated subsidiaries 91 52 21 Leveraged lease income (58) (59) (61) Pension, postretirement, and other employee benefits (78) (101) (114) Other, net 4 (98) 172 Changes in certain current assets and liabilities -- Receivables, net (119) 327 (363) Fossil fuel stock 105 (199) 78 Materials and supplies 8 (43) (15) Other current assets (59) (12) (42) Accounts payable 118 (51) 180 Taxes accrued (49) 91 40 Other current liabilities 220 21 52 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities of continuing operations 2,831 2,384 2,376 - ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (2,717) (2,617) (2,225) Investment in unconsolidated subsidiaries - (50) (6) Cost of removal net of salvage (109) (99) (45) Other (135) 30 (30) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities of continuing operations (2,961) (2,736) (2,306) - ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase (decrease) in notes payable, net (968) 223 (275) Proceeds -- Long-term senior notes 2,655 1,242 650 Other long-term debt 259 757 93 Capital and preferred securities 1,315 30 - Common stock 451 395 910 Redemptions -- First mortgage bonds (376) (616) (211) Long-term senior notes (857) (25) (8) Other long-term debt (137) (544) (196) Capital and preferred securities (1,171) - - Preferred stock (70) - - Common stock repurchased - - (415) Payment of common stock dividends (958) (922) (873) Other (94) (33) (54) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided from (used for) financing activities of continuing operations 49 507 (379) - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided from (used for) discontinued operations - - 354 - ----------------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents (81) 155 45 Cash and Cash Equivalents at Beginning of Year 354 199 154 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 273 $ 354 $ 199 =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-25
CONSOLIDATED BALANCE SHEETS At December 31, 2002 and 2001 Southern Company and Subsidiary Companies 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- Assets 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) Current Assets: Cash and cash equivalents $ 273 $ 354 Receivables -- Customer accounts receivable 711 594 Unbilled revenues 277 237 Under recovered regulatory clause revenues 174 296 Other accounts and notes receivable 370 324 Accumulated provision for uncollectible accounts (26) (24) Fossil fuel stock, at average cost 299 394 Materials and supplies, at average cost 539 550 Other 350 231 - ----------------------------------------------------------------------------------------------------------------------------------- Total current assets 2,967 2,956 - ----------------------------------------------------------------------------------------------------------------------------------- Property, Plant, and Equipment: In service 37,486 35,813 Less accumulated depreciation 15,449 15,020 - ----------------------------------------------------------------------------------------------------------------------------------- 22,037 20,793 Nuclear fuel, at amortized cost 223 202 Construction work in progress 2,382 2,089 - ----------------------------------------------------------------------------------------------------------------------------------- Total property, plant, and equipment 24,642 23,084 - ----------------------------------------------------------------------------------------------------------------------------------- Other Property and Investments: Nuclear decommissioning trusts, at fair value 639 682 Leveraged leases 791 655 Other 243 193 - ----------------------------------------------------------------------------------------------------------------------------------- Total other property and investments 1,673 1,530 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 898 924 Prepaid pension costs 786 641 Unamortized debt issuance expense 109 103 Unamortized premium on reacquired debt 313 280 Other 411 379 - ----------------------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 2,517 2,327 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $31,799 $29,897 =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED BALANCE SHEETS (continued) At December 31, 2002 and 2001 Southern Company and Subsidiary Companies 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) Current Liabilities: Securities due within one year $ 1,639 $ 429 Notes payable 1,007 1,902 Accounts payable 986 823 Customer deposits 169 153 Taxes accrued -- Income taxes 113 160 Other 219 193 Interest accrued 158 118 Vacation pay accrued 130 125 Other 593 473 - ----------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 5,014 4,376 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt (See accompanying statements) 8,658 8,297 Deferred Credits and Other Liabilities: Accumulated deferred income taxes 4,214 4,097 Deferred credits related to income taxes 450 500 Accumulated deferred investment tax credits 607 634 Employee benefits provisions 614 533 Deferred capacity revenues 37 42 Other 777 790 - ----------------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 6,699 6,596 - ----------------------------------------------------------------------------------------------------------------------------------- Company or subsidiary obligated mandatorily redeemable capital and preferred securities (See accompanying statements) 2,420 2,276 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative preferred stock of subsidiaries (See accompanying statements) 298 368 - ----------------------------------------------------------------------------------------------------------------------------------- Common stockholders' equity (See accompanying statements) 8,710 7,984 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $31,799 $29,897 =================================================================================================================================== Commitments and Contingent Matters (See notes) - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
II-27
CONSOLIDATED STATEMENTS OF CAPITALIZATION At December 31, 2002 and 2001 Southern Company and Subsidiary Companies 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) (percent of total) Long-Term Debt of Subsidiaries: First mortgage bonds -- Maturity Interest Rates -------- -------------- 2005 6.07% $ - $ 2 2006 6.50% to 6.90% 45 45 2023 through 2026 6.88% to 7.75% 93 467 - ----------------------------------------------------------------------------------------------------------------------------------- Total first mortgage bonds 138 514 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term senior notes and debt -- Maturity Interest Rates -------- -------------- 2002 9.75% - 7 2003 4.69% to 7.85% 841 871 2004 4.88% to 7.13% 575 575 2005 5.49% to 7.25% 380 381 2006 6.20% 150 150 2007 4.88% to 7.13% 902 200 2008 through 2048 4.70% to 8.12% 3,420 2,367 Adjustable rates: 2002 1.98% to 2.13% - 382 2003 1.52% to 1.53% 517 167 2004 1.51% to 2.93% 512 336 2005 2.12% to 2.69% 211 193 2007 2.82% 50 - - ----------------------------------------------------------------------------------------------------------------------------------- Total long-term senior notes and debt 7,558 5,629 - ----------------------------------------------------------------------------------------------------------------------------------- Other long-term debt -- Pollution control revenue bonds -- Maturity Interest Rates -------- -------------- Collateralized: 2006 5.25% 12 12 2007 5.80% 1 1 2018 through 2026 5.50% to 6.30% 86 155 Variable rates (at 1/1/03) 2015 through 2017 1.56% to 1.80% 90 90 Non-collateralized: 2012 through 2034 1.75% to 5.45% 789 726 Variable rates (at 1/1/03) 2011 through 2037 1.30% to 2.50% 1,564 1,566 - ----------------------------------------------------------------------------------------------------------------------------------- Total other long-term debt 2,542 2,550 - ----------------------------------------------------------------------------------------------------------------------------------- Capitalized lease obligations 106 92 - ----------------------------------------------------------------------------------------------------------------------------------- Unamortized debt (discount), net (47) (59) - ----------------------------------------------------------------------------------------------------------------------------------- Total long-term debt (annual interest requirement -- $499 million) 10,297 8,726 Less amount due within one year 1,639 429 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt excluding amount due within one year 8,658 8,297 43.1% 43.9% - -----------------------------------------------------------------------------------------------------------------------------------
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CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued) At December 31, 2002 and 2001 Southern Company and Subsidiary Companies 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) (percent of total) Company or Subsidiary Obligated Mandatorily Redeemable Capital and Preferred Securities: $25 liquidation value -- 4.75% to 5.60% 640 - 6.85% to 7.00% 435 435 7.13% 840 200 7.20% to 8.19% 505 1,591 Auction rate (3.60% at 1/1/02) - 50 - ----------------------------------------------------------------------------------------------------------------------------------- Total company or subsidiary obligated mandatorily redeemable capital and preferred securities (annual distribution requirement -- $163 million) 2,420 2,276 12.0 12.0 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock of Subsidiaries: $100 par or stated value -- 4.20% to 7.00% 98 98 $25 par or stated value -- 5.20% to 5.83% 200 200 Adjustable and auction rates -- at 1/1/02: 3.10% to 3.56% - 70 - ----------------------------------------------------------------------------------------------------------------------------------- Total cumulative preferred stock of subsidiaries (annual dividend requirement -- $18 million) 298 368 1.5 1.9 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stockholders' Equity: Common stock, par value $5 per share -- Authorized -- 1 billion shares Issued -- 2002: 717 million shares -- 2001: 701 million shares Treasury -- 2002: 0.1 million shares -- 2001: 2 million shares Par value 3,583 3,503 Paid-in capital 338 14 Treasury, at cost (3) (57) Retained earnings 4,874 4,517 Accumulated other comprehensive income (loss) (82) 7 - ----------------------------------------------------------------------------------------------------------------------------------- Total common stockholders' equity 8,710 7,984 43.4 42.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $20,086 $18,925 100.0% 100.0% =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-29
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY For the Years Ended December 31, 2002, 2001, and 2000 Southern Company and Subsidiary Companies 2002 Annual Report Accumulated Other Comprehensive Common Stock Income (Loss) From ------------------------ ---------------------------------------- Par Paid-In Retained Continuing Discontinued Value Capital Treasury Earnings Operations Operations Total - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) Balance at December 31, 1999 $3,503 $ 2,480 $(919) $4,232 $ - $ (92) $ 9,204 Net income - - - 1,313 - - 1,313 Other comprehensive income (loss) - - - - - (1) (1) Stock issued - 121 789 - - - 910 Stock repurchased, at cost - - (414) - - - (414) Cash dividends - - - (873) - - (873) Mirant initial public offering - 560 - - - - 560 Other - (8) (1) - - - (9) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 3,503 3,153 (545) 4,672 - (93) 10,690 Net income - - - 1,262 - - 1,262 Other comprehensive income (loss) - - - - 7 (315) (308) Stock issued - - 488 (93) - - 395 Mirant spin off distribution - (3,168) - (391) - 408 (3,151) Cash dividends - - - (922) - - (922) Other - 29 - (11) - - 18 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 3,503 14 (57) 4,517 7 - 7,984 Net income - - - 1,318 - - 1,318 Other comprehensive income (loss) - - - - (89) - (89) Stock issued 80 322 55 (6) - - 451 Cash dividends - - - (958) - - (958) Other - 2 (1) 3 - - 4 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $3,583 $ 338 $ (3) $4,874 $(82) $ - $ 8,710 ===================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2002, 2001, and 2000 Southern Company and Subsidiary Companies 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (in millions) Consolidated Net Income $1,318 $1,262 $1,313 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) -- continuing operations: Change in additional minimum pension liability, net of tax of $(18) (31) - - Changes in fair value of qualifying hedges, net of tax of $(44) and $4, respectively (59) 7 - Less: Reclassification adjustment for amounts included in net income, net of tax 1 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) -- continuing operations (89) 7 - - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) -- discontinued operations: Cumulative effect of accounting change for qualifying hedges, net of tax of $(121) - (249) - Changes in fair value of qualifying hedges, net of tax of $(51) - (104) - Less reclassification adjustment for amounts included in net income, net of tax of $29 - 60 - Foreign currency translation adjustments, net of tax of $(22) and $(1) respectively - (22) (1) - ----------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) -- discontinued operations - (315) (1) - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Comprehensive Income $1,229 $ 954 $1,312 =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-30 NOTES TO FINANCIAL STATEMENTS Southern Company and Subsidiary Companies 2002 Annual Report 1. SUMMARRY OF SIGNIFICANT ACCOUNTING POLICIES General Southern Company is the parent company of five operating companies, Southern Power Company (Southern Power), a system service company, Southern Communications Services (Southern LINC), Southern Company Gas (Southern Company GAS), Southern Company Holdings (Southern Holdings), Southern Nuclear Operating Company (Southern Nuclear), Southern Telecom, and other direct and indirect subsidiaries. The operating companies -- Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric -- provide electric service in four southeastern states. Southern Power constructs, owns, and manages Southern Company's competitive generation assets and sells electricity at market-based rates in the wholesale market. Contracts among the operating companies and Southern Power -- related to jointly owned generating facilities, interconnecting transmission lines, or the exchange of electric power -- are regulated by the Federal Energy Regulatory Commission (FERC) and/or the Securities and Exchange Commission. The system service company provides, at cost, specialized services to Southern Company and subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Southern Telecom provides fiber cable services within the Southeast. Southern Company GAS, which began operation in August 2002, is a competitive retail natural gas marketer serving communities in Georgia. Southern Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products, and an energy services business. Southern Nuclear provides services to Southern Company's nuclear power plants. On April 2, 2001, the spin off of Mirant Corporation (Mirant) was completed. As a result of the spin off, Southern Company's financial statements and related information reflect Mirant as discontinued operations. For additional information, see Note 11. The financial statements reflect Southern Company's investments in the subsidiaries on a consolidated basis. All material intercompany items have been eliminated in consolidation. Certain prior years' data presented in the consolidated financial statements have been reclassified to conform with the current year presentation. Southern Company is registered as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA). Both the company and its subsidiaries are subject to the regulatory provisions of the PUHCA. In addition, the operating companies and Southern Power are subject to regulation by the FERC, and the operating companies are also subject to regulation by their respective state public service commissions. The companies follow accounting principles generally accepted in the United States and comply with the accounting policies and practices prescribed by their respective commissions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates, and the actual results may differ from those estimates. Regulatory Assets and Liabilities The operating companies are 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 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 Consolidated Balance Sheets at December 31 relate to the following: 2002 2001 - -------------------------------------------------------------- (in millions) Deferred income tax charges $ 898 $ 924 Premium on reacquired debt 313 280 Department of Energy assessments 33 39 Vacation pay 99 95 Postretirement benefits 25 28 Deferred income tax credits (450) (500) Accelerated cost recovery (229) (344) Storm damage reserves (38) (34) Fuel-hedging assets - 9 Fuel-hedging liabilities (38) (2) Other assets 188 164 Other liabilities (91) (13) - -------------------------------------------------------------- Total $ 710 $ 646 ============================================================== See "Depreciation and Nuclear Decommissioning" in this note for information regarding significant regulatory assets and liabilities created as a result of the January 1, 2003, adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations. In the event that a portion of an operating company's operations is no longer subject to the provisions of FASB Statement No. 71, the company would be II-31 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report required to write off related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, the operating company would be required to determine if any impairment to other assets exists, including plant, and write down the assets, if impaired, to their fair value. All regulatory assets and liabilities are reflected in rates. Revenues and Fuel Costs Energy revenues are recognized as services are rendered. Capacity revenues are generally recognized on a levelized basis over the appropriate contract periods. Other revenues are recognized as services are provided. Unbilled revenues are accrued at the end of each fiscal period. Fuel costs are expensed as the fuel is used. Electric rates for the operating companies include provisions to adjust billings for fluctuations in fuel costs, fuel hedging, the energy component of purchased power costs, and certain other costs. Revenues are adjusted for differences between recoverable fuel costs and amounts actually recovered in current regulated rates. Southern 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. Fuel expense includes the amortization of the cost of nuclear fuel and a charge, based on nuclear generation, for the permanent disposal of spent nuclear fuel. Total charges for nuclear fuel included in fuel expense amounted to $134 million in 2002, $133 million in 2001, and $136 million in 2000. Alabama Power and Georgia Power have contracts with the U.S. Department of Energy (DOE) that provide for the permanent disposal of spent nuclear fuel. The DOE failed to begin disposing of spent nuclear fuel in January 1998 as required by the contracts, and the companies are pursuing legal remedies against the government for breach of contract. Sufficient pool storage capacity for spent fuel is available at Plant Farley to maintain full-core discharge capability until the refueling outages scheduled for 2006 and 2008 for units 1 and 2, respectively. Sufficient pool storage capacity for spent fuel is available at Plant Vogtle to maintain full-core discharge capability for both units into 2014. At Plant Hatch, an on-site dry storage facility became operational in 2000. Sufficient dry storage capacity is believed to be available to continue dry storage operations at Plant Hatch through the life of the plant. Procurement of on-site dry storage capacity at Plant Farley is in progress, with the intent to place the capacity in operation in 2005. Procurement of on-site dry storage capacity at Plant Vogtle will begin in sufficient time to maintain pool full-core discharge capability. Also, the Energy Policy Act of 1992 required the establishment of a Uranium Enrichment Decontamination and Decommissioning Fund, which is funded in part by a special assessment on utilities with nuclear plants. This assessment is being paid over a 15-year period, which began in 1993. This fund will be used by the DOE for the decontamination and decommissioning of its nuclear fuel enrichment facilities. The law provides that utilities will recover these payments in the same manner as any other fuel expense. Alabama Power and Georgia Power -- based on its ownership interests -- estimate their respective remaining liability at December 31, 2002, under this law to be approximately $17 million and $13 million. These obligations are recorded in other deferred credits in the Consolidated Balance Sheets. Depreciation and Nuclear Decommissioning Depreciation of the original cost of plant in service is provided primarily by using composite straight-line rates, which approximated 3.2 percent in 2002 and 3.4 percent a year in 2001 and 2000. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its original cost -- together with the cost of removal, less salvage -- is charged to accumulated 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 costs of decommissioning nuclear facilities and removal of other facilities. In accordance with regulatory requirements, prior to January 2003, Southern Company followed the industry practice of accruing for the ultimate cost of retiring most long-lived assets over the life of the related asset as part of the annual depreciation expense provision. In January 2003, Southern Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. The cumulative effect adjustment to net income resulting from the adoption of Statement No. 143 was immaterial. The operating companies expect to receive II-32 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report accounting orders from their respective public service commissions to defer the transition adjustment; therefore, Southern Company recorded a related regulatory liability of $47 million to reflect the operating companies' regulatory treatment of these costs under Statement No. 71. The initial Statement No. 143 liability Southern Company recognized was $778 million, of which $644 million was removed from the accumulated depreciation reserve. The amount capitalized to property, plant, and equipment was $181 million. The liability recognized to retire long-lived assets primarily relates to the company's nuclear facilities, which include Alabama Power's Plant Farley and Georgia Power's ownership interests in plants Hatch and Vogtle. In addition, the operating companies have retirement obligations related to various landfill sites, ash ponds, and underground storage tanks. Southern Company has also identified retirement obligations related to certain transmission and distribution facilities. However, a liability for the removal of these transmission and distribution assets will not be recorded because no reasonable estimate can be made regarding the timing of any related retirements. The operating companies will continue to recognize in the income statement their ultimate removal costs in accordance with each company's respective regulatory treatment. Any difference between costs recognized under Statement No. 143 and those reflected in rates will be recognized as either a regulatory asset or liability. It is estimated that this annual difference will be approximately $27 million. Management believes actual asset removal costs will be recoverable in rates over time. Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. However, in accordance with the regulatory treatment of these costs, the operating companies will continue to recognize the removal costs for these other obligations in their depreciation rates. As of January 1, 2003, the amount included in the accumulated depreciation reserve that represents a regulatory liability for these costs was $1.23 billion. Georgia Power recorded accelerated depreciation and amortization amounting to $91 million in 2001 and $135 million in 2000. Effective January 2002, Georgia Power discontinued recording accelerated depreciation and amortization in accordance with a new retail rate order. Also, Georgia Power was ordered to amortize $333 million -- the cumulative balance previously expensed -- equally over three years as a credit to depreciation and amortization expense beginning January 2002. See Note 3 under "Georgia Power Retail Rate Orders" for additional information. The Nuclear Regulatory Commission (NRC) requires all licensees operating commercial nuclear power reactors to establish a plan for providing, with reasonable assurance, funds for decommissioning. Alabama Power and Georgia Power have external trust funds to comply with the NRC's regulations. Amounts previously recorded in internal reserves are being transferred into the external trust funds over periods approved by the respective state public service commissions. The NRC's minimum external funding requirements are based on a generic estimate of the cost to decommission the radioactive portions of a nuclear unit based on the size and type of reactor. Alabama Power and Georgia Power have filed plans with the NRC to ensure that -- over time -- the deposits and earnings of the external trust funds will provide the minimum funding amounts prescribed by the NRC. Site study cost is the estimate to decommission a specific facility as of the site study year, and ultimate cost is the estimate to decommission a specific facility as of its retirement date. The estimated costs of decommissioning -- both site study costs and ultimate costs -- based on the most current study as of December 31, 2002 for Alabama Power's Plant Farley and Georgia Power's ownership interests in plants Hatch and Vogtle were as follows: Plant Plant Plant Farley Hatch Vogtle - -------------------------------------------------------------- Site study year 1998 2000 2000 Decommissioning periods: Beginning year 2017 2014 2027 Completion year 2031 2042 2045 - -------------------------------------------------------------- (in millions) Site study costs: Radiated structures $629 $486 $420 Non-radiated structures 60 37 48 - -------------------------------------------------------------- Total $689 $523 $468 ============================================================== (in millions) Ultimate costs: Radiated structures $1,868 $1,004 $1,468 Non-radiated structures 178 79 166 - -------------------------------------------------------------- Total $2,046 $1,083 $1,634 ============================================================== Significant assumptions: Inflation rate 4.5% 4.7% 4.7% Trust earning rate 7.0 6.5 6.5 - -------------------------------------------------------------- The decommissioning cost estimates are based on prompt dismantlement and removal of the plant from service. The actual decommissioning costs may vary II-33 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report from the above estimates because of changes in the assumed date of decommissioning, changes in NRC requirements, or changes in the assumptions used in making these estimates. Annual provisions for nuclear decommissioning are based on an annuity method as approved by the respective state public service commissions. The amount expensed in 2002 and fund balances were as follows: Plant Plant Plant Farley Hatch Vogtle - -------------------------------------------------------------- (in millions) Amount expensed in 2002 $ 18 $ 7 $ 2 Accumulated provisions: External trust funds, at fair value $292 $219 $128 Internal reserves 34 7 4 - -------------------------------------------------------------- Total $326 $226 $132 ============================================================== Alabama Power's decommissioning costs for ratemaking are based on the site study. Effective January 1, 2002, the Georgia Public Service Commission (GPSC) decreased Georgia Power's annual provision for decommissioning expenses to $9 million. This amount is based on the NRC generic estimate to decommission the radioactive portion of the facilities as of 2000. The estimates are $383 million and $282 million for plants Hatch and Vogtle, respectively. The ultimate costs associated with the 2000 NRC minimum funding requirements are $823 million and $1.03 billion for plants Hatch and Vogtle, respectively. Alabama Power and Georgia Power expect their respective state public service commissions to periodically review and adjust, if necessary, the amounts collected in rates for the anticipated cost of decommissioning. In January 2002, Georgia Power received NRC approval for a 20-year extension of the license at Plant Hatch, which would permit the operation of units 1 and 2 until 2034 and 2038, respectively. Decommissioning costs will not reflect the license extension until a new site study is complete in 2003 and the GPSC issues a new rate order, which is not expected until December 2004. Alabama Power has notified the NRC that it plans to submit an application in September 2003 to extend the operating license for Plant Farley for an additional 20 years. Income Taxes Southern Company 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. Allowance for Funds Used During Construction (AFUDC) and Interest Capitalized In accordance with regulatory treatment, the operating companies record AFUDC. AFUDC represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new regulated facilities. While cash is not realized currently from such allowance, it increases the revenue requirement over the service life of the plant through a higher rate base and higher depreciation expense. Interest related to the construction of new facilities not included in the operating companies' retail rates is capitalized in accordance with standard interest capitalization requirements. Cash payments for interest totaled $544 million, $624 million, and $802 million in 2002, 2001, and 2000, respectively, net of amounts capitalized of $59 million, $57 million, and $44 million, respectively. Property, Plant, and Equipment Property, plant, and equipment is stated at original cost less regulatory disallowances and impairments. Original 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 interest capitalized and/or cost of funds used during construction. The cost of replacements of property -- exclusive of minor items of property - -- is capitalized. The cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expense as incurred or performed with the exception of nuclear refueling costs, which are recorded in accordance with specific public service commission orders. Alabama Power accrues estimated refueling costs in advance of the unit's next refueling outage. Georgia Power defers and amortizes refueling costs over the unit's operating cycle before the next refueling. The refueling cycles for Alabama Power and Georgia Power range from 18 to 24 months for each unit. In accordance with recent retail accounting orders, both Georgia Power and Savannah Electric will defer the costs of certain significant inspection costs for the combustion turbines at Plant McIntosh and amortize such costs over 10 years, which approximates the expected maintenance cycle. II-34 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Leveraged Leases Southern Company has several leveraged lease agreements -- ranging up to 45 years -- that relate to international and domestic energy generation, distribution, and transportation assets. Southern Company receives federal income tax deductions for depreciation and amortization and for interest on long-term debt related to these investments. Southern Company's net investment in leveraged leases consists of the following at December 31: 2002 2001 - -------------------------------------------------------------- (in millions) Net rentals receivable $1,507 $1,430 Unearned income (716) (775) - -------------------------------------------------------------- Investment in leveraged leases 791 655 Deferred taxes arising from leveraged leases (260) (193) - -------------------------------------------------------------- Net investment in leveraged leases $ 531 $ 462 ============================================================== A summary of the components of income from leveraged leases is as follows: 2002 2001 2000 - -------------------------------------------------------------- (in millions) Pretax leveraged lease income $58 $59 $61 Income tax expense 21 21 21 - --------------------------------------------------------------- Net leveraged lease income $37 $38 $40 =============================================================== Impairment of Long-Lived Assets and Intangibles Southern Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. Cash and Cash Equivalents For purposes of the consolidated financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. Materials and Supplies Generally, materials and supplies include the average costs of transmission, distribution, and generating plant materials. Materials are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed. Stock Options Southern Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized because the exercise price of all options granted equaled the fair-market value on the date of grant. Comprehensive Income Comprehensive income -- consisting of net income and changes in the fair value of qualifying cash flow hedges and changes in additional minimum pension liability, less income taxes and reclassifications for amounts included in net income -- is presented in the consolidated financial statements. Comprehensive income from discontinued operations also includes foreign currency translation adjustments, net of income taxes. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Financial Instruments Southern Company uses derivative financial instruments to limit exposure to fluctuations in interest rates, foreign currency exchange rates, the prices of certain fuel purchases, and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. Substantially all of Southern Company's bulk energy purchases and sales contracts are derivatives. However, in many cases, these II-35 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions. This results in the deferral of related gains and losses in other comprehensive income or regulatory assets or liabilities as appropriate until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income and are recorded on a net basis in the Consolidated Statements of Income. Southern Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the company's exposure to counterparty credit risk. Other Southern Company 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, 2002 $10,191 $10,475 At December 31, 2001 8,634 8,693 Capital and preferred securities: At December 31, 2002 2,420 2,498 At December 31, 2001 2,276 2,282 - -------------------------------------------------------------- The fair values for long-term debt and capital and preferred securities were based on either closing market price or closing price of comparable instruments. 2. RETIREMENT BENEFITS Southern Company has a defined benefit, trusteed, pension plan that covers substantially all employees. Southern Company also provides certain non-qualified benefit plans for a selected group of management and highly compensated employees. Also, Southern Company provides certain medical care and life insurance benefits for retired employees. The operating companies fund trusts to the extent required by their respective regulatory commissions. In late 2000, as well as in 2002, Southern Company adopted several pension and postretirement benefit plan changes that had the effect of increasing benefits to both current and future retirees. Plan assets consist primarily of domestic and international equities, global fixed income securities, real estate, and private equity investments. The measurement date for plan assets and obligations 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 ------------------- 2002 2001 - -------------------------------------------------------------- (in millions) Balance at beginning of year $3,760 $3,397 Service cost 109 104 Interest cost 277 260 Benefits paid (184) (176) Plan amendments 88 173 Actuarial (gain) loss 44 2 - -------------------------------------------------------------- Balance at end of year $4,094 $3,760 ============================================================== Plan Assets ----------------- 2002 2001 - -------------------------------------------------------------- (in millions) Balance at beginning of year $5,109 $6,157 Actual return on plan assets (343) (889) Benefits paid (166) (159) - -------------------------------------------------------------- Balance at end of year $4,600 $5,109 ============================================================== The accrued pension costs recognized in the Consolidated Balance Sheets were as follows: 2002 2001 - -------------------------------------------------------------- (in millions) Funded status $ 506 $ 1,349 Unrecognized transition obligation (39) (51) Unrecognized prior service cost 334 269 Unrecognized net gain (loss) (115) (1,020) - -------------------------------------------------------------- Prepaid asset, net 686 547 Portion included in benefit obligations 100 94 - -------------------------------------------------------------- Total prepaid assets recognized in the Consolidated Balance Sheets $ 786 $ 641 ============================================================== In 2002 and 2001, amounts recognized in the Consolidated Balance Sheets for accumulated other comprehensive income and intangible assets were $49 million and $35 million and $0 million and $33 million, respectively. II-36 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Components of the pension plan's net periodic cost were as follows: 2002 2001 2000 - ------------------------------------------------------------- (in millions) Service cost $ 109 $ 104 $ 96 Interest cost 277 260 239 Expected return on plan assets (449) (423) (384) Recognized net gain (65) (73) (62) Net amortization 11 8 - - ------------------------------------------------------------- Net pension cost (income) $(117) $ (124) $(111) ============================================================= Postretirement Benefits Changes during the year in the accumulated benefit obligations and in the fair value of plan assets were as follows: Accumulated Benefit Obligations ------------------- 2002 2001 - -------------------------------------------------------------- (in millions) Balance at beginning of year $1,239 $1,052 Service cost 21 22 Interest cost 91 88 Benefits paid (62) (54) Plan amendments - 186 Actuarial (gain) loss 172 (55) - -------------------------------------------------------------- Balance at end of year $1,461 $1,239 ============================================================== Plan Assets ------------------ 2002 2001 - -------------------------------------------------------------- (in millions) Balance at beginning of year $425 $459 Actual return on plan assets (34) (59) Employer contributions 88 79 Benefits paid (62) (54) - -------------------------------------------------------------- Balance at end of year $417 $425 ============================================================== The accrued postretirement costs recognized in the Consolidated Balance Sheets were as follows: 2002 2001 - -------------------------------------------------------------- (in millions) Funded status $(1,043) $(814) Unrecognized transition obligation 159 174 Unrecognized prior service cost 225 239 Unrecognized net loss (gain) 239 (9) Fourth quarter contributions 51 41 - -------------------------------------------------------------- Accrued liability recognized in the Consolidated Balance Sheets $ (369) $(369) ============================================================== Components of the postretirement plan's net periodic cost were as follows: 2002 2001 2000 - ------------------------------------------------------------- (in millions) Service cost $ 21 $ 22 $ 18 Interest cost 91 88 76 Expected return on plan assets (42) (40) (34) Net amortization 29 26 18 - ------------------------------------------------------------- Net postretirement cost $ 99 $ 96 $ 78 ============================================================= The weighted average rates assumed in the actuarial calculations for both the pension plan and postretirement benefits plan were: 2002 2001 2000 - -------------------------------------------------------------- Discount 6.5% 7.5% 7.5% Annual salary increase 4.0 5.0 5.0 Long-term return on plan assets 8.5 8.5 8.5 - -------------------------------------------------------------- An additional assumption used in measuring the accumulated postretirement benefit obligation was a weighted average medical care cost trend rate of 8.75 percent for 2002, decreasing gradually to 5.25 percent through the year 2010 and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 2002, as follows: 1 Percent 1 Percent Increase Decrease - -------------------------------------------------------------- (in millions) Benefit obligation $122 $108 Service and interest costs 10 8 - -------------------------------------------------------------- Employee Savings Plan Southern Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The company provides a 75 percent matching contribution up to 6 percent of an employee's base salary. Total matching contributions made to the plan for the years 2002, 2001, and 2000 were $53 million, $51 million, and $49 million, respectively. II-37 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report 3. CONTINGENCIES AND REGULATORY MATTERS General Litigation Matters Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. Southern Company's business activities are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against Southern Company and its subsidiaries cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on Southern Company's financial statements. Georgia Power Potentially Responsible Party Status Georgia Power has been designated as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation and Liability Act. Georgia Power has recognized $34 million in cumulative expenses through December 31, 2002, for the assessment and anticipated cleanup of sites on the Georgia Hazardous Sites Inventory. In addition, in 1995 the EPA designated Georgia Power and four other unrelated entities as potentially responsible parties at a site in Brunswick, Georgia, that is listed on the federal National Priorities List. Georgia Power has contributed to the removal and remedial investigation and feasibility study costs for the site. Additional claims for recovery of natural resource damages at the site are anticipated. As of December 31, 2002, Georgia Power had recorded approximately $6 million in cumulative expenses associated with Georgia Power's agreed-upon share of the removal and remedial investigation and feasibility study costs for the Brunswick site. The final outcome of each of these matters cannot now be determined. However, based on the currently known conditions at these sites and the nature and extent of Georgia Power's activities relating to these sites, management does not believe that the company's additional liability, if any, at these sites would be material to the financial statements. New Source Review Enforcement Actions In November 1999, the EPA brought a civil action in U.S. District Court in Georgia against Alabama Power, Georgia Power, and the system service company. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, which includes the five facilities mentioned previously. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation and to add Gulf Power, Mississippi Power, and Savannah Electric as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal-burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted the system service company's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add Savannah Electric as a defendant, but it denied the motion to add Gulf Power and Mississippi Power based on lack of jurisdiction over those companies. As directed by the court, the EPA refiled its amended complaint limiting claims to those brought against Georgia Power and Savannah Electric. Also, the EPA refiled its claims against Alabama Power in the U.S. District Court in Alabama. It has not refiled against Gulf Power, Mississippi Power, or the system service company. The Alabama Power, Georgia Power, and Savannah Electric cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama II-38 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003, or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. Southern Company believes that its operating companies complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Plant Wansley Environmental Litigation On December 30, 2002, the Sierra Club, Physicians for Social Responsibility, Georgia ForestWatch, and one individual filed a civil suit in U.S. District Court in Georgia against Georgia Power for alleged violations of the Clean Air Act at Plant Wansley. The complaint alleges Clean Air Act violations at both the existing coal-fired units and the new combined cycle units. Specifically, the plaintiffs allege (1) opacity violations at the coal-fired units, (2) violations of a permit provision that requires the combined cycle units to operate above certain levels, (3) violation of nitrogen oxide emission offset requirements, and (4) violation of hazardous air pollutant requirements. The civil action requests injunctive and declaratory relief, civil penalties, a supplemental environmental project, and attorneys' fees. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. On January 27, 2003, Georgia Power filed a response to the complaint. Georgia Power also filed a motion to dismiss the allegations regarding emission offsets and hazardous air pollutants. While Georgia Power believes that it has complied with applicable laws and regulations, an adverse outcome could require payment of substantial penalties. The final outcome of this matter cannot now be determined. Mobile Energy Services' Petition for Bankruptcy Mobile Energy Services Holdings (MESH), a subsidiary of Southern Company, is the owner and operator of a facility that generates electricity, produces steam, and processes black liquor as part of a pulp and paper complex in Mobile, Alabama. In January 1999, MESH filed a petition for Chapter 11 bankruptcy relief in the U.S. Bankruptcy Court. This action was in response to Kimberly-Clark Tissue Company's announcement in May 1998 of plans to close its pulp mill, which had historically provided 50 percent of MESH's revenues. As a result of the bankruptcy filing, Southern Company has written off its entire investment in MESH, including a $10 million after-tax write down in 2000. At December 31, 2002, MESH had senior debt outstanding of $139 million of first mortgage bonds and $53 million related to tax-exempt bonds. In connection with the bond financings, in lieu of funding debt service and maintenance reserve accounts, Southern Company provided and has subsequently paid certain limited guarantees totaling $41 million. Southern Company continues to have a guarantee outstanding of certain potential environmental obligations of MESH and an obligation under certain circumstances to fund a maintenance reserve account for the benefit of the owners of the pulp and paper complex that together represent a maximum contingent liability of $19 million at December 31, 2002. Mirant, formerly a subsidiary of Southern Company, agreed to indemnify Southern Company for any amounts required to be paid under such guarantees. In August 2000, MESH filed a proposed plan of reorganization with the U.S. Bankruptcy Court. The proposed plan of reorganization was most recently amended on December 13, 2001. Southern Company expects that approval of a plan of reorganization would result in a termination of Southern Company's ownership interest in MESH but would not affect Southern Company's continuing guarantee obligations discussed earlier. The final outcome of this matter cannot now be determined. California Electricity Markets Litigation Prior to the spin off of Mirant, Southern Company was named as a defendant in two lawsuits filed in the superior courts of California alleging that certain owners of electric generation facilities in California, including Southern Company, engaged in various unlawful and anticompetitive acts that served to manipulate wholesale power markets and inflate wholesale electricity prices in California with the result, as alleged in one lawsuit, that customers paid II-39 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report approximately $4 billion more for electricity than they otherwise would have. Both lawsuits sought an award of treble damages, as well as other injunctive and equitable relief. In the fall of 2001, the plaintiffs voluntarily dismissed Southern Company without prejudice from the two lawsuits in which it had been named as a defendant. Prior to being dismissed, Southern Company had notified Mirant of its claim for indemnification for costs associated with the lawsuits under the terms of the master separation agreement that governs the spin off of Mirant. Mirant had undertaken the defense of the lawsuits. Plaintiffs would not be barred by their own dismissal from naming Southern Company in some future lawsuit, but management believes that the likelihood of Southern Company having to pay damages in any such lawsuit is remote. California Electricity Markets Investigation Southern Company has received a subpoena to provide information to a federal grand jury in the Northern District of California. The subpoena covers a number of broad areas, including specific information regarding electricity production and sales activities in California. Southern Company's former subsidiary, Mirant, participated in energy marketing and trading in California during the period relevant to the subpoena. Southern Company has produced documents in response to the subpoena and is fully cooperating in the investigation. Mirant Securities Litigation In November 2002, Southern Company, along with certain former and current senior officers of Southern Company and 12 underwriters of Mirant's initial public offering, were added as defendants in a class action lawsuit that several Mirant shareholders originally filed against Mirant and certain Mirant officers in May 2002. The original lawsuit against Mirant and its officers was based on allegations related to alleged improper energy trading and marketing activities involving the California energy market. Several other similar lawsuits filed subsequently were consolidated into this litigation in the U.S. District Court for the Northern District of Georgia. The November 2002 amended complaint is based on allegations related to alleged improper energy trading and marketing activities involving the California energy market, alleged false statements and omissions in Mirant's prospectus for its initial public offering and in subsequent public statements by Mirant, and accounting-related issues previously disclosed by Mirant. For more information, see Note 11. The lawsuit purports to include persons who acquired Mirant securities on the open market or pursuant to an offering between September 26, 2000 and September 5, 2002. The amended complaint does not allege any improper trading and marketing activity, accounting errors, or material misstatements or omissions on the part of Southern Company but seeks to impose liability on Southern Company based on allegations that Southern Company was a "control person" as to Mirant. On February 14, 2003, Southern Company filed a motion seeking to dismiss all claims against the company. However, the final outcome of this matter cannot now be determined. Race Discrimination Litigation In July 2000, a lawsuit alleging race discrimination was filed by three Georgia Power employees against Georgia Power, Southern Company, and the system service company in the Superior Court of Fulton County, Georgia. Shortly thereafter, the lawsuit was removed to the U.S. District Court for the Northern District of Georgia. The lawsuit also raised claims on behalf of a purported class. The plaintiffs seek compensatory and punitive damages in an unspecified amount, as well as injunctive relief. In August 2000, the lawsuit was amended to add four more plaintiffs. Also, an additional subsidiary of Southern Company, Southern Company Energy Solutions, was named a defendant. In October 2001, the district court denied the plaintiffs' motion for class certification. The plaintiffs filed a motion to reconsider the order denying class certification, and the court denied the plaintiffs' motion to reconsider. In December 2001, the plaintiffs filed a petition in the U.S. Court of Appeals for the Eleventh Circuit seeking permission to file an appeal of the October 2001 decision, and this petition was denied. After discovery was completed on the claims raised by the seven named plaintiffs, the defendants filed motions for summary judgment on all of the named plaintiffs' claims. The parties await the district court's ruling on the seven motions for summary judgment. The final outcome of the case cannot now be determined. Right of Way Litigation In 2002, certain subsidiaries of Southern Company, including Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Telecom (collectively, defendants), were named as defendants in numerous lawsuits brought by landowners regarding the installation and use of fiber optic cable over defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs' properties and that such actions by defendants exceed the easements or other II-40 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment. The plaintiffs seek compensatory and punitive damages and injunctive relief. Defendants believe that the plaintiffs' claims are without merit. An adverse outcome in these matters could result in substantial judgments; however, the final outcome of these matters cannot now be determined. Alabama Power Retail Rate Adjustment Procedures In November 1982, the Alabama Public Service Commission (APSC) adopted rates that provide for periodic adjustments based upon Alabama Power's earned return on end-of-period retail common equity. The rates also provide for adjustments to recognize the placing of new generating facilities in retail service. Both increases and decreases have been placed into effect since the adoption of these rates. In accordance with the Rate Stabilization Equalization plan, a 2 percent increase in retail rates was effective in both April 2002 and October 2001, amounting to an annual increase of $55 million and $58 million, respectively. The rate adjustment procedures were revised by the APSC on March 5, 2002. The new procedures provide for periodic rate adjustments annually rather than quarterly and limit any annual adjustment to 3 percent. The return on common equity range of 13 percent to 14.5 percent remained unchanged. The ratemaking procedures will remain in effect until the APSC votes to modify or discontinue them. Georgia Power Retail Rate Orders In December 2001, the GPSC approved a three-year retail rate order for Georgia Power ending December 31, 2004. Under the terms of the order, earnings will be evaluated against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds, with the remaining one-third retained by Georgia Power. Retail rates were decreased by $118 million effective January 1, 2002. Under a previous three-year order ending December 2001, Georgia Power's earnings were evaluated against a retail return on common equity range of 10 percent to 12.5 percent. The order further provided for $85 million in each year, plus up to $50 million of any earnings above the 12.5 percent return during the second and third years, to be applied to accelerated amortization or depreciation of assets. Two-thirds of additional earnings above the 12.5 percent return were applied to rate refunds, with the remaining one-third retained by Georgia Power. Pursuant to the order, Georgia Power recorded $333 million of accelerated amortization and interest thereon, which has been credited to a regulatory liability account as mandated by the GPSC. Under the rate order, the accumulated accelerated amortization and the interest will be amortized equally over three years as a credit to expense beginning in 2002. Effective January 1, 2002, Georgia Power discontinued recording accelerated depreciation and amortization. Georgia Power may not file for a general base rate increase unless its projected retail return on common equity falls below 10 percent. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the GPSC would be expected to determine whether the rate order should be continued, modified, or discontinued. In 2000 and 1999, Georgia Power recorded $44 million and $79 million, respectively, of revenue subject to refund for estimated earnings above 12.5 percent retail return on common equity. Those refunds were made to customers in 2001 and 2000, respectively. 4. JOINT OWNERSHIP AGREEMENTS Alabama Power owns an undivided interest in units 1 and 2 of Plant Miller and related facilities jointly with Alabama Electric Cooperative, Inc. Georgia Power owns undivided interests in plants Vogtle, Hatch, Scherer, and Wansley in varying amounts jointly with Oglethorpe Power Corporation (OPC), the Municipal Electric Authority of Georgia, the city of Dalton, Georgia, Florida Power &Light Company (FP&L), and Jacksonville Electric Authority (JEA). In addition, Georgia Power has joint ownership agreements with OPC for the Rocky Mountain facilities and with Florida Power Corporation (FPC) for a combustion turbine unit at Intercession City, Florida. Southern Power owns an undivided interest in Stanton Unit A and related facilities jointly with the Orlando Utilities Commission, Kissimmee Utility Authority, and Florida Municipal Power Agency. The unit is scheduled to go into commercial operation in October 2003. II-41 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report At December 31, 2002, Alabama Power's, Georgia Power's, and Southern Power's ownership and investment (exclusive of nuclear fuel) in jointly owned facilities with the above entities were as follows: Jointly Owned Facilities --------------------------------------- Percent Amount of Accumulated Ownership Investment Depreciation --------- -------------------------- (in millions) Plant Vogtle (nuclear) 45.7% $3,267 $1,779 Plant Hatch (nuclear) 50.1 884 665 Plant Miller (coal) Units 1 and 2 91.8 760 341 Plant Scherer (coal) Units 1 and 2 8.4 113 58 Plant Wansley (coal) 53.5 305 156 Rocky Mountain (pumped storage) 25.4 169 82 Intercession City (combustion turbine) 33.3 12 1 Plant Stanton (combined cycle) Unit A 65.0 128 - - -------------------------------------------------------------- Alabama Power, Georgia Power, and Southern Power have contracted to operate and maintain the jointly owned facilities -- except for the Rocky Mountain project and Intercession City -- as agents for their respective co-owners. The companies' proportionate share of their plant operating expenses is included in the corresponding operating expenses in the Consolidated Statements of Income. 5. LONG-TERM POWER SALES AGREEMENTS The operating companies have long-term contractual agreements for the sale of capacity to certain non-affiliated utilities located outside the system's service area. These agreements are firm and are related to specific generating units. Because the energy is generally provided at cost under these agreements, profitability is primarily affected by capacity revenues. Unit power from specific generating plants is currently being sold to FP&L, FPC, and JEA. Under these agreements, approximately 1,500 megawatts of capacity is scheduled to be sold annually unless reduced by FP&L, FPC, and JEA for the periods after 2002 with a minimum of three years' notice -- until the expiration of the contracts in 2010. Capacity revenues from unit power sales amounted to $175 million in 2002, $170 million in 2001, and $177 million in 2000. Southern Power and Mississippi Power have contractual agreements with non-affiliated companies for the sale of capacity from certain generating units. These capacity revenues amounted to $65 million in 2002, $53 million in 2001, and $20 million in 2000. These amounts are included in sales for resale in the income statement. Future capacity revenues as of December 31, 2002, are as follows: Year Amounts - ---- ------------ (in millions) 2003 $ 73 2004 96 2005 148 2006 178 2007 177 2008 and thereafter 1,396 - -------------------------------------------------------------- Total $2,068 ============================================================== Included in the amounts above are capacity revenues related to contracts with Dynegy Inc. (Dynegy) of approximately $34 million through May 2005, $64 million from June 2005 through May 2011, and $42 million from June 2011 through May 2030. As a result of Dynegy's liquidity problems, it has provided letters of credit totaling $96 million that can be drawn in the event of a default under the purchase power agreements or the failure to renew the letters of credit prior to expiration in April 2003. 6. INCOME TAXES At December 31, 2002, the tax-related regulatory assets and liabilities were $898 million and $450 million, respectively. These assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized interest. These liabilities are attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized investment tax credits. The following tables and disclosures exclude discontinued operations. II-42 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Details of income tax provisions are as follows: 2002 2001 2000 - -------------------------------------------------------------- (in millions) Total provision for income taxes: Federal -- Current $284 $477 $421 Deferred 167 (10) 95 - -------------------------------------------------------------- 451 467 516 - -------------------------------------------------------------- State -- Current 64 103 71 Deferred 13 (12) 1 - -------------------------------------------------------------- 77 91 72 - -------------------------------------------------------------- Total $528 $558 $588 ============================================================== Net cash payments for income taxes related to continuing operations in 2002, 2001, and 2000 were $372 million, $558 million, and $581 million, respectively. 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: 2002 2001 - -------------------------------------------------------------- (in millions) Deferred tax liabilities: Accelerated depreciation $3,364 $3,222 Property basis differences 1,011 1,059 Other 840 739 - -------------------------------------------------------------- Total 5,215 5,020 - -------------------------------------------------------------- Deferred tax assets: Federal effect of state deferred taxes 111 116 Other property basis differences 185 178 Deferred costs 188 234 Pension and other benefits 146 123 Other 384 304 - -------------------------------------------------------------- Total 1,014 955 - -------------------------------------------------------------- Total deferred tax liabilities, net 4,201 4,065 Portion included in current assets (liabilities), net 1 23 Deferred state tax assets 12 9 - -------------------------------------------------------------- Accumulated deferred income taxes in the Consolidated Balance Sheets $4,214 $4,097 ============================================================== In addition, at December 31, 2002, Southern Company had available state of Georgia net operating loss carryforward deductions totaling $779 million, which could result in net state income tax benefits of $30 million, if utilized. Less than $1 million of such deductions will expire by 2007; the remainder will expire between 2008 and 2022. During 2002, Southern Company realized $14 million in such state income tax benefits. Beginning in 2002, the state of Georgia allows the filing of a combined return, which should substantially reduce any additional net operating loss carryforwards. In accordance with regulatory requirements, deferred investment tax credits are amortized over the lives of the related property with such amortization normally applied as a credit to reduce depreciation in the Consolidated Statements of Income. Credits amortized in this manner amounted to $27 million in 2002 and $30 million a year in 2001 and 2000. At December 31, 2002, all investment tax credits available to reduce federal income taxes payable had been utilized. The provision for income taxes differs from the amount of income taxes determined by applying the applicable U.S. Federal statutory rate to earnings before income taxes and preferred dividends of subsidiaries, as a result of the following: 2002 2001 2000 - -------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State income tax, net of federal deduction 2.7 3.7 3.4 Alternative fuel tax credits (5.8) (4.2) (1.3) Employee stock plans dividend deduction (2.9) - - Non-deductible book depreciation 1.3 1.7 1.7 Difference in prior years' deferred and current tax rate (1.0) (1.1) (1.3) Other (0.9) (2.2) (0.8) - -------------------------------------------------------------- Effective income tax rate 28.4% 32.9% 36.7% ============================================================== 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. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. Mirant was included in the consolidated federal tax return through April 2, 2001. Under the terms of the separation agreement, Mirant will indemnify Southern Company for subsequent assessment of any additional taxes related to its transactions prior to the spin off. II-43 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report 7. COMMON STOCK Stock Issued and Repurchased In 2002, Southern Company raised $378 million from the issuance of 16 million new common shares under the company's various stock plans. Southern Company issued 2 million, 17 million, and 5 million treasury shares of common stock in 2002, 2001, and 2000, respectively, through various company stock plans. Proceeds from the issuance of treasury stock were $56 million in 2002, $395 million in 2001, and $140 million in 2000. In April 1999, Southern Company's Board of Directors approved the repurchase of up to 50 million shares of Southern Company's common stock over a two-year period through open market or privately negotiated transactions. Under this program, 50 million shares were repurchased by February 2000 at an average price of $25.53 per share. Shares Reserved At December 31, 2002, a total of 42 million shares was reserved for issuance pursuant to the Southern Investment Plan, the Employee Savings Plan, the Outside Directors Stock Plan, and the Omnibus Incentive Compensation Plan (stock option plan). Stock Option Plan Southern Company provides non-qualified stock options to a large segment of its employees ranging from line management to executives. As of December 31, 2002, 5,878 current and former employees participated in the stock option plan. The maximum number of shares of common stock that may be issued under this plan may not exceed 55 million. The prices of options granted to date have been at the fair market value of the shares on the dates of grant. Options granted to date become exercisable pro rata over a maximum period of three years from the date of grant. Options outstanding will expire no later than 10 years after the date of grant, unless terminated earlier by the Southern Company Board of Directors in accordance with the plan. Stock option data for the plan has been adjusted to reflect the Mirant spin off. Activity in 2001 and 2002 for the plan is summarized below: Shares Average Subject Option Price To Option Per Share - -------------------------------------------------------------- Balance at December 31, 1999 13,419,978 $14.97 Options granted 11,042,626 14.67 Options canceled (335,282) 14.87 Options exercised (1,560,695) 13.65 - -------------------------------------------------------------- Balance at December 31, 2000 22,566,627 $14.92 Options granted 13,623,210 20.31 Options canceled (3,397,152) 15.39 Options exercised (3,161,800) 13.83 - -------------------------------------------------------------- Balance at December 31, 2001 29,630,885 17.46 Options granted 8,040,495 25.28 Options canceled (103,295) 19.64 Options exercised (4,892,354) 15.16 - -------------------------------------------------------------- Balance at December 31, 2002 32,675,731 $19.72 ============================================================== Shares reserved for future grants: At December 31, 2000 43,955,368 At December 31, 2001 54,795,653 At December 31, 2002 46,788,994 - -------------------------------------------------------------- Options exercisable: At December 31, 2000 9,354,705 At December 31, 2001 11,965,858 At December 31, 2002 15,463,414 - -------------------------------------------------------------- The following table summarizes information about options outstanding at December 31, 2002: Dollar Price Range of Options - -------------------------------------------------------------- 11-15 15-20 20-25 - -------------------------------------------------------------- Outstanding: Shares (in thousands) 8,149 11,635 12,892 Average remaining life (in years) 6.1 6.5 8.4 Average exercise price $14.53 $18.40 $24.20 Exerciseable: Shares (in thousands) 5,830 7,186 2,448 Average exercise price $14.47 $17.99 $22.88 - -------------------------------------------------------------- II-44 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report The estimated fair values of stock options granted in 2002, 2001, and 2000 were derived using the Black-Scholes stock option pricing model. The following table shows the assumptions and the weighted average fair values of stock options: 2002 2001 2000 - --------------------------------------------------------------- Interest rate 2.8% 4.8% 6.7% Average expected life of stock options (in years) 4.3 4.3 4.0 Expected volatility of common stock 26.3% 25.4% 20.9% Expected annual dividends on common stock $1.37 $1.34 $1.34 Weighted average fair value of stock options granted $3.37 $2.82 $3.36 - --------------------------------------------------------------- The pro forma impact of fair-value accounting for options granted on earnings from continuing operations is as follows: As Pro Reported Forma - -------------------------------------------------------------- 2002 Net income (in millions) $1,318 $1,299 Earnings per share (dollars): Basic $1.86 $1.83 Diluted $1.85 $1.82 2001 Net income (in millions) $1,119 $1,102 Earnings per share (dollars): Basic $1.62 $1.60 Diluted $1.61 $1.59 2000 Net income (in millions) $994 $984 Earnings per share (dollars): Basic $1.52 $1.51 Diluted $1.52 $1.51 - -------------------------------------------------------------- Diluted Earnings Per Share For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to outstanding options under the stock option plan. The effect of the stock options was determined using the treasury stock method. Shares used to compute diluted earnings per share are as follows: Average Common Stock Shares ------------------------------- 2002 2001 2000 - -------------------------------------------------------------- (in thousands) As reported shares 708,161 689,352 653,087 Effect of options 5,409 4,191 1,018 - -------------------------------------------------------------- Diluted shares 713,570 693,543 654,105 ============================================================== Common Stock Dividend Restrictions The income of Southern Company is derived primarily from equity in earnings of its subsidiaries. At December 31, 2002, consolidated retained earnings included $3.6 billion of undistributed retained earnings of the subsidiaries. Of this amount, $313 million was restricted against the payment by the subsidiary companies of cash dividends on common stock under terms of bond indentures. 8. FINANCING Capital and Preferred Securities Company or subsidiary obligated mandatorily redeemable capital and preferred securities have been issued by special purpose financing entities of Southern Company and its subsidiaries. Substantially all the assets of these special financing entities are junior subordinated notes issued by the related company seeking financing. Each of these companies considers that the mechanisms and obligations relating to the capital or preferred securities issued for its benefit, taken together, constitute a full and unconditional guarantee by it of the respective special financing entities' payment obligations with respect to the capital or preferred securities. At December 31, 2002, capital securities of $400 million and preferred securities of $2.0 billion were outstanding and recognized in the Consolidated Balance Sheets. Southern Company guarantees the notes related to $950 million of capital or preferred securities issued on its behalf. Long-Term Debt Due Within One Year A summary of scheduled maturities and redemptions of long-term debt due within one year at December 31 is as follows: 2002 2001 - -------------------------------------------------------------- (in millions) First mortgage bond maturities and redemptions $ 33 $ 7 Pollution control bonds 1 8 Capitalized leases 11 4 Senior notes 1,552 380 Other long-term debt 42 30 - -------------------------------------------------------------- Total $1,639 $429 ============================================================== Debt redemptions and/or serial maturities through 2007 applicable to total long-term debt are as follows: $1.6 billion in 2003; $692 million in 2004; $432 million in 2005; $228 million in 2006; and $519 million in 2007. II-45 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Assets Subject to Lien Each of Southern Company's subsidiaries is organized as a legal entity, separate and apart from Southern Company and its other subsidiaries. The subsidiary companies' mortgages, which secure the first mortgage bonds issued by the operating companies, constitute a direct first lien on substantially all of the operating companies' respective fixed property and franchises. Georgia Power discharged its mortgage in early 2002 and the lien was removed. There are no agreements or other arrangements among the subsidiary companies under which the assets of one company have been pledged or otherwise made available to satisfy obligations of Southern Company or any of its other subsidiaries. Bank Credit Arrangements At the beginning of 2003, unused credit arrangements with banks totaled $3.9 billion, of which $3.0 billion expires during 2003, $860 million expires during 2004, and $15 million expires during 2005. The following table outlines the credit arrangements by company: Amount of Credit -------------------------------------- Expires ---------------- 2004 & Company Total Unused 2003 beyond - ------- -------------------------------------- (in millions) Alabama Power $ 923 $ 923 $ 533 $390 Georgia Power 1,175 1,175 1,175 - Gulf Power 66 66 66 - Mississippi Power 97 97 97 - Savannah Electric 80 55 40 15 Southern Company 1,000 1,000 1,000 - Southern Power 850 470 - 470 Other 70 70 70 - - -------------------------------------------------------------- Total $4,261 $3,856 $2,981 $875 ============================================================== Approximately $2.6 billion of the credit facilities expiring in 2003 allow the execution of term loans for an additional two-year period. Most of these agreements include stated borrowing rates but also allow for competitive bid loans. All of the credit arrangements require payment of commitment fees based on the unused portion of the commitments or the maintenance of compensating balances with the banks. Commitment fees are less than 1/8 of 1 percent for Southern Company and the operating companies and less than 3/8 of 1 percent for Southern Power. Compensating balances are not legally restricted from withdrawal. Included in the total $3.9 billion of unused credit arrangements is $3.4 billion of syndicated credit arrangements that require the payment of agent fees. Most of Southern Company's and the operating companies' credit arrangements with banks have covenants that limit debt levels to 65 percent of total capitalization. For Southern Power, the debt level is 60 percent, excluding intercompany loans. Exceeding these debt levels would result in a default under the credit arrangements. In addition, the credit arrangements typically contain cross default provisions that would be triggered if the borrower defaulted on other indebtedness above a specified threshold. Under the credit arrangements for Southern Company and the operating companies, the cross default provisions are restricted only to the indebtedness, including any guarantee obligations, of the company that has the credit arrangement with the bank. For Southern Power's bank credit arrangements, there is a cross default to Southern Company's indebtedness, which if triggered would require prepayment of debt related to projects financed under the credit arrangement that are not complete. Southern Company and its subsidiaries are currently in compliance with all such covenants. Borrowings under certain operating companies' unused credit arrangements totaling $159 million would be prohibited if the borrower experiences a material adverse change, as defined in such agreements. Initial borrowings for new projects under Southern Power's credit facility would be prohibited if Southern Power or Southern Company experiences a material adverse change, as defined in that credit facility. A portion of the $3.9 billion unused credit with banks is allocated to provide liquidity support to the companies' variable rate pollution control bonds. The amount of variable rate pollution control bonds requiring liquidity support as of December 31, 2002 was $941 million. II-46 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Southern Company, the operating companies, and Southern Power borrow through commercial paper programs that have the liquidity support of committed bank credit arrangements. In addition, the companies from time to time borrow under uncommitted lines of credit with banks and through extendible commercial note programs. As of December 31, 2002, the amount outstanding was $20 million under these lines and $31 million in extendible commercial notes. The amount of commercial paper outstanding at December 31, 2002 and December 31, 2001, was $858 million and $1.8 billion, respectively. Commercial paper is included in notes payable on the Consolidated Balance Sheets. Financial Instruments Southern Company has firm purchase commitments for equipment that require payment in euros. As a hedge against fluctuations in the exchange rate for euros, the company entered into forward currency swaps. The total notional amount is 6 million euros maturing in 2003. At December 31, 2002, the unrealized gain on these swaps was $1 million. Southern Company and certain subsidiaries enter into interest rate swaps to hedge exposure to interest rate changes. Swaps related to fixed rate securities are accounted for as fair value hedges. Swaps related to variable rate securities or forecasted transactions are accounted for as cash flow hedges. The swaps are generally structured to mirror the terms of the hedged debt instruments; therefore, no material ineffectiveness has been recorded in earnings. The gain or loss in fair value for cash flow hedges is recorded in other comprehensive income and will be recognized in earnings over the life of the hedged items. At December 31, 2002, Southern Company had $2.8 billion notional amount of interest rate swaps outstanding with net deferred losses of $52 million as follows: Fair Value Hedges Fixed Variable Fair Rate Rate Notional Value Company Maturity Received Paid Amount Gain - ------------------------------------------ ----------------- (in millions) Southern Company 2007 5.30% 1.53% $400 $39 - -------------------------------------------------------------- Cash Flow Hedges Weighted Average -------------------- Variable Fixed Fair Rate Rate Notional Value Company Maturity Received Paid Amount (Loss) - ------------------------------------------ ---------------- (in millions) Southern Company 2003 1.74% 3.20% $200 $ (2) 2004 1.74 3.20 200 (4) Alabama Power 2003 1.95 3.02 350 (5) Alabama Power 2004 1.43 1.63 486 (2) Alabama Power 2003 * 3.05 167 (2) Alabama Power 2003 * 3.96 250 (6) Georgia Power 2003 * 4.76 250 (7) Southern Power 2013 * 6.23 350 (50) Southern Power 2008 * 5.48 150 (13) - -------------------------------------------------------------- *Rate has not been set. For the year 2002, approximately $1 million was reclassified from other comprehensive income to interest expense. For the year 2003, approximately $2 million is expected to be reclassified. 9. COMMITMENTS Construction Program Southern Company is engaged in continuous construction programs, currently estimated to total $2.1 billion in 2003, $2.3 billion in 2004, and $2.4 billion in 2005. The construction programs are 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; acquisition of additional generating assets; revised load growth estimates; changes in environmental regulations; changes in existing nuclear plants to meet new regulatory requirements; increasing costs of labor, equipment, and materials; and cost of capital. At December 31, 2002, significant purchase commitments were outstanding in connection with the construction program. Southern Company has approximately 4,100 megawatts of additional generating capacity scheduled to be placed in service by 2005. II-47 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Long-Term Service Agreements The operating companies and Southern Power have entered into several Long-Term Service Agreements (LTSAs) with General Electric (GE) for the purpose of securing maintenance support for the combined cycle and combustion turbine generating facilities owned by the subsidiaries. In summary, the LTSAs stipulate that GE will perform all planned inspections on the covered equipment, which includes the cost of all labor and materials. GE is also obligated to cover the costs of unplanned maintenance on the covered equipment subject to a limit specified in each contract. In general, except for Southern Power's Plant Dahlberg, these LTSAs are in effect through two major inspection cycles per unit. The Dahlberg agreement is in effect through the first major inspection of each unit. Scheduled payments to GE are made at various intervals based on actual operating hours of the respective units. Total payments to GE under these agreements for facilities owned are currently estimated at $1.2 billion over the life of the agreements, which may range up to 30 years. However, the LTSAs contain various cancellation provisions at the option of the purchasers. Payments made to GE prior to the performance of any planned inspections are recorded as a prepayment in the Consolidated Balance Sheets. Inspection costs are capitalized or charged to expense based on the nature of the work performed. Fuel and Purchased Power Commitments To supply a portion of the fuel requirements of the generating plants, Southern Company has entered into various long-term commitments for the procurement of fossil and nuclear fuel. In most cases, these contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. Natural gas purchases are based on various indices at the time of delivery; therefore, only the volume commitments are firm and disclosed in the following chart. Also, Southern Company has entered into various long-term commitments for the purchase of electricity. Total estimated minimum long-term obligations at December 31, 2002 were as follows: Natural Gas Purchased Year MMBtu Fuel Power - ---- ----------- --------------------- (in millions) (in millions) 2003 199,635 $2,211 $ 116 2004 121,020 1,735 136 2005 58,465 1,296 171 2006 38,960 1,130 178 2007 13,590 1,038 180 2008 and thereafter - 2,347 1,090 - -------------------------------------------------------------- Total commitments 431,670 $9,757 $1,871 ============================================================== Additional commitments for fuel will be required to supply Southern Company's future needs. Operating Leases In May 2001, Mississippi Power began the initial 10-year term of a lease agreement signed in 1999 for a combined cycle generating facility built at Plant Daniel. The facility cost approximately $370 million. The lease provides for a residual value guarantee -- approximately 71 percent of the completion cost -- by Mississippi Power that is due upon termination of the lease in certain circumstances. The lease also includes purchase and renewal options. Upon termination of the lease, Mississippi Power may either exercise its purchase option of the facility or allow it to be sold to a third party. Mississippi Power expects the fair market value of the leased facility to substantially reduce or eliminate its payment under the residual value guarantee. The amount of future minimum operating lease payments exclusive of any payment related to this guarantee will be approximately $25 million annually during the initial term. Southern Company has other operating lease agreements with various terms and expiration dates. Total operating lease expenses were $171 million, $64 million, and $42 million for 2002, 2001, and 2000, respectively. At December 31, 2002, II-48 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report estimated minimum rental commitments for noncancelable operating leases were as follows: Rail Year Cars Other Total - ---- ----------------------------- (in millions) 2003 $ 37 $ 88 $125 2004 36 78 114 2005 33 66 99 2006 28 56 84 2007 20 43 63 2008 and thereafter 125 152 277 - --------------------------------------------------------------- Total minimum payments $279 $483 $762 =============================================================== For the operating companies, the rail car lease expenses are recoverable through fuel cost recovery provisions. In addition to the above rental commitments, Alabama Power and Georgia Power have obligations upon expiration of certain rail car leases with respect to the residual value of the leased property. These leases expire in 2004, 2006, and 2010, and the maximum obligations are $39 million, $66 million, and $40 million, respectively. At the termination of the leases, the lessee may either exercise its purchase option or the property can be sold to a third party. Alabama Power and Georgia Power expect that the fair market value of the leased property would substantially reduce or eliminate the payments under the residual value obligations. Guarantees Southern Company has made separate guarantees to certain counterparties regarding performance of contractual commitments by Mirant's trading and marketing subsidiaries. At December 31, 2002, the total notional amount of guarantees was $42 million, all of which will expire by 2007. The estimated fair value of these net contractual commitments outstanding was approximately $19 million at December 31, 2002. Under the terms of the separation agreement, Mirant may not enter into any new commitments under these guarantees after the spin off date. Southern Company's potential exposure under these contractual commitments is not expected to materially differ from the estimated fair value. Subsequent to the spin off, Mirant began paying Southern Company a fee of 1 percent annually on the average aggregate maximum principal amount of all guarantees outstanding until they are replaced or expire. Mirant must use reasonable efforts to release Southern Company from all such support arrangements and will indemnify Southern Company for any obligations incurred. Prior to 1999, a subsidiary of Southern Company originated loans to residential customers of the operating companies for heat pump purchases. These loans were sold to Fannie Mae with recourse for any loan with payments outstanding over 120 days. The individual operating companies are responsible for the repurchase of their respective customers' delinquent loans. As of December 31, 2002, the outstanding loans guaranteed by the operating companies were $18 million, and loan loss reserves of $4 million have been recorded. Southern Company has executed a keep-well agreement with a subsidiary of Southern Holdings -- a direct subsidiary -- to make capital contributions in the event of any shortfall in payments due under a participation agreement with an entity in which the subsidiary holds a 30 percent investment. The maximum aggregate amount of Southern Company's liability under this keep-well agreement is $50 million. As discussed earlier in this note under Operating Leases, Mississippi Power, Georgia Power, and Alabama Power have entered into certain residual value guarantees. Southern Company has also guaranteed certain contingent liabilities of MESH discussed in Note 3. 10. NUCLEAR INSURANCE Under the Price-Anderson Amendments Act of 1988, Alabama Power and Georgia Power maintain agreements of indemnity with the NRC that, together with private insurance, cover third-party liability arising from any nuclear incident occurring at the companies' nuclear power plants. The act provides funds up to $9.5 billion for public liability claims that could arise from a single nuclear incident. Each nuclear plant is insured against this liability to a maximum of $300 million by American Nuclear Insurers (ANI), with the remaining coverage provided by a mandatory program of deferred premiums that could be assessed, after a nuclear incident, against all owners of nuclear reactors. A company could be assessed up to $88 million per incident for each licensed reactor it operates, but not more than an aggregate of $10 million per incident to be paid in a calendar year for each reactor. Such maximum assessment, excluding any applicable state premium taxes, for Alabama Power and Georgia Power -- based on its ownership and buyback interests -- is $176 million and $178 million, respectively, per incident, but not more than an aggregate of $20 million per company to be paid for each incident in any one year. II-49 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report Alabama Power and Georgia Power are members of Nuclear Electric Insurance Limited (NEIL), a mutual insurer established to provide property damage insurance in an amount up to $500 million for members' nuclear generating facilities. Additionally, both companies have policies that currently provide decontamination, excess property insurance, and premature decommissioning coverage up to $2.25 billion for losses in excess of the $500 million primary coverage. This excess insurance is also provided by NEIL. NEIL also covers the additional costs that would be incurred in obtaining replacement power during a prolonged accidental outage at a member's nuclear plant. Members can purchase this coverage, subject to a deductible waiting period of between 8 to 26 weeks, with a maximum per occurrence per unit limit of $490 million. After this deductible period, weekly indemnity payments would be received until either the unit is operational or until the limit is exhausted in approximately three years. Alabama Power and Georgia Power each purchase the maximum limit allowed by NEIl subject to ownership limitations. Each facility has elected a 12 week waiting period. Under each of the NEIL policies, members are subject to assessments if losses each year exceed the accumulated funds available to the insurer under that policy. The current maximum annual assessments for Alabama Power and Georgia Power under the NEIL policies would be $36 million and $40 million, respectively. Following the terrorist attacks of September 2001, both ANI and NEIL confirmed that terrorist acts against commercial nuclear power plants would be covered under their insurance. However, both companies revised their policy terms on a prospective basis to include an industry aggregate for all terrorist acts. The NEIL aggregate, which applies to all claims stemming from terrorism within a 12-month duration, is $3.24 billion plus any amounts that would be available through reinsurance or indemnity from an outside source. The ANI cap is a $300 million shared industry aggregate. For all on-site property damage insurance policies for commercial nuclear power plants, the NRC requires that the proceeds of such policies shall be dedicated first for the sole purpose of placing the reactor in a safe and stable condition after an accident. Any remaining proceeds are to be applied next toward the costs of decontamination and debris removal operations ordered by the NRC, and any further remaining proceeds are to be paid either to the company or to its bond trustees as may be appropriate under the policies and applicable trust indentures. All retrospective assessments -- whether generated for liability, property, or replacement power -- may be subject to applicable state premium taxes. 11. DISCONTINUED OPERATIONS Mirant Spin Off In April 2000, Southern Company announced an initial public offering of up to 19.9 percent of Mirant and its intention to spin off the remaining ownership of Mirant to Southern Company stockholders within 12 months of the initial stock offering. On October 2, 2000, Mirant completed its initial public offering of 66.7 million shares of common stock priced at $22 per share. This represented 19.7 percent of the 338.7 million shares outstanding. As a result of the stock offering, Southern Company recorded a $560 million increase in paid-in capital with no gain or loss being recognized. On February 19, 2001, the Southern Company Board of Directors approved the spin off of its remaining ownership of 272 million Mirant shares. On April 2, 2001, the tax-free distribution of Mirant shares was completed at a ratio of approximately 0.4 for every share of Southern Company common stock held at record date. The distribution resulted in charges of approximately $3.2 billion and $0.4 billion to Southern Company's paid-in capital and retained earnings, respectively. The distribution was treated as a non-cash transaction for purposes of the statement of cash flows. As a result of the spin off, Southern Company's financial statements reflect Mirant's results of operations, balance sheets, and cash flows as discontinued operations. Potential Mirant Restatement In November 2002, Mirant announced that it had identified accounting errors in previously issued financial statements, primarily related to its risk management and marketing operations. As a result of these accounting errors, Mirant reported that its net income for January 1999 through December 2001 was overstated by $51 million. Mirant has stated that the specific periods to which II-50 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report these overstatements apply have not been determined. Mirant further announced that it had requested its independent auditors to reaudit Mirant's 2001 and 2000 financial statements and stated that it did not expect that its reaudit could be completed until it files its Form 10-K for the year ended December 31, 2002. If the reaudit of Mirant's 2001 and 2000 financial statements results in adjustments that relate to periods prior to Southern Company's spin off of Mirant, Southern Company's earnings from discontinued operations for such periods could be affected. The impact of any such adjustments would not affect Southern Company's 2002 or any future financial statements. 12. SEGMENT AND RELATED INFORMATION Southern Company's reportable business segment is the sale of electricity in the Southeast by the five operating companies and Southern Power. Net income and total assets for discontinued operations are included in the reconciling eliminations column. The all other column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include alternative fuel investments, energy-related products and services, and leasing and financing services. Intersegment revenues are not material. Financial data for business segments and products and services are as follows: Business Segments
Electric All Reconciling Year Utilities Other Eliminations Consolidated - ---- ---------------------------------------------------------------------------------- (in millions) 2002 - ---- Operating revenues $10,206 $ 365 $ (22) $10,549 Depreciation and amortization 988 59 - 1,047 Interest income 19 10 (7) 22 Interest expense 586 105 (7) 684 Income taxes 777 (249) - 528 Segment net income (loss) 1,296 23 (1) 1,318 Total assets 30,409 1,881 (491) 31,799 Gross property additions 2,598 119 - 2,717 - --------------------------------------------------------------------------------------------------------------------------- Electric All Reconciling Year Utilities Other Eliminations Consolidated - --- ----------------------------------------------------------------------------------- (in millions) 2001 - ---- Operating revenues $ 9,906 $ 267 $ (18) $10,155 Depreciation and amortization 1,144 29 - 1,173 Interest income 21 8 (2) 27 Interest expense 591 137 (2) 726 Income taxes 702 (144) - 558 Segment net income (loss) 1,149 (30) 143 1,262 Total assets 29,479 2,420 (2,002) 29,897 Gross property additions 2,565 52 - 2,617 - ---------------------------------------------------------------------------------------------------------------------------
II-51 NOTES (continued) Southern Company and Subsidiary Companies 2002 Annual Report
Electric All Reconciling Year Utilities Other Eliminations Consolidated - ---- ---------------------------------------------------------------------------------- (in millions) 2000 - ---- Operating revenues $ 9,860 $ 246 $ (40) $10,066 Depreciation and amortization 1,135 36 - 1,171 Interest income 21 7 1 29 Interest expense 615 197 - 812 Income taxes 703 (115) - 588 Segment net income (loss) 1,109 (115) 319 1,313 Total assets 26,922 2,200 2,240 31,362 Gross property additions 2,199 26 - 2,225 - --------------------------------------------------------------------------------------------------------------------------- Products and Services Electric Utilities Revenues -------------------------------------------------------------------------------------- Year Retail Wholesale Other Total - ---- -------------------------------------------------------------------------------------- (in millions) 2002 $8,728 $1,168 $310 $10,206 2001 8,440 1,174 292 9,906 2000 8,600 977 283 9,860 - -------------------------------------------------------------------------------------------------------------------------- 13. QUARTERLY FINANCIAL INFORMATION FOR CONTINUING OPERATIONS (UNUADITED) Summarized quarterly financial data for 2002 and 2001 are as follows: Per Common Share (Note) ------------------------------------------------ Operating Operating Consolidated Basic Price Range Quarter Ended Revenues Income Net Income Earnings Dividends High Low - -------------- --------- --------------------------------------------------------------------------------- (in millions) March 2002 $2,214 $ 512 $224 $0.32 $0.3350 $26.78 $24.49 June 2002 2,630 659 332 0.47 0.3350 28.39 25.65 September 2002 3,248 1,070 595 0.84 0.3425 29.02 23.89 December 2002 2,457 340 167 0.23 0.3425 30.85 25.17 March 2001 $2,270 $475 $180 $0.26 $0.3350 $21.65 $16.15 June 2001 2,561 585 270 0.40 0.3350 23.88 20.89 September 2001 3,165 998 554 0.80 0.3350 26.00 22.05 December 2001 2,159 333 116 0.16 0.3350 25.98 22.30 - ---------------------------------------------------------------------------------------------------------------------------------- Southern Company's business is influenced by seasonal weather conditions.
II-52
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1998-2002 Southern Company and Subsidiary Companies 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in millions) $10,549 $10,155 $10,066 $9,317 $9,499 Total Assets (in millions) $31,799 $29,897 $31,362 $29,291 $28,723 Gross Property Additions (in millions) $2,717 $2,617 $2,225 $1,881 $1,356 Return on Average Common Equity (percent) 15.79 13.51 13.20 13.43 10.04 Cash Dividends Paid Per Share of Common Stock $1.355 $1.34 $1.34 $1.34 $1.34 - --------------------------------------------------------------------------------------------------------------------------- Consolidated Net Income (in millions): Continuing operations $1,318 $1,120 $ 994 $ 915 $986 Discontinued operations - 142 319 361 (9) - --------------------------------------------------------------------------------------------------------------------------- Total $1,318 $1,262 $1,313 $1,276 $977 =========================================================================================================================== Earnings Per Share From Continuing Operations -- Basic $1.86 $1.62 $1.52 $1.33 $1.41 Diluted 1.85 1.61 1.52 1.33 1.41 Earnings Per Share Including Discontinued Operations -- Basic $1.86 $1.83 $2.01 $1.86 $1.40 Diluted 1.85 1.82 2.01 1.86 1.40 - --------------------------------------------------------------------------------------------------------------------------- Capitalization (in millions): Common stock equity $ 8,710 $ 7,984 $10,690 $ 9,204 $ 9,797 Preferred stock and securities 2,718 2,644 2,614 2,615 2,465 Long-term debt 8,658 8,297 7,843 7,251 6,505 - --------------------------------------------------------------------------------------------------------------------------- Total excluding amounts due within one year $20,086 $18,925 $21,147 $19,070 $18,767 =========================================================================================================================== Capitalization Ratios (percent): Common stock equity 43.4 42.2 50.6 48.3 52.2 Preferred stock and securities 13.5 13.9 12.3 13.7 13.1 Long-term debt 43.1 43.9 37.1 38.0 34.7 - --------------------------------------------------------------------------------------------------------------------------- Total excluding amounts due within one year 100.0 100.0 100.0 100.0 100.0 =========================================================================================================================== Other Common Stock Data (Note): Book value per share (year-end) $12.16 $11.43 $15.69 $13.82 $14.04 Market price per share (dollars): High $30.850 $26.000 $35.000 $29.625 $31.563 Low 23.890 16.152 20.375 22.063 23.938 Close 28.390 25.350 33.250 23.500 29.063 Market-to-book ratio (year-end) (percent) 233.5 221.8 211.9 170.0 207.0 Price-earnings ratio (year-end) (times) 15.3 15.6 16.5 12.6 20.8 Dividends paid (in millions) $958 $922 $873 $921 $933 Dividend yield (year-end) (percent) 4.8 5.3 4.0 5.7 4.6 Dividend payout ratio (percent) 72.8 82.4 66.5 72.2 95.6 Shares outstanding (in thousands): Average 708,161 689,352 653,087 685,163 696,944 Year-end 716,402 698,344 681,158 665,796 697,747 Stockholders of record (year-end) 141,784 150,242 160,116 174,179 187,053 - --------------------------------------------------------------------------------------------------------------------------- Customers (year-end) (in thousands): Residential 3,496 3,441 3,398 3,339 3,277 Commercial 553 539 527 513 497 Industrial 14 14 14 15 15 Other 5 4 5 4 5 - --------------------------------------------------------------------------------------------------------------------------- Total 4,068 3,998 3,944 3,871 3,794 =========================================================================================================================== Employees (year-end) 26,178 26,122 26,021 26,269 25,206 - --------------------------------------------------------------------------------------------------------------------------- Note: Common stock data in 2001 declined as a result of the Mirant spin off.
II-53
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1998-2002 (continued) Southern Company and Subsidiary Companies 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in millions): Residential $ 3,556 $ 3,247 $ 3,361 $3,107 $3,167 Commercial 3,007 2,966 2,918 2,745 2,766 Industrial 2,078 2,144 2,289 2,238 2,268 Other 87 83 32 - 79 - --------------------------------------------------------------------------------------------------------------------------- Total retail 8,728 8,440 8,600 8,090 8,280 Sales for resale within service area 389 338 377 350 374 Sales for resale outside service area 779 836 600 473 522 - --------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 9,896 9,614 9,577 8,913 9,176 Other revenues 653 541 489 404 323 - --------------------------------------------------------------------------------------------------------------------------- Total $10,549 $10,155 $10,066 $9,317 $9,499 =========================================================================================================================== Kilowatt-Hour Sales (in millions): Residential 48,784 44,538 46,213 43,402 43,503 Commercial 48,250 46,939 46,249 43,387 41,737 Industrial 53,851 52,891 56,746 56,210 55,331 Other 1,000 977 970 945 929 - --------------------------------------------------------------------------------------------------------------------------- Total retail 151,885 145,345 150,178 143,944 141,500 Sales for resale within service area 10,597 9,388 9,579 9,440 9,847 Sales for resale outside service area 21,954 21,380 17,190 12,929 12,988 - --------------------------------------------------------------------------------------------------------------------------- Total 184,436 176,113 176,947 166,313 164,335 =========================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 7.29 7.29 7.27 7.16 7.28 Commercial 6.23 6.32 6.31 6.33 6.63 Industrial 3.86 4.05 4.03 3.98 4.10 Total retail 5.75 5.81 5.73 5.62 5.85 Sales for resale 3.59 3.82 3.65 3.68 3.92 Total sales 5.37 5.46 5.41 5.36 5.58 Average Annual Kilowatt-Hour Use Per Residential Customer 14,036 13,014 13,702 13,107 13,379 Average Annual Revenue Per Residential Customer $1,023.18 $948.83 $996.44 $938.39 $973.94 Plant Nameplate Capacity Owned (year-end) (megawatts) 36,353 34,579 32,807 31,425 31,161 Maximum Peak-Hour Demand (megawatts): Winter 25,939 26,272 26,370 25,203 21,108 Summer 32,355 29,700 31,359 30,578 28,934 System Reserve Margin (at peak) (percent) 13.3 19.3 8.1 8.5 12.8 Annual Load Factor (percent) 51.1 62.0 60.2 59.2 60.0 Plant Availability (percent): Fossil-steam 84.8 88.1 86.8 83.3 85.2 Nuclear 90.3 90.8 90.5 89.9 87.8 - --------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 65.7 67.5 72.3 73.1 72.8 Nuclear 14.7 15.2 15.1 15.7 15.4 Hydro 2.6 2.6 1.5 2.3 3.9 Gas 11.4 8.4 4.0 2.8 3.3 Purchased power 5.6 6.3 7.1 6.1 4.6 - --------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 100.0 ===========================================================================================================================
II-54 ALABAMA POWER COMPANY FINANCIAL SECTION II-55 MANAGEMENT'S REPORT Alabama Power Company 2002 Annual Report The management of Alabama 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 accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 the accounting records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls, however, based on a recognition that the cost of the system should not exceed its benefits. The Company believes its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's 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 Southern Company audit committee of its board of directors, composed of five independent directors, provides a broad overview of management's financial reporting and control functions. Additionally, a committee of Alabama Power's board of directors, composed of three outside directors, meets periodically with management, the internal auditors and the independent public accountants to discuss auditing, internal controls, and compliance matters. The internal auditors and independent public accountants have access to the members of these committees 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 Alabama Power Company in conformity with accounting principles generally accepted in the United States. /s/Charles D. McCrary Charles D. McCrary President and Chief Executive Officer /s/William B. Hutchins, III William B. Hutchins, III Executive Vice President, Chief Financial Officer, and Treasurer February 17, 2003 II-56 INDEPENDENT AUDITORS' REPORT Alabama Power Company: We have audited the accompanying balance sheet and statement of capitalization of Alabama Power Company (a wholly owned subsidiary of Southern Company) as of December 31, 2002, and the related statements of income, comprehensive income, common stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of Alabama Power Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Alabama Power Company as of December 31, 2001, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described a change in the method of accounting for derivative instruments and hedging activities in their report dated February 13, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements (pages II-71 to II-92) present fairly, in all material respects, the financial position of Alabama Power Company at December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Birmingham, Alabama February 17, 2003 THE FOLLOWING REPORT OF INDEPENDENT ACCOUNTANTS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE COMPANY'S 2001 ANNUAL REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. SEE EXHIBIT 23(b)2 FOR ADDITIONAL INFORMATION. To Alabama Power Company: We have audited the accompanying balance sheets and statements of capitalization of Alabama Power Company (an Alabama corporation and a wholly owned subsidiary of Southern Company) as of December 31, 2001 and 2000, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 II-58 through II-76) referred to above present fairly, in all material respects, the financial position of Alabama Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, effective January 1, 2001, Alabama Power Company changed its method of accounting for derivative instruments and hedging activities. /s/ Arthur Andersen LLP Birmingham, Alabama February 13, 2002 II-57 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Alabama Power Company 2002 Annual Report RESULTS OF OPERATIONS Earnings Alabama Power Company's 2002 net income after dividends on preferred stock was $461 million, representing a $74 million (19.3 percent) increase from the prior year. This improvement is primarily attributable to increased territorial energy sales and higher retail rates when compared to the prior year. More favorable weather conditions in 2002 as compared to the unusually mild weather experienced in 2001 contributed to the increases in territorial sales. The increases in revenues were partially offset by increased non-fuel operating expenses. In 2001 earnings were $387 million, representing a 7.9 percent decrease from the prior year. This decline was primarily attributable to a decrease in territorial energy sales as a result of an economic downturn and milder temperatures. Earnings in the year 2000 were $420 million, representing a 5 percent increase from the prior year. This improvement was primarily attributable to an increase in territorial sales partially offset by increased non-fuel operating expenses. The return on average common equity for 2002 was 13.80 percent compared to 11.89 percent in 2001 and 13.58 percent in 2000. A condensed income statement is as follows: Increase (Decrease) Amount From Prior Year - -------------------------------------------------------------- 2002 2002 2001 2000 - -------------------------------------------------------------- (in millions) Operating revenues $3,710 $124 $(81) $282 - -------------------------------------------------------------- Fuel 970 (31) 38 108 Purchased power 249 (44) (56) 75 Other operation and maintenance 854 71 (56) 30 Depreciation and amortization 398 15 19 17 Taxes other than income taxes 217 2 5 5 - -------------------------------------------------------------- Total operating expenses 2,688 13 (50) 235 ------------------------------------------------------------- Operating income 1,022 111 (31) 47 Other income (expense), net (269) 7 (15) (8) Less -- Income taxes 292 44 (13) 19 - -------------------------------------------------------------- Net Income $ 461 $ 74 $(33) $ 20 ============================================================== Revenues Operating revenues for 2002 were $3.7 billion, reflecting a $124 million increase from 2001. The following table summarizes the principal factors that have affected operating revenues for the past three years: Amount ---------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------- (in thousands) Retail - prior year $2,747,673 $2,952,707 $2,811,117 Change in - Base rates 76,326 22,918 - Sales growth 70,050 (36,197) 58,347 Weather 60,089 (61,846) 21,917 Fuel cost recovery and other (2,921) (129,909) 61,326 - ----------------------------------------------------------------- Total retail 2,951,217 2,747,673 2,952,707 - ----------------------------------------------------------------- Sales for resale -- Non-affiliates 474,291 485,974 461,730 Affiliates 188,163 245,189 166,219 - ----------------------------------------------------------------- Total sales for resale 662,453 731,163 627,949 - ----------------------------------------------------------------- Other operating revenues 96,862 107,554 86,805 - ----------------------------------------------------------------- Total operating revenues $3,710,533 $3,586,390 $3,667,461 ================================================================= Percent change 3.5% (2.2)% 8.3% - ------------------------------------------------------------------ Retail revenues of $3.0 billion in 2002 increased $204 million (7.4 percent) from the prior year, decreased $205 million (6.9 percent) in 2001, and increased $142 million (5 percent) in 2000. The primary contributors to the increase in revenues in 2002, shown in the table above, were the positive effect of favorable weather conditions on energy sales and increases in retail base rates (0.6 percent increase in July 2001, and 2 percent increases in October 2001 and April 2002). The Company mitigated these increases to the customer with a decrease to the energy cost recovery factor in April 2002. Fuel rates billed to customers are designed to fully recover fluctuating fuel costs over a period of time. Lower natural gas prices and increased hydro production combined with decreased costs of purchased power have resulted in an $83 million reduction in under-recovered fuel costs. At December 31, 2002, the Company had completely recovered its previously under-recovered fuel cost. Fuel revenues have no effect on net income because they represent the recording of revenues to offset fuel expenses. II-58 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report Energy sales for resale outside the service area are predominantly unit power sales under long-term contracts to Florida utilities. Economy energy and energy sold under short-term contracts are also sold for resale outside the service area. Revenues from power sales contracts have both a capacity and energy component. Capacity revenues reflect the recovery of fixed costs and a return on investment under the contracts. Energy is generally sold at variable cost. These capacity and energy components of the unit power contracts and other outside the service area contracts with non-affiliates, were as follows: 2002 2001 2000 ------------------------------------ (in thousands) Unit power - Capacity $119,193 $124,720 $127,445 Energy 134,051 134,006 127,911 Other power contracts - Capacity 14,613 13,324 11,546 Energy 61,925 91,608 43,964 --------------------------------------------------------------- Total $329,782 $363,658 $310,866 =============================================================== Capacity revenues from non-affiliates were relatively unchanged over the past three years. There are no significant scheduled declines in capacity until the termination of the unit power sales contracts in 2010. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from year to year depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Other operating revenues in 2002 decreased $11 million (9.9 percent) from 2001 due to a decrease in revenues from gas-fueled co-generation steam facilities primarily from lower gas prices and lower demand. Since co-generation steam revenues are generally offset by fuel expenses, these revenues did not have a significant impact on earnings. The $21 million (23.9 percent) increase in other operating revenues in 2001 and $20 million (30.5 percent) increase in 2000 were primarily attributed to increased steam sales in conjunction with the operation of the Company's co-generation facilities, fuel sales, and rent from electric property. Kilowatt-hour (KWH) sales for 2002 and the percent change by year were as follows: KWH Percent Change ----------------------------------- 2002 2002 2001 2000 ----------------------------------- (millions) Residential 17,403 9.6% (5.3)% 6.8% Commercial 13,363 4.4 (1.5) 5.5 Industrial 21,103 3.1 (7.4) 0.7 Other 204 3.7 (3.9) 2.3 -------- Total retail 52,073 5.5 (5.2) 3.8 Sales for resale - Non-affiliates 15,554 1.8 2.9 19.4 Affiliates 8,844 - 64.7 6.7 -------- Total 76,471 4.1 1.6 6.9 - ------------------------------------------------------------ Residential energy sales for 2002 experienced a 9.6 percent increase over the prior year and total retail energy sales grew by 5.5 percent primarily as a result of warmer summer temperatures and colder winter weather conditions compared to the previous year. Although retail sales to industrial customers increased 3.1 percent in 2002, overall sales to industrial customers remain depressed due to the continuing effect of sluggish economic conditions. Retail energy sales in 2001 decreased by 5.2 percent due to milder temperatures and an economic downturn in the Company's service area. This was offset by an increase in sales for resale to affiliates. Increased operation of the Company's combined cycle facilities due to lower natural gas prices and an increase in the Company's combined cycle capacity contributed to the increase in sales for resale. The increase in 2000 retail energy sales was primarily due to the strength of business and economic conditions in the Company's service area. Residential energy sales experienced a 6.8 percent increase over the prior year primarily as a result of warmer summer temperatures and colder winter weather conditions compared to 1999. Expenses Total 2002 operating expenses of $2.7 billion increased by $13 million or 0.5 percent over the previous year. This slight increase is mainly due to a $35 million increase in administrative and general expenses primarily related to employee salaries, insurance expense and injuries and damages expense, a $19 million increase in production expenses related to boiler plant maintenance, and II-59 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report a $15 million increase in depreciation and amortization expenses due to an increase in depreciable property. These increases are offset by a $43 million decrease in purchased power expenses and a $14 million decrease in fuel expenses related to lower coal prices. Fuel expenses, including purchased power, are offset by fuel revenues and have no effect on net income. In 2001 total operating expenses of $2.7 billion were down $50 million or 1.8 percent compared with 2000. This decline is mainly due to an $18 million net decrease in fuel and purchased power costs related to lower fuel prices, increased hydro generation and added capacity. The Company also had a $56 million decrease in non-production operation and maintenance expense related to settlements received in connection with the Company's insurance program, lower costs related to services provided by the system service company and Southern Nuclear, and a reduction to the natural disaster reserve accrual. These decreases in expense were partially offset by a $19 million increase in depreciation and amortization due to an increase in depreciable property. Total operating expenses of $2.7 billion in 2000 were up $235 million or 9.4 percent compared with the prior year. This increase was mainly due to a $183 million increase in fuel and purchased power costs as a result of warmer summer temperatures and colder winter weather conditions compared to 1999, accompanied by a $23 million increase in maintenance expenses related to overhead line clearing. Fuel costs constitute the single largest expense for the Company. The mix of fuel sources for generation of electricity is determined primarily by system load, the unit cost of fuel consumed, and the availability of hydro and nuclear generating units. The amount and sources of generation and the average cost of fuel per net KWH generated were as follows: ------------------------ 2002 2001 2000 ------------------------ Total generation (billions of KWHs) 71 68 65 Sources of generation (percent) -- Coal 62 64 72 Nuclear 19 18 19 Hydro 6 6 3 Gas 13 12 6 Average cost of fuel per net KWH generated (cents) -- 1.47 1.56 1.54 - ------------------------------------------------------------ In 2002, total fuel and purchased power expenses of $1.2 billion decreased $75 million (5.8 percent) due primarily to lower average fuel cost, while total energy sales increased 3,012 million kilowatt hours (4.1 percent) compared with the amounts recorded in 2001. Fuel and purchased power expenses in 2001 decreased $18 million (1.4 percent) compared to 2000 because of milder temperatures in 2001. Fuel and purchased power expenses increased $183 million (16 percent) in 2000 compared to 1999 because of hotter-than-normal summer weather in 2000. Purchased power consists of purchases from affiliates in the Southern electric system and non-affiliated companies. Purchased power transactions among the Company and its affiliates will vary from period to period depending on demand, the availability, and the variable production cost of generating resources at each company. During 2002 purchased power transactions from non-affiliates decreased $54 million (37 percent) due to the addition in May 2001 of a combined cycle unit which generated 6.1 billion kilowatt hours in 2002, an 18.4 percent increase over the previous year. Purchased power transactions from non-affiliates also declined in 2001 because of the addition of the combined cycle unit and an increase in hydro generation resulting in a $20 million (12 percent) decline from the year 2000. Depreciation and amortization expense increased 3.9 percent in 2002, 5.2 percent in 2001, and 4.9 percent in 2000. These increases reflect additions to property, plant, and equipment. Allowance for Funds Used During Construction (AFUDC) increased $4 million (57.5 percent) in 2002 due to an increase in the amount of construction work in progress over the prior year. AFUDC decreased $16 million (68.9 percent) in 2001 due to completion of construction of Plant Barry Unit 7 and placing it in service in May 2001. In 2000, AFUDC increased $11 million (94.6 percent) as a result of this construction. Interest expense decreased $26 million (9.9 percent) in 2002. The decrease reflects a decrease in interest on long-term debt due to refinancing activities. Interest expense increased $3 million (1.1 percent) in 2001 compared to 2000. In 2000 interest expense was relatively flat when compared to the previous year. II-60 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report Effects of Inflation The Company is subject to rate regulation that is based on the recovery of historical costs. In addition, the income tax laws are also based on 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 utility plant with long economic lives. Conventional accounting for historical cost 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 securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed in the Company's approved electric rates. Future Earnings Potential General The results of continuing operations for the past three years are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors. The major factor is the ability of the Company to achieve energy sales growth while containing costs and maintaining a stable regulatory environment. Growth in energy sales is subject to a number of factors. These factors include weather, competition, new short- and long-term contracts with neighboring utilities, energy conservation practiced by customers, the elasticity of demand, and the rate of economic growth in the Company's service area. Assuming normal weather, sales to retail customers are projected to grow approximately 1.8 percent annually on average during 2003 through 2007. The Company currently operates as a vertically integrated utility providing electricity to customers within its traditional service area located in the state of Alabama. Prices for electricity provided by the Company to retail customers are set by the Alabama Public Service Commission (APSC) under cost-based regulatory principles. Rates for the Company can be adjusted periodically within certain limitations based on earned retail rate of return compared with an allowed return. Increases in retail rates of 2 percent were effective in April 2002 and October 2001 in accordance with the Rate Stabilization Equalization plan. See Note 3 to the financial statements under "Retail Rate Adjustment Procedures" for additional information. The rates also provide for adjustments to recognize the placing of new generating facilities into retail service under Rate CNP (Certificated New Plant). Effective July 2001, the Company's retail rates were adjusted by 0.6 percent under Rate CNP to recover costs for Plant Barry Unit 7, which was placed into commercial operation on May 1, 2001. In April 2000, the APSC approved an amendment to the Company's existing rate structure to provide for the recovery of retail costs associated with certified purchased power agreements. In November 2000, the APSC certified a seven-year purchased power agreement pertaining to a 615 megawatt wholesale generating facility under construction in Autaugaville, Alabama (Plant Harris), which was sold to Southern Power in June 2001. All of the 615 megawatts are scheduled to be available beginning in June 2003. In addition, the APSC certified a seven-year purchase power agreement with a third party for approximately 630 megawatts; one half of the capacity will be available beginning in 2003, while the remaining half is scheduled to be available beginning in 2004. Rate CNP will adjust retail rates one month after the contracted capacity delivery is scheduled to begin. In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers' Accounting for Pensions, the Company recorded non-cash pre-tax pension income of approximately $56 million in 2002. Future pension income is dependent on several factors including trust earnings and changes to the plan. Current estimates indicate a reversal of recording pension income to recording pension expense by as early as 2007. Postretirement benefit costs for the Company were $23 million in 2002 and are expected to continue to trend upward. A portion of pension income is capitalized based on construction related labor charges. For the Company, pension income and postretirement benefits are a component of the regulated rates and do not have a significant effect on net income. For more information see Note 2 to the financial statements. Proposed nuclear security legislation is expected to be introduced in the 108th Congress. The Nuclear Regulatory Commission is also considering additional security measures for licensees that could require immediate implementation. Any such requirements could have a significant impact on the Company's nuclear power II-61 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report plant and result in increased operation and maintenance expenses as well as additional capital expenditures. The impact of any new requirements would depend upon the development and implementation of the regulations. The Company is involved in various matters being litigated. See Note 3 to the financial statements for information regarding material issues that could possibly affect future earnings. Compliance costs related to current and future environmental laws and regulations could affect earnings if such costs are not fully recovered. The Clean Air Act and other important environmental items are discussed later under "Environmental Matters." Industry Restructuring The electric utility industry in the United States is continuing to evolve 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 power plants for a utility's large industrial and/or commercial customers where retail access is allowed and to sell excess energy to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign and domestic electric infrastructure assets. The Company has not experienced any material financial impact regarding its limited energy trading operations through SCS and recent generating capacity additions. Although the Energy Act does not provide for retail customer access, it was a major catalyst for the recent restructuring and consolidation taking place within the utility industry. Numerous federal and state initiatives that promote wholesale and retail competition are in varying stages. Among other things, these initiatives allow retail customers in some states to choose their electricity provider. Some states have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. While various restructuring and competition initiatives have been discussed in Alabama, none have been enacted. In October 2000, the APSC completed a two-year study of electric industry restructuring, concluding that (i) restructuring of the electric utility industry in Alabama was not in the public interest and (ii) the APSC itself would not mandate retail competition or electric industry restructuring without enabling state legislation. Electric utility restructuring would require numerous issues to be resolved, including significant ones relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. Continuing to be a low-cost producer could provide opportunities to increase market share and profitability in markets that evolve with changing regulation and competition. Conversely, if the Company does not remain a low-cost producer and provide quality service, then energy sales growth could be limited, and this could significantly erode earnings. FERC Matters In December 1999, the Federal Energy Regulatory Commission (FERC) issued its final ruling on Regional Transmission Organizations (RTOs). The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company and its operating companies, including the Company, have submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2001, Entergy Corporation and Cleco Power joined the SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans' sponsors petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other II-62 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on the Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company and the Company. Any impact of this proposal on the Company will depend on the form in which final rules may be ultimately adopted; however, the Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. In 2002, the Company initiated the relicensing process for the Company's seven hydroelectric projects on the Coosa River (Weiss, Henry, Logan Martin, Lay, Mitchell, Jordan, and Bouldin) and the Smith and Bankhead Projects on the Warrior River. The FERC licenses for all of these nine projects expire in 2007. Upon or after the expiration of each license, the United States Government, by act of Congress, may take over the project or the FERC may relicense the project either to the original licensee or to a new licensee. The FERC may grant relicenses subject to certain requirements that could result in additional costs to the Company. Accounting Policies Critical Policy The Company's significant accounting policies are described in Note 1 to the financial statements. The Company's only critical accounting policy involves rate regulation. The Company is subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of 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. New Accounting Standards Derivatives - ----------- Effective January 2001, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-03. In October 2002, the Company prospectively adopted the EITF's requirements to reflect the impact of certain energy trading contracts on a net basis. This change had no material impact on the Company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on the Company's current accounting treatment. Asset Retirement Obligations - ---------------------------- Prior to January 2003, the Company accrued for the ultimate cost of retiring most long-lived assets over the life of the related asset through depreciation expense. FASB Statement No. 143, Accounting for Asset Retirement Obligations, establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to II-63 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. For more information regarding the impact of adopting this standard effective January 1, 2003, see Note 1 to the financial statements under "Regulatory Assets and Liabilities" and "Depreciation and Nuclear Decommissioning." Guarantees - ---------- In 2002, the FASB issued Interpretation No. 45, Accounting and Disclosure Requirements for Guarantees. This interpretation requires disclosure of certain direct and indirect guarantees as reflected in Note 8 to the financial statements under "Guarantees." Also, the interpretation requires recognition of a liability at inception for certain new or modified guarantees issued after December 31, 2002. The adoption of Interpretation No. 45 in January 2003 did not have a material impact on the Company's financial statements. FINANCIAL CONDITION Overview Over the last several years the Company's financial condition has remained stable with emphasis on cost control measures combined with significantly lower cost of capital, achieved through the refinancing and/or redemption of higher-cost long-term debt and preferred stock. The Company had gross property additions of $635 million in 2002. The majority of funds needed for gross property additions for the last several years have been provided from operating activities, principally from earnings and non-cash charges to income such as depreciation and deferred income taxes. The Statements of Cash Flows provide additional details. Credit Rating Risk The Company does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Exposure to Market Risk The Company is exposed to market risks, including changes in interest rates and certain commodity prices. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. Company policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average interest rate on variable long-term debt outstanding at December 31, 2002 was 1.64%. If the Company sustained a 100 basis point change in interest rates for all variable long-term debt, the change would affect annualized interest expense by $10.5 million. To further mitigate the Company's exposure to interest rates, it has entered into interest rate swaps that were designed as cash flow hedges of variable rate debt or anticipated debt issuances. See Note 1 and Note 7 to the financial statements under "Financial Instruments" for additional information. The Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulation, the Company has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements in electricity prices, the Company enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market. In addition, in October 2001, the APSC approved a revision to the Company's Rate ECR (Energy Cost Recovery) allowing the recovery of specific costs associated with the sales of natural gas that become necessary due to operating considerations at its electric generating facilities. This revision also includes the cost of financial instruments used for hedging market price risk up to 75 percent of the budgeted annual amount of natural gas purchases. The Company may not engage in natural gas hedging activities that extend beyond a rolling 42-month window. Also, the premiums paid for natural gas financial options may not exceed 5 percent of the Company's natural gas budget for that year. At December 31, 2002, exposure from these activities was not material to the Company's financial position, results of operations, or cash flows. The changes in fair value of derivative energy contracts and year-end valuations were as follows: II-64 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report Changes in Fair Value - --------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------- (in thousands) Contracts beginning of year $ 214 $ 567 Contracts realized or settled (21,088) (509) New contracts at inception - - Changes in valuation techniques - - Current period changes 42,276 156 - -------------------------------------------------------------- Contracts end of year $ 21,402 $ 214 ============================================================== Source of Year-End Valuation Prices ---------------------------------- Maturity Total ------------------- Fair Value Year 1 1-3 Years - ----------------------------------------------------------------- (in thousands) - ----------------------------------------------------------------- Actively quoted $21,402 $26,462 $(5,060) External sources - - - Models and other methods - - - - ----------------------------------------------------------------- Contracts end of Year $21,402 $26,462 $(5,060) ================================================================= Unrealized gains and losses from mark to market adjustments on contracts related to the retail fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the Company's fuel cost recovery clause. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. At December 31, 2002, the fair value of derivative energy contracts reflected in the financial statements was as follows: Amounts - ---------------------------------------------------------- (in millions) Regulatory liabilities, net $21.3 Other comprehensive income - Net income 0.1 - ------------------------------------------------------- Total fair value $21.4 ======================================================= For the years ended December 31, 2002 and 2001, approximately $(2.0) million and $2.0 million, respectively, of gains (losses) were recognized in income. Financing Activities In 2002, the Company's financing costs decreased due to lower interest rates despite the issuance of new debt during the year. New issues during 2000 through 2002 totaled $2.0 billion and retirement or repayment of higher-cost securities totaled $1.5 billion. Composite financing rates for long-term debt, preferred stock, and preferred securities for the years 2000 through 2002, as of year-end, were as follows: 2002 2001 2000 - --------------------------------------------------------------- Long-term debt interest rate 5.05% 5.72% 6.60% Preferred stock dividend rate 5.17 4.79 5.18 Preferred securities dividend rate 5.25 6.96 7.38 - --------------------------------------------------------------- The Company's current liabilities exceed current assets because of securities due within one year. The Company intends to refinance debt that comes due during 2003. Subsequent to December 31, 2002, the Company has refinanced $167 million of securities classified as current on the Balance Sheet with long-term securities. An additional $250 million of securities has been issued to retire long-term debt and for other corporate purposes. Capital Structure The Company's ratio of common equity to total capitalization -- including short-term debt -- was 42.6 percent in 2002, 42.8 percent in 2001, and 42.2 percent in 2000. See Note 7 to the financial statements under "Capitalization" for additional information. Capital Requirements for Construction Capital expenditures are estimated to be $643 million for 2003, $787 million for 2004, and $948 million for 2005. Over the next three years the Company estimates spending $485 million on environmental related additions including $355 million on Selective Catalytic Reduction facilities, $164 million on Plant Farley including $43 million on replacing reactor vessel heads, $620 million on distribution facilities, and $569 million on transmission additions. See Note 8 to the financial statements for additional details. Actual construction costs may vary from estimates because of changes in such factors as: business conditions; environmental regulations; nuclear plant regulations; FERC rules and transmission regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition there can be no assurance that costs related to capital expenditures will be fully recovered. II-65 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report Other Capital Requirements In addition to the funds required for the Company's construction program, approximately $1.9 billion will be required by the end of 2005 for maturities of long-term debt. The Company 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. As a result of requirements by the Nuclear Regulatory Commission, the Company has established external trust funds for the purpose of funding nuclear decommissioning costs. Annual provisions for nuclear decommissioning are based on an annuity method as approved by the APSC. The amount expensed in 2002 was $18 million. For additional information concerning nuclear decommissioning costs, see Note 1 to the financial statements under "Depreciation and Nuclear Decommissioning." In 1994 the Company also established an external trust fund for postretirement benefits as ordered by the APSC. The cumulative effect of funding these items over a long period will diminish internally funded capital and may require capital from other sources. For additional information, see Note 2 to the financial statements under "Postretirement Benefits." These capital requirements, lease obligations, purchase commitments, and trust requirements - discussed above and in the financial statements - are summarized as follows: 2003 2004 2005 --------------------------------------------------------------- (in millions) Construction expenditures $ 643.0 $787.0 $948.0 Senior Notes 1,117.0 525.0 225.0 Leases - Capital 0.9 1.0 0.5 Operating 28.2 27.2 23.4 Purchase commitments - Fuel 757.7 768.1 522.6 Purchased Power 53.0 83.0 86.0 Long-term service agreements 25.7 15.2 14.3 Trusts - Nuclear decommissioning 20.3 20.3 20.3 Postretirement benefits 5.1 4.9 24.2 - ---------------------------------------------------------------- Sources of Capital The Company plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from internal sources. However, the type and timing of any financings - if needed - will depend on market conditions and regulatory approval. In recent years financings primarily have utilized unsecured debt and trust preferred securities. To meet short-term cash needs and contingencies, the Company has various internal and external sources of liquidity. At the beginning of 2003, the Company had approximately $23 million of cash and cash equivalents and $923 million of unused credit arrangements with banks. In addition, the Company has substantial cash flow from operating activities and access to the capital markets to meet liquidity needs. Cash flows from operating activities were $951 million in 2002, $838 million in 2001, and $827 million in 2000. Credit arrangements are as follows: Expires ---------------------------- Total Unused 2003 2004 - ----------------------------------------------------------- (in millions) $923 $923 $533 $390 - ----------------------------------------------------------- Approximately $361 million of the credit facilities expiring in 2003 allow for the execution of term loans for an additional two-year period. See Note 7 to the financial statements under "Bank Credit Arrangements" for additional information. The Company may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of the Company and the other Southern Company operating companies. At December 31, 2002, the Company had outstanding $37 million of commercial paper. Environmental Matters New Source Review Enforcement Actions In November 1999, the Environmental Protection Agency (EPA) brought a civil action against the Company in the U.S. District Court in Atlanta, Georgia. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to coal-fired generating facilities at the Company's Plants Miller, Barry, and Gorgas. The civil action requests penalties and injunctive II-66 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued to the Company a notice of violation relating to these specific facilities, as well as Plants Greene County and Gaston. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal-burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia. The EPA refiled its claims against Alabama Power in the U.S. District Court in Alabama. The Company's case has been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against the Company. Because the outcome of the TVA appeal could have a significant adverse impact on the Company, it is a party to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Environmental Statutes and Regulations The Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations has been and will continue to be, a significant focus for the company. The Title IV acid rain provisions of the Clean Air Act, for example, required significant reductions in sulfur dioxide and nitrogen oxide emissions. Compliance was required in two phases -- Phase I, effective in 1995 and Phase II, effective in 2000. Construction expenditures associated with Phase I and Phase II compliance totaled approximately $88 million. Some of the expenditures required to comply with the Phase II acid rain requirements also assisted the Company in complying with nitrogen oxide emission reduction requirements under Title I of the Clean Air Act, which were designed to address one-hour ozone nonattainment problems in Birmingham, Alabama. In December 2000, the Alabama Department of Environmental Management (ADEM) adopted revisions to the State Implementation Plan for meeting the one-hour ozone standard. New emission limits to comply with these requirements must be implemented in May 2003. Two plants in the Birmingham area will be affected. Construction expenditures for compliance with these new rules are currently estimated at approximately $270 million, of which $70 million remains to be spent. To help bring the remaining nonattainment areas into compliance with the one-hour ozone standard, in 1998 the EPA issued regional nitrogen oxide reduction rules. Those rules required 21 states, including Alabama, to reduce and cap nitrogen oxide emissions from power plants and other large industrial sources. Affected sources, including five of the Company's coal-fired plants in Alabama, must comply with the reduction requirements by May 31, 2004. Additional construction expenditures for compliance with these new rules are currently estimated at approximately $292 million, of which $287 million remains to be spent. In July 1997, the EPA revised the national ambient air quality standards for ozone and particulate matter. These revisions made the standards significantly more stringent. In the subsequent litigation of these standards, the U.S. Supreme Court found the EPA's implementation program for the new ozone standards II-67 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report unlawful and remanded it to the EPA for further rulemaking. The EPA is expected to propose implementation rules designed to address the court's concerns in 2003 and issue final implementation rules in 2004. The remaining legal challenges to the new standards, which were pending before the U.S. Court of Appeals, District of Columbia Circuit, have been resolved. The EPA plans to designate areas as attainment or nonattainment with the new eight-hour ozone standard by April 2004, based on air quality data for 2001 through 2003. Several areas within the Company's service area are likely to be designated nonattainment under the new ozone standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as 2007. Those state plans could require further reductions in nitrogen oxide emissions from power plants. If so, reductions could be required sometime after 2007. The impact of any new standards will depend on the development and implementation of applicable regulations. The EPA currently plans to designate areas as attainment or nonattainment with the new fine particulate matter standard by the end of 2004. Those area designations will be based on air quality data collected during 2001 through 2003. Several areas within the Company's service area will likely be designated nonattainment under the new particulate matter standard. State implementation plans, including new regulations necessary to bring those areas into attainment could be required as early as the end of 2007. Those state plans will likely require reductions in sulfur dioxide emissions from power plants. If so, the reductions could be required sometime after 2007. Any additional emission reductions and costs associated with the new fine particulate matter standard cannot be determined at this time. The EPA has also announced plans to issue a proposed Regional Transport Rule for the fine particulate matter standard by the end of 2003 and to finalize the rule in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. If issued, this rule would likely modify other state implementation plan requirements for attainment of the fine particulate matter standard and the eight-hour ozone standard. It is not possible at this time to determine the effect such a rule would have on the Company. Further reductions in sulfur dioxide could also be required under the EPA's Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. The Company has a number of plants that could be subject to these rules. The EPA regional haze program calls for States to submit State Implementation Plans in 2007 and 2008 that contain emission reduction strategies for achieving progress toward the visibility improvement goal. In 2002, however, the U.S. Court of Appeals, District of Columbia Circuit, vacated and remanded the BART provisions of the federal Regional Haze rules to the EPA for further rulemaking. Because new BART rules have not been developed and state visibility assessments are only beginning, it is not possible to determine the effect of these rules on the company at this time. The EPA's Compliance Assurance Monitoring (CAM) regulations under Title V of the Clean Air Act require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. The regulations require certain facilities with Title V operating permits to develop and submit a CAM plan to the appropriate permitting authority upon applying for renewal of the facility's Title V operating permit. The Company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, the Company cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements. Actual ongoing monitoring costs are expensed as incurred and are not material for any period presented. In December 2000, having completed its utility studies for mercury and other hazardous air pollutants (HAPS), the EPA issued a determination that an emission control program for mercury and, perhaps, other HAPS is warranted. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. The EPA currently plans to issue proposed rules regulating mercury emissions from electric utility boilers by the end of 2003, and those regulations are scheduled to be finalized by the end of 2004. Compliance could be required as early as 2007. Because the rules have not yet been proposed, the costs associated with compliance cannot be determined at this time. In December 2002, the EPA issued final and proposed revisions to the New Source Review program under the Clean Air Act. In February 2003, several II-68 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report northeastern states petitioned the D.C. Circuit Court for a stay of the final rules. The proposed rules are open to public comment and may be revised before being finalized by the EPA. If fully implemented, these proposed and final regulations could affect the applicability of the New Source Review provisions to activities at the Company's facilities. In any event, any final regulations must be adopted by the states in the Company's service area in order to apply to the Company's facilities. The effect of these proposed and final rules cannot be determined at this time. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002, proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the last Congress. Similar bills have been, and are anticipated to be, introduced this year. The Bush Administration's Clear Skies Act was recently reintroduced, and President Bush has stated that it will be a high priority for the Administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. The cost impacts of such legislation would depend upon the specific requirements enacted. Domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and specifically the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. The Bush Administration does not support U.S. ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation and has instead announced a new voluntary climate initiative which seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. The Company is involved in a voluntary electric utility industry sector climate change initiative in partnership with the government. Because this initiative is still under development, it is not possible to determine the effect on the company at this time. The Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste and releases of hazardous substances. Under these various laws and regulations, the Company could incur substantial costs to clean up properties. The Company conducts studies to determine the extent of any required cleanup and will recognize in its financial statements costs to clean up known sites. The Company may be liable for a portion or all required cleanup costs for additional sites that may require environmental remediation. The Company has not incurred any significant cleanup costs to date. Under the Clean Water Act, the EPA is developing new rules aimed at reducing impingement and entrainment of fish and fish larvae at cooling water intake structures that will require numerous biological studies, and perhaps, retrofits to some intake structures at existing power plants. The new rule was proposed in February 2002 and will be finalized by August 2004. The impact of any new standards will depend on the development and implementation of applicable regulations. Also, under the Clean Water Act, the EPA and ADEM are developing total maximum daily loads (TMDLs) for certain impaired waters. Establishment of maximum loads by the EPA or ADEM may result in lowering permit limits for various pollutants and a requirement to take additional measures to control non-point source pollution (e.g., storm water runoff) at facilities discharging into waters for which TMDLs are established. Because the effect on the Company will depend on the actual TMDLs and permit limitations established by the implementing agency, it is not possible to determine the effect on the Company at this time. The EPA and state environmental regulatory agencies are reviewing and evaluating various other matters including limits on pollutant discharges to impaired waters, hazardous waste disposal requirements, and other regulatory matters. The impact of any new standards will depend on the development and implementation of applicable regulations. Several major pieces of environmental legislation are periodically 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; the Toxic Substances Control Act; the Emergency Planning & Community Right-to-Know Act; and the Endangered Species Act. II-69 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Alabama Power Company 2002 Annual Report Compliance with possible additional federal or state legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could also significantly affect the Company. The impact of any new legislation, or changes to existing legislation, could affect many areas of the Company's operations. The full impact of any such changes cannot, however, be determined at this time. Cautionary Statement Regarding Forward-Looking Information The Company's 2002 Annual Report includes forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning projected retail sales growth and scheduled completion of new generation. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, and also changes in environmental and other laws and regulations to which the Company is subject, as well as changes in application of existing laws and regulations; current and future litigation, including the pending EPA civil action against the Company; the effects, extent, and timing of the entry of additional competition in the markets in which the Company operates; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; internal restructuring or other restructuring options that may be pursued; the ability of counterparties of the Company to make payments as and when due; the effects of, and changes in, economic conditions in the areas in which the Company operates, including the current soft economy; the direct or indirect effects on the Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the timing and acceptance of the Company's new product and service offerings; the ability of the Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed from time to time by the Company with the Securities and Exchange Commission. 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STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001, and 2000 Alabama Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Retail sales $2,951,217 $2,747,673 $2,952,707 Sales for resale -- Non-affiliates 474,291 485,974 461,730 Affiliates 188,163 245,189 166,219 Other revenues 96,862 107,554 86,805 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 3,710,533 3,586,390 3,667,461 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 969,521 1,000,828 963,275 Purchased power -- Non-affiliates 90,998 144,991 164,881 Affiliates 158,121 147,967 184,014 Other 574,979 508,264 538,529 Maintenance 279,406 275,510 301,046 Depreciation and amortization 398,428 383,473 364,618 Taxes other than income taxes 216,919 214,665 209,673 - ----------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 2,688,372 2,675,698 2,726,036 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Income 1,022,161 910,692 941,425 Other Income and (Expense): Allowance for equity funds used during construction 11,168 7,092 22,769 Interest income 13,991 15,101 16,152 Equity in earnings of unconsolidated subsidiaries 3,399 4,494 3,156 Interest expense, net of amounts capitalized (225,706) (246,436) (235,331) Distributions on preferred securities of subsidiary (24,599) (24,775) (25,549) Other income (expense), net (32,184) (15,671) (24,995) - ----------------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (253,931) (260,195) (243,798) - ----------------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 768,230 650,497 697,627 Income taxes 292,436 248,597 261,555 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings Before Cumulative Effect of 475,794 401,900 436,072 Accounting Change Cumulative effect of accounting change-- less income taxes of $215 thousand - 353 - - ----------------------------------------------------------------------------------------------------------------------------------- Net Income 475,794 402,253 436,072 Dividends on Preferred Stock 14,439 15,524 16,156 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income After Dividends on Preferred Stock $ 461,355 $ 386,729 $ 419,916 =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001, and 2000 Alabama Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 475,794 $ 402,253 $ 436,072 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 465,325 437,490 412,998 Deferred income taxes and investment tax credits, net 48,828 (21,569) 66,166 Pension, postretirement, and other employee benefits (34,464) (58,118) (53,362) Other, net (50,863) (64,533) 15,659 Changes in certain current assets and liabilities -- Receivables, net (46,458) 88,325 (125,652) Fossil fuel stock 25,535 (38,663) 23,967 Materials and supplies 3,728 (13,025) (10,662) Other current assets 6,889 (15,474) (6,613) Accounts payable 10,587 (83,077) 107,702 Taxes accrued (40,922) 46,187 3,266 Other current liabilities 86,850 158,110 (42,507) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 950,829 837,906 827,034 - ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (634,559) (635,540) (870,581) Cost of removal net of salvage (32,105) (37,304) (34,378) Sales of property - 102,068 - Other 2,054 2,533 (15,036) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (664,610) (568,243) (919,995) - ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase (decrease) in notes payable, net 26,994 (271,347) 184,519 Proceeds -- Pollution control bonds - 35,000 - Senior notes 975,000 442,000 250,000 Preferred securities 300,000 - - Common stock - 15,642 - Capital contributions from parent company 49,788 107,313 204,371 Redemptions -- First mortgage bonds (350,000) (138,991) (111,009) Pollution control bonds - (15,000) - Senior notes (415,602) (3,179) (5,041) Other long-term debt (883) (842) (946) Preferred securities (347,000) - - Preferred stock (70,000) - - Payment of preferred stock dividends (14,176) (14,942) (16,110) Payment of common stock dividends (431,000) (393,900) (417,100) Other (22,411) (9,908) (951) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided from (used for) financing activities (299,290) (248,154) 87,733 - ----------------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents (13,071) 21,509 (5,228) Cash and Cash Equivalents at Beginning of Period 35,756 14,247 19,475 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 22,685 $ 35,756 $ 14,247 =================================================================================================================================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of $6,738, $11,690, and $19,953 capitalized $230,102 $246,316 $237,066 Income taxes (net of refunds) 236,634 223,961 175,303 - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Alabama Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------- Assets 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents $ 22,685 $ 35,756 Receivables -- Customer accounts receivable 240,052 201,566 Unbilled revenues 89,336 80,419 Under recovered regulatory clause revenues - 83,497 Other accounts and notes receivable 47,535 49,940 Affiliated companies 74,099 72,639 Accumulated provision for uncollectible accounts (4,827) (5,237) Fossil fuel stock, at average cost 73,742 99,278 Materials and supplies, at average cost 187,596 191,324 Other 110,035 74,640 - ------------------------------------------------------------------------------------------------------------------------- Total current assets 840,253 883,822 - ------------------------------------------------------------------------------------------------------------------------- Property, Plant, and Equipment: In serv ice 13,506,170 13,159,560 Less accumulated provision for depreciation 5,543,416 5,309,557 - ------------------------------------------------------------------------------------------------------------------------- 7,962,754 7,850,003 Nuclear fuel, at amortized cost 103,088 88,777 Construction work in progress 478,652 357,906 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant, and equipment 8,544,494 8,296,686 - ------------------------------------------------------------------------------------------------------------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 45,553 44,742 Nuclear decommissioning trusts 292,297 317,508 Other 16,477 12,244 - ------------------------------------------------------------------------------------------------------------------------- Total other property and investments 354,327 374,494 - ------------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 327,276 334,830 Prepaid pension costs 389,793 329,259 Unamortized debt issuance expense 4,361 8,150 Unamortized premium on reacquired debt 103,819 77,173 Department of Energy assessments 17,144 21,015 Other 104,539 108,031 - ------------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 946,932 878,458 - ------------------------------------------------------------------------------------------------------------------------- Total Assets $10,686,006 $10,433,460 ========================================================================================================================= The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Alabama Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Current Liabilities: Securities due within one year $ 1,117,945 $ 5,382 Notes payable 36,991 9,996 Accounts payable -- Affiliated 109,790 98,268 Other 150,195 151,705 Customer deposits 44,410 42,124 Taxes accrued -- Income taxes 80,438 113,003 Other 20,561 19,023 Interest accrued 36,344 35,522 Vacation pay accrued 33,901 32,324 Other 114,870 93,589 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,745,445 600,936 - --------------------------------------------------------------------------------------------------------------------------- Long-term debt (See accompanying statements) 2,851,562 3,742,346 - --------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,436,559 1,387,661 Deferred credits related to income taxes 177,205 202,881 Accumulated deferred investment tax credits 227,270 238,225 Employee benefits provisions 141,149 115,078 Deferred capacity revenues 33,924 40,730 Other 147,640 130,214 - --------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 2,163,747 2,114,789 - --------------------------------------------------------------------------------------------------------------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes (See accompanying statements) 300,000 347,000 - --------------------------------------------------------------------------------------------------------------------------- Cumulative preferred stock (See accompanying statements) 247,512 317,512 - --------------------------------------------------------------------------------------------------------------------------- Common stockholder's equity (See accompanying statements) 3,377,740 3,310,877 - --------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $10,686,006 $10,433,460 =========================================================================================================================== Commitments and Contingent Matters (See notes) - --------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CAPITALIZATION At December 31, 2002 and 2001 Alabama Power Company 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Long-Term Debt: First mortgage bonds -- Maturity Interest Rates -------- ------------- 2023 7.30% - 7.75% $ - $350,000 - --------------------------------------------------------------------------------------------------------------------------------- Total first mortgage bonds - 350,000 - --------------------------------------------------------------------------------------------------------------------------------- Long-term notes payable -- Variable rate (1.525% at 1/1/03) due 2003 517,000 167,000 5.35% to 7.85% due 2003 406,200 406,200 4.875% to 7.125% due 2004 525,000 525,000 5.49% due November 1, 2005 225,000 225,000 7.125% due October 1, 2007 200,000 200,000 5.375% due October 1, 2008 160,000 160,000 4.70% to 7.125% due 2010-2048 1,408,800 1,199,402 - --------------------------------------------------------------------------------------------------------------------------------- Total long-term notes payable 3,442,000 2,882,602 - --------------------------------------------------------------------------------------------------------------------------------- Other long-term debt -- Pollution control revenue bonds -- Collateralized: 5.50% due 2024 24,400 24,400 Variable rates (1.56% to 1.80% at 1/1/03) due 2015-2017 89,800 89,800 Non-collateralized: Variable rates (1.42% to 1.95% at 1/1/03) due 2021-2031 445,940 445,940 - --------------------------------------------------------------------------------------------------------------------------------- Total other long-term debt 560,140 560,140 - --------------------------------------------------------------------------------------------------------------------------------- Capitalized lease obligations 2,439 3,323 - --------------------------------------------------------------------------------------------------------------------------------- Unamortized debt premium (discount), net (35,072) (48,337) - --------------------------------------------------------------------------------------------------------------------------------- Total long-term debt (annual interest requirement -- $202.1 million) 3,969,507 3,747,728 Less amount due within one year 1,117,945 5,382 - --------------------------------------------------------------------------------------------------------------------------------- Long-term debt excluding amount due within one year $2,851,562 $3,742,346 42.1% 48.5% - ----------------------------------------------------------------------------------------------------------------------------------
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STATEMENTS OF CAPITALIZATION (continued) At December 31, 2002 and 2001 Alabama Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Company Obligated Mandatorily Redeemable Preferred Securities: $25 liquidation value -- 4.75% $ 100,000 $ - 5.50% 200,000 - 7.375% - 97,000 7.60% - 200,000 Auction rate (3.60% at 1/1/02) - 50,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total (annual distribution requirement -- $15.8 million) 300,000 347,000 4.4 4.5 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock: $100 par or stated value -- 4.20% to 4.92% 47,512 47,512 $25 par or stated value -- 5.20% to 5.83% 200,000 200,000 Auction rates -- at 1/1/02 3.10% to 3.557% - 70,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total (annual dividend requirement -- $12.8 million) 247,512 317,512 3.7 4.1 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stockholder's Equity: Common stock, par value $40 per share -- Authorized - 6,000,000 shares Outstanding - 6,000,000 shares Par value 240,000 240,000 Paid-in capital 1,900,464 1,850,676 Premium on Preferred Stock 99 99 Retained earnings 1,250,594 1,220,102 Accumulated other comprehensive income (loss) (13,417) - - ----------------------------------------------------------------------------------------------------------------------------------- Total common stockholder's equity 3,377,740 3,310,877 49.8 42.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $6,776,814 $7,717,735 100.0% 100.0% =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2002, 2001, and 2000 Alabama Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- Premium on Other Common Paid-In Preferred Retained Comprehensive Stock Capital Stock Earnings Income (loss) Total - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1999 $224,358 $1,538,992 $99 $1,225,414 $ - $2,988,863 Net income after dividends on preferred stock - - - 419,916 - 419,916 Capital contributions from parent company - 204,371 - - - 204,371 Cash dividends on common stock - - - (417,100) - (417,100) Other - - - (278) - (278) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 224,358 1,743,363 99 1,227,952 - 3,195,772 Net income after dividends on preferred stock - - - 386,729 - 386,729 Capital contributions from parent company - 107,313 - - - 107,313 Cash dividends on common stock - - - (393,900) - (393,900) Issuance of common stock 15,642 - - - - 15,642 Other - - - (679) - (679) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 240,000 1,850,676 99 1,220,102 - 3,310,877 Net income after dividends on preferred stock - - - 461,355 - 461,355 Capital contributions from parent company - 49,788 - - - 49,788 Other comprehensive income (loss) - - - - (13,417) (13,417) Cash dividends on common stock - - - (431,000) - (431,000) Other - - - 137 - 137 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $240,000 $1,900,464 $99 $1,250,594 $(13,417) $3,377,740 =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2002, 2001, and 2000 Alabama Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) Net income after dividends on preferred stock $461,355 $386,729 $419,916 - -------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss): Change in additional minimum pension liability, net of tax of (4,172) - - $(2,536) Changes in fair value of qualifying hedges, net of tax of (9,245) - - $(5,621) - -------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (13,417) - - - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $447,938 $386,729 $419,916 ================================================================================================================================ The accompanying notes are an integral part of these financial statements.
II-77 NOTES TO FINANCIAL STATEMENTS Alabama Power Company 2002 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Alabama Power Company (the Company) is a wholly owned subsidiary of Southern Company, which is the parent company of five operating companies, Southern Power Company (Southern Power), a system service company, Southern Communications Services (Southern LINC), Southern Company Gas (Southern GAS), Southern Company Holdings (Southern Holdings), Southern Nuclear Operating Company (Southern Nuclear), Southern Telecom, 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. Southern Power constructs, owns, and manages Southern Company's competitive generation assets and sells electricity at market-based rates in the wholesale market. Contracts among the operating companies and Southern Power -- related to jointly-owned generating facilities, interconnecting transmission lines, or the exchange of electric power -- are regulated by the Federal Energy Regulatory Commission (FERC) and/or the Securities and Exchange Commission. The system service company provides, at cost, specialized services to Southern Company and its subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Southern Telecom provides fiber cable services within the Southeast. Southern GAS, which began operation in August 2002, is a competitive retail natural gas business serving communities in Georgia. Southern Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products, and an energy service business. Southern Nuclear provides services to the operating companys' nuclear power plants. 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. The Company is also subject to regulation by the FERC and the Alabama Public Service Commission (APSC). The Company follows accounting principles generally accepted in the United States and complies with the accounting policies and practices prescribed by its respective regulatory commissions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Affiliate Transactions The Company has an agreement with the system service company under which the following services are rendered to the Company at direct or allocated cost: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures, and other services with respect to business and operations and power pool transactions. Costs for these services amounted to $218 million, $183 million, and $187 million during 2002, 2001, and 2000, respectively. Cost allocation methodologies used by the system service company are approved by the SEC and management believes they are reasonable. The Company has an agreement with Southern Nuclear to operate Plant Farley and provide the following nuclear-related services at cost: general executive and advisory services; general operations, management and technical services; administrative services including procurement, accounting, statistical analysis, and employee relations; and other services with respect to business and operations. Costs for these services amounted to $154 million, $160 million, and $148 million during 2002, 2001, and 2000, respectively. The Company has an agreement with Mississippi Power under which Mississippi Power owns a portion of Plant Greene County. The Company operates Plant Greene County and Mississippi Power reimburses the Company for its proportionate share of expenses which were $6.4 million in 2002. See Note 4 for additional information. In 2001, the Company had under construction a 1,230 megawatt combined cycle facility in Autaugaville, Alabama (Plant Harris). In June 2001, the Company sold this project to Southern Power. The Company has entered into an agreement with Southern Power to operate and maintain Plant Harris and provide fuel at cost beginning in June 2003. The operating companies, including the Company, Southern Power, and Southern GAS may jointly enter into various types of wholesale energy, natural gas and II-78 NOTES (continued) Alabama Power Company 2002 Annual Report certain other contracts, either directly or through the system service company as agent. Each participating company may be jointly and severally liable for the obligations incurred under these agreements. Regulatory Assets and Liabilities The Company 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 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 at December 31 relate to the following: 2002 2001 -------------------- (in millions) Deferred income tax charges $ 327 $ 335 Premium on reacquired debt 104 77 Department of Energy assessments 17 21 Vacation pay 34 32 Deferred income tax credits (177) (203) Natural disaster reserve (12) (12) Fuel-hedging assets - 4 Fuel-hedging liabilities (21) (2) Other regulatory assets 56 55 Other regulatory liabilities (12) (4) - -------------------------------------------------------------- Total $ 316 $ 303 ============================================================== See "Depreciation and Nuclear Decommissioning" in this note for information regarding significant regulatory assets and liabilities created as a result of the January 1, 2003, adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations. 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 related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition the Company would be required to determine if any impairment to other assets exists, including plant, and write down the assets, if impaired, to their fair values. All regulatory assets and liabilities are reflected in rates. Revenues and Fuel Costs The Company currently operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the state of Alabama and to wholesale customers in the southeast. Revenues are recognized as services are rendered. Unbilled revenues are accrued at the end of each fiscal period. Fuel costs are expensed as the fuel is used. Electric rates for the Company include provisions to adjust billings for fluctuations in fuel costs, fuel hedging, the energy component of purchased power costs, and certain other costs. Revenues are adjusted for differences between recoverable fuel costs and amounts actually recovered in current regulated periods. 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 continue to average less than 1 percent of revenues. Fuel expense includes the amortization of the cost of nuclear fuel and a charge based on nuclear generation for the permanent disposal of spent nuclear fuel. Total charges for nuclear fuel included in fuel expense amounted to $63 million in 2002, $58 million in 2001, and $61 million in 2000. The Company has a contract with the U.S. Department of Energy (DOE) that provides for the permanent disposal of spent nuclear fuel. The DOE failed to begin disposing of spent fuel in January 1998 as required by the contract, and the Company is pursuing legal remedies against the government for breach of contract. Sufficient fuel storage capacity is available at Plant Farley to maintain full-core discharge capability until the refueling outage scheduled in 2006 for Farley Unit 1 and the refueling outage scheduled in 2008 for Farley Unit 2. Procurement of on-site dry spent fuel storage capacity at Plant Farley is in progress, with the intent to place the capacity in operation in 2005. Also, the Energy Policy Act of 1992 required the establishment of a Uranium Enrichment Decontamination and Decommissioning Fund, which is funded in part by a special assessment on utilities with nuclear plants. This assessment is being paid over a 15-year period, which began in 1993. This fund will be used by the DOE for the decontamination and decommissioning of its nuclear fuel enrichment facilities. The law provides that utilities will recover these payments in the same manner as any other fuel expense. The Company estimates its remaining liability under this law to be approximately $17 million at December 31, 2002. This obligation is recorded in other deferred credits in the accompanying Balance Sheets. II-79 NOTES (continued) Alabama Power Company 2002 Annual Report Depreciation and Nuclear Decommissioning Depreciation of the original cost of depreciable utility plant in service is provided primarily by using composite straight-line rates, which approximated 3.2 percent in 2002, 2001, and 2000. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its original cost -- together with the cost of removal, less salvage -- is charged to accumulated 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 decommissioning nuclear facilities and removal of other facilities. Prior to January 2003, in accordance with regulatory requirements, the Company followed the industry practice of accruing for the ultimate cost of retiring most long-lived assets over the life of the related asset as part of the annual depreciation expense provision. In January 2003, the Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. There was no cumulative effect to net income resulting from the adoption of Statement No. 143. The Company received an accounting order from the APSC to defer the transition adjustment; therefore, the Company recorded a related regulatory liability of $71 million to reflect the Company's regulatory treatment of these costs under Statement No. 71. The initial Statement No. 143 liability the Company recognized was $301 million, of which $310 million was removed from the accumulated depreciation reserve. The amount capitalized to property, plant, and equipment was $63 million. The liability recognized to retire long-lived assets primarily relates to the Company's nuclear facility, Plant Farley. In addition, the Company has retirement obligations related to various landfill sites and underground storage tanks. The Company has also identified retirement obligations related to certain transmission and distribution facilities, co-generation facilities, certain wireless communication towers, and certain structures authorized by the United States Army Corps of Engineers. However, a liability for the removal of these assets will not be recorded because no reasonable estimate can be made regarding the timing of any related retirements. The Company will continue to recognize in the income statement its ultimate removal costs in accordance with its regulatory treatment. Any difference between costs recognized under Statement No. 143 and those reflected in rates will be recognized as either a regulatory asset or liability as ordered by the APSC. It is estimated that this annual difference will be approximately $4 million. The APSC regulatory order states that actual asset removal costs will be recoverable in rates. Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets they do not have a legal obligation to retire. However, in accordance with the regulatory treatment of these costs, the Company will continue to recognize the removal costs for these other obligations in their depreciation rates. As of January 1, 2003, the amount included in the accumulated depreciation reserve that represents a regulatory liability for these costs was $550 million. The Nuclear Regulatory Commission (NRC) requires all licensees operating commercial nuclear power reactors to establish a plan for providing with reasonable assurance funds for decommissioning. The Company has established external trust funds to comply with the NRC's regulations. Amounts previously recorded in internal reserves are being transferred into the external trust funds over periods approved by the APSC. The NRC's minimum external funding requirements are based on a generic estimate of the cost to decommission the radioactive portions of a nuclear unit based on the size and type of reactor. The Company has filed plans with the NRC to ensure that -- over time -- the deposits and earnings of the external trust funds will provide the minimum funding amounts prescribed by the NRC. Site study cost is the estimate to decommission the facility as of the site study year, and ultimate cost is the estimate to decommission the facility as of its retirement date. The estimated costs of decommissioning -- both site study costs and ultimate costs - based on the most current study for Plant Farley were as follows: II-80 NOTES (continued) Alabama Power Company 2002 Annual Report Site study year 1998 Decommissioning periods: Beginning year 2017 Completion year 2031 ----------------------------------------------------------- (in millions) Site study costs: Radiated structures $629 Non-radiated structures 60 ----------------------------------------------------------- Total $689 =========================================================== (in millions) Ultimate costs: Radiated structures $1,868 Non-radiated structures 178 ----------------------------------------------------------- Total $2,046 =========================================================== The decommissioning cost estimates are based on prompt dismantlement and removal of the plant from service. The actual decommissioning costs may vary from the above estimates because of changes in the assumed date of decommissioning, changes in NRC requirements, or changes in the assumptions used in making estimates. Annual provisions for nuclear decommissioning are based on an annuity method as approved by the APSC. The amount expensed in 2002 and fund balances as of December 31, 2002 were as follows: (in millions) Amount expensed in 2002 $ 18 ------------------------------------------------------------ Accumulated provisions: External trust funds, at fair value $292 Internal reserves 34 ------------------------------------------------------------ Total $326 ============================================================ All of the Company's decommissioning costs are approved for recovery by the APSC through the ratemaking process. Significant assumptions include an estimated inflation rate of 4.5 percent and an estimated trust earnings rate of 7.0 percent. The Company expects the APSC to periodically review and adjust, if necessary, the amounts collected in rates for the anticipated cost of decommissioning. The Company has informed the NRC that the Company plans to submit an application in September 2003 to extend the operating license for Plant Farley for 20 additional years. Income Taxes The Company 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. Allowance For Funds Used During Construction (AFUDC) and Interest Capitalized In accordance with regulatory treatment, the Company records AFUDC. AFUDC represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new regulated facilities. While cash is not realized currently from such allowance, it increases the revenue requirement over the service life of the plant through a higher rate base and higher depreciation expense. Interest related to the construction of new facilities not included in the Company's retail rates is capitalized in accordance with standard interest capitalization requirements. All current construction costs should be included in retail rates. The composite rate used to determine the amount of AFUDC was 8.2 percent in 2002, 7.7 percent in 2001, and 9.6 percent in 2000. AFUDC and interest capitalized, net of income tax, as a percent of net income after dividends on preferred stock was 3.3 percent in 2002 and 2001, and 8.4 percent in 2000. Property, Plant, and Equipment Property, plant, and equipment is stated at original cost less regulatory disallowances and impairments. Original 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. The cost of replacements of property--exclusive of minor items of property--is capitalized. The cost of maintenance, repairs and replacement of minor items of property is charged to maintenance expense as incurred or performed with the exception of nuclear refueling costs, which are recorded in accordance with specific APSC orders. The Company accrues estimated refueling costs in advance of the unit's next refueling outage. The refueling cycle is 18 months for each unit. During 2002, the Company accrued $34.4 million to the nuclear refueling outage reserve and at December 31, the reserve balance was $9.7 million. II-81 NOTES (continued) Alabama Power Company 2002 Annual Report Impairment of Long-Lived Assets and Intangibles The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. Cash and Cash Equivalents For purposes of the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. 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 installed. Natural Disaster Reserve In accordance with an APSC order, the Company has established a Natural Disaster Reserve. The Company is allowed to accrue $250 thousand per month until the maximum accumulated provision of $32 million is attained. Higher accruals to restore the reserve to its authorized level are allowed whenever the balance in the reserve declines below $22.4 million. During 2002, the Company accrued $3 million to the reserve and at December 31, the reserve balance was $11.8 million. Comprehensive Income Comprehensive income - consisting of net income and changes in the fair value of qualifying cash flow hedges and changes in additional minimum pension liabilities, less income taxes and reclassifications for amounts included in net income - is presented in the financial statements. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. For additional information, see Note 7. Stock Options Southern Company provides non-qualified stock options to a large segment of the Company's employees ranging from line management to executives. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized because the exercise price of all options granted equaled the fair-market value on the date of grant. When options are exercised, the Company receives a capital contribution from Southern Company equivalent to the related income tax benefit. Financial Instruments The Company uses derivative financial instruments to limit exposure to fluctuations in interest rates, the prices of certain fuel purchases, and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. Substantially all of the Company's bulk energy purchases and sales contracts are derivatives. However, in many cases, these contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions. This results in the deferral of related gains and losses in other comprehensive income or regulatory assets or liabilities as appropriate until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income and are recorded on a net basis in the Statements of Income. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. II-82 NOTES (continued) Alabama Power Company 2002 Annual Report Other Company 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, 2002 $3,967 $4,065 At December 31, 2001 3,744 3,800 Preferred Securities: At December 31, 2002 300 303 At December 31, 2001 347 346 ------------------------------------------------------------ The fair value for long-term debt and preferred securities was based on either closing market prices or closing prices of comparable instruments. 2. RETIREMENT BENEFITS The Company has a defined benefit, trusteed, pension plan that covers substantially all employees. The Company also provides certain non-qualified benefit plans for a selected group of management and highly-compensated employees. The Company provides certain medical care and life insurance benefits for retired employees. Substantially all 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 APSC and the FERC. In late 2000, as well as in 2002, the Company adopted several pension and postretirement benefit plan changes that had the effect of increasing benefits to both current and future retirees. Plan assets consist primarily of domestic and international equities, global fixed income securities, real estate, and private equity investments. The measurement date for plan assets and obligations is September 30 of each year. The weighted average rates assumed in the actuarial calculations for both the pension and postretirement benefit plans were as follows: 2002 2001 2000 - --------------------------------------------------------------- Discount 6.50% 7.50% 7.50% Annual salary increase 4.00 5.00 5.00 Long-term return on plan assets 8.50 8.50 8.50 - -------------------------------------------------------------- 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 ------------------------- 2002 2001 - ------------------------------------------------------------- (in millions) Balance at beginning of year $1,011 $ 925 Service cost 26 25 Interest cost 74 70 Benefits paid (61) (56) Actuarial gain and employee transfers 16 (1) Amendments 22 48 - ------------------------------------------------------------- Balance at end of year $1,088 $1,011 ============================================================= Plan Assets ------------------------- 2002 2001 - ------------------------------------------------------------- (in millions) Balance at beginning of year $1,584 $1,921 Actual return on plan assets (106) (277) Benefits paid (61) (56) Employee transfers 2 (4) - ------------------------------------------------------------- Balance at end of year $1,419 $1,584 ============================================================= The accrued pension costs recognized in the Balance Sheets were as follows: 2002 2001 - --------------------------------------------------------------- (in millions) Funded status $331 $ 573 Unrecognized transition obligation (10) (15) Unrecognized prior service cost 93 78 Unrecognized net gain (loss) (40) (322) - --------------------------------------------------------------- Prepaid asset, net 374 314 Portion included in benefit obligations 16 15 - --------------------------------------------------------------- Prepaid asset recognized in the Balance Sheets $390 $ 329 =============================================================== In 2002 and 2001, amounts recognized in the Balance Sheets for accumulated other comprehensive income and intangible assets were $6.7 million and $4.8 million, and $0 and $6.3 million, respectively. II-83 NOTES (continued) Alabama Power Company 2002 Annual Report Components of the pension plan's net periodic cost were as follows: 2002 2001 2000 - --------------------------------------------------------------- (in millions) Service cost $ 26 $ 25 $ 23 Interest cost 74 70 65 Expected return on plan assets (138) (131) (119) Recognized net actuarial gain (20) (22) (19) Net amortization 2 1 (1) - --------------------------------------------------------------- Net pension cost (income) $ (56) $ (57) $ (51) =============================================================== Postretirement Benefits Changes during the year in the accumulated benefit obligations and in the fair value of plan assets were as follows: Accumulated Benefit Obligations ------------------------ 2002 2001 - ------------------------------------------------------------ (in millions) Balance at beginning of year $348 $264 Service cost 5 5 Interest cost 26 24 Benefits paid (20) (18) Actuarial gain and employee transfers 46 (13) Amendments - 86 - ------------------------------------------------------------ Balance at end of year $405 $348 ============================================================ Plan Assets ------------------------ 2002 2001 - ----------------------------------------------------------- (in millions) Balance at beginning of year $169 $192 Actual return on plan assets (12) (24) Employer contributions 21 19 Benefits paid (20) (18) - ------------------------------------------------------------ Balance at end of year $158 $169 ============================================================ The accrued postretirement costs recognized in the Balance Sheets were as follows: 2002 2001 - -------------------------------------------------------------- (in millions) Funded status $(247) $(179) Unrecognized transition obligation 41 45 Prior service cost 77 82 Unrecognized net actuarial gain 66 (9) Fourth quarter contributions 8 8 - -------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $ (55) $ (53) ============================================================== Components of the plan's net periodic cost were as follows: 2002 2001 2000 - -------------------------------------------------------------- (in millions) Service cost $ 5 $ 5 $ 4 Interest cost 25 24 19 Expected return on plan assets (16) (15) (13) Net amortization 9 7 4 - -------------------------------------------------------------- Net postretirement cost $ 23 $ 21 $ 14 ============================================================== An additional assumption used in measuring the accumulated postretirement benefit obligations was a weighted average medical care cost trend rate of 8.75 percent for 2002, decreasing gradually to 5.25 percent through the year 2010, and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 2002 as follows: 1 Percent 1 Percent Increase Decrease - ------------------------------------------------------------- (in millions) Benefit obligation $32 $28 Service and interest costs 3 2 ============================================================= Employee Savings Plan The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides a 75 percent matching contribution up to 6 percent of an employee's base salary. Total matching contributions made to the plan for the years 2002, 2001, and 2000 were $12 million, $12 million, and $11 million, respectively. Work Force Reduction Programs The Company has incurred costs for work force reduction programs totaling $13.6 million, $13.0 million and $2.6 million for the years 2002, 2001 and 2000, respectively. These costs were deferred and are being amortized in accordance with regulatory treatment over 22 month periods. The unamortized balance of these costs was $5.1 million at December 31, 2002. II-84 NOTES (continued) Alabama Power Company 2002 Annual Report 3. CONTINGENCIES AND REGULATORY MATTERS General Litigation Matters The Company is subject to certain claims and legal actions arising in the ordinary course of business. The Company's business activities are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against the Company cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the Company's financial statements. Environmental Protection Agency Litigation In November 1999, the EPA brought a civil action in U.S. District Court in Georgia against the Company. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to coal-fired generating facilities at the Company's Plants Miller, Barry, and Gorgas. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the Company a notice of violation relating to these specific facilities, as well as Plants Greene County and Gaston. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation. The complaint and the notice of violation are similar to those brought against and issued to several other electric utilities. The complaint and the notice of violation allege that the Company failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia. The EPA refiled its claims against Alabama Power in U.S. District Court in Alabama. The Company's case has been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against the Company. Because the outcome of the TVA appeal could have a significant adverse impact on the Company, it is a party to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Retail Rate Adjustment Procedures The APSC has adopted rates that provide for periodic adjustments based upon the Company's earned return on end-of-period retail common equity. Increases in retail rates of 2 percent were effective in April 2002 and in October 2001 in accordance with the Rate Stabilization Equalization Plan. In March 2002, the APSC approved a revision to the rate adjustment procedures that provides for an annual, rather than quarterly, adjustment and imposes a 3 percent limit on changes in rates in any calendar year. The return on common equity range of 13.0 percent to 14.5 percent remained unchanged. The rates also provide for adjustments to recognize the placing of new generating facilities into retail service under Rate CNP (Certificated New Plant). Effective July 2001, the Company's retail rates were adjusted by 0.6 percent under Rate CNP to recover costs for Plant Barry Unit 7, which was placed into commercial operation on May 1, 2001. In April 2000, the APSC approved an amendment to the Company's existing rate structure to provide for the recovery of retail costs associated with certified purchased power agreements. In November 2000, the APSC certified a seven-year II-85 NOTES (continued) Alabama Power Company 2002 Annual Report purchased power agreement pertaining to a 615 megawatt wholesale generating facility under construction at Plant Harris, which was sold to Southern Power in June 2001. All of the 615 megawatts are scheduled to be available beginning in June 2003. In addition, the APSC certified a seven-year purchased power agreement with a third party for approximately 630 megawatts; one half of the capacity will be available beginning in 2003 while the remaining half is scheduled to be available beginning in 2004. Rate CNP will adjust retail rates one month after the contracted capacity delivery is scheduled to begin. In October 2001, the APSC approved a revision to the Company's Rate ECR (Energy Cost Recovery) allowing the recovery of specific costs associated with the sales of natural gas that become necessary due to operating considerations at its electric generating facilities. This revision also includes the cost of financial tools used for hedging market price risk up to 75 percent of the budgeted annual amount of natural gas purchases. The Company may not engage in natural gas hedging activities that extend beyond a rolling 42-month window. Also, the premiums paid for natural gas financial options may not exceed 5 percent of the Company's natural gas budget for that year. The Company's ratemaking procedures will remain in effect until the APSC votes to modify or discontinue them. 4. JOINT OWNERSHIP AGREEMENTS The Company and Georgia Power own equally all of the outstanding capital stock of Southern Electric Generating Company (SEGCO), which owns electric generating units with a total rated capacity of 1,020 megawatts, together with associated transmission facilities. The capacity of these units is sold equally to the Company and Georgia Power under a contract which, in substance, requires payments sufficient to provide for the operating expenses, taxes, interest expense and a return on equity, whether or not SEGCO has any capacity and energy available. The term of the contract extends automatically for two-year periods, subject to either party's right to cancel upon two year's notice. The Company's share of expenses totaled $84 million in 2002, $80 million in 2001, and $85 million in 2000 and is included in "Purchased power from affiliates" in the Statements of Income. In addition the Company has guaranteed unconditionally the obligation of SEGCO under an installment sale agreement for the purchase of certain pollution control facilities at SEGCO's generating units, pursuant to which $24.5 million principal amount of pollution control revenue bonds are outstanding. Georgia Power has agreed to reimburse the Company for the pro rata portion of such obligation corresponding to its then proportionate ownership of stock of SEGCO if the Company is called upon to make such payment under its guaranty. At December 31, 2002, the capitalization of SEGCO consisted of $59 million of equity and $92 million of debt on which the annual interest requirement is $2.2 million. SEGCO paid dividends totaling $5.8 million in 2002, $0.7 million in 2001, and $5.1 million in 2000, of which one-half of each was paid to the Company. In addition, the Company recognizes 50 percent of SEGCO's net income. The Company's percentage ownership and investment in jointly-owned generating plants at December 31, 2002 is as follows: Total Megawatt Company Facility (Type) Capacity Ownership ------------------ ------------- ------------- Greene County 500 60.00% (1) (coal) Plant Miller Units 1 and 2 1,320 91.84% (2) (coal) ----------------------------------------------------------- (1) Jointly owned with an affiliate, Mississippi Power Company. (2) Jointly owned with Alabama Electric Cooperative, Inc. Company Accumulated Facility Investment Depreciation --------------------- -------------- --------------- (in millions) Greene County $105 $ 51 Plant Miller Units 1 and 2 760 341 ---------------------------------------------------------- The Company has contracted to operate and maintain the jointly owned facilities as agent for their co-owners. The Company's proportionate share of their plant operating expenses is included in the operating expenses in the Statements of Income. 5. LONG-TERM POWER SALES AGREEMENTS General The Company and the other operating companies of Southern Company have entered into long-term contractual agreements for the sale of capacity to certain non-affiliated utilities located outside the system's service area. These II-86 NOTES (continued) Alabama Power Company 2002 Annual Report agreements are firm and related to specific generating units. Because the energy is generally provided at cost under these agreements, profitability is primarily affected by capacity revenues. Unit power from Plant Miller is being sold to Florida Power Corporation (FPC), Florida Power & Light Company (FP&L), and Jacksonville Electric Authority (JEA). Under these agreements approximately 1,239 megawatts of capacity are scheduled to be sold annually through the expiration of the contract in 2010. The Company's capacity revenues from these unit power sales amounted to $119 million in 2002, $125 million in 2001, and $127 million in 2000. Alabama Municipal Electric Authority (AMEA) Capacity Contracts In October 1991, the Company entered into a firm power sales contract with AMEA entitling AMEA to scheduled amounts of capacity (up to a maximum 80 megawatts) for a period of 15 years. Under the terms of the contract, the Company received payments from AMEA representing the net present value of the revenues associated with the capacity entitlement, discounted at an effective annual rate of 11.19 percent. These payments are being recognized as operating revenues and the discount is amortized to other interest expense as scheduled capacity is made available over the terms of the contract. To secure AMEA's advance payments and the Company's performance obligation under the contracts, the Company issued and delivered to an escrow agent first mortgage bonds representing the maximum amount of liquidated damages payable by the Company in the event of a default under the contracts. No principal or interest is payable on such bonds unless and until a default by the Company occurs. As the liquidated damages decline, a portion of the bond equal to the decrease is returned to the Company. At December 31, 2002, $32.6 million of these bonds was held by the escrow agent under the contract. 6. INCOME TAXES At December 31, 2002, the Company's tax-related regulatory assets and liabilities were $327 million and $177 million, respectively. These assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized interest. 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 income tax provisions are as follows: 2002 2001 2000 ------------------------------- (in millions) Total provision for income taxes: Federal -- Current $209 $234 $168 Deferred 41 (20) 60 - --------------------------------------------------------------- 250 214 228 - --------------------------------------------------------------- State -- Current 35 37 27 Deferred 7 (2) 7 - --------------------------------------------------------------- 42 35 34 - --------------------------------------------------------------- Total $292 $249 $262 =============================================================== 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: 2002 2001 --------------- (in millions) Deferred tax liabilities: Accelerated depreciation $1,081 $1,034 Property basis differences 381 390 Fuel cost adjustment - 28 Premium on reacquired debt 39 29 Pensions 103 89 Other 38 23 --------------------------------------------------------------- Total 1,642 1,593 - ---------------------------------------------------------------- Deferred tax assets: Capacity prepayments 11 13 Other deferred costs 13 14 Postretirement benefits 18 21 Unbilled revenue 20 18 Other 87 93 - ---------------------------------------------------------------- Total 149 159 - ---------------------------------------------------------------- Total deferred tax liabilities, net 1,493 1,434 Portion included in current liabilities, net (56) (47) - ---------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $1,437 $1,387 ================================================================ In accordance with regulatory requirements, deferred investment tax credits are amortized over the lives 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 $11 million in 2002, 2001, and 2000. At December 31, 2002, all investment tax credits available to reduce federal income taxes payable had been utilized. II-87 NOTES (continued) Alabama Power Company 2002 Annual Report A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: 2002 2001 2000 ------------------------ Federal statutory rate 35.0% 35.0% 35.0% State income tax, net of federal deduction 3.5 3.5 3.1 Non-deductible book depreciation 1.3 1.5 1.4 Differences in prior years' deferred and current tax rates (1.2) (1.3) (1.3) Other (0.5) (0.5) (0.7) - ------------------------------------------------------------- Effective income tax rate 38.1% 38.2% 37.5% ============================================================= 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. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. 7. CAPITALIZATION Mandatorily Redeemable Preferred Securities Statutory business trusts formed by the Company, of which the Company owns all the common securities, have issued mandatorily redeemable flexible trust preferred securities as follows: Date of Maturity Issue Amount Rate* Notes Date --------------------------------------------------- (millions) (millions) Trust IV 10/2002 $ 100 4.75% $103 10/2042 Trust V 10/2002 200 5.50 206 10/2042 * Issued at a five year initial fixed rate and a seven year initial fixed rate for Trust IV and Trust V, respectively, and thereafter, at fixed rates determined through remarketings for specific periods of varying length or at floating rates determined by reference to 3-month LIBOR plus 2.91% and 3.10%, respectively. Substantially all of the assets of each trust are junior subordinated notes issued by the Company in the respective approximate principal amounts set forth above. The Company considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by the Company of the Trusts' payment obligations with respect to the preferred securities. The Trusts are subsidiaries of the Company and accordingly are consolidated in the Company's financial statements. The securities issued by Trusts I, II, and III were redeemed in 2002. Pollution Control Bonds Pollution control obligations represent installment purchases of pollution control facilities financed by funds derived from sales by public authorities of revenue bonds. The Company is required to make payments sufficient for the authorities to meet principal and interest requirements of such bonds. With respect to $114.2 million of such pollution control obligations, the Company has authenticated and delivered to the trustees a like principal amount of first mortgage bonds as security for its obligations under the installment purchase agreements. No principal or interest on these first mortgage bonds is payable unless and until a default occurs on the installment purchase agreements. The amount of pollution control revenue bonds outstanding was $560 million at December 31, 2002 and 2001. Senior Notes The Company issued a total of $975 million of unsecured senior notes in 2002. The proceeds of these issues were used to redeem higher cost debt and for other general corporate purposes. At December 31, 2002 and 2001, the Company had $3.4 billion and $2.9 billion, respectively, of senior notes outstanding. These senior notes are subordinate to all secured debt of the Company which amounted to approximately $302 million at December 31, 2002. Capitalized Leases The estimated aggregate annual maturities of capitalized lease obligations through 2006 are as follows: $0.9 million in 2003, $1.0 million in 2004, $0.5 million in 2005, and $0.1 million in 2006. Securities Due Within One Year A summary of the improvement fund requirements and scheduled maturities and redemptions of long-term debt due within one year at December 31 is as follows: 2002 2001 ------------------------ (in thousands) First mortgage bond maturities and redemptions $ - $4,498 Other long-term debt maturities and redemptions 1,117,945 884 -------------------------------------------------------------- Total long-term debt due within one year $1,117,945 $5,382 ============================================================== II-88 NOTES (continued) Alabama Power Company 2002 Annual Report Bank Credit Arrangements The Company maintains committed lines of credit in the amount of $923 million (including $454 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds). Of these lines, $533 million expire at various times during 2003 and $390 million expire in 2004. In certain cases, such lines require payment of a commitment fee based on the unused portion of the commitment or the maintenance of compensating balances with the banks. Commitment fees are less than 1/8 of 1 percent for the Company. Because the arrangements are based on an average balance, the Company does not consider any of its cash balances to be restricted as of any specific date. An annual fee is also paid to the agent bank. Most of the Company's credit arrangements with banks have covenants that limit the Company's debt to 65 percent of total capitalization. Exceeding this debt level would result in a default under the credit arrangements. In addition, the credit arrangements typically contain cross default provisions on other indebtedness of the Company that would be triggered if the Company defaulted on other indebtedness above a specified threshold. The Company is currently in compliance with all such covenants. Borrowings under unused credit arrangements totaling $74 million would be prohibited if the Company experiences a material adverse change (as defined in such arrangements). The Company borrows through commercial paper programs that have the liquidity support of committed bank credit arrangements. In addition, the Company borrows from time to time pursuant to arrangements with banks for uncommitted lines of credit and through extendible commercial note programs. At December 31, 2002, there were no extendible commercial notes outstanding. The amount of commercial paper outstanding at December 31, 2002 was $37 million. At December 31, 2002, the Company had regulatory approval to have outstanding up to $1 billion of short-term borrowings. Financial Instruments The Company enters into interest rate swaps to hedge exposure to interest rate changes. Swaps related to fixed rate securities are accounted for as fair value hedges. Swaps related to variable rate securities or forecasted transactions are accounted for as cash flow hedges. The swaps are generally structured to mirror the terms of the hedged debt instruments; therefore, no material ineffectiveness has been recorded in earnings. The gain or loss in fair value for cash flow hedges is recorded in other comprehensive income and will be recognized in earnings over the life of the hedged items. At December 31, 2002, the Company had $1.25 billion notional amount of interest rate swaps outstanding with net deferred losses of $15 million as follows: Cash Flow Hedges Weighted Average ----------------------- Variable Fixed Fair Rate Rate Notional Value Maturity Received Paid Amount (Loss) - ------------------------------------------------------------- (in millions) 2003 1.95 3.02 $350 $(5) 2004 1.43 1.63 486 (2) 2003 * 3.05 167 (2) 2003 * 3.96 250 (6) - ------------------------------------------------------------- *Rate has not been set. Assets Subject to Lien The Company's mortgage, as amended and supplemented, securing the first mortgage bonds issued by the Company, constitutes a direct lien on substantially all of the Company's fixed property and franchises. 8. COMMITMENTS Construction Program The Company's construction program includes significant projects related to transmission, distribution and generating facilities, including the expenditures necessary to comply with environmental regulation. The Company currently estimates property additions to be $643 million in 2003, $787 million in 2004, and $948 million in 2005. The capital budget is subject to periodic review and revision, and actual capital costs incurred may vary from estimates because of numerous factors. These factors include: changes in business conditions; revised load growth estimates; changes in environmental regulations; changes in existing nuclear plants to meet new regulatory requirements; increasing costs of labor, equipment, and materials; and cost of capital. At December 31, 2002, significant purchase commitments were outstanding in connection with the construction program. There can be no assurance that costs related to capital expenditures will be fully recovered. II-89 NOTES (continued) Alabama Power Company 2002 Annual Report Southern Company has guaranteed Southern Power obligations totaling $6.6 million for the Company's construction of transmission interconnection facilities to Plant Harris. Long-Term Service Agreements The Company has entered into several Long-Term Service Agreements (LTSAs) with General Electric (GE) for the purpose of securing maintenance support for its combined cycle and combustion turbine generating facilities. In summary, the LTSAs stipulate that GE will perform all planned maintenance on the covered equipment, which includes the cost of all labor and materials. GE is also obligated to cover the costs of unplanned maintenance on the covered equipment subject to a limit specified in each contract. In general, these LTSAs are in effect through two major inspection cycles per unit. Scheduled payments to GE are made at various intervals based on actual operating hours of the respective units. Total payments to GE under these agreements are currently estimated at $253 million over the life of the agreements, which are approximately 12 to 14 years per unit. However, the LTSAs contain various cancellation provisions at the option of the Company. Payments made to GE prior to the performance of any planned maintenance are recorded as a prepayment in the Balance Sheets. Inspection costs are capitalized or charged to expense based on the nature of the work performed. Purchased Power Commitments The Company has entered into various long-term commitments for the purchase of electricity. Estimated total long-term obligations at December 31, 2002 were as follows: Commitments ----------------------------------- Non- Year Affiliated Affiliated Total - ---- ----------------------------------- (in millions) 2003 $ 37 $ 16 $ 53 2004 49 34 83 2005 49 37 86 2006 49 38 87 2007 49 39 88 2008 and thereafter 111 103 214 - -------------------------------------------------------------- Total commitments $344 $267 $611 ============================================================== Fuel Commitments To supply a portion of the fuel requirements of its generating plants, the Company has entered into various long-term commitments for the procurement of fossil and nuclear fuel. In most cases these contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. Total estimated long-term obligations at December 31, 2002, were as follows: Year Commitments - ---- ---------------- (in millions) 2003 $ 772 2004 782 2005 537 2006 448 2007 453 2008 and thereafter 280 - -------------------------------------------------------------- Total commitments $3,272 ============================================================== In addition, the system service company acts as agent for the five operating companies, Southern Power, and Southern GAS with regard to natural gas purchases. Natural gas purchases (in dollars) are based on various indices at the actual time of delivery; therefore, only the volume commitments are firm. The Company's committed volumes allocated based on usage projections, as of December 31, 2002, are as follows: Year Natural Gas - ---- ----------- (MMBtu) 2003 91,672,637 2004 53,978,335 2005 20,562,820 2006 12,962,557 2007 4,534,876 - ------------------------------------------------------------ Total commitments 183,711,225 ============================================================ Additional commitments for fuel will be required to supply the Company's future needs. Acting as an agent for all of Southern Company's operating companies, Southern Power, and Southern GAS, the system service company may enter into various types of wholesale energy and natural gas contracts. Under these agreements, each of the operating companies, Southern Power, and Southern GAS may be jointly and severally liable for the obligations of each of the operating companies. Accordingly, the creditworthiness of Southern Power and Southern GAS is currently inferior to the creditworthiness of the operating companies. Southern Company has entered into keep-well agreements with each of the II-90 NOTES (continued) Alabama Power Company 2002 Annual Report operating companies to insure they will not subsidize or be responsible for any costs, losses, liabilities, or damages resulting from the inclusion of Southern Power or Southern GAS as a contracting party under these agreements. Operating Leases The Company has entered into rental agreements for coal rail cars, vehicles, and other equipment with various terms and expiration dates. These expenses totaled $29.6 million in 2002, $27.9 million in 2001, and $20.9 million in 2000. Of these amounts, $19.1 million, $21.1 million, and $20.9 million for 2002, 2001, and 2000, respectively, relates to the railcar leases and is recoverable through the Company's energy cost recovery clause. At December 31, 2002, estimated minimum rental commitments for noncancellable operating leases were as follows: Vehicles Year Railcars & Other Total - -------------------------------------------------------------- (in millions) 2003 $18.6 $ 9.6 $28.2 2004 18.2 9.0 27.2 2005 15.5 7.9 23.4 2006 10.6 5.6 16.2 2007 3.3 2.8 6.1 2008 and thereafter 33.4 4.2 37.6 - -------------------------------------------------------------- Total minimum payments $99.6 $39.1 $138.7 ============================================================== In addition to the rental commitments above, the Company has potential obligations upon expiration of certain leases with respect to the residual value of the leased property. These leases expire in 2004 and 2006, and the Company's maximum obligations are $25.7 million and $66 million, respectively. At the termination of the leases, at the Company's option, the Company may negotiate an extension, exercise its purchase option, or the property can be sold to a third party. The Company expects that the fair market value of the leased property would substantially reduce or eliminate the Company's payments under the residual value obligations. Guarantees At December 31, 2002, the Company had outstanding guarantees related to SEGCO's purchase of certain pollution control facilities, as discussed in Note 4, and to certain residual values of leased assets. See "Operating Leases" above. 9. NUCLEAR INSURANCE Under the Price-Anderson Amendments Act of 1988 (the Act), the Company maintains agreements of indemnity with the NRC that, together with private insurance, cover third-party liability arising from any nuclear incident occurring at Plant Farley. The Act provides funds up to $9.5 billion for public liability claims that could arise from a single nuclear incident. Plant Farley is insured against this liability to a maximum of $300 million by American Nuclear Insurers (ANI), with the remaining coverage provided by a mandatory program of deferred premiums which could be assessed, after a nuclear incident, against all owners of nuclear reactors. The Company could be assessed up to $88 million per incident for each licensed reactor it operates, but not more than an aggregate of $10 million per incident to be paid in a calendar year for each reactor. Such maximum assessment, excluding any applicable state premium taxes, for the Company is $176 million per incident but not more than an aggregate of $20 million to be paid for each incident in any one year. The Company is a member of Nuclear Electric Insurance Limited (NEIL), a mutual insurer established to provide property damage insurance in an amount up to $500 million for members' nuclear generating facilities. Additionally, the Company has policies that currently provide decontamination, excess property insurance, and premature decommissioning coverage up to $2.25 billion for losses in excess of the $500 million primary coverage. This excess insurance is also provided by NEIL. NEIL also covers the additional cost that would be incurred in obtaining replacement power during a prolonged accidental outage at a member's nuclear plant. Members can purchase this coverage, subject to a deductible waiting period of between 8 to 26 weeks, with a maximum per occurrence per unit limit of $490 million. After this deductible period, weekly indemnity payments would be received until either the unit is operational or until the limit is exhausted in approximately three years. The Company purchases the maximum limit allowed by NEIL and has elected a 12 week waiting period. Under each of the NEIL policies, members are subject to assessments if losses each year exceed the accumulated funds available to the insurer under that policy. The current maximum annual assessments for the Company under the three NEIL policies would be $36 million. Following the terrorist attacks of September 2001, both ANI and NEIL confirmed that terrorist acts against commercial nuclear power stations would be covered under their insurance. However, both companies revised their policy terms on a prospective basis to include an industry aggregate for all terrorist II-91 NOTES (continued) Alabama Power Company 2002 Annual Report acts. The NEIL aggregate, which applies to all claims stemming from terrorism within a 12 month duration, is $3.24 billion plus any amounts that would be available through reinsurance or indemnity from an outside source. The ANI cap is a $300 million shared industry aggregate. For all on-site property damage insurance policies for commercial nuclear power plants, the NRC requires that the proceeds of such policies shall be dedicated first for the sole purpose of placing the reactor in a safe and stable condition after an accident. Any remaining proceeds are to be applied next toward the costs of decontamination and debris removal operations ordered by the NRC, and any further remaining proceeds are to be paid either to the Company or to its bond trustees as may be appropriate under the policies and applicable trust indentures. All retrospective assessments, whether generated for liability, property or replacement power may be subject to applicable state premium taxes. 10. QUARTERLY FINANCIAL INFORMATION (Unaudited) Summarized quarterly financial data for 2002 and 2001 are as follows: Net Income After Dividends Quarter Operating Operating on Preferred Ended Revenues Income Stock - -------------------- ------------ ----------- ------------- (in millions) March 2002 $ 802 $191 $ 72 June 2002 924 256 116 September 2002 1,119 393 201 December 2002 865 182 72 March 2001 $ 850 $180 $ 70 June 2001 904 194 75 September 2001 1,061 362 180 December 2001 772 175 62 - ---------------------------------------------------------------- The Company's business is influenced by seasonal weather conditions. II-92
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 Alabama Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $3,710,533 $3,586,390 $3,667,461 $3,385,474 $3,386,373 Net Income after Dividends on Preferred Stock (in thousands) $461,355 $386,729 $419,916 $399,880 $377,223 Cash Dividends on Common Stock (in thousands) $431,000 $393,900 $417,100 $399,600 $367,100 Return on Average Common Equity (percent) 13.80 11.89 13.58 13.85 13.63 Total Assets (in thousands) $10,686,006 $10,433,460 $10,379,108 $9,648,704 $9,225,698 Gross Property Additions (in thousands) $634,559 $635,540 $870,581 $809,044 $610,132 - ------------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $3,377,740 $3,310,877 $3,195,772 $2,988,863 $2,784,067 Preferred stock 247,512 317,512 317,512 317,512 317,512 Company obligated mandatorily redeemable preferred securities 300,000 347,000 347,000 347,000 297,000 Long-term debt 2,851,562 3,742,346 3,425,527 3,190,378 2,646,566 - ------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $6,776,814 $7,717,735 $7,285,811 $6,843,753 $6,045,145 =============================================================================================================================== Capitalization Ratios (percent): Common stock equity 49.8 42.9 43.9 43.7 46.1 Preferred stock 3.7 4.1 4.4 4.6 5.3 Company obligated mandatorily redeemable preferred securities 4.4 4.5 4.8 5.1 4.9 Long-term debt 42.1 48.5 46.9 46.6 43.7 - ------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0 =============================================================================================================================== Security Ratings: First Mortgage Bonds - Moody's A1 A1 A1 A1 A1 Standard and Poor's A A A A+ A+ Fitch A+ A+ AA- AA- AA- Preferred Stock - Moody's Baa1 Baa1 a2 a2 a2 Standard and Poor's BBB+ BBB+ BBB+ A- A Fitch A- A- A A A Unsecured Long-Term Debt - Moody's A2 A2 A2 A2 A2 Standard and Poor's A A A A A Fitch A A A+ A+ A+ =============================================================================================================================== Customers (year-end): Residential 1,148,645 1,139,542 1,132,410 1,120,574 1,106,217 Commercial 203,017 196,617 193,106 188,368 182,738 Industrial 4,874 4,728 4,819 4,897 5,020 Other 789 751 745 735 733 - ------------------------------------------------------------------------------------------------------------------------------- Total 1,357,325 1,341,638 1,331,080 1,314,574 1,294,708 =============================================================================================================================== Employees (year-end): 6,715 6,706 6,871 6,792 6,631 - -------------------------------------------------------------------------------------------------------------------------------
II-93
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 (continued) Alabama Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands): Residential $1,264,431 $1,138,499 $1,222,509 $1,145,646 $1,133,435 Commercial 882,669 829,760 854,695 807,098 779,169 Industrial 788,037 763,934 859,668 843,090 853,550 Other 16,080 15,480 15,835 15,283 14,523 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 2,951,217 2,747,673 2,952,707 2,811,117 2,780,677 Sales for resale - non-affiliates 474,291 485,974 461,730 415,377 448,973 Sales for resale - affiliates 188,163 245,189 166,219 92,439 103,562 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues from sales of electricity 3,613,671 3,478,836 3,580,656 3,318,933 3,333,212 Other revenues 96,862 107,554 86,805 66,541 53,161 - ------------------------------------------------------------------------------------------------------------------------------ Total $3,710,533 $3,586,390 $3,667,461 $3,385,474 $3,386,373 ============================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 17,402,645 15,880,971 16,771,821 15,699,081 15,794,543 Commercial 13,362,631 12,798,711 12,988,728 12,314,085 11,904,509 Industrial 21,102,568 20,460,022 22,101,407 21,942,889 21,585,117 Other 205,346 198,102 205,827 201,149 196,647 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 52,073,190 49,337,806 52,067,783 50,157,204 49,480,816 Sales for resale - non-affiliates 15,553,545 15,277,839 14,847,533 12,437,599 11,840,910 Sales for resale - affiliates 8,844,050 8,843,094 5,369,474 5,031,781 5,976,099 - ------------------------------------------------------------------------------------------------------------------------------ Total 76,470,785 73,458,739 72,284,790 67,626,584 67,297,825 ============================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 7.27 7.17 7.29 7.30 7.18 Commercial 6.61 6.48 6.58 6.55 6.55 Industrial 3.73 3.73 3.89 3.84 3.95 Total retail 5.67 5.57 5.67 5.60 5.62 Sales for resale 2.72 3.03 3.11 2.91 3.10 Total sales 4.73 4.74 4.95 4.91 4.95 Residential Average Annual Kilowatt-Hour Use Per Customer 15,198 13,981 14,875 14,097 14,370 Residential Average Annual Revenue Per Customer $1,104.28 $1,002.30 $1,084.26 $1,028.76 $1,031.21 Plant Nameplate Capacity Ratings (year-end) (megawatts) 12,153 12,153 12,122 11,379 11,151 Maximum Peak-Hour Demand (megawatts): Winter 9,423 9,300 9,478 8,863 7,757 Summer 10,910 10,241 11,019 10,739 10,329 Annual Load Factor (percent) 62.9 62.5 59.3 59.7 62.9 Plant Availability (percent): Fossil-steam 85.8 87.1 89.4 80.4 85.6 Nuclear 93.2 83.7 88.3 91.0 80.2 - ------------------------------------------------------------------------------------------------------------------------------ Source of Energy Supply (percent): Coal 55.5 56.8 63.0 64.1 65.3 Nuclear 17.1 15.8 16.9 17.8 16.3 Hydro 5.1 5.1 2.9 4.7 6.9 Gas 11.6 10.7 4.9 1.1 1.5 Purchased power - From non-affiliates 4.0 4.4 4.6 4.5 3.3 From affiliates 6.7 7.2 7.7 7.8 6.7 - ------------------------------------------------------------------------------------------------------------------------------ Total 100.0 100.0 100.0 100.0 100.0 ==============================================================================================================================
II-94 GEORGIA POWER COMPANY FINANCIAL SECTION II-95 MANAGEMENT'S REPORT Georgia Power Company 2002 Annual Report The management of Georgia Power Company has prepared this annual report and is responsible for the financial statements and related information. These statements were prepared in accordance with accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 the accounting records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls based upon the recognition that the cost of the system should not exceed its benefits. The Company believes that its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's 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. Southern Company's audit committee of its board of directors, composed of five independent directors, provides a broad overview of management's financial reporting and control functions. Additionally, a committee of Georgia Power's board of directors, composed of a minimum of three outside directors, meets periodically with management, the internal auditors, and the independent public accountants to discuss auditing, internal controls, and compliance matters. The internal auditors and independent public accountants have access to the members of these committees at any time. Management believes that its policies and procedures provide reasonable assurance that the Company's operations are conducted with 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 Georgia Power Company in conformity with accounting principles generally accepted in the United States. /s/David M. Ratcliffe David M. Ratcliffe President and Chief Executive Officer /s/Allen L. Leverett Allen L. Leverett Executive Vice President, Treasurer and Chief Financial Officer February 17, 2003 II-96 INDEPENDENT AUDITORS' REPORT Georgia Power Company: We have audited the accompanying balance sheet and statement of capitalization of Georgia Power Company (a wholly owned subsidiary of Southern Company) as of December 31, 2002, and the related statements of income, comprehensive income, common stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of Georgia Power's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Georgia Power as of December 31, 2001, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph that described a change in the method of accounting for derivative instruments and hedging activities in their report dated February 13, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements (pages II-111 to II-133) present fairly, in all material respects, the financial position of Georgia Power Company at December 31, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 THE FOLLOWING REPORT OF INDEPENDENT ACCOUNTANTS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE COMPANY'S 2001 ANNUAL REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. SEE EXHIBIT 23(c)2 FOR ADDITIONAL INFORMATION. To Georgia Power Company: We have audited the accompanying balance sheets and statements of capitalization of Georgia Power Company (a Georgia corporation and a wholly owned subsidiary of Southern Company) as of December 31, 2001 and 2000, and the related statements of income, comprehensive income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 II-93 through II-113) referred to above present fairly, in all material respects, the financial position of Georgia Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, effective January 1, 2001, Georgia Power Company changed its method of accounting for derivative instruments and hedging activities. /s/Arthur Andersen LLP Atlanta, Georgia February 13, 2002 II-97 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Georgia Power Company 2002 Annual Report RESULTS OF OPERATIONS Earnings Georgia Power Company's 2002 earnings totaled $618 million, representing an $8 million (1.2 percent) increase over 2001. Operating income declined slightly in 2002. Lower retail and wholesale revenues, higher other operating and maintenance expenses and increased purchased power capacity expenses were significantly offset by lower depreciation and amortization expense as a result of a Georgia Public Service Commission (GPSC) retail rate order effective January 2002. The increase in net income for 2002 is attributed to lower financing costs and a lower effective tax rate due to the realization of certain state tax credits. The Company's 2001 earnings totaled $610 million, representing a $51 million (9.1 percent) increase over 2000. Operating income was lower in 2001 compared to 2000 due to the impact of mild weather on retail revenues; however, overall net income improved due to lower financing costs and non-operating expenses and a lower effective tax rate resulting from various factors including property donations and positive resolution of outstanding tax issues. The Company's 2000 earnings totaled $559 million, representing an $18 million (3.3 percent) increase over the prior year due to increased sales and continued control of operating expenses. Increase (Decrease) Amount From Prior Year ----------------------------------- 2002 2002 2001 2000 - ---------------------------------------------------------------- (in millions) Operating revenues $ 4,822 $ (144) $ 95 $ 414 - ---------------------------------------------------------------- Fuel 1,003 64 (79) 98 Purchased power 685 (87) 175 206 Other operation and maintenance 1,325 85 41 4 Depreciation and amortization 403 (197) (19) 66 Taxes other than income taxes 202 (1) (1) 2 - ---------------------------------------------------------------- Total operating expenses 3,618 (136) 117 376 - ---------------------------------------------------------------- Operating income 1,204 (8) (22) 38 Other income and (expense) (229) 9 76 (11) Less - Income taxes 357 (7) 3 9 - ---------------------------------------------------------------- Net income $ 618 $ 8 $ 51 $ 18 ================================================================ Revenues Operating revenues in 2002, 2001, and 2000 and the percent of change from the prior year are as follows: Amount ------------------------------------- 2002 2001 2000 ------------------------------------- (in millions) Retail - prior year $4,349 $4,317 $4,050 Change in - Base rates (118) - (24) Sales growth and other 2 90 53 Weather 82 (107) 55 Fuel cost recovery and other clauses (27) 49 183 - -------------------------------------------------------------------- Total retail 4,288 4,349 4,317 - -------------------------------------------------------------------- Sales for resale - Non-affiliates 271 366 298 Affiliates 98 100 96 - -------------------------------------------------------------------- Total sales for resale 369 466 394 - -------------------------------------------------------------------- Other operating revenues 165 151 160 - -------------------------------------------------------------------- Total operating revenues $4,822 $4,966 $4,871 ==================================================================== Percent change (2.9%) 2.0% 9.3% - -------------------------------------------------------------------- Retail base revenues of $3.068 billion in 2002 decreased by $34 million (1.1 percent) from 2001 primarily due to a base rate reduction effective January 2002 under the retail rate order and generally lower prices to large business customers. This decrease was partially offset by a 10.1 percent increase in residential kilowatt-hour sales due to warmer weather. Retail base revenues of $3.102 billion in 2001 decreased $17 million (0.5 percent) from 2000, primarily due to a 2.5 percent decrease in retail kilowatt-hour sales from the prior year. Milder-than-normal weather and a slowdown in the economy contributed to the decline in such sales. Retail base revenues of $3.119 billion in 2000 increased $84 million from the prior year primarily due to a 4.9 percent increase in retail kilowatt-hour sales due to warmer summer temperatures and colder winter weather. Electric rates include provisions to adjust billings for fluctuations in fuel costs, the energy component of purchased power costs, and certain other costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses -- including the fuel component of purchased energy -- and do not affect net income. As of December 31, 2002, the Company had $118 million in underrecovered fuel costs. Under a GPSC rate order, the fuel cost recovery rate was increased effective June 2001 to allow for an estimated 24-month recovery of II-98 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report the deferred underrecovered fuel costs. Also, effective January 1, 2002, the Company is allowed to collect a carrying cost on average underrecovered fuel balances. Wholesale revenues from sales to non-affiliated utilities were: 2002 2001 2000 --------------------------- (in millions) Unit power sales -- Capacity $ 34 $ 26 $ 30 Energy 34 35 25 Other power sales -- Capacity 41 72 67 Energy 162 233 176 - ----------------------------------------------------------- Total $271 $366 $298 =========================================================== Revenues from unit power contracts increased $7 million in 2002 due to higher capacity charges and $6 million in 2001 due to increased energy sales, while remaining constant in 2000. See Note 7 to the financial statements for further information regarding these sales. Revenues from other non-affiliated sales decreased $102 million (33.4 percent) in 2002 and increased $62 million in 2001 and $88 million in 2000 primarily due to fluctuations in off-system sale transactions that were generally offset by corresponding purchase transactions. These transactions had no significant effect on income. In 2002, revenues also decreased $37 million as a result of transferring Plant Dahlberg to Southern Power Company (Southern Power) in July 2001. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from year to year depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Other operating revenues in 2002 increased $14 million (9.5 percent) primarily due to the collection of new late payment fees approved under the retail rate order effective January 2002 and revenues from outdoor lighting and the transmission of electricity. Other operating revenues in 2001 decreased $9 million (5.3 percent) primarily due to lower gains on the sale of generating plant emission allowances, partially offset by increased revenues from the transmission of electricity and from the rental of electric equipment and property. Other operating revenues in 2000 increased $39 million (32.8 percent) due to increased revenues from the transmission of electricity and gains on the sale of generating plant emission allowances. Kilowatt-hour (KWH) sales for 2002 and the percent change by year were as follows: Percent Change ---------------------------- KWH 2002 2002 2001 2000 --------------------------------------- (in billions) Residential 22.1 10.1% (2.8)% 6.6% Commercial 27.0 1.7 3.4 8.1 Industrial 25.7 1.5 (8.0) 0.9 Other 0.6 1.7 2.5 3.2 ------ Total retail 75.4 4.0 (2.5) 4.9 ------ Sales for resale - Non-affiliates 8.1 (0.5) 25.5 27.7 Affiliates 4.0 26.5 28.7 35.6 ------ Total sales for resale 12.1 7.0 26.3 29.8 ------ Total sales 87.5 4.4 0.5 7.1 ====== - ------------------------------------------------------------ Residential sales increased 10.1 percent in 2002 due to the effect of the warmer weather. Commercial and industrial sales increased 1.7 percent and 1.5 percent, respectively, due to corresponding increases of 2.6 percent and 2.4 percent, respectively, in customers. Residential sales decreased 2.8 percent in 2001 due to milder-than-normal weather. Commercial sales increased 3.4 percent due to an increase in customers, while industrial sales decreased 8.0 percent due to an economic slowdown. Residential and commercial sales increased 6.6 percent and 8.1 percent, respectively, in 2000 due to weather and economic growth. Industrial sales remained fairly constant in 2000. Expenses Fuel costs constitute the single largest expense for the Company. The mix of fuel sources for generation of electricity is determined primarily by system load, the unit cost of fuel consumed, and the availability of hydro and nuclear generating units. The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated were as follows: II-99 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report 2002 2001 2000 -------------------------- Total generation (billions of KWH) 70.4 68.9 73.6 Sources of generation (percent) -- Coal 77.4 74.9 75.8 Nuclear 21.1 23.2 21.2 Hydro 1.2 1.4 0.8 Oil and gas 0.3 0.5 2.2 Average cost of fuel per net KWH generated (cents) -- 1.44 1.38 1.39 - --------------------------------------------------------------- Fuel expense increased 6.8 percent due to an increase in generation because of higher energy demands and a higher average cost of fuel due to the higher cost of coal in 2002. In 2001, fuel expense decreased 7.7 percent due to a decrease in generation because of lower energy demands and a slightly lower average cost of fuel. In 2000, fuel expense increased 10.7 percent due to an increase in generation because of higher energy demands and a slightly higher average cost of fuel. Purchased power expense decreased $87 million (11.2 percent) in 2002 primarily due to a decrease in off-system purchases used to meet lower off-system sales commitments. This decrease, which had no significant effect on income, was partially offset by a $43 million increase in capacity expense associated with new purchased power contracts. Purchased power expense increased $175 million (29.4 percent) in 2001 primarily due to an increase in off-system purchases used to meet off-system sales commitments. These transactions had no significant effect on earnings. Purchased power expense in 2000 increased $206 million (53.0 percent) over the prior year due to higher retail energy demands and off-system purchase transactions used to meet off-system sales transactions. In 2002, other operation and maintenance expenses increased $85 million (6.8 percent) due to increased generating plant maintenance, higher transmission expense, and increased property insurance expense. In 2001, other operation and maintenance expenses increased $41 million (3.4 percent) due to additional severance costs, increased scheduled generating plant maintenance, and higher uncollectible account expense. Other operation and maintenance expenses in 2000 increased slightly over the prior year. Increased line maintenance, customer assistance and sales expense, and severance costs were partially offset by decreased generating plant maintenance and decreased employee benefit provisions. Depreciation and amortization decreased $197 million in 2002 primarily as a result of discontinuing accelerated depreciation, beginning amortization of the regulatory liability for accelerated cost recovery, and lowering the composite depreciation rates in January 2002 all in accordance with the retail rate order. Depreciation and amortization decreased $19 million in 2001 primarily due to lower accelerated amortization under the third year of a prior GPSC retail rate order. Depreciation and amortization increased $66 million in 2000 primarily due to $50 million of additional accelerated amortization of regulatory assets required under the second year of the prior GPSC retail rate order and increased plant in service. See Note 3 to the financial statements under "Retail Rate Orders" for additional information. Interest expense decreased in 2002 and 2001 primarily due to lower interest rates that offset new financing costs. Interest expense increased in 2000 due to the issuance of additional senior notes. The Company refinanced or retired $929 million, $775 million, and $179 million of securities in 2002, 2001, and 2000, respectively. Interest capitalized decreased in 2002 due to the transfer of three new generation projects to Southern Power. Interest capitalized increased in 2001 and 2000 during the construction phase of these new projects. See Note 4 under "Construction Program" for additional information regarding the construction and subsequent transfer of these generation assets. Distributions on preferred securities of subsidiary companies increased in 2002 due to the issuance of additional securities and remained unchanged in 2001. Distributions on preferred securities of subsidiary companies decreased $7 million in 2000 due to the redemption of $100 million of preferred securities in December 1999. Other income (expense), net decreased in 2002 due to lower gains realized on sales of assets. Other income (expense), net increased in 2001 due to gains realized on sales of assets and a decrease in charitable contributions. Other income (expense), net decreased in 2000 due to an increase in charitable contributions. Effects of Inflation The Company is subject to rate regulation that is based on the recovery of historical costs. In addition, the income tax laws are also based on historical costs. Therefore, inflation creates an economic loss because the Company is II-100 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report 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 utility plants with long economic lives. Conventional accounting for historical cost 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 securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed. FUTURE EARNINGS POTENTIAL General The results of operations for the past three years are not necessarily indicative of future earnings. The level of future earnings depends on numerous factors including energy sales and regulatory matters. Growth in energy sales is subject to a number of factors which traditionally have included changes in contracts with neighboring utilities, energy conservation practiced by customers, the price elasticity of demand, weather, competition, initiatives to increase sales to existing customers, and the rate of economic growth in the Company's service area which has decreased recently in concert with a slowing national economy. Retail sales growth assuming normal weather is expected to be 2.3 percent on average from 2003 to 2005 and is down from last year's forecast of 3.1 percent. The Company currently operates as a vertically integrated utility providing electricity to customers within its traditional service area located in the State of Georgia. Prices for electricity provided by the Company to retail customers are set by the GPSC under cost-based regulatory principles. In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers' Accounting for Pensions, the Company recorded non-cash pension income, before tax, of approximately $59 million in 2002. Future pension income is dependent on several factors including trust earnings and changes to the plan. Current estimates indicate a reversal of recording pension income to recording pension expense by as early as 2006. Postretirement benefit costs for the Company were $43 million in 2002 and are expected to continue to trend upward. A portion of pension and postretirement benefit costs is capitalized based on construction-related labor charges. For the Company, pension income and postretirement benefit costs are a component of the regulated rates and do not have a significant effect on net income. For additional information, see Note 2 to the financial statements. In December 2001, the GPSC approved a three-year retail rate order for the Company ending December 31, 2004. Under the terms of the order, earnings will be evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds with the remaining one-third retained by the Company. Retail rates were decreased by $118 million effective January 1, 2002. Pursuant to a previous three-year accounting order, the Company recorded $333 million of accelerated cost amortization and interest thereon which has been credited to a regulatory liability account as mandated by the GPSC. Under the rate order, the accelerated amortization and the interest will be amortized equally over three years as a credit to expense beginning in 2002. Within the three year period covered by the rate order, the Company may not file for a general base rate increase unless its projected retail return on common equity falls below 10 percent. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the GPSC would be expected to determine whether the rate order should be continued, modified, or discontinued. See Note 3 to the financial statements under "Retail Rate Orders" for additional information. Beginning in 2002, the Company entered into purchased power agreements which will result in higher capacity and operating and maintenance payments in future years. Under the current retail rate order, these costs will be reflected in rates evenly over the three years ending 2004. In December 2002, the GPSC approved additional expansion of the Company's electricity generating capacity starting in 2005 through purchased power contracts. Beginning in June 2005, the Company will purchase 1,040 megawatts of capacity from the planned units at Plant McIntosh to be built and owned by Southern Power, and will also buy 620 megawatts of capacity from a plant owned by Duke Energy Trading & Marketing. See Note 4 to the financial statements under "Purchased Power Commitments" for additional information. Additionally, the GPSC approved the retirement of 415 megawatts from 11 units at plants Arkwright, Atkinson, and Mitchell. The II-101 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report retirements are the result of a unit retirement analysis that determined the units are more expensive to operate than the cost of replacement power. When property subject to composite depreciation is retired or otherwise disposed of in the normal course of business, its original cost - together with the cost of removal, less salvage - is charged to accumulated depreciation. On December 24, 2002, the GPSC approved an order allowing Georgia Power to implement a natural gas and oil procurement and hedging program effective January 1, 2003. This order allows the Company to use financial instruments in implementing a hedging program. The order limits the program in terms of time, volume, dollars, and physical amounts hedged. The costs of the program, including any net losses, are recovered as a fuel cost through the fuel cost recovery mechanism. Annual net financial gains from the hedging program will be shared with the retail customers receiving 75 percent and Georgia Power retaining 25 percent of the net gains. Georgia Power had three generation projects under construction during 2001. They included two units at Plant Dahlberg, a ten-unit, 800 megawatt combustion turbine facility; two units totaling 1,132 megawatts at Plant Wansley; and Plant Franklin (formerly Plant Goat Rock), a two-unit, 1,181 megawatt facility. All three of these projects have been transferred, at cost, to Southern Power. The ten Dahlberg units and two Franklin units were transferred in 2001 and the transfer of the two Wansley units was completed in January 2002. See Note 3 to the financial statements for information regarding material litigation issues that could possibly affect future earnings. Compliance costs related to current and future environmental laws, regulations, and litigation could affect earnings if such costs are not fully recovered. See "Environmental Matters" for further discussion of these matters. The State of Georgia is currently considering changes to laws that could potentially impact Georgia Power's ability to establish sites for new transmission lines. The proposed legislation would require certification by the GPSC prior to the acquisition of any property for the construction of an electric transmission line. The outcome of this matter cannot now be determined. Proposed nuclear security legislation is expected to be introduced in the 108th Congress. The Nuclear Regulatory Commission (NRC) is also considering additional security measures for licensees that could require immediate implementation. Any such requirements could have a significant impact on the Company's nuclear power plants and result in increased operation and maintenance expenses as well as additional capital expenditures. The impact of any new requirements would depend upon the development and implementation of the regulations. Industry Restructuring The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the primary agents of change was 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 enhanced the incentive for IPPs to build power plants for a utility's large industrial and commercial customers where retail access is allowed and sell energy to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign and domestic electric infrastructure assets. The Company has not experienced any material financial impact regarding its limited energy trading operations. Although the Energy Act does not provide for retail customer access, it has been a major catalyst for recent restructuring and consolidations taking place within the utility industry. Numerous federal and state initiatives that promote wholesale and retail competition are in varying stages. Among other things, these initiatives allow retail customers in some states to choose their electricity provider. Some states have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. While various restructuring and competition initiatives have been discussed in Georgia, none have been enacted. Enactment could require numerous issues to be II-102 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report resolved, including significant ones relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. The Company does compete with other electric suppliers within the state. In Georgia, most new retail customers with at least 900 kilowatts of connected load may choose their electricity supplier. Continuing to be a low-cost producer could provide opportunities to increase market share and profitability in markets that evolve with changing regulation and competition. Conversely, if the Company does not remain a low-cost producer and provide quality service, then energy sales growth could be limited, and this could significantly erode earnings. FERC Matters In December 1999, the Federal Energy Regulatory Commission (FERC) issued its final rule on Regional Transmission Organizations (RTOs). The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company has submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans sponsors' petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred candidate for ISA. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for the formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of SeTrans ISA. The creation of SeTrans is not expected to have a material impact on the Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company. Any impact of this proposal on the Company will depend on the form in which final rules may be ultimately adopted; however, the Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Accounting Policies Critical Policy Georgia Power's significant accounting policies are described in Note 1 to the financial statements. The Company's only critical accounting policy involves rate regulation. The Company is subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of 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, including plant, have been impaired. See Note 1 to the financial statements under "Regulatory Assets and Liabilities" for additional information. New Accounting Standards Derivatives - ----------- Effective January 2001, Georgia Power adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-03. In October 2002, the Company prospectively adopted the EITF's requirements to reflect the impact of certain energy trading contracts on a net basis. This change had no material II-103 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report impact on the Company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on the Company's current accounting treatment. Asset Retirement Obligations - ---------------------------- Prior to January 2003, the Company accrued for the ultimate cost of retiring most long lived assets over the life of the related asset through depreciation expense. FASB Statement No. 143, Accounting for Asset Retirement Obligations, establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. For more information regarding the impact of adopting this standard effective January 1, 2003, see Note 1 to the financial statements under "Regulatory Assets and Liabilities" and "Depreciation and Nuclear Decommissioning." Guarantees - ---------- In 2002, the FASB issued Interpretation No. 45, Accounting and Disclosure Requirements for Guarantees. This interpretation requires disclosure of certain direct and indirect guarantees, as reflected in Note 4 to the financial statements under "Guarantees." Also, the interpretation requires recognition of a liability at inception for certain new or modified guarantees issued after December 31, 2002. The adoption of Interpretation No. 45 in January 2003 did not have a material impact on the Company's financial statements. FINANCIAL CONDITION Plant Additions In 2002, gross utility plant additions were $884 million. These additions were primarily related to transmission and distribution facilities, the purchase of nuclear fuel and equipment to comply with environmental standards. The funds needed for gross property additions are currently provided from operations, short-term and long-term debt, and capital contributions from Southern Company. The Statements of Cash Flows provide additional details. Credit Rating Risk The Company does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral -- but not accelerated payment -- in the event of a credit rating change to below investment grade. At December 31, 2002, the maximum potential collateral requirements were approximately $229 million. Exposure to Market Risks Due to cost-based rate regulations, the Company has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. Company policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average interest rate on variable long-term debt outstanding at December 31, 2002 was 1.7 percent. If the Company sustained a 100 basis point change in interest rates for all variable rate long-term debt, the change would affect annualized interest expense by approximately $9 million. To further mitigate the Company's exposure to interest rates, the Company has entered into interest rate swaps that were designed as cash flow hedges of variable rate debt or anticipated debt issuances. See Note 1 and Note 9 to the financial statements under "Financial Instruments" for additional information. The Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. To mitigate residual risks relative to movements in electricity prices, the Company entered into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and to a lesser extent similar contracts for gas purchases. Realized gains and losses are recognized in the Statements of Income as incurred. At December 31, 2002 and 2001, exposure II-104 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report from these activities was not material to the Company's financial statements. Fair value of changes in derivative energy contracts and year-end valuations were as follows: Changes in Fair Value - ---------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------- (in millions) Contracts beginning of year $0.4 $0.9 Contracts realized or settled 0.9 (0.6) New contracts at inception - - Changes in valuation techniques - - Current period changes (1.2) 0.1 ================================================================ Contracts end of year $0.1 $0.4 ================================================================ All of these contracts are actively quoted and mature within one year. For additional information, see Note 1 to the financial statements under "Financial Instruments." Gains (losses) were not material and were recognized in income in 2002 and 2001. The Company is exposed to market-price risk in the event of nonperformance by parties to the derivative energy contracts. The Company's policy is to enter into agreements with counterparties that have investment grade credit ratings by Moody's and Standard & Poor's or with counterparties who have posted collateral to cover potential credit exposure. Therefore, the Company does not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see Notes 1 and 9 to the financial statements under "Financial Instruments." Financing Activities In 2002, the Company's financing costs decreased due to lower interest rates despite the issuance of new debt during the year. New issues during 2000 through 2002 totaled $2.6 billion and retirement or repayment of higher-cost securities totaled $1.9 billion. The Company's current liabilities exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of long-term debt. Subsequent to December 31, 2002, the Company has issued $250 million of new securities with the proceeds being used primarily to retire current maturities and to reduce short-term debt. An additional $150 million of securities has been issued to retire long-term debt and for other corporate purposes. The proceeds from assets transferred to Southern Power were used to reduce short-term debt and return capital that was used during the construction of these projects to Southern Company. Composite financing rates for long-term debt, preferred stock, and preferred securities for the years 2000 through 2002, as of year-end, were as follows: 2002 2001 2000 ------------------------------- Composite interest rate on long-term debt 4.47% 4.26% 5.90% Composite preferred stock dividend rate 4.60 4.60 4.60 Composite preferred securities dividend rate 6.35 7.49 7.49 - --------------------------------------------------------------- Liquidity and Capital Requirements Cash provided from operating activities of $1.2 billion increased by $142 million primarily due to lower fuel inventories and the collection of underrecovered fuel costs. See the Statements of Cash Flows for additional information. The Company plans investments primarily in additional transmission and distribution facilities and equipment to comply with environmental requirements. In addition to the funds needed for the construction program, capital will be needed for lease commitments and fuel and purchased power contracts. For additional information, see Note 4 to the financial statements. Also, capital will be needed for the maturities of long-term debt. The Company will continue to retire higher-cost debt and preferred securities and replace these obligations with lower-cost capital if market conditions permit. For additional information, see Note 9 to the financial statements under "Securities Due Within One Year." As a result of requirements by the NRC, the Company has established external trust funds for nuclear decommissioning costs. For additional information concerning nuclear decommissioning costs, see Note 1 to the financial statements under "Depreciation and Nuclear Decommissioning." As discussed in Note 2, the Company also provides postretirement benefits to substantially all employees and funds trusts to the extent required by the GPSC and the FERC. II-105 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report The liquidity and capital requirements discussed above are as follows: 2003 2004 2005 - ------------------------------------------------------------------- (in millions) Construction expenditures $ 759 $ 781 $806 Senior and other notes 320 0 150 Leases Capital 2 2 2 Operating 30 28 23 Purchase commitments Fuel 1,097 764 657 Purchased power 223 285 389 Trusts Nuclear decommissioning 9 9 9 Postretirement benefits 8 9 8 - ------------------------------------------------------------------- Sources of Capital The Company expects to meet future capital requirements primarily using funds generated from operating activities and equity funds from Southern Company and by the issuance of new debt and equity securities, term loans, and short-term borrowings. The Company received new financing authority from the GPSC in early 2002, which allows for the issuance of new long-term securities. Recently, the Company has relied on the issuance of unsecured debt and trust preferred securities, in addition to unsecured pollution control bonds issued for its benefit by public authorities, to meet its long-term external financing requirements. To meet short-term cash needs and contingencies, the Company had approximately $1.175 billion of unused credit arrangements with banks at the beginning of 2003. See Note 9 to the financial statements under "Bank Credit Arrangements" for additional information. The Company may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of the Company and the other Southern Company operating companies. At December 31, 2002, the Company had outstanding $358 million of commercial paper and $19 million of extendible commercial notes. In February 2002, the Company defeased its first mortgage bond indenture. As a result, the Company cannot issue any securities pursuant to the first mortgage bond indenture. Any liens or encumbrances on the Company's property pursuant to the first mortgage bond indenture were discharged. See "First Mortgage Bond Indenture" under Note 9 to the financial statements for more information. At the beginning of 2003, Georgia Power had not used any of its available credit arrangements. Bank credit arrangements are as follows: Expires --------------------- Total Unused 2003 ------------------------------------------------ (in millions) $1,175 $1,175 $1,175 - -------------------------------------------------- All of these credit arrangements allow for the execution of term loans for an additional two year period. Environmental Matters New Source Review Enforcement Actions In November 1999, the Environmental Protection Agency (EPA) brought a civil action in U.S. District Court in Georgia. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to coal-fired generating facilities at the Company's Bowen and Scherer plants. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the Company a notice of violation related to the two plants mentioned previously. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal-burning plants constructed or under construction prior to 1978. As directed by the court, the EPA refiled its amended complaint limiting claims to those brought against the Company. The case against the Company has been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the II-106 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against the Company. Because the outcome of the TVA appeal could have a significant adverse impact on Georgia Power, the Company has been a party to that case as well. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome in any one of these cases could require substantial capital expenditures and additional operation and maintenance expenses that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Plant Wansley Clean Air Act Litigation On December 30, 2002, the Sierra Club, Physicians for Social Responsibility, Georgia ForestWatch, and one individual filed a civil suit in the U.S. District Court in Georgia against Georgia Power for alleged violations of the Clean Air Act at Plant Wansley. The complaint alleges Clean Air Act violations at both the existing coal-fired units and the new combined cycle units. Specifically, the plaintiffs allege (1) opacity violations at the coal-fired units, (2) violations of a permit provision that requires the combined cycle units to operate above certain levels, (3) violation of the nitrogen oxide emission offset requirements, and (4) violation of the hazardous air pollutant (HAPS) requirements. The civil action requests injunctive and declaratory relief, civil penalties, a supplemental environmental project, and attorneys' fees. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. On January 27, 2003, Georgia Power filed a response to the complaint. Georgia Power also filed a motion to dismiss the allegations regarding emission offsets and HAPS. While Georgia Power believes that it has complied with applicable laws and regulations, an adverse outcome could require payment of substantial penalties. The final outcome of this matter cannot now be determined. Environmental Statutes and Regulations The Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to be, a significant focus for the Company. The Title IV acid rain provisions of the Clean Air Act, for example, required significant reductions in sulfur dioxide and nitrogen oxide emissions. Compliance was required in two phases -- Phase I, effective in 1995 and Phase II, effective in 2000. Construction expenditures associated with Phase I and Phase II compliance totaled approximately $206 million. Some of the expenditures required to comply with the Phase II acid rain requirements also assisted the Company in complying with nitrogen oxide emission reduction requirements under Title I of the Clean Air Act, which were designed to address one-hour ozone nonattainment problems in Atlanta, Georgia. The State of Georgia has adopted regulations that will require additional nitrogen oxide emission reductions from plants in and/or near those nonattainment areas, beginning in May 2003. Seven generating plants in the Atlanta area will be affected. Construction expenditures for compliance with these new rules are currently estimated at approximately $690 million, of which $71 million remains to be spent. To help bring the remaining nonattainment areas into compliance with the one-hour ozone standard, in 1998 the EPA issued regional nitrogen oxide reduction rules. Those rules required 21 states, including Georgia, to reduce and cap nitrogen oxide emissions from power plants and other large industrial sources. For Georgia, the EPA must complete a separate rulemaking before the requirements will apply. The EPA proposed a rule for Georgia in 2002 and expects to issue a final rule in 2003. The proposed rule requires compliance by May 1, 2005. In July 1997, the EPA revised the national ambient air quality standards for ozone and particulate matter. These revisions made the standards significantly more stringent. In the subsequent litigation of these standards, the U.S. II-107 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report Supreme Court found the EPA's implementation program for the new ozone standard unlawful and remanded it to the EPA for further rulemaking. The EPA is expected to propose implementation rules designed to address the court's concerns in 2003 and issue final implementation rules in 2004. The remaining legal challenges to the new standards, which were pending before the U.S. Court of Appeals, District of Columbia Circuit, have been resolved. The EPA plans to designate areas as attainment or nonattainment with the new eight-hour ozone standard by April 2004, based on air quality data for 2001 through 2003. Several areas within the Company's service territory are likely to be designated nonattainment under the new ozone standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as 2007. Those state plans could require further reductions in nitrogen oxide emissions from power plants. If so, reductions could be required sometime after 2007. The impact of any new standards will depend on the development and implementation of applicable regulations. The EPA currently plans to designate areas as attainment or nonattainment with the new fine particulate matter standard by the end of 2004. Those area designations will be based on air quality data collected during 2001 through 2003. Several areas within the Company's service territory will likely be designated nonattainment under the new particulate matter standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as the end of 2007. Those state plans will likely require reductions in sulfur dioxide emissions from power plants. If so, the reductions could be required sometime after 2007. Any additional emission reductions and costs associated with the new fine particulate matter standard cannot be determined at this time. The EPA has also announced plans to issue a proposed Regional Transport Rule for the fine particulate matter standard by the end of 2003 and to finalize the rule in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. If issued, this rule would likely modify other state implementation plan requirements for attainment of the fine particulate matter standard and the eight-hour ozone standard. It is not possible at this time to determine the effect such a rule would have on the Company. Further reductions in sulfur dioxide could also be required under the EPA's Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. The Company has a number of plants that could be subject to these rules. The EPA regional haze program calls for states to submit State Implementation Plans in 2007 and 2008 that contain emission reduction strategies for achieving progress toward the visibility improvement goal. In 2002, however, the U.S. Court of Appeals, District of Columbia Circuit, vacated and remanded the BART provisions of the federal Regional Haze rules to the EPA for further rulemaking. Because new BART rules have not been developed and state visibility assessments are only beginning, it is not possible to determine the effect of these rules on the Company at this time. The EPA's Compliance Assurance Monitoring (CAM) regulations under Title V of the Clean Air Act require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. The regulations require certain facilities with Title V operating permits to develop and submit a CAM plan to the appropriate permitting authority upon applying for renewal of the facility's Title V operating permit. The Company will be applying for renewal of its Title V operating permits between 2003 and 2005, and a number of its plants will likely be subject to CAM requirements for at least one pollutant, in most cases, particulate matter. The Company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, the Company cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements. Actual ongoing monitoring costs are expensed as incurred and are not material for any period presented. In December 2000, having completed its utility studies for mercury and other HAPS, the EPA issued a determination that an emission control program for mercury and, perhaps, other HAPS is warranted. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. The EPA currently plans to issue proposed rules regulating mercury emissions from electric utility boilers by the end of 2003, and those regulations are II-108 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report scheduled to be finalized by the end of 2004. Compliance could be required as early as 2007. Because the rules have not yet been proposed, the costs associated with compliance cannot be determined at this time. In December 2002, the EPA issued final and proposed revisions to the New Source Review program under the Clean Air Act. In February 2003, several northeastern states petitioned the D.C. Circuit Court for a stay of the final rules. The proposed rules are open to public comment and may be revised before being finalized by the EPA. If fully implemented, these proposed and final regulations could affect the applicability of the New Source Review provisions to activities at the Company's facilities. In any event, any final regulations must be adopted by the State of Georgia in order to apply to the Company's facilities. The effect of these proposed and final rules cannot be determined at this time. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002, proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the last Congress. Similar bills have been, and are anticipated to be, introduced this year. The Bush Administration's Clear Skies Act was recently reintroduced, and President Bush has stated that it will be a high priority for the Administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. The cost impacts of such legislation would depend upon the specific requirements enacted. Domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and specifically the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. The Bush Administration does not support U.S. ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation and has instead announced a new voluntary climate initiative which seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. As part of Southern Company, the Company is involved in a voluntary electric utility industry sector climate change initiative in partnership with the government. Because this initiative is still under development, it is not possible to determine the effect on the Company at this time. The Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste and releases of hazardous substances. Under these various laws and regulations, the Company could incur substantial costs to clean up properties. The Company conducts studies to determine the extent of any required cleanup and has recognized in its financial statements the costs to clean up known sites. The Company expensed $4.0 million, $0.6 million, and $4.0 million for cleanup and ongoing monitoring costs in 2002, 2001, and 2000, respectively. The Company may be liable for a portion or all required cleanup costs for additional sites that may require environmental remediation. Under GPSC ratemaking provisions, $21 million has been deferred in a regulatory liability account for use in meeting future environmental remediation costs. See Note 3 to the financial statements under "Other Environmental Contingencies" for information regarding the Company's potentially responsible party status at sites in Georgia. Under the Clean Water Act, the EPA is developing new rules aimed at reducing impingement and entrainment of fish and fish larvae at cooling water intake structures that will require numerous biological studies, and, perhaps, retrofits to some intake structures at existing power plants. The new rule was proposed in February 2002 and will be finalized by August 2004. The impact of any new standards will depend on the development and implementation of applicable regulations. Also, under the Clean Water Act, the EPA and the State of Georgia Environmental Protection Division are developing total maximum daily loads (TMDLs) for certain impaired waters. Establishment of maximum loads by the EPA or state agencies may result in lowering permit limits for various pollutants and a requirement to take additional measures to control non-point source pollution (e.g., storm water runoff) at facilities discharging into waters for which TMDLs are established. Because the effect on the Company will depend on the actual TMDLs and permit limitations established by the implementing agency, it is not possible to determine the effect on the Company at this time. II-109 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Georgia Power Company 2002 Annual Report The EPA and state environmental regulatory agencies are reviewing and evaluating various other matters including limits on pollutant discharges to impaired waters, hazardous waste disposal requirements, and other regulatory matters. The impact of any new standards will depend on the development and implementation of applicable regulations. Several major pieces of environmental legislation are periodically 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; the Toxic Substances Control Act; the Emergency Planning & Community Right-to-Know Act; and the Endangered Species Act. Compliance with possible additional federal or state legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could also significantly affect the Company. The impact of any new legislation, or changes to existing legislation, could affect many areas of the Company's operations. The full impact of any such changes cannot be determined at this time. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Company's 2002 Annual Report includes forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning retail sales growth expectations. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "projects," "potential" or "continue" or the negative of these terms or other comparable terminology. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which the Company is subject, as well as changes in application of existing laws and regulations; current and future litigation, including the pending EPA civil action; the effect, extent, and timing of the entry of additional competition in the markets in which the Company operates; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; the effects of, and changes in economic conditions in the areas in which the Company operates, including the current soft economy; internal restructuring or other restructuring options that may be pursued by the Company; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial; the direct or indirect effects on the Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the ability of counterparties of the Company to make payments as and when due; the ability of the Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time by the Company with the Securities and Exchange Commission. 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STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001, and 2000 Georgia Power Company 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Retail sales $4,288,097 $4,349,312 $4,317,338 Sales for resale -- Non-affiliates 270,678 366,085 297,643 Affiliates 98,323 99,411 96,150 Other revenues 165,362 150,986 159,487 - ---------------------------------------------------------------------------------------------------------------------------- Total operating revenues 4,822,460 4,965,794 4,870,618 - ---------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 1,002,703 939,092 1,017,878 Purchased power -- Non-affiliates 264,814 442,196 356,189 Affiliates 419,839 329,232 239,815 Other 848,436 810,043 795,458 Maintenance 476,962 430,413 404,189 Depreciation and amortization 403,507 600,631 619,094 Taxes other than income taxes 201,857 202,483 204,527 - ---------------------------------------------------------------------------------------------------------------------------- Total operating expenses 3,618,118 3,754,090 3,637,150 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income 1,204,342 1,211,704 1,233,468 Other Income and (Expense): Allowance for equity funds used during construction 7,622 9,081 2,901 Interest income 3,857 4,264 2,629 Equity in earnings of unconsolidated subsidiaries 3,714 4,178 3,051 Interest expense, net of amounts capitalized (168,391) (183,879) (208,868) Distributions on preferred securities of subsidiary (62,553) (59,104) (59,104) Other income (expense), net (12,973) (11,897) (53,396) - ---------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (228,724) (237,357) (312,787) - ---------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 975,618 974,347 920,681 Income taxes 357,319 363,599 360,587 - ----------------------------------------------------------------------------------------------------------------------------- Earnings Before Cumulative Effect of 618,299 610,748 560,094 Accounting Change Cumulative effect of accounting change-- less income taxes of $162 - 257 - - ---------------------------------------------------------------------------------------------------------------------------- Net Income 618,299 611,005 560,094 Dividends on Preferred Stock 670 670 674 - ---------------------------------------------------------------------------------------------------------------------------- Net Income After Dividends on Preferred Stock $ 617,629 $ 610,335 $ 559,420 ============================================================================================================================ The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001, and 2000 Georgia Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $618,299 $ 611,005 $ 560,094 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 411,435 697,143 712,960 Deferred income taxes and investment tax credits, net 65,550 (48,329) (28,961) Pension, postretirement, and other employee benefits (76,700) (57,239) (61,825) Other, net (38,353) (43,458) 10,324 Changes in certain current assets and liabilities -- Receivables, net 68,527 60,914 (108,621) Fossil fuel stock 82,711 (103,296) 26,835 Materials and supplies 15,874 (15,628) (9,715) Other current assets (18,880) 3,755 (9,282) Accounts payable 64,902 (15,406) 64,412 Taxes accrued (6,540) 18,392 7,334 Other current liabilities 16,166 (46,691) (102,379) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 1,202,991 1,061,162 1,061,176 - ----------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (883,968) (1,389,751) (1,078,163) Cost of removal net of salvage (60,912) (50,093) 3,247 Sales of property 387,212 534,760 - Other 27,169 45,319 (8,697) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (530,499) (859,765) (1,083,613) - ----------------------------------------------------------------------------------------------------------------------------- Financing Activities: (Decrease) increase in notes payable, net (389,860) 43,698 67,598 Proceeds -- Senior notes 500,000 600,000 300,000 Pollution control bonds - 404,535 78,725 Preferred securities 740,000 - - Capital contributions from parent company 173,483 225,060 301,514 Redemptions -- First mortgage bonds (1,860) (390,140) (100,000) Pollution control bonds (7,800) (385,035) (78,725) Senior notes (330,000) - - Preferred securities (589,250) - - Preferred stock - - (383) Capital distributions to parent company (200,000) (160,000) - Payment of preferred stock dividends (721) (578) (751) Payment of common stock dividends (542,900) (527,300) (549,600) Other (29,971) (17,747) (1,231) - ----------------------------------------------------------------------------------------------------------------------------- Net cash (used for) provided from financing activities (678,879) (207,507) 17,147 - ----------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents (6,387) (6,110) (5,290) Cash and Cash Equivalents at Beginning of Period 23,260 29,370 34,660 - ----------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 16,873 $ 23,260 $ 29,370 ============================================================================================================================= Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of $9,368, $38,331, and $23,152 capitalized for 2002, 2001, and 2000, respectively) $203,707 $234,456 $265,373 Income taxes (net of refunds) 281,661 381,995 392,310 - ----------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Georgia Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ Assets 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Current Assets: Cash and cash equivalents $ 16,873 $ 23,260 Receivables -- Customer accounts receivable 302,995 271,728 Unbilled revenues 104,454 104,594 Under recovered regulatory clause revenues 117,580 161,462 Other accounts and notes receivable 122,585 129,073 Affiliated companies 40,501 87,786 Accumulated provision for uncollectible accounts (5,825) (8,895) Fossil fuel stock, at average cost 120,048 202,759 Materials and supplies, at average cost 263,364 279,237 Other 96,922 125,246 - ------------------------------------------------------------------------------------------------------------------------------ Total current assets 1,179,497 1,376,250 - ------------------------------------------------------------------------------------------------------------------------------ Property, Plant, and Equipment: In service 17,222,661 16,886,399 Less accumulated provision for depreciation 7,333,529 7,243,209 - ------------------------------------------------------------------------------------------------------------------------------ 9,889,132 9,643,190 Nuclear fuel, at amortized cost 119,588 112,771 Construction work in progress 667,581 883,285 - ------------------------------------------------------------------------------------------------------------------------------ Total property, plant, and equipment 10,676,301 10,639,246 - ------------------------------------------------------------------------------------------------------------------------------ Other Property and Investments: Equity investments in unconsolidated subsidiaries 36,167 35,209 Nuclear decommissioning trusts 346,870 364,180 Other 28,612 29,618 - ------------------------------------------------------------------------------------------------------------------------------ Total other property and investments 411,649 429,007 - ------------------------------------------------------------------------------------------------------------------------------ Deferred Charges and Other Assets: Deferred charges related to income taxes 524,510 543,584 Prepaid pension costs 341,944 273,405 Unamortized debt issuance expense 67,362 58,165 Unamortized premium on reacquired debt 178,590 173,724 Other 162,686 117,706 - ------------------------------------------------------------------------------------------------------------------------------ Total deferred charges and other assets 1,275,092 1,166,584 - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $13,542,539 $13,611,087 ============================================================================================================================== The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Georgia Power Company 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands) Current Liabilities: Securities due within one year $ 322,125 $ 311,620 Notes payable 357,677 747,537 Accounts payable -- Affiliated 135,260 109,591 Other 445,220 409,253 Customer deposits 94,859 83,172 Taxes accrued -- Income taxes 20,245 35,247 Other 134,269 125,807 Interest accrued 59,608 46,942 Vacation pay accrued 42,442 41,830 Other 112,131 120,980 - ---------------------------------------------------------------------------------------------------------------------------- Total current liabilities 1,723,836 2,031,979 - ---------------------------------------------------------------------------------------------------------------------------- Long-term debt (See accompanying statements) 3,109,619 2,961,726 - ---------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,176,438 2,163,959 Deferred credits related to income taxes 208,410 229,216 Accumulated deferred investment tax credits 324,994 337,482 Employee benefits provisions 236,486 244,647 Other 373,740 440,774 - ---------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 3,320,068 3,416,078 - ---------------------------------------------------------------------------------------------------------------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes (See accompanying statements) 940,000 789,250 - ---------------------------------------------------------------------------------------------------------------------------- Preferred stock (See accompanying statements) 14,569 14,569 - ---------------------------------------------------------------------------------------------------------------------------- Common stockholder's equity (See accompanying statements) 4,434,447 4,397,485 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $13,542,539 $13,611,087 ============================================================================================================================ Commitments and Contingent Matters (See notes) - ---------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CAPITALIZATION At December 31, 2002 and 2001 Georgia Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Long-Term Debt: First mortgage bonds -- Maturity Interest Rates ------- -------------- 2005 6.07% $ - $ 1,860 - -------------------------------------------------------------------------------------------------------- Total first mortgage bonds - 1,860 - -------------------------------------------------------------------------------------------------------- Long-term notes payable -- Variable rate (1.98125% at 1/1/02) due February 22, 2002 - 300,000 5.25% to 5.75% due 2003 320,000 350,000 5.50% due December 1, 2005 150,000 150,000 6.20% due February 1, 2006 150,000 150,000 4.875% due July 15, 2007 300,000 - 5.125% to 6.875% due 2011-2047 745,000 545,000 - -------------------------------------------------------------------------------------------------------- Total long-term notes payable 1,665,000 1,495,000 - -------------------------------------------------------------------------------------------------------- Other long-term debt -- Pollution control revenue bonds -- Collateralized: 6.00% to 6.25% due 2018-2019 - 7,800 Non-collateralized: 1.75% to 5.45% due 2012-2034 751,760 701,760 Variable rates (1.30% to 2.50% at 1/1/03) due 2011-2032 934,130 984,130 - -------------------------------------------------------------------------------------------------------- Total other long-term debt 1,685,890 1,693,690 - -------------------------------------------------------------------------------------------------------- Capitalized lease obligations 81,411 83,371 - -------------------------------------------------------------------------------------------------------- Unamortized debt premium (discount), net (557) (575) - -------------------------------------------------------------------------------------------------------- Total long-term debt (annual interest requirement -- $179.6 million) 3,431,744 3,273,346 Less amount due within one year 322,125 311,620 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt excluding amount due within one year $3,109,619 $2,961,726 36.5% 36.3% - ----------------------------------------------------------------------------------------------------------------------------------- Company Obligated Mandatorily Redeemable Preferred Securities $25 liquidation value -- 4.875% $300,000 $ - 6.85% 200,000 200,000 7.125% 440,000 - 7.60% - 175,000 7.75% - 414,250 - ----------------------------------------------------------------------------------------------------------------------------------- Total (annual distribution requirement -- $59.1 million) 940,000 789,250 11.1 9.6 - ----------------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock: $100 stated value at 4.60% 14,569 14,569 - ----------------------------------------------------------------------------------------------------------------------------------- Total (annual dividend requirement -- $0.7 million) 14,569 14,569 Less amount due within one year - - - ----------------------------------------------------------------------------------------------------------------------------------- Total excluding amount due within one year 14,569 14,569 0.2 0.2 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stockholder's Equity: Common stock, without par value -- Authorized - 15,000,000 shares Outstanding - 7,761,500 shares 344,250 344,250 Paid-in capital 2,156,040 2,182,557 Premium on preferred stock 40 40 Retained earnings 1,945,520 1,870,791 Accumulated other comprehensive income (loss) (11,403) (153) - ----------------------------------------------------------------------------------------------------------------------------------- Total common stockholder's equity 4,434,447 4,397,485 52.2 53.9 - ----------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $8,498,635 $8,163,030 100.0% 100.0% =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2002, 2001, and 2000 Georgia Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- Premium on Other Common Paid-In Preferred Retained Comprehensive Stock Capital Stock Earnings Income (loss) Total - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1999 $344,250 $1,815,983 $40 $1,777,937 $ - $3,938,210 Net income after dividends on preferred stock - - - 559,420 - 559,420 Capital contributions from parent company - 301,514 - - - 301,514 Cash dividends on common stock - - - (549,600) - (549,600) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 344,250 2,117,497 40 1,787,757 - 4,249,544 Net income after dividends on preferred stock - - - 610,335 - 610,335 Capital distributions to parent company - (160,000) - - (160,000) Capital contributions from parent company - 225,060 - - - 225,060 Other comprehensive income (loss) - - - - (153) (153) Cash dividends on common stock - - - (527,300) - (527,300) Preferred stock transactions, net - - - (1) - (1) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 344,250 2,182,557 40 1,870,791 (153) 4,397,485 Net income after dividends on preferred stock - - - 617,629 - 617,629 Capital contributions from parent company - 173,483 - - - 173,483 Capital distributions to parent company - (200,000) - - - (200,000) Other comprehensive income (loss) - - - - (11,250) (11,250) Cash dividends on common stock - - - (542,900) - (542,900) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $344,250 $2,156,040 $40 $1,945,520 $(11,403) $4,434,447 ================================================================================================================================== The accompanying notes are an integral part of these financial statements.
STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2002, 2001, and 2000 Georgia Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Net income after dividends on preferred stock $617,629 $610,335 $559,420 - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss): Change in additional minimum pension liability, net of tax of $(4,853) (7,693) - - Change in fair value of marketable securities, net of tax of $(97) 153 - - Cumulative effect of accounting change for qualifying hedges, net of tax of $180 - 286 - Changes in fair value of qualifying hedges, net of tax of $(2,599), $(277), respectively (3,708) (439) - Less: Reclassification adjustment for amounts included in net income (2) - - - --------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (11,250) (153) - - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $606,379 $610,182 $559,420 =========================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-116 NOTES TO FINANCIAL STATEMENTS Georgia Power Company 2002 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General The Company is a wholly owned subsidiary of Southern Company, which is the parent company of five operating companies, Southern Power Company (Southern Power), a system service company (SCS), Southern Communications Services (Southern LINC), Southern Company Gas (Southern GAS), Southern Company Holdings (Southern Holdings), Southern Nuclear Operating Company (Southern Nuclear), Southern Telecom, and other direct and indirect subsidiaries. The operating companies -- Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric -- provide electric service in four southeastern states. Southern Power constructs, owns, and manages Southern Company's competitive generation assets and sells electricity at market-based rates in the wholesale market. Contracts among the operating companies and Southern Power -- related to jointly owned generating facilities, interconnecting transmission lines, or 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 subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Southern Telecom provides fiber cable services within the Southeast. Southern GAS, which began operation in August 2002, is a competitive retail natural gas marketer serving communities in Georgia. Southern Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products, and an energy services business. Southern Nuclear provides services to Southern Company's nuclear power plants. 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. The Company is also subject to regulation by the FERC and the Georgia Public Service Commission (GPSC). The Company follows accounting principles generally accepted in the United States and complies with the accounting policies and practices prescribed by the respective regulatory commissions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates, and the actual results may differ from these estimates. Certain prior years' data presented in the financial statements have been reclassified to conform with current year presentation. Affiliate Transactions The Company has an agreement with SCS under which the following services are rendered to the Company at direct or allocated cost: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures, and other services with respect to business and operations and power pool operations. Costs for these services amounted to $318 million in 2002, $286 million in 2001, and $266 million in 2000. Cost allocation methodologies used by SCS are approved by the SEC and management believes they are reasonable. The Company has an agreement with Southern Nuclear under which the following nuclear-related services are rendered to the Company at cost: general executive and advisory services; general operations, management and technical services; administrative services including procurement, accounting, employee relations, and systems and procedures services; strategic planning and budgeting services; and other services with respect to business and operations. Costs for these services amounted to $301 million in 2002, $281 million in 2001, and $281 million in 2000. The Company has an agreement with Southern Power under which the Company operates and maintains Southern Power owned plants Dahlberg, Franklin, and Wansley at cost. Collections from these agreements with Southern Power amounted to $5.3 million in 2002 and $1.0 million in 2001. These agreements arose from the transfer of certain generation facilities to Southern Power in 2001 and 2002. See Note 4 under "Construction Program" for additional information. Effective June 2002, the Company entered into purchased power agreements with Southern Power for capacity and energy. Purchased power costs in 2002 amounted to $128 million. Additionally, the Company recorded $12 million of II-117 NOTES (continued) Georgia Power Company 2002 Annual Report prepaid capacity expenses included in Other Deferred Charges and Other Assets on the balance sheet at December 31, 2002. See Note 4 under "Purchased Power Commitments" for additional information. The Company has an agreement with Gulf Power under which Gulf Power jointly owns a portion of Plant Scherer. Under this agreement, Georgia Power operates Plant Scherer and Gulf Power reimburses the Company for its proportionate share of the related expenses which were $4.5 million in 2002. Georgia Power has an agreement with Savannah Electric under which Georgia Power jointly owns a portion of Plant McIntosh. Under this agreement, Savannah Electric operates Plant McIntosh and Georgia Power reimburses Savannah Electric for its proportionate share of the related expenses which were $1.8 million in 2002. See Note 6 for additional information. The operating companies, including Georgia Power, Southern Power, and Southern GAS may jointly enter into various types of wholesale energy, natural gas and certain other contracts, either directly or through SCS as agent. Each participating company may be jointly and severally liable for the obligations incurred under these agreements. See Note 4 under "Fuel Commitments" and "Purchased Power Commitments" for additional information. Regulatory Assets and Liabilities The Company 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 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. See Note 3 under "Retail Rate Orders" for additional information regarding the disposition of the regulatory liability for the accelerated cost recovery recorded under the retail rate order that ended December 31, 2001. Regulatory assets and (liabilities) reflected in the Company's Balance Sheets at December 31 relate to the following: 2002 2001 --------------------- (in millions) Deferred income tax charges $ 525 $ 544 Deferred income tax credits (208) (229) Premium on reacquired debt 179 174 Corporate building lease 54 54 Vacation pay 54 52 Postretirement benefits 25 28 Department of Energy assessments 16 18 Generating plant outage costs 48 24 Accelerated cost recovery (222) (336) Environmental remediation reserve (21) - Purchased power (63) - Other regulatory assets 7 17 Other regulatory liabilities (1) (1) - -------------------------------------------------------------- Total $ 393 $ 345 ============================================================== See "Depreciation and Nuclear Decommissioning" in this note for information regarding significant regulatory assets and liabilities created as a result of the January 1, 2003 adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations. In the event that a portion of the Company's operations is no longer subject to the provisions of Statement No. 71, the Company would be required to write off related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, the Company would be required to determine if any impairment to other assets exists, including plant, and if impaired, write down the assets to their fair value. All regulatory assets and liabilities are reflected in rates. Revenues and Fuel Costs The Company currently operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the State of Georgia and to wholesale customers in the Southeast. 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 averaged less than 1 percent of revenues despite an increase in customer bankruptcies. Revenues are recognized as services are rendered. Unbilled revenues are accrued at the end of each fiscal period. Fuel costs are expensed as the fuel is used. The Company's fuel cost recovery mechanism includes provisions to adjust revenues for fluctuations in fuel costs, fuel hedging, the energy component of II-118 NOTES (continued) Georgia Power Company 2002 Annual Report purchased power costs, and certain other costs. Revenues are adjusted for differences between recoverable fuel costs and amounts actually recovered in current rates. Fuel expense includes the amortization of the cost of nuclear fuel and a charge, based on nuclear generation, for the permanent disposal of spent nuclear fuel. Total charges for nuclear fuel included in fuel expense amounted to $71 million in 2002, $75 million in 2001, and $75 million in 2000. The Company has contracts with the U.S. Department of Energy (DOE) that provide for the permanent disposal of used nuclear fuel. The DOE failed to begin disposing of used nuclear fuel in January 1998 as required by the contracts, and the Company is pursuing legal remedies against the government for breach of contract. Sufficient pool storage capacity is available at Plant Vogtle to maintain full-core discharge capability for both units until the year 2014. To maintain pool discharge capability at Plant Hatch, effective June 2000, an on-site dry storage facility for Plant Hatch became operational. Sufficient dry storage capacity is believed to be available to continue dry storage operations at Plant Hatch through the life of the plant. Procurement of on-site dry storage capacity at Plant Vogtle will commence in sufficient time to maintain pool full-core discharge capability. Also, the Energy Policy Act of 1992 required the establishment of a Uranium Enrichment Decontamination and Decommissioning Fund, which is to be funded in part by a special assessment on utilities with nuclear plants. The assessment will be paid over a 15-year period, which began in 1993. This fund will be used by the DOE for the decontamination and decommissioning of its nuclear fuel enrichment facilities. The law provides that utilities will recover these payments in the same manner as any other fuel expense. The Company -- based on its ownership interests -- estimates its remaining liability at December 31, 2002 under this law to be approximately $13 million. This obligation is recorded in other deferred credits in the accompanying Balance Sheets. Depreciation and Nuclear Decommissioning Depreciation of the original cost of depreciable utility plant in service is provided primarily by using composite straight-line rates, which approximated 2.9 percent in 2002 and 3.3 percent in 2001 and 2000. The composite depreciation rate was reduced because the lives of depreciable assets were extended effective January 2002 under the retail rate order. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its original cost -- together with the cost of removal, less salvage -- is charged to accumulated depreciation. Minor items of property included in the original cost of the plant are retired when the related property unit is retired. In January 2003, the Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. There was no cumulative effect adjustment to net income resulting from the adoption of Statement No. 143. The Company received permission from the GPSC to defer the transition adjustment, therefore, the Company recorded a related regulatory asset of $21 million to reflect the regulatory treatment of these costs under Statement No. 71 as of January 2003. The initial Statement No. 143 liability the Company recognized was $469 million, of which $332 million was removed from the accumulated depreciation reserve. The amount capitalized to property, plant, and equipment was $116 million. The liability recognized to retire long-lived assets primarily relates to the Company's nuclear facilities, which include the Company's ownership interests in plants Hatch and Vogtle. In addition, the Company has retirement obligations related to various landfill sites, ash ponds, and underground storage tanks. The Company has also identified retirement obligations related to certain transmission and distribution facilities, leasehold improvements, equipment on customer property, and property associated with Georgia Power rail lines. However, a liability for the removal of these facilities will not be recorded because no reasonable estimate can be made regarding the timing of any related retirements. The Company will continue to recognize in the Statements of Income the ultimate removal costs in accordance with respective regulatory treatment. Any difference between costs recognized under Statement No. 143 and those reflected in rates will be recognized as either a regulatory asset or liability. II-119 NOTES (continued) Georgia Power Company 2002 Annual Report It is estimated that this annual difference will be approximately $23 million. Management believes actual asset removal costs will be recoverable in rates over time. Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets they do not have a legal obligation to retire. However, in accordance with the regulatory treatment of these costs, the Company will continue to recognize the removal costs for these other obligations in the depreciation rates. As of January 1, 2003, the amount included in the accumulated depreciation reserve that represents a regulatory liability for these costs was $419 million. The Company recorded accelerated depreciation and amortization amounting to $91 million in 2001 and $135 million in 2000. Effective January 2002, the Company discontinued recording accelerated depreciation and amortization in accordance with the retail rate order. Also, the Company was ordered to amortize $333 million -- the cumulative balance previously expensed -- equally over three years as a credit to depreciation and amortization expense beginning January 2002. See Note 3 under "Retail Rate Orders" for additional information. The Nuclear Regulatory Commission (NRC) regulations require all licensees operating commercial power reactors to establish a plan for providing, with reasonable assurance, funds for decommissioning. The Company has established external trust funds to comply with the NRC's regulations. Earnings on the trust funds are considered in determining decommissioning expense. Amounts previously recorded in internal reserves are being transferred into the external trust funds over periods approved by the GPSC. The NRC's minimum external funding requirements are based on a generic estimate of the cost to decommission the radioactive portions of a nuclear unit based on the size and type of reactor. The Company has filed plans with the NRC to ensure that -- over time -- the deposits and earnings of the external trust funds will provide the minimum funding amounts prescribed by the NRC. The Company periodically conducts site-specific studies to estimate the actual cost of decommissioning its nuclear generating facilities. Site study cost is the estimate to decommission the facility as of the site study year, and ultimate cost is the estimate to decommission the facility as of its retirement date. The estimated site study costs based on the most current study and ultimate costs assuming an inflation rate of 4.7 percent for the Company's ownership interests are as follows: Plant Plant Hatch Vogtle ------------------- Site study year 2000 2000 Decommissioning periods: Beginning year 2014 2027 Completion year 2042 2045 - ------------------------------------------------------------ (in millions) Site study costs: Radiated structures $486 $420 Non-radiated structures 37 48 - ------------------------------------------------------------ Total $523 $468 ============================================================ (in millions) Ultimate costs: Radiated structures $1,004 $1,468 Non-radiated structures 79 166 - ------------------------------------------------------------ Total $1,083 $1,634 ============================================================ The decommissioning cost estimates are based on prompt dismantlement and removal of the plant from service. The actual decommissioning costs may vary from the above estimates because of changes in the assumed date of decommissioning, the NRC requirements, the assumptions used in making the estimates, regulatory requirements, technology, and costs of labor, materials, and equipment. Annual provisions for nuclear decommissioning expense are based on an annuity method as approved by the GPSC. The amounts expensed in 2002 and fund balances as of December 31, 2002 were: Plant Plant Hatch Vogtle - ---------------------------------------------------------------- (in millions) Amount expensed in 2002 $7 $2 ================================================================ (in millions) Accumulated provisions: External trust funds, at fair value $219 $128 Internal reserves 7 4 - ---------------------------------------------------------------- Total $226 $132 ================================================================ Effective January 1, 2002, the GPSC decreased the annual provision for decommissioning expenses to $9 million. This amount is based on the NRC generic estimate to decommission the radioactive portion of the facilities as of 2000. The estimates are $383 million and $282 million for plants Hatch and Vogtle, II-120 NOTES (continued) Georgia Power Company 2002 Annual Report respectively. The ultimate costs associated with the 2000 NRC minimum funding requirements are $823 million and $1.03 billion for plants Hatch and Vogtle, respectively. Significant assumptions include an estimated inflation rate of 4.7 percent and an estimated trust earnings rate of 6.5 percent. The Company expects the GPSC to periodically review and adjust, if necessary, the amounts collected in rates for the anticipated cost of decommissioning. In January 2002, the NRC granted the Company a 20-year extension of the licenses for both units at Plant Hatch which permits the operation of units 1 and 2 until 2034 and 2038, respectively. Decommissioning costs will not reflect the license extension until a new site study is completed in 2003 and the GPSC issues a new rate order, which is not expected until 2004. Income Taxes The Company 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. Allowance for Funds Used During Construction (AFUDC) and Interest Capitalized AFUDC represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new regulated facilities. While cash is not realized currently from such allowance, it increases the revenue requirement over the service life of the plant through a higher rate base and higher depreciation expense. Interest related to the construction of new facilities not included in the Company's retail rates is capitalized in accordance with standard interest capitalization requirements. For the years 2002, 2001, and 2000, the average AFUDC rates were 3.79 percent, 6.33 percent, and 6.74 percent, respectively. AFUDC and interest capitalized, net of taxes, as a percentage of net income after dividends on preferred stock, was less than 3.0 percent for 2002, 2001, and 2000. Property, Plant, and Equipment Property, plant, and equipment is stated at original cost, less regulatory disallowances and impairments. Original 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 interest capitalized and/or estimated cost of funds used during construction. The cost of replacements of property (exclusive of minor items of property) is capitalized. The cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expense as incurred or performed with the exception of certain generating plant maintenance costs. In accordance with a GPSC order, the Company defers and amortizes nuclear refueling costs over the unit's operating cycle before the next refueling. The refueling cycles range from 18 to 24 months for each unit. In accordance with the 2001 retail rate order, the Company defers the costs of certain significant inspection costs for the combustion turbines at Plant McIntosh and amortizes such costs over 10 years, which approximates the expected maintenance cycle. Impairment of Long-Lived Assets and Intangibles The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. Cash and Cash Equivalents For purposes of the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. 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 installed. II-121 NOTES (continued) Georgia Power Company 2002 Annual Report Stock Options Southern Company provides non-qualified stock options to a large segment of the Company's employees ranging from line management to executives. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized because the exercise price of all options granted equaled the fair market value on the date of grant. When options are exercised, the Company receives a capital contribution from Southern Company equivalent to the related income tax benefit. Comprehensive Income Comprehensive income -- consisting of net income, changes in the fair values of marketable securities and qualifying cash flow hedges, and changes in additional minimum pension liabilities, net of income taxes less reclassifications for amounts included in net income -- is presented in the financial statements. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Financial Instruments The Company uses derivative financial instruments to hedge exposures to fluctuations in interest rates, the prices of certain fuel purchases and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. The Company and its affiliates, through SCS acting as their agent, enter into commodity related forward and option contracts to limit exposure to changing prices on certain fuel purchases and electricity purchases and sales. Substantially all of the Company's bulk energy purchases and sales contracts are derivatives. However, these contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income and are recorded on a net basis in the Statements of Income. The Company's financial instruments for which the carrying amounts did not approximate fair value at December 31 were as follows: Carrying Fair Amount Value ------------------------ Long-term debt: (in millions) At December 31, 2002 $3,350 $3,417 At December 31, 2001 $3,190 $3,190 Preferred securities: At December 31, 2002 $940 $961 At December 31, 2001 $789 $782 - -------------------------------------------------------------- The fair values for securities were based on either closing market prices or closing prices of comparable instruments. 2. RETIREMENT BENEFITS The Company has defined benefit, trusteed pension plans that cover substantially all employees. The Company also provides certain non-qualified benefit plans for a selected group of management and highly compensated employees. Also, the Company provides certain medical care and life insurance benefits for retired employees. The Company funds postretirement trusts to the extent required by the GPSC and the FERC. In late 2000, as well as in 2002, the Company adopted several pension and postretirement benefits plan changes that had the effect of increasing benefits to both current and future retirees. Plan assets consist primarily of domestic and international equities, global fixed income securities, real estate, and private equity investments. The measurement date for plan assets and obligations is September 30 for each year. II-122 NOTES (continued) Georgia Power Company 2002 Annual Report Pension Plan Changes during the year in the projected benefit obligations and in the fair value of plan assets were as follows: Projected Benefit Obligation ------------------------- 2002 2001 - -------------------------------------------------------------- (in millions) Balance at beginning of year $1,448 $1,322 Service cost 36 35 Interest cost 107 101 Benefits paid (74) (74) Amendments 33 - Actuarial loss 14 64 - -------------------------------------------------------------- Balance at end of year $1,564 $1,448 ============================================================== Plan Assets ------------------------ 2002 2001 - ------------------------------------------------------------- (in millions) Balance at beginning of year $2,044 $2,464 Actual return on plan assets (137) (356) Benefits paid (69) (64) - ------------------------------------------------------------- Balance at end of year $1,838 $2,044 ============================================================= The accrued pension costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------- (in millions) Funded status $274 $ 596 Unrecognized transition obligation (17) (22) Unrecognized prior service cost 123 98 Unrecognized net actuarial (loss) (78) (444) - ------------------------------------------------------------- Prepaid asset, net 302 228 Portion included in benefit obligations 40 45 - ------------------------------------------------------------- Total prepaid assets recognized in the Balance Sheets $342 $ 273 ============================================================= In 2002 and 2001, amounts recognized in the Balance Sheets for accumulated other comprehensive income and intangible assets were $13 million and $10 million and $0 and $11 million, respectively. Components of the plan's net periodic cost were as follows: 2002 2001 2000 - --------------------------------------------------------------- (in millions) Service cost $ 36 $ 35 $ 33 Interest cost 107 101 94 Expected return on plan assets (179) (168) (152) Recognized net gain (27) (31) (26) Net amortization 4 3 (1) - --------------------------------------------------------------- Net pension (income) $ (59) $ (60) $ (52) =============================================================== Postretirement Benefits Changes during the year in the accumulated benefit obligations and in the fair value of plan assets were as follows: Accumulated Benefit Obligation -------------------------- 2002 2001 - --------------------------------------------------------------- (in millions) Balance at beginning of year $542 $495 Service cost 8 9 Interest cost 40 39 Benefits paid (27) (24) Actuarial loss 64 23 - --------------------------------------------------------------- Balance at end of year $627 $542 =============================================================== Plan Assets --------------------------- 2002 2001 - ---------------------------------------------------------------- (in millions) Balance at beginning of year $195 $198 Actual return on plan assets (18) (26) Employer contributions 49 47 Benefits paid (27) (24) - ---------------------------------------------------------------- Balance at end of year $199 $195 ================================================================ The accrued postretirement costs recognized in the Balance Sheets were as follows: 2002 2001 - --------------------------------------------------------------- (in millions) Funded status $ (427) $ (347) Unrecognized transition obligation 96 105 Unrecognized prior service cost 98 104 Unrecognized net loss 106 5 Fourth quarter contributions 37 27 - --------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $ (90) $(106) =============================================================== II-123 NOTES (continued) Georgia Power Company 2002 Annual Report Components of the plans' net periodic cost were as follows: 2002 2001 2000 - --------------------------------------------------------------- (in millions) Service cost $ 8 $ 9 $ 7 Interest cost 40 39 36 Expected return on plan assets (20) (19) (16) Net amortization 15 14 12 - --------------------------------------------------------------- Net postretirement cost $ 43 $ 43 $ 39 =============================================================== The weighted average rates assumed in the actuarial calculations for both the pension and postretirement benefit plans were: 2002 2001 2000 - --------------------------------------------------------------- Discount 6.5% 7.5% 7.5% Annual salary increase 4.0 5.0 5.0 Long-term return on plan assets 8.5 8.5 8.5 - --------------------------------------------------------------- An additional assumption used in measuring the accumulated postretirement benefit obligations was a weighted average medical care cost trend rate of 8.75 percent for 2002, decreasing gradually to 5.25 percent through the year 2010 and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 2002 as follows: 1 Percent 1 Percent Increase Decrease - --------------------------------------------------------------- (in millions) Benefit obligation $59 $52 Service and interest costs 5 4 =============================================================== Employee Savings Plan The Company sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides a 75 percent matching contribution up to 6 percent of an employee's base salary. Total matching contributions made to the plan for the years 2002, 2001, and 2000 were $17 million, $16 million, and $15 million, respectively. 3. CONTINGENCIES AND REGULATORY MATTERS General Litigation Matters The Company is subject to certain claims and legal actions arising in the ordinary course of business. The Company's business activities are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against the Company cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the Company's financial statements. Retail Rate Orders In December 2001, the GPSC approved a three-year retail rate order for the Company ending December 31, 2004. Under the terms of the order, earnings will be evaluated against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds, with the remaining one-third retained by the Company. The Company's earnings in 2002 were within the common equity range. Retail rates were decreased by $118 million effective January 1, 2002. Under a previous three-year order ending December 2001, the Company's earnings were evaluated against a retail return on common equity range of 10 percent to 12.5 percent. The order further provided for $85 million in each year, plus up to $50 million of any earnings above the 12.5 percent return during the second and third years, to be applied to accelerated amortization or depreciation of assets. Two-thirds of any additional earnings above the 12.5 percent return were applied to rate refunds, with the remaining one-third retained by the Company. In 2000, the Company recorded $44 million of revenue subject to refund for estimated earnings above 12.5 percent retail return on common equity. Refunds applicable to 2000 were made to customers in 2001. II-124 NOTES (continued) Georgia Power Company 2002 Annual Report Pursuant to the order, the Company recorded $333 million of accelerated amortization and interest thereon, which has been credited to a regulatory liability account as mandated by the GPSC. Under the rate order, the accumulated accelerated amortization and the interest are being amortized equally over three years as a credit to expense beginning in 2002. Effective January 1, 2002, the Company discontinued recording accelerated depreciation and amortization. Within the three-year period covered by the rate order, the Company may not file for a general base rate increase unless its projected retail return on common equity falls below 10 percent. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the GPSC would be expected to determine whether the rate order should be continued, modified, or discontinued. Under GPSC ratemaking provisions, $21 million has been deferred in a regulatory liability account for use in meeting future environmental remediation costs. Retail Fuel Hedging Program On December 24, 2002, the GPSC approved an order, effective in January 2003, allowing Georgia Power to implement a natural gas and oil procurement and hedging program. This order allows the Company to use financial instruments in implementing a hedging program. The order limits the program in terms of time, volume, dollars, and physical amounts hedged. The costs of the program, including any net losses, are recovered as a fuel cost through the fuel cost recovery clause. Annual net financial gains from the hedging program will be shared with the retail customers receiving 75 percent and Georgia Power retaining 25 percent of the net gains. New Source Review Enforcement Actions In November 1999, the EPA brought a civil action in U.S. District Court in Georgia. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to coal-fired generating facilities at the Company's Bowen and Scherer plants. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the Company a notice of violation related to the two plants mentioned previously. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal-burning plants constructed or under construction prior to 1978. As directed by the court, the EPA refiled its amended complaint limiting claims to those brought against the Company. The case against the Company has been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against the Company. Because the outcome of the TVA appeal could have a significant adverse impact on Georgia Power, the Company has been a party to that case as well. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates. Plant Wansley Clean Air Act Litigation On December 30, 2002, the Sierra Club, Physicians for Social Responsibility, Georgia ForestWatch, and one individual filed a civil suit in the U.S. District Court in Georgia against Georgia Power for alleged violations of the Clean Air Act at Plant Wansley. The complaint alleges Clean Air Act violations at both the existing coal-fired units and the new combined cycle units. Specifically, the plaintiffs allege (1) opacity violations at the coal-fired units, (2) violations II-125 NOTES (continued) Georgia Power Company 2002 Annual Report of a permit provision that requires the combined cycle units to operate above certain levels, (3) violation of the nitrogen oxide emission offset requirements, and (4) violation of the hazardous air pollutant requirements. The civil action requests injunctive and declaratory relief, civil penalties, a supplemental environmental project, and attorneys' fees. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. On January 27, 2003, Georgia Power filed a response to the complaint. Georgia Power also filed a motion to dismiss the allegations regarding emission offsets and hazardous air pollutants. While Georgia Power believes that it has complied with applicable laws and regulations, an adverse outcome could require payment of substantial penalties. The final outcome of this matter cannot now be determined. Other Environmental Contingencies The Company has been designated as a potentially responsible party at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation and Liability Act. Georgia Power has recognized $34 million in cumulative expenses through December 31, 2002 for the assessment and anticipated cleanup of sites on the Georgia Hazardous Sites Inventory. In addition, in 1995 the EPA designated Georgia Power and four other unrelated entities as potentially responsible parties at a site in Brunswick, Georgia that is listed on the federal National Priorities List. Georgia Power has contributed to the removal and remedial investigation and feasibility study costs for the site. Additional claims for recovery of natural resource damages at the site are anticipated. As of December 31, 2002, Georgia Power had recorded approximately $6 million in cumulative expenses associated with Georgia Power's agreed-upon share of the removal and remedial investigation and feasibility study costs for the Brunswick site. The final outcome of these matters cannot now be determined. However, based on the currently known conditions at these sites and the nature and extent of Georgia Power's activities relating to these sites, management does not believe that the Company's additional liability, if any, at these sites would be material to the financial statements. Nuclear Performance Standards The GPSC has adopted a nuclear performance standard for the Company's nuclear generating units under which the performance of plants Hatch and Vogtle is evaluated every three years. The performance standard is based on each unit's capacity factor as compared to the average of all comparable U.S. nuclear units operating at a capacity factor of 50 percent or higher during the three-year period of evaluation. Depending on the performance of the units, the Company could receive a monetary award or penalty under the performance standards criteria. The GPSC has approved a performance award of approximately $7.8 million for performance during the 1996-1998 period. This award was collected through the retail fuel cost recovery provision and recognized in income over a 36-month period that began in January 2000 as mandated by the GPSC. For the period 1999-2001, the Company's performance fell within the criteria prescribed by the GPSC. The Company will therefore not receive an award or penalty for the 1999-2001 performance period. Race Discrimination Litigation In July 2000, a lawsuit alleging race discrimination was filed by three Georgia Power employees against the Company, Southern Company, and SCS in the United States District Court for the Northern District of Georgia. The lawsuit also raised claims on behalf of a purported class. The plaintiffs seek compensatory and punitive damages in an unspecified amount, as well as injunctive relief. In August 2000, the lawsuit was amended to add four more plaintiffs. Also, Southern Company Energy Solutions, a subsidiary of Southern Company, was named a defendant. In October 2001, the district court denied plaintiffs' motion for class certification. The plaintiffs filed a motion to reconsider the order denying class certification, and the court denied the plaintiffs' motion to reconsider. In December 2001, the plaintiffs filed a petition in the United States Court of Appeals for the Eleventh Circuit seeking permission to file an appeal of the October 2001 decision, and this petition was denied. After discovery was completed on the claims raised by the seven named plaintiffs, the defendants filed motions for summary judgment on all of the named plaintiff's claims. The II-126 NOTES (continued) Georgia Power Company 2002 Annual Report parties await the district court's ruling on the seven motions for summary judgment. The final outcome of this matter cannot now be determined. Right of Way Litigation In 2002, Georgia Power was named as a defendant in several lawsuits brought by landowners regarding the installation and use of fiber optic cable over defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs' properties and that such actions by defendants exceed the easements or other property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment. The plaintiffs seek compensatory and punitive damages and injunctive relief. The Company believes that the plaintiffs' claims are without merit. An adverse outcome could result in substantial judgments; however, the final outcome of these matters cannot now be determined. 4. COMMITMENTS Construction Program Significant construction of transmission and distribution facilities and projects to remain in compliance with environmental requirements will continue. The Company currently estimates property additions to be approximately $759 million, $781 million, and $806 million in 2003, 2004, and 2005, respectively. The construction program is subject to periodic review and revision, and actual construction costs may vary from estimates because of numerous factors, including, but not limited to, changes in business conditions, revised load growth estimates, changes in environmental regulations, changes in existing nuclear plants to meet new regulatory requirements, increasing costs of labor, equipment, and materials, and cost of capital. At December 31, 2002, significant purchase commitments were outstanding in connection with the construction program. Georgia Power had three generation projects under construction during 2001. They included two units at Plant Dahlberg, a ten-unit, 800 megawatt combustion turbine facility; two combined cycle units totaling 1,132 megawatts at Plant Wansley; and Plant Franklin, a two-unit, 1,181 megawatt combined cycle facility. All three of these projects have been transferred to Southern Power. The ten Dahlberg units and two Franklin units were transferred in 2001 and the transfer of the two Wansley units was completed in January 2002. In connection with the transfer of plants Dahlberg, Franklin, and Wansley, the Company has assigned $12 million in vendor equipment contracts to Southern Power. While the Company could be obligated to assume responsibility for these contracts if Southern Power fails to meet these commitments, Southern Company has entered into limited keep-well arrangements whereby Southern Company would contribute funds to Southern Power either through loans or capital contributions in order to fund performance by Southern Power as equipment purchaser under certain contingencies. Southern Company has also guaranteed Southern Power obligations totaling $6.7 million for the Company's construction of transmission interconnection facilities to these plants. Fuel Commitments To supply a portion of the fuel requirements of its generating plants, the Company has entered into various long-term commitments for the procurement of fossil and nuclear fuel. In most cases, these contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. Total estimated long-term fossil and nuclear fuel commitments at December 31, 2002 were as follows: Minimum Year Obligations - ---- ------------------ (in millions) 2003 $1,097 2004 764 2005 657 2006 564 2007 465 2008 and beyond 1,236 - ----------------------------------------------------------- Total $4,783 =========================================================== Additional commitments for coal and for nuclear fuel will be required to supply the Company's future needs. In addition, SCS acts as agent for the five operating companies, Southern Power, and Southern GAS with regard to natural gas purchases. Natural gas purchases (in dollars) are based on various indices at the actual time of delivery; therefore, only the volume commitments are firm and disclosed in the following chart. The committed volumes, as of December 31, 2002, are as follows: II-127 NOTES (continued) Georgia Power Company 2002 Annual Report Year Natural Gas - ---- ------------------- (MMBtu) 2003 18,588,990 2004 17,306,665 2005 17,143,446 2006 12,785,477 2007 4,587,102 - ------------------------------------------------------------ Total 70,411,680 ============================================================ Purchased Power Commitments The Company and an affiliate, Alabama Power, own equally all of the outstanding capital stock of Southern Electric Generating Company (SEGCO), which owns electric generating units with a total rated capacity of 1,020 megawatts, as well as associated transmission facilities. The capacity of the units has been sold equally to the Company and Alabama Power under a contract which, in substance, requires payments sufficient to provide for the operating expenses, taxes, debt service, and return on investment, whether or not SEGCO has any capacity and energy available. The term of the contract extends automatically for two-year periods, subject to either party's right to cancel upon two year's notice. The Company's share of expenses included in purchased power from affiliates in the Statements of Income is as follows: 2002 2001 2000 --------------------------------- (in millions) Energy $53 $52 $57 Capacity 32 30 30 - -------------------------------------------------------------- Total $85 $82 $87 ============================================================== The Company has commitments regarding a portion of a 5 percent interest in Plant Vogtle owned by Municipal Electric Authority of Georgia (MEAG) that are in effect until the latter of the retirement of the plant or the latest stated maturity date of MEAG's bonds issued to finance such ownership interest. The payments for capacity are required whether or not any capacity is available. The energy cost is a function of each unit's variable operating costs. Except as noted below, the cost of such capacity and energy is included in purchased power from non-affiliates in the Company's Statements of Income. Capacity payments totaled $57 million, $59 million, and $58 million in 2002, 2001, and 2000, respectively. The current projected Plant Vogtle capacity payments are: Year Capacity Payments - ---- ---------------------- (in millions) 2003 $ 59 2004 57 2005 56 2006 54 2007 54 2008 and beyond 423 - ---------------------------------------------------------------- Total $ 703 ================================================================ Portions of the payments noted above relate to costs in excess of Plant Vogtle's allowed investment for ratemaking purposes. The present value of these portions was written off in 1987 and 1990. The Company has entered into other various long-term commitments for the purchase of electricity. Estimated total long-term capacity obligations at December 31, 2002 were as follows: Non- Year Affiliateed Affiliated - ---- ---------------------------- (in millions) 2003 $ 123 $ 41 2004 183 45 2005 255 78 2006 268 86 2007 268 87 2008 and beyond 1,800 564 - -------------------------------------------------------------- Total $2,897 $ 901 ============================================================== Acting as an agent for all of Southern Company's operating companies, Southern Power, and Southern GAS, SCS may enter into various types of wholesale energy and natural gas contracts. Each of the operating companies, Southern Power, and Southern GAS may be jointly and severally liable under these agreements. The creditworthiness of Southern Power and Southern GAS is currently inferior to the creditworthiness of the operating companies. Southern Company has entered into keep-well agreements with each of the operating companies to insure they will not subsidize or be responsible for any costs, losses, liabilities, or damages resulting from the inclusion of Southern Power or Southern GAS as a contracting party under these agreements. Operating Leases The Company has entered into various operating leases with various terms and expiration dates. Rental expenses related to these operating leases totaled $35 II-128 NOTES (continued) Georgia Power Company 2002 Annual Report million for 2002, $14 million for 2001, and $16 million for 2000. At December 31, 2002, estimated minimum rental commitments for these noncancelable operating leases were as follows: Minimum Obligations Year Rail Cars Other Total - ---- -------------------------------------- (in millions) 2003 $ 14 $ 16 $ 30 2004 14 14 28 2005 12 11 23 2006 13 8 21 2007 12 8 20 2008 and beyond 67 23 90 - --------------------------------------------------------------- Total $ 132 $ 80 $ 212 =============================================================== In addition to the rental commitments above, the Company has obligations upon expiration of certain of the rail car leases with respect to the residual value of the leased property. These leases expire in 2004 and 2010, and the Company's maximum obligations are $13 million and $40 million, respectively. At the termination of the leases, at the Company's option, the Company may either exercise its purchase option or the property can be sold to a third party. The Company expects that the fair market value of the leased property would substantially reduce or eliminate the Company's payments under the residual value obligation. A portion of the railcar lease obligations is shared with the joint owners of plants Scherer and Wansley. Rental expenses related to the railcar leases are fully recoverable through the fuel cost recovery clause as ordered by the GPSC. Guarantees Prior to 1999, a subsidiary of Southern Company originated loans to residential customers of the Company for heat pump purchases. These loans were sold to Fannie Mae with recourse for any loan with payments outstanding over 120 days. The Company is responsible for the repurchase of customers' delinquent loans. As of December 31, 2002, the outstanding loans guaranteed by the Company were $14 million and loan loss reserves of $3.4 million have been recorded. Alabama Power has guaranteed unconditionally the obligation of SEGCO under an installment sale agreement for the purchase of certain pollution control facilities at SEGCO's generating units, pursuant to which $24.5 million principal amount of pollution control revenue bonds are outstanding. Georgia Power has agreed to reimburse Alabama Power for the pro rata portion of such obligation corresponding to Georgia Power's then proportionate ownership of stock of SEGCO if Alabama Power is called upon to make such payment under its guaranty. As discussed earlier in this note under "Operating Leases," the Company has entered into certain residual value guarantees related to rail car leases. 5. NUCLEAR INSURANCE Under the Price-Anderson Amendments Act of 1988, the Company maintains agreements of indemnity with the NRC that, together with private insurance, cover third-party liability arising from any nuclear incident occurring at the Company's nuclear power plants. The Act provides funds up to $9.5 billion for public liability claims that could arise from a single nuclear incident. Each nuclear plant is insured against this liability to a maximum of $300 million by American Nuclear Insurers (ANI), with the remaining coverage provided by a mandatory program of deferred premiums that could be assessed, after a nuclear incident, against all owners of nuclear reactors. The Company could be assessed up to $88 million per incident for each licensed reactor it operates but not more than an aggregate of $10 million per incident to be paid in a calendar year for each reactor. Such maximum assessment for the Company, excluding any applicable state premium taxes -- based on its ownership and buyback interests - -- is $178 million per incident but not more than an aggregate of $20 million to be paid for each incident in any one year. The Company is a member of Nuclear Electric Insurance Limited (NEIL), a mutual insurer established to provide property damage insurance in an amount up to $500 million for members' nuclear generating facilities. Additionally, the Company has policies that currently provide decontamination, excess property insurance, and premature decommissioning coverage up to $2.25 billion for losses in excess of the $500 million primary coverage. This excess insurance is also provided by NEIL. NEIL also covers additional costs that would be incurred in obtaining replacement power during a prolonged accidental outage at a member's nuclear plant. Members can purchase this coverage, subject to a deductible waiting period of between 8 to 26 weeks, with a maximum per occurrence per unit limit of $490 million. After this deductible period, weekly indemnity payments would be received until either the unit is operational or until the limit is exhausted in approximately three years. Georgia Power purchases the maximum limit allowed by NEIL subject to ownership limitations and has elected a 12 week waiting period. Under each of the NEIL policies, members are subject to assessments if losses each year exceed the accumulated funds available to the insurer under that policy. The current maximum annual assessments for the Company under the three NEIL policies would be $40 million. II-129 NOTES (continued) Georgia Power Company 2002 Annual Report Following the terrorist attacks of September 2001, both ANI and NEIL confirmed that terrorist acts against commercial nuclear power stations would be covered under their insurance. Both companies, however, revised their policy terms on a prospective basis to include an industry aggregate for all terrorist acts. The NEIL aggregate, which applies to all claims stemming from terrorism within a 12 month duration, is $3.24 billion plus any amounts that would be available through reinsurance or indemnity from an outside source. The ANI cap is a $300 million shared industry aggregate. For all on-site property damage insurance policies for commercial nuclear power plants, the NRC requires that the proceeds of such policies should be dedicated first for the sole purpose of placing the reactor in a safe and stable condition after an accident. Any remaining proceeds are to be applied next toward the costs of decontamination and debris removal operations ordered by the NRC, and any further remaining proceeds are to be paid either to the Company or to its bond trustees as may be appropriate under the policies and applicable trust indentures. All retrospective assessments, whether generated for liability, property, or replacement power, may be subject to applicable state premium taxes. 6. JOINT OWNERSHIP AGREEMENTS Except as otherwise noted, the Company has contracted to operate and maintain all jointly owned generating facilities. Georgia Power owns undivided interests in plants Vogtle, Hatch, Scherer, and Wansley in varying amounts jointly with Oglethorpe Power Corporation (OPC), the Municipal Electric Authority of Georgia, the city of Dalton, Georgia, Florida Power & Light Company (FP&L), Jacksonville Electric Authority (JEA), and Gulf Power. Under these agreements, the Company is jointly and severally liable for third party claims related to these plants. In addition, the Company jointly owns the Rocky Mountain pumped storage hydroelectric plant with OPC who is the operator of the plant. The Company also jointly owns Plant McIntosh with Savannah Electric who operates the plant. The Company and Florida Power Corporation (FPC) jointly own a combustion turbine unit (Intercession City) operated by FPC. The Company includes its proportionate share of plant operating expenses in the corresponding operating expenses in the Statements of Income. At December 31, 2002, the Company's percentage ownership and investment (exclusive of nuclear fuel) in jointly owned facilities in commercial operation were as follows: Company Accumulated Facility (Type) Ownership Investment Depreciation - -------------------------------------------------------------------- (in millions) Plant Vogtle (nuclear) 45.7% $3,267 $1,779 Plant Hatch (nuclear) 50.1 884 665 Plant Wansley (coal) 53.5 305 156 Plant Scherer (coal) Units 1 and 2 8.4 113 58 Unit 3 75.0 554 234 Plant McIntosh Common Facilities 75.0 24 3 (combustion-turbine) Rocky Mountain 25.4 169 82 (pumped storage) Intercession City 33.3 12 1 (combustion-turbine) - -------------------------------------------------------------------- 7. LONG-TERM POWER SALES AGREEMENTS The Company and the other operating companies of Southern Company, except Savannah Electric, have long-term contractual agreements for the sale of capacity and energy to certain non-affiliated utilities located outside the system's service area. These agreements consist of firm unit power sales pertaining to capacity from specific generating units. Because energy is generally sold at cost under these agreements, it is primarily the capacity revenues that affect the Company's profitability. The Company's capacity revenues were as follows: Year Revenues Capacity ------------------------------------- (in millions) (megawatts) 2002 $34 102 2001 26 102 2000 30 124 ------------------------------------- II-130 NOTES (continued) Georgia Power Company 2002 Annual Report Unit power from specific generating plants is being sold to FP&L, FPC, and JEA. Under these agreements, approximately 103 megawatts of capacity is scheduled to be sold annually for periods after 2002 with a minimum of three years notice until the expiration of the contracts in 2010. 8. INCOME TAXES At December 31, 2002, tax-related regulatory assets were $525 million and tax-related regulatory liabilities were $208 million. The assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized interest. The 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 as follows: 2002 2001 2000 ------------------------------- Total provision for income taxes: (in millions) Federal: Current $261 $352 $342 Deferred 60 (46) (34) - ----------------------------------------------------------------- 321 306 308 - ----------------------------------------------------------------- State: Current 31 61 48 Deferred 5 (8) (5) Deferred investment tax credits - 5 10 - ----------------------------------------------------------------- Total $357 $364 $361 ===============================-================================= 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: 2002 2001 ------------------- (in millions) Deferred tax liabilities: Accelerated depreciation $1,779 $1,722 Property basis differences 623 660 Other 309 295 - ----------------------------------------------------------------- Total 2,711 2,677 - ----------------------------------------------------------------- Deferred tax assets: Federal effect of state deferred taxes 90 88 Other property basis differences 170 178 Other deferred costs 214 257 Other 64 40 - ----------------------------------------------------------------- Total 538 563 - ----------------------------------------------------------------- Net deferred tax liabilities 2,173 2,114 Portion included in current assets 3 50 - ---------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $2,176 $2,164 ================================================================ In accordance with regulatory requirements, 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 $12 million in 2002 and $15 million in both 2001 and 2000. At December 31, 2002, all investment tax credits available to reduce federal income taxes payable had been utilized. A reconciliation of the federal statutory tax rate to the effective income tax rate is as follows: 2002 2001 2000 ------------------------- Federal statutory rate 35% 35% 35% State income tax, net of federal deduction 2 4 4 Non-deductible book depreciation 1 2 2 Other (1) (4) (2) - -------------------------------------------------------------- Effective income tax rate 37% 37% 39% ============================================================== Southern Company and its subsidiaries file 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. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. II-131 NOTES (continued) Georgia Power Company 2002 Annual Report 9. CAPITALIZATION First Mortgage Bond Indenture In 2002, the first mortgage bond indenture of Georgia Power was defeased by paying to JPMorgan Chase Bank, the Trustee, an amount representing the last outstanding obligations on the Company's first mortgage bonds. As a result of the defeasance, there are no longer any first mortgage bond liens on the Company's property and the Company no longer has to comply with the covenants and restrictions of the first mortgage bond indenture. Preferred Securities Statutory trusts formed by the Company, of which the Company owns all the common securities, have issued mandatorily redeemable preferred securities. The following securities are currently outstanding: Date of Maturity Issue Amount Rate Notes Date --------------------------------------------------------- (millions) % (millions) Trust IV 2/1999 $200 6.850 $206 3/2029 Trust V 6/2002 440 7.125 454 3/2042 Trust VI 11/2002 300 4.875* 309 11/2042 * Issued at a five year initial fixed rate of 4.875 percent and, thereafter, at fixed rates determined through remarketings for specific periods of varying length or at floating rates determined by reference to 3-month LIBOR plus 3.05 percent. The securities issued by Trusts I, II, and III were redeemed in 2002. Substantially all of the assets of each trust are junior subordinated notes issued by the Company in the respective approximate principal amounts set forth above. The Company considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by the Company of the Trusts' payment obligations with respect to the preferred securities. The Trusts are subsidiaries of the Company and accordingly are consolidated in the Company's financial statements. Pollution Control Bonds The Company has incurred obligations in connection with the sale by public authorities of tax-exempt pollution control revenue bonds. The amount of tax-exempt pollution control revenue bonds outstanding at December 31, 2002 was $1.7 billion. Senior Notes In 2002, the Company issued a total of $500 million of unsecured senior notes. The proceeds of these issues were used to redeem higher cost long-term debt and to reduce short-term borrowing. Bank Credit Arrangements At the beginning of 2003, the Company had unused credit arrangements with banks totaling $1.175 billion expiring at April 18, 2003. Upon expiration, the $1.175 billion agreement provides the option of converting borrowings into a two-year term loan. The agreement contains stated borrowing rates but also allows for competitive bid loans. In addition, the agreement requires payment of commitment fees based on the unused portions of the commitments or the maintenance of compensating balances with the banks. Commitment fees are less than 1/8 of 1 percent for the Company. Compensating balances are not legally restricted from withdrawal. An annual fee is also paid to the agent bank. The credit arrangements contain covenants that limit the level of indebtedness to capitalization to 65 percent. Not meeting these limits would result in an event of default under the credit arrangements. In addition, the credit arrangements contain cross default provisions to other indebtedness of the Company that would trigger an event of default if the Company defaulted on indebtedness over a specified threshold. The Company is currently in compliance with all such covenants. This $1.175 billion in unused credit arrangements provides liquidity support to the Company's variable rate pollution control bonds. The amount of variable rate pollution control bonds outstanding requiring liquidity support as of December 31, 2002 was $422 million. In addition, the Company borrows under uncommitted lines of credit with banks, through a $155 million extendible commercial note program, and through a $750 million commercial paper program that has the liquidity support of the committed bank credit arrangements. The amount of extendible commercial notes and commercial paper outstanding at II-132 NOTES (continued) Georgia Power Company 2002 Annual Report December 31, 2002 was $19 million and $358 million, respectively. The amount of commercial paper outstanding at December 31, 2001 was $708 million. Commercial paper is included in notes payable on the Balance Sheets. Financial Instruments The Company enters into interest rate swaps to hedge exposure to interest rate changes. Swaps related to fixed rate securities are accounted for as fair value hedges. Swaps related to variable rate securities or forecasted transactions are accounted for as cash flow hedges. The swaps are generally structured to mirror the terms of the hedged debt instruments; therefore, no material ineffectiveness has been recorded in earnings. The gain or loss in fair value for cash flow hedges is recorded in other comprehensive income and will be recognized in earnings over the life of the hedged items. In 2002, the Company recognized gains totaling $413 thousand upon settlement of certain cash flow hedges. At December 31, 2002, the Company had interest rate swaps outstanding with net deferred losses as follows: Cash Flow Hedges Weighted Average Variable Fixed Fair Rate Rate Notional Value Maturity Received Paid Amount (Loss) - --------------------------------------------------------------- (in millions) 2003 * 4.76% $250 $(7) *Rate has not been set Other Long-Term Debt Assets acquired under capital leases are recorded in the Balance Sheets as utility plant in service, and the related obligations are classified as long-term debt. At December 31, 2002 and 2001, the Company had a capitalized lease obligation for its corporate headquarters building of $81 million with an interest rate of 8.1 percent. For ratemaking purposes, the GPSC has treated the lease as an operating lease and has allowed only the lease payments in cost of service. The difference between the accrued expense and the lease payments allowed for ratemaking purposes has been deferred and is being amortized to expense as ordered by the GPSC. At both December 31, 2002 and 2001, the interest and lease amortization deferred on the Balance Sheets was $54 million. Securities Due Within One Year A summary of the improvement fund requirements and scheduled maturities and redemptions of securities due within one year at December 31 is as follows: 2002 2001 ------------------ (in millions) Capital lease $ 2 $ 2 First mortgage bonds - 2 Pollution control bonds - 8 Senior notes 320 300 - --------------------------------------------------------------- Total $322 $312 =============================================================== Serial maturities through 2007 applicable to total long-term debt are as follows: $322 million in 2003; $2 million in 2004; $153 million in 2005; $153 million in 2006; and $303 million in 2007. 10. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial information for 2002 and 2001 is as follows: Net Income After Operating Operating Dividends on Quarter Ended Revenues Income Preferred Stock - --------------------------------------------------------------------- (in millions) -------------------------------------------- March 2002 $ 1,007 $260 $127 June 2002 1,204 320 171 September 2002 1,517 498 271 December 2002 1,095 126 49 March 2001 $ 1,108 $249 $ 108 June 2001 1,259 322 163 September 2001 1,579 515 298 December 2001 1,020 126 41 - --------------------------------------------------------------------- The Company's business is influenced by seasonal weather conditions. II-133
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 Georgia Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $4,822,460 $4,965,794 $4,870,618 $4,456,675 $4,738,253 Net Income after Dividends on Preferred Stock (in thousands) $617,629 $610,335 $559,420 $541,383 $570,228 Cash Dividends on Common Stock (in thousands) $542,900 $527,300 $549,600 $543,000 $536,600 Return on Average Common Equity (percent) 13.99 14.12 13.66 14.02 14.61 Total Assets (in thousands) $13,542,539 $13,611,087 $13,133,609 $12,361,860 $12,033,618 Gross Property Additions (in thousands) $883,968 $1,389,751 $1,078,163 $790,464 $499,053 - ----------------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $4,434,447 $4,397,485 $4,249,544 $3,938,210 $3,784,172 Preferred stock 14,569 14,569 14,569 14,952 15,527 Company obligated mandatorily redeemable preferred securities 940,000 789,250 789,250 789,250 689,250 Long-term debt 3,109,619 2,961,726 3,041,939 2,688,358 2,744,362 - ----------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $8,498,635 $8,163,030 $8,095,302 $7,430,770 $7,233,311 =================================================================================================================================== Capitalization Ratios (percent): Common stock equity 52.2 53.9 52.5 53.0 52.3 Preferred stock 0.2 0.2 0.2 0.2 0.2 Company obligated mandatorily redeemable preferred securities 11.1 9.6 9.7 10.6 9.5 Long-term debt 36.5 36.3 37.6 36.2 38.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0 =================================================================================================================================== Security Ratings: First Mortgage Bonds - Moody's N/A A1 A1 A1 A1 Standard and Poor's N/A A A A+ A+ Fitch N/A AA- AA- AA- AA- Preferred Stock - Moody's Baa1 Baa1 a2 a2 a2 Standard and Poor's BBB+ BBB+ BBB+ A- A Fitch A A A A+ A+ Unsecured Long-Term Debt - Moody's A2 A2 A2 A2 A2 Standard and Poor's A A A A A Fitch A+ A+ A+ A+ A+ =================================================================================================================================== Customers (year-end): Residential 1,734,430 1,698,407 1,669,566 1,632,450 1,596,488 Commercial 250,993 244,674 237,977 229,524 221,180 Industrial 8,240 8,046 8,533 8,958 9,485 Other 3,328 3,239 3,159 3,060 3,034 - ----------------------------------------------------------------------------------------------------------------------------------- Total 1,996,991 1,954,366 1,919,235 1,873,992 1,830,187 =================================================================================================================================== Employees (year-end): 8,837 9,048 8,860 8,961 8,371 - ----------------------------------------------------------------------------------------------------------------------------------- N/A = Not Applicable.
II-134
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 (continued) Georgia Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $ 1,600,438 $1,507,031 $ 1,535,684 $ 1,410,099 $ 1,486,699 Commercial 1,631,130 1,682,918 1,620,466 1,527,880 1,591,363 Industrial 1,004,288 1,106,420 1,154,789 1,143,001 1,170,881 Other 52,241 52,943 6,399 (30,892) 49,274 - -------------------------------------------------------------------------------------------------------------------------------- Total retail 4,288,097 4,349,312 4,317,338 4,050,088 4,298,217 Sales for resale - non-affiliates 270,678 366,085 297,643 210,104 259,234 Sales for resale - affiliates 98,323 99,411 96,150 76,426 81,606 - -------------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 4,657,098 4,814,808 4,711,131 4,336,618 4,639,057 Other revenues 165,362 150,986 159,487 120,057 99,196 - -------------------------------------------------------------------------------------------------------------------------------- Total $4,822,460 $4,965,794 $4,870,618 $4,456,675 $4,738,253 ================================================================================================================================ Kilowatt-Hour Sales (in thousands): Residential 22,144,559 20,119,080 20,693,481 19,404,709 19,481,486 Commercial 26,954,922 26,493,255 25,628,402 23,715,485 22,861,391 Industrial 25,739,785 25,349,477 27,543,265 27,300,355 27,283,147 Other 593,202 583,007 568,906 551,451 543,462 - -------------------------------------------------------------------------------------------------------------------------------- Total retail 75,432,468 72,544,819 74,434,054 70,972,000 70,169,486 Sales for resale - non-affiliates 8,069,375 8,110,096 6,463,723 5,060,931 6,438,891 Sales for resale - affiliates 3,962,559 3,133,485 2,435,106 1,795,243 2,038,400 - -------------------------------------------------------------------------------------------------------------------------------- Total 87,464,402 83,788,400 83,332,883 77,828,174 78,646,777 ================================================================================================================================ Average Revenue Per Kilowatt-Hour (cents): Residential 7.23 7.49 7.42 7.27 7.63 Commercial 6.05 6.35 6.32 6.44 6.96 Industrial 3.90 4.36 4.19 4.19 4.29 Total retail 5.68 6.00 5.80 5.71 6.13 Sales for resale 3.07 4.14 4.43 4.18 4.02 Total sales 5.32 5.75 5.65 5.57 5.90 Residential Average Annual Kilowatt-Hour Use Per Customer 12,867 11,933 12,520 12,006 12,314 Residential Average Annual Revenue Per Customer $929.90 $893.84 $929.11 $872.48 $939.73 Plant Nameplate Capacity Ratings (year-end) (megawatts) 14,059 14,474 15,114 14,474 14,437 Maximum Peak-Hour Demand (megawatts): Winter 11,873 11,977 12,014 11,568 11,959 Summer 14,597 14,294 14,930 14,575 13,923 Annual Load Factor (percent) 60.4 61.7 61.6 58.9 58.7 Plant Availability (percent): Fossil-steam 80.9 88.5 86.1 84.3 86.0 Nuclear 88.8 94.4 91.5 89.3 91.6 - -------------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 59.5 58.5 62.3 63.0 62.3 Nuclear 16.2 18.1 17.4 18.0 18.3 Hydro 0.9 1.1 0.7 0.9 2.2 Oil and gas 0.3 0.4 1.8 1.6 2.2 Purchased power - From non-affiliates 6.3 7.8 8.1 6.6 6.5 From affiliates 16.8 14.1 9.7 9.9 8.5 - -------------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 100.0 ================================================================================================================================
II-135 GULF POWER COMPANY FINANCIAL SECTION II-136 MANAGEMENT'S REPORT Gulf Power Company 2002 Annual Report The management of Gulf 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 accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 the accounting records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls, however, based on a recognition that the cost of the system should not exceed its benefits. The Company believes its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's 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. Southern Company's audit committee of its board of directors, composed of five independent directors, provides a broad overview of management's financial reporting and control functions. Additionally, a committee of Gulf Power's board of directors (composed of five outside directors) meets periodically with management, the internal auditors, and the independent public accountants to discuss auditing, internal controls, and compliance matters. The internal auditors and independent public accountants have access to the members of these committees 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 Gulf Power Company in conformity with accounting principles generally accepted in the United States. /s/Thomas A. Fanning Thomas A. Fanning President and Chief Executive Officer /s/Ronnie R. Labrato Ronnie R. Labrato Vice President, Chief Financial Officer and Comptroller February 17, 2003 II-137 INDEPENDENT AUDITORS' REPORT Gulf Power Company: We have audited the accompanying balance sheet and statement of capitalization of Gulf Power Company (a wholly owned subsidiary of Southern Company) as of December 31, 2002, and the related statements of income, comprehensive income, common stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of Gulf Power Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Gulf Power Company as of December 31, 2001, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described a change in the method of accounting for derivative instruments and hedging activities in their report dated February 13, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements (pages II-152 to II-170) present fairly, in all material respects, the financial position of Gulf Power Company at December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP February 17, 2003 Atlanta, Georgia THE FOLLOWING REPORT OF INDEPENDENT ACCOUNTANTS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE COMPANY'S 2001 ANNUAL REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. SEE EXHIBIT 23(d)2 FOR ADDITIONAL INFORMATION. To Gulf Power Company: We have audited the accompanying balance sheets and statements of capitalization of Gulf Power Company (a Maine corporation and a wholly owned subsidiary of Southern Company) as of December 31, 2001 and 2000, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 II-129 through II-144) referred to above present fairly, in all material respects, the financial position of Gulf Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, effective January 1, 2001, Gulf Power Company changed its method of accounting for derivative instruments and hedging activities. /s/Arthur Andersen LLP Atlanta, Georgia February 13, 2002 II-138 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Gulf Power Company 2002 Annual Report RESULTS OF OPERATIONS Earnings Gulf Power Company's 2002 net income after dividends on preferred stock was $67.0 million, an increase of $8.7 million from the previous year. In 2001, earnings were $58.3 million, up $6.5 million when compared to 2000. In 2000, earnings were $51.8 million, down $1.9 million when compared with the prior year. The improvement in earnings in 2002 is due primarily to higher operating revenues related to an increase in base rates, offset somewhat by higher operating expenses and higher financing costs primarily related to the commercial operation of Plant Smith Unit 3 in April 2002. The increase in 2001 earnings was primarily a result of an increase in Allowance for Funds Used During Construction (AFUDC) and lower interest expense. The decrease in 2000 earnings was primarily a result of expenses related to the discontinuance of the Company's appliance sales division and higher interest expense. A condensed income statement follows: Increase (Decrease) Amount From Prior Year - --------------------------------------------------------------- 2002 2002 2001 2000 - --------------------------------------------------------------- (in millions) Operating revenues $820 $ 95 $ 11 $40 - --------------------------------------------------------------- Fuel 274 73 (15) 7 Purchased power 63 (44) 24 26 Other operation and maintenance 200 23 5 - Depreciation and amortization 77 9 1 2 Taxes other than income taxes 61 6 (1) 4 - --------------------------------------------------------------- Total operating expenses 675 67 14 39 - --------------------------------------------------------------- Operating income 145 28 (3) 1 Other income and (expense) (41) (13) 10 (5) Income taxes (37) (6) - 2 - --------------------------------------------------------------- Net income $ 67 $ 9 $ 7 $ (2) =============================================================== Revenues Operating revenues increased in 2002 when compared to 2001 and 2000. The following table summarizes the changes in operating revenues for the past three years: 2002 2001 2000 ----------------------------------- (in thousands) Retail - Prior Year $584,591 $548,640 $516,949 Change in - Base Revenues 31,200 - (8,508) Sales Growth 16,557 10,254 4,407 Weather 9,497 (5,699) 7,522 Fuel and other cost recovery 23,991 31,396 28,270 - ----------------------------------------------------------------- Total retail 665,836 584,591 548,640 - ----------------------------------------------------------------- Sales for resale-- Non-affiliates 77,171 82,252 66,890 Affiliates 40,391 27,256 66,995 - ----------------------------------------------------------------- Total sales for resale 117,562 109,508 133,885 Other operating revenues 37,069 31,104 31,794 - ----------------------------------------------------------------- Total operating revenues $820,467 $725,203 $714,319 ================================================================= Percent change 13.1% 1.5% 6.0% - ----------------------------------------------------------------- Retail revenues increased $81.2 million, or 13.9 percent in 2002, $36.0 million, or 6.6 percent in 2001, and $31.7 million, or 6.1 percent in 2000. The significant factors driving these changes are shown in the table above. In addition, see Note 3 to the financial statements under "Retail Revenue Sharing Plan" for further information. "Fuel and other cost recovery" includes: recovery provisions for fuel expenses and the energy component of purchased power costs, energy conservation costs, purchased power capacity costs, and environmental compliance costs. Annually, the Company seeks recovery of projected costs plus any true-up amount from prior periods. Approved rates are implemented each January. Therefore, the recovery provisions generally equal the related expenses and have no material effect on net income. See Notes 1 and 3 to the financial statements under "Revenues and Regulatory Cost Recovery Clauses" and "Environmental Cost Recovery," respectively, for further information. Sales for resale were $117.6 million in 2002, an increase of $8.1 million, or 7.4 percent, from 2001 primarily due to increased energy sales for resale to affiliates reflecting the commercial operation of the 574 MW Plant Smith Unit 3. II-139 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report Sales for resale were $109.5 million in 2001, a decrease of $24.4 million, or 18.2 percent, from 2000 and $133.9 million in 2000, an increase of $5.4 million, or 4.2 percent over 1999. These changes were primarily weather related. Sales to affiliated companies vary from year to year depending on demand and the availability and cost of generating resources at each company. These energy sales do not have a significant impact on earnings. Revenues from sales to utilities outside the service area under long-term contracts consist of capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment under the contracts. Energy is generally sold at variable cost. The capacity and energy components under these long-term contracts were as follows: 2002 2001 2000 ----------------------------------- (in thousands) Unit Power -- Capacity $19,898 $19,472 $20,270 Energy 28,565 27,579 21,922 - ------------------------------------------------------------- Total $48,463 $47,051 $42,192 ============================================================= Capacity revenues remained relatively unchanged during 2002, 2001, and 2000. No significant declines in the amount of capacity are scheduled until the termination of these contracts in 2010. See Note 6 to the financial statements for additional information. Other operating revenues for 2002 increased $6.0 million due primarily to a $1.7 million settlement related to a power purchase agreement, a $3.3 million increase in franchise fees, and $0.9 million increase in revenues from the transmission of electricity to others. Energy Sales Kilowatt-hour sales for 2002 and the percent changes by year were as follows: KWH Percent Change ------------------------------------------ 2002 2002 2001 2000 ------------------------------------------ (millions) Residential 5,144 9.1% (1.5)% 7.1% Commercial 3,553 4.0 1.2 4.9 Industrial 2,054 1.8 4.8 4.3 Other 21 - 10.5 - ------- Total retail 10,772 5.9 0.6 5.8 Sales for resale Non-affiliates 2,157 3.1 22.8 9.2 Affiliates 1,720 78.4 (49.8) (23.7) ------- Total 14,649 10.7 (3.7) 0.7 ================================================================== The retail energy sales increases in 2002 and 2000 were primarily due to the impact of weather on the residential and commercial sectors. An increase in energy sales for resale to non-affiliates of 3.1 percent in 2002, 22.8 percent in 2001, and 9.2% in 2000, is primarily related to unit power sales under long-term contracts to other Florida utilities and bulk power sales under short-term contracts to other non-affiliated utilities. Energy sales to affiliated companies vary from year to year depending on demand and availability and cost of generating resources at each company. Expenses Total operating expenses in 2002 increased $67.0 million, or 11 percent, over the amount recorded in 2001 due primarily to higher fuel and maintenance costs. In 2001, total operating expenses increased $13.5 million, or 2.3 percent, compared to 2000 due primarily to higher purchased power expenses and maintenance expenses. In 2000, total operating expenses increased $39.5 million, or 7.1 percent, from the prior year due primarily to higher fuel and purchased power expenses. Fuel expense in 2002, when compared to 2001, increased $73.2 million, or 36.5 percent, due primarily to the commercial operation of Plant Smith Unit 3 beginning in April 2002. In 2001, fuel expenses decreased $15.1 million, or 7.0 percent, when compared to 2000 as a result of decreased generation. In 2000, fuel expenses increased $6.7 million, or 3.2 percent, as a result of an increase in average fuel costs. The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated were as follows: 2002 2001 2000 ------------------------------ Total generation (millions of kilowatt-hours) 13,142 11,423 12,866 Sources of generation (percent) Coal 81.8 99.0 98.2 Gas 18.2 1.0 1.8 Average cost of fuel per net kilowatt-hour generated (cents)-- 2.08 1.76 1.68 - ------------------------------------------------------------- ---------- Purchased power expenses decreased in 2002 by $43.2 million, or 40.7 percent, from 2001 primarily due to a decrease in purchased power from non-affiliated companies. This decrease in expenses from non-affiliates is mainly attributable II-140 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report to additional generating capacity within the Southern system in 2002 including the Company's Plant Smith Unit 3. Purchased power expenses for 2001 increased from 2000 by $23.8 million, or 28.8 percent, due primarily to an increase in purchased power from affiliate companies. Purchased power expenses for 2000 increased by $25.5 million, or 44.7 percent, due primarily to a higher demand for energy. Purchases of energy from affiliates will vary from year to year depending on demand and the availability and cost of generating resources at each company. These purchases have little impact on earnings. Depreciation and amortization expense increased $8.8 million, or 12.9 percent, in 2002 primarily due to the commercial operation of Plant Smith Unit 3 in April 2002. Depreciation and amortization expense increased $1.3 million, or 2.0 percent, in 2001 and $2.3 million, or 3.5 percent, in 2000 due to an increase in depreciable property. The increases in 2001 and 2000 were also due to the amortization of a portion of a regulatory asset, which was allowed in the current retail revenue sharing plan. See Note 3 to the financial statements under "Retail Revenue Sharing Plan" for further information. Allowance for equity funds used during construction in 2002 was $3.0 million due primarily to the completion of Plant Smith Unit 3, which began construction in 2000. See Note 1 to the financial statements under "Allowance for Funds Used During Construction and Interest Capitalized" for further information. Interest expense increased $6.4 million, or 25.6 percent, in 2002 due primarily to the issuance of $60 million of senior notes in August 2001, $75 million of senior notes in October 2001, and $45 million of senior notes in January 2002. These financings were primarily used to finance the construction of Plant Smith Unit 3. In 2001, interest expense decreased $3.1 million, or 10.9 percent, due primarily to higher allowance for debt funds used during construction related to the Company's Plant Smith Unit 3, as well as lower interest rates on notes payable and variable rate pollution control bonds. In 2000, interest expense increased $1.2 million, or 4.6 percent, due primarily to the issuance of $50 million of senior notes in August 1999. Effects of Inflation The Company is subject to rate regulation based on the recovery of historical costs. In addition, the income tax laws are based on historical costs. Therefore, inflation creates an economic loss because the Company is recovering its cost 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 utility plant with long economic lives. Conventional accounting for historical cost 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 securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed. Future Earnings Potential General 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. The major factors include regulatory matters and the ability to achieve energy sales growth. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. Traditionally, these factors have included the rate of economic growth in the Company's service area, weather, competition, changes in contracts with neighboring utilities, the elasticity of demand, and energy conservation practiced by the Company's customers. The Company currently operates as a vertically integrated utility providing electricity to customers within its traditional service area located in northwest Florida. Prices for electricity provided by the Company to retail customers are set by the Florida Public Service Commission (FPSC). In September 2001 the Company filed a request with the FPSC for a base rate increase of approximately $70 million, the majority of which was related to the Plant Smith Unit 3 combined cycle facility which was placed in service in April 2002. In May 2002 the FPSC approved a retail base rate increase of $53.2 million effective June 7, 2002. II-141 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers' Accounting for Pensions, the Company recorded non-cash pre-tax pension income of approximately $5.6 million in 2002. Future pension income is dependent on several factors including trust earnings and changes to the plan. Current estimates indicate a reversal of recording pension income to recording pension expense as early as 2006. Postretirement benefit costs for the Company were $4.5 million in 2002 and are expected to continue to trend upward. A portion of pension income and postretirement benefit costs are capitalized based on construction-related labor charges. For more information regarding pension and postretirement benefits, see Note 2 to the financial statements. The Company is involved in various matters being litigated. See Note 3 to the financial statements for information regarding material issues that could possibly affect future earnings. Compliance costs related to current and future environmental laws and regulations could affect earnings if such costs are not fully recovered. The Clean Air Act and other important environmental items are discussed later in Financial Condition under "Environmental Matters." Also, Florida legislation adopted in 1993 and amended in 2002 provides for recovery of prudent environmental compliance costs and is discussed in Note 3 to the financial statements under "Environmental Cost Recovery." Industry Restructuring The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the primary agents of change was 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 power plants for a utility's large industrial and commercial customers where retail access is allowed and sell energy to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign and domestic electric infrastructure assets. The Company has not experienced any material financial impact regarding its limited energy trading operations through Southern Company Services (SCS). Although the Energy Act does not provide for retail customer access, it has been a major catalyst for recent restructuring and consolidations taking place within the utility industry. Numerous federal and state initiatives to promote wholesale and retail competition are in varying stages. Among other things, these initiatives allow retail customers in some states to choose their electricity provider. Some states have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. While various restructuring and competition initiatives have been discussed in Florida, none have been enacted. Enactment could require numerous issues to be resolved, including significant ones relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. In 2000, Florida's Governor appointed a study commission to look at the state's electric industry, studying issues ranging from current and future reliability of electric and natural gas supply, retail and wholesale competition, environmental impacts of energy supply, conservation, and tax issues. The study commission's final report, entitled "Florida...Energy Wise," was presented in December 2001 to the Governor and the Legislature. The five key areas addressed by the report were Energy Efficiency, Adequate and Reliable Supply of Energy, Improvement of Energy Infrastructure, Preservation of the Environment, and Utilization of New Technologies and Renewable Resources. Changes were recommended within the wholesale energy market only. For changes to occur, they will have to be drafted and voted into law by the Legislature. No legislation of this type was voted on in 2002. The effects of any proposed changes cannot presently be determined but could have a material effect on the Company's financial condition and results of operations. Continuing to be a low-cost producer could provide opportunities to increase market share and profitability in markets that evolve with changing regulation. II-142 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report Conversely, if the Company does not remain a low-cost producer and provide quality service, then energy sales growth could be limited, and this could significantly erode earnings. The FPSC has approved a revised rule for investor-owned utilities engaging in power plant construction subject to the Florida Electrical Power Plant Siting Act (PPSA) to govern the process for selecting such generation projects. This new rule is aimed at creating a more transparent process accessible to a greater number of bidders. The revisions require a utility that intends to build a project subject to the PPSA to first issue a request for proposals (RFP) that meets the requirements of the revised rule, including a more detailed description of the methodology and criteria that will be used to evaluate the response. Also, respondents that have not been eliminated from further consideration must be given an opportunity to revise their proposals if the utility intends to revise its cost estimates on which the RFP was based. The revised rule also provides a mechanism for expedited dispute resolution and places restrictions on the level of costs a utility may recover if, at the conclusion of the RFP process, the FPSC certifies the utility's own self-build option as the most cost effective generation alternative identified through the process. The staff of the legislature's Joint Administrative Procedures Committee (JAPC) has filed a letter with the FPSC that raises some concerns with the proposed rule. The FPSC cannot file the rule for adoption until JAPC's comments have been addressed, therefore, the effective date for this new rule has not yet been established. The FPSC, in collaboration with the Florida Department of Environmental Protection (FDEP), was directed by the Florida Legislature to prepare a report on renewable energy. A final report was prepared by the FPSC and FDEP in January 2003. This report describes various renewable and green energy options. The report provided the FPSC, the FDEP, and the state Legislature with information on current and potential technologies, costs, feasibility, and status of current renewable technologies within the State of Florida. The report does not provide any formal policy recommendations with respect to renewable energy but is intended to provide the legislature and policymakers a sound starting point if they consider new legislation in this area. While the Company is actively pursuing a renewable energy portfolio that may be incorporated into its offering to its customers, the pursuit of a mandatory renewable portfolio standard or non-by-passable public benefits charge by the State could add additional costs to the Company's operations and affect the Company's competitive position. FERC Matters In December 1999, the FERC issued its final rule on Regional Transmission Organizations (RTOs). The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company has submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2001, Entergy Corporation and Cleco Power joined the SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans sponsors' petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on the Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; II-143 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company. Any impact of this proposal on the Company will depend on the form in which final rules may be ultimately adopted; however the Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Accounting Policies Critical Policy The Company's significant accounting policies are described in Note 1 to the financial statements. The Company's only critical accounting policy involves rate regulation. The Company is subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of 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. New Accounting Standards Derivatives Effective January 2001, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-3. In October 2002, the Company prospectively adopted the EITF's requirement to reflect the impact of certain energy trading contracts on a net basis. This change had no material impact on the Company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on the Company's current accounting treatment. Asset Retirement Obligations Prior to January 2003, the Company accrued for the ultimate cost of retiring most long-lived assets over the life of the related asset through depreciation expense. FASB Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate cost for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that the Company does not have a legal obligation to retire. For more information regarding the impact of adopting this standard effective January 1, 2003, see Note 1 to the financial statements under "Regulatory Assets and Liabilities" and "Depreciation and Amortization." Guarantees In November 2002, the FASB issued Interpretation No. 45, Accounting and Disclosure Requirements for Guarantees. This interpretation requires disclosure of certain direct and indirect guarantees as reflected in Note 4 to the financial statements. In addition, it requires recognition of a liability at inception for any new or modified guarantees issued after December 31, 2002. The adoption of this new standard had no material impact on the Company's financial statements. FINANCIAL CONDITION Overview During 2002, gross property additions were $106.6 million. Funds for the Company's property additions were provided by operating activities, capital contributions, and additional financings. See the Statements of Cash Flows for additional information. Credit Rating Risk The Company does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Exposure to Market Risks Due to cost-based rate regulation, the Company has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various II-144 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. Company policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average rate on variable long-term debt outstanding at December 31, 2002 was 1.43 percent. If the Company sustained a 100 basis point change in interest rates for all variable rate long-term debt, the change would affect annualized interest expense by approximately $0.83 million at December 31, 2002. See Note 1 to the financial statements for additional information. The Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. 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 and, to a lesser extent, similar contracts for gas purchases. At December 31, 2002, exposure from these activities was not material. The fair value of changes in derivative energy trading contracts and year-end valuations are as follows: Changes in Fair Value - -------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------- (in thousands) Contracts beginning of year $(110) $110 Contracts realized or settled 150 (100) New contracts at inception - - Changes in valuation techniques - - Current period changes 2,296 (120) - -------------------------------------------------------------- Contracts end of year $2,336 $(110) ============================================================== Source of Year-End Valuation Prices - -------------------------------------------------------- Total Maturity Fair Value -------------------- Year 1 1-3 Years - -------------------------------------------------------------- (in thousands) Actively quoted $2,336 $3,176 $(840) External sources - - - Models and other methods - - - - -------------------------------------------------------------- Contracts end of year $2,336 $3,176 $(840) ============================================================== Unrealized gains and losses from mark to market adjustments on contracts related to fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the Company's fuel cost recovery clause. Gains and losses on contracts that do not represent hedges are recognized in the income statement as incurred. At December 31, 2002, the fair value of derivative energy contracts was reflected in the financial statements as follows: Amounts - --------------------------------------------------------------- (in thousands) Regulatory liabilities, net $2,322 Other comprehensive income - Net income 14 - --------------------------------------------------------------- Total fair value $2,336 =============================================================== Approximately $0.12 million and $0.05 million of gains were recognized in income in 2002 and 2001, respectively. The Company is exposed to market-price risk in the event of nonperformance by parties to the derivative energy contracts. The Company's policy is to enter into agreements with counterparties that have investment grade credit ratings by Moody's and Standard & Poor's or with counterparties who have posted collateral to cover potential credit exposure. . Therefore, the Company does not anticipate market risk exposure from nonperformance by its counterparties. For additional information, see Note 1 to the financial statements under "Financial Instruments." Financing Activities In 2002, the Company issued $45 million of Senior Notes primarily to finance certain construction costs for Plant Smith Unit 3. Also in 2002, the Company refinanced a total of $55 million of pollution control bonds. In 2001, the Company sold $135 million of senior notes and $30 million of trust preferred securities and used the proceeds to retire $30 million of first mortgage bonds and for Plant Smith Unit 3 construction. Composite financing rates for the years 2000 through 2002 as of year end were as follows: 2002 2001 2000 ----------------------------- Composite interest rate on long-term debt 5.3% 5.6% 6.2% Composite rate on trust preferred securities 6.9% 7.2% 7.3% Composite preferred stock dividend rate 5.1% 5.1% 5.1% - ----------------------------------------------------------------- II-145 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report The composite interest rates on long-term debt decreased in 2002 due to the refinancing of certain pollution control bonds at lower interest rates. The composite rate on trust preferred securities decreased in 2002 due to refinancing the 7.625% issue with flexible trust preferred securities at a five year initial fixed rate of 5.60%. Capital Requirements for Construction The Company's gross property additions, including those amounts related to environmental compliance, are budgeted at $414 million for the three years beginning in 2003 ($108 million in 2003, $150 million in 2004, and $156 million in 2005). These amounts include $34 million, $52 million, and $47 million in 2003, 2004, and 2005, respectively, for capital expenditures related to environmental controls at Plant Crist as part of an agreement with the FDEP to reduce nitrogen oxide (NOx) emissions. The FPSC authorized the Company to recover the costs related to these environmental projects through the Environmental Cost Recovery Clause. See further discussion under Environmental Matters and Note 4 to the financial statements under "Construction Program." The remaining capital expenditures are for maintaining and upgrading transmission and distribution facilities and generating plants. Actual construction costs may vary from this estimate because of changes in such factors as the following: business conditions; environmental regulations; FERC rules and transmission regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. Other Capital Requirements The Company will continue to retire higher-cost debt and preferred securities and replace these securities with lower-cost capital as market conditions and terms of the instruments permit. Future note maturities, operating lease obligations, and purchase commitments - discussed in notes 4 and 8 to the financial statements - are as follows: 2003 2004 2005 - ---------------------------------------------------------------- (in millions) Notes 60 50 0 Operating leases 2 2 2 - ---------------------------------------------------------------- Purchase commitments Fuel 113 90 92 Purchased power 1 1 1 - -------------------------------------------------------------- Long-term service agreements 7 7 7 - -------------------------------------------------------------- Environmental Matters New Source Review Enforcement Actions In November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S. District Court in Georgia against Alabama Power, Georgia Power, and SCS. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued to the operating companies a notice of violation related to ten generating facilities, including the five facilities mentioned previously and the Company's Plants Crist and Scherer. For additional information, see Note 5 to the financial statements under "Joint Ownership Agreements" related to the Company's ownership interest in Georgia Power's Plant Scherer Unit No. 3. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation, and to add the Company, Mississippi Power, and Savannah Electric as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities had failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted SCS's motion to dismiss on the grounds that it neither owned II-146 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add Savannah Electric as a defendant, but denied the motion to add the Company and Mississippi Power based on lack of jurisdiction. As directed by the court, the EPA re-filed its amended complaint limiting claims to those brought against Georgia Power and Savannah Electric. The EPA also re-filed its claims against Alabama Power in the U.S. District Court in Alabama. It has not re-filed against the Company, Mississippi Power, or SCS. The Alabama Power, Georgia Power, and Savannah Electric cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised against Alabama Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003, or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it has complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes civil penalties of up to $27,500 per day per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Environmental Statutes and Regulations The Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations have been and will continue to be, a significant focus for the Company. The Title IV acid rain provisions of the Clean Air Act, for example, required significant reductions in sulfur dioxide and nitrogen oxide emissions. Compliance was required in two phases -- Phase I, effective in 1995 and Phase II, effective in 2000. Construction expenditures associated with Phase I totaled approximately $42 million for the Company. Phase II sulfur dioxide compliance was required in 2000 and did not have a material impact on the Company. In 1993, the Florida Legislature adopted legislation that allows a utility to petition the FPSC for specific recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. This legislation was amended in 2002 to allow specific recovery of costs incurred as a result of an agreement between the Company and the FDEP for the purpose of ensuring compliance with ozone ambient air quality standards adopted by the EPA. The legislation is discussed in Note 3 to the financial statements under "Environmental Cost Recovery." Substantially all of the costs for the Clean Air Act and other new environmental legislation discussed below are expected to be recovered through the Environmental Cost Recovery Clause. In July 1997, the EPA revised the national ambient air quality standards for ozone and particulate matter. These revisions made the standards significantly more stringent. In the subsequent litigation of these standards, the U.S. Supreme Court found the EPA's implementation program for the new ozone standard unlawful and remanded it to the EPA for further rulemaking. The EPA is expected to propose implementation rules designed to address the court's concerns in 2003 and issue final implementation rules in 2004. The remaining legal challenges to the new standards, which were pending before the U.S. Court of Appeals, District of Columbia Circuit, have been resolved. Based on recommendations from the State, EPA is expected to designate areas of Florida as attainment or nonattainment for the new ozone and particulate standards in April 2004. In August 2002, the Company entered into an agreement II-147 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report with the FDEP calling for NOx emission reductions at Plant Crist to help ensure attainment of the new standards in the Pensacola area. Under the agreement, the Company will install Selective Catalytic Reduction controls and a new precipitator on Crist Unit 7 by 2005. In addition, the Company will retire Crist Unit 1 in 2003 and Units 2 and 3 by 2006. Costs for implementation of the agreement have been approved for recovery under the Environmental Cost Recovery Clause. The EPA has also announced plans to issue a proposed Regional Transport Rule for the fine particulate matter standard by the end of 2003 and to finalize the rule in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. It is not possible at this time to determine the effect such a rule would have on the Company. Further reductions in sulfur dioxide could also be required under the EPA's Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. The Company has a number of plants that could be subject to these rules. The EPA regional haze program calls for states to submit State Implementation Plans in 2007 and 2008 that contain emission reduction strategies for achieving progress toward the visibility improvement goal. In 2002, however, the U.S. Court of Appeals for the District of Columbia Circuit, vacated and remanded the BART provisions of the federal Regional Haze rules to the EPA for further rulemaking. Because new BART rules have not been developed and state visibility assessments are only beginning, it is not possible to determine the effect of these rules on the Company at this time. The EPA's Compliance Assurance Monitoring (CAM) regulations under Title V of the Clean Air Act require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. The regulations require certain facilities with Title V operating permits to develop and submit a CAM plan to the appropriate permitting authority upon applying for renewal of the facility's Title V operating permit. The Company will be applying for renewal of its Title V operating permits between 2003 and 2005, and a number of the plants will likely be subject to CAM requirements for at least one pollutant, in most cases, particulate matter. The Company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, the Company cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements. Actual ongoing monitoring costs are expensed as incurred and are not material for any period presented. In December 2000, having completed its utility studies for mercury and other hazardous air pollutants (HAPS), the EPA issued a determination that an emission control program for mercury and, perhaps, other HAPS is warranted. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. The EPA currently plans to issue proposed rules regulating mercury emissions from electric utility boilers by the end of 2003, and those regulations are scheduled to be finalized by the end of 2004. Compliance could be required as early as 2007. Because the rules have not yet been proposed, the costs associated with compliance cannot be determined at this time. In December 2002, the EPA issued final and proposed revisions to the New Source Review program under the Clean Air Act. In February 2003, several northeastern states petitioned the D.C. Circuit Court for a stay of the final rules. The proposed rules are open to public comment and may be revised before being finalized by the EPA. If fully implemented, these proposed and final regulations could affect the applicability of the New Source Review provisions to activities at the Company's facilities. In any event, any final regulations must be adopted by the states in the Company's service area in order to apply to the Company's facilities. The effect of these proposed and final rules cannot be determined at this time. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002 proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the 107th Congress. Similar bills have been, and are anticipated to be introduced this year. The Bush Administration's Clear Skies Act was recently II-148 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report reintroduced and President Bush has stated that it will be a high priority for the Administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. The cost impacts of such legislation would depend upon the specific requirements enacted. Domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and, specifically, the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. The Bush Administration does not support U.S. ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation and has instead announced a new voluntary climate initiative which seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. The Company is involved in a voluntary electric utility industry sector climate change initiative, in partnership with the government. Because this initiative is still under development, it is not possible to determine the effect on the Company at this time. The Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste and releases of hazardous substances. Under these various laws and regulations, the Company could incur substantial costs to clean up properties; however, such costs are expected to be recovered through the Environmental Cost Recovery Clause. The Company conducts studies to determine the extent of any required cleanup and has recognized in its financial statements the costs to clean up known sites. The Company expensed $1.2 million, $1.2 million, and $1.3 million for cleanup and ongoing monitoring in 2002, 2001, and 2000, respectively. The Company may be liable for a portion or all required cleanup costs for additional sites that may require environmental remediation. See Note 3 to the financial statements for further information. Under the Clean Water Act, the EPA is developing new rules aimed at reducing impingement and entrainment of fish and fish larvae at cooling water intake structures that will require numerous biological studies and, perhaps, retrofits to some intake structures at existing power plants. The new rule was proposed in February 2002 and will be finalized by August 2004. The impact of any new standards will depend on the development and implementation of applicable regulations. Also, under the Clean Water Act, the EPA and the FDEP are developing total maximum daily loads (TMDLs) for certain impaired waters. Establishment of maximum loads by the EPA or the FDEP may result in lowering permit limits for various pollutants and a requirement to take additional measures to control non-point source pollution (e.g. storm water runoff) at facilities discharging into waters for which TMDLs are established. Because the effect on the Company will depend on the actual TMDLs and permit limitations established by the implementing agency, it is not possible to determine the effect on the Company at this time. The EPA and state environmental regulatory agencies are reviewing and evaluating various other matters including limits on pollutant discharges to impaired waters, hazardous waste disposal requirements, and other regulatory matters. The impact of any new standards will depend on the development and implementation of applicable regulations. Several major pieces of environmental legislation are periodically 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; the Toxic Substances Control Act; the Emergency Planning & Community Right-to-Know Act; and the Endangered Species Act. Compliance with possible additional federal or state legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could also significantly affect the Company. The impact of any new legislation, or changes to existing legislation, could affect many areas of the Company's operations. The full impact of any such changes cannot be determined at this time. II-149 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report Sources of Capital The Company plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from internal sources. However, the type and timing of any financings - if needed - will depend on market conditions and regulatory approval. In recent years, financings primarily have utilized unsecured debt and trust preferred securities. To meet short-term cash needs and contingencies, the Company has various internal and external sources of liquidity. At the beginning of 2003, the Company had approximately $13.3 million of cash and cash equivalents and unused committed lines of credit with banks to meet its short-term cash needs. In addition, the Company has significant cash flow from operating activities. At the beginning of 2003, the Company had used none of its available credit arrangements. Bank credit arrangements are as follows: Expires --------------------------- Total Unused 2003 2004 & beyond - --------------------------------------------------------------- (in millions) $66.3 $66.3 $66.3 $ - - --------------------------------------------------------------- See Note 8 to the financial statements under "Bank Credit Arrangements" and the Statements of Cash Flows for additional information. The Company may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of the Company and the other Southern Company operating companies. At December 31, 2002, the Company had outstanding $8.5 million of commercial paper. The Company historically has relied on issuances of first mortgage bonds and preferred stock, in addition to pollution control bonds issued for its benefit by public authorities, to meet its long-term external financing requirements. The Company has no restrictions on the amounts of unsecured indebtedness it may incur. However, in order to issue first mortgage bonds or preferred stock, the Company is required to meet certain coverage requirements specified in its mortgage indenture and corporate charter. The Company's ability to satisfy all coverage requirements is such that it could issue new first mortgage bonds and preferred stock to provide sufficient funds for all anticipated requirements. Cautionary Statement Regarding Forward-Looking Information The Company's 2002 Annual Report contains forward looking and historical information. Forward looking information includes, among other things, statements concerning projected retail sales growth and scheduled completion of new generation. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, and also changes in environmental and other laws and regulations to which the Company is subject, as well as changes in application of existing laws and regulations; current and future litigation; the effects, extent, and timing of the entry of additional competition in the markets in which the Company operates; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to the Company; the ability of counterparties of the Company to make payments as and when due; the effects of, and changes in, economic conditions in the areas in which the Company operates, including the current soft economy; the direct or indirect effects on the Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing II-150 MANAGEMENTS DISCUSSION AND ANALYSIS (continued) Gulf Power Company 2002 Annual Report efforts; the ability of the Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed from time to time by the Company with the Securities and Exchange Commission. 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STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001, and 2000 Gulf Power Company 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Retail sales $665,836 $584,591 $548,640 Sales for resale -- Non-affiliates 77,171 82,252 66,890 Affiliates 40,391 27,256 66,995 Other revenues 37,069 31,104 31,794 - ---------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 820,467 725,203 714,319 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 273,860 200,633 215,744 Purchased power -- Non-affiliates 23,797 65,585 73,846 Affiliates 39,201 40,660 8,644 Other 124,654 117,394 117,146 Maintenance 75,421 60,193 56,281 Depreciation and amortization 77,014 68,218 66,873 Taxes other than income taxes 61,033 55,261 55,904 - ---------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 674,980 607,944 594,438 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Income 145,487 117,259 119,881 Other Income and (Expense): Allowance for equity funds used during construction 2,980 5,373 160 Interest income 572 1,258 1,137 Interest expense, net of amounts capitalized (31,452) (25,034) (28,085) Distributions on preferred securities of subsidiary (8,524) (6,477) (6,200) Other income (expense), net (4,666) (2,663) (4,286) - ---------------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (41,090) (27,543) (37,274) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 104,397 89,716 82,607 Income taxes 37,144 31,260 30,530 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Before Cumulative Effect of 67,253 58,456 52,077 Accounting Change Cumulative effect of accounting change-- less income taxes of $42 - 68 - - ---------------------------------------------------------------------------------------------------------------------------------- Net Income 67,253 58,524 52,077 Dividends on Preferred Stock 217 217 234 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income After Dividends on Preferred Stock $ 67,036 $ 58,307 $ 51,843 ================================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001, and 2000 Gulf Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 67,253 $ 58,524 $ 52,077 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 82,230 72,320 69,915 Deferred income taxes 9,619 3,394 (12,516) Pension, postretirement, and other employee benefits (8,170) 511 (2,983) Other, net 5,756 (2,315) 13,669 Changes in certain current assets and liabilities -- Receivables, net (28,173) 15,991 (20,212) Fossil fuel stock 10,464 (30,887) 13,101 Materials and supplies (5,982) 176 1,055 Other current assets (14,178) (29,735) 8,945 Accounts payable 19,168 (7,289) 15,924 Taxes accrued 1,117 (4,560) 81 Other current liabilities (4,251) (2,627) 10,698 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 134,853 73,503 149,754 - ------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (106,624) (274,668) (95,807) Cost of removal net of salvage (7,978) (5,620) (3,902) Other (9,745) 10,910 (530) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (124,347) (269,378) (100,239) - ------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase (decrease) in notes payable, net (58,831) 44,311 (12,000) Proceeds -- Pollution control bonds 55,000 - - Senior notes 45,000 135,000 - Preferred securities 40,000 30,000 - Capital contributions from parent company 43,809 72,484 12,222 Redemptions -- First mortgage bonds - (30,000) - Pollution control bonds (55,000) - - Senior notes (454) (862) (1,853) Payment of preferred stock dividends (217) (217) (234) Payment of common stock dividends (65,500) (53,275) (59,000) Other (3,279) (3,703) (22) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided from (used for) financing activities 528 193,738 (60,887) - ------------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents 11,034 (2,137) (11,372) Cash and Cash Equivalents at Beginning of Period 2,244 4,381 15,753 - ------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 13,278 $ 2,244 $ 4,381 =============================================================================================================================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of $1,392, $2,510, and $440 capitalized for 2002, 2001, and 2000, respectively $39,604 $30,813 $32,277 Income taxes (net of refunds) 28,320 33,349 42,252 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Gulf Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------- Assets 2002 2001 - --------------------------------------------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents $ 13,278 $ 2,244 Receivables -- Customer accounts receivable 48,609 38,898 Unbilled revenues 28,077 25,215 Under recovered regulatory clause revenues 29,549 24,912 Other accounts and notes receivable 6,618 4,316 Affiliated companies 8,678 2,689 Accumulated provision for uncollectible accounts (889) (1,342) Fossil fuel stock, at average cost 37,191 47,655 Materials and supplies, at average cost 34,840 28,857 Prepaid taxes 12,704 - Other 14,134 12,662 - --------------------------------------------------------------------------------------------------------------------- Total current assets 232,789 186,106 - --------------------------------------------------------------------------------------------------------------------- Property, Plant, and Equipment: In service 2,248,156 1,951,512 Less accumulated provision for depreciation 946,408 912,581 - --------------------------------------------------------------------------------------------------------------------- 1,301,748 1,038,931 Construction work in progress 35,708 264,525 - --------------------------------------------------------------------------------------------------------------------- Total property, plant, and equipment 1,337,456 1,303,456 - --------------------------------------------------------------------------------------------------------------------- Other Property and Investments 10,157 7,049 - --------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 18,798 16,766 Prepaid pension costs 36,298 29,980 Unamortized debt issuance expense 3,900 3,036 Unamortized premium on reacquired debt 14,052 14,518 Other 20,379 12,222 - --------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 93,427 76,522 - --------------------------------------------------------------------------------------------------------------------- Total Assets $1,673,829 $1,573,133 ===================================================================================================================== The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Gulf Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- (in thousands) Current Liabilities: Securities due within one year $ 60,000 $ - Notes payable 28,479 87,311 Accounts payable -- Affiliated 26,395 18,202 Other 39,685 38,308 Customer deposits 16,047 14,506 Taxes accrued -- Income taxes 10,718 8,162 Other 9,170 8,053 Interest accrued 7,875 8,305 Vacation pay accrued 5,044 4,725 Other 3,933 11,777 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 207,346 199,349 - ----------------------------------------------------------------------------------------------------------------------- Long-term debt (See accompanying statements) 452,040 467,784 - ----------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 167,689 161,968 Deferred credits related to income taxes 29,692 28,293 Accumulated deferred investment tax credits 22,289 24,056 Employee benefits provisions 39,656 41,508 Other 46,376 26,045 - ----------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 305,702 281,870 - ----------------------------------------------------------------------------------------------------------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes (See accompanying statements) 155,000 115,000 - ----------------------------------------------------------------------------------------------------------------------- Preferred stock (See accompanying statements) 4,236 4,236 - ----------------------------------------------------------------------------------------------------------------------- Common stockholder's equity (See accompanying statements) 549,505 504,894 - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $1,673,829 $1,573,133 ======================================================================================================================= Commitments and Contingent Matters (See notes) - ------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CAPITALIZATION At December 31, 2002 and 2001 Gulf Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) (percent of total) Long Term Debt: First mortgage bonds -- 6.50% to 6.875% due 2006 $ 55,000 $ 55,000 - ------------------------------------------------------------------------------------------------------------------------------ Total first mortgage bonds 55,000 55,000 - ------------------------------------------------------------------------------------------------------------------------------ Long-term notes payable -- 4.69% due August 1, 2003 60,000 60,000 7.05% due August 15, 2004 50,000 50,000 6.00% to 7.50% due 2012-2038 186,757 142,211 - ------------------------------------------------------------------------------------------------------------------------------ Total long-term notes payable 296,757 252,211 - ------------------------------------------------------------------------------------------------------------------------------ Other long-term debt -- Pollution control revenue bonds -- Collateralized: 5.25% due April 1, 2006 12,075 12,075 5.50% to 5.80% due 2023-2026 61,625 96,625 Non-collateralized: 4.80% due 2028 13,000 - Variable rates (1.30% to 1.85% at 1/1/03) due 2022-2037 82,930 60,930 - ------------------------------------------------------------------------------------------------------------------------------ Total other long-term debt 169,630 169,630 - ------------------------------------------------------------------------------------------------------------------------------ Unamortized debt premium (discount), net (9,347) (9,057) - ------------------------------------------------------------------------------------------------------------------------------ Total long-term debt (annual interest requirement -- $27.9 million) 512,040 467,784 Less amount due within one year 60,000 - - ------------------------------------------------------------------------------------------------------------------------------ Long-term debt excluding amount due within one year 452,040 467,784 38.9% 42.9% - ------------------------------------------------------------------------------------------------------------------------------ Cumulative Preferred Stock: $100 par value 4.64% 1,250 1,250 5.16% 1,357 1,357 5.44% 1,629 1,629 - ------------------------------------------------------------------------------------------------------------------------------ Total (annual dividend requirement -- $0.2 million) 4,236 4,236 0.4% 0.4% - ------------------------------------------------------------------------------------------------------------------------------ Company Obligated Mandatorily Redeemable Preferred Securities: $25 liquidation value -- 5.60% 40,000 - 7.00% 45,000 45,000 7.375% 30,000 30,000 7.625% 40,000 40,000 - ------------------------------------------------------------------------------------------------------------------------------ Total (annual distribution requirement -- $10.7 million) 155,000 115,000 13.4% 10.5% - ------------------------------------------------------------------------------------------------------------------------------ Common Stockholder's Equity: Common stock, without par value -- Authorized and outstanding - 992,717 shares in 2002 and 2001 38,060 38,060 Paid-in capital 349,769 305,960 Premium on preferred stock 12 12 Retained earnings 162,398 160,862 Accumulated other comprehensive income (loss) (734) - - ------------------------------------------------------------------------------------------------------------------------------ Total common stockholder's equity 549,505 504,894 47.3% 46.2% - ------------------------------------------------------------------------------------------------------------------------------ Total Capitalization $1,160,781 $1,091,914 100.0% 100.0% ============================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2002, 2001, and 2000 Gulf Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------------- Premium on Other Common Paid-In Preferred Retained Comprehensive Stock Capital Stock Earnings Income (loss) Total - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1999 $38,060 $221,254 $12 $162,987 $ - $422,313 Net income after dividends on preferred stock - - - 51,843 - 51,843 Capital contributions from parent company - 12,222 - - - 12,222 Cash dividends on common stock - - - (59,000) - (59,000) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 38,060 233,476 12 155,830 - 427,378 Net income after dividends on preferred stock - - - 58,307 58,307 Capital contributions from parent company - 72,484 - - - 72,484 Cash dividends on common stock - - - (53,275) - (53,275) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 38,060 305,960 12 160,862 - 504,894 Net income after dividends on preferred stock - - - 67,036 - 67,036 Capital contributions from parent company - 43,809 - - - 43,809 Other comprehensive income (loss) - - - - (734) (734) Cash dividends on common stock - - - (65,500) - (65,500) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $38,060 $349,769 $12 $162,398 $(734) $549,505 ================================================================================================================================= The accompanying notes are an integral part of these financial statements. STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2002, 2001, and 2000 Gulf Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Net income after dividends on preferred stock $67,036 $58,307 $51,843 - -------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss): Changes in additional minimum pension liability, net (734) - - of tax of $(461) - -------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (734) - - - ------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $66,302 $58,307 $51,843 ========================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-157 NOTES TO FINANCIAL STATEMENTS Gulf Power Company 2002 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Gulf Power Company (the Company) is a wholly owned subsidiary of Southern Company, which is the parent company of five operating companies, Southern Power Company (Southern Power), a system service company (SCS), Southern Communications Services (Southern LINC), Southern Company Gas (Southern GAS), Southern Company Holdings (Southern Holdings), Southern Nuclear Operating Company (Southern Nuclear), Southern Telecom, and other direct and indirect subsi diaries. The operating companies - Alabama Power, Georgia Power, the Company, Mississippi Power, and Savannah Electric - provide electric service in four southeastern states. Southern Power was established in 2001 to construct, own, and manage Southern Company's competitive generation assets and sell electricity at market-based rates in the wholesale market. Contracts among the operating companies and Southern Power - related to jointly owned generating facilities, interconnecting transmission lines, or the exchange of electric power - are regulated by the Federal Energy Regulatory Commission (FERC) and/or the Securities and Exchange Commission (SEC). SCS provides, at cost, specialized services to Southern Company and subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Southern Telecom provides fiber and cable services within the southeast. Southern GAS, which began operation in August 2002, is a competitive retail natural gas marketer serving customers in Georgia. Southern Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products, and an energy services business. Southern Nuclear provides services to Southern Company's nuclear power plants. 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. The Company is also subject to regulation by the FERC and the Florida Public Service Commission (FPSC). The Company follows accounting principles generally accepted in the United States and complies with the accounting policies and practices prescribed by its respective regulatory commissions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Affiliate Transactions The Company has an agreement with SCS under which the following services are rendered to the Company at direct or allocated cost: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures, and other services with respect to business and operations and power pool transactions. Costs for these services amounted to $49 million, $45 million, and $44 million during 2002, 2001, and 2000, respectively. Cost allocation methodologies used by SCS are approved by the SEC and management believes they are reasonable. The operating companies (including the Company), Southern Power, and Southern GAS may jointly enter into various types of wholesale energy, natural gas and certain other contracts, either directly or through SCS as agent. Each participating company may be jointly and severally liable for the obligations incurred under these agreements. The Company has agreements with Georgia Power and Mississippi Power under which the Company owns a portion of Plant Scherer and Plant Daniel. Georgia Power operates Plant Scherer and Mississippi Power operates Plant Daniel. The Company reimbursed Georgia Power $4.5 million and Mississippi Power $16.6 million in 2002 for its proportionate share of related expenses. See Note 4 under "Lease Agreements" and Note 5 for additional information. Regulatory Assets and Liabilities The Company 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 II-158 NOTES (continued) Gulf Power Company 2002 Annual Report 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 at December 31 relate to the following: 2002 2001 ------------------------ (in thousands) Deferred income tax charges $ 18,798 $ 16,766 Deferred loss on reacquired debt 14,052 14,518 Environmental remediation 14,428 7,163 Vacation pay 5,044 4,725 Accumulated provision for property damage (15,418) (13,565) Deferred income tax credits (29,692) (28,293) Fuel-hedging liabilities (2,322) - Other regulatory assets 2,859 2,272 Other regulatory liabilities (3,277) (5,245) - ----------------------------------------------------------------- Total $ 4,472 $ (1,659) ================================================================= 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 related regulatory assets and liabilities 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. All regulatory assets and liabilities are reflected in rates. See "Depreciation and Amortization" for information regarding regulatory assets and liabilities created as a result of the January 1, 2003 adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations. Revenues, Regulatory Cost Recovery Clauses, and Fuel Costs Revenues are recognized as services are rendered. Unbilled revenues are accrued at the end of each fiscal period. Fuel costs are expensed as the fuel is used. The Company's retail electric rates include provisions to annually adjust billings for fluctuations in fuel costs, the energy component of purchased power costs, and certain other costs. The Company has similar retail cost recovery clauses for energy conservation costs, purchased power capacity costs, and environmental compliance costs. Revenues are adjusted monthly for differences between recoverable costs and amounts actually reflected in current rates. The Company has a diversified base of customers and no single customer or industry comprises 10 percent or more of revenues. For all periods presented, uncollectible accounts averaged significantly less than 1 percent of revenues. Depreciation and Amortization Depreciation of the original cost of plant in service is provided primarily by using composite straight-line rates, which approximated 3.9 percent in 2002, 3.7 percent in 2001, and 3.8 percent in 2000. 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. Prior to January 2003, in accordance with regulatory requirements, the Company followed the industry practice of accruing for the ultimate cost of retiring most long-lived assets over the life of the related asset as part of the annual depreciation expense provision. In January 2003, the Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. There was no cumulative effect adjustment to net income resulting from the adoption of Statement No. 143. The Company expects to receive an accounting order from the FPSC to defer the transition adjustment; therefore, the Company recorded a related regulatory asset of $0.9 million to reflect the Company's regulatory treatment of these costs under Statement No. 71. The initial Statement No. 143 liability the Company recognized was $4.0 million, of which $1.9 million was removed from the accumulated depreciation reserve. The amount capitalized to property, plant, and equipment was $1.2 million. II-159 NOTES (continued) Gulf Power Company 2002 Annual Report The liability recognized under Statement No. 143 to retire long-lived assets primarily relates to the Company's combustion turbines at its Pea Ridge facility, various landfill sites, ash ponds, and a barge unloading dock. The Company has also identified retirement obligations related to certain transmission and distribution facilities. However, a liability for the removal of these transmission and distribution assets will not be recorded because no reasonable estimate can be made regarding the timing of any related retirements. The Company will continue to recognize in the income statement their ultimate removal costs in accordance with its regulatory treatment. Any difference between costs recognized under Statement No. 143 and those reflected in rates will be recognized as either a regulatory asset or liability. It is estimated that this annual difference will be approximately $0.1 million. Management believes that the actual removal costs will be recoverable in rates over time. Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets they do not have a legal obligation to retire. However, in accordance with the regulatory treatment of these costs, the Company will continue to recognize the removal costs for these other obligations in their depreciation rates. As of January 1, 2003, the amount included in the accumulated depreciation reserve that represents a regulatory liability for these costs was approximately $143 million. Allowance for Funds Used During Construction and Interest Capitalized In accordance with regulatory treatment, the Company records Allowance for Funds Used During Construction (AFUDC) on construction projects. AFUDC represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new regulated facilities. While cash is not realized currently from such allowance, it increases the revenue requirement over the service life of the plant through a higher rate base and higher depreciation expense. For the years 2002, 2001, and 2000 the average AFUDC rates were 7.35 percent, 7.35 percent, and 7.27 percent, respectively. AFUDC, net of taxes, as a percentage of net income after dividends on preferred stock was 5.72 percent, 11.86 percent, and 0.83 percent, respectively for, 2002, 2001, and 2000. Income Taxes The Company uses the liability method of accounting for 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. Property, Plant, and Equipment Property, plant, and equipment is stated at original cost. Original 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 interest capitalized and/or estimated cost of funds used during construction. The cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expense. The cost of replacements of property (exclusive of minor items of property) is charged to utility plant. Impairment of Long-Lived Assets and Intangibles The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is re-evaluated when circumstances or events change. Cash and Cash Equivalents For purposes of the financial statements temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. II-160 NOTES (continued) Gulf Power Company 2002 Annual Report Financial Instruments The Company uses derivative financial instruments to limit exposure to fluctuations in the prices of certain fuel purchases, and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. Substantially all of the Company's bulk energy purchases and sales contracts are derivatives. However, in many cases, these contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions. This results in the deferral of related gains and losses in other comprehensive income or regulatory assets or liabilities as appropriate until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income and are recorded on a net basis in the Statements of Income. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. Other financial instruments for which the carrying amount did not equal fair value at December 31 were as follows: Carrying Fair Amount Value --------------------------- (in thousands) Long-term debt: At December 31, 2002 $512,040 $531,133 At December 31, 2001 $467,784 $474,911 Capital trust preferred securities: At December 31, 2002 $155,000 $156,853 At December 31, 2001 $115,000 $114,898 - -------------------------------------------------------------- The fair values for long-term debt and preferred securities were based on either closing market prices or closing prices 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 installed. Stock Options Southern Company provides non-qualified stock options to a large segment of the Company's employees ranging from line management to executives. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized because the exercise price of all options granted equaled the fair-market value on the date of grant. When options are exercised, the Company receives a capital contribution from Southern Company equivalent to the related income tax benefit. Comprehensive Income Comprehensive income - consisting of net income and changes in additional minimum pension liability, net of income taxes - is presented in the financial statements. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Provision for Injuries and Damages The Company is subject to claims and suits arising in the ordinary course of business. As permitted by regulatory authorities, the Company provides for the uninsured costs of injuries and damages by charges to income amounting to $1.2 million annually. The expense of settling claims is charged to a provision account. The accumulated provision of $0.7 million and $1.3 million at December 31, 2002 and 2001, respectively, is included in other current liabilities in the accompanying Balance Sheets. For further information see Note 3 under "Personal Injury Litigation." II-161 NOTES (continued) Gulf Power Company 2002 Annual Report Provision for Property Damage The Company provides for the cost of repairing damages from major storms and other uninsured property damages. This includes the cost of major storms and other damages to its transmission and distribution lines and the cost of uninsured damages to its generation facilities and other property. The expense of such damages is charged to the provision account. At December 31, 2002 and 2001, the accumulated provision for property damage was $15.5 million and $13.6 million respectively, and is included in other deferred credits in the accompanying balance sheets. The FPSC approved annual accrual to the accumulated provision for property damage is $3.5 million, with a target level for the accumulated provision account between $25.1 and $36.0 million. The FPSC had also given the Company the flexibility to increase its annual accrual amount above $3.5 million at the Company's discretion. The Company accrued $3.5 million in 2002, $4.5 million in 2001, and $3.5 million in 2000 to the accumulated provision for property damage. The Company had a net charge of $1.6 million to the provision account in 2002 and had a net credit of $(0.3) million to the provision account in 2001 related to insurance proceeds that exceeded actual claims. In 2000, the Company charged $0.3 million to the provision account. 2. RETIREMENT BENEFITS The Company has a defined benefit, trusteed, non-contributory pension plan that covers substantially all regular employees. The Company also provides certain non-qualified benefit plans for a selected group of management and highly compensated employees. The Company provides certain medical care and life insurance benefits for retired employees. Substantially all employees may become eligible for these benefits when they retire. Trusts are funded to the extent required by the Company's regulatory commissions. In late 2000, as well as in 2002, the Company adopted several pension and postretirement benefit plan changes that had the effect of increasing benefits to both current and future retirees. Plan assets consist primarily of domestic and international equities, global fixed income securities, real estate, and private equity investments. The measurement date for plan assets and obligations is September 30 for each year. The weighted average rates assumed in the actuarial calculations for both the pension plan and postretirement benefits plan were: 2002 2001 2000 - ------------------------------------------------------------------ Discount 6.50% 7.50% 7.50% Annual salary increase 4.00% 5.00% 5.00% Long-term return on plan assets 8.50% 8.50% 8.50% - ------------------------------------------------------------------ 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 --------------------------- 2002 2001 - --------------------------------------------------------------- (in thousands) Balance at beginning of year $169,251 $153,214 Service cost 4,910 4,703 Interest cost 12,394 11,644 Benefits paid (8,395) (8,105) Actuarial (gain)/loss and employee transfers, net 2,672 (195) Amendments - 7,997 Other 4,155 (7) - -------------------------------------------------------------- Balance at end of year $184,987 $169,251 ============================================================== Plan Assets --------------------------- 2002 2001 - --------------------------------------------------------------- (in thousands) Balance at beginning of year $233,706 $283,266 Actual return on plan assets (15,694) (40,841) Benefits paid (7,934) (7,758) Employee transfers 1,088 (961) - --------------------------------------------------------------- Balance at end of year $211,166 $233,706 =============================================================== II-162 NOTES (continued) Gulf Power Company 2002 Annual Report The accrued pension costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------- (in thousands) Funded status $26,179 $64,455 Unrecognized transition obligation (2,161) (2,832) Unrecognized prior service cost 14,874 11,689 Unrecognized net gain (6,589) (47,038) 4th quarter cash flow adjustment 85 90 - ------------------------------------------------------------- Prepaid asset, net 32,388 26,364 Portion included in benefit obligations 3,910 3,616 - ------------------------------------------------------------- Total Prepaid asset recognized in the Balance Sheets $36,298 $29,980 ============================================================= In 2002 amounts recognized in the Balance Sheets for accumulated other comprehensive income and intangible assets were $1.2 million and $0.9 million. In 2001, the amount recognized for intangible assets was $1.2 million. Components of the pension plan's net periodic cost were as follows: 2002 2001 2000 - ---------------------------------------------------------------- Service cost $ 4,910 $ 4,703 $ 4,367 Interest cost 12,394 11,644 10,695 Expected return on plan assets (20,431) (19,312) (17,504) Recognized net gain (2,746) (3,072) (2,582) Net amortization 298 165 (235) - ---------------------------------------------------------------- Net pension income $ (5,575) $ (5,872) $ (5,259) =============================================================== Postretirement Benefits Changes during the year in the accumulated benefit obligations and in the fair value of plan assets were as follows: Accumulated Benefit Obligations ------------------------- 2002 2001 - ------------------------------------------------------------- (in thousands) Balance at beginning of year $54,337 $50,025 Service cost 948 983 Interest cost 3,992 3,886 Benefits paid (1,984) (1,823) Amendments - 3,412 - ------------------------------------------------------------- Actuarial (gain)/loss 6,382 (2,146) - ------------------------------------------------------------- Balance at end of year $63,675 $54,337 ============================================================= Plan Assets ----------------------- 2002 2001 - ----------------------------------------------------------- (in thousands) Balance at beginning of year $11,632 $13,388 Actual return on plan assets (793) (1,830) Employer contributions 2,038 1,897 Benefits paid (1,984) (1,823) - ----------------------------------------------------------- Balance at end of year $10,893 $11,632 =========================================================== The accrued postretirement costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------- (in thousands) Funded status $(52,782) $(42,705) Unrecognized transition obligation 3,656 4,012 Unrecognized prior service cost 5,349 5,695 Unrecognized net loss 9,530 1,235 Fourth quarter contributions 581 386 - ------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $(33,666) $(31,377) ============================================================= II-163 NOTES (continued) Gulf Power Company 2002 Annual Report Components of the postretirement plan's net periodic cost were as follows: 2002 2001 2000 - ----------------------------------------------------------------- Service cost $ 948 $ 983 $ 896 Interest cost 3,991 3,886 3,515 Expected return on plan assets (1,100) (1,037) (901) Transition obligation 356 356 355 Prior service cost 346 299 159 Recognized net (gain)/loss (19) (18) 13 - ----------------------------------------------------------------- Net post-retirement cost $ 4,522 $ 4,469 $4,037 ================================================================= An additional assumption used in measuring the accumulated postretirement benefit obligations was a weighted average medical care cost trend rate of 9.25 percent for 2002, decreasing gradually to 5.25 percent through the year 2010, and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 2002 as follows (in thousands): 1 Percent Increase Decrease - --------------------------------------------------------------- Benefit obligation $4,846 $4,293 Service and interest costs $381 $325 =============================================================== Employee Savings Plan The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides a 75 percent matching contribution up to 6 percent of an employee's base salary. Total matching contributions made to the plan for the years 2002, 2001, and 2000 were $2.5 million, $2.3 million, and $2.2 million, respectively. 3. CONTINGENCIES AND REGULATORY MATTERS General Litigation Matters The Company is subject to certain claims and legal actions arising in the ordinary course of business. The Company's business activities are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against the Company cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the Company's financial statements. Environmental Cost Recovery In 1993, the Florida Legislature adopted legislation for an Environmental Cost Recovery Clause (ECRC), which allows an electric utility to petition the FPSC for recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. Such environmental costs include operation and maintenance expense, emission allowance expense, depreciation, and a return on invested capital. This legislation was amended in 2002 to allow recovery of costs incurred as a result of an agreement between the Company and FDEP for the purpose of ensuring compliance with ozone ambient air quality standards adopted by the EPA. During 2002, 2001, and 2000, the Company recorded ECRC revenues of $10.8 million, $10.0 million, and $9.9 million, respectively. At December 31, 2002, the Company's liability for the estimated costs of environmental remediation projects for known sites was $14.4 million. These estimated costs are expected to be expended from 2003 through 2012. These projects have been approved by the FPSC for recovery through the ECRC discussed above. Therefore, the Company recorded $1.3 million in current assets and current liabilities and $13.1 million in deferred assets and deferred liabilities representing the future recoverability of these costs. Environmental Protection Agency Litigation In November 1999, the EPA brought a civil action in the U.S. District Court against Alabama Power, Georgia Power, and SCS. The complaint alleges violations II-164 NOTES (continued) Gulf Power Company 2002 Annual Report of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, including the five facilities mentioned previously and the Company's Plants Crist and Scherer. See Note 5 under "Joint Ownership Agreements" related to the Company's ownership interest in Georgia Power's Plant Scherer Unit No. 3. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation, and to add the Company, Mississippi Power, and Savannah Electric as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities had failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. On August 1, 2000 the U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted SCS's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add Savannah Electric as a defendant, but denied the motion to add the Company and Mississippi Power based on lack of jurisdiction. As directed by the court, the EPA re-filed its amended complaint limiting claims to those brought against Georgia Power and Savannah Electric. Also, the EPA re-filed its claims against Alabama Power in the U.S. District Court in Alabama. It has not re-filed its claims against the Company, Mississippi Power, or SCS. The Alabama Power, Georgia Power, and Savannah Electric cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it has complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Personal Injury Litigation On January 28, 2003 a jury in Escambia County, Florida returned a verdict of $3 million against the Company arising out of an alleged electrical injury sustained by the plaintiff in January 1999 while inside his apartment. If the verdict is not overturned, the plaintiff will also be entitled to recover attorney's fees. The Company intends to seek a new trial; however, if the Company is not successful in obtaining a new trial, it intends to pursue an appeal. The ultimate outcome of this matter cannot now be determined but is not expected to have a material impact on the Company's financial statements. Right of Way Litigation In 2002, certain subsidiaries of Southern Company, including the Company, Georgia Power, Mississippi Power, Savannah Electric, and Southern Telecom (collectively, defendants), were named as defendants in numerous lawsuits brought by landowners regarding the installation and use of fiber optic cable over defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way II-165 NOTES (continued) Gulf Power Company 2002 Annual Report that cross the plaintiffs' properties, and that such actions by defendants exceed the easements or other property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment. The plaintiffs seek compensatory and punitive damages and injunctive relief. Defendants believe that the plaintiffs' claims are without merit. An adverse outcome in these matters could result in substantial judgments; however, the final outcome of these matters cannot now be determined. Retail Rate Case In September 2001 the Company filed a request with the FPSC for a base rate increase of approximately $70 million, the majority of which was related to the Plant Smith Unit 3 combined cycle facility which was placed in service in April 2002. In May 2002, the FPSC approved a retail base rate increase of $53.2 million effective June 7, 2002. Retail Revenue Sharing Plan In October 1999, the Office of Public Counsel, the Coalition for Equitable Rates, the Florida Industrial Power Users Group, and the Company jointly filed a petition with the FPSC that included a reduction to retail base rates of $10 million annually and provided for revenues to be shared within set ranges for 1999 through 2002. Customers received two-thirds of any revenue within the sharing range and the Company retained one-third. The stipulation also included authorization for the Company, at its discretion, to accrue up to an additional $5 million to the property insurance reserve and $1 million to amortize a regulatory asset related to the corporate office. The FPSC approved stipulation became effective in November 1999. The Company recorded revenues subject to refund (with interest) of $1.5 million in 2001 and $7.2 million in 2000. No refund was required in 2002. In addition to the refund, the Company amortized $1.0 million of the regulatory asset related to the corporate office and accrued an additional $1.0 million to the property insurance reserve in 2001. The sharing plan expired April 21, 2002. 4. COMMITMENTS Construction Program The Company is engaged in a continuous construction program, the cost of which is currently estimated to total $108 million in 2003, $150 million in 2004, and $156 million in 2005. 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. At December 31, 2002 significant purchase commitments were outstanding in connection with the construction program. Included in the amounts above, the Company has budgeted $34 million, $52 million, and $47 million in 2003, 2004, and 2005, respectively, for capital expenditures related to environmental controls at Plant Crist as part of an agreement with the FDEP to reduce NOx emissions. The FPSC authorized the Company to recover the costs related to these environmental projects through the Environmental Cost Recovery Clause. The Company's remaining construction program is related to maintaining and upgrading the transmission, distribution, and generating facilities. Long-Term Service Agreements The Company has entered into a Long-Term Service Agreement (LTSA) with General Electric (GE) for the purpose of securing maintenance support for combined cycle and combustion turbine generating facilities. In summary, the LTSA stipulates that GE will perform all planned inspections on the covered equipment, which includes the cost of all labor and materials. GE is also obligated to cover the costs of unplanned maintenance on the covered equipment subject to a limit specified in the contract. In general, the LTSA is in effect through two major inspection cycles of the unit. Scheduled payments to GE are made at various intervals based on actual operating hours of the unit. Total payment to GE under this agreement for facilities owned is currently estimated at $96.5 million over approximately 13 II-166 NOTES (continued) Gulf Power Company 2002 Annual Report years. However, the LTSA contains various cancellation provisions at the option of the Company. Payments made to GE prior to the performance of any planned inspections are recorded as a prepayment in the Balance Sheets. Inspection costs are capitalized or charged to expense based on the nature of the work performed. Fuel Commitments To supply a portion of the fuel requirements of its generating plants, the Company has entered into contract commitments for the procurement of fuel. In some cases, these contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. Total estimated obligations at December 31, 2002 were as follows: Year Fuel ---- ---------------- (in millions) 2003 $113 2004 90 2005 92 2006 93 2007 95 2008 and thereafter 312 ---------------------------------------------------------- Total commitments $795 ========================================================== In addition, SCS acts as an agent for the five operating companies, Southern Power, and Southern GAS with regard to natural gas purchases. Natural gas purchases (in dollars) are based on various indices at the actual time of delivery; therefore, only the volume commitments are firm. The Company's committed volumes are allocated based on usage projections as of December 31 as follows: Year Natural Gas ----- ---------------- (MMBtu) 2003 24,879,611 2004 15,595,381 2005 5,758,513 2006 3,696,035 2007 1,235,291 -------------------------------------------------------- Total commitments 51,164,831 ======================================================== Additional commitments for fuel will be required to supply the Company's future needs. Acting as an agent for all of Southern Company's operating companies, Southern Power and Southern GAS, SCS may enter into various types of wholesale energy and natural gas contracts. Each of the operating companies, Southern Power, and Southern GAS may be jointly and severally liable under these agreements. The creditworthiness of Southern Power and Southern GAS is currently inferior to the creditworthiness of the operating companies. Southern Company has entered into keep-well agreements with each of the operating companies to insure it will not subsidize or be responsible for any costs, losses, liabilities, or damages resulting from the inclusion of Southern Power or Southern GAS as a contracting party under these agreements. Lease Agreements The Company has operating lease agreements with various terms and expiration dates. Total operating lease expenses were $2.1 million, $1.9 million, and $2.4 million for 2002, 2001, and 2000, respectively. At December 31, 2002, estimated minimum rental commitments for noncancelable operating leases were as follows: Year Amounts ---- --------------- (in thousands) 2003 $2,141 2004 2,150 2005 2,165 2006 2,042 2007 2,038 2008 and thereafter 10,190 ------------------------------------------------------------ Total commitments $20,726 ============================================================ In 1989, the Company and Mississippi Power jointly entered into a twenty-two year operating lease agreement for the use of 495 aluminum railcars. In 1994, a second lease agreement for the use of 250 additional aluminum railcars was entered into for twenty-two years. Both of these leases are for the transportation of coal to Plant Daniel. At the end of each lease term, 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. II-167 NOTES (continued) Gulf Power Company 2002 Annual Report The Company, as a joint owner of Plant Daniel, is responsible for one half of the lease costs. The lease commitments above include the railcar lease amounts. The lease costs are charged to fuel inventory and are allocated to fuel expense as the fuel is used. These expenses are then recovered through the Company's fuel cost recovery clause. The Company's share of the lease costs charged to fuel inventories was $1.9 million in 2002 and $1.9 million in 2001. The annual amounts for 2003 through 2007 are expected to be $1.9 million, $1.9 million, $2.0 million, $2.0 million, and $2.0 million, respectively, and after 2007 are expected to total $10.2 million. Guarantees Prior to 1999, a subsidiary of Southern Company originated loans to residential customers of the operating companies for heat pump purchases. These loans were sold to Fannie Mae with recourse for any loan with payments outstanding over 120 days. The Company is responsible for the repurchase of its customers' delinquent loans. As of December 31, 2002, the outstanding loans guaranteed by the Company totaled $1 million and a loan loss reserve of $0.2 million has been recorded. 5. JOINT OWNERSHIP AGREEMENTS The Company and Mississippi Power jointly own Plant Daniel Unit No. 1 and Unit No. 2, which together represent capacity of 1,000 MWs. Plant Daniel is a generating plant located in Jackson County, Mississippi. In accordance with the operating agreement, Mississippi Power acts as the Company's agent with respect to the construction, operation, and maintenance of these units. The Company and Georgia Power jointly own the 818 MW capacity Plant Scherer Unit No. 3. Plant Scherer is a generating plant located near Forsyth, Georgia. In accordance with the operating agreement, Georgia Power acts as the Company's agent with respect to the construction, operation, and maintenance of the unit. The Company's pro rata share of expenses related to both plants is included in the corresponding operating expense accounts in the Statements of Income. At December 31, 2002, the Company's percentage ownership and its investment in these jointly owned facilities were as follows: Plant Plant Scherer Daniel Unit Unit No. 3 Nos. 1 & 2 (coal) (coal) ----------------------------- (in thousands) Plant In Service $187,768(1) $232,272 Accumulated Depreciation $77,476 $119,655 Construction Work in Progress $258 $3,512 Ownership 25% 50% - ------------------------------------------------------------------ (1) Includes net plant acquisition adjustment. 6. LONG-TERM POWER SALES AGREEMENTS The Company and the other operating affiliates have long-term contractual agreements for the sale of capacity to certain non-affiliated utilities located outside the system's service area. The unit power sales agreements are fixed and pertain to capacity related to specific generating units. Because the energy is generally sold at cost under these agreements, profitability is primarily affected by revenues from capacity sales. The capacity revenues from these sales were $19.9 million in 2002, $19.5 million in 2001, and $20.3 million in 2000. Unit power from specific generating plants of Southern Company is currently being sold to Florida Power Corporation (FPC), Florida Power & Light Company (FP&L), and Jacksonville Electric Authority (JEA). Under these agreements, 210 megawatts of net dependable capacity were sold by the Company during 2002. Sales will remain close to that level, unless reduced by FP&L, FPC, and JEA with a minimum of three years notice, until the expiration of the contracts in 2010. 7. INCOME TAXES At December 31, 2002, the tax-related regulatory assets to be recovered from customers were $ 18.8 million. These assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized allowance for funds used during construction. At December 31, 2002, the tax-related regulatory liabilities to be credited to customers were $29.7 II-168 NOTES (continued) Gulf Power Company 2002 Annual Report million. 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 as follows: 2002 2001 2000 ------------------------------------ (in thousands) Total provision for income taxes: Federal-- Current $24,474 $24,207 $37,250 Deferred 7,936 2,568 (11,159) - -------------------------------------------------------------------- 32,410 26,775 26,091 - -------------------------------------------------------------------- State-- Current 3,051 3,701 5,796 Deferred 1,683 826 (1,357) - -------------------------------------------------------------------- 4,734 4,527 4,439 - -------------------------------------------------------------------- Total $37,144 $31,302 $30,530 ==================================================================== 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: 2002 2001 --------------------------- (in thousands) Deferred tax liabilities: Accelerated depreciation $188,879 $179,071 Other 28,377 27,328 - --------------------------------------------------------------------- Total 217,256 206,399 - --------------------------------------------------------------------- Deferred tax assets: Federal effect of state deferred taxes 9,421 9,009 Postretirement benefits 10,826 9,379 Other 18,396 17,881 - --------------------------------------------------------------------- Total 38,643 36,269 - --------------------------------------------------------------------- Net deferred tax liabilities 178,613 170,130 Less current portion, net (10,924) (8,162) - --------------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $167,689 $161,968 ===================================================================== Deferred investment tax credits are amortized over the lives of the related property with such amortization normally applied as a credit to reduce depreciation and amortization in the Statements of Income. Credits amortized in this manner amounted to $1.8 million in 2002, $1.7 million in 2001, and 1.9 million in 2000. At December 31, 2002, 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: 2002 2001 2000 ---------------------------- Federal statutory rate 35% 35% 35% State income tax, net of federal deduction 3 4 4 Non-deductible book depreciation 1 1 1 Difference in prior years' deferred and current tax rate (2) (2) (2) Other, net (1) (3) (1) - ---------------------------------------------------------------- Effective income tax rate 36% 35% 37% ================================================================ The Company and the other subsidiaries of Southern Company file a consolidated federal tax return. Under a joint consolidated income tax agreement, each subsidiary's current and deferred tax expense is computed on a stand-alone basis. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. 8. CAPITALIZATION Preferred Securities Statutory business trusts formed by the Company, of which the Company owns all the common securities, have issued mandatorily redeemable preferred securities. The following securities are currently outstanding: Date of Maturity Issue Amount Rate Notes Date --------------------------------------------------- (millions) (millions) Trust I 01/1997 $40 7.625 $41 12/2036 Trust II 01/1998 45 7.000 46 12/2037 Trust III 11/2001 30 7.375 31 09/2041 Trust IV 12/2002 40 5.600* 41 11/2042 * Issued to redeem the 7.625 percent Trust I preferred securities in January 2003 at a five year initial fixed rate of 5.60 percent and, thereafter, at fixed rates determined through remarketings for specific periods of varying length or at floating rates determined by reference to 3-month LIBOR plus 3.49%. Substantially all of the assets of each trust are junior subordinated notes issued by the Company in the respective approximate principal amounts set forth above. The Company considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by the Company of the Trusts' payment obligations with respect to the II-169 NOTES (continued) Gulf Power Company 2002 Annual Report preferred securities. The Trusts are subsidiaries of the Company and accordingly are consolidated in the Company's financial statements. Securities Due Within One Year At December 31, 2002, the Company had an improvement fund requirement of $550,000. The first mortgage bond improvement fund requirement amounts to 1 percent of each outstanding series of bonds authenticated under the indenture prior to January 1 of each year, other than those issued to collateralize pollution control revenue bond obligations. The requirement may be satisfied by depositing cash, reacquiring bonds, or by pledging additional property equal to 1 and 2/3 times the requirement. The sinking fund requirements of first mortgage bonds were satisfied by certifying property additions in 2002 and 2001. It is anticipated that the 2003 requirement will be satisfied by certifying property additions. Sinking fund requirements and/or maturities through 2007 applicable to long-term debt are as follows: $60.6 million in 2003; $50.6 million in 2004; $0.6 million in 2005; $37.6 million in 2006; and $0.3 million in 2007. Dividend Restrictions The Company's first mortgage bond indenture contains various common stock dividend restrictions, which remain in effect as long as the bonds are outstanding. At December 31, 2002, retained earnings of $127 million were restricted against the payment of cash dividends on common stock under the terms of the mortgage indenture. Bank Credit Arrangements At December 31, 2002, the Company had $66.3 million of lines of credit with banks subject to renewal the following year, all of which remained unused. The $66.3 million in committed lines of credit provide liquidity support for Gulf's commercial paper program and for $3.9 million of daily variable rate pollution control bonds. In connection with these credit lines, the Company has agreed to pay commitment fees and/or to maintain compensating balances with the banks. The compensating balances, which represent substantially all of the cash of the Company except for daily working funds and like items, are not legally restricted from withdrawal. Certain credit arrangements contain covenants that limit the level of indebtedness to capitalization to 65 percent. Not meeting these limits would result in an event of default under the credit arrangements. In addition, certain credit arrangements contain cross default provisions to other indebtedness that would trigger an event of default if the borrower defaulted on indebtedness over a specified threshold. The cross default provisions are restricted only to indebtedness of the Company. The Company is currently in compliance with all such covenants. Borrowings under unused credit arrangements totaling $20 million would be prohibited if the Company experiences a material adverse change (as defined in such arrangements). The Company borrows through a commercial paper program that has the liquidity support of committed bank credit arrangements and through an extendible commercial note program. The amount of commercial paper outstanding at December 31, 2002 was $8.5 million. In addition, the Company has bid-loan facilities with five major money center banks that total $50 million, with none committed at December 31, 2002. Assets Subject to Lien The Company'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. 9. QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data for 2002 and 2001 are as follows: Net Income Operating Operating After Dividends Quarter Ended Revenues Income on Preferred Stock - ---------------------------------------------------------------------- (in thousands) March 2002 $160,933 $24,493 $11,717 June 2002 209,987 31,174 13,487 September 2002 245,601 65,661 33,979 December 2002 203,946 24,159 7,853 March 2001 $165,029 $24,785 $10,196 June 2001 180,430 30,702 14,770 September 2001 226,616 45,504 26,657 December 2001 153,128 16,268 6,684 - ---------------------------------------------------------------------- The Company's business is influenced by seasonal weather conditions and the timing of rate changes, among other factors. II-170
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 Gulf Power Company 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $820,467 $725,203 $714,319 $674,099 $650,518 Net Income after Dividends on Preferred Stock (in thousands) $67,036 $58,307 $51,843 $53,667 $56,521 Cash Dividends on Common Stock (in thousands) $65,500 $53,275 $59,000 $61,300 $57,200 Return on Average Common Equity (percent) 12.72 12.51 12.20 12.63 13.20 Total Assets (in thousands) $1,673,829 $1,573,133 $1,315,496 $1,308,495 $1,267,901 Gross Property Additions (in thousands) $106,624 $274,668 $95,807 $69,798 $69,731 - ---------------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $549,505 $504,894 $427,378 $422,313 $427,652 Preferred stock 4,236 4,236 4,236 4,236 4,236 Company obligated mandatorily redeemable preferred securities 155,000 115,000 85,000 85,000 85,000 Long-term debt 452,040 467,784 365,993 367,449 317,341 - ---------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $1,160,781 $1,091,914 $882,607 $878,998 $834,229 ================================================================================================================================== Capitalization Ratios (percent): Common stock equity 47.3 46.2 48.4 48.0 51.3 Preferred stock 0.4 0.4 0.5 0.5 0.5 Company obligated mandatorily redeemable preferred securities 13.4 10.5 9.6 9.7 10.2 Long-term debt 38.9 42.9 41.5 41.8 38.0 - ---------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0 ================================================================================================================================== Security Ratings: First Mortgage Bonds - Moody's A1 A1 A1 A1 A1 Standard and Poor's A+ A+ A+ AA- AA- Fitch A+ A+ AA- AA- AA- Preferred Stock - Moody's Baa1 Baa1 a2 a2 a2 Standard and Poor's BBB+ BBB+ BBB+ A- A Fitch A- A- A A A+ Unsecured Long-Term Debt - Moody's A2 A2 A2 A2 A2 Standard and Poor's A A A A A Fitch A A A+ A+ A+ ================================================================================================================================== Customers (year-end): Residential 333,757 327,128 321,731 315,240 307,077 Commercial 49,411 48,654 47,666 47,728 46,370 Industrial 281 270 280 267 257 Other 474 468 442 316 268 - ---------------------------------------------------------------------------------------------------------------------------------- Total 383,923 376,520 370,119 363,551 353,972 ================================================================================================================================== Employees (year-end): 1,339 1,309 1,327 1,339 1,328 - ----------------------------------------------------------------------------------------------------------------------------------
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SELECTED FINANCIAL AND OPERATING DATA 1998-2002 (continued) Gulf Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $365,693 $313,165 $302,210 $279,238 $279,621 Commercial 207,960 188,759 177,047 167,305 163,207 Industrial 89,385 81,719 74,095 68,222 71,119 Other 2,798 948 (4,712) 2,184 2,113 - ------------------------------------------------------------------------------------------------------------------------------- Total retail 665,836 584,591 548,640 516,949 516,060 Sales for resale - non-affiliates 77,171 82,252 66,890 62,354 61,893 Sales for resale - affiliates 40,391 27,256 66,995 66,110 42,642 - ------------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 783,398 694,099 682,525 645,413 620,595 Other revenues 37,069 31,104 31,794 28,686 29,923 - ------------------------------------------------------------------------------------------------------------------------------- Total $820,467 $725,203 $714,319 $674,099 $650,518 =============================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 5,143,802 4,716,404 4,790,038 4,471,118 4,437,558 Commercial 3,552,931 3,417,427 3,379,449 3,222,532 3,111,933 Industrial 2,053,668 2,018,206 1,924,749 1,846,237 1,833,575 Other 21,496 21,208 18,730 19,296 18,952 - ------------------------------------------------------------------------------------------------------------------------------- Total retail 10,771,897 10,173,245 10,112,966 9,559,183 9,402,018 Sales for resale - non-affiliates 2,156,741 2,093,203 1,705,486 1,561,972 1,341,990 Sales for resale - affiliates 1,720,240 962,892 1,916,526 2,511,983 1,758,150 - ------------------------------------------------------------------------------------------------------------------------------- Total 14,648,878 13,229,340 13,734,978 13,633,138 12,502,158 =============================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 7.11 6.64 6.31 6.25 6.30 Commercial 5.85 5.52 5.24 5.19 5.24 Industrial 4.35 4.05 3.85 3.70 3.88 Total retail 6.18 5.75 5.43 5.41 5.49 Sales for resale 3.03 3.58 3.70 3.15 3.37 Total sales 5.35 5.25 4.97 4.73 4.96 Residential Average Annual Kilowatt-Hour Use Per Customer 15,510 14,497 14,992 14,318 14,577 Residential Average Annual Revenue Per Customer $1,100.35 $962.57 $945.87 $894.18 $918.56 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,809 2,188 2,188 2,188 2,188 Maximum Peak-Hour Demand (megawatts): Winter 2,182 2,106 2,154 2,085 2,040 Summer 2,454 2,223 2,285 2,161 2,146 Annual Load Factor (percent) 55.3 57.5 55.4 55.2 55.3 Plant Availability Fossil-Steam (percent): 90.6 90.1 85.2 87.2 87.6 - ------------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 69.8 81.2 87.8 89.8 89.2 Gas 15.5 1.0 1.6 2.5 2.0 Purchased power - From non-affiliates 4.6 6.5 7.6 5.9 5.5 From affiliates 10.1 11.3 3.0 1.8 3.3 - ------------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 100.0 ===============================================================================================================================
II-172 MISSISSIPPI POWER COMPANY FINANCIAL SECTION II-173 MANAGEMENT'S REPORT Mississippi Power Company 2002 Annual Report The management of Mississippi Power Company (the Company) has prepared - and is responsible for - the financial statements and related information included in this report. These statements were prepared in accordance with accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 the accounting records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls, however, based on recognition that the cost of the system should not exceed its benefits. The Company believes its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's 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. Southern Company's audit committee of its board of directors, composed of five independent directors, provides a broad overview of management's financial reporting and control functions. Additionally, a committee of the Company's board of directors, composed of four outside directors, meets periodically with management, the internal auditors, and the independent public accountants to discuss auditing, internal controls, and compliance matters. The internal auditors and independent public accountants have access to the members of these committees 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 the Company in conformity with accounting principles generally accepted in the United States. /s/Michael D. Garrett Michael D. Garrett President and Chief Executive Officer /s/Michael W. Southern Michael W. Southern Vice President, Treasurer and Chief Financial Officer February 17, 2003 II-174 INDEPENDENT AUDITOR'S REPORT Mississippi Power Company: We have audited the accompanying balance sheet and statement of capitalization of Mississippi Power Company (a wholly owned subsidiary of Southern Company) as of December 31, 2002, and the related statements of income, comprehensive income, common stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of Mississippi Power Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Mississippi Power Company as of December 31, 2001, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described a change in the method of accounting for derivative instruments and hedging activities in their report dated February 13, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements (pages II-189 to II-209) present fairly, in all material respects, the financial position of Mississippi Power Company at December 31, 2002, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 THE FOLLOWING REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE COMPANY'S 2001 ANNUAL REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. SEE EXHIBIT 23(e)2 FOR ADDITIONAL INFORMATION. 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, 2001 and 2000, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 II-160 through II-176) referred to above present fairly, in all material respects, the financial position of Mississippi Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, effective January 1, 2001, Mississippi Power Company changed its method of accounting for derivative instruments and hedging activities. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 II-175 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Mississippi Power Company 2002 Annual Report RESULTS OF OPERATIONS Earnings Mississippi Power Company's net income after dividends on preferred stock of $73.0 million in 2002 and $63.9 million in 2001 increased $9.1 million and $8.9 million, respectively, from the prior year. The 2002 increase in net income was primarily attributable to the retail and wholesale rate increases in late 2001 and early 2002, respectively, and lower interest expense. The increase in net income for 2001 was due primarily to the commercial operation of Plant Daniel Units 3 and 4 and lower interest costs. The Company's 2000 net income after dividends on preferred stock of $55 million was relatively unchanged from the prior year. A condensed income statement for 2002 including the change by year is as follows: Increase (Decrease) Amount From Prior Year - ------------------------------------------------------------------ 2002 2002 2001 2000 - ------------------------------------------------------------------- (in thousands) Operating revenues $824,165 $ 28,100 $ 108,463 $54,598 - ------------------------------------------------------------------- Fuel 282,393 4,447 86,819 18,441 Purchased power 51,333 (43,911) (11,895) 36,052 Other operation and maintenance 232,013 41,015 23,193 (4,571) Depreciation and amortization 57,638 3,561 3,802 1,069 Taxes other than income taxes 55,518 10,552 (3,720) 793 - ------------------------------------------------------------------- Total operating expenses 678,895 15,664 98,199 51,784 - ------------------------------------------------------------------- Operating income 145,270 12,436 10,264 2,814 Other income (expense), net (26,378) 2,036 4,828 (2,412) Less -- Income taxes (45,879) (5,346) (6,177) (239) - ------------------------------------------------------------------- Net Income $ 73,013 $ 9,126 $ 8,915 $ 163 =================================================================== Revenues Details of the Company's operating revenues in 2002 and the prior two years are as follows: Amount -------------------------------------- 2002 2001 2000 -------------------------------------- (in thousands) Retail - prior year $489,153 $498,551 $469,434 Change in -- Base rates 38,143 - - Sales growth 566 (1,048) (11,510) Weather 3,533 (1,953) 7,167 Fuel cost recovery and other 5,432 (6,397) 33,460 - ----------------------------------------------------------------- Total retail 536,827 489,153 498,551 - ----------------------------------------------------------------- Sales for resale -- Non-affiliates 224,275 204,623 145,931 Affiliates 46,314 85,652 27,915 - ----------------------------------------------------------------- Total sales for resale 270,589 290,275 173,846 - ----------------------------------------------------------------- Other electric operating revenues 16,749 16,637 15,205 - ----------------------------------------------------------------- Total electric operating revenues $824,165 $796,065 $687,602 ================================================================= Percent change 3.5% 15.8% 8.6% - ----------------------------------------------------------------- Total retail revenues for 2002 increased approximately 9.7 percent when compared to 2001, primarily due to a retail rate increase which took effect in January 2002 and, to a lesser extent, higher kilowatt-hour energy sales resulting from colder winter weather. See Note 3 to the financial statements under "2001 Retail Rate Case" for additional information. Retail revenues for 2001 reflected a 1.9 percent decrease from 2000 due to lower energy sales to residential, commercial, and industrial customers as a result of mild weather and a slowdown in manufacturing activity in the Company's service territory. Retail revenues for 2000 reflected a 6.2 percent increase over the prior year due to increased fuel revenues and a positive weather impact. 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. Sales for resale to non-affiliates are influenced by the non-affiliate 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 II-176 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report southeastern Mississippi. Energy sales to these utilities increased 8.0 percent in 2002, decreased 3.7 percent in 2001 and increased 10.9 percent in 2000, with the related revenues increasing 19.8 percent, decreasing 2.4 percent and increasing 10.8 percent, respectively. The customer demand experienced by these utilities is determined by factors very similar to those of the Company. Revenues from sales for resale to non-affiliates increased in 2002 and 2001, primarily as the result of a new power sales contract associated with Plant Daniel Units 3 and 4 that began in June 2001 as well as colder winter months during 2002. Revenues from sales for resale to non-affiliates increased in 2000 as a result of off system sale transactions that were generally offset by corresponding purchase transactions. These transactions had no significant impact on net income. Energy sales to affiliated companies within the Southern Company electric system, as well as purchases, will vary from year to year depending on demand and the availability and cost of generating resources at each company. These sales do not have a significant impact on earnings. Kilowatt-hour (KWH) sales for 2002 and percent change by year were as follows: KWH Percent Change 2002 2002 2001 2000 ------------------------------------------------------------------ (in millions) Residential 2,300 6.3% (5.4)% 1.7% Commercial 2,902 2.1 (1.5) 1.3 Industrial 4,162 (2.7) (2.3) (0.7) Other 40 - (0.3) 2.5 -------- Total retail 9,404 0.1 (2.8) 0.5 Sales for Resale Non-Affiliated 5,380 7.4 36.4 12.9 Affiliated 1,587 (46.3) 552.3 (16.2) -------- Total 16,371 (5.3) 26.0 2.8 ================================================================== Total retail kilowatt-hour sales increased slightly in 2002 due to colder than average winter weather, which primarily affects residential sales. In addition, commercial sales increased 2.1 percent due primarily to growth in the health, education and retail sales areas. Industrial sales fell 2.7 percent in 2002 due to an economic downturn in the Company's service area. In 2001, residential sales decreased 5.4 percent due to unusually mild weather in the Company's service area. The commercial sales and industrial sales in 2001 decreased 1.5 percent and 2.3 percent, respectively, due to an economic slowdown. Total retail kilowatt-hour sales increased slightly in 2000, primarily as a result of weather impacts. Kilowatt-hour sales for non-affiliated sales for resale increased in 2002 and 2001 due to the increased demand from these customers and the commercial operation of Plant Daniel Units 3 and 4 in May 2001. Expenses Total operating expenses were $679 million in 2002, reflecting an increase of 2.4 percent over the prior year. The increase was due primarily to the increase in fuel expense, the increase in maintenance expense due to planned outages at Plant Watson and Plant Daniel and a full year of rental expense for Plant Daniel Units 3 and 4. In 2001, total operating expenses increased by 17.4 percent over the prior year due primarily to the commercial operation and related lease of Plant Daniel Units 3 and 4 beginning in May 2001. See Note 8 to the financial statements under "Lease Agreements" for additional information. In 2000, total operating expenses increased by 10.1 percent over the prior year due primarily to higher fuel and purchased power expenses. Fuel costs are the single largest expense for the Company. Fuel expenses for 2002, 2001 and 2000 increased 1.6 percent, 45.4 percent and 10.7 percent, respectively. The increase for 2002 was due to a fuel hedging loss, which is approved for recovery by the Mississippi Public Service Commission (MPSC) through the energy cost management plan (ECM). The 2001 increase was due to increased generation including Plant Daniel Units 3 and 4 and a higher average cost of fuel. The 2000 increase was due to increased generation and a higher average cost of fuel. In 2002, purchased power expense decreased 46.1 percent when compared to 2001. This decrease resulted from both lower prices and lower purchase requirements, primarily due to the commercial operation of Plant Daniel Units 3 and 4 beginning in May 2001. In 2001, purchased power expenses decreased 11.1 percent primarily due to the commercial operation of Plant Daniel Units 3 and 4 and the expiration of non-affiliated purchase power contracts in 2000. In 2000, purchased power expenses increased 51.0 percent primarily due to an increase in off-system purchases used to meet off-system sales commitments. These transactions had no significant effect on earnings. II-177 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated were as follows: 2002 2001 2000 - ---------------------------------------------------------------- Total generation (millions of kilowatt hours) 15,079 15,770 11,688 Sources of generation (percent) -- Coal 57 59 83 Gas 43 41 17 Average cost of fuel per net kilowatt-hour generated (cents) -- 2.03 1.89 1.80 - ---------------------------------------------------------------- Other operation expenses increased 17.4 percent in 2002 primarily due to lease payments associated with the commercial operation of Plant Daniel Units 3 and 4 and higher labor related expenses. In 2001, other operation expense increased 17.2 percent primarily due to an increase in other production expenses resulting from the commercial operation of Plant Daniel Units 3 and 4. In 2000, other operation expense decreased 8.2 percent primarily due to decreases in expenses related to labor costs, legal costs and services provided by SCS. Maintenance expense in 2002 increased 31.2 percent primarily due to scheduled maintenance performed at Plant Watson and Plant Daniel, while maintenance expense in 2001 increased 6.5 percent as a result of the commercial operation of Plant Daniel Units 3 and 4. Maintenance expense in 2000 increased 12 percent primarily due to additional scheduled maintenance. Depreciation and amortization expense increased 6.6 percent and 7.6 percent in 2002 and 2001, respectively, due to a growth in plant investment and amortization of the Company's regulatory asset related to the recovery of environmental compliance costs. See Note 3 to the financial statements under "Environmental Compliance Overview Plan" for further information. In 2000, depreciation expense increased 2.2 percent due to growth in plant investment and new depreciation rates, which became effective January 2000. Taxes other than income taxes increased 23.5 percent in 2002 due to additional property taxes related to the Plant Daniel Units 3 and 4 and higher municipal franchise taxes. These taxes decreased 7.6 percent in 2001 due to reductions in certain ad valorem tax rates. These taxes increased 1.7 percent in 2000 due to higher municipal franchise taxes resulting from higher retail revenues. Interest on long-term debt decreased in 2002 and 2001 as a result of lower interest rates on debt outstanding. Effects of Inflation The Company 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 utility plant with long economic lives. 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 securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed in the Company's approved electric rates. Future Earnings Potential General The results of continuing operations for the past three years are not necessarily indicative of future earnings potential. The level of the Company's future earnings depends on numerous factors. A major factor is a stable regulatory environment and the Company's ability to achieve energy sales growth while containing costs. Expenses are subject to constant review and cost control programs. The Company is also maximizing invested capital and minimizing the need for additional capital by refinancing outstanding obligations, managing the size of its fuel stockpile, raising generating plant availability and efficiency, and aggressively controlling its construction budget. In the near term, future earnings 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 the Company's service area. The Company anticipates somewhat slower growth in energy sales as the tourism industry stabilizes within its service area. In addition to tourism, the healthcare and retail trade sectors will provide most of the anticipated energy growth for the commercial class of II-178 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report customers, while shipbuilding, food products, and the U.S. government will provide much of the basis for anticipated growth in the industrial sector. The Company currently operates as a vertically integrated utility 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. The Federal Energy Regulatory Commission (FERC) regulates the Company's wholesale rate schedules, wholesale power sales contracts, and wholesale transmission services. In August 2001, the Company filed a request with the MPSC to increase annual retail rate revenues by approximately $46.4 million. In connection with this request, the MPSC suspended the semi-annual evaluations under Performance Evaluation Plan (PEP). In December 2001, the MPSC approved an increase of approximately $39 million, which took effect in January 2002. Additionally, the MPSC ordered the Company to reactivate the semi-annual evaluations under PEP, beginning with the 12-month period ending December 31, 2002. PEP will remain in effect until the MPSC modifies, suspends or terminates the plan. In May 2002, the MPSC issued an order adopting new return on equity models to be used in the PEP process. The new models are very similar to those that established the $39 million rate increase authorized in December 2001 and were incorporated into the PEP evaluation filing for the period ending December 31, 2002. See Note 3 to the financial statements under "Retail Rate Adjustment Plans" for additional information. In February 2002, the Company reached an agreement with certain of its wholesale customers to increase its wholesale tariff rates effective June 1, 2002. The FERC accepted the settlement agreement and placed the new tariff rates in effect without modification. The settlement agreement results in an annual increase in revenues of approximately $10.5 million, the adoption of an ECM provision, and the cost allocation of Plant Daniel Units 3 and 4, similar to the plans approved by the Company's retail jurisdiction. In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers' Accounting for Pensions, the Company recorded non-cash pension income, before taxes, of approximately $2.5 million. Future pension income is dependent on several factors including trust earnings and changes to the plan. Current estimates indicate a reversal of recording pension income to recording pension expense by as early as 2005. Postretirement benefit costs for the Company were $4 million in 2002 and are expected to continue to trend upward. A portion of pension income and postretirement benefit costs is capitalized based on construction-related labor charges. These costs are components of the Company's regulated rates and do not have a significant effect on net income. For more information, see Note 2 to the financial statements. The Company has a power sale contract with a subsidiary of Dynegy, Inc. (Dynegy). Dynegy is currently experiencing liquidity problems and its credit rating is now below investment grade. Minimum capacity revenues under this contract average approximately $21 million annually through May 2011. Dynegy has provided a letter of credit expiring in April 2003 totaling $26 million - approximately 15 months of capacity payments - to the Company. The letter of credit can be drawn in the event of a default under the agreement or the failure to renew the letter of credit prior to expiration. In the event of such a default, and if the Company is unable to resell that capacity into the market, future earnings could be affected. The outcome cannot now be determined. The Company is involved in various matters being litigated. See Note 3 to the financial statements for information regarding material issues that could possibly affect future earnings. Compliance costs related to current and future environmental laws, regulations, and litigation could affect earnings if such costs are not fully recovered. The Clean Air Act and other important environmental items are discussed later in Financial Condition under "Environmental Matters." Industry Restructuring The electric utility industry in the United States is continuing to evolve 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 II-179 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report IPPs to build power plants for a utility's large industrial and commercial customers where retail access is allowed and sell energy to other utilities. Also, electricity sales for resale rates are affected by numerous potential new energy suppliers, including power marketers and brokers. In 2002, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign and domestic electric infrastructure assets. The Company has not experienced any material financial impact regarding its limited energy trading operations through SCS. Although the Energy Act does not provide for retail customer access, it was a major catalyst for the current restructuring and consolidation taking place within the utility industry. Numerous federal and state initiatives to promote wholesale and retail competition are in various stages. Among other things, these initiatives allow retail customers in some states to choose their electricity provider. As these initiatives materialize, the structure of the utility industry could radically change. In May 2000, the MPSC ordered that its docket reviewing restructuring of the electric industry in the State of Mississippi be suspended. The MPSC found that retail competition may not be in the public interest at this time and ordered that no further formal hearings would be held on this subject. It also found that the current regulatory structure produced reliable low cost power and "should not be changed without clear and convincing demonstration that change would be in the public interest." The MPSC will continue to monitor retail and wholesale restructuring activities throughout the United States and reserves its right to order further formal hearings on the matter should new evidence demonstrate that retail competition would be in the public interest and all customers could receive a reduction in the total cost of their electric service. If the MPSC decides to hold future restructuring hearings on this matter, enactment could require numerous issues to be resolved, including recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. 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 the Company remains a low-cost producer and provides quality service, the Company's energy sales growth could be limited, and this could significantly erode earnings. FERC Matters In December 1999, the FERC issued its final ruling on Regional Transmission Organizations (RTOs). The order encourages utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company and its operating companies, including the Company, have submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2001, Entergy Corporation and Cleco Power joined SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans' sponsors petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on the Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the II-180 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company. Any impact of this proposal on the Company will depend on the form in which final rules may be ultimately adopted; however, the Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. In January 2002, the FERC began conducting an investigation to determine whether the cost of debt and the cost of preferred stock reflected in the amount charged under the Transmission Facilities Agreement between Entergy Corp. and the Company, when considered in light of other aspects of the contract, yield an overall just and reasonable rate. The hearing is scheduled for September 2003. The Company believes that it is in full compliance with the terms of the contract, which has been in place since 1982, and does not believe that the FERC investigation will have a significant impact on the Company's financial results. However, the outcome of the FERC's investigation cannot be predicted. Accounting Policies Critical Policies The Company's significant accounting policies are described in Note 1 to the financial statements. The Company's most critical accounting policy involves rate regulation. The Company is subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of 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. Additionally, the Company accounts for its lease agreement with Escatawpa Funding, Limited Partnership (Escatawpa) as an operating lease. Under this agreement, Escatawpa, a special purpose entity, is owner-lessor of the combined-cycle generating units at the Company's Plant Daniel. The Company does not consolidate this entity since parties unrelated to the Company have made substantive residual equity capital investments in excess of 3 percent. Recently, FASB Interpretation No. 46, Consolidation of Variable Interest Entities, was issued. Under Interpretation No. 46, Escatawpa is a variable interest entity, which the Company, as primary beneficiary, would be required to consolidate, including both the leased asset and related debt, as of July 1, 2003. Unless the Escatawpa arrangement is restructured to comply with Interpretation No. 46, the Company would recognize a cumulative effect adjustment of approximately $13 million, net of tax, related to depreciation. The Company's current operating lease arrangement with Escatawpa has been reviewed and approved by the MPSC and is reflected and approved for recovery in both its retail and wholesale rate jurisdictions. Consolidation of the leased asset and related debt or restructuring this arrangement could require the Company to seek additional regulatory review. The Company will continue to analyze the impact of Interpretation No. 46 and its regulatory and restructuring options. See "Financial Condition - Off-Balance Sheet Financing Arrangements" herein and Note 8 to the financial statements under "Lease Agreements" for additional information. New Accounting Standards Derivatives - ----------- Effective January 2001, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-03. In October 2002, the Company prospectively adopted the EITF's requirements to reflect the impact of certain energy trading contracts on a net basis. This change had no material impact on the Company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on the Company's current accounting treatment. Asset Retirement Obligations - ---------------------------- Prior to January 2003, the Company accrued for the ultimate cost of retiring most long-lived assets over the life of the related asset through depreciation II-181 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report expense. FASB Statement No. 143, Accounting for Asset Retirement Obligations, establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. For more information regarding the impact of adopting this standard effective January 1, 2003, see Note 1 to the financial statements under "Regulatory Assets and Liabilities" and "Depreciation and Amortization." Guarantees - ---------- In November 2002, the FASB issued Interpretation No. 45, Accounting and Disclosure Requirements for Guarantees. This interpretation requires disclosure of certain direct and indirect guarantees as reflected in Note 8 to the financial statements under "Lease Agreements." Also, the interpretation requires recognition of a liability at inception for certain new or modified guarantees issued after December 31, 2002. The adoption of Interpretation No. 45 in January 2003 did not have a material impact on the financial statements. FINANCIAL CONDITION Overview The principal change in the Company's financial condition during 2002 was the addition of approximately $67 million to utility plant. See the Statements of Cash Flows for additional information. Off-Balance Sheet Financing Arrangements In 1999, the Company signed an Agreement for Lease and a Lease Agreement with Escatawpa. These agreements called for the Company to design and construct, as agent for Escatawpa, a 1,064 megawatt natural gas combined cycle facility at the Company's Plant Victor J. Daniel Facility (the Facility). In May 2001, the Facility was completed, placed into commercial operation and the initial 10-year lease term began. The completion cost was approximately $370 million. The lease provides for a residual value guarantee (approximately 71 percent of the completion cost) by the Company that is due upon termination of the lease in certain circumstances. The lease also includes a purchase and renewal option based on the completion cost of the Facility. The Company is required to amortize approximately 10 percent of the initial completion cost over the initial ten year period. Eighteen months prior to the end of the initial lease, the Company may elect to renew for another 10 years. If the Company elects to renew the lease, the agreement calls for the Company to amortize an additional 17 percent of the initial completion cost over the renewal period. Upon termination of the lease, at the Company's option, the Company may either exercise its purchase option or the Facility can be sold to a third party. The Company expects that the fair market value of the Facility would substantially reduce or eliminate the payment under the residual value guarantee. In 2002 and 2001, the Company recognized approximately $26 million and $18 million, respectively, in lease expense which includes approximately $3.5 million and $2.4 million, respectively, related to the amortization of the initial completion cost. Credit Rating Risk The Company does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain fixed-price physical gas purchase contracts that could require collateral - but not accelerated payment - in the event of a credit rating change to below investment grade; however, at December 31, 2002, this exposure was immaterial. Market Price Risk Due to cost-based rate regulations, the Company has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. Company policy is that derivatives are to be used primarily for hedging purposes. II-182 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average rate on variable long-term debt outstanding at December 31, 2002 was 1.6 percent. Based on the Company's overall variable rate long-term debt exposure at December 31, 2002, a near-term 100 basis point change in interest rates would not materially affect the Company's financial statements. See Note 1 to the financial statements under "Financial Instruments" for additional information. In addition, the Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. 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. At December 31, 2002, exposure from these activities was not material to the Company's financial statements. Fair value of changes in energy contracts and year-end valuations are as follows: Change in Fair Value - ------------------------------------------------------------- 2002 2001 - ------------------------------------------------------------ (in thousands) Contracts beginning of year $(3,830) $ 112 Contracts realized or settled (1,562) (101) Current period changes 18,256 (3,841) - ------------------------------------------------------------- Contracts end of year $12,864 $(3,830) ============================================================ At December 31, 2002, all of these contracts are actively quoted and mature within one year. These contracts are related to fuel hedging programs under which unrealized gains and losses from mark to market adjustments are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the Company's fuel cost recovery clauses. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. For the years ended December 31, 2002 and 2001, these amounts were not material. See Note 1 to the financial statements under "Financial Instruments" for additional information. Financing Activity During 2002, the Company continued a program to retire higher-cost debt and replace these securities with lower-cost capital. See the Statements of Cash Flows for further details. As a result, composite financing rates have decreased as follows: 2002 2001 2000 ----------------------------- Composite interest rate on long-term debt 4.10% 4.60% 6.41% Composite preferred stock dividend rate 6.33% 6.33% 6.33% Composite interest rate on preferred securities 7.20% 7.75% 7.75% ------------------------------------------------------------ In February 2003, the Company redeemed $33 million of 7.45% first mortgage bonds, originally due in 2023, and $850,000 of 5.8% pollution control issuance bonds, originally due in 2007. Capital Structure The Company's ratio of common equity to total capitalization, excluding long-term debt due within one year, decreased from 62.1 percent in 2001 to 62.5 percent at December, 31 2002. Capital Requirements for Construction The Company's projected construction expenditures for the next three years total $237 million ($76 million in 2003, $86 million in 2004, and $75 million in 2005). The major emphasis within the construction program will be on the upgrade of existing facilities. Actual construction costs may vary from this estimate because of changes in such factors as: business conditions; environmental regulations; FERC rules and transmission regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurances that costs related to capital expenditures will be fully recovered. Other Capital Requirements In addition to the funds required for the Company's construction program, approximately $115 million will be required by the end of 2004 for present sinking fund requirements and maturities of long-term debt. The Company plans to continue, when economically feasible, to retire higher cost debt and preferred II-183 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report stock and replace these obligations with lower-cost capital if market conditions permit. The capital requirements, lease obligations, and purchase commitments - discussed in Notes 4 and 8 to the financial statements - are as follows: 2003 2004 2005 - ---------------------------------------------------------------- (in thousands) Bonds - First mortgage $33,350 $ - $ - Pollution control 850 25 25 Senior notes 35,000 80,000 - Lease obligations 28,000 27,800 27,500 Purchase commitments fuel 191,000 74,000 6,000 Other post retirement benefits 330 330 330 - ---------------------------------------------------------------- Sources of Capital At the beginning of 2003, the Company had not used any of its available credit arrangements. Credit arrangements are as follows: Expires ---------------------------------- Total Unused 2003 2004 & Beyond - ----------------------------------------------------------------- (in millions) $97.5 $97.5 $97.5 - - ----------------------------------------------------------------- In addition to these arrangements, to meet short-term cash needs and contingencies, the Company had approximately $63 million of cash and cash equivalents as well as significant cash flow from operating activities. See the Statement of Cash Flows and Note 7 to the financial statements under "Bank Credit Arrangements" for additional information. The Company may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of the Company and the other Southern Company operating companies. At December 31, 2002, the Company had no outstanding commercial paper or extendible commercial notes. At December 31, 2002, the Company's current liabilities exceed current assets because of scheduled maturity of $35 million in senior notes and the redemption in February 2003 of the 7.45% First Mortgage Bonds in the amount of $33.4 million and the 5.80% Pollution Control Bonds in the amount of $850,000. 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 issuance of unsecured debt and preferred securities, in addition to pollution control revenue bonds issued for the Company's benefit by public authorities. The Company has no restrictions on the amounts of unsecured indebtedness it may incur. However, the Company 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 high enough to permit, at present interest rate levels, any foreseeable security sales. The amount of securities which the Company will be permitted to issue in the future will depend upon market conditions and other factors prevailing at that time. Environmental Matters New Source Review Enforcement Actions On November 3, 1999, the Environmental Protection Agency (EPA), brought a civil action in the U.S. District Court against Alabama Power Company, Georgia Power Company, and SCS. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, which includes the five facilities mentioned previously and the Company's plants Watson and Greene County. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation, and to add Gulf Power, Savannah Electric, and the Company as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of II-184 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report violation allege that the utilities had failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted the system service company's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add Savannah Electric as a defendant, but it denied the motion to add Gulf Power and the Company based on lack of jurisdiction over those companies. As directed by the court, the EPA re-filed its amended complaint limiting claims to those brought against Georgia Power and Savannah Electric. Also, the EPA re-filed its claims against Alabama Power in the U.S. District Court in Alabama. It has not re-filed against Gulf Power, SCS, or the Company. The Alabama Power, Georgia Power, and Savannah Electric cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes civil penalties of up to $27,500 per day per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. An adverse outcome of this matter could establish legal precedent that eventually could require substantial capital expenditures that cannot be determined at this time and possibly require payment of substantial penalties. This could affect future results of operations, cash flows and possibly financial condition unless such costs can be recovered through regulated rates. Environmental Statutes and Regulations The Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations has been and will continue to be, a significant focus for the Company. The Title IV acid rain provisions of the Clean Air Act, for example, required significant reductions in sulfur dioxide and nitrogen oxide emissions. Compliance was required in two phases - Phase I, effective in 1995 and Phase II, effective in 2000. Construction expenditures associated with Phase I were $65 million and Phase II cost did not have a material impact on the company. In September 1998, the EPA issued regional nitrogen oxide reduction rules to the states for implementation. Compliance is required by May, 31, 2004 for most states, including Alabama. The final rules affect 21 states that do not include Mississippi. The EPA is presently evaluating whether or not to bring an additional 15 states, including Mississippi, under this regional nitrogen oxide rule. The Company'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. The Company's management believes that the ECO Plan provides for recovery of the Clean Air Act costs; however, there can be no assurance that all Clean Air Act Costs will be recovered. See Note 3 to the financial statements under "Environmental Compliance Overview Plan" for additional information. II-185 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report In July 1997, the EPA revised the national ambient air quality standards for ozone and fine particulate matter. These revisions made the standards significantly more stringent. In the subsequent litigation of these standards, the U.S. Supreme Court found the EPA's implementation program for the new ozone standard unlawful and remanded it to the EPA for further rulemaking. The EPA is expected to propose implementation rules designed to address the court's concerns in 2003 and issue final implementation rules in 2004. The remaining legal challenges to the new standards, which were pending before the U.S. Court of Appeals, District of Columbia Circuit, have been resolved. The EPA plans to designate areas as attainment or nonattainment with the new eight-hour ozone standard by April 2004 and with the new fine particulate standard by December 2004. Based on the most recent air monitoring data, it is likely that the three coastal counties of Mississippi would initially be in attainment with the new eight-hour average ozone standard and the fine particulate matter standard. The impact of any new standards will depend on the development and implementation of applicable regulations. The EPA has also announced plans to issue a proposed Regional Transport Rule for the fine particulate matter standard by the end of 2003 and to finalize the rule in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. It is not possible at this time to determine the effect such a rule would have on the Company. Further reductions in sulfur dioxide could also be required under the EPA's Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. The Company has two plants that could be subject to these rules. The EPA regional haze program calls for the State of Mississippi to submit State Implementation Plans that contain emission reduction strategies for achieving progress toward the visibility improvement goal. The State of Mississippi is on schedule to accomplish this by December 2007. In 2002, however, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded the BART provisions of the federal Regional Haze rules to the EPA for further rulemaking. Because new BART rules have not been developed, it is not possible to determine the effect of these rules on the company at this time. The EPA's Compliance Assurance Monitoring (CAM) regulations under Title V of the Clean Air Act require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. The regulations require certain facilities with Title V operating permits to develop and submit a CAM plan to the appropriate permitting authority upon applying for renewal of the facility's Title V operating permit. The Company will be applying for renewal of certain Title V operating permits beginning in 2003. The Company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, the Company cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements. Actual ongoing monitoring costs are expensed as incurred and are not material for any period presented. In December 2000, having completed its utility studies for mercury and other hazardous air pollutants (HAPS), the EPA issued a determination that an emission control program for mercury and, perhaps, other HAPS is forthcoming. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. The EPA currently plans to issue proposed rules regulating mercury emissions from electric utility boilers by the end of 2003, and those regulations are scheduled to be finalized by the end of 2004. Compliance could be required as early as 2007. Because the rules have not yet been proposed, the costs associated with compliance cannot be determined at this time. In December 2002, the EPA issued final and proposed revisions to the New Source Review program under the Clean Air Act. In February 2003, several northeastern states petitioned the D.C. Circuit Court for a stay of the final rules. The proposed rules are open to public comment and may be revised before being finalized by the EPA. If fully implemented, these proposed and final regulations could affect the applicability of the New Source Review provisions II-186 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report to activities at the Company's facilities. In any event, any final regulations must be adopted by the state of Mississippi in order to apply to the Company's facilities. The effect of these proposed and final rules cannot be determined at this time. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002, proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the 107th Congress. Similar bills have been, and are anticipated to be, introduced in 2003. The Bush Administration's Clear Skies Act was recently reintroduced, and President Bush has stated that it will be high priority for the Administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. The cost impacts of such legislation would depend upon the specific requirements enacted. Domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and, specifically, the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. The Bush Administration does not support U.S. ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction legislation and has instead announced a new voluntary climate initiative which seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. The Company is involved in a voluntary electric utility industry sector climate change initiative in partnership with the government. Because this initiative is still under development, it is not possible to determine the effect on the Company at this time. The Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste and release of hazardous substances. Under these various laws and regulations, the Company could incur costs to clean up properties. However, such costs are expected to be recovered through the ECO Plan. The Company conducts studies to determine the extent of any required clean up and have recognized in the financial statements the costs to clean up known sites. Should remediation be determined to be probable, reasonable estimates of costs to clean up such sites are developed and recognized in the financial statements. Under the Clean Water Act, the EPA is developing new rules aimed at reducing impingement and entrainment of fish and fish larvae at cooling water intake structures that will require numerous biological studies, and perhaps, retrofits to some intake structures at existing power plants. The new rule was proposed in February 2002 and will be finalized by February 2004. The impact of any new standards will depend on the development and implementation of applicable regulations. Also, under the Clean Water Act, the EPA and Mississippi Department of Environmental Quality (MDEQ) are developing total maximum daily loads (TMDLs) for certain impaired waters. Establishment of maximum loads by the EPA or state agencies may result in lowering permit limits for various pollutants and a requirement to take additional measures to control non-point source pollution (e.g. storm water runoff) at facilities discharging into waters for which TMDLs are established. It is not possible to determine the effect on the Company at this time. The EPA and MDEQ are reviewing and evaluating various other matters including limits on pollutant discharges to impaired waters, hazardous waste disposal requirements, and other regulatory matters. The impact of any new standards will depend on the development and implementation of applicable regulations. 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; the Toxic Substances Control Act; the Emergency Planning and Community Right-to-Know Act; and the Endangered Species Act. Compliance with possible additional federal or state legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could also significantly affect the Company. The impact of any II-187 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 2002 Annual Report new legislation, or changes to existing legislation could affect many areas of the Company's operations. However, the full impact of any such changes cannot be determined at this time. Cautionary Statement Regarding Forward-Looking Information This Annual Report includes forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning projected sales growth and scheduled completion of new generation. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "projects," "potential," or "continue" or the negative of these terms or other comparable terminology. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which the Company is subject, as well as changes in application of existing laws and regulations; current and future litigation; the effects, extent and timing of the entry of additional competition in the markets of the Company; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to the Company; the ability of counterparties of the Company to make payments as and when due; the effects of, and changes in, economic conditions in the areas in which the Company operates, including the current soft economy; the direct or indirect effects on the Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the ability of the Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time by the Company with the Securities and Exchange Commission. 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STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001, and 2000 Mississippi Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Retail sales $536,827 $489,153 $498,551 Sales for resale -- Non-affiliates 224,275 204,623 145,931 Affiliates 46,314 85,652 27,915 Other revenues 16,749 16,637 15,205 - --------------------------------------------------------------------------------------------------------------------------- Total operating revenues 824,165 796,065 687,602 - --------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 282,393 277,946 191,127 Purchased power -- Non-affiliates 18,550 41,254 56,082 Affiliates 32,783 53,990 51,057 Other 158,354 134,845 115,055 Maintenance 73,659 56,153 52,750 Depreciation and amortization 57,638 54,077 50,275 Taxes other than income taxes 55,518 44,966 48,686 - --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 678,895 663,231 565,032 - --------------------------------------------------------------------------------------------------------------------------- Operating Income 145,270 132,834 122,570 Other Income and (Expense): Interest income 655 369 347 Interest expense (18,650) (23,568) (28,101) Distributions on preferred securities of subsidiary (3,016) (2,712) (2,712) Other income (expense), net (3,354) (532) (647) - --------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (24,365) (26,443) (31,113) - --------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 120,905 106,391 91,457 Income taxes 45,879 40,533 34,356 - --------------------------------------------------------------------------------------------------------------------------- Earnings Before Cumulative Effect of 75,026 65,858 57,101 Accounting Change Cumulative effect of accounting change-- less income taxes of $43 thousand - 70 - - --------------------------------------------------------------------------------------------------------------------------- Net Income 75,026 65,928 57,101 Dividends on Preferred Stock 2,013 2,041 2,129 - --------------------------------------------------------------------------------------------------------------------------- Net Income After Dividends on Preferred Stock $ 73,013 $ 63,887 $ 54,972 =========================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001, and 2000 Mississippi Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 75,026 $ 65,928 $ 57,101 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 61,930 58,105 54,638 Deferred income taxes and investment tax credits, net (3,404) (9,718) 752 Pension, postretirement, and other employee benefits 730 (2,467) (4,801) Other, net 2,017 4,349 3,054 Changes in certain current assets and liabilities -- Receivables, net 6,120 (7,796) (3,231) Fossil fuel stock 4,186 (20,269) 14,577 Materials and supplies 1,160 (1,529) (1,056) Other current assets (13,346) 138 520 Accounts payable 18,487 53,462 1,309 Taxes accrued 3,160 4,695 3,169 Other current liabilities 34,770 6,977 (737) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 190,836 151,875 125,295 - ----------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (67,460) (61,193) (81,211) Cost of removal net of salvage (9,987) (3,042) (5,718) Other (3,471) 54 (3,435) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (80,918) (64,181) (90,364) - ----------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase (decrease) in notes payable, net (15,973) (40,027) (1,500) Proceeds -- Pollution control bonds 42,625 - - Senior notes 80,000 - 100,000 Preferred securities 35,000 - - Capital contributions from parent company 18,025 73,095 12,659 Redemptions -- First mortgage bonds (650) (36,000) - Pollution control bonds (42,645) (20) (20) Senior notes (80,550) (21,001) (1,385) Other long-term debt - - (80,000) Preferred securities (35,000) - - Payment of preferred stock dividends (2,013) (2,041) (2,129) Payment of common stock dividends (63,500) (50,200) (54,700) Other (1,492) (81) (498) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided from (used for) financing activities (66,173) (76,275) (27,573) - ----------------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents 43,745 11,419 7,358 Cash and Cash Equivalents at Beginning of Period 18,950 7,531 173 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 62,695 $ 18,950 $7,531 =================================================================================================================================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest $17,743 $28,126 $30,570 Income taxes (net of refunds) 44,088 45,761 33,276 - ----------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Mississippi Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------------- Assets 2002 2001 - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents $ 62,695 $ 18,950 Receivables -- Customer accounts receivable 31,136 30,254 Unbilled revenues 18,434 17,946 Under recovered regulatory clause revenues 27,233 15,086 Other accounts and notes receivable 8,056 26,068 Affiliated companies 20,674 22,569 Accumulated provision for uncollectible accounts (718) (856) Fossil fuel stock, at average cost 27,303 31,489 Materials and supplies, at average cost 22,063 23,223 Assets from risk management activities 13,061 71 Deferred income tax assets 18,675 8,819 Other 7,469 7,112 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 256,081 200,731 - --------------------------------------------------------------------------------------------------------------------------------- Property, Plant, and Equipment: In service 1,786,378 1,741,499 Less accumulated provision for depreciation 722,231 698,681 - --------------------------------------------------------------------------------------------------------------------------------- 1,064,147 1,042,818 Construction work in progress 34,065 38,253 - --------------------------------------------------------------------------------------------------------------------------------- Total property, plant, and equipment 1,098,212 1,081,071 - --------------------------------------------------------------------------------------------------------------------------------- Other Property and Investments 1,768 1,900 - --------------------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 12,617 13,394 Prepaid pension costs 14,993 11,171 Unamortized debt issuance expense 4,304 4,396 Unamortized premium on reacquired debt 7,776 6,719 Other 16,415 20,821 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 56,105 56,501 - --------------------------------------------------------------------------------------------------------------------------------- Total Assets $1,412,166 $1,340,203 ================================================================================================================================= The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Mississippi Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity 2002 2001 - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Current Liabilities: Securities due within one year $69,200 $ 80,020 Notes payable - 15,973 Accounts payable -- Affiliated 22,396 16,642 Other 91,710 82,072 Customer deposits 6,855 6,540 Taxes accrued -- Income taxes 12,042 14,981 Other 41,464 35,282 Interest accrued 6,562 5,079 Vacation pay accrued 5,782 5,810 Regulatory clauses over recovery 35,680 13,296 Other 8,504 12,040 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 300,195 287,735 - --------------------------------------------------------------------------------------------------------------------------------- Long-term debt (See accompanying statements) 243,715 233,753 - --------------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 146,631 138,913 Deferred credits related to income taxes 20,798 23,626 Accumulated deferred investment tax credits 21,054 22,268 Employee benefits provisions 49,869 45,827 Other 45,142 29,592 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 283,494 260,226 - --------------------------------------------------------------------------------------------------------------------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trust holding company junior subordinated notes (See accompanying statements) 35,000 35,000 - --------------------------------------------------------------------------------------------------------------------------------- Preferred stock (See accompanying statements) 31,809 31,809 - --------------------------------------------------------------------------------------------------------------------------------- Common stockholder's equity (See accompanying statements) 517,953 491,680 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $1,412,166 $1,340,203 ================================================================================================================================= Commitments and Contingent Matters (See notes) - --------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CAPITALIZATION At December 31, 2002 and 2001 Mississippi Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Long-Term Debt: First mortgage bonds -- Maturity Interest Rates -------- -------------- June 1, 2023 7.45% $ 33,350 $ 34,000 December 1, 2025 6.875% 30,000 30,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total first mortgage bonds 63,350 64,000 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term notes payable -- 6.05% due May 1, 2003 35,000 35,000 6.75% due June 30, 2038 51,628 52,178 Adjustable rates (1.51% at 1/1/03) due 2004 80,000 80,000 - ----------------------------------------------------------------------------------------------------------------------------------- Total long-term notes payable 166,628 167,178 - ----------------------------------------------------------------------------------------------------------------------------------- Other long-term debt -- Pollution control revenue bonds -- Collateralized: 5.80% due October 1, 2007 850 870 5.65% due November 1, 2023 - 25,875 Non-collateralized: Variable rates (1.75% to 1.85% at 1/1/03) due 2020-2028 82,695 56,820 - ----------------------------------------------------------------------------------------------------------------------------------- Total other long-term debt 83,545 83,565 - ----------------------------------------------------------------------------------------------------------------------------------- Unamortized debt premium (discount), net (608) (970) - ----------------------------------------------------------------------------------------------------------------------------------- Total long-term debt (annual interest requirement -- $14.5 million) 312,915 313,773 Less amount due within one year 69,200 80,020 - ----------------------------------------------------------------------------------------------------------------------------------- Long-term debt excluding amount due within one year $243,715 $233,753 29.5% 29.5% - -----------------------------------------------------------------------------------------------------------------------------------
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STATEMENTS OF CAPITALIZATION (continued) At December 31, 2002 and 2001 Mississippi Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Company Obligated Mandatorily Redeemable Preferred Securities:(See notes) $25 liquidation value -- 7.20% $ 35,000 $ - 7.75% - 35,000 - ------------------------------------------------------------------------------------------------------------------------------- Total (annual distribution requirement -- $2.5 million) 35,000 35,000 4.2 4.4 - ------------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock: $100 par value 4.40% to 7.00% 31,809 31,809 - ------------------------------------------------------------------------------------------------------------------------------- Total (annual dividend requirement -- $2.0 million) 31,809 31,809 3.8 3.9 - ------------------------------------------------------------------------------------------------------------------------------- Common Stockholder's Equity: Common stock, without par value -- Authorized - 1,130,000 shares Outstanding - 1,121,000 shares in 2001 and 2000 37,691 37,691 Paid-in capital 285,280 267,256 Premium on preferred stock 326 326 Retained earnings 195,920 186,407 Accumulated other comprehensive income (loss) (1,264) - - ------------------------------------------------------------------------------------------------------------------------------- Total common stockholder's equity 517,953 491,680 62.5 62.1 - ------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $828,477 $792,242 100.0% 100.0% =============================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2002, 2001, and 2000 Mississippi Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------------- Premium on Other Common Paid-In Preferred Retained Comprehensive Stock Capital Stock Earnings Income (loss) Total - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1999 $37,691 $181,502 $326 $172,449 $ - $391,968 Net income after dividends on preferred stock - - - 54,972 - 54,972 Capital contributions from parent company - 12,659 - - - 12,659 Cash dividends on common stock - - - (54,700) - (54,700) Other - - - (1) - (1) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 37,691 194,161 326 172,720 - 404,898 Net income after dividends on preferred stock - - - 63,887 - 63,887 Capital contributions from parent company - 73,095 - - - 73,095 Cash dividends on common stock - - - (50,200) - (50,200) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 37,691 267,256 326 186,407 - 491,680 Net income after dividends on preferred stock - - - 73,013 - 73,013 Capital contributions from parent company - 18,025 - - - 18,025 Other comprehensive income (loss) - - - - (1,264) (1,264) Cash dividends on common stock - - - (63,500) - (63,500) Other - (1) - - - (1) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $37,691 $285,280 $326 $195,920 $(1,264) $517,953 ================================================================================================================================= The accompanying notes are an integral part of these financial statements.
STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2002, 2001, and 2000 Mississippi Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands) Net income after dividends on preferred stock $73,013 $63,887 $54,972 - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss): Change in additional minimum pension liability, net of (1,264) - - tax of $(783) - --------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (1,264) - - - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $71,749 $63,887 $54,972 =========================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-195 NOTES TO FINANCIAL STATEMENTS Mississippi Power Company 2002 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Mississippi Power Company (the Company) is a wholly owned subsidiary of Southern Company, which is the parent company of five operating companies, a system service company (SCS), Southern Communications Services (Southern LINC), Southern Company Gas (Southern GAS), Southern Company Holdings (Southern Holdings), Southern Nuclear Operating Company (Southern Nuclear), Southern Power Company (Southern Power), Southern Telecom, and other direct and indirect subsidiaries. The operating companies - Alabama Power Company, Georgia Power Company, Gulf Power Company, the Company, and Savannah Electric and Power Company - provide electric service in four southeastern states. Southern Power was established in 2001 to construct, own, and manage Southern Company's competitive generation assets and sell electricity at market-based rates in the wholesale market. Contracts among the operating companies - related to 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 subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Southern Telecom provides fiber optic communication services within the Southeast. Southern GAS, which began operations in August 2002, is a competitive retail natural gas marketer serving communities in Georgia. Southern Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products, and an energy services business. Southern Nuclear provides services to Southern Company's nuclear power plants. Southern Company is registered as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA). Both the Company and its subsidiaries are subject to the regulatory provisions of the PUHCA. The Company is also subject to regulation by the FERC and the Mississippi Public Service Commission (MPSC). The Company follows accounting principles generally accepted in the United States and complies with the accounting policies and practices prescribed by its respective regulatory commissions. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates, and the actual results may differ from those estimates. Prior years' data presented in the financial statements have been reclassified to conform with the current year presentation. Affiliate Transactions The Company has an agreement with SCS under which the following services are rendered to the Company at cost: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures, and other services with respect to business and operations and power pool operations. Costs for these services amounted to $43.6 million, $44.1 million, and $46.2 million during 2002, 2001, and 2000, respectively. Cost allocation methodologies used by SCS are approved by the SEC and management believes they are reasonable. The Company has an agreement with Alabama Power under which the Company owns a portion of Greene County Steam Plant. Alabama Power operates Greene County Steam Plant and the Company reimburses Alabama Power for its proportionate share of all associated expenditures and costs. The Company reimbursed Alabama Power for the Company's proportionate share of related expenses which totaled $6.4 million in 2002. The Company also has an agreement with Gulf Power under which Gulf Power owns a portion of Plant Daniel. The Company operates Plant Daniel and Gulf Power reimburses the Company for its proportionate share of all associated expenditures and costs. Gulf Power reimbursed the Company for Gulf Power's proportionate share of related expenses which totaled $16.6 million in 2002. See Note 4 for additional information. The operating companies, (including the Company), Southern Power, and Southern Gas may jointly enter into various types of wholesale energy, natural gas and certain other contracts, either directly or through SCS as an agent. II-196 NOTES (continued) Mississippi Power Company 2002 Annual Report Each participating company may be jointly and severally liable for the obligations incurred under these agreements. Regulatory Assets and Liabilities The Company 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 at December 31 relate to the following: 2002 2001 ------------------------- (in thousands) Deferred income tax charges $ 12,617 $ 13,394 Vacation pay 5,782 5,810 Premium on reacquired debt 7,776 6,719 Fuel hedging asset 14,558 8,366 Other assets 49 674 Property damage reserve (5,077) (4,044) Deferred income tax credits (20,798) (23,626) Fuel-hedging liabilities (14,990) - Other liabilities (2,450) (1,066) - --------------------------------------------------------------- Total $ (2,533) $ 6,227 =============================================================== 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 related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, the Company would be required to determine if any impairment to other assets exists, including plant, and write down the assets, if impaired, to their fair value. All regulatory assets and liabilities are reflected in rates. See "Depreciation and Amortization" for information regarding regulatory assets and liabilities created as a result of the January 1, 2003 adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations. Revenues and Fuel Costs 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. Energy revenues are recognized as services are rendered. Capacity revenues from long-term contracts are recognized at the lesser of the levelized basis or the cash collected over the respective contract period. Unbilled revenues are accrued at the end of each fiscal period. The Company's retail and wholesale rates include provisions to adjust billings for fluctuations in fuel costs, fuel hedging, 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 1/2 percent of revenues. Depreciation and Amortization Depreciation of the original cost of plant in service is provided primarily by using composite straight-line rates, which approximated 3.4 percent in 2002, 3.5 percent in 2001, and 3.5 percent in 2000. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its original cost - together with the cost of removal, less salvage - is charged to accumulated 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. In January 2003, the Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability II-197 NOTES (continued) Mississippi Power Company 2002 Annual Report is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. There was no cumulative effect adjustment to net income resulting from the adoption of Statement No. 143. The Company expects to receive an accounting order from the MPSC to defer the transition adjustment; therefore, the Company recorded a related regulatory asset of $596,000 to reflect the regulatory treatment of these costs under Statement No. 71. The initial Statement No. 143 liability the Company recognized was $979,000, of which $59,000 was added to the accumulated depreciation reserve. The amount capitalized to property, plant, and equipment was $442,000. The Company has retirement obligations related to ash landfill sites, ash ponds, water wells, and underground storage tanks. The Company has also identified retirement obligations related to certain transmission, distribution, and wireless communication facilities. However, a liability for the removal of these transmission, distribution, and wireless communication assets will not be recorded because no reasonable estimate can be made regarding the timing of any related retirements. The Company will continue to recognize in its income statement the ultimate removal costs in accordance with its regulatory treatment. Any difference between costs recognized under Statement No. 143 and those reflected in rates will be recognized as either a regulatory asset or liability. It is estimated that this annual difference will be approximately $75,000. Historically, these costs have been recovered in rates and management believes the actual asset removal costs will continue to be recoverable in rates. Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. However, in accordance with the regulatory treatment of these costs, the Company will continue to recognize the removal costs for these other obligations in its depreciation rates. As of January 1, 2003, the amount included in the accumulated depreciation reserve that represents a regulatory liability for these costs was $70 million. Income Taxes The Company 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. Property, Plant, and Equipment Property, plant, and equipment is stated at original cost. Original 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 and recovered through the Company's fuel clause. The cost of replacements of property - exclusive of minor items of property - is capitalized. Impairment of Long-Lived Assets and Intangibles The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. 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. II-198 NOTES (continued) Mississippi Power Company 2002 Annual Report 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. Stock Options Southern Company provides non-qualified stock options to a large segment of the Company's employees ranging from line management to executives. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized because the exercise price of all options granted equals the fair-market value on the date of grant. When options are exercised, the Company receives a capital contribution from Southern Company equivalent to the related income tax benefit. Comprehensive Income Comprehensive income - consisting of net income and changes in additional minimum pension liability, net of income taxes - is presented in the financial statements. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Financial Instruments The Company uses derivative financial instruments to limit exposure to fluctuations in interest rates, the prices of certain fuel purchases, and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. Substantially all of the Company's bulk energy purchases and sales contracts are derivatives. However, in many cases, these contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions. This results in the deferral of related gains and losses in other comprehensive income or regulatory assets or liabilities as appropriate until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income and are recorded on a net basis in the Statements of Income. In June 2001, the MPSC approved the Company's request to implement an Energy Cost Management Clause (ECM). ECM, among other things, allows the Company to utilize financial instruments that are used to hedge its fuel commitments. Changes in the fair value of these financial instruments are recorded as regulatory assets or liabilities. Amounts paid or received as a result of financial settlement of these instruments are classified as fuel expense and are included in the ECM factor applied to customer billings. The Company's jurisdictional wholesale customers have a similar ECM mechanism which was approved by the FERC in 2002. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. The Company's other 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, 2002 $313 $313 At December 31, 2001 $314 $309 Capital trust preferred securities: At December 31, 2002 $ 35 $ 36 At December 31, 2001 $ 35 $ 35 - ------------------------------------------------------------ The fair values for long-term debt and preferred securities were based on either closing market price or closing price of comparable instruments. Provision for Property Damage The Company carries insurance for the cost of certain types of damage to generation plants and general property. However, the Company is self-insured for II-199 NOTES (continued) Mississippi Power Company 2002 Annual Report 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 accrues for the cost of such damage by charging expense and crediting an accumulated provision. The cost of repairing damage resulting from such events that individually exceed $50,000 is charged to the accumulated provision as ordered by the MPSC. The annual accruals may range from $1.5 million to $4.6 million with a maximum reserve totaling $23 million. The Company accrued $1.8 million in 2002, $2.5 million in 2001 and $3.5 million in 2000. As of December 31, 2002, the accumulated provision amounted to $5.1 million. 2. RETIREMENT BENEFITS The Company has a defined benefit, trusteed, pension plan that covers substantially all employees. The Company also provides certain non-qualified benefit plans for a selected group of management and highly compensated 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 the extent required by regulatory commissions. In late 2000, as well as in 2002, the Company adopted several pension and postretirement benefit plan changes that had the effect of increasing benefits to both current and future retirees. Plan assets consist primarily of domestic and international equities, global fixed income securities, real estate, and private equity investments. The measurement date for plan assets and obligations 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 -------------------------- 2002 2001 - --------------------------------------------------------------------- (in thousands) Balance at beginning of year $172,167 $154,411 Service cost 5,259 4,797 Interest cost 12,674 11,817 Benefits paid (8,386) (8,456) Actuarial gain and employee transfers 528 1,268 Amendments 4,200 8,406 Other - (76) - --------------------------------------------------------------------- Balance at end of year $186,442 $172,167 ===================================================================== Plan Assets -------------------------- 2002 2001 - --------------------------------------------------------------------- (in thousands) Balance at beginning of year $211,546 $256,648 Actual return on plan assets (14,089) (37,214) Benefits paid (7,875) (7,850) Employee transfers (743) (38) - --------------------------------------------------------------------- Balance at end of year $188,839 $211,546 ===================================================================== The accrued pension costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------------ (in thousands) Funded status $2,396 $ 39,379 Unrecognized transition obligation (2,180) (2,716) Unrecognized prior service cost 16,669 13,656 Unrecognized net gain (9,087) (45,818) - ------------------------------------------------------------------ Prepaid asset, net 7,798 4,501 Portion included in benefit obligations 7,195 6,670 - ------------------------------------------------------------------ Total prepaid assets recognized in the Balance Sheet $14,993 $ 11,171 ================================================================== In 2002 and 2001, amounts recognized in the Balance Sheet for accumulated other comprehensive income was $2 million and $0 million, respectively. Intangible assets recognized were $2 million in 2002 and $2 million in 2001. II-200 NOTES (continued) Mississippi Power Company 2002 Annual Report Components of the pension plans' net periodic cost were as follows: 2002 2001 2000 - --------------------------------------------------------------- (in thousands) Service cost $ 5,259 $ 4,797 $ 4,357 Interest cost 12,674 11,818 10,912 Expected return on plan assets (18,380) (17,328) (15,910) Recognized net gain (2,654) (3,012) (2,577) Net amortization 650 511 76 - --------------------------------------------------------------- Net pension income $ (2,451) $ (3,214) $(3,142) =============================================================== Postretirement Benefits Changes during the year in the accumulated benefit obligations and in the fair value of plan assets were as follows: Accumulated Benefit Obligations ------------------------- 2002 2001 - -------------------------------------------------------------- (in thousands) Balance at beginning of year $51,523 $44,952 Service cost 959 922 Interest cost 3,781 3,411 Benefits paid (3,320) (2,918) Actuarial gain and employee transfers 8,225 3,256 Amendments - 1,900 - -------------------------------------------------------------- Balance at end of year $61,168 $51,523 ============================================================== Plan Assets ---------------------- 2002 2001 - -------------------------------------------------------------- (in thousands) Balance at beginning of year $16,269 $17,843 Actual return on plan assets (516) (1,888) Employer contributions 3,645 3,232 Benefits paid (3,320) (2,918) - -------------------------------------------------------------- Balance at end of year $16,078 $16,269 ============================================================== The accrued postretirement costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------------ (in thousands) Funded status $(45,090) $(35,254) Unrecognized transition obligation 3,582 3,928 Unrecognized prior service cost 1,715 1,821 Unrecognized net gain 10,216 (40) Fourth quarter contributions 1,029 1,268 - ------------------------------------------------------------------ Accrued liability recognized in the Balance Sheets $(28,548) $(28,277) ================================================================== Components of the postretirement plans' net periodic cost were as follows: 2002 2001 2000 - ----------------------------------------------------------------- (in thousands) Service cost $ 959 $ 922 $ 830 Interest cost 3,781 3,411 3,309 Expected return on plan assets (1,514) (1,409) (1,235) Transition obligation 346 346 346 Prior service cost 106 80 - Recognized net loss - (38) - - ----------------------------------------------------------------- Net postretirement cost $ 3,678 $ 3,312 $ 3,250 ================================================================= The weighted average rates assumed in the actuarial calculations for both the pension plans and postretirement benefits plan were: 2002 2001 2000 ----------------------------------------------------------------- Discount 6.50% 7.50% 7.50% Annual salary increase 4.00 5.00 5.00 Long-term return on plan assets 8.50 8.50 8.50 ----------------------------------------------------------------- II-201 NOTES (continued) Mississippi Power Company 2002 Annual Report An additional assumption used in measuring the accumulated postretirement benefit obligation was a weighted average medical care cost trend rate of 8.75 percent for 2002, decreasing gradually to 5.25 percent through the year 2010 and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 2002 as follows: 1 Percent 1 Percent Increase Decrease - ---------------------------------------------------------------- (in thousands) Benefit obligation $4,438 $3,943 Service and interest costs 331 286 - ---------------------------------------------------------------- Employee Savings Plan The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides a 75 percent matching contribution up to 6 percent of an employee's base salary. Total matching contributions made to the plan for the years 2002, 2001, and 2000 were $2.6 million, $2.5 million, and $2.3 million, respectively. 3. CONTINGENCIES AND REGULATORY MATTERS General The Company is subject to certain claims and legal actions arising in the ordinary course of business. The Company's business activities are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against the Company cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the Company's financial statements. Environmental Litigation On November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S. District Court in Georgia against Alabama Power, Georgia Power and the SCS. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, which includes the five facilities mentioned previously, and the Company's plants Watson and Greene County. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation and to add Gulf Power, Savannah Electric and the Company as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities had failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction and granted the SCS' motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add Savannah Electric as a defendant, but it denied the motion to add Gulf Power and the Company based on lack of jurisdiction over those companies. As directed by the court, the EPA re-filed its amended complaint limiting claims to those brought against Georgia Power and Savannah Electric. Also, the EPA re-filed its claims against Alabama Power in the U.S. District Court in Alabama. It has not re-filed its claims against Gulf Power, SCS, or the Company. The Alabama Power, Georgia Power, and Savannah Electric cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review II-202 NOTES (continued) Mississippi Power Company 2002 Annual Report enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that appeal as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows and possibly financial condition unless such costs can be recovered through regulated rates. Retail Rate Adjustment Plans The Company's retail base rates are set under Performance Evaluation Plan (PEP), a rate plan originally approved in 1986 and modified in 1994 and 2002. See "2001 Retail Rate Case." PEP was designed with the objective that the plan would reduce the impact of rate changes on the customer and provide incentives for the Company to keep customer prices low. PEP includes a mechanism for 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 the Company's performance-based return on investment. Any change in rates is limited to 2 percent of retail revenues per evaluation period. Environmental Compliance Overview Plan The MPSC approved the Company's Environmental Compliance Overview Plan (ECO Plan) in 1992. The ECO 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 ECO Plan also provides for carryover of any amount over the 2 percent limit into the next year's revenue requirement. The Company 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. The Company recovers such costs under the ECO Plan as they are incurred, as provided for in the Company's 1995 ECO Plan Order. The Company filed its 2003 ECO Plan in January 2003, which, if approved as filed, will result in a slight increase in customer prices. 2001 Retail Rate Case In August 2001, the Company filed a request with the MPSC for a retail rate increase of approximately $46.4 million. In connection with the Company's request, the MPSC suspended the semi-annual evaluations under PEP. In December 2001, the MPSC approved an increase of approximately $39 million, which took effect in January 2002. Additionally, the MPSC ordered the Company to reactivate the semi-annual evaluations under PEP, beginning with the 12-month period ending December 31, 2002. PEP will remain in effect until the MPSC modifies, suspends or terminates the plan. In May 2002, the MPSC issued an order adopting new return on equity models to be used in the PEP process. The new models are very similar to those that established the $39 million rate increase authorized in December 2001 and are incorporated into the PEP evaluation filing for the period ending December 31, 2002. In 1998, the Company was granted a Certificate of Public Convenience and Necessity to build approximately 1,064 megawatts of combined cycle generation at the Company's Plant Daniel site. The certificate and ownership rights were transferred to Escatawpa Funding Limited Partnership (Escatawpa), which is II-203 NOTES (continued) Mississippi Power Company 2002 Annual Report currently leasing the facility to the Company. See Note 8 under "Lease Agreements" for additional information. In October 2000, the MPSC approved a cost allocation that allocates a pro-rata share of the Plant Daniel Unit 3 and 4 capacity, along with the Company's existing generation, to the retail jurisdiction. The Company's 2001 retail rate case reflected this methodology and the MPSC's December 2001 order on the retail rate case filing approved the Company's cost allocations. Wholesale Customer Settlement Agreement In February 2002, the Company reached an agreement with certain of its wholesale customers to increase its wholesale tariff rates effective June 1, 2002. The FERC accepted the settlement agreement and placed the new tariff rates in effect without modification. The settlement agreement results in an annual increase of approximately $10.5 million, the adoption of an Energy Cost Management Clause and the cost allocation of Plant Daniel Units 3 and 4, similar to the plans approved by the Company's retail jurisdiction. Right of Way Litigation In 2002, the Company, along with Georgia Power, Gulf Power, Savannah Electric, and Southern Telecom (collectively, defendants), were named as defendants in numerous lawsuits brought by landowners regarding the installation and use of fiber optic cable over defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs' properties, and that such actions by defendants exceed the easements or other property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment. The plaintiffs seek compensatory and punitive damages and injunctive relief. Defendants believe that the plaintiffs' claims are without merit. An adverse outcome in these matters could result in substantial judgments; however, the final outcome of these matters cannot now be determined. Transmission Facilities Agreement In January 2002, FERC began conducting an investigation to determine whether the cost of debt and the cost of preferred stock reflected in the amount charged under the Transmission Facilities Agreement between Entergy Corp. and the Company, when considered in light of other aspects of the contract, yield an overall just and reasonable rate. The hearing is scheduled for September, 2003. The Company believes that it is in full compliance with the terms of the contract, which has been in place since 1982, and does not believe that it will have a significant impact on the Company's financial results. However, the outcome of FERC's investigation cannot be predicted. 4. JOINT OWNERSHIP AGREEMENTS The Company and Alabama Power own as tenants in common Units 1 and 2 at Greene County Steam Plant, which is located in Alabama and operated by Alabama Power. Additionally, the Company and Gulf Power own as tenants in common Units 1 and 2 at Plant Daniel, which is located in Mississippi and operated by the Company. At December 31, 2002, the Company'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% $65,223 $34,441 Daniel Units 1 and 2 1,000 50% $237,912 $114,481 --------------------------------------------------------------- The Company's proportionate share of plant operating expenses is included in the corresponding operating expenses in the Statements of Income. 5. LONG-TERM SALES AND FACILITY AGREEMENTS The Company and the other operating affiliates have long-term contractual agreements for the sale of capacity and energy to certain non-affiliated utilities located outside the Southern 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 Company's capacity revenues under these agreements were not material during the periods reported. The Company has a 10-year power sale agreement with Dynegy that began in June 2001. The minimum capacity revenue that the Company will receive will II-204 NOTES (continued) Mississippi Power Company 2002 Annual Report average approximately $21 million per year through May 2011. Capacity revenues for 2002 and 2001 were approximately $20.3 million and $12.3 million, respectively, and were classified as sales for resale in the Statements of Income. As a result of Dynegy's liquidity problems and under the terms of this contract, Dynegy has provided a letter of credit expiring in April 2003 totaling $26 million that can be drawn in the event of a default under the agreement or the failure to renew the letters of credit prior to expiration. In 1984, the Company and Entergy Corp. entered into a 40-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 2002, 2001 and 2000, use fees collected under this agreement, net of related expenses, amounted to approximately $1.6 million, $2.5 million and $2.6 million respectively, and are included within Other Income in the Statements of Income. See Note 3 under "Transmission Facilities Agreement" for additional information. 6. INCOME TAXES At December 31, 2002, the tax-related regulatory assets and liabilities were $13 million and $21 million, respectively. These assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized interest. 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: 2002 2001 2000 ---------------------------------- (in thousands) Total provision for income taxes Federal -- Current $42,603 $43,596 $28,934 Deferred (3,122) (8,661) 622 ---------------------------------------------------------------- 39,481 34,935 29,556 ---------------------------------------------------------------- State -- Current 6,680 6,698 4,670 Deferred (282) (1,057) 130 ---------------------------------------------------------------- 6,398 5,641 4,800 ---------------------------------------------------------------- Total $45,879 $40,576 $34,356 ================================================================ 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: 2002 2001 ------------------------------ (in thousands) Deferred tax liabilities: Accelerated depreciation $157,087 $147,147 Basis differences 7,791 8,271 Other 38,005 34,544 -------------------------------------------------------------- Total 202,883 189,962 -------------------------------------------------------------- Deferred tax assets: Other property basis differences 14,501 15,983 Pension and other benefits 9,546 9,474 Property insurance 1,942 1,547 Unbilled fuel 6,048 5,596 Other 42,891 27,269 -------------------------------------------------------------- Total 74,928 59,869 -------------------------------------------------------------- Total deferred tax liabilities, net 127,955 130,093 Portion included in current assets, net 18,675 8,820 -------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $146,630 $138,913 ============================================================== Deferred investment tax credits are amortized over the lives 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 2002, 2001, and 2000. At December 31, 2002, all II-205 NOTES (continued) Mississippi Power Company 2002 Annual Report 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: 2002 2001 2000 ------------------------------ Federal statutory rate 35.0% 35.0% 35.0% State income tax, net of federal deduction 3.4 3.4 3.4 Non-deductible book depreciation 0.5 0.5 0.6 Other (1.0) (0.8) (1.5) -------------------------------------------------------------- Effective income tax rate 37.9% 38.1% 37.5% ============================================================== 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. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. 7. CAPITALIZATION Preferred Securities Statutory trusts formed by the Company, of which the Company owns all the common securities, have issued mandatorily redeemable preferred securities. In March 2002, Mississippi Power Capital Trust II sold $35 million of its 7.20% Trust Originated Preferred Securities due December 30, 2041, which are guaranteed by the Company. The proceeds of this issuance were used to redeem $35 million of Mississippi Power Capital Trust I 7.75% Trust Originated Preferred Securities originally issued in 1997. The Company considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by the Company of the Trust's payment obligations with respect to the preferred securities. Trust II is a subsidiary of the Company, and accordingly is consolidated in the Company's financial statements. 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: 2002 2001 ------------------ (in thousands) Bond improvement fund requirement $ 634 $ 650 Less: Portion to be satisfied by certifying property additions 634 650 ------------------------------------------------------------- Cash sinking fund requirement - - Current portion of other long-term debt 68,350 80,000 Pollution control bond cash sinking fund requirements 850 20 ------------------------------------------------------------- Total $69,200 $80,020 ============================================================= The first mortgage bond improvement fund requirement is one percent of each outstanding series authenticated under the indenture of the Company 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. Bank Credit Arrangements At December 31, 2002, the Company had total committed credit agreements with banks for approximately $97.5 million, all of which was unused. These credit agreements expire in 2003. Some of these agreements allow short-term borrowings to be converted into term loans, payable in 8 equal quarterly installments, with the first installment due at the end of the first 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. Commitment fees are less than 1/8 of 1 percent for the Company. Compensating balances are not legally restricted from withdrawal. This $97.5 million in unused credit arrangements provides required liquidity support to the Company's borrowings through a commercial paper program. The Company has a $67 million commercial paper program. At December 31, II-206 NOTES (continued) Mississippi Power Company 2002 Annual Report 2002, the Company had no outstanding commercial paper or extendible commercial notes. The credit arrangements also provide support to the Company's variable daily rate pollution control bonds. Assets Subject to Lien The Company'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. Dividend Restrictions The Company's first mortgage bond indenture and the corporate charter contain various common stock dividend restrictions. At December 31, 2002, 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. Pollution Control Bonds The Company has incurred obligations in connection with the sale by public authorities of tax-exempt pollution control revenue bonds. The amount of tax-exempt pollution control revenue bonds outstanding at December 31, 2002 was $83.5 million. Senior Notes In March 2002, the Company issued $80 million of Series D Floating Rate Senior Notes due March 12, 2004. The proceeds of the sale were used to repay $80 million of Series C Floating Rate Senior Notes due March 28, 2002. 8. COMMITMENTS Construction Program The Company is engaged in continuous construction programs, primarily related to transmission and distribution facilities and generating plants, the costs of which are currently estimated to total $76 million in 2003, $86 million in 2004, and $75 million in 2005. 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; FERC rules and transmission regulations; increasing costs of labor, equipment and materials; and cost of capital. At December 31, 2002, significant purchase commitments were outstanding in connection with the construction program. Long-Term Service Agreements The Company has entered into a Long-Term Service Agreement (LTSA) with General Electric (GE) for the purpose of securing maintenance support for the lease combined cycle units at Plant Daniel. In summary, the LTSA stipulates that GE will perform all planned inspections on the covered equipment, which includes the cost of all labor and materials. GE is also obligated to cover the costs of unplanned maintenance on the covered equipment subject to a limit specified in the contract. However, the LTSA contains various cancellation provisions at the option of the Company. In general, the LTSA is in effect through two major inspection cycles of the units. Scheduled payments to GE are made monthly based on estimated operating hours of the units and are recognized as an expense based on actual hours of operation. The Company has recognized $11 million and $9.6 million for 2002 and 2001, respectively, which is included in maintenance expense on the Statements of Income. Total remaining payments to GE under this agreement are currently estimated to total $166.5 million over the next 11 years. Lease Agreements In 1989, the Company entered into a twenty-two year operating 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. Both of these leases were for the transport of coal to Plant Daniel. Gulf Power, as joint owner of Plant Daniel Units 1 and 2, is responsible for one half of the lease cost. The Company's share (50%) of the leases, charged to fuel stock and recovered through the fuel cost recovery clause, was $1.9 million in 2002, $1.9 million in 2001, and $2.1 million in 2000. The Company's II-207 NOTES (continued) Mississippi Power Company 2002 Annual Report annual lease payments for 2003 through 2007 will average approximately $2.0 million and after 2007, lease payments total in aggregate approximately $10 million. In 1999, the Company signed an Agreement for Lease and a Lease Agreement with Escatawpa Funding, Limited Partnership (Escatawpa). These agreements called for the Company to design and construct, as agent for Escatawpa, a 1,064 megawatt natural gas combined cycle facility at the Company's Plant Victor J. Daniel Facility (Facility). The Company entered into this transaction during a period when retail access was under review by MPSC. Additionally, the lease arrangement provided a lower cost alternative to its cost based rate regulated customers than a traditional rate base asset. See Note 3 under "Retail Rate Adjustment Plans" for a description of the Company's PEP formula rate plan. The Facility is treated as an operating lease for accounting purposes, as well as for both retail and wholesale rate recovery purposes. For income tax purposes, the Company retains tax ownership. In May 2001, the Facility was completed, placed into commercial operation and the initial 10-year lease term began. The completion cost was approximately $370 million. The lease provides for a residual value guarantee (approximately 71% of the completion cost) by the Company that is due upon termination of the lease in certain circumstances. The lease also includes a purchase and renewal option. The purchase price is based on the completion cost of the Facility. The Company is required to amortize approximately 10% of the initial completion cost over the initial ten year period. Eighteen months prior to the end of the initial lease, the Company may elect to renew for another 10 years. If the Company elects to renew the lease, the agreement calls for the Company to amortize an additional 17% of the initial completion cost over the renewal period. Upon termination of the lease, at the Company's option, the Company may either exercise its purchase option or the Facility can be sold to a third party. The Company expects that the fair market value of the Facility would substantially reduce or eliminate the payment under the residual value guarantee. In 2002 and 2001, the Company recognized approximately $26 million and $18 million, respectively, in lease expense which includes approximately $3.5 million and $2.4 million, respectively, related to the amortization of the initial completion cost. The Company does not consolidate Escatawpa on its balance sheet since parties unrelated to the Company and Southern Company have made substantive residual equity investments in excess of 3 percent. In January 2003, the FASB issued its Interpretation No. 46, Consolidation of Certain Special-Purpose Entities. Under this interpretation, the Company would be required to consolidate Escatawpa as of July 1, 2003, and record a cumulative effect adjustment as if the Company had initially recorded that asset on its books. If the Company does not restructure the existing arrangement, the impact of consolidating Escatawpa would result in a cumulative effect adjustment relating to depreciation of approximately $13 million, net of tax, through June 30, 2003 and additional expenses of approximately $10.8 million annually thereafter. Consolidating the asset and related debt or restructuring the current arrangement could require further regulatory review by the MPSC. The Company estimates that its annual amount of future minimum operating lease payments under this arrangement, exclusive of any payment related to the residual value guarantee, as of December 31, 2002, are as follows: Year Lease Payments (in millions) 2003 $26 2004 26 2005 26 2006 25 2007 25 2008 and thereafter 98 - ------------------------------------------------------------- Total commitments $226 ============================================================= Fuel To supply a portion of the fuel requirements of its generating plants, the Company 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. In addition, the Company utilizes financial instruments to eliminate price volatility. II-208 NOTES (continued) Mississippi Power Company 2002 Annual Report Total estimated fixed-price obligations at December 31, 2002 are as follows: Year Fuel (in millions) 2003 $191 2004 74 2005 6 2006 6 2007 6 2008 and thereafter 65 - ----------------------------------------------------------- Total commitments $348 =========================================================== In addition, SCS acts as agent for the five operating companies, Southern Power and Southern GAS with regard to natural gas purchases. Natural gas purchases (in dollars) are based on various market indices at the actual time of delivery; therefore, only the volume commitments are firm. The Company's committed volumes allocated based on usage projections, as of December 31, 2002 are as follows: Year Natural Gas (MMBtu) 2003 42,172,935 2004 25,730,963 2005 9,796,080 2006 6,381,115 2007 2,088,762 - ----------------------------------------------------------- Total commitments 86,169,855 =========================================================== Additional commitments for fuel will be required to supply the Company's future needs. Acting as an agent for all of Southern Company's operating companies, Southern Power, and Southern GAS, SCS may enter into various types of wholesale energy and natural gas contracts. Each of the operating companies, Southern Power, and Southern GAS may be jointly and severally liable for the obligations under these agreements. Accordingly, the creditworthiness of Southern Power and Southern GAS are currently inferior to the creditworthiness of the operating companies. Southern Company has entered into keep-well agreements with each of the operating companies, including the Company, to insure they will not subsidize or be responsible for any costs, losses, liabilities, or damages resulting from the inclusion of Southern Power or Southern GAS as a contracting party under these agreements. 9. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 2002 and 2001 are as follows: Net Income After Dividends Operating Operating On Preferred Quarter Ended Revenues Income Stock - ------------------------------------------------------------------- (in thousands) March 2002 $183,058 $28,873 $13,982 June 2002 205,378 38,457 20,788 September 2002 243,077 60,010 33,384 December 2002 192,652 17,930 4,859 March 2001 $171,312 $23,615 $ 9,757 June 2001 203,949 32,640 16,571 September 2001 235,916 53,263 30,379 December 2001 184,888 23,315 7,180 - ------------------------------------------------------------------- The Company's business is influenced by seasonal weather conditions and the timing of rate changes. II-209
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 Mississippi Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands)* $824,165 $796,065 $687,602 $633,004 $595,131 Net Income after Dividends on Preferred Stock (in thousands) $73,013 $63,887 $54,972 $54,809 $55,105 Cash Dividends on Common Stock (in thousands) $63,500 $50,200 $54,700 $56,100 $51,700 Return on Average Common Equity (percent) 14.46 14.25 13.80 14.00 14.15 Total Assets (in thousands) $1,412,166 $1,340,203 $1,275,071 $1,251,136 $1,189,605 Gross Property Additions (in thousands) $67,460 $61,193 $81,211 $75,888 $68,231 - ----------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $517,953 $491,680 $404,898 $391,968 $391,231 Preferred stock 31,809 31,809 31,809 31,809 31,809 Company obligated mandatorily redeemable preferred securities 35,000 35,000 35,000 35,000 35,000 Long-term debt 243,715 233,753 370,511 321,802 292,744 - ----------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $828,477 $792,242 $842,218 $780,579 $750,784 ============================================================================================================================= Capitalization Ratios (percent): Common stock equity 62.5 62.1 48.1 50.2 52.1 Preferred stock 3.8 4.0 3.8 4.1 4.2 Company obligated mandatorily redeemable preferred securities 4.2 4.4 4.2 4.5 4.7 Long-term debt 29.5 29.5 43.9 41.2 39.0 - ----------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0 ============================================================================================================================= Security Ratings: First Mortgage Bonds - Moody's Aa3 Aa3 Aa3 Aa3 Aa3 Standard and Poor's A+ A+ A+ AA- AA- Fitch AA- AA- AA- AA- AA- Preferred Stock - Moody's A3 A3 a1 a1 a1 Standard and Poor's BBB+ BBB+ BBB+ A- A Fitch A A A A A+ Unsecured Long-Term Debt - Moody's A1 A1 - - - Standard and Poor's A A - - - Fitch A+ A+ - - - ============================================================================================================================= Customers (year-end): Residential 158,873 158,852 158,253 157,592 156,530 Commercial 32,713 32,538 32,372 31,837 31,319 Industrial 489 498 517 546 587 Other 171 173 206 202 200 - ----------------------------------------------------------------------------------------------------------------------------- Total 192,246 192,061 191,348 190,177 188,636 ============================================================================================================================= Employees (year-end): 1,301 1,316 1,319 1,328 1,230 - ----------------------------------------------------------------------------------------------------------------------------- * 1999 data includes the true-up of the unbilled revenue estimates.
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SELECTED FINANCIAL AND OPERATING DATA 1998-2002 (continued) Mississippi Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands)*: Residential $186,522 $164,716 $170,729 $159,945 $157,642 Commercial 181,224 163,253 163,552 153,936 145,677 Industrial 164,042 156,525 159,705 151,244 135,039 Other 5,039 4,659 4,565 4,309 4,209 - -------------------------------------------------------------------------------------------------------------------------------- Total retail 536,827 489,153 498,551 469,434 442,567 Sales for resale - non-affiliates 224,275 204,623 145,931 131,004 121,225 Sales for resale - affiliates 46,314 85,652 27,915 19,446 18,285 - -------------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 807,416 779,428 672,397 619,884 582,077 Other revenues 16,749 16,637 15,205 13,120 13,054 - -------------------------------------------------------------------------------------------------------------------------------- Total $824,165 $796,065 $687,602 $633,004 $595,131 ================================================================================================================================ Kilowatt-Hour Sales (in thousands)*: Residential 2,300,017 2,162,623 2,286,143 2,248,255 2,248,915 Commercial 2,902,291 2,840,840 2,883,197 2,847,342 2,623,276 Industrial 4,161,902 4,275,781 4,376,171 4,407,445 3,729,166 Other 39,635 41,009 41,153 40,091 39,772 - -------------------------------------------------------------------------------------------------------------------------------- Total retail 9,403,845 9,320,253 9,586,664 9,543,133 8,641,129 Sales for resale - non-affiliates 5,380,145 5,011,212 3,674,621 3,256,175 3,157,837 Sales for resale - affiliates 1,586,968 2,952,455 452,611 539,939 552,142 - -------------------------------------------------------------------------------------------------------------------------------- Total 16,370,958 17,283,920 13,713,896 13,339,247 12,351,108 ================================================================================================================================ Average Revenue Per Kilowatt-Hour (cents)*: Residential 8.11 7.62 7.47 7.11 7.01 Commercial 6.24 5.75 5.67 5.41 5.55 Industrial 3.94 3.66 3.65 3.43 3.62 Total retail 5.71 5.25 5.20 4.92 5.12 Sales for resale 3.88 3.64 4.21 3.96 3.76 Total sales 4.93 4.51 4.90 4.65 4.71 Residential Average Annual Kilowatt-Hour Use Per Customer * 14,453 13,634 14,445 14,301 14,376 Residential Average Annual Revenue Per Customer * $1,172.12 $1,038.41 $1,078.76 $1,017.42 $1,007.68 Plant Nameplate Capacity Ratings (year-end) (megawatts) 3,156 3,156 2,086 2,086 2,086 Maximum Peak-Hour Demand (megawatts): Winter 2,311 2,249 2,305 2,125 1,740 Summer 2,492 2,466 2,593 2,439 2,339 Annual Load Factor (percent) 61.8 60.7 59.3 59.6 58.0 Plant Availability Fossil-Steam (percent): 91.7 92.8 92.6 91.0 90.0 - -------------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 50.8 52.0 67.8 69.4 66.5 Oil and gas 37.7 35.9 13.5 15.9 14.5 Purchased power - From non-affiliates 3.1 3.1 7.7 6.2 8.0 From affiliates 8.4 9.0 11.0 8.5 11.0 - -------------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 100.0 ================================================================================================================================ * 1999 data includes the true-up of the unbilled revenue estimates.
II-211 SAVANNAH ELECTRIC AND POWER COMPANY FINANCIAL SECTION II-212 MANAGEMENT'S REPORT Savannah Electric and Power Company 2002 Annual Report The management of Savannah Electric and 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 accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 accounting records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls, however, based on a recognition that the cost of the system should not exceed its benefits. The Company believes its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's 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. Southern Company's audit committee of its board of directors, composed of five independent directors, provides a broad overview of management's financial reporting and control functions. Additionally, a committee of Savannah Electric and Power Company's board of directors, composed of five outside directors, meets periodically with management, the internal auditors and the independent public accountants to discuss auditing, internal controls and compliance matters. The internal auditors and the independent public accountants have access to the members of these committees 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 Savannah Electric and Power Company in conformity with accounting principles generally accepted in the United States. /s/Anthony R. James Anthony R. James President and Chief Executive Officer /s/K. R. Willis K. R. Willis Vice President, Treasurer, Chief Financial Officer and Assistant Secretary February 17, 2003 II-213 INDEPENDENT AUDITORS' REPORT Savannah Electric and Power Company: We have audited the accompanying balance sheet and statement of capitalization of Savannah Electric and Power Company (a wholly owned subsidiary of Southern Company) as of December 31, 2002, and the related statements of income, comprehensive income, common stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of Savannah Electric and Power Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Savannah Electric and Power Company as of December 31, 2001, and for each of the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and included an explanatory paragraph that described a change in the method of accounting for derivative instruments and hedging activities in their report dated February 13, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements (pages II-228 to II-245) present fairly, in all material respects, the financial position of Savannah Electric and Power Company at December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 THE FOLLOWING REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE COMPANY'S 2001 ANNUAL REPORT ON FORM 10-K AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. To Savannah Electric and Power Company: We have audited the accompanying balance sheets and statements of capitalization of Savannah Electric and Power Company (a Georgia corporation and a wholly owned subsidiary of Southern Company) as of December 31, 2001 and 2000, and the related statements of income, common stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 II-192 through II-206) referred to above present fairly, in all material respects, the financial position of Savannah Electric and Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 1 to the financial statements, effective January 1, 2001, Savannah Electric and Power Company changed its method of accounting for derivative instruments and hedging activities. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 II-214 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Savannah Electric and Power Company 2002 Annual Report RESULTS OF OPERATIONS - --------------------- Earnings Savannah Electric and Power Company's net income for 2002 totaled $22.9 million, representing an increase of $0.8 million or 3.7 percent from the prior year. Earnings were up primarily due to higher retail revenues, somewhat offset by higher operating expenses. Earnings were $22.1 million in 2001 and $23.0 million in 2000. Compared to prior years, this represented a 3.9 percent decrease in 2001 and no significant change in 2000. A condensed income statement is as follows: Increase (Decrease) Amount From Prior Year - ------------------------------------------------------------------ 2002 2002 2001 2000 - ------------------------------------------------------------------ (in thousands) Operating revenues $299,552 $15,700 $(11,866) $44,124 - ------------------------------------------------------------------ Fuel 54,955 4,159 (6,381) 6,647 Purchased power 75,604 2,518 (2,254) 27,544 Other operation and maintenance 81,018 10,525 (1,927) 5,746 Depreciation and amortization 22,704 (3,247) 711 1,399 Taxes other than income taxes 14,457 473 868 426 ----------------------------------------------------------------- Total operating Expenses 248,738 14,428 (8,983) 41,762 - ------------------------------------------------------------------ Operating income 50,814 1,272 (2,883) 2,362 Other income (expense), net (15,501) 247 134 (710) Less -- Income taxes 12,433 702 (1,843) 1,766 - ------------------------------------------------------------------ Net Income $ 22,880 $ 817 $ (906) $ (114) ================================================================== Revenues Total operating revenues for 2002 were $299.6 million, reflecting a 5.5 percent increase when compared to 2001. The following table summarizes the factors affecting operating revenues for the past three years: Amount --------------------------------------- 2002 2001 2000 --------------------------------------- (in thousands) Retail - prior year $269,172 $282,622 $242,265 Change in -- Base rates 5,101 - (499) Sales growth 8,729 (1,541) 6,798 Weather 2,397 (427) 2,973 Fuel cost recovery and other 372 (11,482) 31,085 - ------------------------------------------------------------------ Total retail 285,771 269,172 282,622 - ------------------------------------------------------------------ Sales for resale -- Non-affiliates 6,354 8,884 4,748 Affiliates 4,075 3,205 4,974 - ------------------------------------------------------------------ Total sales for resale 10,429 12,089 9,722 - ------------------------------------------------------------------ Other operating revenues 3,352 2,591 3,374 - ------------------------------------------------------------------ Total operating revenues $299,552 $283,852 $295,718 ================================================================== Percent change 5.5% (4.0)% 17.5% - ------------------------------------------------------------------ Retail revenues increased 6.2 percent or $16.6 million in 2002, declined $13.5 million in 2001, and increased $40.4 million in 2000. The significant factors driving these changes are shown in the table above. Retail base rates increased reflecting the Georgia Public Service Commission (GPSC) decision effective June 2002. See Note 3 to the financial statements under "Retail Regulatory Matters" for additional information on the Company's 2002 rate order. Electric rates include provisions to adjust billings for fluctuations in fuel costs, the energy component of purchased power costs, and certain other costs. Under the fuel recovery provisions, fuel revenues generally equal fuel expenses--including the fuel component of purchased energy--and do not affect net income. In May 2001, the Company implemented a Fuel Cost Recovery (FCR) rate increase under a GPSC rate order. The order established a new fuel rate to better reflect current fuel costs and to collect the under-recovered balance. The GPSC-approved FCR anticipated a three year recovery of the under-recovered fuel balance. Due to decreasing fuel costs in late 2001 and early 2002, the Company recovered all of this balance by March 2002. In May 2002, the GPSC II-215 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report approved a FCR decrease which more than offset the Company's base rate increase. See Note 3 to the financial statements under "Retail Regulatory Matters" for additional information on the Company's 2002 rate order. Revenues from sales to utilities outside the service area under long-term contracts may include both capacity and energy components. These transactions do not have a significant impact on earnings since the energy is generally sold at variable cost. Sales to affiliated companies within the Southern electric system vary from year to year depending on demand and the availability and cost of generating resources at each company. These energy sales do not have a significant impact on earnings. Energy Sales Changes in revenues are influenced heavily by the amount of energy sold each year. Kilowatt-hour (KWH) sales for 2002 and the percent change by year were as follows: KWH Percent Change ----------- -------------------------- 2002 2002 2001 2000 ----------- --------------------------- (in millions) Residential 1,793 8.1% (0.7)% 5.8% Commercial 1,477 6.4 1.4 6.3 Industrial 793 0.7 (1.6) 12.2 Other 140 4.4 (1.4) 2.5 ----------- Total retail 4,203 5.9 (0.2) 7.1 Sales for resale -- Non-affiliates 151 35.7 43.4 50.3 Affiliates 126 43.4 (1.0) 15.1 ----------- Total 4,480 7.5% 0.6% 7.8% =============================================================== In 2002, residential and commercial energy sales increased from the prior year reflecting the positive impact of weather and continued growth in customers. Industrial sales increased slightly reflecting customer growth, offset by a general economic slowdown. In 2001, total retail energy sales were down slightly from the prior year, reflecting a decrease in energy sales of 1.6 percent to industrial customers due to a slowing of the economy. Residential energy sales also decreased reflecting weather related demand, somewhat offset by customer growth. In 2000, total retail energy sales were up by 7.1 percent from the prior year, reflecting increased energy sales of 12.2 percent to industrial customers due to the re-opening of an industrial facility under new ownership. Residential and commercial energy sales also increased reflecting weather-related demand and customer growth. Expenses Fuel and purchased power costs constitute the single largest expense for the Company. The mix of energy supply is determined primarily by system load, the unit cost of fuel consumed, and the availability of generating units. The amount and sources of energy supply and the total average cost of energy supply were as follows: 2002 2001 2000 -------------------------- Total energy supply (millions of KWHs) 4,628 4,310 4,286 Sources of energy supply (percent) -- Coal 45 50 52 Oil - 1 2 Gas 4 3 5 Purchased power 51 46 41 Total average cost of energy supply (cents/KWH) 2.82 2.87 3.09 - ----------------------------------------------------------------- Fuel expense increased 8.2 percent due to increased gas usage and a higher cost of coal in 2002. In 2001, fuel expense decreased 11.2 percent due to a decrease in generation and a slightly lower average cost of fuel. In 2000, fuel expense increased 13.2 percent due to an increase in generation and a higher average cost of fuel. Purchased power expense increased 3.4 percent in 2002 primarily due to an increase in energy demands. Purchased power from non-affiliates decreased 72.5 percent and increased from affiliates 38.6 percent in 2002 due principally to a purchased power agreement between the Company and Southern Power for energy and capacity from Plant Wansley Units 6 and 7 which began operation in June 2002. Purchased power expense decreased 3.0 percent in 2001 primarily due to lower fuel prices. Purchased power expense, in 2000, increased 57.6 percent over the prior year due to higher energy demands and higher energy prices. II-216 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report In 2002, other operation and maintenance expenses increased 14.9 percent. Other operation expense was higher reflecting increased distribution and administrative and general costs and costs associated with new marketing programs. Distribution costs increased to support improved customer reliability. Administrative and general costs were higher primarily due to increases in security, outside services including legal, accounting and auditing, regulatory activities, and employee benefits expenses. Administrative and general expenses were also higher reflecting the annual true-up in billings to Georgia Power for charges associated with the jointly owned combustion turbines at the Company's Plant McIntosh. Maintenance expense increased from 2001 primarily as a result of scheduled maintenance outages at Plant Kraft and amortization of expenses for a major maintenance project on the combustion turbines at Plant McIntosh. See Note 3 to the financial statements under "Retail Regulatory Matters" for additional information. In 2001, other operation expense decreased 4.7 percent reflecting the discontinuation of a marketing program and lower administrative and general expenses. Administrative and general expenses decreased primarily due to the annual true-up in billings to Georgia Power for charges associated with the jointly owned combustion turbines at the Company's Plant McIntosh and lower insurance expenses. Other operation and maintenance expenses in 2000 increased 8.6 percent over the prior year. Other operation expense was higher reflecting increased employee benefit expenses. Maintenance expense increased from 1999 reflecting higher power delivery and power generation maintenance costs to support improved customer reliability and unit availability, respectively. Depreciation and amortization decreased 12.5 percent in 2002 primarily as a result of discontinuing accelerated depreciation and beginning amortization of the related regulatory liability in June 2002, in accordance with the 2002 rate order. Depreciation and amortization increased over prior years by 2.8 percent in 2001 and 5.9 percent in 2000 primarily due to additional depreciation charges under a 1998 GPSC accounting order. See Note 3 to the financial statements under "Retail Regulatory Matters" for additional information. Interest expense decreased in 2002 and 2001 primarily due to lower interest rates. Interest expense increased in 2000 due to higher rates on variable rate debt and an increase in short-term debt. Effects of Inflation The Company is subject to rate regulation that is based on the recovery of historical costs. In addition, the income tax laws are also based on 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 utility plant with long economic lives. Conventional accounting for historical cost does not recognize this economic loss or the partially offsetting gain that arises through financing facilities with fixed-money obligations such as long-term debt and trust preferred securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed. Future Earnings Potential General 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, which include maintaining a stable regulatory environment and achieving energy sales growth while containing costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, energy conservation practiced by customers, the elasticity of demand, and the rate of economic growth in the Company's service area. The Company currently operates as a vertically integrated utility providing electricity to customers within the traditional service area of southeastern Georgia. Prices for electricity provided by the Company to retail customers are set by the GPSC. Prices for electricity relating to jointly owned generating facilities, interconnecting transmission lines, and the exchange of electric power are set by the Federal Energy Regulatory Commission (FERC). II-217 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report In November 2001, the Company filed a request with the GPSC for a base rate increase of $24.4 million to recover expenses related to a new purchased power agreement and other operation and maintenance expenses. The Company also filed for a fuel cost recovery decrease in March 2002. In May 2002, the GPSC approved a $7.8 million base rate increase and an authorized return on equity of 12.0 percent. At the same time, the GPSC also approved a $44.3 million fuel cost recovery reduction. All customers saw a net rate decrease effective June 2002. In August 2002, the GPSC denied the Company's request for reconsideration of the base rate case decision. In November 2002, the Company filed a request for an accounting order to defer approximately $3.8 million annually in Plant Wansley purchased power costs, which the GPSC had ruled to be outside of the test period in the Company's base rate order. On December 17, 2002, an accounting order was approved by the GPSC, which allows the deferral of these costs until May 2005. Under the terms of the order, two-thirds of any earnings of the Company in a calendar year above a 12 percent return on common equity will be used to amortize the deferred amounts to expense. The remaining one-third of any such earnings will be retained by the Company. In January 2003, the Company began deferring the costs under the terms of the accounting order. Prior to the 2002 base rate case order, the Company had been operating under a four-year accounting order approved by the GPSC. See Note 3 to the financial statements under "Retail Regulatory Matters" for additional information. The Company plans to retire a 102 megawatt peaking facility in May 2005. In June 2002, the Company entered into a fifteen-year purchased power agreement with Southern Power for 200 megawatts of capacity beginning in June 2005 from the planned combined-cycle plant at Plant McIntosh to be built and owned by Southern Power. The annual capacity cost is expected to be approximately $15.0 million. In December 2002, the Company received certification of this capacity from the GPSC. In accordance with Financial Accounting Standards Board (FASB) Statement No. 87, Employers' Accounting for Pensions, the Company recorded non-cash pension costs of approximately $4.4 million pre-tax in 2002. Future pension costs are dependent on several factors including trust earnings and changes to the plan. Postretirement benefit costs for the Company were approximately $2.6 million in 2002 and are expected to continue to trend upward. A portion of pension and postretirement benefit costs is capitalized based on construction-related labor charges. For more information regarding pension and postretirement benefits, see Note 2 to the financial statements. The Company is involved in various matters being litigated. See Note 3 to the financial statements for information regarding material issues that could possibly affect future earnings. Compliance costs related to current and future environmental laws and regulations could affect earnings if such costs are not fully recovered. The Clean Air Act and other important environmental items are discussed under "Environmental Matters." Industry Restructuring The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the primary agents of change was the Energy Policy Act of 1992 (Energy Act). The Energy Act allows independent power producers (IPPs) to access the Company's transmission network in order to sell electricity to other utilities. This enhanced the incentive for IPPs to build power plants for a utility's large industrial and commercial customers where retail access is allowed and sell energy to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign and domestic electric infrastructure assets. The Company has not experienced any material financial impact regarding its limited energy trading operations. Although the Energy Act does not provide for retail customer access, it was a major catalyst for restructuring and consolidation that took place within the utility industry. Numerous federal and state initiatives that promote wholesale and retail competition are in varying stages. Among other things, these II-218 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report initiatives allow retail customers in some states to choose their electricity provider. Some states have approved initiatives that result in a separation of the ownership and/or operation of generating facilities from the ownership and/or operation of transmission and distribution facilities. While various restructuring and competition initiatives have been discussed in Georgia, none have been enacted. Enactment could require numerous issues to be resolved, including significant ones relating to recovery of any stranded investments, full cost recovery of energy produced, and other issues related to the energy crisis that occurred in California. The Company does compete with other electric suppliers within the state. In Georgia, most new retail customers with at least 900 kilowatts of connected load may choose their electricity supplier. FERC Matters In December 1999, the FERC issued its final rule on Regional Transmission Organizations (RTOs). The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company and its operating companies, including the Company, have submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2002, Entergy Corporation and Cleco Power joined the SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans' sponsors petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on the Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company. Any impact of this proposal on Southern Company and its subsidiaries, including the Company, will depend on the form in which final rules may be ultimately adopted; however, the Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Accounting Policies Critical Policy The Company's significant accounting policies are described in Note 1 to the financial statements. The Company's only critical accounting policy involves rate regulation. The Company is subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of 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. II-219 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report New Accounting Standards Derivatives - ----------- Effective January 2001, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-03. In October 2002, the Company prospectively adopted the EITF's requirement to reflect the impact of certain energy trading contracts on a net basis. This change had no material impact on the Company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on the Company's current accounting treatment. Asset Retirement Obligations - ---------------------------- Prior to the adoption of FASB Statement No. 143 in January 2003, the Company accrued for the ultimate cost of retiring most long-lived assets over the life of the related asset through depreciation expense. FASB Statement No. 143, Accounting for Asset Retirement Obligations, establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. See Note 1 to the financial statements under "Depreciation and Amortization" and "Regulatory Assets and Liabilities" for information regarding the financial statement impacts of adopting this standard effective January 1, 2003. Guarantees - ---------- In 2002, the FASB issued Interpretation No. 45, Accounting and Disclosure Requirements for Guarantees. This interpretation requires disclosure of certain direct and indirect guarantees. In addition, it requires recognition of a liability at inception for any new or modified guarantees issued after December 31, 2002. The adoption of this new standard had no impact on the Company's financial statements. FINANCIAL CONDITION - ------------------- Plant Additions The principal change in the Company's financial condition in 2002 was the addition of $32.5 million to utility plant. The funds needed for gross property additions are currently provided from operating activities and from financing activities. See Statements of Cash Flows for additional information. Credit Rating Risk The Company does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Exposure to Market Risks Due to cost-based regulation, the Company has limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. Company policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average rate on variable rate long-term debt outstanding at December 31, 2002 was 2.0 percent. If the Company sustained a 100 basis point change in interest rates for all variable rate long-term debt, the change would have affected annualized interest expense by approximately $0.4 million at December 31, 2002. See Note 1 to the financial statements under "Financial Instruments" for additional information. The Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. II-220 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report 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. In addition, on June 1, 2001, the Company implemented a natural gas/oil hedging program ordered by the GPSC. The program has negative financial hedge limits. In terms of dollar amounts, negative financial hedging positions, recoverable through the fuel clause, are limited to an above market cap equal to 10 percent of the Company's annual natural gas/oil budget. These hedging position limits were $1.5 million for 2001, $2.4 million for 2002 and will be $1.1 million for 2003. The program has operated within the defined hedging position limits set for each year. The fair value of changes in derivative energy trading contracts and year-end valuations are as follows: Changes in Fair Value - --------------------------------------------------------------- 2002 2001 - --------------------------------------------------------------- (in thousands) Contracts beginning of year $(1,053) $ 36 Contracts realized or settled 269 (32) New contracts at inception - - Changes in valuation techniques - - Current period changes 1,410 (1,057) - --------------------------------------------------------------- Contracts end of year $ 626 $ (1,053) =============================================================== Source of Year-End Valuation Prices - ------------------------------------------------------------------ Maturity Total ------------------------ Fair Value Year 1 2-3 Years - ------------------------------------------------------------------ (in thousands) - ----------------------------------------------------------------- Actively quoted $626 $986 $(360) External sources - - - Models and other methods - - - - ----------------------------------------------------------------- Contracts end of year $626 $986 $(360) ================================================================= Unrealized gains and losses from mark to market adjustments on contracts related to the retail fuel hedging program are recorded as regulatory assets and liabilities. Realized gains and losses from this program are included in fuel expense and are recovered through the Company's fuel cost recovery clause. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. At December 31, 2002, the fair value of derivative energy contracts was reflected in the financial statements as follows: Amounts - -------------------------------------------------------------- (in thousands) Regulatory liabilities, net $621 Other comprehensive income 0 Net income 5 - -------------------------------------------------------------- Total fair value $626 ============================================================== Approximately $40 thousand and $35 thousand of gains were recognized in income in 2002 and 2001, respectively. The Company is exposed to market-price risk in the event of nonperformance by parties to the derivative energy contracts. The Company's policy is to enter into agreements with counterparties that have investment grade credit ratings by Moody's and Standard & Poor's or with counterparties who have posted collateral to cover potential credit exposure. Therefore, the Company does not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see Note 1 to the financial statements under "Financial Instruments." Capital Structure As of December 31, 2002, the Company's capital structure consisted of 46.4 percent common stockholder's equity, 10.3 percent trust preferred securities, and 43.3 percent long-term debt, excluding amounts due within one year. Maturities and retirements of long-term debt were $53.6 million in 2002, $50.7 million in 2001, and $0.4 million in 2000. In September 2002, the Company borrowed $25 million under a $30 million variable rate revolving credit agreement which terminates in 2005. The proceeds were used to repay a portion of the Company's short-term indebtedness. In November 2002, the Company issued $55 million of Series D 5.50% senior notes maturing in 2017. The Company used the proceeds to redeem all of the remaining $23.1 million 7.40% Series First Mortgage Bonds due in 2023, to redeem its $30 million Series A 6 5/8% Senior Retail Intermediate Bonds due in 2015, and for general corporate purposes. II-221 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report Subsequent to December 31, 2002, the Company refinanced $13.9 million in pollution control bonds from a daily variable interest rate to an auction rate mode. The composite interest rates and dividend rates for the years 2000 through 2002 as of year-end were as follows: 2002 2001 2000 ------------------------------- Composite interest rates on long-term debt 5.0% 5.9% 6.6% Trust preferred securities dividend rate 6.9% 6.9% 6.9% - ----------------------------------------------------------------- The composite interest rates on long-term debt decreased from 2000 to 2002 due to lower interest rates on variable rate debt and the refinancing of higher priced fixed rate debt. Capital Requirements for Construction The Company's projected construction expenditures for the next three years total $136.3 million ($41.5 million in 2003, $50.7 million in 2004, and $44.1 million in 2005). Actual construction costs may vary from this estimate because of factors such as changes in: business conditions; environmental regulations; FERC rules and transmission regulations; load projections; the cost and efficiency of construction labor, equipment and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered. Construction and upgrading of new and existing transmission and distribution facilities and upgrading of generating plants will be continuing. Other Capital Requirements In addition to the funds needed for the construction program, approximately $47.5 million will be needed by the end of 2005 for maturities of long-term debt and present sinking fund requirements. Capital requirements, lease obligations, and purchase commitments -- discussed in Notes 4 and 6 to the financial statements -- are as follows: 2003 2004 2005 - ----------------------------------------------------------------- (in thousands) Notes $20,000 $ - $25,000 Leases - Capital 892 836 774 Operating 858 842 775 Purchase commitments Fuel 28,326 15,594 314 Purchased power 12,917 12,694 23,882 - ---------------------------------------------------------------- Sources of Capital As shown in the chart below, at December 31, 2002, the Company had $55 million of unused short-term and revolving credit arrangements with banks to meet its short-term cash needs and to provide additional interim funding for the Company's construction program. The Company also has adequate cash flow from operating activities and access to the capital markets to meet liquidity needs. Bank arrangements are as follows: Expires ------------------------ Total Unused 2003 2005 ----------------------------------------------------------- (in thousands) $80,000 $55,000 $40,000 $40,000 ----------------------------------------------------------- For additional information, see Note 6 to the financial statements under "Bank Credit Arrangements". The Company may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of the Company and the other Southern Company operating companies. At December 31, 2002, the Company had outstanding $2.9 million of commercial paper and no outstanding extendible commercial notes. The Company's committed credit arrangements provide liquidity support to the Company's variable rate obligations and to its commercial paper program. At December 31, 2002, the amount of variable rate obligations outstanding requiring liquidity support was $25.0 million, which includes the $2.9 million outstanding commercial paper. II-222 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report 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 including both internal and external funds. The external funding came from the issuance of debt and trust preferred securities. Recently, the Company's debt financings have consisted of unsecured debt. The Company is required to meet certain earnings 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 to permit, at present interest rate levels, any foreseeable security sales. There are no restrictions on the amount of unsecured indebtedness allowed. The amount of securities which the Company will be permitted to issue in the future will depend upon market conditions and other factors prevailing at that time. Authorization for long-term financings is required by the GPSC. The Company received authority from the GPSC for $115 million of such financings expiring December 31, 2003. Currently, the Company has $16.0 million available under this authority. Environmental Matters New Source Review Enforcement Actions In November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S. District Court in Georgia against Alabama Power, Georgia Power, and the system service company. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, which includes the five facilities mentioned previously and the Company's Plant Kraft. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation and to add Gulf Power, Mississippi Power, and the Company as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal-burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted the system service company's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add the Company as a defendant, but it denied the motion to add Gulf Power and Mississippi Power based on lack of jurisdiction over those companies. As directed by the court, the EPA refiled its amended complaint limiting claims to those brought against Georgia Power and the Company. Also, the EPA refiled its claims against Alabama Power in the U.S. District Court in Alabama. It has not refiled against Gulf Power, Mississippi Power, or the system service company. The Alabama Power, Georgia Power, and the Company's cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power, Georgia Power, and the Company. Because the outcome of the TVA appeal could have a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. An adverse outcome in any one of these cases could require II-223 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Environmental Statutes and Regulations The Company's operations are subject to extensive regulation by state and federal environmental agencies under a variety of statutes and regulations governing environmental media, including air, water, and land resources. Compliance with these environmental requirements will involve significant costs, a major portion of which is expected to be recovered through existing ratemaking provisions. There is no assurance, however, that all such costs will, in fact, be recovered. Compliance with the federal Clean Air Act and resulting regulations has been and will continue to be, a significant focus for the Company. The Title IV acid rain provisions of the Clean Air Act, for example, required significant reductions in sulfur dioxide and nitrogen oxide emissions. Compliance was required in two phases -- Phase I, effective in 1995 and Phase II, effective in 2000. Construction expenditures associated with Phase I compliance totaled approximately $2 million. Phase II compliance had no significant impact on the Company. To help bring the remaining nonattainment areas into compliance with the one-hour ozone standard, in 1998 the EPA issued regional nitrogen oxide reduction rules. Those rules required 21 states, including Georgia, to reduce and cap nitrogen oxide emissions from power plants and other large industrial sources. However, for Georgia, the EPA must complete a separate rulemaking before the requirements will apply. The EPA proposed a rule for Georgia in 2002 and expects to issue a final rule in 2003. The proposed rule requires compliance by May 1, 2005. The Company's additional construction expenditures for compliance with these new rules are currently estimated at approximately $7 million, most of which remains to be spent. In July 1997, the EPA revised the national ambient air quality standards for ozone and particulate matter. These revisions made the standards significantly more stringent. In the subsequent litigation of these standards, the U.S. Supreme Court found the EPA's implementation program for the new ozone standard unlawful and remanded it to the EPA for further rulemaking. The EPA is expected to propose implementation rules designed to address the court's concerns in 2003 and issue final implementation rules in 2004. The remaining legal challenges to the new standards, which were pending before the U.S. Court of Appeals, District of Columbia Circuit, have been resolved. The EPA plans to designate areas as attainment or nonattainment with the new eight-hour ozone standard by April 2004, based on air quality data for 2001 through 2003. Although not expected, part or all of the Company's service area may be designated nonattainment under the new ozone standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as 2007. Those state plans could require further reductions in nitrogen oxide emissions from power plants. If so, reductions could be required sometime after 2007. The impact of any new standards will depend on the development and implementation of applicable regulations. The EPA currently plans to designate areas as attainment or nonattainment with the new fine particulate matter standard by the end of 2004. Those area designations will be based on air quality data collected during 2001 through 2003. Part or all of the Company's service area may be designated nonattainment under the new particulate matter standard. State implementation plans, including new emission control regulations necessary to bring those areas into attainment, could be required as early as the end of 2007. Those state plans will likely require reductions in sulfur dioxide emissions from power plants. If so, the reductions could be required sometime after 2007. Any additional emission reductions and costs associated with the new fine particulate matter standard cannot be determined at this time. The EPA has also announced plans to issue a proposed Regional Transport Rule for the fine particulate matter standard by the end of 2003 and to finalize the rule in 2005. This rule would likely require year-round sulfur dioxide and nitrogen oxide emission reductions from power plants as early as 2010. If issued, this rule would likely modify other state implementation plan II-224 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report requirements for attainment of the fine particulate matter standard and the eight-hour ozone standard. It is not possible at this time to determine the effect such a rule would have on the Company. Further reductions in sulfur dioxide could also be required under the EPA's Regional Haze rules. The Regional Haze rules require states to establish Best Available Retrofit Technology (BART) standards for certain sources that contribute to regional haze. The Company has two plants that could be subject to these rules. The EPA regional haze program calls for states to submit State Implementation Plans in 2007 and 2008 that contain emission reduction strategies for achieving progress toward the visibility improvement goal. In 2002, however, the U.S. Court of Appeals, District of Columbia Circuit, vacated and remanded the BART provisions of the federal Regional Haze rules to the EPA for further rulemaking. Because new BART rules have not been developed and state visibility assessments are only beginning, it is not possible to determine the effect of these rules on the Company at this time. The EPA's Compliance Assurance Monitoring (CAM) regulations under Title V of the Clean Air Act require that monitoring be performed to ensure compliance with emissions limitations on an ongoing basis. The regulations require certain facilities with Title V operating permits to develop and submit a CAM plan to the appropriate permitting authority upon applying for renewal of the facility's Title V operating permit. The Company is in the process of developing CAM plans, which could indicate a need for improved particulate matter controls at affected facilities. Because the plans are still in the early stages of development, the Company cannot determine the extent to which improved controls could be required or the costs associated with any necessary improvements. Actual ongoing monitoring costs are expensed as incurred and are not material for any period presented. In December 2000, having completed its utility studies for mercury and other hazardous air pollutants (HAPS), the EPA issued a determination that an emission control program for mercury and, perhaps, other HAPS is warranted. The program is being developed under the Maximum Achievable Control Technology provisions of the Clean Air Act. The EPA currently plans to issue proposed rules regulating mercury emissions from electric utility boilers by the end of 2003, and those regulations are scheduled to be finalized by the end of 2004. Compliance could be required as early as 2007. Because the rules have not yet been proposed, the costs associated with compliance cannot be determined at this time. In December 2002, the EPA issued final and proposed revisions to the New Source Review program under the Clean Air Act. In February 2003, several northeastern states petitioned the D.C. Circuit Court for a stay of the final rules. The proposed rules are open to public comment and may be revised before being finalized by the EPA. If fully implemented, these proposed and final regulations could affect the applicability of the New Source Review provisions to activities at the Company's facilities. In any event, any final regulations must be adopted by Georgia in order to apply to the Company's facilities. The effect of these proposed and final rules cannot be determined at this time. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002 proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the last Congress. Similar bills have been, and are anticipated to be, introduced this year. The Bush Administration's Clear Skies Act was recently reintroduced, and President Bush has stated that it will be a high priority for the Administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. The cost impacts of such legislation would depend upon the specific requirements enacted. Domestic efforts to limit greenhouse gas emissions have been spurred by international discussions surrounding the Framework Convention on Climate Change and specifically the Kyoto Protocol, which proposes international constraints on the emissions of greenhouse gases. The Bush Administration does not support U.S. ratification of the Kyoto Protocol or other mandatory carbon dioxide reduction II-225 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report legislation and has instead announced a new voluntary climate initiative which seeks an 18 percent reduction by 2012 in the rate of greenhouse gas emissions relative to the dollar value of the U.S. economy. The Company is involved in a voluntary electric utility industry sector climate change initiative in partnership with the government. Because this initiative is still under development, it is not possible to determine the effect on the Company at this time. The Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste and releases of hazardous substances. Under these various laws and regulations, the Company could incur substantial costs to clean up properties. The Company conducts studies to determine the extent of any required cleanup and has recognized in its financial statements the costs to clean up known sites. The Company may be liable for a portion or all required cleanup costs for additional sites that may require environmental remediation. The Company has not incurred any significant cleanup costs to date. Under the Clean Water Act, the EPA is developing new rules aimed at reducing impingement and entrainment of fish and fish larvae at cooling water intake structures that will require numerous biological studies, and perhaps, retrofits to some intake structures at existing power plants. The new rule was proposed in February 2002 and is expected to be finalized by August 2004. The impact of any new standards will depend on the development and implementation of applicable regulations. Also, under the Clean Water Act, the EPA and state environmental regulatory agencies are developing total maximum daily loads (TMDLs) for certain impaired waters. Establishment of maximum loads by the EPA or the Georgia Environmental Protection Division may result in lowering permit limits for various pollutants and a requirement to take additional measures to control non-point source pollution (e.g., storm water runoff) at facilities discharging into waters for which TMDLs are established. Because the effect on the Company will depend on the actual TMDLs and permit limitations established by the implementing agency, it is not possible to determine the effect on the Company at this time. The EPA and the Georgia Environmental Protection Division are reviewing and evaluating various other matters including limits on pollutant discharges to impaired waters, hazardous waste disposal requirements, and other regulatory matters. The impact of any new standards will depend on the development and implementation of applicable regulations. Several major pieces of environmental legislation are periodically 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; the Toxic Substances Control Act; the Emergency Planning & Community Right-to-Know Act; and the Endangered Species Act. Compliance with possible additional federal or state legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could also significantly affect the Company. The impact of any new legislation, or changes to existing legislation, could affect many areas of the Company's operations. The full impact of any such changes cannot, however, be determined at this time. Cautionary Statement Regarding Forward-Looking Information This Annual Report includes forward-looking statements in addition to historical information. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "could," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "projects," "potential" or "continue" or the negative of these terms or other comparable terminology. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which the Company is subject, as well as changes in application of existing laws and II-226 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Savannah Electric and Power Company 2002 Annual Report regulations; current and future litigation, including the pending EPA civil actions against the Company; the effects, extent, and timing of the entry of additional competition in the markets of the Company; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial; the ability of counterparties of the Company to make payments as and when due; the effects of, and changes in, economic conditions in the United States, including the current soft economy; the direct or indirect effects on the Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the ability of the Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed from time to time by the Company with the Securities and Exchange Commission. 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STATEMENTS OF INCOME For the Years Ended December 31, 2002, 2001, and 2000 Savannah Electric and Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Retail sales $285,771 $269,172 $282,622 Sales for resale -- Non-affiliates 6,354 8,884 4,748 Affiliates 4,075 3,205 4,974 Other revenues 3,352 2,591 3,374 - ---------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 299,552 283,852 295,718 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 54,955 50,796 57,177 Purchased power -- Non-affiliates 6,368 23,147 25,229 Affiliates 69,236 49,939 50,111 Other 55,756 50,607 53,086 Maintenance 25,262 19,886 19,334 Depreciation and amortization 22,704 25,951 25,240 Taxes other than income taxes 14,457 13,984 13,116 - ---------------------------------------------------------------------------------------------------------------------------------- Total operating expenses 248,738 234,310 243,293 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Income 50,814 49,542 52,425 Other Income and (Expense): Interest income 147 173 252 Interest expense, net of amounts capitalized (11,608) (12,517) (12,737) Distributions on preferred securities of subsidiary (2,740) (2,740) (2,740) Other income (expense), net (1,300) (686) (657) - ---------------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (15,501) (15,770) (15,882) - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 35,313 33,772 36,543 Income taxes 12,433 11,731 13,574 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings Before Cumulative Effect of Accounting Change 22,880 22,041 22,969 Cumulative effect of accounting change-- less income taxes of $14 - 22 - - ---------------------------------------------------------------------------------------------------------------------------------- Net Income $ 22,880 $ 22,063 $ 22,969 ================================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2002, 2001, and 2000 Savannah Electric and Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Operating Activities: Net income $ 22,880 $ 22,063 $ 22,969 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 24,653 27,895 26,639 Deferred income taxes and investment tax credits, net (6,227) (20,528) 728 Pension, postretirement, and other employee benefits 6,133 6,282 3,975 Other, net (10,559) (2,198) (140) Changes in certain current assets and liabilities -- Receivables, net 7,965 24,079 (23,260) Fossil fuel stock 1,522 (2,711) (31) Materials and supplies 3,383 (4,025) (542) Other current assets (5,470) 8,587 (6,159) Accounts payable 7,527 (8,439) 8,881 Taxes accrued (627) 2,820 (2,454) Other current liabilities 6,002 1,224 3,939 - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided from operating activities 57,182 55,049 34,545 - ------------------------------------------------------------------------------------------------------------------------------ Investing Activities: Gross property additions (32,481) (31,296) (27,290) Other (1,331) (1,875) (1,835) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (33,812) (33,171) (29,125) - ------------------------------------------------------------------------------------------------------------------------------ Financing Activities: Increase (decrease) in notes payable, net (29,263) (13,241) 11,100 Proceeds -- Senior notes 55,000 65,000 - Other long-term debt 25,616 - - Capital contributions from parent company 3,950 1,561 1,478 Redemptions -- First mortgage bonds (23,558) (20,642) - Senior notes (30,000) - - Other long-term debt - (30,071) (251) Payment of common stock dividends (22,700) (21,700) (24,300) Other (828) (394) - - ------------------------------------------------------------------------------------------------------------------------------ Net cash used for financing activities (21,783) (19,487) (11,973) - ------------------------------------------------------------------------------------------------------------------------------ Net Change in Cash and Cash Equivalents 1,587 2,391 (6,553) Cash and Cash Equivalents at Beginning of Period 2,391 - 6,553 - ------------------------------------------------------------------------------------------------------------------------------ Cash and Cash Equivalents at End of Period $ 3,978 $ 2,391 $ - ============================================================================================================================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of $165, $271, and $324 capitalized for 2002, 2001, and 2000, respectively $13,353 $15,340 $13,329 Income taxes (net of refunds) $20,979 $21,034 $19,939 - ------------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Savannah Electric and Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------------------------- Assets 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents $ 3,978 $ 2,391 Receivables -- Customer accounts receivable 22,631 21,514 Unbilled revenues 11,531 8,445 Under recovered regulatory clause revenues - 11,974 Other accounts and notes receivable 2,937 2,882 Affiliated companies 1,102 1,170 Accumulated provision for uncollectible accounts (682) (500) Fossil fuel stock, at average cost 8,328 9,851 Materials and supplies, at average cost 9,586 12,969 Prepaid taxes 20,422 12,511 Other 6,058 586 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 85,891 83,793 - -------------------------------------------------------------------------------------------------------------------------- Property, Plant, and Equipment: In service 880,604 855,290 Less accumulated provision for depreciation 416,232 402,492 - -------------------------------------------------------------------------------------------------------------------------- 464,372 452,798 Construction work in progress 6,082 8,540 - -------------------------------------------------------------------------------------------------------------------------- Total property, plant, and equipment 470,454 461,338 - -------------------------------------------------------------------------------------------------------------------------- Other Property and Investments 3,648 2,742 - -------------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 11,692 12,283 Cash surrender value of life insurance for deferred compensation plans 21,943 20,002 Unamortized debt issuance expense 3,757 3,197 Unamortized premium on reacquired debt 8,103 6,890 Other 11,717 4,498 - -------------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 57,212 46,870 - -------------------------------------------------------------------------------------------------------------------------- Total Assets $617,205 $594,743 ========================================================================================================================== The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Savannah Electric and Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------ Liabilities and Stockholder's Equity 2002 2001 - ------------------------------------------------------------------------------------------------------------------------ (in thousands) Current Liabilities: Securities due within one year $ 20,892 $ 1,178 Notes payable 2,897 32,159 Accounts payable -- Affiliated 7,889 5,087 Other 15,769 10,160 Customer deposits 6,781 6,237 Taxes accrued -- Income taxes 311 2,587 Other 3,317 1,668 Interest accrued 3,268 4,014 Vacation pay accrued 2,427 2,361 Other 15,233 9,097 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 78,784 74,548 - ------------------------------------------------------------------------------------------------------------------------ Long-term debt (See accompanying statements) 168,052 160,709 - ------------------------------------------------------------------------------------------------------------------------ Deferred Credits and Other Liabilities: Accumulated deferred income taxes 78,970 77,331 Deferred credits related to income taxes 12,445 13,776 Accumulated deferred investment tax credits 9,289 9,952 Employee benefits provisions 33,619 27,486 Other 16,242 14,023 - ------------------------------------------------------------------------------------------------------------------------ Total deferred credits and other liabilities 150,565 142,568 - ------------------------------------------------------------------------------------------------------------------------ Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes (See accompanying statements) 40,000 40,000 - ------------------------------------------------------------------------------------------------------------------------ Common stockholder's equity (See accompanying statements) 179,804 176,918 - ------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholder's Equity $617,205 $594,743 ======================================================================================================================== Commitments and Contingent Matters (See notes) - ------------------------------------------------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CAPITALIZATION At December 31, 2002 and 2001 Savannah Electric and Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) (percent of total) Long-Term Debt: First mortgage bonds -- Maturity Interest Rates -------- -------------- May 1, 2006 6.90% $ 20,000 $ 20,000 July 1, 2023 7.40% - 23,558 - ------------------------------------------------------------------------------------------------------------------------------ Total first mortgage bonds 20,000 43,558 - ------------------------------------------------------------------------------------------------------------------------------ Long-term notes payable -- 5.12% due May 15, 2003 20,000 20,000 6.55% due May 15, 2008 45,000 45,000 5.50% to 6.625% due 2015 through 2017 55,000 30,000 Adjustable rates (2.12% at 1/1/03) due September 6, 2005 25,000 - - ------------------------------------------------------------------------------------------------------------------------------ Total long-term notes payable 145,000 95,000 - ------------------------------------------------------------------------------------------------------------------------------ Other long-term debt -- Pollution control revenue bonds -- Non-collateralized: Variable rates (1.80 at 1/1/03) due 2016-2037 17,955 17,955 - ------------------------------------------------------------------------------------------------------------------------------ Total other long-term debt 17,955 17,955 - ------------------------------------------------------------------------------------------------------------------------------ Capitalized lease obligations 5,989 5,374 - ------------------------------------------------------------------------------------------------------------------------------ Total long-term debt (annual interest requirement -- $9.4 million) 188,944 161,887 Less amount due within one year 20,892 1,178 - ------------------------------------------------------------------------------------------------------------------------------ Long-term debt excluding amount due within one year 168,052 160,709 43.3% 42.6% - ------------------------------------------------------------------------------------------------------------------------------ Company Obligated Mandatorily Redeemable Preferred Securities: $25 liquidation value -- 6.85% 40,000 40,000 - ------------------------------------------------------------------------------------------------------------------------------ Total (annual distribution requirement -- $2.7 million) 40,000 40,000 10.3 10.6 - ------------------------------------------------------------------------------------------------------------------------------ Common Stockholder's Equity: Common stock, par value $5 per share -- Authorized - 16,000,000 shares Outstanding - 10,844,635 shares in 2002 and 2001 Par value 54,223 54,223 Paid-in capital 16,776 12,826 Retained earnings 110,049 109,869 Accumulated other comprehensive income (loss) (1,244) - - ------------------------------------------------------------------------------------------------------------------------------ Total common stockholder's equity 179,804 176,918 46.4 46.8 - ------------------------------------------------------------------------------------------------------------------------------ Total Capitalization $387,856 $377,627 100.0% 100.0% ============================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 2002, 2001, and 2000 Savannah Electric and Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (loss) Total - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1999 $54,223 $ 9,787 $110,837 $ - $174,847 Net income - - 22,969 - 22,969 Capital contributions from parent company - 1,478 - - 1,478 Cash dividends on common stock - - (24,300) - (24,300) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 54,223 11,265 109,506 - 174,994 Net income - - 22,063 - 22,063 Capital contributions from parent company - 1,561 - - 1,561 Cash dividends on common stock - - (21,700) - (21,700) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 54,223 12,826 109,869 - 176,918 Net income - - 22,880 - 22,880 Capital contributions from parent company - 3,950 - - 3,950 Other comprehensive income (loss) - - - (1,244) (1,244) Cash dividends on common stock - - (22,700) - (22,700) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $54,223 $16,776 $110,049 $(1,244) $179,804 =================================================================================================================================== The accompanying notes are an integral part of these financial statements. STATEMENTS OF COMPREHENSIVE INCOME For the Years Ended December 31, 2002, 2001, and 2000 Savannah Electric and Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) Net income $22,880 $22,063 $22,969 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss): Change in additional minimum pension liability, net of tax of $(785) (1,244) - - - ----------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (1,244) - - - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $21,636 $22,063 $22,969 =================================================================================================================================== The accompanying notes are an integral part of these financial statements.
II-233 NOTES TO FINANCIAL STATEMENTS Savannah Electric and Power Company 2002 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Savannah Electric and Power Company (the Company) is a wholly owned subsidiary of Southern Company, which is the parent company of five operating companies, Southern Power Company (Southern Power), a system service company, Southern Communications Services (Southern LINC), Southern Company Gas (Southern GAS), Southern Company Holdings (Southern Holdings), Southern Nuclear Operating Company (Southern Nuclear), Southern Telecom, and other direct and indirect subsidiaries. The operating companies provide electric service in four southeastern states. Southern Power was established in 2001 to construct, own, and manage Southern Company's competitive generation assets and sell electricity at market-based rates in the wholesale market. Contracts among the operating companies and Southern Power--related to 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. The system service company provides, at cost, specialized services to Southern Company and subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Southern Telecom provides fiber cable services within the Southeast. Southern GAS, which began operation in August 2002, is a competitive retail natural gas marketer serving communities in Georgia. Southern Holdings is an intermediate holding subsidiary for Southern Company's investments in leveraged leases, alternative fuel products, and an energy services business. Southern Nuclear provides services to Southern Company's nuclear power plants. 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. The Company also is subject to regulation by the FERC and the Georgia Public Service Commission (GPSC). The Company follows accounting principles generally accepted in the United States and complies with the accounting policies and practices prescribed by the GPSC. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates, and the actual results may differ from those estimates. Certain prior years' data presented in the financial statements has been reclassified to conform with the current year presentation. Affiliate Transactions The Company has an agreement with the system service company under which the following services are rendered to the Company at direct or allocated cost: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and employee benefits, human resources, systems and procedures, and other administrative services with respect to business and operations and power pool operations. Costs for these services amounted to $15.6 million, $15.0 million, and $15.1 million during 2002, 2001, and 2000, respectively. Cost allocation methodologies used by the system service company are approved by the SEC and management believes they are reasonable. The Company has entered into a purchased power agreement with Southern Power for 200 megawatts of capacity from Plant Wansley Units 6 and 7 which began operation in June 2002. Purchased power costs in 2002 amounted to $23.2 million. At December 31, 2002, approximately $1.5 million in prepaid capacity expense related to this agreement was recorded in other deferred debits in the balance sheet. In June 2002, the Company entered into another purchased power agreement `with Southern Power for 200 megawatts of capacity from a planned combined-cycle plant at Plant McIntosh to be built and owned by Southern Power. This agreement will be effective in June 2005 and the annual capacity cost is expected to be approximately $15.0 million through June 2020. See Note 4 under "Fuel and Purchased Power Commitments" for additional information. The Company operates an eight-unit combustion turbine site at its Plant McIntosh. Two of the units are owned by the Company, and six of the units are owned by Georgia Power. Georgia Power reimburses the Company for its proportionate share of the related expenses, which were $1.8 million in 2002. II-234 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report The operating companies, including the Company, Southern Power, and Southern GAS may jointly enter into various types of wholesale energy, natural gas and certain other contracts, either directly or through the system service company as agent. Each participating company may be jointly and severally liable for the obligations incurred under these agreements. Regulatory Assets and Liabilities The Company 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 could be credited to customers through the ratemaking process. Regulatory assets and (liabilities) reflected in the Balance Sheets at December 31 relate to: 2002 2001 -------------------------- (in thousands) Deferred income tax charges $11,692 $ 12,283 Premium on reacquired debt 8,103 6,890 Deferred McIntosh maintenance costs 5,790 53 Fuel-hedging assets - 1,018 Fuel-hedging liabilities (621) - Deferred income tax credits (12,445) (13,776) Storm damage reserves (5,603) (4,228) Accelerated cost recovery (7,282) (8,000) - --------------------------------------------------------------- Total $ (366) $ (5,760) =============================================================== 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 related regulatory assets and liabilities that are not specifically recoverable through regulated rates. In addition, the Company would be required to determine if any impairment to other assets including plant exists, and write down the assets, if impaired, to their fair value. All regulatory assets and liabilities are reflected in rates. See "Depreciation and Amortization" in this Note for information regarding significant regulatory assets and liabilities created as a result of the January 1, 2003 adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations. Revenues and Fuel Costs The Company currently operates as a vertically integrated utility providing electricity to retail customers within its traditional service area of southeastern Georgia and to wholesale customers in the Southeast. Revenues are recognized as services are rendered. Unbilled revenues are accrued at the end of each fiscal period. Fuel costs are expensed as the fuel is used. Electric rates for the Company include provisions to adjust billings for fluctuations in fuel costs, fuel hedging, the energy component of purchased power costs, and certain other costs. Revenues are adjusted for differences between recoverable fuel costs and amounts actually recovered in current regulated 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 averaged less than 1 percent of revenues. Depreciation and Amortization Depreciation of the original cost of plant in service is provided primarily by using composite straight-line rates, which approximated 2.9 percent in 2002 and 3.0 percent in both 2001 and 2000. 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 certain facilities. In accordance with regulatory requirements, prior to the implementation of FASB Statement No. 143 in January 2003, the Company followed the industry practice of accruing for the ultimate cost of retiring most long-lived assets over the life of the related asset as part of the annual depreciation expense provision. In 2002, 2001, and 2000, the Company recorded accelerated depreciation of $1.0 million, $2.5 million, and $2.5 million, respectively, in accordance with the GPSC's 1998 accounting order. In the 2002 base rate order, the GPSC ordered the Company to amortize the balance of accelerated depreciation as a credit to depreciation expense over a three year period beginning June 2002. See Note 3 under "Retail Regulatory Matters" for more information. II-235 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report In January 2003, the Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. The cumulative effect adjustment to net income resulting from the adoption of Statement No. 143 was immaterial. The Company expects to receive an accounting order from the GPSC to defer the transition adjustment; therefore, the Company recorded a related regulatory asset of $2.4 million to reflect the Company's regulatory treatment of these costs under Statement No. 71. The initial Statement No. 143 liability the Company recognized was $3.2 million, of which $0.2 million was added to the accumulated depreciation reserve. The amount capitalized to property, plant, and equipment was $1.0 million. The Company has retirement obligations related to various landfill sites, ash ponds, a rail line, and underground storage tanks. The Company has also identified retirement obligations related to certain transmission and distribution facilities. However, a liability for the removal of these transmission and distribution assets will not be recorded because no reasonable estimate can be made regarding the timing of any related retirements. The Company will continue to recognize in the income statement its ultimate removal costs in accordance with its regulatory treatment. Any difference between costs recognized under Statement No. 143 and those reflected in rates will be recognized as either a regulatory asset or liability. It is estimated that this annual difference will be approximately $0.2 million. Management believes that actual asset removal costs will be recoverable in rates over time. Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets they do not have a legal obligation to retire. However, in accordance with the regulatory treatment of these costs, the Company will continue to recognize the removal costs for these other obligations in its depreciation rates. As of January 1, 2003, the amount included in the accumulated depreciation reserve that represents a regulatory liability for these costs was $31.9 million. Income Taxes The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences. Federal investment tax credits utilized are deferred and amortized to income over the average lives of the related property. Allowance for Funds Used During Construction (AFUDC) AFUDC represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new facilities. While cash is not realized currently from such allowance, it increases the revenue requirement over the service life of the plant through a higher rate base and higher depreciation expense. The composite rates used by the Company to calculate AFUDC were 2.82 percent in 2002, 5.13 percent in 2001, and 6.87 percent in 2000. AFUDC as a percent of net income was 0.4 percent in 2002, 0.8 percent in 2001, and 0.9 percent in 2000. Property, Plant, and Equipment Property, plant, and equipment is stated at original cost less regulatory disallowances and impairments. Original cost includes: materials; labor; minor items of property; appropriate administrative and general costs; payroll-related costs such as taxes, pensions, and other benefits, and AFUDC. The cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expense. The cost of replacements of property exclusive of minor items of property is capitalized. In accordance with the 2002 base rate order, the Company is deferring the costs of certain significant maintenance costs for the combustion turbines at Plant McIntosh and amortizing such costs over 10 years, which approximates the expected maintenance cycle. Impairment of Long-Lived Assets and Intangibles The Company evaluates long-lived assets for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of whether an impairment has occurred is based on either a specific regulatory disallowance or an estimate of undiscounted future II-236 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report cash flows attributable to the assets, as compared with the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. Cash and Cash Equivalents For purposes of the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. Materials and Supplies Generally, materials and supplies include the costs of transmission, distribution, and generating plant materials. Materials are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed. Stock Options Southern Company provides non-qualified stock options to a large segment of the Company's employees ranging from line management to executives. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized because the exercise price of all options granted equaled the fair-market value on the date of grant. When options are exercised the Company receives a capital contribution from Southern Company equivalent to the related income tax benefit. Comprehensive Income Comprehensive income - consisting of net income and changes in additional minimum pension liability, net of income taxes - is presented in the Company's financial statements. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Financial Instruments The Company uses derivative financial instruments to limit exposure to fluctuations in the prices of certain fuel purchases and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. Substantially all of the Company's bulk energy purchases and sales contracts are derivatives. However, in many cases, these contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions. This results in the deferral of related gains and losses in other comprehensive income or regulatory assets or liabilities as appropriate until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. On June 1, 2001, the Company implemented a natural gas/oil hedging program which was ordered by the GPSC as part of the fuel cost recovery increase filing. The program has negative financial hedge limits. In terms of dollar amounts, negative financial hedging positions, recoverable through the fuel clause, are limited to an above market cap equal to 10 percent of the Company's annual natural gas/oil budget. These hedging position limits were $1.5 million for 2001, $2.4 million for 2002 and will be $1.1 million for 2003. The program has operated within the defined hedging position limits set for each year. II-237 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report The Company's other financial instruments for which the carrying amounts did not equal fair value at December 31 were as follows: Carrying Fair Amount Value -------------------------- (in millions) Long-term debt: At December 31, 2002 $183 $187 At December 31, 2001 $157 $157 Trust preferred securities: At December 31, 2002 $40 $40 At December 31, 2001 $40 $38 The fair values for long-term debt and trust preferred securities were based on either closing market prices or closing prices of comparable instruments. 2. RETIREMENT BENEFITS The Company has defined benefit, trusteed, non-contributory pension plans that cover substantially all employees. The Company also provides certain non-qualified benefit plans for a select group of management and highly compensated employees. Also, the Company provides certain medical care and life insurance benefits for retired employees. The Company funds trusts to the extent required by the GPSC and the FERC. In late 2000, as well as in 2002, the Company adopted several pension and postretirement benefit plan changes that had the effect of increasing benefits to both current and future retirees. Plan assets consist primarily of domestic and international equities, global fixed income securities, real estate, and private equity investments. The measurement date for plan assets and obligations is September 30 for each year. Pension Plans Changes during the year in the projected benefit obligations and in the fair value of plan assets were as follows: Projected Benefit Obligations ------------------------- 2002 2001 - ------------------------------------------------------------- (in thousands) Balance at beginning of year $79,550 $71,521 Service cost 2,204 2,074 Interest cost 5,811 5,426 Benefits paid (4,213) (3,986) Actuarial loss and employee transfers 1,793 894 Amendments 117 3,621 - ------------------------------------------------------------- Balance at end of year $85,262 $79,550 ============================================================= Plan Assets ------------------------- 2002 2001 - ------------------------------------------------------------- (in thousands) Balance at beginning of year $50,858 $61,880 Actual return on plan assets (2,720) (8,911) Benefits paid (3,734) (3,570) Employee transfers (312) 1,459 - ------------------------------------------------------------- Balance at end of year $44,092 $50,858 ============================================================= The accrued pension costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------- (in thousands) Funded status $(41,170) $(28,692) Unrecognized prior service cost 6,847 7,401 Unrecognized net loss (gain) 21,432 12,336 - ------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $(12,891) $ (8,955) ============================================================= In 2002 and 2001, amounts recognized in the balance sheets for accumulated other comprehensive income and intangible assets were $2.0 million and $1.5 million and $0 and $1.6 million, respectively. II-238 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report Components of the pension plan's net periodic cost were as follows: 2002 2001 2000 - --------------------------------------------------------------- (in thousands) Service cost $2,204 $2,074 $1,844 Interest cost 5,811 5,426 4,854 Expected return on plan assets (4,311) (4,215) (4,174) Recognized net loss 54 16 - Net amortization 672 700 503 - --------------------------------------------------------------- Net pension cost $4,430 $4,001 $3,027 =============================================================== Postretirement Benefits Changes during the year in the accumulated benefit obligations and in the fair value of plan assets were as follows: Accumulated Benefit Obligations -------------------------- 2002 2001 - -------------------------------------------------------------- (in thousands) Balance at beginning of year $28,121 $26,124 Service cost 431 433 Interest cost 2,065 2,022 Benefits paid (1,160) (987) Actuarial loss (gain) and employee transfers 3,245 (1,214) Amendments - 1,743 - -------------------------------------------------------------- Balance at end of year $32,702 $28,121 ============================================================== Plan Assets ------------------------ 2002 2001 - ------------------------------------------------------------ (in thousands) Balance at beginning of year $7,401 $6,910 Actual return on plan assets (732) (789) Employer contributions 2,485 2,267 Benefits paid (1,160) (987) - ------------------------------------------------------------ Balance at end of year $7,994 $7,401 ============================================================ The accrued postretirement costs recognized in the Balance Sheets were as follows: 2002 2001 - ------------------------------------------------------------ (in thousands) Funded status $(24,708) $(20,720) Unrecognized transition obligation 4,938 5,431 Unamortized prior service cost 4,429 4,691 Unrecognized net loss 6,435 1,831 Fourth quarter contributions 2,104 1,577 - ------------------------------------------------------------ Accrued liability recognized in the Balance Sheets $ 6,802) $ (7,190) ============================================================ Components of the postretirement plan's net periodic cost were as follows: 2002 2001 2000 - --------------------------------------------------------------- (in thousands) Service cost $ 431 $ 433 $ 376 Interest cost 2,065 2,022 1,865 Expected return on plan assets (627) (555) (429) Recognized net loss - - 66 Net amortization 756 731 618 - --------------------------------------------------------------- Net postretirement cost $2,625 $2,631 $2,496 =============================================================== The weighted average rates assumed in the actuarial calculations for both the pension plan and postretirement benefits plan were: 2002 2001 2000 - -------------------------------------------------------------- Discount 6.50% 7.50% 7.50% Annual salary increase 4.00 5.00 5.00 Long-term return on plan assets 8.50 8.50 8.50 - -------------------------------------------------------------- An additional assumption used in measuring the accumulated postretirement benefit obligations was a weighted average medical care cost trend rate of 8.75 percent for 2002, decreasing gradually to 5.25 percent through the year 2010, and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 2002 as follows: 1 Percent 1 Percent Increase Decrease - --------------------------------------------------------------- (in thousands) Benefit obligation $2,138 $1,935 Service and interest costs 168 166 =============================================================== II-239 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report The Company has a supplemental retirement plan for certain executive employees. The plan is unfunded and payable from the general funds of the Company. The Company has purchased life insurance on participating executives and plans to use these policies to satisfy this obligation. Employee Savings Plan The Company also sponsors a 401(k) defined contribution plan covering substantially all employees. The Company provides a 75 percent matching contribution up to 6 percent of an employee's base salary. Total matching contributions made to the plan for the years 2002, 2001, and 2000 were $1.0 million, $1.0 million, and $0.9 million, respectively. 3. CONTINGENCIES AND REGULATORY MATTERS General Litigation Matters The Company is subject to certain claims and legal actions arising in the ordinary course of business. The Company's business activities are also subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against the Company cannot be predicted at this time; however, after consultation with legal counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the Company's financial statements. Environmental Protection Agency Litigation In November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S. District Court against Alabama Power, Georgia Power, and the system service company. The complaint alleges violations of the New Source Review provisions of the Clean Air Act with respect to five coal-fired generating facilities in Alabama and Georgia. The civil action requests penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per day. The EPA concurrently issued to the operating companies a notice of violation related to 10 generating facilities, which include the five facilities mentioned previously and the Company's Plant Kraft. In early 2000, the EPA filed a motion to amend its complaint to add the violations alleged in its notice of violation, and to add Gulf Power, Mississippi Power, and the Company as defendants. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities failed to secure necessary permits or install additional pollution control equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. The U.S. District Court in Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and granted the system service company's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. The court granted the EPA's motion to add the Company as a defendant, but it denied the motion to add Gulf Power and Mississippi Power based on lack of jurisdiction over those companies. As directed by the court, the EPA refiled its amended complaint limiting claims to those brought against Georgia Power and the Company. Also, the EPA refiled its claims against Alabama Power in the U.S. District Court in Alabama. It has not refiled its claims against Gulf Power, Mississippi Power, or the system service company. The Alabama Power, Georgia Power, and the Company's cases have been stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the appeal of a very similar New Source Review enforcement action against the Tennessee Valley Authority (TVA). The TVA appeal involves many of the same legal issues raised by the actions against Alabama Power, Georgia Power, and the Company. Because the outcome of the TVA appeal could have II-240 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report a significant adverse impact on Alabama Power and Georgia Power, both companies have been parties to that case as well. In February 2003, the U.S. District Court in Alabama extended the stay of the EPA litigation proceeding in Alabama until the earlier of May 6, 2003 or a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the related litigation involving TVA. On August 21, 2002, the U.S. District Court in Georgia denied the EPA's motion to reopen the Georgia case. The denial was without prejudice to the EPA to refile the motion at a later date, which the EPA has not done at this time. The Company believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and possibly require payment of substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates. Right of Way Litigation In 2002, certain subsidiaries of Southern Company, including Georgia Power, Gulf Power, Mississippi Power, the Company, and Southern Telecom (collectively, defendants), were named as defendants in numerous lawsuits brought by landowners regarding the installation and use of fiber optic cable over defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs' properties and that such actions by defendants exceed the easements or other property rights held by defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment. The plaintiffs seek compensatory and punitive damages and injunctive relief. Defendants believe that the plaintiffs' claims are without merit. An adverse outcome in these matters could result in substantial judgments; however, the final outcome of these matters cannot now be determined. Retail Regulatory Matters The Company filed a base rate case in November 2001 to recover significant new expenses related to the 200 megawatt Plant Wansley purchased power agreement which began in June 2002, as well as other operation and maintenance expense changes. In early 2002, the Company filed for a fuel cost recovery decrease. In May 2002, the GPSC approved a $7.8 million base rate increase and an authorized return on equity of 12.0 percent rather than the $24.4 million and 13.5 percent return on equity which were requested. At the same time, the GPSC also approved a $44.3 million fuel cost recovery reduction. As a result of these two rate changes, all customers saw a net rate decrease effective June 2002. In August 2002, the GPSC denied the Company's request for reconsideration in this matter and in November 2002, the Company filed a request for an accounting order to defer approximately $3.8 million annually in Plant Wansley purchased power costs, which the GPSC had ruled to be outside of the test period in the Company's 2002 base rate order. On December 17, 2002, an accounting order was approved by the GPSC, authorizing the Company to defer the $3.8 million in Wansley purchased power costs until May 2005. Under the terms of the order, two-thirds of any earnings of the Company in a calendar year above a 12 percent return on common equity will be used to amortize the deferred amounts to purchase power expense. The remaining one-third of any such earnings will be retained by the Company. In January 2003, the Company began deferring the costs under the terms of the accounting order. Prior to the 2002 base rate order, the Company had been operating under a four-year accounting order approved by the GPSC. Under this order, the Company reduced the electric rates of its small business customers by approximately $11 million over four years. The Company also expensed an additional $1.95 million in storm damage accruals and accrued an additional $8 million in depreciation on generating assets over the term of the order. The additional depreciation accumulated in a regulatory liability account. In addition, the Company had discretionary authority to provide up to an additional $0.3 million per year in storm damage accruals and up to an additional $4.0 million in depreciation expense over the four years. Total storm damages accrued under the order were $0.5 million in 2002 and $1.5 million per year in both 2001 and 2000. As part of the order, the Company was precluded from asking for a rate increase except upon significant changes in economic conditions, new laws, or regulations for the four-year term. 11-241 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report 4. COMMITMENTS Construction Program The Company is engaged in a continuous construction program, currently estimated to total $41.5 million in 2003, $50.7 million in 2004, and $44.1 million in 2005. 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; acquisition of additional generating assets; revised load growth estimates; changes in environmental regulations; FERC rules and transmission regulations; increasing costs of labor, equipment, and materials; and cost of capital. The Company does not have any traditional baseload generating plants under construction. However, construction related to new and upgrading of existing transmission and distribution facilities and the upgrading of generating plants will continue. At December 31, 2002, significant purchase commitments were outstanding in connection with the construction program. Fuel and Purchased Power Commitments To supply a portion of the fuel requirements of its generating plants, the Company has entered into long-term commitments for the procurement of fuel. In most cases, these contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. The Company had fuel commitments at December 31, 2002 as follows: Year Commitments - ---- ---------------- (in thousands) 2003 $28,326 2004 15,594 2005 314 2006 314 2007 314 2008 and thereafter 5,334 - --------------------------------------------------------------- Total commitments $50,196 =============================================================== In addition, the system service company acts as agent for the Company and the other operating companies and Southern Power with regard to natural gas purchases. Natural gas purchases (in dollars) are based on various indices at the actual time of delivery; therefore, only the volume commitments are firm. The Company's committed volumes allocated based on usage projections as of December 31, 2002 were as follows: Year Natural Gas - ---- -------------- (MMBtu) 2003 2,140,514 2004 1,282,989 2005 1,158,037 2006 883,956 2007 313,819 2008 and thereafter - - -------------------------------------------------------------- Total commitments 5,779,315 ============================================================== Additional commitments for fuel will be required to supply the Company's future needs. Acting as an agent for all of Southern Company's operating companies, Southern Power, and Southern GAS, the system service company may enter into various types of wholesale energy and natural gas contracts. Each of the operating companies, Southern Power, and Southern GAS may be jointly and severally liable under these agreements. The creditworthiness of Southern Power and Southern GAS is currently inferior to the creditworthiness of the operating companies. Accordingly, Southern Company has entered into keep-well agreements with each of the operating companies to insure they will not subsidize or be responsible for any costs, losses, liabilities, or damages resulting from the inclusion of Southern Power or Southern GAS as a contracting party under these agreements. The Company has entered into two long-term commitments for the purchase of electricity from Southern Power. Estimated total long-term obligations at December 31, 2002 were as follows: Year Commitments - ---- ---------------- (in thousands) 2003 $12,917 2004 12,694 2005 23,882 2006 26,741 2007 26,722 2008 and thereafter 197,438 - --------------------------------------------------------------- Total commitments $300,394 =============================================================== II-242 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report Operating Leases The Company has rental agreements with various terms and expiration dates. Rental expenses totaled $0.6 million for 2002, $0.4 million for 2001, and $0.4 million for 2000. Of these amounts, $0.5 million in 2002 and $0.4 million in both 2001 and 2000 related to railcar leases and coal dozers and were recoverable through the Company's fuel cost recovery clause. At December 31, 2002, estimated future minimum lease payments for noncancelable operating leases were as follows: Year Railcars Other Total - ------------------------------------------------------------- (in thousands) 2003 $ 429 $ 429 $ 858 2004 429 413 842 2005 429 346 775 2006 429 331 760 2007 429 327 756 2008 and thereafter 4,463 528 4,991 - ------------------------------------------------------------- Total minimum payments $6,608 $2,374 $8,982 ============================================================= 5. INCOME TAXES At December 31, 2002, tax-related regulatory assets and liabilities were $11.7 million and $12.4 million, respectively. The assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized interest. The liabilities are attributable to deferred taxes previously recognized at rates higher than current enacted tax law and to unamortized investment tax credits. Details of income tax provisions are as follows: 2002 2001 2000 -------------------------------- (in thousands) Total provision for income taxes Federal -- Currently payable $17,089 $27,991 $11,102 Deferred (5,660) (17,951) 75 - ------------------------------------------------------------------ 11,429 10,040 11,177 - ------------------------------------------------------------------ State -- Currently payable 1,572 4,282 1,744 Deferred (568) (2,577) 653 - ------------------------------------------------------------------ 1,004 1,705 2,397 - ------------------------------------------------------------------ Total $12,433 $11,745 $13,574 ================================================================== 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: 2002 2001 --------------------- (in thousands) Deferred tax liabilities: Accelerated depreciation $83,092 $81,654 Property basis differences (1,250) (1,437) Other 3,630 6,566 - ------------------------------------------------------------------ Total 85,472 86,783 - ------------------------------------------------------------------ Deferred tax assets: Pension and other benefits 12,792 11,403 Other 14,132 10,560 - ------------------------------------------------------------------ Total 26,924 21,963 - ------------------------------------------------------------------ Total deferred tax liabilities, net 58,548 64,820 Portion included in current assets, net 20,422 12,511 - ------------------------------------------------------------------ Accumulated deferred income taxes in the Balance Sheets $78,970 $77,331 ================================================================== In accordance with regulatory requirements, deferred investment tax credits are amortized over the lives 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 $0.7 million per year in 2002, 2001, and 2000. At December 31, 2002, 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: 2002 2001 2000 ---------------------------- Federal statutory tax rate 35% 35% 35% State income tax, net of federal income tax benefit 2 3 4 Other (2) (3) (2) --------------------------------------------------------------- Effective income tax rate 35% 35% 37% =============================================================== 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. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. II-243 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report 6. CAPITALIZATION Trust Preferred Securities In December 1998, Savannah Electric Capital Trust I, of which the Company owns all of the common securities, issued $40 million of 6.85% mandatorily redeemable preferred securities. Substantially all of the assets of the Trust are $40 million aggregate principal amount of the Company's 6.85% junior subordinated notes due December 31, 2028. The Company considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by the Company of payment obligations with respect to the preferred securities of Savannah Electric Capital Trust I. Savannah Electric Capital Trust I is a subsidiary of the Company and accordingly is consolidated in the Company's financial statements. Long-Term Debt and Capital Leases The Company's Indenture related to its First Mortgage Bonds is unlimited as to the authorized amount of bonds which may be issued, provided that required property additions, earnings, and other provisions of such Indenture are met. Maturities and retirements of long-term debt were $53.6 million in 2002, $50.7 million in 2001, and $0.4 million in 2000. In September 2002, the Company borrowed $25 million under a $30 million variable rate revolving credit agreement which terminates September 6, 2005. The proceeds were used to repay a portion of the Company's short-term indebtedness. In November 2002, the Company issued $55 million of Series D 5.50% senior notes maturing November 15, 2017. The Company used these proceeds to redeem all of the remaining $23.1 million 7.40% Series First Mortgage Bonds due July 1, 2023, to redeem its $30 million Series A 6 5/8% Senior Retail Intermediate Bonds due March 17, 2015 and for general corporate purposes. Assets acquired under capital leases are recorded as utility plant in service, and the related obligation is classified as other long-term debt. Leases are capitalized at the net present value of the future lease payments. However, for ratemaking purposes, these obligations are treated as operating leases, and as such, lease payments are charged to expense as incurred. Securities Due Within One Year A summary of the sinking fund requirements and scheduled maturities and redemptions of long-term debt due within one year at December 31 is as follows: 2002 2001 ---------------------- (in thousands) Bond sinking fund requirement $ 200 $ 436 Less: Portion to be satisfied by certifying property additions 200 - - -------------------------------------------------------------------- Cash sinking fund requirement - 436 Other long-term debt maturities 20,892 742 - -------------------------------------------------------------------- Total $20,892 $1,178 ==================================================================== The first mortgage bond improvement (sinking) fund requirements amount to 1 percent of each outstanding series of bonds authenticated under the first mortgage bond indenture prior to January 1 of each year, other than those issued to collateralize pollution control and other obligations. The requirements may be satisfied by depositing cash or reacquiring bonds, or by pledging additional property equal to 1 2/3 times the requirements. The sinking fund requirements of first mortgage bonds were satisfied by cash redemption in 2002 and 2001. The 2003 requirement will be satisfied by certifying property additions. Sinking fund requirements and/or maturities through 2007 applicable to long-term debt are as follows: $20.9 million in 2003; $0.8 million in 2004; $25.8 million in 2005; $20.7 million in 2006; and $0.7 million in 2007. Bank Credit Arrangements At the end of 2002, credit arrangements with four banks totaled $80 million and expire at various times during 2003 and 2005. In September 2002, the Company borrowed $25 million under a $30 million variable rate revolving credit agreement which terminates in 2005. 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. Commitment fees are less than 1/8 of 1 II-244 NOTES (continued) Savannah Electric and Power Company 2002 Annual Report percent for the Company. Compensating balances are not legally restricted from withdrawal. The credit arrangements contain covenants that limit the level of indebtedness to capitalization to 65 percent. Not meeting these limits would result in an event of default under the credit arrangements. In addition, the credit arrangements contain cross default provisions to other indebtedness that would trigger an event of default if the borrower defaulted on indebtedness over a specified threshold. The cross default provisions are restricted only to indebtedness of the Company. The Company is currently in compliance with all such covenants. Borrowings under unused credit arrangements totaling $5 million would be prohibited if the Company experiences a material adverse change (as defined in such arrangements). The Company may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of the Company and the other Southern Company operating companies. At December 31, 2002, the Company had outstanding $2.9 million of commercial paper and no extendible commercial notes. The Company's committed credit arrangements provide liquidity support to the Company's variable rate obligations and to its commercial paper program. At December 31, 2002, the amount of variable rate obligations outstanding requiring liquidity support was $25.0 million, which includes the $2.9 million outstanding commercial paper. Assets Subject to Lien As amended and supplemented, the Company's first mortgage bond indenture 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. Common Stock Dividend Restrictions The Company's first mortgage bond indenture contains certain limitations on the payment of cash dividends on common stock. At December 31, 2002, approximately $68 million of retained earnings was restricted against the payment of cash dividends on common stock under the terms of the Indenture. 7. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial data for 2002 and 2001 are as follows (in thousands): Operating Operating Net Quarter Ended Revenues Income Income - ------------------------------------------------------------- March 2002 $57,378 $ 6,865 $ 1,802 June 2002 78,360 14,594 7,035 September 2002 96,971 24,654 13,148 December 2002 66,843 4,701 895 March 2001 $61,691 $ 6,799 $ 1,476 June 2001 73,970 14,620 6,246 September 2001 93,583 22,332 11,309 December 2001 54,608 5,791 3,032 - ------------------------------------------------------------- The Company's business is influenced by seasonal weather conditions and a seasonal rate structure, among other factors. II-245
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 Savannah Electric and Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $299,552 $283,852 $295,718 $251,594 $254,455 Net Income after Dividends on Preferred Stock (in thousands) $22,880 $22,063 $22,969 $23,083 $23,644 Cash Dividends on Common Stock (in thousands) $22,700 $21,700 $24,300 $25,200 $23,500 Return on Average Common Equity (percent) 12.83 12.54 13.13 13.16 13.44 Total Assets (in thousands) $617,205 $594,743 $594,227 $570,218 $555,799 Gross Property Additions (in thousands) $32,481 $31,296 $27,290 $29,833 $18,071 - --------------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $179,804 $176,918 $174,994 $174,847 $175,865 Company obligated mandatorily redeemable preferred securities 40,000 40,000 40,000 40,000 40,000 Long-term debt 168,052 160,709 116,902 147,147 163,443 - --------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $387,856 $377,627 $331,896 $361,994 $379,308 ================================================================================================================================= Capitalization Ratios (percent): Common stock equity 46.4 46.8 52.7 48.3 46.4 Company obligated mandatorily redeemable preferred securities 10.3 10.6 12.1 11.0 10.5 Long-term debt 43.3 42.6 35.2 40.7 43.1 - --------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0 ================================================================================================================================= Security Ratings: First Mortgage Bonds - Moody's A1 A1 A1 A1 A1 Standard and Poor's A+ A+ A+ AA- AA- Preferred Stock - Moody's Baa1 Baa1 a2 a2 a2 Standard and Poor's BBB+ BBB+ BBB+ A- A Unsecured Long-Term Debt - Moody's A2 A2 - - - Standard and Poor's A A - - - ================================================================================================================================= Customers (year-end): Residential 120,131 117,199 115,646 112,891 110,437 Commercial 16,512 16,121 15,727 15,433 15,328 Industrial 81 76 75 67 63 Other 494 474 444 417 377 - --------------------------------------------------------------------------------------------------------------------------------- Total 137,218 133,870 131,892 128,808 126,205 ================================================================================================================================= Employees (year-end): 550 550 554 533 542 - --------------------------------------------------------------------------------------------------------------------------------
II-246
SELECTED FINANCIAL AND OPERATING DATA 1998-2002 (continued) Savannah Electric and Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands): Residential $139,262 $123,819 $129,520 $112,371 $109,393 Commercial 104,195 100,835 102,116 88,449 86,231 Industrial 32,504 34,971 40,839 32,233 37,865 Other 9,810 9,547 10,147 9,212 8,838 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 285,771 269,172 282,622 242,265 242,327 Sales for resale - non-affiliates 6,354 8,884 4,748 3,395 4,548 Sales for resale - affiliates 4,075 3,205 4,974 4,151 3,016 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues from sales of electricity 296,200 281,261 292,344 249,811 249,891 Other revenues 3,352 2,591 3,374 1,783 4,564 - ------------------------------------------------------------------------------------------------------------------------------ Total $299,552 $283,852 $295,718 $251,594 $254,455 ============================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 1,793,330 1,658,735 1,671,089 1,579,068 1,539,792 Commercial 1,477,224 1,388,357 1,369,448 1,287,832 1,236,337 Industrial 793,181 787,674 800,150 713,448 900,012 Other 139,891 133,967 135,824 132,555 131,142 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 4,203,626 3,968,733 3,976,511 3,712,903 3,807,283 Sales for resale - non-affiliates 150,795 111,145 77,481 51,548 53,294 Sales for resale - affiliates 125,882 87,799 88,646 76,988 58,415 - ------------------------------------------------------------------------------------------------------------------------------ Total 4,480,303 4,167,677 4,142,638 3,841,439 3,918,992 ============================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 7.77 7.46 7.75 7.12 7.10 Commercial 7.05 7.26 7.46 6.87 6.97 Industrial 4.10 4.44 5.10 4.52 4.21 Total retail 6.80 6.78 7.11 6.52 6.36 Sales for resale 3.77 6.08 5.85 5.87 6.77 Total sales 6.61 6.75 7.06 6.50 6.38 Residential Average Annual Kilowatt-Hour Use Per Customer 15,085 14,241 14,593 14,100 14,061 Residential Average Annual Revenue Per Customer $1,171.46 $1,063.07 $1,131.08 $1,003.39 $998.94 Plant Nameplate Capacity Ratings (year-end) (megawatts) 788 788 788 788 788 Maximum Peak-Hour Demand (megawatts): Winter 738 758 724 719 582 Summer 921 846 878 875 846 Annual Load Factor (percent) 54.5 55.9 53.4 51.2 54.9 Plant Availability Fossil-Steam (percent): 81.4 81.2 78.5 72.8 72.9 - ------------------------------------------------------------------------------------------------------------------------------ Source of Energy Supply (percent): Coal 44.4 50.5 51.6 44.6 41.6 Oil and gas 4.2 4.0 6.9 12.3 12.9 Purchased power - From non-affiliates 3.1 5.3 7.7 5.3 3.4 From affiliates 48.3 40.2 33.8 37.8 42.1 - ------------------------------------------------------------------------------------------------------------------------------ Total 100.0 100.0 100.0 100.0 100.0 ==============================================================================================================================
II-247 SOUTHERN POWER COMPANY FINANCIAL SECTION II-248 MANAGEMENT'S REPORT Southern Power Company 2002 Annual Report The management of Southern Power Company has prepared this annual report and is responsible for the financial statements and related information. These statements were prepared in accordance with accounting principles generally accepted in the United States and necessarily include amounts that are based on the 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 the accounting records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls based upon the recognition that the cost of the system should not exceed its benefits. The Company believes that its system of internal accounting controls maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the Company's 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 Southern Company audit committee of its board of directors, composed of five independent directors, provides a broad overview of management's financial reporting and control functions. This committee meets periodically 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 with 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 Southern Power Company in conformity with accounting principles generally accepted in the United States. /s/William P. Bowers William P. Bowers President and Chief Executive Officer /s/Cliff S. Thrasher Cliff S. Thrasher Senior Vice President, Comptroller and Chief Financial Officer February 17, 2003 II-249 INDEPENDENT AUDITORS' REPORT Southern Power Company: We have audited the accompanying balance sheets of Southern Power Company (a wholly owned subsidiary of Southern Company) as of December 31, 2002 and 2001, and the related statements of income, comprehensive income, common stockholder's equity, and cash flows for the year ended December 31, 2002 and for the period from January 8, 2001 (inception) to December 31, 2001. These financial statements are the responsibility of Southern Power 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 auditing standards generally accepted in the United States of America. 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, such financial statements (pages II-260 through II-274) present fairly, in all material respects, the financial position of Southern Power Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002 and for the period from January 8, 2001 (inception) to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 II-250 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Southern Power Company 2002 Annual Report RESULTS OF OPERATIONS In January 2001, Southern Power Company was formed as a wholly-owned subsidiary of Southern Company. Southern Power constructs, owns, and manages wholesale generating assets in the Southeast and is the primary growth engine for Southern Company's competitive wholesale energy business. Earnings The Company's 2002 earnings totaled $54.3 million, representing a $46.1 million increase over 2001. The 2002 increase was the result of increased sales of wholesale capacity and energy to affiliated and non-affiliated companies. The increased sales resulted primarily from the initiation of Power Purchase Agreements (PPAs) with Georgia Power and Savannah Electric and requirements agreements with 11 electric municipal cooperatives (EMCs) that went into effect in June 2002. Earnings for 2002 also reflect commercial operation of Wansley Units 6 and 7 and Franklin Unit 1 (the New Units) beginning in June 2002 and a full year of Plant Dahlberg operations. As of December 31, 2002, the Company had approximately 2,400 megawatts in commercial operation. The Company began significant operations in July 2001 when Plant Dahlberg was transferred from Georgia Power, another wholly-owned subsidiary of Southern Company. The Company's 2001 earnings totaled $8.2 million and were derived primarily from the sales of wholesale capacity and energy to affiliated and non-affiliated companies. Increase (Decrease) Amount From Prior Year ------------------------------ 2002 2002 - --------------------------------------------------------- (in thousands) Operating revenues $298,768 $269,467 - --------------------------------------------------------- Fuel 97,965 94,186 Purchased power 53,663 48,937 Other operation and maintenance 28,351 21,726 Depreciation and amortization 18,319 15,028 Taxes other than Income taxes 4,275 3,882 - --------------------------------------------------------- Total operating expenses 202,573 183,759 - --------------------------------------------------------- Operating income 96,195 85,708 Other income, net 35,599 32,630 Less -- Interest expense and other, net 49,067 46,329 Income taxes 28,457 25,946 - --------------------------------------------------------- Net Income $54,270 $46,063 ========================================================= Revenues Operating revenues in 2002 were $298.8 million, reflecting a $269.5 million increase from 2001. In 2002, operating revenues were positively impacted by commercial operation of the New Units and the initiation of PPAs with Georgia Power and Savannah Electric and requirements agreements with 11 EMCs in June 2002. A majority of the revenues resulted from wholesale energy sales to affiliated companies under PPAs. The remaining operating revenues are attributed to wholesale energy sales to non-affiliated companies under PPAs and sales through the Southern Company system power pool (Southern Pool). Capacity revenues for 2002 were $123.9 million, or 41.5% of total revenues. These revenues are an integral component of the PPAs with both associated and non-associated customers. In 2001, operating revenues of $29.3 million were solely attributed to operations at Plant Dahlberg. The majority of the revenues, $26.4 million, were from capacity and energy sales to non-affiliated companies under PPAs. The remainder, $2.9 million, was from sales to affiliated companies through the Southern Pool. II-251 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report Revenues from sales to affiliated companies through the Southern Pool that are not covered by PPAs will vary depending on demand and the availability and cost of generating resources at each company within the Southern Pool. These transactions do not have a significant impact on earnings since the energy is generally sold at variable cost. Expenses Natural gas fuel costs constitute the single largest expense for the Company. The increase in fuel expense in 2002 is primarily due to the commercial operation of the New Units in 2002 and a full year of operation for Plant Dahlberg. In addition, the average price of natural gas increased 33.4% from 2002 to 2001. The Company's PPAs provide that the purchasers are responsible for substantially all of the cost of fuel relating to energy delivered under such PPAs; therefore, these expense increases do not have a significant impact on net income. In 2002, purchased power from non-affiliates and affiliates increased by $33.3 million and $15.6 million, respectively, to meet the demands of the Company's contractual sales commitments. Expenses from purchased power transactions will vary depending on demand and the availability and cost of generating resources accessible throughout the Southern Pool. Load requirements are submitted to the Southern Pool on an hourly basis and are fulfilled with the lowest cost alternative, whether that is Southern Power-owned, or affiliate-owned generation or external purchases. In 2001, purchased power from non-affiliates and affiliates totaled $4.7 million. These expenses reflected the demand and the availability and cost of generating resources accessible through the Southern Pool. In 2002, other operation expense increased by $17.6 million mainly due to increased administrative and general expenses of $12.3 million and other production expenses of $5.2 million. These increases are primarily attributed to the June 2002 commercial operation of the New Units. Other operation expense in 2001 included administrative and general expenses of $5.6 million and other production expenses of $0.6 million related to the startup of the Company and the transfer of Plant Dahlberg in July 2001. In 2002, depreciation and amortization increased as a direct result of the New Units. Depreciation and amortization in 2001 all related to Plant Dahlberg which was placed into service in July 2001. In 2002, the increase in taxes other than income taxes is related to property taxes for the New Units. Interest expense in 2002 increased by $40.9 million from the amount recorded in 2001. This increase in 2002 is primarily attributed to increased debt associated with the Company's ongoing construction program. The majority of the additional debt is comprised of $575 million in senior notes issued in June 2002 which accounted for $20.0 million of the increased expense. Increased borrowing against the revolving line of credit increased expense by $15.7 million and an increase in the note payable to Southern Company of $209.5 million contributed $5.2 million of the increase. In 2001, interest expense represented interest on long-term debt and interest on borrowings from Southern Company to support the Company's on-going construction program. These expenses were offset by interest capitalized related to borrowings used to finance the Company's on-going construction program. Other, net in 2002 decreased primarily due to unrealized losses on derivative energy contracts. Effects of Inflation The Company is subject to long-term contracts and income tax laws that are based on the recovery of historical costs. 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 generating facilities with long economic lives. Conventional accounting for historical cost 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. FUTURE EARNINGS POTENTIAL General The results of operations for 2002 and 2001 are not necessarily indicative of future earnings. The level of future earnings depends on numerous factors including completion of construction on new generating facilities, regulatory II-252 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report matters, energy sales, creditworthiness of customers, total generating capacity available in the Super Southeast, and the remarketing of capacity. The Company is working to maintain and expand its share of wholesale energy sales in the Southeastern power markets. By the end of 2005, the Company plans to have approximately 6,600 megawatts of available generating capacity in commercial operation. At December 31, 2002, 2,400 megawatts were in commercial operation. The Company currently has general authorization from the Federal Energy Regulatory Commission (FERC) to sell power to non-affiliates at market-based prices. Specific FERC approval must be obtained with respect to a market-based contract with an affiliate. As with any seller that has been authorized to sell at market-based rates, the FERC retains the authority to modify or withdraw the Company's market-based rate authority if it determines that the underlying requirements for having such authority are no longer applicable. In that event, the Company would be required to obtain FERC approval of rates based on cost of service, which may be lower than those in negotiated market-based rates. In June 2002, PPAs with Georgia Power and Savannah Electric and requirements agreements with 11 EMCs went into effect. Additionally, in June 2002 commercial operation of the New Units began. In 2003, the Company expects Plant Franklin Unit 2, Plant Harris Units 1 and 2 and Plant Stanton A to be completed and placed into commercial operation. In 2004, the Company's PPA with Georgia Power will begin for Plant Harris Unit 2. The Company also expects Plant Franklin Unit 3 and Plant McIntosh Units 10 and 11 to begin commercial operation in 2005. Substantially all of the Company's generating capacity in operation, under construction or planned has been sold under PPAs. (See Note 5 to the financial statements herein for additional details.) Also, effective in January 2003, the Company entered into contracts with North Carolina Municipal Power Authority 1 (North Carolina) and the City of Dalton (Dalton). Under the North Carolina contract, the Company will be responsible for supplying North Carolina's capacity and energy needs in excess of its existing resources and disposing of its surplus energy. The contract term is January 1, 2003 through December 31, 2004. Under the Dalton contract, the Company is responsible for supplying Dalton's requirements for capacity and energy in excess of Dalton's existing resources. The contract term is for 15 years, beginning January 1, 2003, with a customer option to convert to a fixed capacity purchase at the end of year 10. Although under some of the Company's PPAs energy will be sold to Southern Company's five regulated operating companies, the Company's generating facilities will not be in the operating companies' regulated rate bases, and the Company will not be able to seek recovery from the affiliated companies' ratepayers for construction, repair or maintenance costs. It is expected that the capacity payments in the PPAs will produce sufficient cash flow to meet these costs, pay debt service and provide an equity return. However, the Company's overall profit will depend on numerous factors, including efficient operation of its generating facilities. As a general matter, existing PPAs provide that the purchasers are responsible for substantially all of the cost of fuel relating to the energy delivered under such PPA. To the extent a particular generating facility does not meet the operational requirements contemplated in most PPAs, the Company may be responsible for excess fuel costs. With respect to fuel transportation risk, most of the Company's PPAs provide that the purchasers are responsible for procuring and transporting the fuel to the particular generating facility. The Company's PPAs with non-affiliated counterparties have provisions that require the posting of collateral or an acceptable substitute guarantee in the event that Standard & Poor's or Moody's downgrades the credit ratings of such counterparty to below-investment grade, or, if the counterparty is not rated or fails to maintain a minimum coverage ratio. The PPAs are expected to provide the Company with a stable source of revenue during their respective terms. The Company has PPAs with subsidiaries of Dynegy Inc. (Dynegy) which are now rated below investment grade. Minimum capacity revenues under one of these contracts average approximately $13 million annually through May 2005. Dynegy has provided a letter of credit expiring in April 2003 totaling $20 million (approximately 18 months of capacity payments) to the Company. In addition, two one-year letters of credit totaling $50 million (approximately 14 months of capacity payments) were provided in April 2002 as security for obligations of II-253 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report Dynegy affiliates under the Plant Franklin Unit 3 PPAs beginning in 2005. These letters of credit can be drawn in the event of a default under the PPA or failure to renew the letters of credit prior to expiration. In the event of such a default, and if the Company was unable to resell that capacity in the market, future earnings could be affected. The outcome of this matter cannot now be determined. In 2002, the Company executed additional PPAs whereby the Company will sell capacity and energy from planned generating facilities at Plant McIntosh to Georgia Power and Savannah Electric beginning in 2005. These PPAs are subject to regulatory approval. Under these contracts and all other existing PPAs, the Company has the right, at its sole discretion, to supply capacity and energy under these arrangements from any resource available to it as part of the Southern Pool. Reference is made to Note 3 to the financial statements herein for additional information. Fixed and variable operation and maintenance (O&M) costs will be covered either through capacity charges or other charges based on dollars per kilowatt year or dollars per megawatt hour. The Company has also entered into long-term service contracts with General Electric International, Inc. (GE) to reduce its exposure to certain O&M costs relating to GE equipment. See Note 5 to the financial statements herein for additional information. Industry Restructuring The electric utility industry in the United States is continuing to evolve as a result of regulatory and competitive factors. Among the early primary agents of change was 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 enhanced the incentive for IPPs to build power plants for a utility's large industrial and commercial customers where retail access is allowed and sell energy to other utilities. Also, electricity sales for resale rates were affected by numerous new energy suppliers, including power marketers and brokers. This past year, merchant energy companies and traditional electric utilities with significant energy marketing and trading activities came under severe financial pressures. Many of these companies have completely exited or drastically reduced all energy marketing and trading activities and sold foreign and domestic electric infrastructure assets. The Company has not experienced any material financial impact regarding its limited energy trading operations and recent generating capacity additions. In general, the Company only constructs new generating capacity after entering into long-term capacity contracts for the new facilities. FERC Matters In December 1999, the FERC issued its final rule on Regional Transmission Organizations (RTOs). The order encouraged utilities owning transmission systems to form RTOs on a voluntary basis. Southern Company has submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, Southern Company explained that it is developing a for-profit RTO known as SeTrans with a number of non-jurisdictional cooperative and public power entities. In 2001, Entergy Corporation and Cleco Power joined the SeTrans development process. In 2002, the sponsors of SeTrans established a Stakeholder Advisory Committee, which will participate in the development of the RTO, and held public meetings to discuss the SeTrans proposal. On October 10, 2002, the FERC granted Southern Company's and other SeTrans' sponsors petition for a declaratory order regarding the governance structure and the selection process for the Independent System Administrator (ISA) of the SeTrans RTO. The FERC also provided guidance on other issues identified in the petition. The SeTrans sponsors announced the selection of ESB International, Ltd. (ESBI) to be the preferred ISA candidate. Should negotiations with this candidate successfully conclude with final agreement among the parties, the SeTrans sponsors intend to seek any state and federal regulatory or other approvals necessary for formation of the SeTrans RTO and the approval of ESBI to serve in the capacity of the SeTrans ISA. The creation of SeTrans is not expected to have a material impact on the Company's financial statements; however, the outcome of this matter cannot now be determined. In July 2002, the FERC issued a notice of proposed rulemaking regarding open access transmission service and standard electricity market design. The proposal, if adopted, would among other things: (1) require transmission assets of jurisdictional utilities to be operated by an independent entity; (2) II-254 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report establish a standard market design; (3) establish a single type of transmission service that applies to all customers; (4) assert jurisdiction over the transmission component of bundled retail service; (5) establish a generation reserve margin; (6) establish bid caps for a day ahead and spot energy markets; and (7) revise the FERC policy on the pricing of transmission expansions. Comments on certain aspects of the proposal have been submitted by Southern Company. Any impact of this proposal on Southern Company and its subsidiaries will depend on the form in which final rules may be ultimately adopted; however, the Company's revenues, expenses, assets, and liabilities could be adversely affected by changes in the transmission regulatory structure in its regional power market. Environmental Matters The Company's business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States; in particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. Several major bills to amend the Clean Air Act to impose more stringent emissions limitations have been proposed. Three of these, the Bush Administration's Clear Skies Act, the Clean Power Act of 2002, and the Clean Air Planning Act of 2002, proposed to further limit power plant emissions of sulfur dioxide, nitrogen oxides, and mercury. The latter two bills also proposed to limit emissions of carbon dioxide. None of these bills were enacted into law in the last Congress. Similar bills have been, and are anticipated to be, introduced this year. The Bush Administration's Clear Skies Act was recently reintroduced, and President Bush has stated that it will be a high priority for the administration. Other bills already introduced include the Climate Stewardship Act of 2003, which proposes capping greenhouse gas emissions. Federal and state environmental regulatory agencies are actively considering and developing additional control strategies for emission of air pollution from all major sources of air pollution, particularly electric generating facilities. This includes the overall reduction of emission of nitrogen oxides (NOx) in the eastern United States, the reduction of NOx and particulate matter emissions to reduce regional haze and visibility impairment in sensitive areas, the development of appropriate control standards and technologies for emissions of mercury and the reduction of so-called "greenhouse gases" (such as carbon dioxide) to address concerns over global climate change. Development and implementation of final federal and state rules on these issues could require substantial further reductions in all air emissions associated with electricity generation. Additional compliance costs and capital expenditures resulting from the implementation of such rules and standards cannot be determined until the results of legal challenges are known and final rules have been adopted at both the federal and state level. The EPA and state environmental regulatory agencies are reviewing and evaluating various other matters including: control strategies to reduce regional haze; limits on pollutant discharges to impaired waters; cooling water intake restrictions; and hazardous waste disposal requirements. The impact of any new standards will depend on the development and implementation of applicable regulations. 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 Recovery Act; the Toxic Substances Control 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 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. All of the Company's PPAs contain provisions that permit charging the purchaser with some of the new costs incurred as a result of change in law, including environmental regulations. Certain environmental, natural resource and land use concerns could have an effect on site selection for future plants. This includes the potential for designation of target areas as non-attainment for ozone or particulate matter under newly adopted National Ambient Air Quality Standards, the availability of water withdrawal rights, uncertainties regarding aesthetic impacts such as II-255 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report increased light or noise or regarding any potential for adverse health impacts associated with electric and magnetic fields. Such concerns and uncertainties can increase the cost of siting and operating any type of electric generating facility. Accounting Policies Critical Policies The Company's significant accounting policies are described in Note 1 to the financial statements. The Company has three critical accounting policies that require a significant amount of judgment and are considered to be the most important to the presentation of the Company's financial position and results of operations. The first critical policy is the recognition of capacity revenues from long-term contracts at the lesser of the levelized basis or the cash collected over the contract periods. Second, the Company designates qualifying derivative instruments as cash flow or fair value hedges under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and marks such derivative instruments to market based primarily on quoted market prices. The unrealized changes in fair value of qualifying cash flow hedges are deferred in other comprehensive income. Any ineffectiveness in those hedges and changes in non-qualifying positions are reported as a component of current period income. Finally, the Company uses flow-through accounting for state manufacturer's tax credits. This means that the Company recognizes the credit as a reduction of tax expense when it is more likely than not to be allowed by the Georgia Department of Revenue. Derivatives Effective January 2001, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. In October 2002, the Emerging Issues Task Force (EITF) of the FASB announced accounting changes related to energy trading contracts in Issue No. 02-03. In October 2002, the Company prospectively adopted the EITF's requirements to reflect the impact of certain energy trading contracts on a net basis. This change had no material impact on the company's income statement. Another change also required certain energy trading contracts to be accounted for on an accrual basis effective January 2003. This change had no impact on the Company's current accounting treatment. Asset Retirement Obligations In January 2003, the Company adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit non-regulated companies to continue accruing future retirement costs for long-lived assets that they do not have a legal obligation to retire. The Company has no liability for asset retirement obligations. In January 2003, the Company recorded a reduction to the accumulated reserve for depreciation and a cumulative effect of change in accounting principle of $0.6 million. This represents removal costs accrued prior to the implementation of Statement No. 143. FINANCIAL CONDITION Plant Additions The major change in the Company's financial condition during 2002 was the addition of approximately $1.2 billion to utility plant related to on-going construction of combined-cycle units and the transfer of two units at Plant Wansley from Georgia Power. The funds for these additions were provided by the Company's credit facility, the issuance of senior notes in June 2002, and capital contributions and subordinated loans from Southern Company. The Statements of Cash Flows provide additional information. Credit Rating Risk The Company does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral -- but not accelerated payment -- in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity sales, fixed-price physical gas purchases and agreements covering interest rate swaps and currency swaps. At December 31, 2002, the maximum potential collateral II-256 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report requirements under the electricity sale contracts and financial instruments were approximately $194 million. Generally, collateral may be provided for by a Southern Company guaranty, a letter of credit or cash. At December 31, 2002, there were no material collateral requirements for the gas purchase contracts. Exposure to Market Risks The Company is exposed to market risks, including changes in interest rates, currency exchange rates, and certain commodity prices. To manage the volatility attributable to these exposures, the Company nets the exposures to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. The Company's policy is that derivatives are to be used primarily for hedging purposes. Derivative positions are monitored using techniques that include market valuation and sensitivity analysis. The weighted average interest rate on variable long-term debt outstanding at December 31, 2002 was 3.65%. If the Company sustained a 100 basis-point change in interest rates for all variable rate long-term debt, the change would affect annualized gross interest cost by approximately $5.6 million at December 31, 2002. Most or all of that change would be capitalized, given the size of the Company's construction program. To further mitigate the Company's exposure to interest rates, it has entered into interest rate swaps that were designated as cash flow hedges for planned debt issuances. The Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term. See "Financing Activities" herein and Notes 1 and 7 to the financial statements under the heading "Financial Instruments" for additional information. The Company has firm purchase commitments that require payment in Euros. As a hedge against fluctuations in the exchange rate for Euros, the Company entered into forward contracts to purchase Euros and has designated these contracts as fair value hedges. Since the terms of these Euro contracts mirror the purchase commitment terms, there is no ineffectiveness recognized in income. At December 31, 2002, the Company had outstanding contracts covering a notional amount of $5.5 million in commitments through May 2003. Because energy from the Company's facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the purchasers, the Company's exposure to market volatility in commodity fuel prices and prices of electricity is limited. To mitigate residual risks in those areas, the Company enters into fixed-price contracts for the purchase or sale of fuel and electricity. In connection with the transfers of Plant Franklin in 2001 and Plant Wansley in 2002 to the Company, Georgia Power transferred approximately $5.6 million and $1.6 million, respectively, in derivative assets relating to electric and gas forward contracts in effect at the date of the transfers. These contracts were recorded at fair value on the date of the transfer, which was equal to Georgia Power's carrying amount. Following the transfer, these contracts are marked to market through income until realized and settled. At December 31, 2002 and 2001, the fair value of changes in derivative energy contracts and year-end valuations were as follows: Changes in Fair Value ------------------------------------------------------------- 2002 2001 ------------------------------------------------------------- (in thousands) Contracts beginning of year $ 5,496 $ - Contracts realized or settled (4,336) - New contracts at inception 1,576 5,617 Changes in valuation techniques - - Current period changes 1,128 (121) ------------------------------------------------------------ Contracts end of year $ 3,864 $5,496 ============================================================= At December 31, 2002, all of these contracts are actively quoted and mature within one year. Unrealized gains and losses on electric and gas contracts used to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on contracts that do not represent hedges are recognized in the income statement as incurred. At December 31, 2002, the fair value of derivative energy contracts was as follows: Amounts - ------------------------------------------------------------ (in thousands) Other comprehensive income $2,706 Net income 1,158 - ------------------------------------------------------------ Total fair value $3,864 ============================================================ II-257 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report Approximately $(4.9) million and $0.6 million of gains (losses) were recognized in income in 2002 and 2001, respectively. The Company is exposed to market-price risk in the event of nonperformance by parties to the derivative energy contracts. The Company's policy is to enter into agreements with counterparties that have investment grade credit ratings by Moody's and Standard & Poor's, or with counterparties who have posted collateral to cover potential credit exposure. Therefore, the Company does not anticipate market risk exposure from nonperformance by the counterparties. For additional information, see Note 1 to the financial statements under "Financial Instruments." Financing Activities During 2002, Southern Company made to the Company equity contributions of approximately $279.1 million, plus subordinated loans of approximately $209.5 million. Equity contributions and subordinated loans from Southern Company total $941.7 million to the Company at the end of 2002. No dividends were paid in 2002. In June 2002, the Company issued $575 million of 6.25% Senior Notes, Series A due July 15, 2012. The net proceeds were used to reduce outstanding indebtedness under a revolving credit agreement and to reduce loans from Southern Company. The Company also settled several interest rate swap agreements entered into in anticipation of this issuance at a $16.9 million loss. This amount has been deferred in other comprehensive income and will be amortized to interest expense over the life of the senior notes. Also in June 2002, the Company issued a long-term note payable to Chilton County, Alabama for $2.1 million. The proceeds of the note were used for the purchase of land for a potential future generation site. The note is payable over the next 5 years at an imputed interest rate of 6.25%. Capital Requirements for Construction The Company estimates that construction expenditures for the years 2003 through 2005 will total $377 million, $381 million and $278 million, respectively. Actual construction costs may vary from this estimate because of changes in such factors as: business conditions; environmental regulations; FERC rules and transmission regulations; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. The Company has approximately 4,100 megawatts of new generating capacity scheduled to be placed in service by 2005. Other Capital Requirements In addition to the funds needed for the construction program, approximately $380.6 million will be required by the end of 2005 for maturities of long-term debt. These capital requirements and purchase commitments -- discussed in Notes 3 and 5 to the financial statements -- are as follows: 2003 2004 2005 - ----------------------------------------------------------------- (in millions) Notes payable to Chilton County $ 0.2 $ 0.2 $ 0.2 Purchase commitments - ----------------------------------------------------------------- Fuel $22.7 $22.9 $18.6 - ----------------------------------------------------------------- Long-term service agreements $17.1 $22.7 $21.4 - ----------------------------------------------------------------- Sources of Capital The Company will use both external funds and equity capital from Southern Company to finance its construction program. External funds will be from the issuance of unsecured senior debt and commercial paper or utilization of existing credit arrangements from banks. At December 31, 2002, the Company had approximately $19.5 million of cash and cash equivalents to meet short-term cash needs and contingencies. To meet liquidity and capital resource requirements, the Company had at December 31, 2002 approximately $470 million of unused committed credit arrangements with banks as shown in the following table. At the beginning of 2003, bank arrangements are as follows: Unused Expiring In -------------------------------- Total Unused 2003 2004 & beyond - ------------------------------------------------------------- (in millions) $850 $470 $-- $470 - ------------------------------------------------------------- Amounts drawn under the arrangements are used to finance acquisition and construction costs related to gas-fired electric generating facilities and for II-258 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Southern Power Company 2002 Annual Report general corporate purposes, subject to borrowing limitations for each generating facility. The arrangements permit the Company to fund construction of future generating facilities upon meeting certain requirements. At December 31, 2002, the Company had $380 million in outstanding bank borrowings. See Note 7 to the financial statements under "Long-Term Debt" for additional information. Cautionary Statement Regarding Forward-Looking Information The Company's 2002 Annual Report includes forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning scheduled completion of new generation, capacity projections and the strategic goals for the Company's wholesale business. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other comparable terminology. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, and also changes in environmental and other laws and regulations to which the Company is subject, as well as changes in application of existing laws and regulations; current and future litigation; the effects, extent, and timing of the entry of additional competition in the markets in which the Company operates; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; the performance of projects undertaken by the Company and the success of efforts to invest in and develop new opportunities; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to the Company; the ability of counterparties of the Company to make payments as and when due; the effects of, and changes in, economic conditions in the areas in which the Company operates, including the current soft economy; the direct or indirect effects on the Company's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the ability of the Company to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed from time to time by the Company with the Securities and Exchange Commission. 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STATEMENTS OF INCOME For the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001 Southern Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Sales for resale -- Non-affiliates $114,919 $26,390 Affiliates 183,111 2,906 Other revenues 738 5 - -------------------------------------------------------------------------------------------------------------------------- Total operating revenues 298,768 29,301 - -------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 97,965 3,779 Purchased power -- Non-affiliates 34,499 1,209 Affiliates 19,164 3,517 Other 23,800 6,243 Maintenance 4,551 382 Depreciation and amortization 18,319 3,291 Taxes other than income taxes 4,275 393 - -------------------------------------------------------------------------------------------------------------------------- Total operating expenses 202,573 18,814 - -------------------------------------------------------------------------------------------------------------------------- Operating Income 96,195 10,487 Other Income and (Expense): Interest income 288 78 Interest expense, net of amounts capitalized (8,886) (427) Other income (expense), net (4,870) 580 - -------------------------------------------------------------------------------------------------------------------------- Total other income and (expense) (13,468) 231 - -------------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 82,727 10,718 Income taxes 28,457 2,511 - -------------------------------------------------------------------------------------------------------------------------- Net Income $ 54,270 $ 8,207 ========================================================================================================================== The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001 Southern Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 54,270 $8,207 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 18,319 3,291 Deferred income taxes and investment tax credits, net 2,739 3,534 Other, net 17,955 5,406 Changes in certain current assets and liabilities -- Receivables, net (12,433) (5,381) Fossil fuel stock (7,606) (3,425) Materials and supplies (822) (5,731) Other current assets (10,198) (183) Accounts payable 8,628 2,242 Taxes accrued 7,834 394 Interest accrued 20,713 - Other current liabilities - 250 - ------------------------------------------------------------------------------------------------------------------------- Net cash provided from (used for) operating activities 99,399 8,604 - ------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (1,214,677) (765,511) Increase in construction related payables 3,229 28,171 Other (885) (10,126) - ------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (1,212,333) (747,466) - ------------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase (decrease) in notes payable to parent, net 209,538 950 Proceeds -- Senior notes 575,000 - Other long-term debt 87,873 293,205 Capital contributions from parent company 279,133 452,097 Settlement of interest rate swaps on senior note (16,884) - Other (5,963) (3,679) - ------------------------------------------------------------------------------------------------------------------------- Net cash provided from (used for) financing activities 1,128,697 742,573 - ------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents 15,763 3,711 Cash and Cash Equivalents at Beginning of Period 3,711 - - ------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 19,474 $3,711 ========================================================================================================================= Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of $35,311 and $2,891 capitalized for 2002 and 2001, respectively) $ - $ 427 Income taxes (net of refunds) 23,937 (423) - ------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Southern Power Company 2002 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ Assets 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands) Current Assets: Cash and cash equivalents $ 19,474 $ 3,711 Receivables -- Customer accounts receivable 6,609 3,766 Affiliated companies 11,555 1,965 Accumulated provision for uncollectible accounts (350) (350) Fossil fuel stock, at average cost 11,031 3,425 Materials and supplies, at average cost 6,553 5,731 Prepayments 8,796 183 Other 9,954 9,208 - ------------------------------------------------------------------------------------------------------------------------------ Total current assets 73,622 27,639 - ------------------------------------------------------------------------------------------------------------------------------ Property, Plant, and Equipment: In service 896,163 265,153 Less accumulated provision for depreciation 21,590 3,291 - ------------------------------------------------------------------------------------------------------------------------------ 874,573 261,862 Construction work in progress 1,082,987 500,358 - ------------------------------------------------------------------------------------------------------------------------------ Total property, plant, and equipment 1,957,560 762,220 - ------------------------------------------------------------------------------------------------------------------------------ Assets from risk management activities - 9,059 - ------------------------------------------------------------------------------------------------------------------------------ Deferred Charges and Other Assets: Accumulated deferred income taxes 38,591 11,915 Other 16,203 12,024 - ------------------------------------------------------------------------------------------------------------------------------ Total deferred charges and other assets 54,794 23,939 - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $2,085,976 $822,857 ============================================================================================================================== The accompanying notes are an integral part of these financial statements.
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BALANCE SHEETS At December 31, 2002 and 2001 Southern Power Company 2002 Annual Report - ----------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- (in thousands) Current Liabilities: Securities due within one year $ 200 $ - Notes payable to parent 210,488 950 Accounts payable -- Affiliated 37,748 26,135 Other 4,522 4,278 Taxes accrued -- Income taxes 3,915 394 Other 4,313 - Interest accrued 20,713 - Other 3,484 886 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 285,383 32,643 - ----------------------------------------------------------------------------------------------------------------------- Long-Term Debt: Senior notes 575,000 - Other long-term debt 382,089 293,205 Unamortized debt (discount) premium, net (1,210) - - ----------------------------------------------------------------------------------------------------------------------- Long-term debt 955,879 293,205 - ----------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Obligations under risk management activities 63,191 365 Deferred capacity revenues -- Affiliated 13,075 - Other 3,147 1,717 Other -- Affiliated 15,644 23,415 Other 3,053 4,519 - ----------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 98,110 30,016 - ----------------------------------------------------------------------------------------------------------------------- Common stockholder's equity Common stock, par value $0.01 per share -- Authorized - 1,000,000 shares Outstanding - 1,000 shares - - Paid-in capital 731,230 452,097 Retained earnings 62,477 8,207 Accumulated other comprehensive (loss) income (47,103) 6,689 - ----------------------------------------------------------------------------------------------------------------------- Total common stockholder's equity 746,604 466,993 - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $2,085,976 $822,857 ======================================================================================================================= Commitments and Contingent Matters (See notes) - ----------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001 Southern Power Company 2002 Annual Report - --------------------------------------------------------------------------------------------------------------------------- Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (loss) Total - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 2000 $ - $ - $ - $ - $ - Net income - - 8,207 - 8,207 Capital contributions from parent company - 452,097 - - 452,097 Other comprehensive income - - - 6,689 6,689 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 - 452,097 8,207 6,689 466,993 Net income - - 54,270 - 54,270 Capital contributions from parent company - 279,133 - - 279,133 Other comprehensive (loss) - - - (53,792) (53,792) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 $ - $731,230 $62,477 $(47,103) $746,604 =========================================================================================================================== The accompanying notes are an integral part of these financial statements. STATEMENTS OF COMPREHENSIVE INCOME For the Year Ended December 31, 2002 and For the Period from January 8, 2001 (Inception) to December 31, 2001 Southern Power Company 2002 Annual Report - ---------------------------------------------------------------------------------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------- (in thousands) Net income $ 54,270 $ 8,207 - ---------------------------------------------------------------------------------------------------------------- Other comprehensive (loss) income: Changes in fair value of qualifying hedges, net of tax of (54,360) 6,689 $(34,030) and $4,219 for the years 2002 and 2001, respectively Less: Reclassification adjustment for amounts included in net income, 568 - net of tax of $355 and $0 for the years 2002 and 2001, respectively - ---------------------------------------------------------------------------------------------------------------- Total other comprehensive (loss) income (53,792) 6,689 - ---------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 478 $14,896 ================================================================================================================ The accompanying notes are an integral part of these financial statements.
II-264 NOTES TO FINANCIAL STATEMENTS Southern Power Company 2002 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Southern Power is a wholly owned subsidiary of Southern Company, which is also the parent company of five operating companies, a system service company (SCS), Southern Company Gas (Southern GAS), 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. Southern Power constructs, owns and manages Southern Company's competitive generation assets and sells electricity at market-based rates in the wholesale market. Contracts among the operating companies and Southern Power -- related to jointly owned generating facilities, interconnecting transmission lines or the exchange of electric power -- are regulated by the Federal Energy Regulatory Commission (FERC) and/or the Securities and Exchange Commission (SEC). SCS provides, at cost, specialized services to Southern Company and subsidiary companies. Southern GAS, which began operation in August 2002, is a competitive retail natural gas marketer serving communities in Georgia. 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. The Company follows accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates, and the actual results may differ from these estimates. Southern Power was formed on January 8, 2001. Southern Power began commercial operations in August 2001 after Georgia Power transferred its interest in Plant Dahlberg Units 1 through 10. See Note 2, Asset Transfers, for further information regarding asset transfers from affiliates. The consolidated financial statements include the accounts of Southern Power and its wholly-owned subsidiary, Southern Company - Florida LLC (SCF) which was established to own, operate and maintain Plant Stanton Unit A. See Note 4 for further information. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior years' data presented in the financial statements have been reclassified to conform with current year presentation. Affiliate Transactions Southern Power has an agreement with SCS under which the following services are rendered to the Company at direct or allocated cost: general and design engineering, purchasing, accounting and statistical analysis, finance and treasury, tax, information resources, marketing, auditing, insurance and pension administration, human resources, systems and procedures and other services with respect to business and operations and power pool transactions. SCS also enters into fuel purchase and transportation arrangements and contracts, financial instruments for purposes of hedging and wholesale energy purchase and sale transactions for the benefit of Southern Power. As Southern Power has no employees, all employee related charges are rendered at cost under agreements with SCS or the operating companies. Costs for these services from SCS amounted to approximately $29.5 million and $12 million during 2002 and 2001, respectively, of which approximately $16.2 million in 2002 and $4.7 million in 2001 was general, administrative, operation and maintenance expenses; the remainder was capitalized to construction work in progress. Cost allocation methodologies used by SCS are approved by the SEC and management believes they are reasonable. Southern Power has an agreement with Georgia Power to provide operation and maintenance services for Plants Dahlberg, Wansley and Franklin. These services are billed at cost on a monthly basis and are recorded as operations and maintenance expense in the accompanying statements of income. For the periods ended December 31, 2002 and 2001, these services totaled approximately $5.3 million and $1.0 million, respectively. Additionally, Southern Power has agreements with Alabama Power and Georgia Power to provide procurement, payables and other functions related to the construction at Plants Harris and Franklin in Alabama and Plant Wansley in Georgia. Costs for these services are billed monthly and are capitalized. Effective June 2002, Southern Power entered into Power Purchase Agreements (PPAs) with Georgia Power and Savannah Electric for the sale of capacity and energy. Billings under these agreements totaled $165 million, including $13.5 II-265 NOTES (continued) Southern Power Company 2002 Annual Report million of deferred capacity revenues included in deferred capacity revenues on the Balance Sheet at December 31, 2002. See Note 5 herein for additional information. The operating companies, Southern Power, and Southern GAS may jointly enter into various types of wholesale energy, natural gas and certain other contracts, either directly or through SCS as agent. Each participating company may be jointly and severally liable for the obligations incurred under these agreements. See Note 5 for information regarding PPAs between Southern Power and Alabama Power, Georgia Power and Savannah Electric. Southern Power and its affiliates generally settle amounts related to the above transactions on a monthly basis in the month following the performance of such services or the purchase or sale of electricity. Also see Notes 2, 3, 4 and 7 for information related to various types of financing support provided by Southern Company. Revenues and Fuel Costs Revenues are recognized as services are rendered. Capacity is sold at rates specified under contractual terms and is recognized at the lesser of the levelized basis or the cash collected over the respective contract periods. Energy is generally sold at market-based rates and the associated revenue is recognized as the energy is delivered. Significant portions of Southern Power's revenues have been derived from certain customers. For the year ended December 31, 2002, Georgia Power, Savannah Electric, LG&E Energy Marketing, Inc. and Dynegy Power Marketing Inc. accounted for approximately 33.5%, 17.2%, 15.8% and 4.4% of revenues, respectively. For the period ended December 31, 2001, LG&E Energy Marketing, Inc. and Dynegy Power Marketing Inc. accounted for approximately 66% and 21% of revenues, respectively. Fuel costs are expensed as the fuel is consumed. The Company relies mainly on natural gas to fuel its generating units. See Note 3 herein for further details on future commitments. Cash and Cash Equivalents For purposes of the financial statements, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. 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 installed. Materials and supplies are recorded at average cost. Property, Plant and Equipment Property, plant and equipment are stated at original cost. Original cost includes materials, direct labor incurred by affiliated companies, minor items of property and appropriate administrative costs. Interest is capitalized on qualifying projects during the development and construction period. In 2002 and 2001, interest of approximately $35.3 million and $2.9 million, respectively, was capitalized in connection with the development and construction of power plants. The cost of maintenance, repairs and replacement of minor items of property is charged to maintenance expense as incurred. The cost of replacements of property that extend the useful life of the plant, exclusive of minor items of property, is capitalized. Depreciation Depreciation of the original cost of assets is computed under the straight-line method based on the assets' estimated useful lives determined by the Company. The primary assets in property, plant and equipment are power plants all of which have an estimated useful life of 35 years, except Plant Dahlberg which has an estimated useful life of 40 years. In January 2003, Southern Power adopted FASB Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 establishes new accounting and reporting standards for legal obligations associated with the ultimate cost of retiring long-lived assets. The present value of the ultimate costs for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be capitalized as part of the related long-lived II-266 NOTES (continued) Southern Power Company 2002 Annual Report asset and depreciated over the asset's useful life. Additionally, Statement No. 143 does not permit the continued accrual of future retirement costs for long-lived assets that the company does not have a legal obligation to retire. The Company has no liability for asset retirement obligations. In January 2003, the Company recorded a reduction to the accumulated reserve for depreciation and a cumulative effect of change in accounting principle of $0.6 million. This represents removal costs accrued prior to the implementation of Statement No. 143. Impairment of Long-Lived Assets The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The determination of whether an impairment has occurred is based on an estimate of undiscounted future cash flows attributable to the assets, as compared to the carrying value of the assets. If an impairment has occurred, the amount of the impairment recognized is determined by estimating the fair value of the assets and recording a provision for loss if the carrying value is greater than the fair value. For assets identified as held for sale, the carrying value is compared to the estimated fair value less the cost to sell in order to determine if an impairment provision is required. Until the assets are disposed of, their estimated fair value is reevaluated when circumstances or events change. Deferred Project Development Costs The Company capitalizes project development costs once it is determined that it is probable that a specific site will be acquired and a power plant constructed. These costs include professional services, permits and other costs directly related to the construction of a new project. These costs are generally transferred to construction work in progress upon commencement of construction. The total deferred project development costs at December 31, 2002 and December 31, 2001 were $3.6 million and $4.5 million, respectively. Financial Instruments The Company uses derivative financial instruments to hedge exposures to fluctuations in interest rates, foreign currency exchange rates, the prices of certain fuel purchases and electricity purchases and sales. All derivative financial instruments are recognized as either assets or liabilities and are measured at fair value. The Company and its affiliates, through SCS acting as their agent, enter into commodity related forward and option contracts to limit exposure to changing prices on certain fuel purchases and electricity purchases and sales. Substantially all of the Company's bulk energy purchases and sales contracts are derivatives. However, in many cases, these contracts qualify as normal purchases and sales and are accounted for under the accrual method. Other contracts qualify as cash flow hedges of anticipated transactions, resulting in the deferral of related gains and losses, and are recorded in other comprehensive income until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and that do not meet the hedge requirements are marked to market through current period income and are recorded on a net basis in the consolidated Statements of Income. The Company is exposed to losses related to financial instruments in the event of counterparties' nonperformance. The Company has established controls to determine and monitor the creditworthiness of counterparties in order to mitigate the Company's exposure to counterparty credit risk. The Company has firm purchase commitments for equipment that require payment in Euros. As a hedge against fluctuations in the exchange rate for Euros, the Company entered into forward contracts to purchase Euros. The Company has designated these contracts as fair value hedges. At December 31, 2002, Southern Power had outstanding contracts covering a notional amount of $5.5 million in commitments through May 2003. The forward contracts to purchase Euros are on the same dates and in the same amounts as the Euro payments that the Company owes for the equipment. As all of the critical terms of the forward Euro purchases (dates and amounts) match those of the Euro payment obligations, the changes in fair value attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. Therefore, there is no ineffectiveness related to this hedge. II-267 NOTES (continued) Southern Power Company 2002 Annual Report Other Southern Power financial instruments for which the carrying amounts did not equal fair value at December 31, 2002 were as follows: Carrying Fair Amount Value ------------------------ Long-term debt: (in millions) At December 31, 2002 $956 $990 - -------------------------------------------------------------- The fair values for securities were based on either closing market prices or closing prices of comparable instruments. Income Taxes The Company uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences. Comprehensive Income Comprehensive income -- consisting of net income and changes in the fair value of qualifying cash flow hedges, net of income taxes less reclassifications of amounts included in net income-- is presented in the financial statements. The objective of comprehensive income is to report a measure of all changes in common stock equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. 2. ASSET TRANSFERS On July 31, 2001, Georgia Power transferred its interests in Plant Dahlberg Units 1 through 10 and related working capital to Southern Power. In accordance with the affiliate transaction rules of PUHCA, these assets were transferred at Georgia Power's net carrying costs of $260.1 million. The transferred assets consist primarily of 10 combustion turbine units (810 MW) in operation, all located in Jackson County, Georgia. In connection with the asset transfer, Georgia Power also assigned to the Company its interest in three PPAs related to Plant Dahlberg. The results of operations of Plant Dahlberg were included in the financial statements from August 1, 2001. The following projects, which were under construction, were transferred from Alabama Power and Georgia Power to Southern Power and recorded in construction work in progress at the respective affiliate's book value: Transferred Amount Plant from Date (in millions) - ------------------------------------------------------------------- Harris Alabama Power 06/2001 $ 91.4 Units 1 & 2 Franklin Units 1 & 2 Alabama Power 11/2001 267.9 and Georgia Power Wansley Georgia Power 01/2002 389.9 Units 6 & 7 - ------------------------------------------------------------------- In conjunction with these transfers, Alabama Power and Georgia Power have assigned PPAs related to these plants and certain vendor contracts related to the on-going construction of these facilities to Southern Power. Southern Company has entered into limited keep-well arrangements with Alabama Power and Georgia Power whereby Southern Company will contribute funds to the Company via loans or capital contributions to fund the performance of Southern Power as equipment purchaser under certain arrangements. As of December 31, 2002, Southern Power's remaining purchase obligations to equipment vendors under these contracts totaled $12.2 million. In addition, Southern Company has entered into keep-well agreements with Alstom Power for the transfer of an equipment contract at the Company's Plant Franklin Unit 3. At December 31, 2002, the amount outstanding under this contract was $0.1 million. 3. CONTINGENCIES AND COMMITMENTS General Litigation Matters Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. The Company's business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation currently filed against the Company cannot be predicted at this time; however, after consultation with legal II-268 NOTES (continued) Southern Power Company 2002 Annual Report counsel, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material adverse effect on the Company's financial statements. Fuel SCS, as agent for the operating companies and Southern Power, has entered into various fuel transportation and procurement agreements to supply a portion of the fuel (primarily natural gas) requirements for the operating facilities. In most cases, these contracts contain provisions for firm transportation costs, storage costs, minimum purchase levels and other financial commitments. The total estimated firm costs are as follows: Fuel Purchases Year (in thousands) - ---- ------------------ 2003 $ 22,692 2004 22,890 2005 18,577 2006 18,577 2007 18,577 2008 and beyond 449,588 - ---------------------------------------- Total $550,901 ======================================== Natural gas purchases (in dollars) are based on various indices at the actual time of delivery; therefore, only the volume commitments are firm and disclosed in the following chart. Total estimated long-term obligations at December 31, 2002 were as follows: Natural Gas Year MMBtu - ---- --------------- 2003 20,180,312 2004 7,125,668 2005 4,046,104 2006 2,250,859 2007 830,151 2008 and beyond - - ---------------------------------------- Total 34,433,094 ======================================== Purchases of natural gas were approximately $133.5 million and $4.4 million for the periods ended December 31, 2002 and 2001, respectively. Additional commitments for fuel will be required to supply the Company's future needs. Acting as an agent for all of Southern Company's operating companies, Southern Power and Southern GAS, SCS may enter into various types of wholesale energy and natural gas contracts. Under these agreements, each of the operating companies, Southern Power and Southern GAS may be jointly and severally liable for the obligations of each of the operating companies, Southern Power and Southern GAS. The creditworthiness of Southern Power and Southern GAS is currently inferior to the creditworthiness of the operating companies; therefore, Southern Company has entered into keep-well agreements with each of the operating companies to insure they will not subsidize nor be responsible for any costs, losses, liabilities or damages resulting from the inclusion of Southern Power as a contracting party under these agreements. Construction Program The Company currently estimates property additions to be $377 million, $381 million and $278 million in 2003, 2004 and 2005, respectively. Southern Power has approximately 4,100 megawatts of additional generating capacity scheduled to be placed in service by 2005. Significant purchase commitments are outstanding in connection with the construction program. Southern Power's obligations for construction of transmission interconnection facilities to these plants by Alabama Power and Georgia Power totaled $13.5 million and $13 million at December 31, 2002 and 2001, respectively, and are guaranteed by Southern Company. Southern Company has also granted performance guarantees on behalf of Southern Power and its subsidiary for construction payment obligations associated with Plant Stanton. See Note 4 herein for additional information. Long-Term Service Agreements Southern Power has entered into several Long-Term Service Agreements (LTSAs) with General Electric International, Inc. (GE) for the purpose of securing maintenance support for its combined cycle and combustion turbine generating facilities. The LTSAs stipulate that for a fee, GE will perform all planned inspections on the covered equipment, which includes the cost of all labor and II-269 NOTES (continued) Southern Power Company 2002 Annual Report materials. GE is also obligated to cover the costs of unplanned maintenance on the covered equipment subject to a limit specified in each contract. In general, except for Plant Dahlberg, these LTSAs are in effect through two major inspection cycles per unit. The Dahlberg agreement is in effect through the first major inspection of each unit. Scheduled payments to GE are made at various intervals based on actual operation hours of the respective units. Total payments to GE under these agreements are $852 million over the life of the agreements, which are approximately 28 to 30 years per unit. However, the LTSAs contain various cancellation provisions at the Company's option. Payments made to GE prior to the performance of any planned inspections are recorded as a prepayment in the Balance Sheets. Costs are capitalized or charged to expense based on the nature of the work performed. 4. JOINT-OWNERSHIP AGREEMENTS Southern Power, through its wholly owned subsidiary SCF, is a 65% owner of Plant Stanton Unit A (Stanton A), a combined-cycle project that will total 633 MW upon completion. The unit is co-owned by Orlando Utilities Commission (OUA) (28%), Florida Municipal Power Agency (FMPA) (3.5%), and Kissimmee Utility Authority (KUA) (3.5%). Southern Power has a services agreement with SCS where SCS will be responsible for the operation and maintenance of Stanton A and the overall project management of the construction process. Construction on Stanton A began in October 2001 with an expected completion date of October 1, 2003. At December 31, 2002 and 2001, Southern Power's share of the construction costs for Stanton A was $128.3 million and $31.4 million, respectively, and is recorded in construction work in progress in the consolidated Balance Sheets. Southern Company has agreed to grant performance guarantees on behalf of Southern Power and its subsidiary, SCF, for SCF's payment obligations under ownership and PPAs associated with the Stanton A project. Southern Power's maximum exposure is $53 million under the construction and ownership agreement and $20 million under the PPAs. See Note 5 herein for additional information. 5. LONG-TERM POWER SALES AGREEMENTS The Company has entered into long-term power sales agreements for portions of its generating unit capacity, as follows: Project Capacity Contract (megawatts) Term --------------------------------------------------- Affiliated ----------- Franklin Unit 1 571 * 6/02-5/10 Franklin Unit 2 615 ** 6/03-5/11 Wansley Units 6 & 7 1,134 6/02-12/09 Harris Unit 1 618 6/03-5/10 Harris Unit 2 618 *** 6/04-5/19 McIntosh 1,240 6/04-5/20 --------------------------------------------------- Total Affiliated 4,796 --------------------------------------------------- Non-Affiliated --------------- Dahlberg Units 1-7 578 6/00-12/04 Dahlberg Units 8-10 225 6/00-5/05 Stanton A 396 11/03-11/13 Franklin Unit 3 625 6/05-5/30 ----------------------------------------------------- Total Non -affiliated 1,824 ----------------------------------------------------- * 370 megawatts during the first year ** 400 megawatts during the first year *** Contract does not begin until second year of operation of Harris Unit 2. Capacity revenues from these long-term power sales agreements amounted to $120.1 million and $18.6 million for the periods ended December 31, 2002 and 2001, respectively. Future capacity payments to be received under these power sales agreements as of December 31, 2002 are as follows: Year Payments - ------------------------------------------------------------ Affiliated Non-Affiliated (in millions) 2003 $ 172.5 $ 53.6 2004 241.1 76.2 2005 325.1 127.8 2006 338.2 156.8 2007 336.2 155.4 2008 and beyond 2,040.3 1,319.9 - ------------------------------------------------------------ Total $3,453.4 $1,889.7 - ------------------------------------------------------------ II-270 NOTES (continued) Southern Power Company 2002 Annual Report Included in the amounts above are capacity payments to be received related to a five-year contract (beginning in 2000) with Dynegy of approximately $13 million annually through May 2005. As a result of Dynegy's liquidity problems, it has provided a letter of credit totaling $20 million which can be drawn in the event of a default under the PPA or the failure to renew the letter of credit prior to expiration in April 2003. Georgia Power required that certain counterparties to the Dahlberg PPAs make prepayments for operational rights to the units. These prepayments were recorded as liabilities by Georgia Power and were transferred to Southern Power in connection with the Plant Dahlberg transfer. At December 31, 2002 and 2001, the unamortized balance of these amounts totaled $2.8 million and $4.2 million, respectively, and is being amortized into income over the life of the agreements. In June 2002, Southern Power began providing services under requirements agreements with 11 Georgia electric municipal cooperatives (EMCs). Under the agreements, Southern Power will coordinate the generating resources and meet the additional capacity requirements of the EMCs. The contracts are in effect through 2009 with options to renew. Effective in January 2003, the Company entered into contracts with North Carolina Municipal Power Authority 1 (North Carolina) and the City of Dalton (Dalton). Under the North Carolina contract, the Company will be responsible for supplying North Carolina's capacity and energy needs in excess of its existing resources and disposing of its surplus energy. The contract term is for January 1, 2003 through December 31, 2004. Under the Dalton contract, the Company is responsible for supplying Dalton's requirements for capacity and energy in excess of Dalton's existing resources. The contract term is for 15 years, beginning January 1, 2003, with a customer option to convert to a fixed capacity purchase at the end of year 10. 6. INCOME TAXES Details of the federal and state income tax provisions are as follows: 2002 2001 ---------------------------- (in thousands) Total provision for income taxes: Federal: Current $26,990 $ 1,402 Deferred 2,338 3,017 - ------------------------------------------------------------- 29,238 4,419 - ------------------------------------------------------------- State: Current 4,622 240 Deferred 401 517 State manufacturer's tax credits (5,804) (2,665) - ------------------------------------------------------------- (781) (1,908) - ------------------------------------------------------------- Total $28,457 $ 2,511 ============================================================= Southern Power recorded a reduction in 2002 and 2001 tax expense of approximately $5.8 million and $2.7 million, respectively, under the flow-through method of accounting for the State of Georgia manufacturer's tax credits. The State of Georgia provides a tax credit for qualified investment property to manufacturing companies that construct new facilities. The credit ranges from 1% to 5% of construction expenditures depending upon the county in which the new facility is located. Southern Power's policy is to recognize these credits when management believes they are more likely than not to be allowed by the Georgia Department of Revenue. 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: II-271 NOTES (continued) Southern Power Company 2002 Annual Report 2002 2001 ----------------------- (in millions) Deferred tax liabilities: Accelerated depreciation $(17,401) $(4,444) Other (729) (3,451) - -------------------------------------------------------------- Total (18,130) (7,895) - -------------------------------------------------------------- Deferred tax assets: Book/tax basis difference on asset transfer 15,644 19,810 Levelized capacity revenues 8,003 - Other comprehensive on interest rate swaps 30,745 - Other 2,329 - - -------------------------------------------------------------- Total 56,721 19,810 - -------------------------------------------------------------- Accumulated deferred income taxes in the consolidated Balance Sheets $38,591 $11,915 ============================================================== Deferred tax liabilities were primarily the result of property related timing differences and derivative hedging instruments. Deferred tax assets were primarily the result of a deferred tax gain related to the transfer of Plant Dahlberg from Georgia Power. Southern Power has recognized a payable to Georgia Power for Georgia Power's deferred tax liability resulting from this gain of approximately $15.6 million and $19.8 million at December 31, 2002 and 2001, respectively, which is recorded in other deferred credits on the accompanying consolidated balance sheet. A reconciliation of the federal statutory tax rate to the effective income tax rate is as follows: 2002 2001 ------------------ Federal statutory rate 35.0 35.0 State income tax, net of federal deduction 3.9 4.6 State manufacturer's tax Credits, net of federal effect (4.5) (16.2) - ------------------------------------------------------- Effective income tax rate 34.4 23.4 ======================================================= Southern Company and its subsidiaries file 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. In accordance with Internal Revenue Service regulations, each company is jointly and severally liable for the tax liability. 7. FINANCING Southern Company is currently authorized by the SEC under the PUHCA to fund the development of Southern Power up to an aggregate amount not to exceed $1.7 billion, which may take the form of purchases or contributions of equity interests, loans and guarantees issued in support of Southern Power's securities or obligations. Southern Power has SEC approval under the PUHCA to issue up to an aggregate amount of $2.5 billion of preferred securities, long and short-term debt and other equity issuances. Common Stock Southern Power has authorized common stock of 1 million shares at $.01 par value per share. One thousand shares have been issued to Southern Company and were outstanding at December 31, 2002. Note Payable to Parent In 2001, Southern Power entered into an intercompany note payable to Southern Company. The note is payable on demand and bears interest at a variable rate. At December 31, 2002 and 2001, $210.5 million and $1 million, respectively, were outstanding with an interest rate of 5.04% and 2.49%, respectively. As part of the Company's ongoing financing plan, in March 2003, $190 million of the note was converted to a capital contribution from Southern Company, leaving a balance of $51 million. Long-Term Debt In November 2001, the Company entered into an $850 million unsecured syndicated revolving credit facility (Facility). The purpose of the Facility is to finance the acquisition and construction costs related to gas-fired electric generating facilities and general corporate purposes (subject to a $25 million limit), and to pay or support commercial paper used to fund construction of facilities. At December 31, 2002, Southern Power had borrowed approximately $380 million under the Facility leaving an unused borrowing authority of approximately $470 million. Borrowings under the Facility bear interest at Southern Power's option equal to either the Eurodollar rate plus a specified margin ranging from 1.125% to 2.875%, depending on Southern Power's credit rating and the amount drawn down under the facility, or a base rate plus a specified margin. The interest rate II-272 NOTES (continued) Southern Power Company 2002 Annual Report and average interest rate on the Facility were 2.73% and 3.15% and 3.44% and 3.61%, respectively, at December 31, 2002 and 2001 and during the periods then ended. Southern Power is required to pay a commitment fee on the unused balance of the Facility. The commitment fee ranges from 0.3% to 0.45%, depending on Southern Power's credit rating. For the periods ended December 31, 2002 and 2001, Southern Power paid approximately $1.1 million and $0.1 million in commitment fees, respectively. All borrowings outstanding under the Facility are due in November 2004. The Facility contains certain financial covenants relating to Southern Power's debt capitalization which require that additional debt incurred by Southern Power must generally be unsecured and Southern Power must have its ratings reaffirmed at investment grade including the new debt. The Facility also contains restrictions related to the assumption of additional debt, which require a maximum 60% debt ratio, excluding intercompany loans. Southern Power was in compliance with such covenants at December 31, 2002. Initial borrowings under the Facility for new projects would be prohibited if Southern Power or Southern Company experiences a material adverse change (as defined in the Facility). For Southern Power's bank credit arrangements, there is a cross default to Southern Company's indebtedness, which if triggered would require prepayment of debt related to projects financed under the credit arrangement that are not complete. In June 2002, Southern Power issued $575 million of 6.25% Senior Notes, Series A due July 15, 2012. The net proceeds were used to reduce outstanding indebtedness under the Facility and to reduce the intercompany note payable to Southern Company. Southern Power also settled several interest rate swap agreements entered into in anticipation of this issuance at a $16.9 million loss. This amount has been deferred in other comprehensive income and will be amortized to interest expense over the life of the senior notes. Also in June 2002, the Company issued a long-term note payable to Chilton County, Alabama for $2.1 million. The proceeds of the note were used for the purchase of land for a potential future generation site. The note is payable over the next 5 years at an imputed interest rate of 6.25%. Southern Company has committed to fund at least 40% of Southern Power's construction project financing and to pay for construction cost overruns to the extent that Southern Power's own cash flow is insufficient. Also, Southern Company will prepay any portion of revolving credit arrangements used for Southern Power's construction projects not completed within two years of the proposed completion date. Financial Instruments At December 31, 2002, Southern Power had $500 million notional amount of interest rate swaps outstanding with deferred losses of $63 million as follows: Cash Flow Hedges Weighted Average Fair Variable Fixed Value Rate Rate Notional Gain Maturity Received Paid Amount (Loss) - ------------------------------------------------------------------ (in millions) Southern Power 2013 * 6.23% $350 $(50) Southern Power 2008 * 5.48 150 (13) - ------------------------------------------------------------------ *Rate has not been set. For the year 2002, approximately $0.9 million was reclassified from other comprehensive income to interest expense. These reclassifications related to losses incurred upon settlement of interest rate swaps associated with the issuance of senior notes in June 2002. (See "Long-Term Debt" herein). For the year 2003, approximately $1.7 million is expected to be reclassified. In February 2003, the Company initiated a commercial paper program to fund a portion of the construction costs of new plants. The Company's strategy is to refinance such short-term borrowings with long-term securities following plant completion. The amount of commercial paper will initially represent about 45% of total debt, but is forecasted to decline to about 7% at year-end 2005 as increasingly more construction costs are refinanced with long-term securities. The Company's commercial paper program is supported by the Facility. The Facility was structured to accommodate commercial paper, and the conditions that Southern Power must meet to reserve against the Facility for a project-specific commercial paper issue are the same as those for a regular draw on the Facility. The Company is not likely to be restricted from making draws on the Facility to repay any commercial paper coming due, as those conditions include representations and warranties that do not contain any material adverse effect clauses or creditworthiness measures. II-273 NOTES (continued) Southern Power Company 2002 Annual Report 8. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial information for 2002 and 2001 is as follows: Operating Operating Quarter Ended Revenues Income Net Income - ------------------------------------------------------------------ (in millions) ----------------------------------------- March 2002 $ 19,299 $ 7,862 $ 4,455 June 2002 57,777 16,271 8,858 September 2002 136,195 45,298 27,329 December 2002 85,497 26,764 13,628 March 2001 $ - $ (107) $ (65) June 2001 - (1,569) (949) September 2001 14,604 7,056 5,957 December 2001 14,697 5,107 3,264 - ------------------------------------------------------------------ The Company's business is influenced by seasonal weather conditions. The Company's revenues initiated in July 2001 with the transfer of Plant Dahlberg and three related PPAs from Georgia Power. II-274
SELECTED FINANCIAL AND OPERATING DATA 2001-2002 Southern Power Company 2002 Annual Report - -------------------------------------------------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Sales for resale - non-affiliates 114,919 26,390 Sales for resale - affiliates 183,111 2,906 - -------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 298,030 29,296 Other revenues 738 5 - -------------------------------------------------------------------------------------------------------- Total $298,768 $29,301 ======================================================================================================== Net Income (in thousands) $54,270 $8,207 Return on Average Common Equity (percent) 8.94 3.51 Total Assets (in thousands) $2,085,976 $822,857 Gross Property Additions (in thousands) $1,214,677 $765,511 - -------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $746,604 $466,993 Long-term debt 955,879 293,205 - -------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $1,702,483 $760,198 ======================================================================================================== Capitalization Ratios (percent): Common stock equity 43.9 61.4 Long-term debt 56.1 38.6 - -------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 ======================================================================================================== Security Ratings: Unsecured Long-Term Debt - Moody's Baa1 - Standard and Poor's BBB+ - Fitch BBB+ - ======================================================================================================== Kilowatt-Hour Sales (in thousands): Sales for resale - non-affiliates 1,240,290 164,926 Sales for resale - affiliates 3,607,107 69,307 - -------------------------------------------------------------------------------------------------------- Total 4,847,397 234,233 ======================================================================================================== Average Revenue Per Kilowatt-Hour (cents): 6.15 12.51 Plant Available Capacity Ratings (year-end) (megawatts) 2,408 800 Maximum Peak-Hour Demand (megawatts): Winter 949 - Summer 1,426 - Annual Load Factor (percent) 51.1 - Plant Availability (percent): 95.1 83.7 Source of Energy Supply (percent): Gas 77.4 100.0 Purchased power - From non-affiliates 5.9 - From affiliates 16.7 - - -------------------------------------------------------------------------------------------------------- Total 100.0 100.0 ========================================================================================================
II-275 PART III Items 10, 11, 12 and 13 for Southern Company are incorporated by reference in Southern Company's definitive Proxy Statement relating to the 2003 Annual Meeting of Stockholders. Specifically, reference is made to "Nominees for Election as Directors" for Item 10, "Executive Compensation" for Item 11, "Stock Ownership Table" for Item 12 and "Certain Relationships and Related Transactions" for Item 13 for Southern Company. Additionally, Items 10, 11, 12 and 13 for Alabama Power, Georgia Power, Gulf Power and Mississippi Power are incorporated by reference to the Information Statements of Alabama Power, Georgia Power, Gulf Power and Mississippi Power relating to each of their respective 2003 Annual Meetings of Shareholders. Specifically, reference is made to "Nominees for Election as Directors" for Item 10, "Executive Compensation Information" for Item 11, "Stock Ownership Table" for Item 12 and "Certain Relationships and Related Transactions" for Item 13. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS The ages of directors and executive officers set forth below are as of December 31, 2002. SAVANNAH ELECTRIC Identification of directors of Savannah Electric. Anthony R. James President and Chief Executive Officer Age 52 Served as Director since 5-3-01 Gus H. Bell, III (1) Age 65 Served as Director since 7-20-99 Archie H. Davis (1) Age 61 Served as Director since 2-18-97 Walter D. Gnann (1) Age 67 Served as Director since 5-17-83 Robert B. Miller, III (1) Age 57 Served as Director since 5-17-83 Arnold M. Tenenbaum (1) Age 66 Served as Director since 5-17-77 (1) No position other than Director. Each of the above is currently a director of Savannah Electric, serving a term running from the last annual meeting of Savannah Electric's stockholder (May 2, 2002) for one year until the next annual meeting or until a successor is elected and qualified. There are no arrangements or understandings between any of the individuals listed above and any other person pursuant to which he was or is to be selected as a director or nominee, other than any arrangements or understandings with directors or officers of Savannah Electric acting solely in their capacities as such. Identification of executive officers of Savannah Electric. Anthony R. James President, Chief Executive Officer and Director Age 52 Served as Executive Officer since 7-27-00 W. Miles Greer Vice President Age 59 Served as Executive Officer since 11-20-85 Sandra R. Miller Vice President Age 50 Served as Executive Officer since 7-26-01 Kirby R. Willis Vice President, Treasurer and Chief Financial Officer Age 51 Served as Executive Officer since 1-1-94 Each of the above is currently an executive officer of Savannah Electric, serving a term running from the meeting of the directors held on July 25, 2002 for the ensuing year. There are no arrangements or understandings between any of the individuals listed above and any other person pursuant to which he or she was or is to be selected as an officer, other than any arrangements or understandings with officers of Savannah Electric acting solely in their capacities as such. III-1 Identification of certain significant employees. None. Family relationships. None. Business experience. Anthony R. James - President and Chief Executive Officer since 2001. Previously served as Vice President of Power Generation and Senior Production Officer from 2000 to 2001; Central Cluster Manager at Georgia Power's Plant Scherer from 2000 to 2001; and Plant Manager at Georgia Power's Plant Scherer from 1996 to 2000. He is a director of SunTrust Bank of Savannah. Gus H. Bell, III - President and Chief Executive Officer of Hussey, Gay, Bell and DeYoung, Inc., (specializing in environmental, industrial, structural, architectural and civil engineering), Savannah, Georgia since 1986. He is a director of SunTrust Bank of Savannah. Archie H. Davis - President, Chief Executive Officer and Director of Savannah Bancorp, Inc., Savannah, Georgia since 1990 and Vice Chairman and a director of The Savannah Bank, N.A. since January 2003. Previously served as Chief Executive Officer of The Savannah Bank, N.A. from 2002 to 2003 and as President and Chief Executive Officer of The Savannah Bank, N.A. from 1990 to 2002. He is a director of Bryan Bank and Trust, Savannah, Georgia. Walter D. Gnann - President of Walt's TV, Appliance and Furniture Co., Inc., Springfield, Georgia since 1958. Robert B. Miller, III - President of American Building Systems, Inc. (general contracting services), Savannah, Georgia since 1992. Arnold M. Tenenbaum - President and Director of Chatham Steel Corporation (specializing in carbon, stainless and specialty steel), Savannah, Georgia since January 2001. Previously served as President and Chief Executive Officer of Chatham Steel Corporation from 1981 to 2001. He serves on the advisory board of Wachovia Bank, Savannah, Georgia. W. Miles Greer - Vice President of Customer Operations and External Affairs since 1998. Previously served as Vice President of Marketing and Customer Service from 1994 to 1998. Sandra R. Miller - Vice President of Power Generation since 2001. Previously served as Manager of Technical Training at SCS from 1998 to 2001 and Group Leader at Georgia Power's Plant Bowen from June 1996 to June 1998. Kirby R. Willis - Vice President, Treasurer and Chief Financial Officer since 1994 and Assistant Corporate Secretary since 1998. Involvement in certain legal proceedings. None. Section 16(a) Beneficial Ownership Reporting Compliance. No reporting person of Savannah Electric failed to file, on a timely basis, the reports required by Section 16(a). III-2 SOUTHERN POWER Identification of directors of Southern Power. W. Paul Bowers President and Chief Executive Officer Age 46 Served as Director since 5-1-01 H. Allen Franklin (1) Age 58 Served as Director since 1-8-01 Gale E. Klappa (1) Age 52 Served as Director since 5-8-01 Charles D. McCrary (1) Age 51 Served as Director since 2-11-02 and also served as Director from 1-8-01 to 4-16-01 David M. Ratcliffe (1) Age 54 Served as Director since 1-8-01 (1) Each of the above is employed within the Southern Company system; however, each holds no position at Southern Power other than Director. Each of the above is currently a director of Southern Power, serving a term running from the last annual meeting of Southern Power's stockholder (April 29, 2002) for one year until the next annual meeting or until a successor is elected and qualified. There are no arrangements or understandings between any of the individuals listed above and any other person pursuant to which he was or is to be selected as a director or nominee, other than any arrangements or understandings with directors or officers of Southern Power acting solely in their capacities as such. Identification of executive officers of Southern Power. W. Paul Bowers President and Chief Executive Officer Age 46 Served as Executive Officer since 5-1-01 Robert G. Moore Senior Vice President Age 53 Served as Executive Officer since 1-4-02 Cliff S. Thrasher Senior Vice President, Comptroller and Chief Financial Officer Age 52 Served as Executive Officer since 6-10-02 Anthony J. Topazi Senior Vice President Age 52 Served as Executive Officer since 3-1-01 Each of the above is currently an executive officer of Southern Power, serving a term running from the meeting of the directors held on May 9, 2002 for the ensuing year, except for Mr. Thrasher whose election was effective on the date indicated. There are no arrangements or understandings between any of the individuals listed above and any other person pursuant to which he was or is to be selected as an officer, other than any arrangements or understandings with officers of Southern Power acting solely in their capacities as such. Identification of certain significant employees. None. Family relationships. None. III-3 Business experience. W. Paul Bowers - President, Chief Executive Officer and Director since May 2001; Executive Vice President of SCS since May 2001. Previously served as Senior Vice President of SCS and Chief Marketing Officer of Southern Company from March 2000 to May 2001; President and Chief Executive Officer of Western Power Distribution, a subsidiary of Mirant located in Bristol, England from December 1998 to 2000; and Senior Vice President of Retail Marketing for Georgia Power from 1995 to 1998. H. Allen Franklin - Chairman, President and Chief Executive Officer of Southern Company since April 2001. Previously served as President and Chief Executive Officer from March 2001 to April 2001; President and Chief Operating Officer of Southern Company from June 1999 to March 2001; and Executive Vice President of Southern Company and President and Chief Executive Officer of Georgia Power from January 1994 to June 1999. He is a director of SouthTrust Corporation, Vulcan Materials Company, and Southern System companies - Southern Company, Alabama Power, Georgia Power and Gulf Power. Gale E. Klappa - Executive Vice President, Chief Financial Officer and Treasurer of Southern Company since May 2001. Previously served as Financial Vice President, Chief Financial Officer and Treasurer of Southern Company from March 2001 to May 2001; Senior Vice President and Chief Strategic Officer of Southern Company from October 1999 to March 2001; President of Mirant's North America Group and Senior Vice President of Mirant from December 1998 to October 1999; and President and Chief Executive Officer of Western Power Distribution, a subsidiary of Mirant located in Bristol, England, from September 1995 to December 1998. Charles D. McCrary - Executive Vice President of Southern Company since February 2002 and President and Chief Executive Officer of Alabama Power since October 2001. Previously served as President and Chief Operating Officer of Alabama Power from April 2001 to October 2001; Vice President of Southern Company from February 1998 to April 2001; and Executive Vice President of Alabama Power from April 1994 to February 1998. He is a director of Alabama Power and AmSouth Banccorporation. David M. Ratcliffe - Executive Vice President of Southern Company since 1999 and President and Chief Executive Officer of Georgia Power since June 1999. Previously served as Executive Vice President, Treasurer and Chief Financial Officer of Georgia Power from March 1998 to June 1999; and Senior Vice President of Southern Company from March 1995 to March 1998. He is a director of Georgia Power; Mississippi Chemical Company; Federal Reserve Bank of Atlanta and CSX Corporation. Robert G. Moore - Senior Vice President since January 2002 and Vice President of SCS since August 1997. Previously served as Vice President of Gulf Power from July 1997 to May 2002. Cliff S. Thrasher - Senior Vice President, Comptroller and Chief Financial Officer of Southern Power since November 2002 and Vice President of SCS since June 2002. Previously served as Vice President, Comptroller and Chief Financial Officer of Southern Power from June 2002 to November 2002 and Vice President, Comptroller and Chief Accounting Officer of Georgia Power from September 1995 to June 2002. Anthony J. Topazi - Senior Vice President since November 2002 and Vice President of SCS since December 1999. Previously served as Vice President of Southern Power from March 2001 until November 2002 and Vice President of Alabama Power from March 1991 to December 1999. Section 16(a) Beneficial Ownership Reporting Compliance. Not applicable. III-4 Item 11. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth information concerning any Chief Executive Officer and the three most highly compensated executive officers of Savannah Electric serving during 2002.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------- ------------------------------------- Number of Securities Long- Name Restricted Underlying Term and Other Annual Stock Stock Incentive All Other Principal Compensation Award Options Payouts Compensation Position Year Salary($) Bonus($) ($)1 ($) (Shares) ($)2 ($)3 - ------------------------------------------------------------------------------------------------------------------------- Anthony R. James 4 President, Chief 2002 235,748 189,044 13,109 - 35,354 136,462 12,235 Executive Officer, 2001 210,856 177,858 1,328 - 31,363 87,577 30,195 Director 2000 175,048 161,442 - - 12,752 23,144 7,582 W. Miles Greer 2002 191,400 101,796 107 - 14,278 115,884 20,261 Vice President 2001 184,066 104,286 666 - 32,505 105,924 8,567 2000 177,013 100,923 601 - 13,416 26,434 16,982 Kirby R. Willis Vice President, 2002 175,476 93,329 891 - 13,090 61,913 13,283 Chief Financial 2001 168,747 100,480 490 - 29,993 89,814 8,495 Officer, Treasurer 2000 162,279 97,394 4,908 - 8,785 24,565 12,159 Sandra R. Miller 5 2002 138,074 104,769 1,720 - 10,317 18,824 7,016 Vice President 2001 112,802 83,015 8,123 - 1,896 4,791 20,749 2000 - - - - - - -
- --------------------------------------------- 1 Tax reimbursement on certain personal benefits. 2 Payout of performance dividend equivalents on stock options granted after 1996 that were held by the executive at the end of the performance periods under the Omnibus Incentive Compensation Plan for the four-year performance periods ended December 31, 2000, 2001, and 2002, respectively. Dividend equivalents can range from 25 percent of the common stock dividend paid during the last year of the performance period if total shareholder return over the four-year period, compared to a group of other large utility companies, is at the 30th percentile to 100 percent of the dividend paid if it reaches the 90th percentile. The Southern Company Compensation and Management Succession Committee can increase the payout of performance dividends by up to 200 percent if necessary to maintain the competitiveness of Southern Company's executive compensation program. For eligible stock options held on December 31, 2000, 2001, and 2002, all named executives received a payout of $.90, $1.34, and $1.355 per option, respectively. The payout was not increased by the Committee. 3 Contributions in 2002 to the Employee Savings Plan (ESP), Employee Stock Ownership Plan (ESOP) and Supplemental Benefit Plan (SBP) or Above-Market Earnings on deferred compensation (AME) are as follows: Name ESP ESOP SBP or AME - ---- --- ---- ---------- Anthony R. James $7,696 $701 $3,838 W. Miles Greer 7,750 701 11,810 Kirby R. Willis 6,211 701 6,371 Sandra R. Miller 5,420 701 895 4 Mr. James became President and Chief Executive Officer effective May 1, 2001. 5 Ms. Miller became an executive officer of Savannah Electric on July 26, 2001. III-5 Summary Compensation Table. The following table sets forth information concerning any Chief Executive Officer and the four most highly compensated executive officers of Southern Power serving during 2002.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------- ---------------------------------------- Number of Securities Long- Name Restricted Underlying Term and Other Annual Stock Stock Incentive All Other Principal Compensation Award Options Payouts Compensation Position Year Salary($) Bonus($) ($)6 ($) (Shares) ($)7 ($)8 - -------------------------------------------------------------------------------------------------------------------------- W. Paul Bowers President, Chief Executive Officer, 2002 329,570 403,433 12,337 - 50,046 214,133 16,802 Director 2001 273,758 273,630 3,072 - 51,740 160,515 39,542 Anthony J. Topazi 2002 249,389 262,399 3,218 - 29,229 173,966 64,274 Senior Vice President 2001 237,095 185,293 112,839 - 49,800 145,178 213,144 Robert G. Moore 9 2002 217,233 206,785 2,820 - 20,835 111,206 13,396 Senior Vice President 2001 - - - - - - - Carson B. Harreld, Jr. 10 Vice President, Comptroller 2002 215,014 189,839 1,352 - 17,265 109,251 32,293 & Chief Financial Officer 2001 204,132 123,944 811 - 47,616 143,735 110,053 Cliff S. Thrasher 9 2002 187,200 175,560 52,852 - 13,443 79,394 59,640 Senior Vice President, 2001 - - - - - - - Comptroller & Chief Financial Officer
- -------------------------- 6 Tax reimbursement on certain personal benefits. 7 Payout of performance dividend equivalents on stock options granted after 1996 that were held by the executive at the end of the performance periods under the Omnibus Incentive Compensation Plan for the four-year performance periods ended December 31, 2000, 2001, and 2002, respectively. Dividend equivalents can range from 25 percent of the common stock dividend paid during the last year of the performance period if total shareholder return over the four-year period, compared to a group of other large utility companies, is at the 30th percentile to 100 percent of the dividend paid if it reaches the 90th percentile. The Southern Company Compensation and Management Succession Committee can increase the payout of performance dividends by up to 200 percent if necessary to maintain the competitiveness of Southern Company's executive compensation program. For eligible stock options held on December 31, 2000, 2001, and 2002, all named executives received a payout of $.90, $1.34, and $1.355 per option, respectively. The payout was not increased by the Committee. 8 Contributions in 2002 to the Employee Savings Plan (ESP), Employee Stock Ownership Plan (ESOP), Supplemental Benefit Plan (SBP) and tax sharing benefits paid to participants who elected receipt of dividends on Southern Company's common stock held in the ESP are as follows: Name ESP ESOP SBP ESP Tax Sharing Benefits - ---- --- ---- --- ------------------------ W. Paul Bowers $7,701 $701 $8,400 $ - Anthony J. Topazi 7,709 701 5,864 - Robert G. Moore 7,683 701 2,886 2,626 Carson B. Harreld, Jr. 6,965 701 3,505 1,122 Cliff S. Thrasher 7,421 701 1,518 - In 2002, these amounts include additional incentive compensation of $50,000 each for Mr. Topazi and Mr. Thrasher and $20,000 for Mr. Harreld. In 2001, these amounts included additional incentive compensation for Messrs. Bowers, Topazi and Harreld of $24,380, $200,000 and $100,000 respectively. 9 Mr. Moore became an executive officer of Southern Power in January 2002 and Mr. Thrasher became an executive officer of Southern Power in June 2002. 10 Mr.Harreld ceased to be an executive officer of Southern Power effective June 9, 2002. On May 28, 2002, he was elected Senior Vice President of SCS. III-6 STOCK OPTION GRANTS IN 2002 Stock Option Grants. The following table sets forth all stock option grants to the named executive officers of Savannah Electric and Southern Power during the year ending December 31, 2002.
Individual Grants Grant Date Value # of % of Total Securities Options Exercise Underlying Granted to or Options Employees in Base Price Expiration Grant Date Name Granted11 Fiscal Year12 ($/Sh)11 Date11 Present Value($)13 ------------------------------------------------------------------------------------------------------------- Savannah Electric Anthony R. James 35,354 24.3 25.26 2/15/2012 119,143 W. Miles Greer 14,278 9.8 25.26 2/15/2012 48,117 Kirby R. Willis 13,090 9.0 25.26 2/15/2012 44,113 Sandra R. Miller 10,317 7.1 25.26 2/15/2012 34,768 Southern Power W. Paul Bowers 50,046 1.6 25.26 2/15/2012 168,655 Anthony J. Topazi 29,229 1.0 25.26 2/15/2012 98,502 Robert G. Moore 20,835 0.7 25.26 2/15/2012 70,214 Carson B. Harreld, Jr. 17,265 0.6 25.26 2/15/2012 58,183 Cliff S. Thrasher 13,443 0.4 25.26 2/15/2012 45,269
- ------------------------------------------ 11 Under the terms of the Omnibus Incentive Compensation Plan, stock option grants were made on February 15, 2002 and vest annually at a rate of one-third on the anniversary date of the grant. Grants fully vest upon termination as a result of death, total disability or retirement and expire five years after retirement, three years after death or total disability or their normal expiration date if earlier. The exercise price is the average of the high and low price of Southern Company's common stock on the date granted. Options may be transferred to certain family members, family trusts and family limited partnerships. 12 A total of 145,454 and 3,034,278 stock options were granted in 2002 to Savannah Electric and SCS, respectively. Southern Power has no employees; therefore, SCS employees perform work on behalf of Southern Power that is billed, at cost, to Southern Power. 13 Value was calculated using the Black-Scholes option valuation model. The actual value, if any, ultimately realized depends on the market value of Southern Company's common stock at a future date. Significant assumptions are shown below: Risk-free Dividend Expected Volatility rate of return Yield Term - ------------------------------------------------------------------ 26.34% 2.79% 4.63% 4.28 years - ------------------------------------------------------------------ III-7
AGGREGATED STOCK OPTION EXERCISES IN 2002 AND YEAR-END OPTION VALUES Aggregated Stock Option Exercises. The following table sets forth information concerning options exercised during the year ending December 31, 2002 by the named executive officers and the value of unexercised options held by them as of December 31, 2002. Number of Securities Underlying Value of Unexercised Unexercised Options at Fiscal In-the-Money Options Year-End (#) At Year-End ($)14 ------------------------------------------------------------------ Shares Acquired on Value Name Exercise (#) Realized ($)15 Exercisable Unexercisable Exercisable Unexercisable - -------------------------------------------------------------------------------------------------------------------------- Savannah Electric Anthony R. James - - 37,712 62,998 343,294 367,505 W. Miles Greer 7,803 90,452 42,488 43,035 479,011 309,143 Kirby R. Willis 34,423 352,882 7,967 37,725 92,642 258,703 Sandra R. Miller - - 1,752 12,140 20,620 50,492 Southern Power W. Paul Bowers 11,801 156,131 63,861 94,171 727,111 551,603 Anthony J. Topazi 9,183 131,114 56,374 72,014 626,634 477,002 Robert G. Moore 15,247 188,410 33,374 48,697 375,465 321,306 Carson B. Harreld, Jr. 43,902 479,578 22,532 58,096 195,523 414,870 Cliff S. Thrasher 24,391 269,007 18,728 39,865 173,835 271,157
- --------------------------- 14 This column represents the excess of the fair market value of Southern Company's common stock of $28.39 per share, as of December 31, 2002, above the exercise price of the options. The Exercisable column reports the "value" of options that are vested and therefore could be exercised. The Unexercisable column reports the "value" of options that are not vested and therefore could not be exercised as of December 31, 2002. 15 The "Value Realized" is ordinary income, before taxes, and represents the amount equal to the excess of the fair market value of the shares at the time of exercise above the exercise price. III-8 DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE Pension Plan Table. The following table sets forth the estimated annual pension benefits payable at normal retirement age under Southern's qualified Pension Plan, as well as non-qualified supplemental benefits, based on the stated compensation and years of service with the Southern system for all named executive officers of Savannah Electric and Southern Power, except for Messrs. Greer and Willis. Compensation for pension purposes is limited to the average of the highest three of the final 10 years' compensation. Compensation is base salary plus the excess of annual incentive compensation over 15 percent of base salary. These compensation components are reported under columns titled "Salary" and "Bonus" in the Summary Compensation Tables on pages III-5 and III-6.
Years of Accredited Service Remuneration 15 20 25 30 35 40 - ------------ -------------------------------------------------------------- $ 100,000 $ 25,500 $ 34,000 $ 42,500 $ 51,000 $ 59,500 $ 68,000 300,000 76,500 102,000 127,500 153,000 178,500 204,000 500,000 127,500 170,000 212,500 255,000 297,500 340,000 700,000 178,500 238,000 297,500 357,000 416,500 476,000 900,000 229,500 306,000 382,500 459,000 535,500 612,000 1,100,000 280,500 374,000 467,500 561,000 654,500 748,000 1,300,000 331,500 442,000 552,500 663,000 773,500 884,000
As of December 31, 2002, the applicable compensation levels and years of accredited service are presented in the following tables: Savannah Electric Compensation Accredited Name Level Years of Service ---- ----- ---------------- Anthony R. James $350,806 23 W. Miles Greer16 258,424 26 Kirby R. Willis 240,171 28 Sandra R. Miller 187,416 22 Southern Power Compensation Accredited Name Level Years of Service ---- ----- ---------------- W. Paul Bowers $528,397 22 Anthony J. Topazi 414,272 32 Robert G. Moore 331,584 28 Carson B. Harreld, Jr.17 349,358 29 Cliff S. Thrasher 287,468 31 - ------------------------------ 16 The number of accredited years of service includes 7 years and 6 months credited to Mr. Greer pursuant to a supplemental pension agreement. 17 The number of accredited years of service includes 10 years credited to Mr. Harreld pursuant to a supplemental pension agreement. III-9 The amounts shown in the table were calculated according to the final average pay formula and are based on a single life annuity without reduction for joint and survivor annuities or computation of Social Security offset that would apply in most cases. In 1998, Savannah Electric merged its pension plan into the Southern Company Pension Plan. Savannah Electric also has in effect a supplemental executive retirement plan for certain of its executive employees. The plan is designed to provide participants with a supplemental retirement benefit, which, in conjunction with Social Security and benefits under Southern Company's qualified pension plan, will equal 70 percent of the highest three of the final 10 years' average annual earnings (excluding incentive compensation). The following table sets forth the estimated combined annual pension benefits under Southern Company's pension and Savannah Electric's supplemental executive retirement plans in effect during 2002 which are payable to Messrs. Greer and Willis, upon retirement at the normal retirement age after designated periods of accredited service and at a specified compensation level. Years of Accredited Service -------------------------------------- Remuneration 15 25 35 - -------------------------- -- -- -- $150,000 105,000 105,000 105,000 180,000 126,000 126,000 126,000 210,000 147,000 147,000 147,000 260,000 182,000 182,000 182,000 280,000 196,000 196,000 196,000 300,000 210,000 210,000 210,000 350,000 245,000 245,000 245,000 400,000 280,000 280,000 280,000 430,000 301,000 301,000 301,000 460,000 322,000 322,000 322,000 Compensation of Directors. - -------------------------- Standard Arrangements. The following table presents compensation paid to Savannah Electric's directors during 2002 for service as a member of the board of directors and any board committee(s), except that employee directors received no fees or compensation for service as a member of the board of directors or any board committee. At the election of the director, all or a portion of the cash retainer may be payable in Southern Company's common stock, and all or a portion of the total fees may be deferred under the Deferred Compensation Plan until membership on the board is terminated. Cash Retainer Fee $10,000 Stock Retainer Fee 85 shares per quarter Meeting Fee $750 for each Board or Committee meeting attended Southern Power's directors are all employed within the Southern Company system and receive no fees or compensation for service as a member of Southern Power's board of directors. Other Arrangements. No director received other compensation for services as a director during the year ending December 31, 2002 in addition to or in lieu of that specified by the standard arrangements specified above. III-10 Employment Contracts and Termination of Employment and Change in Control Arrangements. - ------------------------------------------------------------------------ Southern Power's executive officers are employees of SCS. Savannah Electric and SCS have adopted Southern Company's Change in Control Plan, which is applicable to certain of its officers, and has entered into individual change in control agreements with its most highly compensated executive officers. If an executive is involuntarily terminated, other than for cause, within two years following a change in control of Savannah Electric, SCS or Southern Company, the agreements provide for: o lump sum payment of two or three times annual compensation, o up to five years' coverage under group health and life insurance plans, o immediate vesting of all stock options, stock appreciation rights and restricted stock previously granted, o payment of any accrued long-term and short-term bonuses and dividend equivalents and o payment of any excise tax liability incurred as a result of payments made under any individual agreements. A change in control is defined under the agreements as: o acquisition of at least 20 percent of the Southern Company's stock, o a change in the majority of the members of the Southern Company's board of directors, o a merger or other business combination that results in Southern Company's shareholders immediately before the merger owning less than 65 percent of the voting power after the merger or o a sale of substantially all the assets of Southern Company. A change in control of Savannah Electric is defined under the agreements as: o acquisition of at least 50 percent of Savannah Electric's stock, o a merger or other business combination unless Southern Company controls the surviving entity or o a sale of substantially all the assets of Savannah Electric. Southern Company also has amended its short- and long-term incentive plans to provide for pro-rata payments at not less than target-level performance if a change in control occurs and the plans are not continued or replaced with comparable plans. Mr. W. Miles Greer and Savannah Electric entered into agreements that provide for a monthly payment to Mr. Greer after his retirement equal to the difference between the amount he will receive under the Southern Company Pension Plan and Savannah Electric Supplemental Executive Retirement Plan and the amount he would receive under those Plans had he been employed by Savannah Electric an additional seven years and six months under the Pension Plan and an additional eight years under the Supplemental Executive Retirement Plan. Mr. Carson B. Harreld, Jr. and Georgia Power, Southern Company and SCS entered into an agreement that provides for a monthly payment to Mr. Harreld after his retirement equal to the difference between the amount he will receive under the Southern Company Pension Plan and the amount he would receive under the Plan had he been employed by the Southern Company system an additional 10 years. Report on Repricing of Options. - ------------------------------- None. Compensation Committee Interlocks and Insider Participation. - ------------------------------------------------------------ None. III-11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners. Southern Company is the beneficial owner of 100% of the outstanding common stock of Savannah Electric and Southern Power. Amount and Name and Address Nature of Percent of Beneficial Beneficial of Title of Class Owner Ownership Class - -------------------------------------------------------------------------------- Common Stock The Southern Company 100% 270 Peachtree Street, N.W. Atlanta, Georgia 30303 Registrants: Savannah Electric 10,844,635 Southern Power 1,000 Security Ownership of Management. The following table shows the number of shares of Southern Company Common stock owned by the directors, nominees and executive officers as of December 31, 2002. It is based on information furnished by the directors, nominees and executive officers. The shares owned by all directors, nominees and executive officers as a group constitute less than one percent of the total number of shares outstanding on December 31, 2002.
Shares Beneficially Owned Include: Name of Directors, Shares Shares Individuals Nominees and Beneficially Have Rights to Acquire Executive Officers Title of Class Owned (1) Within 60 days (2) - ------------------ -------------- ----------- --------------------- Savannah Electric Gus H. Bell, III Southern Company Common 273 - Archie H. Davis Southern Company Common 682 - Walter D. Gnann Southern Company Common 9,702 - Anthony R. James Southern Company Common 76,441 62,164 Robert B. Miller, III Southern Company Common 5,233 - Arnold M. Tenenbaum Southern Company Common 1,209 - W. Miles Greer Southern Company Common 65,019 60,004 Sandra R. Miller Southern Company Common 7,287 6,196 Kirby R. Willis Southern Company Common 27,402 22,168 The directors, nominees and executive officers as a group Southern Company Common 193,248 150,532
III-12
Shares Beneficially Owned Include: Name of Directors, Shares Shares Individuals Nominees and Beneficially Have Rights to Acquire Executive Officers Title of Class Owned (1) Within 60 days (2) - ------------------ -------------- ----------- ----------------------- Southern Power W. Paul Bowers Southern Company Common 105,348 98,696 H. Allen Franklin Southern Company Common 786,517 747,185 Gale E. Klappa Southern Company Common 159,116 134,656 Charles D. McCrary Southern Company Common 177,749 174,711 David M. Ratcliffe Southern Company Common 253,807 241,461 Robert G. Moore Southern Company Common 66,868 52,668 Cliff S. Thrasher Southern Company Common 36,872 33,148 Anthony J. Topazi Southern Company Common 94,854 84,061 The directors, nominees and executive officers as a group Southern Company Common 1,681,131 1,566,586
(1) As used in the tables, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security and/or investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). (2) Indicates shares of Southern Company common stock that directors and executive officers have the right to acquire within 60 days. Changes in control. Southern Company, Savannah Electric and Southern Power know of no arrangements which may at a subsequent date result in any change in control. III-13 Equity Compensation Plan Information The following table provides information as of December 31, 2002 concerning shares of Southern Company common stock authorized for issuance under Southern Company's existing non-qualified equity compensation plans.
Number of securities to Weighted-average Number of securities remaining be issued upon exercise exercise price of available for future issuance under of outstanding options, outstanding options, equity compensation plans (excluding warrants and rights warrants and rights securities reflected in column (a)) Plan category (a) (b) (c) - ------------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders 32,675,731 $19.72 48,559,919 (1) - ------------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------
(1) Includes securities available for future issuance under the Omnibus Incentive Compensation Plan (46,789,131) and the Outside Directors Stock Plans (1,770,788). III-14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SAVANNAH ELECTRIC Transactions with management and others. Mr. Archie Davis is currently Vice Chairman of The Savannah Bank, N.A., Savannah, Georgia and was also President and Chief Executive Officer prior to January 2003. Messrs. James and Bell are directors of SunTrust Bank of Savannah. During 2002, these banks furnished a number of regular banking services in the ordinary course of business to Savannah Electric. Savannah Electric intends to maintain normal banking relations with the aforesaid banks in the future. Certain business relationships. None. Indebtedness of management. None. Transactions with promoters. None. SOUTHERN POWER Transactions with management and others. None. Certain business relationships. None. Indebtedness of management. None. Transactions with promoters. None. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Within 90 days of the filing date of this annual report, Southern Company, the operating companies and Southern Power conducted separate evaluations under the supervision and with the participation of each company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934). Based upon those evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to each company (including its consolidated subsidiaries) required to be included in periodic filings with the SEC. (b) Changes in internal controls. There have been no significant changes in Southern Company's, the operating companies' or Southern Power's internal controls or in other factors that could significantly affect these internal controls subsequent to the date each company carried out its evaluation. III-15 PART IV Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report on this Form 10-K: (1) Financial Statements: Independent Auditors' Reports on the financial statements for Southern Company and Subsidiary Companies, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power are listed under Item 8 herein. The financial statements filed as a part of this report for Southern Company and Subsidiary Companies, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power are listed under Item 8 herein. Reports of Independent Public Accountants on the financial statements for Southern Company and Subsidiary Companies, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric are listed under Item 8 herein. (2) Financial Statement Schedules: Independent Auditors' Reports as to Schedules for Southern Company and Subsidiary Companies, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power are included herein on pages IV-23, IV-25, IV-27, IV-29, IV-31, IV-33 and IV-35. Financial Statement Schedules for Southern Company and Subsidiary Companies, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power are listed in the Index to the Financial Statement Schedules at page S-1. Reports of Independent Public Accountants as to Schedules for Southern Company and Subsidiary Companies, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric are included herein on pages IV-24, IV-26, IV-28, IV-30, IV-32 and IV-34. (3) Exhibits: Exhibits for Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power are listed in the Exhibit Index at page E-1. (b) Reports on Form 8-K during the fourth quarter of 2002 were as follows: Southern Company filed a Current Report on Form 8-K: Date of event: November 25, 2002 Item reported: 5 Alabama Power filed Current Reports on Form 8-K: Date of event: October 16, 2002 Items reported: 5 and 7 Date of event: November 20, 2002 Items reported: 5 and 7 Date of event: December 6, 2002 Items reported: 5 and 7 Georgia Power filed Current Reports on Form 8-K: Date of event: October 30, 2002 Items reported: 5 and 7 Date of event: November 15, 2002 Items reported: 5 and 7 Gulf Power filed a Current Report on Form 8-K: Date of event: December 5, 2002 Items reported: 5 and 7 Savannah Electric filed a Current Report on Form 8-K: Date of event: November 4, 2002 Items reported: 5 and 7 IV-1 THE SOUTHERN COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. THE SOUTHERN COMPANY By: H. Allen Franklin, Chairman, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. H. Allen Franklin Chairman, President and Chief Executive Officer (Principal Executive Officer) Gale E. Klappa Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) W. Dean Hudson Comptroller and Chief Accounting Officer (Principal Accounting Officer) Directors: Daniel P. Amos Donald M. James Dorrit J. Bern Zack T. Pate Thomas F. Chapman J. Neal Purcell L. G. Hardman III Gerald J. St. Pe' By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-2 THE SOUTHERN COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, Allen Franklin, certify that: 1. I have reviewed this annual report on Form 10-K of The Southern Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Allen Franklin ----------------------------------- Allen Franklin Chairman and Chief Executive Officer IV-3 THE SOUTHERN COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, Gale E. Klappa, certify that: 1. I have reviewed this annual report on Form 10-K of The Southern Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Gale E. Klappa ----------------------------------- Gale E. Klappa Executive Vice President, Chief Financial Officer and Treasurer IV-4 ALABAMA POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANY By: Charles D. McCrary, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Charles D. McCrary President, Chief Executive Officer and Director (Principal Executive Officer) William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Art P. Beattie Vice President and Comptroller (Principal Accounting Officer) Directors: Whit Armstrong Mayer Mitchell David J. Cooper Robert D. Powers H. Allen Franklin C. Dowd Ritter R. Kent Henslee James H. Sanford Carl E. Jones, Jr. John Cox Webb, IV Patricia M. King James W. Wright James K. Lowder Wallace D. Malone, Jr. By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-5 ALABAMA POWER COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, Charles D. McCrary, certify that: 1. I have reviewed this annual report on Form 10-K of Alabama Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Charles D. McCrary ----------------------------------- Charles D. McCrary President and Chief Executive Officer IV-6 ALABAMA POWER COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, William B. Hutchins, III, certify that: 1. I have reviewed this annual report on Form 10-K of Alabama Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ William B. Hutchins, III ----------------------------------- William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer IV-7 GEORGIA POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANY By: David M. Ratcliffe, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. David M. Ratcliffe President, Chief Executive Officer and Director (Principal Executive Officer) Allen L. Leverett Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) W. Ron Hinson Vice President, Comptroller and Chief Accounting Officer (Principal Accounting Officer) Directors: Juanita P. Baranco Richard W. Ussery Anna R. Cablik William Jerry Vereen H. Allen Franklin Carl Ware L. G. Hardman III E. Jenner Wood, III G. Joseph Prendergast By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-8 GEORGIA POWER COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, David M. Ratcliffe, certify that: 1. I have reviewed this annual report on Form 10-K of Georgia Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ David M. Ratcliffe ----------------------------------- David M. Ratcliffe President and Chief Executive Officer IV-9 GEORGIA POWER COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, Allen L. Leverett, certify that: 1. I have reviewed this annual report on Form 10-K of Georgia Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Allen L. Leverett ----------------------------------- Allen L. Leverett Executive Vice President, Chief Financial Officer and Treasurer IV-10 GULF POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By: Thomas A. Fanning, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Thomas A. Fanning President, Chief Executive Officer and Director (Principal Executive Officer) Ronnie R. Labrato Vice President, Chief Financial Officer and Comptroller (Principal Financial and Accounting Officer) Directors: C. LeDon Anchors H. Allen Franklin William C. Cramer, Jr. William A. Pullum Fred C. Donovan, Sr. Joseph K. Tannehill By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-11 GULF POWER COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, Thomas A. Fanning, certify that: 1. I have reviewed this annual report on Form 10-K of Gulf Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Thomas A. Fanning ----------------------------------- Thomas A. Fanning President and Chief Executive Officer IV-12 GULF POWER COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, Ronnie R. Labrato, certify that: 1. I have reviewed this annual report on Form 10-K of Gulf Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Ronnie R. Labrato ----------------------------------- Ronnie R. Labrato Vice President, Chief Financial Officer and Comptroller IV-13 MISSISSIPPI POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. MISSISSIPPI POWER COMPANY By: Michael D. Garrett, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Michael D. Garrett President, Chief Executive Officer and Director (Principal Executive Officer) Michael W. Southern Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Directors: Tommy E. Dulaney George A. Schloegel Robert C. Khayat Philip J. Terrell Aubrey K. Lucas Gene Warr By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-14 MISSISSIPPI POWER COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, Michael D. Garrett, certify that: 1. I have reviewed this annual report on Form 10-K of Mississippi Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Michael D. Garrett ----------------------------------- Michael D. Garrett President and Chief Executive Officer IV-15 MISSISSIPPI POWER COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, Michael W. Southern, certify that: 1. I have reviewed this annual report on Form 10-K of Mississippi Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Michael W. Southern ----------------------------------- Michael W. Southern Vice President, Chief Financial Officer and Treasurer IV-16 SAVANNAH ELECTRIC AND POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. SAVANNAH ELECTRIC AND POWER COMPANY By: Anthony R. James, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. Anthony R. James President, Chief Executive Officer and Director (Principal Executive Officer) Kirby R. Willis Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) Directors: Gus H. Bell, III Robert B. Miller, III Archie H. Davis Arnold M. Tenenbaum Walter D. Gnann By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-17 SAVANNAH ELECTRIC AND POWER COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, Anthony R. James, certify that: 1. I have reviewed this annual report on Form 10-K of Savannah Electric and Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Anthony R. James ----------------------------------- Anthony R. James President and Chief Executive Officer IV-18 SAVANNAH ELECTRIC AND POWER COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, Kirby R. Willis, certify that: 1. I have reviewed this annual report on Form 10-K of Savannah Electric and Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Kirby R. Willis ----------------------------------- Kirby R. Willis Vice President, Chief Financial Officer and Treasurer IV-19 SOUTHERN POWER COMPANY SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. SOUTHERN POWER COMPANY By: William P. Bowers, President and Chief Executive Officer By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above-named company and any subsidiaries thereof. William P. Bowers President, Chief Executive Officer and Director (Principal Executive Officer) Cliff S. Thrasher Senior Vice President, Comptroller and Chief Financial Officer (Principal Financial and Accounting Officer) Directors: H. Allen Franklin Charles D. McCrary Gale E. Klappa David M. Ratcliffe By: Wayne Boston (Wayne Boston, Attorney-in-fact) Date: March 7, 2003 IV-20 SOUTHERN POWER COMPANY Certification Of Chief Executive Officer Per Section 302 Of The Sarbanes-Oxley Act I, William P. Bowers, certify that: 1. I have reviewed this annual report on Form 10-K of Southern Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ William P. Bowers ----------------------------------- William P. Bowers President and Chief Executive Officer IV-21 SOUTHERN POWER COMPANY Certification Of Chief Financial Officer Per Section 302 Of The Sarbanes-Oxley Act I, Cliff S. Thrasher, certify that: 1. I have reviewed this annual report on Form 10-K of Southern Power Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 7, 2003 /s/ Cliff S. Thrasher ----------------------------------- Cliff S. Thrasher Senior Vice President, Comptroller and Chief Financial Officer IV-22 Deloitte & Touche LLP 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Southern Company: We have audited the consolidated financial statements of Southern Company and Subsidiary Companies as of and for the year ended December 31, 2002, and have issued our report thereon dated February 17, 2003; such consolidated financial statement and report are included elsewhere in this Form 10-K. Our audit also included the consolidated financial statement schedule of Southern Company and Subsidiary Companies (page S-2) listed in the accompanying index at Item 15. This financial statement schedule is the responsibility of Southern Company's management. Our responsibility is to express an opinion based on our audit. The consolidated financial statement schedules of Southern Company and Subsidiary Companies as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, in their report dated February 13, 2002. In our opinion, the consolidated financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 IV-23 THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH THE SOUTHERN COMPANY'S 2001 ANNUAL REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To The Southern Company: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of The Southern Company and its subsidiaries included in this Form 10-K, and have issued our report thereon dated February 13, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Item 14(a)(2) herein as it relates to The Southern Company and its subsidiaries (page S-2) is the responsibility of The Southern Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 IV-24 Deloitte & Touche LLP Suite 1000 417 North 20th Street Birmingham, Alabama 35203-3289 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT Alabama Power Company: We have audited the financial statements of Alabama Power Company as of and for the year ended December 31, 2002, and have issued our report thereon dated February 17, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Alabama Power Company (page S-3) listed in the accompanying index at Item 15. This financial statement schedule is the responsibility of Alabama Power Company's management. Our responsibility is to express an opinion based on our audit. The financial statement schedules of Alabama Power Company as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statement schedules, when considered in relation to the basic financial statements taken as a whole, in their report dated February 13, 2002. In our opinion, the financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Birmingham, Alabama February 17, 2003 IV-25 THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH ALABAMA POWER COMPANY'S 2001 ANNUAL REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To Alabama Power Company: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Alabama Power Company included in this Form 10-K, and have issued our report thereon dated February 13, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Item 14(a)(2) herein as it relates to Alabama Power Company (page S-3) is the responsibility of Alabama Power Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Birmingham, Alabama February 13, 2002 IV-26 Deloitte & Touche LLP 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT Georgia Power Company: We have audited the financial statements of Georgia Power Company as of and for the year ended December 31, 2002, and have issued our report thereon dated February 17, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Georgia Power Company (page S-4) listed in the accompanying index at Item 15. This financial statement schedule is the responsibility of Georgia Power Company's management. Our responsibility is to express an opinion based on our audit. The financial statement schedules of Georgia Power Company as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statement schedules, when considered in relation to the basic financial statements taken as a whole, in their report dated February 13, 2002. In our opinion, the financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 IV-27 THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH GEORGIA POWER COMPANY'S 2001 ANNUAL REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To Georgia Power Company: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Georgia Power Company included in this Form 10-K, and have issued our report thereon dated February 13, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Item 14(a)(2) herein as it relates to Georgia Power Company (page S-4) is the responsibility of Georgia Power Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 IV-28 Deloitte & Touche LLP 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT Gulf Power Company: We have audited the financial statements of Gulf Power Company as of and for the year ended December 31, 2002, and have issued our report thereon dated February 17, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Gulf Power Company (page S-5) listed in the accompanying index at Item 15. This financial statement schedule is the responsibility of Gulf Power Company's management. Our responsibility is to express an opinion based on our audit. The financial statement schedules of Gulf Power Company as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statement schedules, when considered in relation to the basic financial statements taken as a whole, in their report dated February 13, 2002. In our opinion, the financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 IV-29 THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH GULF POWER COMPANY'S 2001 ANNUAL REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To Gulf Power Company: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Gulf Power Company included in this Form 10-K, and have issued our report thereon dated February 13, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Item 14(a)(2) herein as it relates to Gulf Power Company (page S-5) is the responsibility of Gulf Power Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 IV-30 Deloitte & Touche LLP 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT Mississippi Power Company: We have audited the financial statements of Mississippi Power Company as of and for the year ended December 31, 2002, and have issued our report thereon dated February 17, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Mississippi Power Company (page S-6) listed in the accompanying index at Item 15. This financial statement schedule is the responsibility of Mississippi Power Company's management. Our responsibility is to express an opinion based on our audit. The financial statement schedules of Mississippi Power Company as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statement schedules, when considered in relation to the basic financial statements taken as a whole, in their report dated February 13, 2002. In our opinion, the financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 IV-31 THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH MISSISSIPPI POWER COMPANY'S 2001 ANNUAL REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To Mississippi Power Company: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Mississippi Power Company included in this Form 10-K, and have issued our report thereon dated February 13, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Item 14(a)(2) herein as it relates to Mississippi Power Company (page S-6) is the responsibility of Mississippi Power Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 IV-32 Deloitte & Touche LLP 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT Savannah Electric and Power Company: We have audited the financial statements of Savannah Electric and Power Company as of and for the year ended December 31, 2002, and have issued our report thereon dated February 17, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audit also included the financial statement schedule of Savannah Electric and Power Company (page S-7) listed in the accompanying index at Item 15. This financial statement schedule is the responsibility of Savannah Electric and Power Company's management. Our responsibility is to express an opinion based on our audit. The financial statement schedules of Savannah Electric and Power Company as of December 31, 2001 and 2000 and for the two years then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statement schedules, when considered in relation to the basic financial statements taken as a whole, in their report dated February 13, 2002. In our opinion, the financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 IV-33 THIS IS A COPY OF THE REPORT PREVIOUSLY ISSUED IN CONNECTION WITH SAVANNAH ELECTRIC AND POWER COMPANY'S 2001 ANNUAL REPORT AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE To Savannah Electric and Power Company: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of Savannah Electric and Power Company included in this Form 10-K, and have issued our report thereon dated February 13, 2002. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed under Item 14(a)(2) herein as it relates to Savannah Electric and Power Company (page S-7) is the responsibility of Savannah Electric and Power Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia February 13, 2002 IV-34 Deloitte & Touche LLP 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 www.deloitte.com Deloitte & Touche INDEPENDENT AUDITORS' REPORT Southern Power Company: We have audited the financial statements of Southern Power Company as of December 31, 2002 and 2001, and for the year ended December 31, 2002 and for the period from January 8, 2001 (inception) to December 31, 2001, and have issued our report thereon dated February 17, 2003; such financial statements and report are included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of Southern Power Company (page S-8) listed in the accompanying index at Item 15. These financial statement schedules are the responsibility of Southern Power Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Atlanta, Georgia February 17, 2003 IV-35 INDEX TO FINANCIAL STATEMENT SCHEDULES Schedule Page II Valuation and Qualifying Accounts and Reserves 2002, 2001 and 2000 The Southern Company and Subsidiary Companies................. S-2 Alabama Power Company......................................... S-3 Georgia Power Company......................................... S-4 Gulf Power Company............................................ S-5 Mississippi Power Company..................................... S-6 Savannah Electric and Power Company........................... S-7 Valuation and Qualifying Accounts and Reserves 2002 and 2001 Southern Power Company........................................ S-8 Schedules I through V not listed above are omitted as not applicable or not required. Columns omitted from schedules filed have been omitted because the information is not applicable or not required. S-1
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in Thousands of Dollars) Additions ---------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period ------------------------------------------------------------------------------------------------------------------------------- Provision for uncollectible accounts 2002..................... $24,383 $40,313 $5,961 (a) $45,111 (b) $25,546 2001..................... 21,799 44,272 269 41,957 (b) 24,383 2000..................... 21,834 31,329 39 31,403 (b) 21,799 - ------------------- (a) Included in this amount are uncollectible accounts acquired by Southern GAS through its June 2002 purchase of certain assets of The New Power Company. (b) Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
S-2
ALABAMA POWER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in Thousands of Dollars) Additions --------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period -------------------------------------------------------------------------------------------------------------------------------- Provision for uncollectible accounts 2002...................... $5,237 $10,804 $- $11,214 (Note) $4,827 2001...................... 6,237 7,419 - 8,419 (Note) 5,237 2000...................... 4,117 9,093 - 6,973 (Note) 6,237 - ------------------- Note: Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
S-3
GEORGIA POWER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in Thousands of Dollars) Additions --------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period -------------------------------------------------------------------------------------------------------------------------------- Provision for uncollectible accounts 2002.......................... $8,895 $14,117 $- $17,187 (Note) $5,825 2001.......................... 5,100 22,913 - 19,118 (Note) 8,895 2000.......................... 7,000 10,794 - 12,694 (Note) 5,100 - ------------------- Note: Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
S-4
GULF POWER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in Thousands of Dollars) Additions -------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period --------------------------------------------------------------------------------------------------------------------------------- Provision for uncollectible accounts 2002.......................... $1,342 $1,620 $- $2,073(Note) $ 889 2001.......................... 1,302 2,282 - 2,242(Note) 1,342 2000.......................... 1,026 2,702 - 2,426(Note) 1,302 - ------------------- Note: Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
S-5
MISSISSIPPI POWER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in Thousands of Dollars) Additions -------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period ----------------------------------------------------------------------------------------------------------------- --------------- Provision for uncollectible accounts 2002.......................... $856 $2,045 $ 7 $2,190 (Note) $718 2001.......................... 571 2,877 (165) 2,427 (Note) 856 2000.......................... 697 1,156 14 1,296 (Note) 571 - ------------------- Note: Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
S-6
SAVANNAH ELECTRIC AND POWER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Stated in Thousands of Dollars) Additions ------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period ------------------------------------------------------------------------------------------------------------------------------- Provision for uncollectible accounts 2002.......................... $500 $1,137 $- $955 (Note) $682 2001.......................... 407 978 - 885 (Note) 500 2000.......................... 237 999 - 829 (Note) 407 - ------------------- Note: Represents write-off of accounts receivable considered to be uncollectible, less recoveries of amounts previously written off.
S-7
SOUTHERN POWER COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (Stated in Thousands of Dollars) Additions ------------------------------------- Balance at Beginning Charged to Charged to Other Balance at End Description of Period Income Accounts Deductions of Period ------------------------------------------------------------------------------------------------------------------------------- Provision for uncollectible accounts 2002.......................... $- $350 $- $- $350 2001.......................... - - - - -
S-8 EX-3.B.2 3 ex3b2.txt Exhibit 3(b)2 ALABAMA POWER COMPANY AMENDED AND RESTATED BY-LAWS -------- ARTICLE I NAME, DURATION, PURPOSE AND LOCATION OF CORPORATION Section 1. The name of this corporation is ALABAMA POWER COMPANY. Its duration is perpetual. Its purposes are expressed in the original certificate of incorporation of Alabama Power Company and the additions thereto and the amendments and changes which have been or which may be made therein from time to time; in the certificate of incorporation and the several amendments thereto of the corporations which have been or may hereafter be merged into or consolidated with this corporation; and the joint agreements of merger or consolidation heretofore made or which may hereafter be made with this corporation (the "Charter"). Its principal office and place of business shall be in Birmingham, Jefferson County, Alabama; but the corporation may also have offices in other counties, cities and towns in the State of Alabama, and in the City of New York, and in such other places beyond the State of Alabama as the board of directors may from time to time appoint, or the business of the corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS Place of Meeting Section 1. All meetings of the stockholders shall be held, either within or without the State of Alabama, at such place designated in the call for or notice of the meeting. Annual Meeting Section 2. The annual meeting of the stockholders shall be held on the fourth Friday in April in each year, if not a legal holiday, and if a legal holiday, then on the following Friday, when the stockholders entitled to vote shall elect by ballot a board of twenty-five directors to serve until the next annual meeting of the stockholders and until their successors are elected or chosen and qualified and shall transact such other business as may come before the meeting. Special Meetings Section 3. Special meetings of stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the Charter, may be called by (i) the president or the board of directors; (ii) the holders of not less than ten percent (10%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting or if such holders sign, date and deliver to the corporation's president or secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held, who shall, within 21 days of the receipt of such demand, cause notice to be given of the meeting to be held within the minimum time following the notice prescribed in Section 4 below; or (iii) the holders of not less than ten percent (10%) of the votes entitled to be cast at the special meeting who signed a demand under clause (ii) above if notice was not given within the 21 days after such demand or the special meeting was not held in accordance with the notice. Notice of Meeting Section 4. Written notice of the time and place of holding all meetings shall, unless waived, be given to each stockholder entitled to vote not less than ten or more than sixty days before the date of the meeting, either personally or by mail, to such address as appears on the books of the corporation, unless by statute other or further notice is required, and in this event the required statutory notice shall be given; and, in the case of special meetings, the purpose thereof shall be stated in the notice. The capital stock or bonded indebtedness of the corporation shall not be increased at the annual meeting unless thirty (30) days' notice has been given before the date of the meeting, or pursuant to such lesser or greater requirements of Section 234 of the Constitution of Alabama as the same may be amended from time to time. Stockholder List Section 5. After fixing a record date for a meeting, the officer having charge of the stock transfer books of the corporation shall prepare an alphabetical list of the names of all its stockholders who are entitled to notice of a stockholders' meeting. The list must be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each stockholder. The stockholders' list must be available for inspection by any stockholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation's principal office. A stockholder, or his or her agent or attorney, is entitled on written demand to inspect and, for a proper purpose, to copy the list, during regular hours and at its expense, during the period it is available for inspection. The corporation shall make the list available at the meeting, and any stockholder, or his or her agent or attorney, is entitled to inspect the list at any time during the meeting or any adjournment thereof. The stock transfer records of the corporation shall be prima facie evidence as to who are the stockholders entitled to examine the stockholders' list or transfer records or to vote at any meeting of stockholders. Voting Section 6. The voting rights of the stockholders shall be set forth in the Charter. Any stockholder entitled to vote may vote in person or by proxy appointed by an instrument in writing subscribed by such stockholder. The proxy holder need not be a stockholder. All elections shall be had and, subject to the provisions of the Charter, all questions decided by a majority vote of the stock voting at the meeting in person or by proxy and entitled to vote thereat. Quorum Section 7. Subject to the provisions of the Charter, the holders of a majority of the stock issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall be requisite to constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such majority shall not be present or represented at any meeting, the stockholders present in person or by proxy and so entitled to vote, shall have power to adjourn the meeting until the requisite amount of stock shall be represented; and at such adjourned meeting any business may be transacted as at the original meeting. Every meeting of the stockholders may be adjourned from time to time until its business is completed. Action Without a Meeting Section 8. Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting, if the action is taken by all stockholders entitled to vote on the action and evidenced by one or more consents in writing, setting forth the action so taken, signed by all stockholders entitled to vote on the action and delivered to the corporation for inclusion in the minutes for filing with the corporate records. Action taken is effective when the last stockholder signs the consent, unless the consent specifies a different effective date. Such consent shall have the same effect as a unanimous vote. ARTICLE III DIRECTORS Election Of Section 1. The property and business of the corporation shall be managed by its board of directors, the members of which shall be elected by the stockholders as aforesaid. Eligibility Section 2. Directors shall be natural persons of the age of at least nineteen (19) but need not be residents of the State of Alabama or stockholders of the corporation. A person being a full time executive employee of the corporation or its parent company or any affiliated company when first elected a director of the corporation (hereinafter sometimes referred to as an "employee-director") shall not be eligible for election as a director when he ceases to be an executive employee; whether by reason of resignation, retirement or other cause. Any employee-director shall resign as a director effective on the date he ceases to be an executive employee. A person not an employee-director shall not be eligible for election or re-election as a director of the corporation (1) after his 70th birthday, (2) after permanent separation from the business or professional organization with which he was primarily associated when first elected a director, (3) after other material change in his primary occupation or executive position from that which he pursued or held when first elected a director, or (4) after moving his principal residence outside the state in which he was a resident when first elected a director, whichever event first occurs. The application to an individual of any provision of this paragraph may be waived by the board of directors. Any such waiver shall only be effective on a year to year basis. Compensation Section 3. Directors, other than "employee-directors", shall receive directors' fees in the amounts and by the method fixed by the board of directors. All directors shall be reimbursed for actual expenses incurred in connection with their attendance of meetings of the board of directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV BOARD OF DIRECTORS Meetings of the Board Section 1. The directors may hold their meetings either within or outside the State of Alabama at such places as they may from time to time determine and as authorized by the laws of the State of Alabama. Annual Meeting Section 2. The annual meeting of the board of directors shall be held as soon as practicable after the annual meeting of the stockholders, for the purpose of electing officers and for the transaction of such other business as may come before the meeting; at least three days' notice of the time and place of holding the meeting to be given to each member of the board. Regular Meetings Section 3. Regular meetings of the board may be held without notice at such time and place as may from time to time be appointed by the board. Special Meetings Section 4. Special meetings of the board may be called by the president, on two day's notice to each director, by delivered letter, by mail or by telegram or by personal communication either over the telephone or otherwise. Special meetings shall be called by the secretary in like manner and on like notice, on the written request of one-third of the directors for the time being in office. Quorum Section 5. At all meetings of the board of directors, a majority of the directors in office shall be necessary and sufficient to constitute a quorum for the transaction of business, except as otherwise provided in Section 15 of this Article IV, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically permitted or provided by statute or by the Charter or by these by-laws. A director is, unless established to the contrary, presumed present for quorum purposes for the remainder of the meeting at which he has been present for any purpose. A director who is present at a meeting of the board or any committee of the board when corporate action is taken is deemed to assent to the action taken place unless (i) he objects at the beginning of the meeting (or promptly upon arrival) to holding it or transacting business at the meeting or, as to a matter required under the Charter or these by-laws to be included in the notice of the purpose of the meeting, he objects before action is taken on the matter; (ii) his dissent or abstention from action taken is entered in the minutes of the meeting; or (iii) he delivers written notice of his dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. If at any meeting of the board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. Meetings by Conference Telephone, etc Section 6. Meetings of the board of directors and of any committee thereof may be held by means of a conference telephone or other communication by which all directors participating may simultaneously hear each other during the meeting. Participation by such means shall constitute presence in person at any such meeting. Action Without a Meeting Section 7. Any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if the action is taken by all members of the board and evidenced by one or more consents in writing, setting forth the action so taken, shall be signed by each member of the board or committee, as the case may be, and included in the minutes or filed with the corporate records reflecting the action taken. Action taken is effective when the last director signs the consent, unless the consent specifies a different effective date. Such consent shall have the same effect as a unanimous vote. General Powers Section 8. In addition to the powers and authority by these by-laws expressly conferred on it, the board may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Charter or by these by-laws, directed or required to be exercised or done by the stockholders. Specific Powers Section 9. Without prejudice to the general powers conferred by Section 8 of this Article IV, the board of directors shall in addition thereto have the following specific powers, that is to say: (a) From time to time to make and change rules and regulations not inconsistent with these by-laws for the management of the property and business of the corporation; (b) To purchase or otherwise acquire for the corporation any property, rights, privileges or franchises which the corporation is authorized to acquire, at such prices or consideration and generally on such terms and conditions as the board shall think fit; and at its discretion to pay for the same either wholly or partly in money, stock or other securities or property of the corporation; (c) To sell, exchange or otherwise dispose of any property of the corporation less than all, for such price or consideration, and generally on such terms and conditions as the board thinks fit; and at its discretion to accept in whole or partial payment therefor, money, stock or other securities or properties; (d) To appoint and at the discretion of the board to remove or suspend such officers, agents or employees, permanently or temporarily, as it may think fit, and to determine their duties, and to require bonds in such instances and in such amounts and with such sureties as it may think fit; (e) To appoint any person or corporation to accept and hold in trust for the corporation any property belonging to the corporation or in which it is interested, or for any other purpose, and to execute all such deeds and instruments and perform such acts as may be requisite in relation to any such trust; (f) To determine who shall be authorized on behalf of the corporation to sign bills, notes, receipts, acceptances, endorsements, checks, releases, contracts and documents; (g) To authorize the execution and delivery of notes and other evidences of indebtedness of the corporation for money borrowed or other indebtedness incurred by the corporation; and to authorize the execution, certification, delivery and sale of the mortgage bonds of the corporation, from time to time upon such terms and conditions as the board may approve; and (h) To delegate any of the powers of the board in the course of the current business of the corporation, to any standing or special committee or to any officer or agent, or to appoint any persons to be agents of the corporation, with such powers and upon such terms as the board thinks fit. Record of Proceedings Section 10. The board of directors shall cause a record of its proceedings and of all board meetings to be properly kept by the secretary of the corporation or by a secretary pro tempore. The records shall be verified by the signature of the person acting as secretary. Books of Account Section 11. The board of directors shall cause regular and correct books of account to be kept, and to be balanced and certified by some public accountant at least once every year. Election of Officers Section 12. The board of directors at its annual meeting shall elect from their own number a president and shall elect a secretary. In addition, the board of directors at its annual meeting may elect one or more vice presidents. At the annual meeting or any other meeting duly held from time to time the board may elect other vice presidents, a treasurer and such other officers as the board shall deem necessary or appropriate. Books, Papers, Etc. Section 13. The property and funds, books, correspondence and papers of the corporation, in the possession or control of any officer or agent thereof, shall at all times be subject to the inspection of the board of directors, the executive committee or a committee appointed for the purpose at a general meeting of the holders of the common stock. The minutes, including the resolutions and proceedings of the board, shall be produced when required by the stockholders at any general meeting. Transactions With Directors Section 14. A director's conflicting interest transaction may not be enjoined, set aside, or give rise to an award of damages or other sanctions, in a proceeding by a stockholder or by or in the right of the corporation, because the director, or any person with whom or which he or she has a personal, economic, or other association, has an interest in the transaction, if: (1) Director's action respecting the transaction was at any time taken in compliance with Section 10-2B-8.62 of the Alabama Code; or (2) Stockholders' action respecting the transaction was at any time taken in compliance with Section 10-2B-8.63 of the Alabama Code; or (3) The transaction, judged according to the circumstances at the time of commitment, is established to have been fair to the corporation. Vacancies Section 15. If a vacancy occurs on the board: (i) the board of directors may fill the vacancy, except that the directors shall not have the power to fill a vacancy resulting from an increase in the number of directors or (ii) if the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy, if it is one that the directors are authorized to fill, by the affirmative vote of a majority of all the directors remaining in office. A director elected to fill a vacancy shall be elected to serve until the next annual meeting of stockholders. If there are no directors in office, then the stockholders may hold a special meeting to elect directors. ARTICLE V EXECUTIVE AND OTHER COMMITTEES Executive Committee Section 1. The board of directors may, by resolution adopted by a majority of the whole board in office, designate no fewer than three (3) of the directors to constitute an executive committee, of which the president shall be a member. Three members of such committee shall constitute a quorum. The president shall act as chairman of the executive committee. During the intervals between the meetings of the board, the executive committee shall have and may exercise all the powers of the board of directors in the management of the property and business of the corporation and shall have power to authorize the seal of the corporation to be affixed to all instruments that may require it, all except as otherwise provided by law. Audit Committee Section 2. The board of directors may, by resolution adopted by a majority of the whole board in office, designate no fewer than three non-employee directors to constitute an audit committee. A majority of the members of the audit committee shall constitute a quorum. The board of directors shall appoint the chairman of the audit committee. The audit committee shall perform the functions set forth in the charter of the audit committee. Other Standing Committees Section 3. The board of directors may also, by resolution or resolutions adopted by a majority of the whole board in office, designate one or more other standing committees as it deems necessary and desirable. Each such committee shall consist of at least two directors of the corporation and shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation to the extent provided in such resolution or resolutions and these by-laws. The board of directors shall designate the name of and appoint the chairman of each such committee. A majority of the members of each such committee shall constitute a quorum. To the extent specified by the board or in the Charter or by-laws, each committee may exercise the authority of the board of directors, shall have and may exercise all the authority of the board of directors in the management of the business and affairs of the corporation; except that no such committee shall have the authority of the board of directors with reference to (1) authorizing distributions, (2) approving or proposing to stockholders actions requiring approval by stockholders, (3) filling vacancies on the board of directors or on any of its committees, (4) amending the Charter, (5) adopting, amending or repealing these by-laws, (6) approving a plan of merger not requiring stockholder approval, (7) authorizing or approving reacquisition of shares, except according to formula or method prescribed by the board of directors, or (8) authorizing or approving the issuance or sale or contract for sale of shares, or determining the designation and relative rights, except that the board of directors may authorize a committee (or senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. Advisory Committees Section 4. The board of directors may also, by resolution or resolutions adopted by a majority of the whole board in office, designate one or more advisory committees as it deems necessary and desirable. Each such committee shall consist of at least two directors of the corporation and shall advise the board of directors on the matter or matters provided in such resolution or resolutions. The board of directors shall designate the name of and appoint the chairman of each such committee. Each such committee shall prepare and deliver reports to the board of directors as the board of directors or the chairman thereof requests. A majority of the members of each such committee shall constitute a quorum. Election of Committee Members Section 5. The members of the executive committee, the audit committee, the other standing committees and the advisory committees shall be elected at the annual meeting of the board of directors or as soon thereafter as is practicable. The members of all such committees shall hold office until the next annual meeting of the board of directors and until their respective successors are elected. The board of directors shall have the power to fill vacancies in, to change the membership of and to dissolve any such committee. Meetings and Minutes Section 6. The executive committee and the other committees shall meet at such time and place as their respective chairman may appoint. Notice of each meeting of the executive committee and the other committees may be given by telephone, telex or telecopy or in writing specifying the place, day and hour thereof. If given in writing, such notice may be served personally at least one hour before such meeting or as otherwise provided in these by-laws. The executive committee and each of the other standing committees shall maintain regular minutes of their respective proceedings; each of the advisory committees shall maintain memoranda of their respective meetings. All actions taken by the executive committee, the audit committee or any of the other standing committees shall be reported to the board of directors at its next succeeding meeting and shall be subject to amendment, revision or alteration by the board of directors, provided, however, that the rights or acts of third parties shall not be affected by such amendment, revision or alteration. The members of the executive committee and the other committees shall be entitled to such fees and expenses as may be fixed by the board of directors. ARTICLE VI OFFICERS Enumeration of Section 1. The officers of the corporation shall be chosen by the board of directors, except as herein provided. The full time executive officers shall include a president and may include one or more vice presidents, all as the board of directors may from time to time determine. The administrative officers shall include a secretary and may include one or more vice presidents in charge of particular work or divisions of the corporation, a treasurer, a comptroller and such assistant secretaries, assistant treasurers and assistant comptrollers as the board of directors may from time to time determine. Two or more offices may be held by the same person, except that the same person may not serve as president and as secretary. Officers other than the president need not be members of the board. President Section 2. The president shall be the chief executive officer of the corporation, a member and chairman of the executive committee. He shall preside at meetings of the board of directors and stockholders. Subject to the control of the board of directors, the executive committee or the committees of the board having authority, he shall be vested with authority to act for the corporation in all matters and shall have general charge of the corporation and the general supervision of its affairs. Subject to the limitations stated, he shall have full power and authority to do and perform in the name of the corporation all acts necessary or proper to be done and performed, and to delegate to the vice presidents such part of his authority as may be appropriate. Vice Presidents Section 3. The vice presidents shall perform such of the duties of the president on behalf of the corporation as may be respectively assigned to them from time to time by the board of directors or the president. One or more vice presidents may be designated as either "executive vice president" or "senior vice president". Secretary Section 4. The secretary shall, unless otherwise directed, attend all sessions of the board and all meetings of the stockholders and act as clerk thereof, and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for standing committees when required. He shall give or cause to be given notice of all meetings of the stockholders and of the board of directors and of standing committees when required, and shall perform such other duties as may be prescribed by the board of directors or the chief executive officer under whose supervision he shall act. He shall keep in safe custody the seal of the corporation and, when authorized, affix the same to any instrument requiring a seal and attest the signature thereof when directed or required to do so. Treasurer Section 5. The treasurer shall have the custody of the corporation funds and securities and shall be accountable for the receipts and disbursements in books belonging to the corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. Section 6. He shall disburse funds of the corporation as may be ordered by the board, taking proper vouchers for such disbursements, and shall render to the president and to the board of directors at the regular meetings of the board or whenever the board may require it, an account of all his transactions as treasurer and of the financial condition of the corporation and shall perform such other duties as may be assigned to him from time to time. Comptroller Section 7. The comptroller shall have charge of all books and accounts of the corporation, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall perform such other duties as may be assigned to him from time to time. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers Section 8. One or more assistant secretaries, assistant treasurers and assistant comptrollers may be elected by the board of directors or appointed by the chief executive officer to hold office until the next annual meeting of the board of directors and until their successors are elected or appointed, but may be removed at any time. They shall perform any of or all of the duties of secretary, treasurer or comptroller, as the case may be, and such other duties as may be assigned to them from time to time. Duties of Officers May Be Delegated Section 9. In case of the absence of any officer of the corporation, or for any other reason the board may deem sufficient, the board may delegate the powers or duties of such officers to any other officer or to any director, for the time being. Term of Office Section 10. The officers of the corporation shall hold office until the next succeeding annual meeting of the board of directors or until their successors are elected and qualified. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the whole board of directors. All officers, agents and employees other than officers appointed by the board, shall hold office at the discretion of the officer appointing them, but shall be subject to removal by the board of directors or the executive committee at any time. ARTICLE VII VACANCIES Section 1. If the office of the president, vice president, secretary, treasurer, comptroller or other officer or agent elected by the board, becomes vacant by reason of death, resignation, retirement, disqualification, removal from office or otherwise, the directors then in office although less than a quorum, by a majority vote may choose a successor or successors who shall hold office for the unexpired term in respect of which such vacancy occurred. ARTICLE VIII CAPITAL STOCK Certificates Section 1. Unless determined otherwise by the board of directors, the certificates of stock of the corporation shall be numbered and shall be entered on the stock certificate books of the corporation as they are issued. They shall exhibit the holder's name and number of shares and shall be signed by the president or a vice president and the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the corporate seal, which may be facsimile, engraved or printed. To the extent permitted under Alabama law, the signature of any such president, vice president, secretary, assistant secretary, treasurer or assistant treasurer upon such certificate may be facsimile, engraved or printed. In any case, when such officer or officers who shall have signed, or whose facsimile signature or signatures shall have been placed upon such certificate shall cease to be such either because of death, resignation or otherwise before such certificate is delivered by the corporation, such certificate may nevertheless be issued and delivered by the corporation with the same effect as if such officer or officers had not ceased to be such. No certificate shall be issued unless the stock represented thereby is fully paid up. Transfer Section 2. The transfer of all classes of stock shall be made and registered only by the person named in the certificate, or by attorney lawfully constituted in writing, upon surrender of such certificate and payment of all taxes; and the corporation shall keep in the hands of an agent or other person designated for that purpose a true statement or book showing who are the holders of the stock of the corporation and all transfers and hypothecations thereof; and the corporation may by its board of directors appoint one or more transfer agents or transfer clerks and registrars, and may require all stock certificates and certificates representing any rights or options to be signed by such transfer agents or transfer clerks acting on behalf of the corporation and by such registrars. Record Date Section 3. For the purpose of determining stockholders entitled to notice of a stockholders' meeting, to demand a special meeting, to vote, or to take any other action, the board of directors of the corporation may fix the record date but not to exceed, in any case, seventy (70) days before the meeting or action requiring a determination of stockholders. A determination of stockholders entitled to notice of or to vote at a stockholders' meeting is effective for any adjournment of the meeting unless the board fixes a new record date, which it must do if the meeting is adjourned to a date more than one hundred twenty (120) days after the date fixed for the original meeting. Record Holder Section 4. The corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Alabama. Lost, Destroyed and Mutilated Certificates Section 5. The holder of any share of stock shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefor, and the board may, in its discretion, and after the expiration of such period of time as it may determine to be advisable, cause a new certificate or certificates for shares of stock to be issued, upon the surrender of the mutilated certificate, or in case of loss or destruction of the certificate, upon proof satisfactory to the board of such loss or destruction. The board may, in its sole discretion, require the owner of the lost, destroyed or mutilated certificate, or his legal representatives, to give the corporation a bond, in such sum and with such surety or sureties as it may direct, to indemnify the corporation against any claim that may be made against it on account of the alleged loss, destruction or mutilation of any such certificate or the issuance of such new certificate. Dividends Section 6. Subject to the provisions of the Charter, dividends upon the capital stock of the corporation when earned, may be declared by the board of directors at any regular meeting, or any special meeting. Before paying any dividend or making any distribution of profits, there may be set aside out of the surplus or net profits of the corporation such sum or sums as the board of directors from time to time in its absolute discretion may determine to be proper, as a reserve fund to meet contingencies or for equalizing dividends or for repairing or maintaining any property of the corporation or for such other purpose as the board shall think proper. Annual Reports to Stockholders Section 7. The board of directors shall cause the corporation to deliver to each of its stockholders, not later than one hundred twenty (120) days after the close of each of its fiscal years, a financial statement, which may be consolidated, including a balance sheet as of the end of such fiscal year and a statement of income for such fiscal year. Such financial statement shall be prepared in accordance with generally accepted accounting principles, or, if the books of the corporation are not maintained on that basis, may be prepared either on the same basis used by the corporation for filing its United States income tax returns or as required by appropriate regulatory agencies. The financial statement shall be accompanied by a report of the president, the officer of the corporation in charge of its financial records or a certified public accountant stating whether, in his opinion, the financial statements of the corporation present fairly the financial position of the corporation and the results of its operations in accordance with generally accepted accounting principles and, if not, describing the basis of their preparation and giving his opinion of the fairness of the presentation of the data shown by them, in accordance with accounting procedures generally used in the trade, industry or business conducted by the corporation. ARTICLE IX CORPORATE SEAL Section 1. The seal of the corporation shall be circular in form and shall have inscribed thereon the name of the corporation followed by the word "Alabama," and shall have the word "Seal" inscribed in the center thereof. ARTICLE X FISCAL YEAR Section 1. The fiscal year shall begin with the first day of January in each year. ARTICLE XI NOTICES Section 1. Whenever under the provision of these by-laws notice is required to be given to any director, officer or stockholder, it shall not be construed to mean personal notice, but such written notice may be given by mail or private carrier, with postage thereon prepaid, or by e-mail transmission or other similar electronic means of communication providing evidence of transmission addressed to such stockholder, officer or director, at such address as it appears on the books of the corporation, or in default of other address, to such stockholder, director or officer at the general post office at the principal office of the corporation in the State of Alabama. Written notice to the corporation's stockholders is effective when mailed, if mailed postpaid and correctly addressed to the stockholder's address shown on the books of the corporation. Notice to directors may also be given in person, or by telephone, telecopy or facsimile transmission. Any stockholder, director or officer may waive any notice required to be given either by statute or under these by-laws; and all meetings of stockholders and directors may be held without notice, if waived, at such time and place as may be fixed. ARTICLE XII AMENDMENTS Section 1. Except as otherwise provided by law, these by-laws may be altered, amended or repealed by a majority of the board of directors present at any meeting thereof. ARTICLE XIII INDEMNIFICATION AND RELATED MATTERS Section 1. Each person who is or was a director, officer or employee of the corporation holding one or more positions of management through and inclusive of department managers or other employees explicitly designated in writing by the president or a vice president of the Company (such individuals being hereinafter referred to as "indemnified parties") and who was or is a party or was or is threatened to be made a party to any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director of the corporation or officer or employee of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the corporation as a matter of right against any and all expenses (including attorneys' fees) actually and reasonably incurred by him and against any and all claims, judgments, fines, penalties, liabilities and amounts paid in settlement actually incurred by him in defense of such claim, action, suit or proceeding, including appeals, to the full extent permitted by applicable law. The indemnification provided by this Section shall inure to the benefit of the heirs, executors and administrators of such person. Expenses (including attorneys' fees) incurred by an indemnified party with respect to the defense of any such claim, action, suit or proceeding may be advanced by the corporation prior to the final disposition of such claim, action, suit or proceeding, as authorized by the board of directors in the specific case, upon receipt of an undertaking by or on behalf of such person entitled to be indemnified by the corporation under this Section or otherwise; provided, however, that the advancement of such expenses shall not be deemed to be indemnification unless and until it shall ultimately be determined that such person is entitled to be indemnified by the corporation. The corporation may purchase and maintain insurance at the expense of the corporation on behalf of any person who is or was a director, officer, employee or agent of the corporation, or any person who is or was serving at the request of the corporation as a director (or the equivalent), officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability or expense (including attorneys' fees) asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability or expense under this Section or otherwise. Without limiting the generality of the foregoing provisions of this Section, no present or future director or officer of the corporation, or his heirs, executors, or administrators, shall be liable for any act, omission, step, or conduct taken or had in good faith, which is required, authorized, or approved by any order or orders issued pursuant to the Public Utility Holding Company Act of 1935, the Federal Power Act, or any federal or state statue or municipal ordinance regulating the corporation or its parent by reason of their being holding or investment companies, public utility companies, public utility holding companies, or subsidiaries of public utility holding companies. In any action, suit, or proceeding based on any act, omission, step, or conduct, as in this paragraph described, the provisions hereof shall be brought to the attention of the court. In the event that the foregoing provisions of this paragraph are found by the court not to constitute a valid defense on the grounds of not being applicable to the particular class of plaintiff, each such director and officer, and his heirs, executors, and administrators, shall be reimbursed for, or indemnified against, all expenses and liabilities incurred by him or imposed on him, in connection with, or arising out of, any such action, suit, or proceeding based on any act, omission, step, or conduct taken or had in good faith as in this paragraph described. Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs, and attorneys' fees. The foregoing rights shall not be exclusive of any other rights to which any such director or officer or employee may otherwise be entitled and shall be available whether or not the director or officer or employee continues to be a director or officer or employee at the time of incurring any such expenses and liabilities. ARTICLE XIV SEVERABILITY AND RULES OF CONSTRUCTION Section 1. If any word, clause or provision of the by-laws or any indemnification made under Article XIII hereof shall for any reason be determined to be invalid, the provisions of the by-laws shall not otherwise be affected thereby but shall remain in full force and effect. The masculine pronoun, as used in the by-laws, means the masculine and feminine wherever applicable. As amended April 26, 2002 EX-3.C.2 4 ex3c2.txt Exhibit 3(c)2 BYLAWS OF GEORGIA POWER COMPANY As Amended Effective February 19, 2003 Seal SECTION 1. The corporate seal shall be circular in form and bear the name of the Company in the margin and the year of organization and the word "Seal" in the center. Stockholders' Meetings SECTION 2. The annual meeting of the stockholders shall be held, upon notice as hereinafter provided, at the principal office of the Company in the City of Atlanta, County of Fulton, State of Georgia, on the third Wednesday in the month of May in each year, if not a legal holiday, and if a legal holiday, then on the next secular day following, when the stockholders entitled to vote thereon shall elect by plurality vote the Board of Directors, and transact such other business as may be brought before the meeting. At the annual meeting any business may be transacted irrespective of whether the notice calling such meeting shall have contained a reference thereto. SECTION 3. Special meetings of the stockholders shall be held, upon notice as hereinafter provided, at the principal office of the Company in the City of Atlanta, County of Fulton, State of Georgia, except such meetings as the Chairman of the Board or the President or the Board of Directors expressly determine shall be held elsewhere within or without the State of Georgia, but within the United States, in which case meetings may be held, upon notice as hereinafter provided, at such other place or places as the Chairman of the Board or the President or the Board of Directors may determine. SECTION 4. At all meetings of the stockholders, the holders of capital stock of the Company representing a majority of the aggregate number of votes entitled to be cast at the meeting, present in person or represented by proxy, shall constitute a quorum requisite for the transaction of business, except as otherwise required by the Charter or by law. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting, until the requisite amount of voting stock shall be present, except as otherwise required by the Charter or by law. At such adjourned meeting at which the requisite amount of voting stock shall be represented, any business may be transacted which might have been transacted at the meeting originally notified. SECTION 5. Each stockholder entitled to vote in accordance with the charter or any amendment thereof and in accordance with the provisions of these Bylaws or of any action taken pursuant thereto shall be entitled, in person or by proxy, to the vote provided by the Charter for each share of stock entitled to vote held by such stockholder. Except where the transfer books of the Company shall have been closed or a date shall have been fixed as the record date for the determination of its stockholders entitled to vote, as hereinafter provided, no share of stock shall be voted on at any election for Directors which shall have been transferred on the books of the Company within twenty days next preceding such election of Directors. The vote for Directors, and, upon the demand of any stockholder, the vote upon any question before the meeting, shall be by ballot. All elections shall be by and all questions decided by plurality vote except as otherwise provided by the Charter and/or by the laws of the State of Georgia. SECTION 6. Written notice of the annual meeting shall be mailed to each stockholder entitled to vote thereat, at such address as appears on the stock books of the Company, at least ten days prior to the meeting. It shall be the duty of every stockholder to furnish to the Secretary of the Company or to the Transfer Agent, if any, of the class or series of stock owned by him, his post office address and to notify said Secretary or Transfer Agent of any change therein. SECTION 7. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Chairman of the Board or by the President, and shall be called by the Chairman of the Board or by the President or the Secretary upon the order in writing of a majority of or by resolution of the Board of Directors or at the request in writing of stockholders owning one-fourth of the entire capital stock of the Company issued and outstanding and entitled to vote. Such request or order shall state the purpose or purposes of the proposed meeting. On failure by the Chairman of the Board or the President or the Secretary to call such special meeting when duly requested, the makers of such request or order may call such special meeting over their own signatures. SECTION 8. Written notice of a special meeting of stockholders, stating the time and place and object thereof, shall, unless waived in writing, be mailed, postage prepaid, or delivered, at least ten days before such meeting, to each stockholder entitled to vote thereat, at such address as appears on the books of the Company. No business may be transacted at such meeting except that referred to in said notice, or in a supplemental notice given also in compliance with the provisions hereof, or such other business as may be germane or supplementary to that stated in said notice or notices. SECTION 9. No stockholder shall be entitled to notice of any meeting of stockholders with respect to any shares registered in his name after the date upon which notice of such meeting is required by law or these Bylaws to have been mailed or otherwise given to stockholders. Directors SECTION 10. The affairs of the Company shall be managed by a Board of Directors consisting of not less than five nor more than the maximum number allowed by law, who shall be elected annually by the stockholders entitled to vote, to hold office for one year and until their successors are elected and qualify except that any Director who is a full-time employee of the Company shall cease to be a Director upon termination of his employment as a full-time employee or upon his retirement from active duty under the Company's pension plan; provided that in the event of failure to hold such annual meeting of the stockholders or to hold such election at such meeting, such election may be held at any special meeting of the stockholders called for the purpose and the Directors then in office shall continue in office until their successors shall have been duly elected and qualified. If the stockholders at such annual meeting or at any special meeting called for the election of Directors shall not elect a full Board of Directors at such election, the Directors elected may elect the remaining Directors in the manner provided below for the filling of vacancies. In addition to the Directors authorized by the first paragraph of this section, there may also be one or more honorary members of the Board of Directors consisting of retired employees of the Company or of any affiliated company or companies who were serving as regular members of the Board of Directors at the time of their retirement from active duty under the Company's pension plan, or of any other former members of the Board who did not wish to continue or were unable to continue as regular members of the Board, or of any other persons whose services as such will be of value to the Company. Any such retired employee or other former member of the Board or other person may, on the recommendation of the Chief Executive Officer of the Company, be elected as an Honorary Director at any Board of Directors' meeting by the vote of the majority of the entire Board then in office or at any meeting of the stockholders by the vote of the holders of the majority of the stock issued and outstanding and entitled to vote at such meeting. An Honorary Director so chosen shall hold office until the next annual meeting of stockholders. Honorary Directors shall receive notices of all meetings of the Board of Directors and shall receive the customary fee or salary and expense reimbursement or allowance for attending meetings and may participate in an advisory capacity in all discussions and deliberations of the Board of Directors, but will not have the right to vote. Such Honorary Directors shall not be counted in determining compliance with the number of Directors authorized by the first paragraph of this section or in determining the existence of a quorum. No person shall be eligible to serve as a Director or as an Honorary Director after his 70th birthday; provided, however, that such provision shall not apply to any person so long as such person shall serve as a member of the Independent Litigation Committee established and designated by the Board of Directors on September 17, 1986. Any Director of the Company may resign at any time by giving written notice to the Chairman of the Board or the President or the Secretary of the Company. Such resignation shall take effect at the time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Each Director who is not an employee-director of the Company shall tender his resignation from the Board of Directors when a change occurs in his principal business association prior to normal retirement, excluding Directors serving on the Board of Directors as of November 15, 2000. Upon receipt of a tender of resignation in accordance with the foregoing statement, the Board of Directors, in its sole discretion, shall determine whether such resignation shall be accepted. SECTION 11. In case of any vacancies in the Board of Directors through death, resignation, disqualification, or any cause other than by reason of removal, the remaining Directors, if less than a quorum, by affirmative vote of a majority thereof, or if a quorum, by a majority vote of such quorum, may elect a successor or successors, and the Director or Directors so chosen shall hold office until the next annual election and until their successor or successors shall be elected and qualified. SECTION 12. In addition to the powers and authorities expressly conferred upon it by the statute, by the charter and by these Bylaws, the Board may exercise all such powers of the Company and do all such lawful acts and things as may be done by the Company as are not by statute or by the charter or by these Bylaws directed or required to be exercised or done by the stockholders. SECTION 13. A majority of the Board shall constitute a quorum and shall be competent to do all acts which the Board can do. SECTION 14. Any and all of the Directors may at any time be removed without cause assigned by the vote of the holders of a majority in number of all of the outstanding stock entitled to vote, given at a meeting called for the purpose of considering such action. Meetings of the Board of Directors SECTION 15. The newly elected Board of Directors may meet at such place and time as shall be fixed by the vote of the stockholders at the meeting at which such newly elected board was elected, for the purpose of organization or otherwise, and no notice of such meeting shall be necessary to the elected Directors in order legally to constitute the meeting, provided a quorum shall be present, or they may meet at such place and time as shall be stated in a notice given to such Directors either personally or by mail or telegram two days prior to such meeting or as shall be fixed by the consent in writing of all the Directors. SECTION 16. Regular meetings of the Board may be held without notice at such time and place as shall from time to time be determined by the Board. SECTION 17. Special meetings of the Board may be called by the Chairman of the Board or the President, on two days' notice to each Director, by delivered letter, by mail or by telegram or by personal communication either over the telephone or otherwise; special meetings shall be called by the Secretary in like manner and on like notice, on the written request of two Directors or on the request of the Chairman of the Board or the President. SECTION 18. Directors shall be entitled to a fee for attendance at each regular or special meeting of the Board, or a committee of the Board, and/or to a monthly or annual fee or salary provided that no fees or salaries shall be paid to those Directors who are officers or employees, other than retired employees, who are on a fixed basis of compensation from the Company or any subsidiary or affiliated company and who have duties and responsibilities to such companies other than those arising from the office of Director. Directors shall be reimbursed for actual expenses, if any, incurred in attending meetings of the Board of Directors and in otherwise performing duties as such Directors or in lieu thereof to an allowance for expenses. The amount of fee for salary paid to Directors and expense allowance, if any, shall be fixed by the Board of Directors. Executive and Other Committees SECTION 19. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate an executive committee, an audit committee, a compensation committee, a finance committee and a nuclear operations overview committee each consisting of three or more directors, each of which committees may act by a majority of its members. There may also exist, at the Board's discretion, one or more committees, each consisting of one or more directors, each of which committees may act by a majority of its members. Such executive committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Company when the Board is not meeting; and each other committee shall have such powers of the Board and otherwise as are provided in the resolution establishing such committee. Provided, however, notwithstanding anything to the contrary herein, the executive committee and all other committees established by the Board shall have no power or authority (1) to amend the Charter or the Bylaws; (2) to adopt a plan of merger or consolidation; (3) to sell, lease, exchange or otherwise dispose of all or substantially all of the assets and property of the Company; or (4) to voluntarily dissolve or revoke a voluntary dissolution of the Company. Unless otherwise specifically permitted by the Board of Directors, the rules promulgated by these Bylaws with respect to meetings of Directors, notice, quorums, voting and other procedures at such meeting shall be applicable to meetings of the executive and any other committee established by the Board of Directors, except that special meetings of any such committees may be called on one day's notice to all members of such committee. Officers SECTION 20. The officers of the Company shall be chosen by the Board of Directors at its first meeting after the meeting of stockholders at which such board has been elected. The executive officers shall be a President, one or more Vice Presidents as said Board of Directors may from time to time determine, and in the discretion of the Board of Directors, a Chairman of the Board. The administrative officers shall be a Secretary, a Treasurer and a Comptroller, and such Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers as the Board of Directors may from time to time determine. Any two or more offices may be held by the same person, except the offices of President and Secretary. The Chairman of the Board and the President shall be chosen from among the Board of Directors, but the other officers need not be members of the Board. SECTION 21. The Board may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. SECTION 22. The officers of the Company shall hold office at the pleasure of the Board, until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors with or without cause. Powers and Duties of the Chairman of the Board SECTION 23. The Chairman of the Board shall preside at all meetings of Directors and stockholders. Unless otherwise provided by the Board, under the supervision of and subject to the Board of Directors, he shall have the general control and management of the business and affairs of the Company; and he shall perform and do all acts and things incident to the position of Chairman of the Board and such other duties as may be assigned to him from time to time by the Board of Directors. Unless otherwise provided by the Board, the Chairman of the Board shall have full power and authority on behalf of the Company to execute any stockholder's consent and to attend and act and to vote in person or by proxy at any meetings of stockholders of any corporation in which the Company may own stock, and at any such meeting shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Company might have possessed and exercised if present. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. Powers and Duties of the President SECTION 24. The President shall do and perform all acts and things incident to the position of President and such other duties as may be assigned to him from time to time by the Board of Directors or the Chairman of the Board. In the absence or inability to act of the Chairman of the Board, he shall act in his stead. In the event the office of Chairman of the Board has not been filled by the Board of Directors, or in the event it is specifically provided for by the Board, the President shall have the powers and duties attributed to the office of Chairman of the Board under the other provisions of these Bylaws. Powers and Duties of Vice Presidents SECTION 25. The Vice Presidents shall perform such duties on behalf of the Company as may be respectively assigned to them from time to time by the Board of Directors or the Chairman of the Board. In the absence or inability to act of the President, any one of the Vice Presidents may act in his stead. Notwithstanding any other provision of these Bylaws, under emergency conditions existing in case of catastrophe wrought by war affecting the territory, facilities or personnel of the Company, in the event of the absence, death or inability to act of the Chairman of the Board, the powers and duties of the Chairman of the Board shall, until the end of the emergency or until prior action by the Board of Directors, devolve successively upon the President and such other officers as shall have been designated in a resolution adopted by the Board of Directors, and in accordance with the order of succession set forth therein. Power and Duties of the Secretary SECTION 26. It shall be the duty of the Secretary to act as custodian of the minutes of all meetings of the Board of Directors and of the stockholders and of any committees of the Board of Directors which keep formal minutes; he shall attend to the giving and serving of all notices of the Company; he shall attest the seal of the Company upon all contracts and instruments executed under such seal and shall affix or cause to be affixed the seal of the Company thereto and to all certificates of shares of the capital stock. He shall have charge of the corporate records and other corporate matters, of the stock certificate book, transfer book and stock ledger, and such other books and papers as the Board of Directors or the Chairman of the Board may direct. He shall perform such other duties as may be assigned to him from time to time by the Board of Directors or the Chairman of the Board Powers and Duties of the Treasurer SECTION 27. It shall be the duty of the Treasurer to have the care and custody of all the funds and securities of the Company. He shall be accountable for the receipts and disbursements of the funds of the Company. He shall endorse checks, drafts and other instruments for the payment of money for deposit or collection when necessary or proper and shall deposit the same to the credit of the Company in such depositories as the Board of Directors may designate; he shall perform all acts incident to the position of Treasurer, and such other duties as may be assigned to him from time to time by the Board of Directors or the Chairman of the Board. Powers and Duties of the Comptroller SECTION 28. It shall be the duty of the Comptroller to maintain adequate records of all assets, liabilities, and accounting transactions of the Company; he shall have charge of the installation and supervision of all accounting and statistical records, financial and statistical statements and reports, and the supervision of the accounting methods and systems in use by all departments and shall perform such other duties as may be assigned to him from time to time by the Board of Directors or the Chairman of the Board. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers SECTION 29. An Assistant Secretary or an Assistant Treasurer or an Assistant Comptroller shall, in the absence or disability or at the request of the Secretary or Treasurer or Comptroller, respectively, perform the duties of the Secretary or Treasurer or Comptroller, respectively, and shall perform such other duties as may, from time to time, be assigned to him by the Board of Directors or the Chairman of the Board. The performance of any such duty shall be conclusive evidence of his right to act. Duties of Officers May Be Delegated SECTION 30. In case of the absence of an officer of the Company, or for any other reason deemed sufficient, the Board of Directors or the Chairman of the Board may delegate, for the time being, the powers or duties, or any of them of such officer to any other officer, or to any Director. Transfer Agents and Registrars SECTION 31. The Board of Directors may appoint one or more Transfer Agents or Transfer Clerks and Registrars, and may require all stock certificates and certificates representing any rights or options to be signed by such Transfer Agents or Transfer Clerks acting on behalf of the Company and by such Registrars. Certificates of Stock SECTION 32. The certificates of stock of the Company shall be of such form and devise as the Board of Directors may elect; they shall be numbered and shall be entered in the books of the Company and registered as they are issued. They shall exhibit the names of the registered holders and shall certify the number of shares owned by the person in whose name issued, and shall be signed by, or in the name of the Company by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall be sealed with the corporate seal of the Company, which signatures and seal, in the case of certificates signed by a Transfer Agent or Transfer Clerk and a Registrar, may be facsimile. In case any officer or officers who shall have signed any such certificate or certificates, or whose facsimile signature shall appear thereon, shall cease to be such officer or officers of the Company, whether because of death, resignation or otherwise, and before such certificate or certificates shall have been delivered by the Company, such certificate or certificates may nevertheless be adopted by the Company and be issued and delivered with the same force and effect as though the person or persons who signed such certificate or certificates, or whose facsimile signature appears thereon, had not ceased to be such officer or officers of the Company, and the issuance and delivery of any such certificate or certificates shall be conclusive evidence of such adoption. Transfers of Stock SECTION 33. Transfers of stock shall be made on the books of the Company only by the person named in the certificate or by attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before the new certificate shall be issued. SECTION 34. The Board of Directors shall have the power to prescribe a period not exceeding 50 days prior to any meeting of the stockholders or the date for payment of any dividend or the date for the allotment of rights of the date when any change or conversion or exchange of capital stock shall go into effect, during which no transfer of stock on the books of the Company may be made, or may fix a day not more than 50 days prior to the holding of any such meeting of stockholders or such date when any change or conversion or exchange of capital stock shall go into effect, as a day as of which stockholders of record entitled to notice of and to vote at such meeting of stockholders, or such date for payment of any dividend or such date for the allotment of rights or such date when any change or conversion or exchange of capital stock shall go into effect, shall be determined, and only stockholders of record on such day entitled to notice or to vote at such meeting of stockholders or entitled to receive payment of any such dividend or to any such allotment of rights or to exercise the rights in respect of any change, conversion or exchange of capital stock, as the case may be, notwithstanding any transfer of any stock on the books of the Company after any such record date fixed as aforesaid; provided, however, that in the case of any meeting of stockholders, such period prescribed or day fixed, as aforesaid, shall not be less than ten days prior to such meeting of stockholders. Registered Stockholders SECTION 35. The Company shall be entitled to treat the holder of record of any share or shares of stock or of any right or rights or option or options as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Georgia. Lost, Stolen or Destroyed Certificates SECTION 36. No certificate of shares of stock of the Company shall be issued in place of any certificate alleged to have been lost or stolen or destroyed, except upon the submission of proper proof by the owner and the delivery to the Company of a bond of indemnity against such lost or stolen or destroyed certificate and except under such regulations and restrictions as the Board of Directors may prescribe. Annual Report and Inspection of Books SECTION 37. The Chairman of the Board and the President shall make and present to the annual meeting of stockholders a report showing a Balance Sheet and Income Statement for the preceding fiscal year. A copy of such report shall be mailed to each stockholder of the Company at least fifteen days in advance of the annual meeting of the Company. Such report may also contain such other information and may be in such detail as the Chairman of the Board and the President and the Board of Directors may determine in their absolute discretion. The stockholders of the Company entitled to vote, by a majority vote at any meeting duly called, or in case such stockholders shall fail to act, the Board of Directors, shall have the power from time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of the Company (other than the stock ledger) or any of them, shall be open to the inspection of stockholders; and no stockholder shall have any right to inspect any account or book or document of the Company, except as conferred by statute or authorized by the Board of Directors or by a resolution of such stockholders. Depositories, Checks and Notes SECTION 38. The Board of Directors are authorized to select such Depositories as they shall deem proper for the funds of the Company. All checks, drafts and demands for money against such deposited funds and all notes of the Company shall be signed by such officers or persons as the Board of Directors may from time to time designate. Fiscal Year SECTION 39. The fiscal year shall begin the first day of January in each year, and shall end on the thirty-first day of December of such year. Notices SECTION 40. Whenever under the provisions of these Bylaws notice is required to be given to any director, officer or stockholder, it shall not be construed to mean personal notice, unless otherwise provided in these Bylaws, but such notice may be given in writing, by mail, by depositing the same in the post office or letter box, in a postpaid wrapper, addressed to such stockholder, officer or director at such address as appears on the books of the Company, or, in default in other address, to such director, officer or stockholder at the General Post Office in the City of Atlanta, Georgia, and such notice shall be deemed to be given at the time when the same shall be thus mailed. Notice need not be given of any adjourned meeting, special or regular, of stockholders or directors other than by announcement at the meeting which is being adjourned. Any stockholder, director or officer may waive any notice required to be given by statute or under the provisions of the Certificate of Incorporation or under these Bylaws, and such waiver shall be deemed equivalent to the notice so required; provided, always, that such waiver shall be in writing and signed by such stockholder, officer or director, or by his duly authorized attorney, whether before or after the meeting or the time stated therein, notice of which is being waived. Indemnification and Related Matters SECTION 41. Each person who is or was a director or officer of the Company or is or was an employee of the Company holding one or more positions of management through and inclusive of department managers (but not positions below the level of department managers) (such positions being hereinafter referred to as "Management Positions") and who was or is a party or was or is threatened to be made a party to any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company or is or was an employee of the Company holding one or more Management Positions, or is or was serving at the request of the Company as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the Company as a matter of right against any and all expenses (including attorneys' fees) actually and reasonably incurred by him and against any and all claims, judgments, fines, penalties, liabilities and amounts paid in settlement actually incurred by him in defense of such claim, action, suit or proceeding, including appeals, to the full extent permitted by applicable law. The indemnification provided by this Section shall inure to the benefit of the heirs, executors and administrators of such person. Expenses (including attorneys' fees) incurred by a director or officer of the Company or employee of the Company holding one or more Management Positions with respect to the defense of any such claim, action, suit or proceeding may be advanced by the Company prior to the final disposition of such claim, action, suit or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of an under taking by or on behalf of such person to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified by the Company under this Section or otherwise; provided, however, that the advancement of such expenses shall not be deemed to be indemnification unless and until it shall ultimately be determined that such person is entitled to be indemnified by the Company. The Company may purchase and maintain insurance at the expense of the Company on behalf of any person who is or was a director, officer, employee, or agent of the Company, or any person who is or was serving at the request of the Company as a director (or the equivalent), officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability or expense (including attorneys' fees) asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability or expense under this Section or otherwise. Without limiting the generality of the foregoing provisions, no present or future director or officer of the Company, or his heirs, executors, or administrators, shall be liable for any act, omission, step, or conduct taken or had in good faith, which is required, authorized, or approved by any order or orders issued pursuant to the Public Utility Holding Company Act of 1935, the Federal Power Act, or any federal or state statute or municipal ordinance regulating the Company or its parent by reason of their being holding or investment companies, public utility companies, public utility holding companies, or subsidiaries of public utility holding companies. In any action, suit, or proceeding based on any act, omission, step, or conduct, as in this paragraph described, the provisions hereof shall be brought to the attention of the court. In the event that the foregoing provisions of this paragraph are found by the court not to constitute a valid defense on the grounds of not being applicable to the particular class of plaintiff, each such director and officer, and his heirs, executors, and administrators, shall be reimbursed for, or indemnified against, all expenses and liabilities incurred by him or imposed on him, in connection with, or arising out of, any such action, suit, or proceeding based on any act, omission, step, or conduct taken or had in good faith as in this paragraph described. Such expenses and liabilities shall include, but shall not be limited to, judgments, court costs, and attorneys' fees. The foregoing rights shall not be exclusive of any other rights to which any such director or officer or employee may otherwise be entitled and shall be available whether or not the director or officer or employee continues to be a director or officer or employee at the time of incurring any such expenses and liabilities. If any word, clause or provision of the Bylaws or any indemnification made under this Section 41 shall for any reason be determined to be invalid, the provisions of the Bylaws shall not otherwise be affected thereby but shall remain in full force and effect. The masculine pronoun, as used in the Bylaws, means the masculine and feminine wherever applicable. Amendments SECTION 42. The Bylaws of the Company may be altered, amended or repealed at any meeting of the Board of Directors, by the vote of a majority of the entire Board then in office, or at any meeting of the stockholders by the vote of the holders of the majority of the stock issued and outstanding and entitled to vote at such meeting, in accordance with the provisions of the Charter and of these Bylaws. EX-3.D.2 5 ex3d2.txt Exhibit 3(d)2 GULF POWER COMPANY BY-LAWS I N D E X Section Page 1. Annual Meeting of Stockholders - Location and date 1 (The annual meeting of stockholders is to be held at the office of the Corporation in the State of Maine, or at such other place within or without the State of Maine as the Board of Directors may determine, on the last Tuesday in June each year; provided, however, that the Board of Directors may fix an earlier day in any year.) 2. Special Meetings of Stockholders - Location and Method of Call 1 3. Notice of Meeting of Stockholders - Time, Place, and Purpose 1 (Notice of the time, place and purpose of every meeting of stockholders shall be mailed by the Secretary or the Officer performing his duties at least ten days before the meeting to each stockholder of record entitled to vote.) 4. Quorum 1 5. Stock 1 (a) Regulations governing issuance of stock (b) Dividends - Declaration, payment, limitations and definitions 6. Replacement of Lost, Destroyed or Mutilated Certificates 2 7. Election of Board of Directors - Total Number of Directors 3 Allowed, and Number Consituting a Quorum 8. Board of Directors' Meetings, Annual and Other Notices 4 of Meetings, etc GULF POWER COMPANY BY-LAWS I N D E X Section Page 9. Appointment and Term of Office 4 10. Appointment and Duties of Executive Committee 4 11. Duties and Powers of the President 5 12. Succession of Officers in Event of Inability of President to Act 5 13. Duties and Powers of the Secretary 5 14. Duties and Powers of the Treasurer 5 15. Duties and Powers of the Comptroller 6 16. Duties and Powers of Assistant Secretaries, Assistant Treasurers, 6 and Assistant Comptroller 17. Qualifications, Duties and Powers of the Clerk 6 18. Delegation of Duties and Powers by the Board of Directors 6 19. Selection of Successor Directors to fill Vacancies by Reason 6 of Death, Resignation, etc. 20. Power to Authorize Compensation for Directors 6 21. Indemnification 7 22. Power to Select Depositaries and Designate Required Signatures 8 23. Corporate Seal - Description 8 24. Business Transactions Between Corporation and its Directors 8 25. Amendment to By-laws 9 GULF POWER COMPANY BY-LAWS Section 1. The annual meeting of the stockholders of the corporation for the election of directors and for the transaction of such other corporate business as may properly come before such meeting shall be held at the corporation's office, in the State of Maine, or at such other place within or without the State of Maine as the Board of Directors may determine, on the last Tuesday in June in each year; provided, however, that the Board of Directors may fix an earlier day for such annual meeting of stockholders in any particular year; and provided further that, if the day fixed for such annual meeting of stockholders is a legal holiday, such meeting shall be held on the first day thereafter which is not a legal holiday. Section 2. Special meetings of the stockholders of the corporation may be held at such time and at such place within or without the State of Maine as may be determined by the President or the Board of Directors or Executive Committee, or stockholders holding one-fourth of the then outstanding capital stock entitled to vote. Section 3. Notice of the time, place and purpose of every meeting of stockholders shall be mailed by the Secretary or the officer performing his duties at least ten days before the meeting to each stockholder of record entitled to vote, at his post office address as shown by the records of the corporation, but meetings may be held without notice if all stockholders entitled to vote are present or if notice is waived before or after the meeting by those not present. No stockholder shall be entitled to notice of any meeting of stockholders with respect to any shares registered in his name after the date upon which notice of such meeting is required by law or by these by-laws to have been mailed or otherwise given to stockholders. Section 4. Subject to the provisions of the articles of incorporation, as amended, the holders of a majority of the stock of the corporation entitled to vote, present in person or by proxy, shall constitute a quorum, but less than a quorum shall have power to adjourn. At all meetings of stockholders, each stockholder entitled to vote may vote and otherwise act either in person or by proxy. Section 5. The stock of the corporation shall be transferable or assignable on the books of the corporation by the holders in person or by attorney on the surrender of the certificates therefor duly endorsed. The certificates of stock of the corporation shall be numbered and shall be entered in the books of the corporation and registered as they are issued. They shall exhibit the name of the registered holder and shall certify the number of shares owned by him and shall be signed by, or in the name of the corporation by, the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, and shall be sealed with the corporate seal of the corporation. Where such certificate is signed by a Transfer Agent or by a Transfer Clerk acting on behalf of the corporation and by a Registrar, the signature of any such President, Vice-President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary and the seal of the corporation may be facsimile. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates, shall cease to be such officer or officers of the corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the corporation, such certificate or certificates may nevertheless be adopted by the corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the corporation and the issuance and delivery of any such certificate or certificates shall be conclusive evidence of such adoption. The stock transfer books of the corporation may be closed by order of the Board of Directors for such period, not to exceed sixty days previous to any meeting of the stockholders or previous to the payment of any dividend upon the stock of the corporation, as the Board may determine, during which time no transfer of stock upon the books of the Corporation shall be made, and said books shall be re-opened the day following the date fixed for such meeting or for the payment of such dividend. If the stock transfer books of the corporation are ordered closed by the Board of Directors, every stockholder who appears of record at the time of closing said books shall be entitled to vote at the meeting or to receive the dividend on account of which the said books were ordered closed. In lieu of providing for the closing of the stock transfer books of the corporation, the Board of Directors may fix a date not exceeding sixty days preceding the date of any meeting of stockholders, or any dividend payment date, as the record date for the determination of the stockholders entitled to notice of and to vote at such meeting, or entitled to receive such dividend, as the case may be. If the stock transfer books of the corporation are not ordered closed by the Board of Directors or if the Board of Directors does not fix a date of record in lieu thereof, every stockholder who appears of record on the date of a stockholders' meeting shall be entitled to vote at such meeting and every stockholder who appears of record on the date specified by the Board of Directors in their declaration of a dividend shall be entitled to such dividend. Section 6. Upon receipt by this corporation of evidence, satisfactory to the Board of Directors, of the loss, destruction or mutilation of any certificate of stock of this corporation and, if required by the Board of Directors, upon receipt of indemnity satisfactory to the Board of Directors and upon surrender and cancellation of such certificate, if mutilated, the Board of Directors may, if it so determines, direct the officers of this corporation to execute and deliver a new certificate of like tenor and for the same number of shares of the same class of stock to be issued in lieu of such lost, destroyed or mutilated certificate. Section 7. The affairs of this corporation shall be managed by a Board consisting of not less than six directors, nor more than fifteen directors, their number to be fixed at the annual or any special meeting of the stockholders, who shall be elected annually by the stockholders entitled to vote, to hold office until their successors are elected and qualify. Directors need not be stockholders. A majority of the members of the Board then in office shall constitute a quorum. Vacancies in the Board of Directors may be filled by the Board at any meeting, including vacancies arising from the election of fewer directors than the total number fixed. Any and all of the directors may at any time be removed without cause assigned by the vote of the holders of a majority in number of all of the outstanding stock entitled to vote given at a meeting called for the purpose of considering such action. The foregoing provisions of this Section 7 relating to the election of directors and to the filling of vacancies in the Board of Directors shall be subject to the provisions of the Articles of Incorporation, as amended. A person being a full-time executive employee of the corporation or its parent company or any affiliated company when first elected a director of the corporation (hereinafter sometimes referred to as an "employee-director") shall not be eligible for election as a director when he ceases to be an executive employee, whether by reason of resignation, retirement or other cause. Any employee-director shall resign as a director effective on the date he ceases to be an executive employee. A person not an employee-director shall not be eligible to serve as a director of the corporation (1) after his 70th birthday, (2) one year after permanent separation from the business or professional organization with which he was primarily associated when first elected a director, (3) one year after any other material change in his primary occupation or executive position from that which he pursued or held when first elected a director, or (4) one year after moving his principal residence outside the service area in which he was a resident when first elected a director, whichever event first occurs. The application to an individual of any provision of this paragraph may be waived by the Board of Directors. Any such waiver shall only be effective on a year-to-year basis. The provisions of this paragraph, with the exception of item (1) above, shall apply only to those individuals elected as a member of the Board of Directors after the annual meeting of this Board held July 26, 1996. Any employee-director who is not eligible for election as a director by reason of the foregoing provisions shall be eligible for election and re-election by the Board of Directors as an advisory director, upon the recommendation of the Chief Executive Officer of the corporation, for a term ending at the first meeting of the Board of Directors following the annual meeting of stockholders next following such election. Any person eligible for election as an advisory director must be one whose services as such will be, in the opinion of the Board of Directors, of value to the corporation. An advisory director shall be entitled to notice of and to attend and advise but not to vote at, meetings of the Board of Directors, and of any committees thereof to which he shall be appointed, nor shall he be counted in determining the existence of a quorum, and for his services may be paid, in the discretion of the Board of Directors, compensation and reimbursement of expenses on the same basis as if he were a director. Section 8. The annual meeting of the Board of Directors shall be held as soon as practicable after the annual meeting of the stockholders. Other meetings of the Board of Directors shall be held at the times fixed by resolution of the Board or upon call of the Chairman of the Board, the President or a Vice-President or any person upon whom powers have devolved pursuant to Section 12 hereof. The Secretary or officer performing his duties shall give at least two days' notice of all meetings of Directors, provided that a meeting may be held without notice immediately after the annual election of Directors, and notice need not be given of regular meetings held at times fixed by resolution of the Board. Meetings may be held at any time without notice if all the Directors are present or if those not present waive notice either before or after the meeting. Notice by mail or telegraph to the usual business or residence address of the director shall be sufficient. The purpose of special meetings of the Board of Directors need not be stated in such notice unless required by law and unless otherwise indicated in the notice any and all business may be transacted at a special meeting of the Board of Directors. Section 9. The Board of Directors, as soon as may be convenient after the election of directors in each year, may appoint one of their number Chairman of the Board and shall appoint one of their number President of the corporation, and shall also appoint one or more Vice-presidents, a Secretary and a Treasurer, none of whom need be members of the Board, and shall, from time to time, appoint such other officers as they may deem proper. The same person may be appointed to more than one office. The term of office of all officers shall be for one year and until their respective successors are chosen and qualified, but any officer may be removed from office at any time by the Board of Directors without cause assigned. Vacancies in the offices shall be filled by the Board of Directors. Section 10. The Board of Directors, as soon as may be after the election in each year, may appoint an executive committee to consist of the President and such number of directors as the Board may from time to time determine. Such committee shall have and may exercise all of the powers of the Board during the intervals between its meetings which may be lawfully delegated, subject to such limitations as may be provided by a resolution of the Board. The Board shall have the power at any time to change the membership of such committee and to fill vacancies in it. The executive committee may make rules for the conduct of its business and may appoint such committees and assistants as it may deem necessary. The Board may, from time to time, determine by resolution the number of members of such committee required to constitute a quorum. The Board shall designate the Chairman of the executive committee and the proceedings of the executive committee shall from time to time be reported to the Board of Directors. Section 11. Unless otherwise designated as separate offices by the Board of Directors, the President shall be the Chief Executive Officer of the corporation; he shall preside at all meetings of the stockholders and directors; he shall have general supervision of the business of the corporation; shall see that all orders and resolutions of the Board are carried into effect, subject, however, to the rights of the directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer of the corporation. He shall, unless otherwise ordered, execute bonds, deeds, mortgages, and other contracts, and when required shall cause the seal of the corporation to be affixed thereto and shall sign certificates of stock. He shall be ex officio a member of all standing committees, and shall submit to the stockholders at their annual meeting a report of the year's business. Should the offices of President and Chief Executive Officer be held by different persons, the above duties shall be as delegated to each office by the Board of Directors. Section 12. Notwithstanding the provisions of Section 9 hereof, in the event of the absence or inability of the President to act, the powers and duties of the President shall, subject to the control of the Board of Directors, devolve successively upon such other persons as shall have been designated in a resolution adopted by the Board of Directors, and in accordance with the order of succession set forth therein. Section 13. The Secretary shall attend all sessions of the Board and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for standing committees when required. He shall give or cause to be given notice of all meetings of the stockholders and the Board of Directors, and of standing committees when required, and shall perform such other duties as may be prescribed by the Board of Directors or the President under whose supervision he shall act. He shall keep in safe custody the seal of the Corporation, and when authorized, affix the same to any instrument requiring a seal, and attest the signatures thereof, when directed or required to do so. Section 14. The Treasurer shall have the custody of the corporate funds and securities, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation, in such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President, and to the directors at the regular meetings of the Board or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the corporation. He shall give the corporation a bond for the faithful performance of the duties of his office, and for the restoration to the corporation in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind, in his possession or under his control belonging to the corporation. Section 15. It shall be the duty of the Comptroller to supervise and be responsible for accounting transactions of the corporation; to have charge of the installation and supervision of all accounting and statistical records, the preparation of all financial and statistical statements and reports, and the accounting methods, systems and forms in use by all departments; he shall perform such other duties as may be assigned to him from time to time by the President. Section 16. One or more Assistant Secretaries or Assistant Treasurers or Assistant Comptrollers may be elected by the Board or appointed by the President to hold office until the next annual meeting of the Board of Directors and until their successors are elected or appointed, but may be removed at any time. They shall perform any or all of the duties of the Secretary or Treasurer, or Comptroller as the case may be, and such other duties as may be assigned to them from time to time. Section 17. The corporation shall have and continuously maintain a Clerk who shall maintain a registered office at some fixed place within the State of Maine which shall then be construed as the corporation's registered office in the State of Maine. The Clerk shall not be an Officer of the corporation. The Clerk shall be a resident of Maine, and shall keep, in a book kept for such purpose, the records of all stockholders' meetings, and shall perform such duties and have such powers as are prescribed by the Maine Business Corporation Act in effect from time to time. The Clerk shall be appointed by the Board of Directors and shall serve until his successor is duly elected and qualified. Section 18. In the case of the absence of any officer of the corporation, or for any other reason that the Board may deem sufficient, the Board may delegate the powers or duties of such officers to any other officer or to any director, for the time being. Section 19. If the office of any director becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, the remaining directors then in office, even though less than a quorum, by a majority vote may choose a successor or successors, who shall hold office for the unexpired term in respect of which such vacancy occurred; but vacancies in the Board of Directors arising from the election of fewer directors than the total number fixed shall be filled in the manner prescribed by Section 7 thereof. Section 20. The Board of Directors shall have power to authorize the payment of compensation to the directors for services to the corporation, including fees for attendance at meetings of the Board of Directors, of the executive committee and all other committees and to determine the amount of such compensation and fees. Section 21. A. Indemnity To the fullest extent permitted by law, the Company shall indemnify each person made, or threatened to be made, a party to any threatened, pending, or completed claim, action, suit or proceeding, whether civil or criminal, administrative or investigative, and whether by or in the right of the Company or otherwise, by reason of the fact that such person, or such person's testator or intestate, is or was a director, officer or was an employee of the Company holding one or more management positions through and inclusive of managers (but not positions below the level of managers) (such positions being hereinafter referred to as "Management Positions") or is or was serving at the request of the Company as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in any capacity at the request of the Company, against all loss and expense actually or reasonably incurred by him including, without limiting the generality of the foregoing, judgments, fines, penalties, liabilities, sanctions, and amounts paid in settlement and attorneys fees and disbursements actually and necessarily incurred by him in defense of such action or proceeding, or any appeal therefrom. The indemnification provided by this Section shall inure to the benefit of the heirs, executors and administrators of such person. In any case in which a director, officer of the Company or employee of the Company holding one or more Management Positions requests indemnification with respect to the defense of any such claim, action, suit or proceedings, the Company may advance expenses (including attorney's fees) incurred by such person prior to the final disposition of such claim, action, suit or proceeding, as authorized by the Board of Directors in the specific case, upon receipt of a written undertaking by or on behalf of such person to repay amounts advanced if it shall ultimately be determined that such person was not entitled to be indemnified by the Company under this Section or otherwise; provided, however, that the advancement of such expenses shall not be deemed to be indemnification unless and until it shall ultimately be determined that such person is entitled to be indemnified by the Company. Such a person claiming indemnification shall be entitled to indemnification upon a determination that no judgment or other final adjudication adverse to such person has established that such person's acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or such person personally obtained an economic benefit including a financial profit or other advantage to which such person was not legally entitled. Without limiting the generality of the foregoing provision, no former, present or future director or officer of the Company or employee of the Company holding one or more management positions, or his heirs, executors or administrators, shall be liable for any undertaking entered into by the Company or its subsidiaries or affiliates as required by the Securities and Exchange Commission pursuant to any rule or regulation of the Securities and Exchange Commission now or hereafter in effect or orders issued pursuant to the Public Utility Holding Company Act of 1935, the Federal Power Act, or any undertaking entered into by the Company due to environmental requirements including all legally enforceable environmental compliance obligations imposed by federal, state or local statute, regulation, permit, judicial or administrative decree, order and judgment or other similar means, or any undertaking entered into by the Company pursuant to any approved Company compliance plan or any federal or state or municipal ordinance which directly or indirectly regulates the Company, or its parent by reason of their being holding or investment companies, public utility companies, public utility holding companies or subsidiaries of public utility holding companies. The foregoing rights shall not be exclusive of any other rights to which any such director, officer or employee may otherwise be entitled and shall be available whether or not the director, officer or employee continues to be a director, officer or employee at the time of incurring any such expenses and liabilities. If any word, clause or provision of the By-laws or any indemnification made under this Section 21 shall for any reason be determined to be invalid, the remaining provisions of the By-Laws shall not otherwise be affected thereby but shall remain in full force and effect. The masculine pronoun, as used in the By-Laws, means the masculine and feminine wherever applicable. B. Insurance The Company may purchase and maintain insurance on behalf of any person described in Section 21 against any liability or expense (including attorney fees) which may be asserted against such person whether or not the Company would have the power to indemnify such person against such liability or expense under this Section 21 or otherwise. Section 22. The Board of Directors are authorized to select such depositaries as they shall deem proper for the funds of the corporation. All checks and drafts against such deposited funds shall be signed by such officers or such other persons as may be specified by the Board of Directors. Section 23. The corporate seal shall be circular in form, and shall have inscribed thereon the name of the corporation, followed by the word "Maine" and shall have the word "Seal" inscribed in the center thereof. Section 24. A director of this corporation shall not be disqualified by his office from dealing or contracting with the corporation, either as vendor, purchaser or otherwise, nor shall any transaction or contract of this corporation be void or voidable by reason of the fact that any director or any firm of which any director is a member or any corporation of which any director is a shareholder or director is in any way interested in such transaction or contract, provided that such transaction or contract is or shall be authorized, ratified or approved either (a) by vote of a majority of a quorum of the Board of Directors or the executive committee, without counting in such majority or quorum any directors so interested or being a member of a firm so interested or a shareholder or director of a corporation so interested, or (b) by vote at a stockholders' meeting of the holders of a majority of all the outstanding shares of the stock of the corporation entitled to vote or by a writing or writings signed by a majority of such holders; nor shall any director be liable to account to the corporation for any profit realized by him from or through any transaction or contract of this corporation authorized, ratified or approved as aforesaid, by reason of the fact that he or any firm of which he is a member or any corporation of which he is a shareholder or director was interested in such transaction or contract. Nothing herein contained shall create any liability in the events above described or prevent the authorization, ratification or approval of such contracts or transactions in any other manner provided by law. Section 25. These by-laws may be altered or amended (a) by a majority vote of the outstanding stock entitled to vote at any annual meeting or upon notice at any special meeting of stockholders, or (b) at any meeting of the Board of Directors by a majority vote of the entire Board then in office. EX-10.A.81 6 ex10a81.txt Exhibit 10(a)81 FIRST AMENDMENT TO THE SOUTHERN COMPANY EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, the Employee Stock Ownership Plan Committee ("Committee") heretofore adopted the amendment and restatement of The Southern Company Employee Stock Ownership Plan ("Plan"), effective as of January 1, 2002; WHEREAS, the Committee desires to amend the Plan to allow a participant to elect whether to receive a cash distribution of all or a portion of the dividends payable on the shares of common stock credited to the participant's account and to allow a terminated participant to elect to receive a withdrawal of common stock credited to the participant's account for at least 84 months; and WHEREAS, the Committee is authorized pursuant to Section 11.1 of the Plan to amend the Plan at any time, provided that the amendment does not involve a substantial increase in cost to any Employing Company or is necessary or desirable to comply with the laws and regulations applicable to the Plan. NOW, THEREFORE, the Committee hereby amends the Plan as follows, to be effective as of the dates indicated: 1. Section 6.6, Allocation of Dividends and Other Distributions, shall be replaced in its entirety with the following, effective as of July 1, 2002: 6.6 Distribution of Dividends Payable on Common Stock. Any dividends on the Common Stock shall be allocated to a Participant's Account on the basis of Account balances. Each Participant may elect whether (i) to receive a cash distribution of all or a portion of the dividends payable on the shares of Common Stock credited to the Participant's Account as of the record date of the Common Stock or (ii) to have such dividends paid to the Plan and reinvested in Common Stock credited to the Participant's Account. The election of a Participant whether to receive a cash distribution of dividends shall remain in effect until such election is changed by the Participant. In the event a Participant fails to make an election with respect to the dividends payable on any shares of Common Stock credited to the Participant's Account, such Participant shall be deemed to have elected to have the dividends payable on such shares paid to the Plan and reinvested in Common Stock credited to the Participant's Account. Upon the death of a Participant, such Participant shall be deemed to have elected to have the dividends payable on all shares of Common Stock credited to the Participant's Account reinvested in Common Stock, notwithstanding any election in effect at the time of the Participant's death. In reinvesting dividends on the Common Stock, the Trustee may purchase Common Stock under The Southern Investment Plan, from the Southern Company, or on the open market. A Participant may change his election whether to receive a cash distribution of dividends at any time. However, with respect to each dividend on Common Stock, the election, or deemed election, of a Participant which is in effect on the last day of the first month in the calendar quarter which includes the record date for such dividend (the "Election Deadline") shall apply with respect to the dividends payable on the shares of Common Stock credited to the Participant's Account on such record date. In any event, all elections and deemed elections shall be irrevocable as of the Election Deadline. Participants are 100% vested in dividends payable on Common Stock. Payment of cash distributions under this Section 6.6 shall be made to the Plan and to Participants, as the case may be, as soon as administratively practicable following the payable date of the dividends. The Committee may establish such administrative procedures as it deems necessary or appropriate to effect the elections under this Section 6.6. 2. Except as amended herein by this First Amendment, the Plan shall remain in full force and effect as amended and restated by the Company prior to the adoption of this First Amendment. IN WITNESS WHEREOF, Southern Company Services, Inc., through the duly authorized members of the Employee Stock Ownership Plan Committee, has adopted this First Amendment to The Southern Company Employee Stock Ownership Plan this ____ day of ___________________, 2002. EMPLOYEE STOCK OWNERSHIP PLAN COMMITTEE: EX-10.A.88 7 ex10a88.txt Exhibit 10(a)88 THE SOUTHERN COMPANY PENSION PLAN EFFECTIVE AS OF JANUARY 1, 2002 TABLE OF CONTENTS Page ARTICLE I Definitions.........................................................3 ARTICLE II Eligibility.......................................................12 2.1 Employees........................................................12 2.2 Employees represented by a collective bargaining agent...........12 2.3 Persons in military service and Employees on authorized leaves of absence................................................12 2.4 Employees reemployed.............................................12 2.5 Participation upon return to eligible class......................13 2.6 Exclusion of certain categories of employees.....................14 2.7 Waiver of participation..........................................14 ARTICLE III Retirement.......................................................15 3.1 Retirement at Normal Retirement Date.............................15 3.2 Retirement at Early Retirement Date..............................15 3.3 Retirement at Deferred Retirement Date...........................15 ARTICLE IV Determination of Accredited Service...............................16 4.1 Accredited Service pursuant to Prior Plan........................16 4.2 Accredited Service...............................................16 4.3 Accredited Service and Years of Service in respect of service of certain Employees previously employed by an Employing Company or by certain Affiliated Employers.............17 4.4 Accrual of Retirement Income during period of total disability...18 4.5 Employees leaving Employer's service.............................20 4.6 Annual Limit on Accredited Service...............................20 ARTICLE V Retirement Income..................................................21 5.1 Normal Retirement Income.........................................21 5.2 Calculation of Social Security Offset............................22 5.3 Early Retirement Income..........................................22 5.4 Deferred Retirement Income.......................................23 5.5 Payment of Retirement Income.....................................23 5.6 Termination of Retirement Income.................................24 5.7 Required distributions...........................................24 5.8 Suspension of Retirement Income..................................31 5.9 Increase in Retirement Income of retired Employees...............32 5.10 Special provisions relating to the treatment of absence of an Employee from the service of an Employing Company to serve in the Armed Forces of the United States................35 ARTICLE VI Limitations on Benefits...........................................36 6.1 Maximum Retirement Income........................................36 6.2 Adjustment to Defined Benefit Dollar Limitation for Early or Deferred Retirement..............................................37 6.3 Adjustment of limitation for Years of Service or participation...37 6.4 Conversion of retirement benefit to a single life annuity........38 6.5 Limitation on benefits from multiple plans.......................38 6.6 Incorporation of Code Section 415................................39 ARTICLE VII Provisional Payee................................................40 7.1 Adjustment of Retirement Income to provide for payment to Provisional Payee................................................40 7.2 Form and time of election and notice requirements................41 7.3 Circumstances in which election and designation are inoperative..42 7.4 Pre-retirement death benefit.....................................42 7.5 Post-retirement death benefit - qualified joint and survivor annuity..........................................................44 7.6 Election and designation by former Employee entitled to Retirement Income in accordance with Article VIII................44 7.7 Death benefit for Provisional Payee of former Employee...........46 7.8 Limitations on Employee's and Provisional Payee's benefits.......46 7.9 Effect of election under Article VII.............................47 7.10 Effects of change in retirement at Early Retirement Date for certain Employees represented by the IBEW........................47 7.11 Commencement of new optional forms of payment....................49 7.12 "Make-up" payments due to retroactive amendment and restatement of the Plan......................................................49 7.13 Definitions......................................................52 ARTICLE VIII Termination of Service..........................................53 8.1 Vested interest..................................................53 8.2 Early distribution of vested benefit.............................53 8.3 Years of Service of reemployed Employees.........................54 8.4 Cash-out and buy-back............................................54 8.5 Retirement Income under Prior Plans..............................55 8.6 Requirement for Direct Rollovers.................................56 ARTICLE IX Contributions.....................................................58 9.1 Contributions generally..........................................58 9.2 Return of Employing Company contributions........................58 9.3 Expenses.........................................................59 ARTICLE X Administration of Plan.............................................60 10.1 Retirement Board.................................................60 10.2 Organization and transaction of business of Retirement Board.....60 10.3 Administrative responsibilities of Retirement Board..............60 10.4 Retirement Board, the "Administrator"............................61 10.5 Fiduciary responsibilities.......................................61 10.6 Employment of actuaries and others...............................62 10.7 Accounts and tables..............................................62 10.8 Indemnity of members of Retirement Board.........................62 10.9 Areas in which the Retirement Board does not have responsibility.63 10.10 Claims procedures................................................63 ARTICLE XI Management of Trust...............................................64 11.1 Trust............................................................64 11.2 Disbursement of the Trust Fund...................................64 11.3 Rights in the Trust..............................................64 11.4 Merger of the Plan...............................................65 ARTICLE XII Termination of the Plan..........................................66 12.1 Termination of the Plan..........................................66 12.2 Limitation on benefits for certain highly paid employees.........66 ARTICLE XIII Amendment of the Plan...........................................68 13.1 Amendment of the Plan............................................68 ARTICLE XIV Special Provisions...............................................69 14.1 Exclusive benefit................................................69 14.2 Assignment or alienation.........................................69 14.3 Voluntary undertaking............................................69 14.4 Top-Heavy Plan requirements......................................70 14.5 Determination of Top-Heavy status................................70 14.6 Minimum Retirement Income for Top-Heavy Plan Years...............73 14.7 Vesting requirements for Top-Heavy Plan Years....................74 14.8 Adjustments to maximum benefits for Top-Heavy Plans..............74 ARTICLE XV SEPCO Provisions..................................................75 15.1 Definition of Terms Used in this Article XV and the SEPCO Schedule.........................................................75 15.2 SEPCO Employees' Benefits........................................75 15.3 Special Transition Rules.........................................76 15.4 Transfers of SEPCO Employees.....................................79 15.5 Application of Plan to SEPCO.....................................80 APPENDIX A...................................................................82 APPENDIX B...................................................................83 Introductory Statement The Southern Company Pension Plan, as amended and restated herein (the "Plan"), is a modification and continuation of the Pension Plan for Employees of Southern Company Services, Inc., which originally became effective November 1, 1949, and which has been amended from time to time. Effective January 1, 1997, the following other plans were merged into the Plan: o Pension Plan for Employees of Alabama Power Company o Pension Plan for Employees of Georgia Power Company o Pension Plan for Employees of Gulf Power Company o Pension Plan for Employees of Mississippi Power Company o Pension Plan for Employees of Southern Company Services, Inc., as adopted by Southern Communications Services, Inc. o Pension Plan for Employees of Southern Company Services, Inc., as adopted by Southern Development and Investment Group, Inc. o Pension Plan for Employees of Southern Company Services, Inc., as adopted by Southern Electric International, Inc. o Pension Plan for Employees of Southern Nuclear Operating Company, Inc. Employees participating in the Merged Plans and employed by an Employing Company on January 1, 1997 became immediately covered under the Plan and upon the merger such Employees were eligible to receive a benefit immediately after the merger which was equal to or greater than the benefit they would have been entitled to receive immediately before the merger. In addition, notwithstanding any provision of the Plan, the terms of the Prior Plans govern an Employee's circumstances with regard to actions taken or occurring before January 1, 1997. To the extent that different terms and conditions existed under the Merged Plans and were protected in the Plan in accordance with requirements under the Code and ERISA, these differences are set forth in Article XVI and supersede any inconsistent provisions otherwise set forth in the Plan. Retirement Income of former Employees (or Provisional Payees of former Employees) who retired in accordance with the provisions of the Prior Plans is payable in accordance with the provisions of the Prior Plans. On April 2, 2001, Mirant Corporation (f/k/a Southern Energy, Inc.; f/k/a Southern Electric International, Inc.) and its subsidiaries ("Mirant") were spun-off from the Employer's controlled group. The Plan assets attributable to accrued benefits of Mirant retirees with service only with Mirant and Mirant employees, as of April 2, 2002, were spun-off to a newly-established pension plan sponsored by Mirant Services, LLC. Accordingly, no Retirement Income shall be paid under the Plan to any former Employee whose accrued benefit was transferred to the Mirant pension plan. The Plan is herein amended and restated, effective as of January 1, 2002, to incorporate changes to the Plan made through a series of amendments since the Plan was last amended and restated on January 1, 1997 and to make certain other changes desired by the Employer, including incorporating the provisions of the pension agreements entered into in 2002 by certain Employing Companies and the various locals of the International Brotherhood of Electrical Workers. Under this restatement of the Plan, the benefit formulas provided for in Article XV of the Plan prior to this amendment and restatement are eliminated, and all affected Employees shall instead receive accrued benefits in accordance with Article V of this Plan, or Article XV of this restatement of the Plan where applicable. This restatement of the Plan shall apply only to Employees who are credited with an Hour of Service with an Employing Company on or after January 1, 2002, unless specifically provided otherwise. The terms of the Plan, as amended and restated on January 1, 1997, govern an Employee's circumstances with regard to actions taken or occurring before January 1, 2002. Retirement Income of former Employees (or Provisional Payees of former Employees) who retired or terminated employment with a vested accrued benefit in accordance with the Plan as amended and restated as of January 1, 1997 is payable in accordance with the terms of the Plan in effect at the time of such retirement or termination, unless specifically provided otherwise under this amended and restated Plan. All contributions made by the Employing Companies to this Plan are expressly conditioned upon the continued qualification of the Plan under Section 401(a) of the Code, including any amendments to the Plan, and upon the deductibility of such contributions by the Employing Companies pursuant to Section 404 of the Code. ARTICLE I Definitions The following words and phraseology as used herein have the following meanings unless a different meaning is plainly required by the context: 1.1 "Accredited Service" means with respect to any Employee included in the Plan, the period of service as provided in Article IV. 1.2 "Actuarial Equivalent" means a benefit of equivalent value when computed on the basis of five percent (5%) interest per annum, compounded annually and the 1951 Group Annuity Mortality Table for males. The ages for all Employees under the above table shall be set back six (6) years and the ages for such Employees' spouses shall be set back one year. Notwithstanding the above, for purposes of determining the equivalent value of a benefit which is subject to Code Section 417(e)(3) and Treas. Reg. ss. 1.417(e)-1(d), "Actuarial Equivalent" means a benefit of equivalent value when computed on the basis of the annual rate of interest on 30-year Treasury securities for the month of August in the Plan Year which precedes the Plan Year in which such present value is determined ("Applicable Interest Rate") and using the table prescribed by the Secretary of the Treasury based on the prevailing commissioners' standard table (as described in Section 807(d)(5)(A) of the Code) used to determine reserves for group annuity contracts in effect on the date as of which the present value is being determined ("Applicable Mortality Table"). However, for the Plan Year beginning on January 1, 2001, the Applicable Interest Rate shall be calculated using the annual rate of interest on 30-year Treasury securities for the month of August or for the month of November in the year which precedes such Plan year, whichever month's rate produces the greater amount. 1.3 "Affiliated Employer" means an Employing Company and any corporation which is a member of a controlled group of corporations (as defined in Section 414(b) of the Code) which includes such Employing Company; any trade or business (whether or not incorporated) which is under common control (as defined in Section 414(c) of the Code) with such Employing Company; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Section 414(m) of the Code) which includes such Employing Company; and any other entity required to be aggregated with such Employing Company pursuant to regulations under Section 414(o) of the Code. 1.4 "Average Monthly Earnings" means the greater of: (a) an Employee's Monthly Earnings averaged over the three (3) highest Plan Years of participation which shall produce the highest monthly average within the last ten (10) Plan Years; or (b) an Employee's Monthly Earnings averaged over the three (3) highest Plan Years of participation which shall produce the highest monthly average within the last ten (10) Plan Years during which the Employee actively performed services for an Employing Company. If an Employee has completed less than three (3) Plan Years of participation upon his termination of employment, his Average Monthly Earnings will be based on his Earnings during his participation to his date of termination. 1.5 "Board of Directors" means the Board of Directors of Southern Company Services, Inc. 1.6 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 1.7 "Deferred Retirement Date" means the first day of the month after a retirement subsequent to the Normal Retirement Date. Employment subsequent to Normal Retirement Date shall be deemed to be a retirement if an Employee has less than forty (40) Hours of Service during a calendar month. 1.8 "Defined Benefit Dollar Limitation" means the limitation set forth in Section 415(b)(1)(A) of the Code. 1.9 "Early Retirement Date" means the first day of the month following the retirement of an Employee on or after his fiftieth (50th) birthday and before his sixty-fifth (65th) birthday. 1.10 (a)......"Earnings" with respect to any Employee including any Employee whose service is terminated by reason of disability (as defined in Section 4.4) means (1) the highest annual rate of salary or wages of an Employee of any Affiliated Employer within any Plan Year before deductions for taxes, Social Security, etc., (2) all amounts contributed by any Affiliated Employer to The Southern Company Employee Savings Plan as Elective Employer Contributions, as said term is described under Section 4.1 of such plan, pursuant to the Employee's exercise of his deferral option made thereunder in accordance with the requirements of Section 401(k) of the Code, and (3) all amounts contributed by any Affiliated Employer to The Southern Company Flexible Benefits Plan on behalf of an Employee pursuant to his salary reduction election, and applied to provide one or more of the optional benefits available under such plan, but (4) shall exclude all amounts deferred under any non-qualified deferred compensation plan maintained by any Affiliated Employer. ...................(b) Notwithstanding the above, "Earnings" with respect to any commissioned salesperson means the salary or wages of an Employee of any Affiliated Employer within any Plan Year, without including overtime, and before deductions for taxes, Social Security, etc. but applying those adjustments identified in paragraphs (a)(2), (3) and (4) above. In addition, "Earnings" for any Employee who is a regular part-time employee means with regard to paragraph (a)(1) above the highest annual rate of salary or wages based on a forty (40) hour work week. "Earnings" shall also include, for appliance salespersons, certain nonproductive pay earnings types as determined from time to time by the Board of Directors and set forth on Appendix B to the Plan, which Appendix may be updated from time to time. ...................(c) With respect to an Employee whose service terminates because of a disability under Section 4.4, Earnings shall be deemed to continue in effect throughout the period of the Employee's Disability Leave, as also defined in Section 4.4. ...................(d) With respect to an Employee on approved leave of absence to serve in the Armed Forces of the United States, Earnings shall be determined for the recognized period of his absence at the rate which is paid to him on the day he returns to the service of an Affiliated Employer or at the rate which was payable to him at the time he left the employment of an Employing Company to enter the Armed Forces of the United States, if such amount was greater. ...................(e) For Plan Years beginning on or after January 1, 2002, the annual compensation of each Employee taken into account under the Plan shall not exceed $200,000, as adjusted for increases in the cost of living in accordance with Code Section 401(a)(17). The cost of living adjustment in effect for a calendar year applies to any period, not exceeding twelve (12) months, over which compensation is determined (the "determination period") beginning in such calendar year. If the determination period is less than twelve (12) months, the limit shall be prorated. In determining benefit accruals in Plan Years beginning after December 31, 2001, the annual compensation taken into account shall be $200,000 for determination periods beginning before January 1, 2002. 1.11 "Effective Date" means January 1, 2002. 1.12 "Eligibility Year of Service" is a Year of Service commencing on the Employee's date of employment or reemployment or anniversary date thereof. 1.13 "Employee" means any person who is currently employed by an Employing Company as (a) a regular full-time employee, (b) a regular part-time employee, (c) a cooperative education employee, or (d) a temporary employee (whether full-time or part-time) paid directly or indirectly by an Employing Company. The term also includes "leased employees" within the meaning of Section 414(n)(2) of the Code, unless the total number of leased employees constitutes less than twenty percent (20%) of the Employing Company's non-highly compensated workforce within the meaning of Section 414(n)(5)(C)(ii) and such leased employees are covered by a plan described in Section 414(n)(5)(B) of the Code. Notwithstanding the preceding, "Employee" shall not mean any person who is classified by an Employing Company as an independent contractor, regardless of whether such classification is determined to be in error. 1.14 "Employer" means Southern Company Services, Inc., and its successors. 1.15 "Employing Company" means the Employer and any affiliate or subsidiary of The Southern Company which the Board of Directors may from time to time, and upon such terms and conditions as may be fixed by the Board of Directors, determine to bring under the Plan, and any successor to them. The Employing Companies are set forth on Appendix A to the Plan as updated from time to time. No entity shall be treated as an Employing Company prior to the date it adopts the Plan. 1.16 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 1.17 "Full Current Costs" means the normal cost, as defined in Treasury Regulation Section 1.404(a)-6, for all years since the Effective Date of the Plan, plus interest on any unfunded liability during such period. 1.18 "Hour of Service" means an Employee shall be credited with one Hour of Service for each hour for which (a) he is paid, or entitled to payment, for the performance of duties for an Affiliated Employer, and such hours shall be credited to the Employee for the computation period or periods in which the duties are performed; (b) he is paid, or entitled to payment, by an Affiliated Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence in which case the Employee shall be credited with Hours of Service for the computation period or periods in which the period during which no duties were performed occurs; (c) back pay, irrespective of mitigation of damages, has been either awarded or agreed to by an Affiliated Employer, in which case the Employee shall be credited with Hours of Service for the computation period or periods to which the award or agreement pertains, rather than the computation period in which the award, agreement, or payment is made; and (d) solely for the purpose of calculating Vesting Years of Service, he was on any form of authorized leave of absence. The same Hours of Service shall not be credited under clauses (a), (b), (c), and (d). An Employee who is entitled to be credited with Hours of Service in accordance with clause (b) or (d) of this Section 1.18 shall be credited with such number of Hours of Service for the period of time during which no duties were performed as though he were in the active employment of an Employing Company during such period of time. However, an Employee shall not be credited with Hours of Service in accordance with clause (b) of this Section 1.18 for unused vacation for which payment is received at termination of employment, or if the payment which is made to him or to which he is entitled in accordance with clause (b) is made or due under a plan maintained solely for the purpose of complying with applicable Worker's Compensation, or unemployment compensation or disability insurance laws, or if such payment is one which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. Provided there is no duplication of Hours of Service credited in accordance with the foregoing provisions, if an Employee is on an approved leave of absence to serve in the Armed Forces of the United States, he shall be credited with such number of Hours of Service with respect to all or such portion of the period of his absence to serve in the Armed Forces of the United States as may be recognized under Sections 1.38(b), 2.3, and 4.2(a). The rules set forth in paragraphs (b) and (c) of Department of Labor Regulations 2530.200b-2 are incorporated in the Plan by this reference and made a part hereof. 1.19 "Limitation Year" means the Plan Year. 1.20 "Merged Plans" means the following: Pension Plan for Employees of Alabama Power Company; Pension Plan for Employees of Georgia Power Company; Pension Plan for Employees of Gulf Power Company; Pension Plan for Employees of Mississippi Power Company; Pension Plan for Employees of Southern Company Services, Inc., as adopted by Southern Communications Services, Inc.; Pension Plan for Employees of Southern Company Services, Inc., as adopted by Southern Development and Investment Group, Inc.; Pension Plan for Employees of Southern Company Services, Inc., as adopted by Southern Electric International, Inc.; and Pension Plan for Employees of Southern Nuclear Operating Company, Inc. 1.21 "Monthly Earnings" means one-twelfth (1/12) of the Earnings of an Employee of an Affiliated Employer during a Plan Year. 1.22 "Normal Retirement Date" means the first day of the month following an Employee's sixty-fifth (65th) birthday, except that the Normal Retirement Date of any Employee hired on or after his sixtieth (60th) birthday shall be the fifth (5th) anniversary of his initial participation in the Plan. 1.23 "One-Year Break in Service" means a twelve (12) consecutive month period commencing on or after January 1, 1976 which would constitute a Year of Service but for the fact that the Employee has not completed more than 500 Hours of Service during such period. Solely for the purpose of determining whether a One-Year Break in Service has occurred for eligibility or vesting purposes, an Employee who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such Employee but for such absence, or in any case in which such hours cannot be determined, eight (8) Hours of Service per day of such absence. In no event shall Hours of Service credited under this paragraph be in excess of the amount necessary to prevent a One-Year Break in Service from occurring. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (a) by reason of the pregnancy of the Employee, (b) by reason of a birth of a child of the Employee, (c) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service shall be credited under this paragraph: (a) in the vesting or eligibility period in which the absence begins if the Hours of Service credited are necessary to prevent a One-Year Break in Service in such period, and (b) in all other cases, in the vesting or eligibility period following the period in which the absence begins. 1.24 "Plan" means The Southern Company Pension Plan, as set forth herein and as hereinafter amended, effective January 1, 2002. 1.25 "Plan Year" means the twelve (12) month period commencing on the first day of January and ending on the last day of December next following. 1.26 "Plan Year of Service" is a Year of Service determined as if the date of employment or reemployment is the first day of the Plan Year. 1.27 "Prior Plans" means the Pension Plan for Employees of Southern Company Services, Inc. and the Merged Plans in effect prior to January 1, 1997. With respect to any particular Employee, Prior Plan means the last plan described in the preceding sentence in which the Employee participated prior to January 1, 1997. 1.28 "Provisional Payee" means a spouse designated or deemed to have been designated by an Employee or former Employee pursuant to Article VII to receive Retirement Income on the death of the Employee or former Employee. 1.29 "Qualified Election" means an election by an Employee or former Employee on a prescribed form that concerns the form of distribution of Retirement Income that must be in writing and must be consented to by the Employee's spouse. The spouse's consent to such an election must acknowledge the effect of such election, must be in writing, and must be witnessed by a notary public. Notwithstanding this consent requirement, if the Employee establishes to the satisfaction of the Retirement Board (or its delegee) that such written consent may not be obtained because the spouse cannot be located or because of such other circumstances as the Secretary of the Treasury may by regulations prescribe, an election by the Employee will be deemed a Qualified Election. Any consent necessary under this provision shall be valid and effective only with respect to the spouse who signs the consent, or in the event of a deemed Qualified Election, with respect to such spouse. A revocation of a prior Qualified Election may be made by the Employee without his spouse's consent at any time commencing within ninety (90) days before such Employee's fiftieth (50th) birthday, but not later than before the commencement of Retirement Income. 1.30 "Retirement Board" means the managing board of the Plan provided for in Article X. 1.31 "Retirement Date" means the Employee's Normal, Early, or Deferred Retirement Date, whichever is applicable to him. 1.32 "Retirement Income" means the monthly retirement income provided for in Article V of the Plan. 1.33 "Social Security Offset" shall mean an amount equal to one-half (1/2) of the amount, if any, of the Federal primary Social Security benefit (primary old age insurance benefit) to which it is estimated that an Employee will become entitled in accordance with the Social Security Act in force as provided in subparagraphs (a) through (e) below which shall exceed $350 per month, multiplied by a fraction not greater than one, the numerator of which shall be the Employee's total Accredited Service, and the denominator of which shall be such total Accredited Service plus the Accredited Service the Employee could have accumulated if he had continued his employment from the date he terminates service with any Affiliated Employer until his Normal Retirement Date. For purposes of determining the estimated Federal primary Social Security benefit used in the Social Security Offset, an Employee shall be deemed to be entitled to receive Federal primary Social Security benefits after retirement or death, if earlier, regardless of the fact that he may have disqualified himself to receive payment thereof. In addition to the foregoing, the calculation of the Social Security benefit shall be based on the salary history of the Employee as provided in Section 5.2 and shall be determined pursuant to the following, as applicable: (a) With regard to an Employee who retires at his Normal Retirement Date or Deferred Retirement Date, the Social Security benefit shall be computed at retirement. In estimating the amount of the Federal primary Social Security benefit to which the Employee would be entitled, it shall be assumed that he will receive no wages for Social Security purposes after his retirement on his Normal Retirement Date or Deferred Retirement Date, and it will be further assumed in calculating his estimated Federal primary Social Security benefit that the amount thereof will be the amount determined under the recomputation provision, if applicable, of the Social Security Act in effect at the time of his retirement. (b) With regard to an Employee who retires at his Early Retirement Date, the Social Security benefit to which it is estimated that he will be entitled at sixty-five (65), shall be computed at the time of his retirement. In estimating the amount of the Federal primary Social Security benefit to which the Employee would be entitled at age sixty-five (65), it shall be assumed that he will receive no wages for Social Security purposes after his Early Retirement Date, and it will be further assumed in calculating his estimated Federal primary Social Security benefit that the amount thereof will be the amount determined under the recomputation provision, if applicable, of the Social Security Act in effect at his Early Retirement Date. (c) With regard to an Employee who terminates his service with an Employing Company by reason of death prior to retirement and after the effective date of his Provisional Payee designation or deemed designation, the Social Security benefit to which it is estimated that he would have been entitled to receive at age sixty-five (65) or his date of death, if later, had he not died, shall be computed at the time of his death. In estimating the amount of Federal primary Social Security benefit to which the Employee would have been entitled at age sixty-five (65) or his date of death, if later, it shall be assumed that he would not have received any wages for Social Security purposes after the date of his death, and it will be further assumed in calculating his Federal primary Social Security benefit that the amount thereof will be the amount determined under the recomputation provision, if applicable, of the Social Security Act in effect at the time of his death. (d) With regard to an Employee who terminates his service with an Employing Company with entitlement to receive Retirement Income in accordance with Section 8.1, the Social Security benefit to which it is estimated that he will become entitled at age sixty-five (65) or his date of termination, if later, shall be computed at the date of termination. In estimating the amount of the Federal primary Social Security benefit to which the Employee would be entitled at age sixty-five (65) or his date of termination, if later, it shall be assumed that he will receive no wages for Social Security purposes after his date of termination, and it will be further assumed in calculating his estimated Federal primary Social Security benefit that the amount thereof will be the amount determined under the recomputation provision, if applicable, of the Social Security Act in effect at his date of termination. (e) With regard to an Employee who terminates service with an Employing Company by reason of disability (as defined in Section 4.4) prior to retirement, the Social Security benefit to which it is estimated that he would have been entitled to receive at age sixty-five (65) or his initial date of disability, if later, had he not become disabled, shall be computed at the time of his retirement. In estimating the amount of Federal primary Social Security benefit to which the Employee would have been entitled at age sixty-five (65) or his date of disability, if later, it shall be assumed that he would have received wages for Social Security purposes as specified in Section 5.2, and it will be further assumed in calculating his estimated Federal primary Social Security benefit that the amount thereof will be the amount determined under the recomputation provision, if applicable, of the Social Security Act in effect at the time of his retirement. 1.34 "Social Security Retirement Age" means age sixty-five (65) if the Employee attained age sixty-two (62) before January 1, 2000 (i.e., born before January 1, 1938), age sixty-six (66) if the Employee attains age sixty-two (62) after December 31, 1999, but before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), and age sixty-seven (67) if the Employee attains age sixty-two (62) after December 31, 2016 (i.e., born after December 31, 1954). 1.35 "Trust" or "Trust Fund" means all such money or other property held by the Trustee pursuant to the terms of the Trust Agreement or pursuant to contracts with life insurance companies. 1.36 "Trust Agreement" means the Trust agreement or agreements between the Employer and the Trustee established for the purpose of funding the Retirement Income to be paid. 1.37 "Trustee" means the trustee or trustees acting as such under the Trust Agreement, including any successor or successors. 1.38 "Vesting Year of Service" means an Employee's Years of Service including: (a) Years of Service with an Affiliated Employer; (b) active service with the Armed Forces of the United States if the Employee entered or enters active service or training in such Armed Forces directly from the employ of an Employing Company and after discharge or release therefrom returns within ninety (90) days to the employ of an Affiliated Employer or is deemed to return under Section 2.3 because of the death of such Employee while in active service with such Armed Forces; and (c) any period during which the Employee was on any other form of authorized leave of absence. For purposes of this Section, in determining Vesting Years of Service with respect to a period of absence referred to in clause (b) or (c) of this Section, an Employee shall be credited with Hours of Service as though the period of absence were a period of active employment with the Affiliated Employer. Each Employee who participated in the Prior Plans shall be credited with such Vesting Years of Service, if any, earned under such Prior Plans as of December 31, 1996. 1.39 "Year of Service" means with respect to an Employee in the service of an Affiliated Employer: (a) a twelve (12) consecutive month period commencing on the Employee's most recent date of hire by the Affiliated Employer (or date of reemployment as provided in Section 2.4) and any subsequent twelve (12) consecutive month period commencing on an anniversary date of such date of hire, provided he has completed at least 1000 Hours of Service during each such twelve (12) consecutive month period; and (b) to the extent not resulting in duplication, each Year of Service restored to the Employee upon reemployment as provided in Section 8.3. An Employee's vested interest in his Retirement Income shall be based on his Vesting Years of Service and an Employee's eligibility to participate in the Plan pursuant to Article II shall be based on his Eligibility Year of Service. Breaks in service will be measured on the same computation period as the Year of Service. In the Plan and Trust Agreement, where the context requires, words in the masculine gender include the feminine and neuter genders and words in the singular include the plural and words in the plural include the singular. ARTICLE II Eligibility 2.1 Employees. Each Employee participating in the Plan as of January 1, 2002 shall continue to be included in the Plan. Each other Employee, except as provided in this Article II, shall be included in the Plan on the first day of the month next following the date on which he first completes an Eligibility Year of Service. 2.2 Employees represented by a collective bargaining agent. An Employee who is represented by a collective bargaining agent may participate in the Plan, subject to its terms, if the representative(s) of his bargaining unit and an Employing Company mutually agree to participation in the Plan by members of his bargaining unit. 2.3 Persons in military service and Employees on authorized leaves of absence. Any person not already included in the Plan who leaves or has left the employ of an Employing Company to enter the Armed Forces of the United States or is on authorized leave of absence without regular pay and who returns to the employ of an Affiliated Employer within ninety (90) days after discharge from such military service or on or before termination of his leave of absence, shall, upon such return, be included in the Plan effective as of the first day of the month next following the date on which he first met or meets the eligibility requirement of Section 2.1. In determining whether an Employee entering the service of an Affiliated Employer has completed an Eligibility Year of Service, his Hours of Service prior to such authorized leave of absence without regular pay or entry into the Armed Forces shall be taken into account, and for purposes of Section 2.4, he shall be deemed not to have incurred a One-Year Break in Service by reason of such absence. If an Employee dies while in active service with the Armed Forces of the United States, such Employee shall be deemed to have returned to the employ of an Employing Company on his date of death. An Employee not already included in the Plan who is on authorized leave of absence and receiving his regular pay shall be considered credited with Hours of Service as though the period of absence was a period of active employment with an Employing Company, and he shall be included in the Plan if and when he meets the requirements of this Article II regardless of whether he is, on the date of such inclusion, on such leave of absence. 2.4 Employees reemployed. (a) With respect to an Employee not described in subsection (b) or (c), any Employee whose service terminates at any time and who is reemployed as an Employee, unless excluded under Section 2.6, will be included in the Plan as provided in Section 2.1 unless: (1) prior to termination of his service he had completed at least one Year of Service; and (2) upon his reemployment, to the extent provided in Section 8.3 without regard to Section 8.4, he is entitled to restoration of his Years of Service, in which case he will be included in the Plan as of the date of his reemployment. For purposes of determining Years of Service of an Employee who is reemployed by an Affiliated Employer subsequent to a One-Year Break in Service, a Year of Service subsequent to his reemployment shall be computed on the basis of the twelve (12) consecutive month period commencing on his date of reemployment or an anniversary thereof. (b) With respect to an Employee whose benefits transferred to the Mirant Services Pension Plan following Mirant Services (f/k/a Southern Energy Resources, Inc.) ceasing to be an Affiliated Employer on April 2, 2001 and who is later reemployed by an Employing Company, such Employee's Accredited Service shall not be restored following his reemployment, notwithstanding the provisions of Sections 8.3, 8.4 or any other provision of the Plan. However, such Employee's Eligibility Years of Service and Vesting Years of Service shall be restored to the extent provided in Section 8.3, without regard to Section 8.4 and subsection (a) above. (c) With respect to a former Employee who is designated as a "temporary employee" upon reemployment by an Employing Company after having commenced payment of Retirement Income, whether or not such designation is determined to be in error, such Employee shall not be eligible to participate in the Plan. 2.5 Participation upon return to eligible class. If an Employee was a participant in the Plan before July 1, 1991, the exclusion from participation provided in Section 2.6, as it regards temporary employees, shall not apply with respect to such Employee, and such Employee shall be eligible to participate in the Plan after July 1, 1991 whether or not he is classified as a temporary employee. Notwithstanding the foregoing, the exclusion set forth in Section 2.6 shall apply with respect to any temporary employee effective as of September 1, 1998. If an Employee first becomes a participant on or after July 1, 1991, in the event such Employee ceases to be a member of an eligible class of Employees and becomes ineligible to participate, but has not incurred a One-Year Break in Service, such Employee will participate immediately upon returning to an eligible class of Employees. If such Employee incurred a One-Year Break in Service, eligibility will be determined under Section 2.4 of the Plan. In all other instances, if an Employee is not a member of an eligible class of Employees but then becomes a member of an eligible class, such Employee will commence participation in the Plan as of the first day of the month next following the later of (a) the date such Employee completes an Eligibility Year of Service or (b) the date he becomes a member of an eligible class of Employees. 2.6 Exclusion of certain categories of employees. Notwithstanding any other provision of this Article II, leased employees and, effective September 1, 1998, any individuals classified by an Employing Company as temporary employees, regardless of whether either such classification is determined to be in error, shall not be eligible to participate in the Plan. Notwithstanding the preceding sentence, temporary employees, defined as Employees in Section 1.14 and participating in the Plan prior to July 1, 1991, were eligible to participate in the Plan up through and including August 31, 1998. 2.7 Waiver of participation. Notwithstanding the above, an Employee may elect voluntarily not to participate in the Plan. The election not to participate must be communicated in writing to and acknowledged by the Retirement Board (or its delegee) and shall be effective as of the date set forth in such written waiver. ARTICLE III Retirement 3.1 Retirement at Normal Retirement Date. Each Employee eligible to participate in the Plan shall have a nonforfeitable right to his Retirement Income by no later than his sixty-fifth (65th) birthday, or in the case of any Employee hired on or after his sixtieth (60th) birthday, the fifth (5th) anniversary of his initial participation in the Plan. Notwithstanding the above, an Employee's Normal Retirement Date shall be as provided in Section 1.22. 3.2 Retirement at Early Retirement Date. An Employee having at least ten (10) Years of Accredited Service (including any Accredited Service which was credited to him in accordance with Section 4.3) may elect to retire on an Early Retirement Date on or after his fiftieth (50th) birthday and before his sixty-fifth (65th) birthday and to have his Retirement Income commence on the first day of any month up to and including the Employee's Normal Retirement Date. 3.3 Retirement at Deferred Retirement Date. An Employee included in the Plan may remain in active service after his Normal Retirement Date. The involuntary retirement of an Employee on or after his Normal Retirement Date shall not be permitted solely on the basis of the Employee's age, except in accordance with the provisions of the Age Discrimination in Employment Act, as amended from time to time. Termination of service of such an Employee for any reason after Normal Retirement Date shall be deemed retirement as provided in the Plan. ARTICLE IV Determination of Accredited Service 4.1 Accredited Service pursuant to Prior Plan. (a) Each Employee who participated in the Prior Plans shall be credited with such Accredited Service, if any, earned under such Prior Plans as of December 31, 1996. (b) In addition to any Accredited Service credited under Section 4.1(a), an Employee shall be entitled to Accredited Service determined under the Prior Plans, without regard to the age requirement for eligibility to participate in the Prior Plans, in excess of the Accredited Service determined under the Prior Plans (including the age requirement for eligibility to participate in the Prior Plans). Such Accredited Service shall be considered Accredited Service after December 31, 1985 for purposes of calculating an Employee's Retirement Income under Articles V and XV. (c) Each Employee shall be credited with Accredited Service determined pursuant to Article XV (relating to service with Savannah Electric Power Company). 4.2 Accredited Service. (a) Each Employee meeting the requirements of Article II shall, in addition to any Accredited Service to which he may be entitled in accordance with Section 4.1, be credited with Accredited Service as set forth in (b) below. Any such Employee who is on authorized leave of absence with regular pay shall be credited with Accredited Service during the period of such absence. Any such Employee who is on an approved leave of absence to serve in the Armed Forces of the United States shall, subject to Sections 1.38(b) and 2.3, be credited with Accredited Service during all or a portion of the period of his absence. Employees on authorized leave of absence without regular pay, other than Employees deemed to accrue Hours of Service under Section 4.4 and Employees described in the preceding sentence, shall not be credited with Accredited Service for the period of such absence. (b) For each Plan Year commencing after December 31, 1996, an Employee included in the Plan who is credited with a Plan Year of Service shall be credited with Accredited Service as follows: (1) if an Employee completes at least 1,680 Hours of Service in a Plan Year, he shall be credited with one year of Accredited Service; (2) if an Employee completes less than 1,680 Hours of Service in a Plan Year, but not less than 1,000 Hours of Service, he shall be credited with one-twelfth (1/12) of a year of Accredited Service for each 140 Hours of Service; or (3) if an Employee's initial eligibility in the Plan shall occur after the beginning of the Plan Year, and the Employee shall therefore have completed less than 1,000 Hours of Service in such Plan Year, he shall be credited with one-twelfth (1/12) of a year of Accredited Service for each 140 Hours of Service during such Plan Year after his inclusion in the Plan. (c) If an Employee (1) who has previously satisfied the eligibility requirements under Article II shall again be included in the Plan at such time which is after the beginning of the Plan Year, or (2) shall terminate his employment for any reason before the close of such Plan Year and shall therefore have completed less than 1,000 Hours of Service in such Plan Year, he shall be credited with one-twelfth (1/12) of a year of Accredited Service for each 140 Hours of Service during such Plan Year after his inclusion in the Plan or before his termination of employment in such Plan Year, as the case may be. (d) In addition to the foregoing, Accredited Service may include Accredited Service accrued subsequent to a One-year Break in Service including such Accredited Service which may be restored in accordance with the provisions of Section 8.3. 4.3 Accredited Service and Years of Service in respect of service of certain Employees previously employed by an Employing Company or by certain Affiliated Employers. An Employee in the service of an Employing Company on January 1, 1976 or employed thereafter who meets the requirements of paragraph (a) of this Section 4.3, in addition to any other Years of Service or Accredited Service to which he may be entitled under the Plan, upon completion of an Eligibility Year of Service where required under Section 8.3(c) (which shall also be considered to be Accredited Service) shall be credited with such number of Years of Service (and fractions thereof to the nearest whole month for service prior to January 1, 1976) and such Accredited Service and Retirement Income as shall be determined in accordance with the provisions of paragraphs (b) and (c) of this Section 4.3. (a) (1)Such Employee shall have been employed prior to January 1, 1976 by an Employing Company or by a company which at that time was an Affiliated Employer; (2) he shall have terminated his service with such Employing Company or such Affiliated Employer other than by retirement and he shall not be entitled to receive at any time any retirement income under the pension plan of any such prior employer in respect of any period of time for which he shall receive credit for Years of Service or Accredited Service under this Section 4.3; and (3) for Employees reemployed on or after January 1, 1985, the number of consecutive One-Year Breaks in Service incurred by the Employee prior to the date of his employment by an Employing Company does not equal or exceed the greater of (A) five (5), or (B) the aggregate number of his Years of Service (and fractions thereof to the nearest whole month for service prior to January 1, 1976) with an Employing Company and such Affiliated Employer. The years of Accredited Service credited to an Employee reemployed prior to January 1, 1985, with regard to years of Accredited Service immediately prior to the termination of his service, shall be determined under the terms of the Prior Plans in effect prior to January 1, 1985. (b) The number of Years of Service (and fractions thereof to the nearest whole month for service prior to January 1, 1976) and the Accredited Service, respectively, which shall be credited to such Employee shall be equal to the respective number of his Years of Service (and fractions thereof to the nearest whole month for service prior to January 1, 1976) and Accredited Service which were forfeited by the Employee and not restored under the pension plans of an Employing Company or an Affiliated Employer described in the preceding paragraph. (c) There shall be credited to the Employee Retirement Income equal to retirement income which was accrued by him under the pension plan of an Employing Company or an Affiliated Employer during the period of his Accredited Service which was forfeited and which is credited under the Plan in accordance with this Section 4.3. The amount of Retirement Income credited in accordance with this paragraph (c) shall be treated as Prior Plans Retirement Income for purposes of determining the amount of Retirement Income to which the Employee is entitled, and shall be determined in accordance with the provisions of the pension plan of the Employing Company or the Affiliated Employer in effect at the time the Employee's service with such Employing Company or the Affiliated Employer terminated without regard to any minimum provisions of such pension plan; for this purpose and if relevant in respect of the Employee, it shall be assumed that the pension plan of the Employing Company or the Affiliated Employer in effect at the time the Employee's service with such Employing Company or the Affiliated Employer terminated contained provisions concerning service in the Armed Forces of the United States as provided under the terms of the Prior Plans. For Plan Years beginning after December 31, 1987, an Employee who meets the requirements of paragraph (a) of this Section 4.3 shall be deemed to have transferred to or from an Affiliated Employer for the purpose of the transfer of assets or liabilities as provided under the terms of the Prior Plans. 4.4 Accrual of Retirement Income during period of total disability. (a) If an Employee included in the Plan who has completed at least five (5) Vesting Years of Service becomes totally disabled and is granted either Social Security disability benefits or long-term disability benefits under a long-term disability benefit plan of an Employing Company, he shall be considered to be on a leave of absence, herein referred to as a "Disability Leave." An Employee's Disability Leave shall be deemed to begin on the initial date of the disability and shall continue until the earlier of: (1) the later of (A) the end of the month in which he shall cease to be entitled to receive Social Security Disability benefits, or (B) the end of the month in which he shall cease to be entitled to receive long-term disability benefits under a long-term disability benefit plan of an Employing Company; (2) his death; and (3) his Retirement Date if he elects to have his Retirement Income commence on such date. During the period of the Employee's Disability Leave, he shall, for purposes of the Plan, be deemed to have received Earnings at the regular rate in effect for him. (b) A disabled Employee who applies for and would be granted long-term disability benefits under a long-term disability benefit plan of an Employing Company, if it were not for the fact that the deductions therefrom attributable to other disability benefits equal or exceed the amount of his unreduced benefit under such long-term disability benefit plan of the Employing Company, will be considered as being currently granted benefits under such long-term disability benefit plan. (c) An Employee's Disability Leave shall be deemed to be a period for which Hours of Service shall be credited to the Employee as though the period of his Disability Leave were a period of active employment. (d) If an Employee's Disability Leave shall terminate prior to his Normal Retirement Date and he shall fail to return to the employment of the Employing Company within sixty (60) days after the termination of such leave, his service shall be deemed to have terminated upon the termination of his Disability Leave and his rights shall be determined in accordance with Article VIII, unless at such time he shall be entitled to retire on an Early Retirement Date, in which event his termination of service shall be deemed to constitute his retirement under Section 3.2. (e) (1) If an Employee's Disability Leave terminates on or after his Normal Retirement Date and he fails to return to the employment of an Employing Company within sixty (60) days after the termination of such leave, his service shall be deemed to have terminated upon the termination of his Disability Leave and such termination of service shall be deemed to constitute his retirement under Section 3.3. (2) An Employee whose Disability Leave continues beyond his Normal Retirement Date based on entitlement to long-term disability benefits under a long-term disability plan of an Employing Company shall have payment of his Retirement Income suspended pursuant to Code Section 411(a)(3)(B) until he is no longer eligible under a long-term disability plan of an Employing Company. Such Employee shall then receive Retirement Income determined as of the date such eligibility ends. However, if the Employee's Disability Leave continues after the date the Employee ceases to be eligible for the long-term disability plan of an Employing Company based on entitlement to Social Security Disability benefits, his Retirement Income for the period after his Normal Retirement Date shall be determined under subsection (3). (3) An Employee whose Disability Leave continues for any period after his Normal Retirement Date based solely on his entitlement to Social Security Disability benefits shall receive Retirement Income as of his Deferred Retirement Date. However, if his Deferred Retirement Date occurs in a Plan Year subsequent to the Plan Year in which occurs his Normal Retirement Date, his Retirement Income shall not be less than his Retirement Income adjusted for commencement after his Normal Retirement Date. For the Plan Year following the Plan Year in which occurs the Employee's Normal Retirement Date, his adjusted Retirement Income shall be equal to the greater of his Retirement Income determined as of such date or the Actuarial Equivalent of his Retirement Income computed as of his Normal Retirement Date. For the next Plan Year, his adjusted Retirement Income shall be equal to the greater of his Retirement Income determined as of such Plan Year or the Actuarial Equivalent of his adjusted Retirement Income computed as of the end of the prior Plan Year. This process shall be repeated each Plan Year until the termination of his Disability Leave. (f) Notwithstanding the above, the years of Accredited Service for any Employee whose initial date of disability occurred under the Prior Plans shall be determined under the terms of the applicable Prior Plans. (g) Notwithstanding any other provisions of this Section 4.4, any Employee who (1) has an initial date of disability on or after January 1, 1998, and (2) is not covered by the terms of a collective bargaining agreement or (3) is covered by the terms of a collective bargaining agreement but where the bargaining unit representative and an Employing Company have mutually agreed to this provision, shall be ineligible for a Disability Leave under this Section 4.4 or such Employee's Disability Leave shall terminate if the Employee has already become eligible if such Employee accepts a benefit under an Employing Company's "career transition plan" or such other severance plan or agreement where such other plan or agreement stipulates that the Employee is ineligible or ceases to be on Disability Leave under this Plan. 4.5 Employees leaving Employer's service. If the service of an Employee is terminated prior to retirement as provided by Article III, such Employee will forfeit any Vesting Years of Service and Accredited Service which he may have subject to possible restoration of some or all of his Vesting Years of Service and Accredited Service in accordance with Article VIII. The provisions of this Section 4.5 shall not affect the rights, if any, of an Employee under Article VIII nor shall the rights of an Employee be affected during or by reason of a layoff, due to lack of work, which continues for a period of one year or less, except that such period of layoff shall not be deemed to be service with an Employing Company. If the service of an Employee is terminated, or if he is not reemployed before the expiration of one year after being laid off for lack of work, and he is subsequently reemployed, he will be treated as provided in Section 2.4. Forfeitures arising by reason of an Employee's termination of service for any reason shall not be applied to increase the benefits any Employee would otherwise receive under the Plan but shall be used to reduce contributions of the Employing Companies to the Plan. 4.6 Annual Limit on Accredited Service. Notwithstanding any provision of this Article IV, an Employee shall be credited with no more than one year of Accredited Service for any given Plan Year. ARTICLE V Retirement Income 5.1 Normal Retirement Income. The monthly Retirement Income payable as a single life annuity to an Employee included in the Plan who retires from the service of an Employing Company at his Normal Retirement Date (before adjustment for Provisional Payee designation, if any) after May 1, 2000, subject to the limitations of Article VI, shall be the greatest of (a), (b), (c) and (d): (a) the Retirement Income determined in accordance with Section 5.1 of the Prior Plans as of December 31, 1996 without regard to the Minimum Retirement Income requirement, plus $25.00 times the Employee's years of Accredited Service earned after December 31, 1996; (b) $25.00 times an Employee's years of Accredited Service; (c) 1.70% of his Average Monthly Earnings multiplied by his years (and fraction of a year) of Accredited Service to his Normal Retirement Date including a Social Security Offset. (d) 1.25% of his Average Monthly Earnings multiplied by his years (and fraction of a year) of Accredited Service to his Normal Retirement Date, without a Social Security Offset. With respect to Employees represented by the International Brotherhood of Electrical Workers ("IBEW"), except those represented by IBEW Local 1208, who performed an Hour of Service on or after January 1, 2002, January 1, 2002 shall replace May 1, 2000 in the preceding sentence. For purposes of this Subsection (d), Average Monthly Earnings shall be calculated using the Employee's Earnings, as defined in Section 1.10, increased by any cash payments made during any given Plan Year from an annual group incentive plan. "Annual group incentive plan" shall mean each plan designated as such and approved and ratified for each Plan Year by the manager of the Southern Company Compensation Administration department pursuant to procedures established by the Retirement Board. The Executive Productivity Improvement Plan shall be considered an "annual group incentive plan" only with regard to amounts earned in 1999 or a prior Plan Year and/or with regard to amounts which became payable in 2000 or a prior Plan Year. Notwithstanding any provision of this Plan to the contrary, a former IBEW Employee, as defined in Section 7.13, other than an IBEW Employee represented by IBEW Local 1208, whose employment with an Employing Company terminated on or after January 1, 2001 but before January 1, 2002 (or his Provisional Payee) shall have his Retirement Income determined and adjusted, if necessary, under the terms of the Plan as herein amended and restated (and/or the survivor benefit attributable thereto) prospectively from the Administrative Change Date, as defined in Section 7.13, unless such IBEW Employee's benefit under the 1997 Plan, as defined in Section 7.13, would provide a greater benefit. When making the determination of the greater benefit, any adjustment to such IBEW Employee's Retirement Income made pursuant to Section 5.11 of the 1997 Plan shall be taken into account. However, such adjustment shall not be applied to the IBEW Employee's benefit as determined under this Plan as amended and restated. Any provisions of this Section 5.1 to the contrary notwithstanding, Retirement Income with respect to an Employee who retires on his Normal Retirement Date or Deferred Retirement Date shall not be less than the Retirement Income which would have been payable with respect to such Employee commencing on an earlier Retirement Date which would have resulted in the greatest Retirement Income if such Retirement Income had been payable in the same form as his Retirement Income commencing on his Normal Retirement Date or Deferred Retirement Date. 5.2 Calculation of Social Security Offset. For purposes of determining the Social Security Offset in calculating an Employee's Retirement Income under the Plan, the Social Security Offset shall be determined by using the actual salary history of the Employee during his employment with any Affiliated Employer, provided that in the event that the Retirement Board (or its delegee) is unable to secure such actual salary history within one hundred eighty (180) days following the later of the date of the Employee's separation from service (by retirement or otherwise) and the time when the Employee is notified of the Retirement Income to which he is entitled, the salary history shall be determined in the following manner: (a) The salary history shall be estimated by applying a salary scale, projected backwards, to the Employee's compensation for W-2 purposes from the Affiliated Employer which last employed the Employee for the first Plan Year following the most recent Plan Year for which the salary history is estimated. The salary scale shall be a level percentage per year equal to six percent (6%) per annum. (b) The Plan shall give clear written notice to each Employee of the Employee's right to supply the actual salary history and of the financial consequences of failing to supply such history. Such notice shall state that the actual salary history is available from the Social Security Administration. For purposes of determining the Social Security Offset in calculating the Retirement Income of an Employee entitled to receive a public pension based on his employment with a Federal, state, or local government agency, no reduction in such Employee's Social Security benefit resulting from the receipt of a public pension shall be recognized. Notwithstanding the foregoing, with respect to an Employee described in Section 2.4(b), any salary history prior to April 2, 2001 shall be disregarded when determining his Social Security Offset. 5.3 Early Retirement Income. The monthly amount of Retirement Income payable to an Employee who retires from the service of an Employing Company at his Early Retirement Date, subject to the limitations of Section 6.1, will be equal to his Retirement Income based on his Accredited Service to his Early Retirement Date, reduced by three-tenths of one percent (0.3%) for each calendar month by which the commencement date of his Retirement Income precedes his Normal Retirement Date but follows the first day of the month following his attainment of his fiftieth (50th) birthday. At the option of the Employee exercised at or prior to commencement of his Retirement Income on or after his Early Retirement Date (provided he shall not have in effect at such Early Retirement Date a Provisional Payee designation pursuant to Article VII), he may have his Retirement Income adjusted upwards in an amount which will make his Retirement Income payable up to age sixty-five (65) equal, as nearly as may be, to the amount of his Federal primary Social Security benefit (primary old age insurance benefit) estimated to become payable after age sixty-five (65), as computed at the time of his retirement, plus a reduced amount, if any, of Retirement Income actuarially determined to be payable after age sixty-five (65). The Federal primary Social Security benefit used in calculating an Employee's Retirement Income and adjustment described in the preceding sentence shall be determined by using the salary history of the Employee during his employment with any Affiliated Employer, as calculated in accordance with Section 5.2. Notwithstanding the preceding sentence, with respect to an Alternate Payee, the adjustment described in this paragraph shall be determined by using the Alternate Payee's actual Social Security salary history and estimated age 65 Social Security benefit provided that the Alternate Payee secures this information for the Retirement Board. 5.4 Deferred Retirement Income. The monthly amount of Retirement Income payable to an Employee who retires from the service of the Employer at his Deferred Retirement Date, subject to the limitations of Section 6.1, will be equal to his Retirement Income based on his Accredited Service to his Deferred Retirement Date. 5.5 Payment of Retirement Income. The first payment of an Employee's Retirement Income will be made on his Early Retirement Date, Normal Retirement Date, Deferred Retirement Date, or date of commencement of payment of Retirement Income in accordance with Section 8.1, 8.2 or 8.6, as the case may be; provided that commencement of the distribution of an Employee's Retirement Income shall not be made prior to his Normal Retirement Date without the consent of such Employee, except as provided in Section 8.4 of the Plan. Notwithstanding anything to the contrary above, if in accordance with this Section 5.5 an Employee is entitled to receive Retirement Income commencing at his Early Retirement Date, he may, in lieu of commencing payment of his Retirement Income upon his Early Retirement Date, elect to receive such Retirement Income commencing as of the first day of any month after his Early Retirement Date and preceding his Normal Retirement Date in an amount equal to his Retirement Income determined as of the commencement of his Retirement Income on or after his Early Retirement Date determined in accordance with Section 5.3. An election pursuant to this Section 5.5 to have Retirement Income commence prior to Normal Retirement Date shall be made on a prescribed form and shall be filed with the Retirement Board (or its delegee) at least thirty (30) days before Retirement Income is to commence. However, if an Employee fails to make an election pursuant to this Section 5.5 within the thirty (30) day period immediately preceding his Retirement Date, his Retirement Income shall be determined as of his Retirement Date and payment thereof shall commence as soon as administratively feasible following his election to retire, provided his election occurs not more than ninety (90) days after his Retirement Date. If the election is made more than ninety (90) days following an Employee's Retirement Date, his benefits shall commence as soon as administratively feasible and his Retirement Income shall be determined as of the first day of the month following submission of his election. In the event of the death of an Employee who has designated a Provisional Payee or who is deemed to have done so in accordance with Article VII, if the designation has become effective, the first payment to be made to the Provisional Payee pursuant to Article VII shall be made to the Provisional Payee on the first day of the month after the later of (a) the Employee's death and (b) the date on which the Employee would have attained his fiftieth (50th) birthday if he had survived to such date, if the Provisional Payee shall then be alive and proof of the Employee's death satisfactory to the Retirement Board (or its delegee) shall have been received by it. Subsequent payments will be made monthly thereafter until the death of such Provisional Payee. In any event, payment of Retirement Income, including any adjustments thereto caused by an amendment to the Plan providing for, or which has the effect of providing for, retroactively increased Retirement Income, to the Employee shall begin not later than the sixtieth (60th) day after the later of the close of the Plan Year in which falls (a) the Employee's Normal Retirement Date or (b) the date the Employee terminates his service with any Affiliated Employer. Notwithstanding the provisions of the Plan for the monthly payment of Retirement Income, such income may be adjusted and payable annually in arrears if the amount of the Retirement Income is less than $10.00 per month. 5.6 Termination of Retirement Income. The monthly payment of Retirement Income will cease with the last payment preceding the retired Employee's death; subject, however, to the continuation of payments to a surviving Provisional Payee, if one has been designated or deemed to have been designated, which likewise will cease with the last payment preceding the death of the Provisional Payee. There shall be no benefits payable under the Plan on behalf of any Employee whose death occurs prior to his retirement, except as otherwise provided in Article VII with respect to a Provisional Payee of an Employee. Following the death of an Employee and of his Provisional Payee, if any, no further payments will be made under the Plan on account of such Employee. 5.7 Required distributions. (a) Once a written claim for benefits is filed with the Retirement Board (or its delegee), payment of benefits to the Employee shall begin not later than sixty (60) days after the last day of the Plan Year in which the latest of the following events occurs: (1) the Employee's Normal Retirement Date; (2) the tenth (10th) anniversary of the date the Employee commenced participation in the Plan; or (3) the Employee's separation from service from any Affiliated Employer. (b) Pre-January 1, 2003 required minimum distributions. (1) With respect to Plan Years beginning before January 1, 2003: (i) The payment of Retirement Income to any Employee shall begin April 1 of the calendar year following the calendar year in which the Employee attains age 70-1/2 or, if later, the calendar year in which such Employee retires. Notwithstanding the preceding sentence, with respect to any Employee who is a five-percent owner as defined in Section 14.5(g) with regard to the Plan Year ending in which the Employee attains age 70-1/2 or any Employee who commenced receipt of his Retirement Income in accordance with the minimum distribution provisions of the Prior Plans before January 1, 1997, the payment of Retirement Income shall commence no later than April 1 of the Plan Year following the Plan Year in which the Employee attains age 70-1/2. (ii) With respect to an Employee who commences receipt of Retirement Income while in active service, the amount of his Retirement Income shall be computed as of the end of the Plan Year the Employee attains age 70-1/2 and shall be recomputed as of the close of each Plan Year thereafter and preceding his actual retirement date. Any additional Retirement Income he accrues at the close of any Plan Year pursuant to the preceding sentence shall be offset (but not below zero) by the value of the benefit payments received in such Plan Year. With respect to the Plan Year of retirement, Retirement Income calculated at the Employee's Deferred Retirement Date shall be offset (but not below zero) by the value of the benefit payments received on or after January 1 but before his retirement date in such Plan Year. The receipt by an Employee of any payments or distributions as a result of his attaining age 70-1/2 prior to his actual retirement or death shall in no way affect the entitlement of an otherwise eligible Employee to additional accrued benefits. (iii) With respect to an Employee who retires after attaining age 70-1/2 and who has not previously commenced receipt of his Retirement Income pursuant to this Section 5.7(b) while an Employee of an Affiliated Employer, the amount of his Retirement Income shall be computed as of the end of the Plan Year the Employee attains age 70-1/2 and shall be recomputed as of the close of each Plan Year thereafter and preceding his Deferred Retirement Date. With respect to each Plan Year following the Plan Year the Employee attains age 70-1/2, his Retirement Income shall equal the greater of his Retirement Income determined as of such Plan Year or the Actuarial Equivalent of his Retirement Income computed as of the end of the Plan Year he attains age 70-1/2. For the next Plan Year, his adjusted Retirement Income shall be equal to the greater of his Retirement Income determined as of such Plan Year or the Actuarial Equivalent of his adjusted Retirement Income computed as of the end of the prior Plan Year. This process shall be repeated each Plan Year until his Deferred Retirement Date. (iv) If a former Employee who is receiving Retirement Income shall be reemployed by any Affiliated Employer as an Employee and his Retirement Income is suspended in accordance with Section 5.8(b), the Retirement Income payable upon his subsequent retirement shall be adjusted in accordance with Section 5.7(b)(iii) if his subsequent retirement occurs after he attains age 70-1/2, but shall be reduced by the Actuarial Equivalent of any Retirement Income he received prior to his reemployment in accordance with Section 5.8(b). (2) Distribution upon death of Employee (i) Death after commencement of benefits If the Employee dies before his entire non-forfeitable interest has been distributed to him, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution selected by the Employee as set forth in the provisions of Article VII. (ii) Death prior to commencement of benefits If the Employee dies before the distribution of his nonforfeitable interest has begun, the entire interest, subject to the provisions of Article VII, shall be distributed monthly to his Provisional Payee, if any, over such Provisional Payee's remaining lifetime. (c) Post-December 31, 2002 required minimum distributions. (1) General rules. (i) Effective date. The provisions of this Section 5.7(c) will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year. (ii) Coordination with minimum distribution requirements previously in effect. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the effective date of this Section equals or exceeds the required minimum distributions determined under this Section, then no additional distributions will be required to be made for 2002 on or after such date to the distributee. If the total amount of 2002 required minimum distributions under the Plan made to the distributee prior to the effective date of this Section is less than the amount determined under this Section, then required minimum distributions for 2002 on and after such date will be determined so that the total amount of required minimum distributions for 2002 made to the distributee will be the amount determined under this Section. (iii) Precedence. The requirements of this Section will take precedence over any inconsistent provisions of the Plan. (iv) Requirements of Treasury regulations incorporated. All distributions required under this Section will be determined and made in accordance with the Treasury regulations under Section 401(a)(9) of the Code. (v) TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Section, distributions may be made under a designation made before January 1, 1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA. (2) Time and Manner of Distribution. (i) Required beginning date. The Employee's entire interest will be distributed, or begin to be distributed, to the Employee no later than the Employee's required beginning date. (ii) Death of Employee before distributions begin. If the Employee dies before distributions begin, the Employee's entire interest will be distributed, or begin to be distributed, no later than as follows: (A) If the Employee's surviving spouse is the Employee's sole beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Employee died, or by December 31 of the calendar year in which the Employee would have attained age 70 1/2, if later. (B) If the Employee's surviving spouse is not the Employee's sole beneficiary, then distributions to the beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Employee died. (C) If there is no beneficiary as of September 30 of the year following the year of the Employee's death, the Employee's entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Employee's death. (D) If the Employee's surviving spouse is the Employee's sole beneficiary and the surviving spouse dies after the Employee but before distributions to the surviving spouse begin, this Section 5.7(c)(2), other than Section 5.7(c)(2)(ii)(A), will apply as if the surviving spouse were the Employee. For purposes of this Section 5.7(c)(2) and Section 5.7(c)(5), distributions are considered to begin on the Employee's required beginning date (or if Section 5.7(c)(2)(ii)(D) applies, the date distributions are required to begin to the surviving spouse under Section 5.7(c)(2)(ii)(A)). If annuity payments irrevocably commence to the Employee before the Employee's required beginning date (or to the Employee's surviving spouse before the date distributions are required to begin to the surviving spouse under Section 5.7(c)(2)(ii)(A)), the date distributions are considered to begin is the date distributions actually commence. (iii) Forms of distribution. Unless the Employee's interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with Subsections (c), (d) and (e) of this Section 5.7(c). If the Employee's interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury regulations. (3) Determination of amount to be distributed each year. (i) General annuity requirements. If the Employee's interest is paid in the form of annuity distributions under the Plan, payments under the annuity will satisfy the following requirements: (A) The annuity distributions will be paid in periodic payments made at intervals not longer than one year; (B) The distribution period will be over a life (or lives) or over a period certain not longer than the period described in Section (d) or (e); (C) Once payments have begun over a period certain, the period certain will not be changed even if the period certain is shorter than the maximum permitted; and (D) Payments will either be nonincreasing or increase only as follows: (I) By an annual percentage increase that does not exceed the annual percentage increase in a cost-of-living index that is based on prices of all items and issued by the Bureau of Labor Statistics; (II) To the extent of the reduction in the amount of the Employee's payments to provide for a survivor benefit upon death, but only if the beneficiary whose life was being used to determine the distribution period described in Section 5.7(c)(4) dies or is no longer the Employee's beneficiary pursuant to a qualified domestic relations order within the meaning of Code Section 414(p); (III) To provide cash refunds of Employee contributions upon the participant's death; or (IV) To pay increased benefits that result from a Plan amendment. (ii) Amount required to be distributed by required beginning date. The amount that must be distributed on or before the Employee's required beginning date (or, if the Employee dies before distributions begin, the date distributions are required to begin under Section 5.7(c)(2)(i) or (ii)) is the payment that is required for one payment interval. The second payment need not be made until the end of the next payment interval even if the payment interval ends in the next calendar year. Payment intervals are the period for which payments are received, e.g., bi-monthly, monthly, semi-annually, or annually. All of the Employee's benefit accruals as of the last day of the first distribution calendar year will be included in the calculation of the amount of the annuity payments for payment intervals ending on or after the Employee's required beginning date. (iii) Additional accruals after first distribution calendar year. Any additional benefits accruing to the Employee in a calendar year after the first distribution calendar year will be distributed beginning with the first payment interval ending in the calendar year immediately following the calendar year in which such amount accrues. (4) Requirements for annuity distributions that commence during Employee's lifetime. Unless the Employee's spouse is the sole designated beneficiary and the form of distribution is a period certain and no life annuity, the period certain for an annuity distribution commencing during the Employee's lifetime may not exceed the applicable distribution period for the Employee under the Uniform Lifetime Table set for in Section 1.401(a)(9)-9 of the Treasury regulations for the calendar year that contains the annuity starting date. If the annuity starting date precedes the year in which the Employee reaches age 70, the applicable distribution period for the Employee is the distribution period for age 70 under the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations plus the excess of 70 over the age of the Employee as of the Employee's birthday in the year that contains the annuity starting date. If the Employee's spouse is the Employee's sole designated beneficiary and the form of distribution is a period certain and no life annuity, the period certain may not exceed the longer of the Employee's applicable distribution period or the joint life and last survivor expectancy of the Employee and the Employee's spouse as determined under the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Employee's and spouse's attained ages as of the Employee's and spouse's birthdays in the calendar year that contains the annuity starting date. (5) Requirements for minimum distributions where Employee dies before date distributions begin. (i) Employee survived by beneficiary. If the Employee dies before the date distributions begin and there is a beneficiary, the Employee's entire interest will be distributed, beginning no later than the time described in Section 5.7(c)(2)(ii)(A) or (B), over the life of the beneficiary or over a period certain not exceeding: (A) Unless the annuity starting date is before the first distribution calendar year, the life expectancy of the beneficiary determined using the beneficiary's age as of the beneficiary's birthday in the calendar year immediately following the calendar year of the Employee's death; or (B) If the annuity starting date is before the first distribution calendar year, the life expectancy of the beneficiary determined using the beneficiary's age as of the beneficiary's birthday in the calendar year that contains the annuity starting date. (ii) No beneficiary. If the Employee dies before the date distributions begin and there is no beneficiary as of September 30 of the year following the year of the Employee's death, distribution of the Employee's entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Employee's death. (iii) Death of surviving spouse before the date distribution of his interest begins, the Employee's surviving spouse is the Employee's sole beneficiary, and the surviving spouse dies before distributions to the surviving spouse begin, this Section 5.7(b)(5) will apply as if the surviving spouse were the Employee, except that the time by which distributions must begin will be determined without regard to Section 5.7(c)(2)(ii)(A). begin. If the Employee dies before the date distributions begin, the Employee's surviving spouse is the Employee's sole beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under subsection 3.8.2(b)(i), this clause 3.8.4(b) will apply as if the surviving spouse were the Employee. (6) Definitions. For purposes of this Section, the follow terms shall have the meaning set forth below: (i) "Beneficiary" shall mean the individual who is designated as the beneficiary under the Plan in accordance with Section 401(a)(9) of the Code and Section 1.401(a)(9)-1, Q&A-4, of the Treasury regulations. (ii) "Distribution calendar year" shall mean a calendar year for which a minimum distribution is required. For distributions beginning before the Employee's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Employee's required beginning date. For distributions beginning after the Employee's death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 5.7(c)(2)(ii). (iii) "Life expectancy" shall mean the life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations. (iv) "Required beginning date" shall mean the date specified in Section 5.7(b) of the Plan. (d) Determining required minimum distributions Notwithstanding anything in this Plan to the contrary, all distributions, including the minimum amounts which must be distributed each calendar year, under this Plan shall be made in accordance with Code Section 401(a)(9) and the regulations thereunder, including Treas. Reg. ss. 1.401(a)(9)-2. With respect to distributions under the Plan made in calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Section 401(a)(9) of the Code in accordance with the regulations under Section 401(a)(9) that were proposed in January 2001, notwithstanding any provision of the Plan to the contrary. This provision shall continue in effect until the end of the last calendar year beginning before the effective date of final regulations under Section 401(a)(9) or such other date specified in guidance published by the Internal Revenue Service. (e) Minimum distribution transitional rules ...................Any distribution made pursuant to Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 shall meet the requirements of Code Section 401(a)(9) as in effect on December 31, 1983, and shall also satisfy Code Sections 401(a)(11) and 417. 5.8 Suspension of Retirement Income. (a) The Retirement Income of an Employee who remains in active service after his Normal Retirement Date shall be suspended for each calendar month after his Normal Retirement Date during which he completes forty (40) or more Hours of Service, pursuant to ERISA Section 203(a)(3)(B) ("ERISA Section 203(a)(3)(B) Service"). (b) If a former Employee who is receiving Retirement Income shall be reemployed by any Affiliated Employer as an Employee and shall not elect to waive his right to participate under the Plan or the pension plan of the Affiliated Employer, whichever applies, his Retirement Income shall be suspended for each calendar month after his reemployment during which he is employed in ERISA Section 203(a)(3)(B) Service. The Retirement Income payable upon his subsequent retirement shall be reduced by the Actuarial Equivalent of any Retirement Income he received prior to his reemployment. Notwithstanding the preceding, the Retirement Income of a former Employee who is reemployed by an Affiliated Employer and classified as a "temporary employee," whether or not such classification is determined to be in error, shall not be suspended. (c) No payment shall be suspended by the Plan pursuant to this Section 5.10 unless the Plan notifies the Employee by personal delivery or first class mail during the first calendar month in which the Plan withholds payments that his Retirement Income is suspended. (d) If the payment of Retirement Income has been suspended, payments shall resume no later than the first day of the third calendar month after the calendar month in which the Employee ceases to be employed in ERISA Section 203(a)(3)(B) Service. The initial payment upon resumption shall include the payment scheduled to occur in the calendar month when payments resume and any amounts withheld during the period between the cessation of ERISA Section 203(a)(3)(B) Service and the resumption of payments. 5.9 Increase in Retirement Income of retired Employees (a) 1996 Increase. (1) Retirement Income payable on and after January 1, 1996 to an Employee (or to the Provisional Payee of an Employee) who retired under the Prior Plans at his Early Retirement Date, Normal Retirement Date, or Deferred Retirement Date on or before January 1, 1996 will be adjusted to increase the amount thereof by an amount ranging from a minimum of one and one-half percent (1.5%) to a maximum of seven and one-half percent (7.5%) in accordance with the following schedule: Year in which Percentage Retirement occurred increase - ------------------- ---------- - ------------------- ---------- 1995 1.5% 1994 3.0% 1993 4.5% 1992 6.0% 1991 and prior years 7.5% (2) A similar adjustment, based on the date of the commencement of Retirement Income payments to the Employee's Provisional Payee, rather than the Employee's Retirement Date, will be made in respect of Retirement Income which is payable on or after January 1, 1996 where a Provisional Payee election was in effect, or was deemed to be in effect, when an Employee died while in service prior to January 1, 1996 and prior to his retirement. (3) A similar adjustment will be made in respect of Retirement Income which is payable on or after January 1, 1996 for a former Employee who is not eligible to retire but who is vested in a benefit (or the Provisional Payee of such former Employee) for which payments have commenced on or before January 1, 1996 in accordance with the terms of the Prior Plans, except for Employees whose Retirement Income has been cashed-out pursuant to the terms of the Prior Plans. (4) For purposes of determining the applicable percentage increase under this Section 5.9(a), the year of retirement includes retirement where the last day of employment was December 31 of such year. An Employee whose Deferred Retirement Date is on or before January 1, 1988 and who did not retire at his Normal Retirement Date shall be deemed to have retired at his Normal Retirement Date for purposes of determining the increase in his Retirement Income payable at his Deferred Retirement Date. (5) This Section 5.9(a) shall not apply with respect to an Employee who has not retired, but for whom the distribution of Retirement Income has commenced pursuant to Section 5.7 of the Plan. (b) 2001 Increase. (1) Retirement Income payable on and after January 1, 2001 to an Employee (or to the Provisional Payee of an Employee) who retired under the Plan or the Prior Plans at his Early Retirement Date, Normal Retirement Date, or Deferred Retirement Date on or before January 1, 2001 will be adjusted to increase the amount thereof by an amount ranging from a minimum of one and one-half percent (1.5%) to a maximum of seven and one-half percent (7.5%) in accordance with the following schedule: Pension Benefit Commencement Dates - ----------------------------------------------------------------------------- Increase From Through Percentage - -------------------------- ------------------------ ------------------ - -------------------------- ------------------------ ------------------ February 1, 2000 January 1, 2001 1.5% February 1, 1999 January 1, 2000 3.0% February 1, 1998 January 1, 1999 4.5% February 1, 1997 January 1, 1998 6.0% Before February 1, 1997 7.5% An Employee whose Deferred Retirement Date is on or before January 1, 1988 and who did not retire at his Normal Retirement Date shall be deemed to have retired at his Normal Retirement Date for purposes of determining the increase in his Retirement Income payable at his Deferred Retirement Date. (2) (A) The adjustment provided in Section 5.9(b)(1) will be made in respect of Retirement Income which is payable on or after January 1, 2001 to a Provisional Payee, pursuant to Section 7.1 of the Plan, based on the Employee's pension benefit commencement date under the Plan or the Prior Plans. (B) The adjustment provided in Section 5.9(b)(1) will be made in respect of Retirement Income which is payable on or after January 1, 2001 to a Provisional Payee, pursuant to Section 7.4 of the Plan, due to the death of an Employee while in the service of an Employing Company based on the Provisional Payee's pension benefit commencement date under the Plan or the Prior Plans. (3) A similar adjustment will be made in respect of Retirement Income which is payable on or after January 1, 2001 for a former Employee who is not eligible to retire but who is vested in a benefit (or the Provisional Payee of such former Employee) for which payments have commenced on or before January 1, 2001 in accordance with the terms of the Plan or Prior Plans, except for Employees whose Retirement Income has been cashed-out pursuant to the terms of the Plan or Prior Plans. (4) Retirement Income payable to an Employee pursuant to the last paragraph of Section 5.3 (i.e., the Social Security level payment option) shall be adjusted for the increase provided in Section 5.9(b)(1) by applying the percentage increase separately to the portion of the Employee's Retirement Income payable before age 65, if still being paid, and his Retirement Income received or to be received after he attains age 65. (5) The increased benefits provided for in Section 5.9(b)(1) shall not apply to the portion of an Employee's Retirement Income payable as a Social Security bridge payment to an Employee who retired subject to the terms of an early retirement window and who is receiving Social Security "bridge" payments pursuant to such early retirement window. (6) This Section 5.9(b) shall not apply with respect to an Employee who has not retired, but for whom the distribution of Retirement Income has commenced pursuant to Section 5.7 of the Plan. (7) The adjustment provided in Section 5.9(b)(1) will be made in respect of an Allowance which is payable on or after January 1, 2001 to a SEPCO Employee or a former SEPCO Employee, as defined in Schedule I of the Plan, based on the Employee's pension benefit commencement date under the Plan, the Prior Plans or the Employees' Retirement Plan of Savannah Electric and Power Company ("SEPCO Plan"). An Allowance payable to a SEPCO Employee or former SEPCO Employee pursuant to Section 5.04 of the SEPCO Schedule (i.e., the Social Security level payment option) shall be adjusted for the increase provided in Section 5.9(b)(1) by applying the percentage increase separately to the portion of the SEPCO Employee's Allowance payable before age 62 or 65 (whichever is applicable), if still being paid, and his Allowance received or to be received after he attains age 62 or 65, whichever is applicable. A SEPCO Employee (or his Provisional Payee) whose Allowance consists entirely of an amount payable pursuant to Retirement Annuities described in Article 2 of the SEPCO Schedule or Article 2 of the SEPCO Plan, whichever is applicable, shall not receive the adjustment provided in Section 5.9(b)(1). A SEPCO Employee (or his Provisional Payee) whose Allowance consists partially of an amount payable pursuant to Retirement Annuities described in Article 2 of the SEPCO Schedule or Article 2 of the SEPCO Plan, whichever is applicable, and partially of amounts accrued pursuant to Article 5 of the SEPCO Schedule or Article 5 of the SEPCO Plan, whichever is applicable, shall have his Allowance adjusted in accordance with Section 5.9(b)(1) based on his total Allowance under both such Articles with such adjustment being paid entirely from the Trust. 5.10 Special provisions relating to the treatment of absence of an Employee from the service of an Employing Company to serve in the Armed Forces of the United States. (a) Notwithstanding any other provisions of the Plan to the contrary, contributions, benefits, and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. (b) Service to be credited to any Employee in accordance with this Section 5.10 may be conditioned by the Retirement Board upon its receipt of (1) such information pertaining to absence of an Employee or former Employee to serve in the Armed Forces of the United States as it may request and (2) such form of receipt and release as it may determine to be appropriate in the circumstances. ARTICLE VI Limitations on Benefits 6.1 Maximum Retirement Income. Notwithstanding any other provision of the Plan, the amount of Retirement Income shall be subject to the provisions of this Article VI. (a) The maximum annual amount of Retirement Income payable with respect to an Employee in the form of a straight life annuity without any ancillary benefits after any adjustment for a Provisional Payee designation shall be the lesser of the dollar limitation determined under Code Section 415(b)(1)(A) as adjusted under Code Section 415(d), or Code Section 415(b)(1)(B) as adjusted under Treasury Regulation Section 1.415-5, subject to the following provisions of Article VI. With respect to any former Employee who has Retirement Income under the Plan or his Provisional Payee, the maximum annual amount shall also be subject to the adjustment under Code Section 415(d), but only those adjustments occurring before September 1, 1996. (b) For purposes of Section 6.1, the term "average compensation for his high three (3) years" shall mean the period of consecutive calendar years (not more than three) during which the Employee was both an active participant in the Plan and had the greatest aggregate compensation from an Employing Company or, if he is also entitled to receive a pension from a defined benefit plan of an Affiliated Employer or if assets and liabilities attributable to the pension of the Employee from a defined benefit plan of an Affiliated Employer have been transferred to this Plan, the greatest aggregate compensation from the Employer and the Affiliated Employer during such high three (3) years. The limitation described in Section 6.1(a) shall also apply in the case of the payment of an Employee's Retirement Income with a Provisional Payee designation. (c) For purposes of Article VI, the term "compensation" means an Employee's earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with any Affiliated Employer (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses), and excluding the following: (1) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; and (2) Amounts realized from the sale, exchange, or other disposition of stock acquired under a qualified stock option. For Limitation Years beginning on and after January 1, 2001, for purposes of applying the limitations described in Section 6.1 of the Plan, compensation paid or made available during such Limitation Years shall include elective amounts that are not includable in the gross income of the Employee by reason of Code Section 132(f)(4). Compensation for any Limitation Year is the compensation, as defined above, paid or payable during such year. (d) The foregoing limitations regarding the maximum Retirement Income shall not apply with respect to an Employee if the Retirement Income payable under the Plan and under any other defined benefit plans of any Affiliated Employer does not exceed $10,000 for the calendar year or for any prior calendar year, and any Affiliated Employer has not at any time maintained a defined contribution plan in which the Employee has participated. The terms "defined benefit plan" and "defined contribution plan" shall have the meanings set forth in Section 415(k) of the Code. 6.2 Adjustment to Defined Benefit Dollar Limitation for Early or Deferred Retirement. (a) If the age at which the retirement benefit of an Employee commences is less than 62, the Defined Benefit Dollar Limitation is determined by reducing the Defined Benefit Dollar Limitation on an actuarially equivalent basis. First, reduce the Defined Benefit Dollar Limitation at age 62 using the interest rate and mortality table, or tabular factors, as applicable, which are set forth in the Plan for the reduction of benefits for early retirement under the Plan. Second, reduce the Defined Benefit Dollar Limitation using five percent (5%) interest and the commissioner's standard table used to determine reserves for group annuity contracts in effect on the date as of which the calculation is being made. Use the lesser of the amounts determined under the two preceding sentences as the Defined Benefit Dollar Limitation. (b) If the age at which the retirement benefit of an Employee commences is greater than age 65, the Defined Benefit Dollar Limitation shall be determined by increasing the Defined Benefit Dollar Limitation at age 65 on an actuarially equivalent basis. The increased Defined Benefit Dollar Limitation shall be the lesser of the equivalent amount computed using the interest rate and mortality table set forth in Section 1.2 that is used for Actuarial Equivalence for deferred Retirement Income under the Plan and the equivalent amount computed using five percent (5%) interest and the Applicable Mortality Table, as defined in Section 1.2, in effect on the date as of which the calculation is being made. 6.3 Adjustment of limitation for Years of Service or participation. (a) If an Employee has completed less than ten (10) years of participation, the Employee's accrued benefit shall not exceed the Defined Benefit Dollar Limitation as adjusted by multiplying such amount by a fraction, the numerator of which is the Employee's number of years (or part thereof) of participation in the Plan, and the denominator of which is ten (10). (b) If an Employee has completed less than ten (10) Years of Service with any Affiliated Employer, the limitations described in Sections 415(b)(1)(B) and 415(b)(4) of the Code shall be adjusted by multiplying such amounts by a fraction, the numerator of which is the Employee's number of years of service (or part thereof), and the denominator of which is ten (10). (c) In no event shall paragraphs (a) and (b) above reduce the limitations provided under Sections 415(b)(1) and 415(b)(4) of the Code to an amount less than one-tenth (1/10) of the applicable limitation (as determined without regard to this Section 6.3). (d) This Section 6.3 shall be applied separately with respect to each change in the benefit structure of the Plan, except as is or may be limited by Revenue Procedure 92-42. 6.4 Conversion of retirement benefit to a single life annuity. If an Employee's retirement benefit is payable in a form other than a straight life annuity for the life of the Employee ("Non-Annuity Benefit Form"), whether as the normal form of benefit or as an optional form which the Employee elects, the Non-Annuity Benefit Form is adjusted to a straight life annuity under either (a) or (b) below, whichever is applicable. No actuarial adjustment to the Non-Annuity Benefit Form is required for (i) the value of a qualified joint and survivor annuity; (ii) the value of benefits that are not directly related to retirement benefits (such as post-retirement medical benefits); or (iii) the value of post-retirement cost-of-living increases made in accordance with the Treasury regulations. (a) If an Employee's retirement benefit is payable as a Non-Annuity Benefit Form which is not a form of benefit subject to Code Section 417(e)(3) (e.g., is not a lump sum or decreasing annuity), first convert the Non-Annuity Benefit Form to a straight life annuity using the interest rate and mortality table, or tabular factors, as applicable, which are specified in the Plan for the Non-Annuity Benefit Form. Second, convert the Non-Annuity Benefit Form to a straight life annuity using a five percent (5%) interest rate and the Applicable Mortality Table, as defined in Section 1.2, in effect on the date as of which the calculation is being made. The greater of the amounts determined under the two preceding sentences is the equivalent straight life annuity. (b) If the Non-Annuity Benefit Form is payable in a form subject to Code Section 417(e)(3) (e.g., a lump sum or decreasing annuity), the determination of the equivalent straight life annuity is the same as in paragraph (a) above, except that the Applicable Interest Rate, as defined in Section 1.2, is substituted for the five percent (5%) interest rate. Thus, the Non-Annuity Benefit Form is converted to a straight life annuity using the interest rate and mortality table or the tabular factors, as applicable, which are set forth in the Plan, or the Applicable Interest Rate and the Applicable Mortality Table, as defined in Section 1.2, whichever gives the greater straight life annuity. 6.5 Limitation on benefits from multiple plans. (a) For purposes of the limitations described in Section 6.1 of the Plan and Section 415 of the Code, all defined benefit plans (whether or not terminated) maintained by an Affiliated Employer shall be treated as one defined benefit plan. (b) Notwithstanding any provisions contained herein to the contrary, in the event that an Employee participates in another defined benefit plan required to be aggregated with this Plan under Code Section 415(g) and the combined benefits with respect to an Employee exceed the limitations contained in Code Section 415(b), corrective adjustments shall first be made under this Plan. 6.6 Incorporation of Code Section 415. Notwithstanding anything contained in this Article to the contrary, the limitations, adjustments and other requirements prescribed in this Article shall at all times comply with the provisions of Code Section 415 and the regulations thereunder, the terms of which are specifically incorporated herein by reference. ARTICLE VII Provisional Payee 7.1 Adjustment of Retirement Income to provide for payment to Provisional Payee. An Employee who desires to have his Retirement Income adjusted in accordance with the provisions of this Article VII to provide a reduced amount of Retirement Income payable to him for his lifetime commencing on his Early Retirement Date, his Normal Retirement Date, or his Deferred Retirement Date, as the case may be, may elect, subject to Section 7.11 and in accordance with the provisions of this Article VII, at his option, either: (a) that an amount of Retirement Income be payable to him for his lifetime which is equal to eighty percent (80%) of the Retirement Income which would otherwise be payable to him, but for such election (taking into account any reduction required in accordance with Sections 7.3 and 7.4(a)), with the provision that the same amount will be continued after his death to his Provisional Payee until the death of such Provisional Payee, or (b) that an amount of Retirement Income be payable to him for his lifetime which is equal to ninety percent (90%) of the Retirement Income which would otherwise be payable to him, but for such election (taking into account any reduction required in accordance with Sections 7.3 and 7.4(a)), with the provision that one-half (1/2) of the amount payable to the Employee will be continued after his death to his Provisional Payee until the death of such Provisional Payee, or (c) that an amount of Retirement Income be payable to him for his lifetime which is equal to seventy-five percent (75%) of the Retirement Income which would otherwise be payable to him, but for such election (taking into account any reduction required in accordance with Sections 7.3 and 7.4(a)), with the provision that the same amount will be continued after his death to his Provisional Payee until the death of such Provisional Payee, or, if such Provisional Payee predeceases the Employee, the Employee's Retirement Income automatically increases to a monthly amount equal to the Retirement Income which would be payable to him had he not elected the form of benefit described in this Section 7.1(c) and instead had elected the single life annuity form of benefit, or (d) that an amount of Retirement Income be payable to him for his lifetime which is equal to eighty-eight percent (88%) of the Retirement Income which would otherwise be payable to him, but for such election (taking into account any reduction required in accordance with Sections 7.3 and 7.4(a)), with the provision that one-half (1/2) of the amount payable to the Employee will be continued after his death to his Provisional Payee until the death of such Provisional Payee, or, if such Provisional Payee predeceases the Employee, the Employee's Retirement Income automatically increases to a monthly amount equal to the Retirement Income which would be payable to him had he not elected the form of benefit described in this Section 7.1(d) and instead had elected the single life annuity form of benefit. 7.2 Form and time of election and notice requirements. (a) An election of payment and designation of a Provisional Payee in accordance with Section 7.1 shall be made in writing at the same time on a prescribed form delivered to the Retirement Board (or its delegee). The election and designation shall specify its effective date which shall not be sooner than the date received by the Retirement Board (or its delegee) or the Employee's fiftieth (50th) birthday, whichever is later, nor later than the date of commencement of payments in accordance with this Article VII. Notwithstanding the preceding paragraph, an election under Section 7.1(c) or (d) is subject to Section 7.11, must be in the form of a written Qualified Election, and shall not become effective until the commencement of Retirement Income payments under the Plan. (b) An election of payment to be made in accordance with paragraph (a), (b), (c), or (d) of Section 7.1 may be changed by an Employee, provided the written election of the change specifies an effective date which shall not be sooner than the date received by the Retirement Board (or its delegee) or the Employee's fiftieth (50th) birthday, whichever is later, nor later than the date of commencement of payments in accordance with this Article VII. Notwithstanding the preceding sentence, an election under Section 7.1(c) or (d) is subject to Section 7.11, must be in the form of a written Qualified Election, and shall not become effective until the commencement of Retirement Income payments under the Plan. To the extent that the new method of payment shall afford the Employee changed protection in the event of his death after the effective date of the new election and prior to retirement, his Retirement Income shall be adjusted pursuant to Section 7.4(a) to reflect such changed protection. (c) With respect to Sections 7.5 and 7.6, within the period not less than thirty (30) days and not more than ninety (90) days prior to the anticipated commencement of benefits, the Employee shall be furnished, by mail or personal delivery, a written explanation of: (1) the terms and conditions of the reduced Retirement Income payable as provided in Section 7.1; (2) the Employee's right to make, and the effect of, an election to waive the payment of reduced Retirement Income pursuant to a Provisional Payee designation; (3) the rights of the Employee's Provisional Payee; and (4) the right to make, and the effect of, a revocation of a previous election to waive the payment of reduced Retirement Income pursuant to a Provisional Payee designation. Notwithstanding the preceding sentence, such written explanation may be furnished after an Employee's Early, Normal or Deferred Retirement Date, as applicable, if in the discretion of the Retirement Board the circumstances so warrant, provided the Employee shall have at least thirty (30) days after being furnished the written explanation to elect payment in accordance with paragraph (a) above. Notwithstanding the above, an Employee may elect (with the consent of his Provisional Payee) to waive any requirement that the written explanation be provided at least thirty (30) days before the Employee's annuity starting date, provided the distribution commences more than seven (7) days after such explanation is provided. Within thirty (30) days following an Employee's written request received by the Retirement Board (or its delegee) during the election period, but within sixty (60) days from the date the Employee is furnished all of the information prescribed in the immediately preceding sentence, the Employee shall be furnished an additional written explanation, in terms of dollar amounts, of the financial effect of an election by him not to receive such reduced Retirement Income. If an Employee makes such request, the election period herein prescribed shall end not earlier than sixty (60) calendar days following the day of the mailing or personal delivery of the additional explanation to the Employee. Except that if an election made as provided in Section 7.5 or 7.6 is revoked, another election under that Section may be made during the specified election period. 7.3 Circumstances in which election and designation are inoperative. An election and designation made pursuant to this Article shall be inoperative and the regular provisions of the Plan shall again become applicable as if a Provisional Payee had not been designated if, prior to the commencement of any payment in accordance with this Article VII: (a) an Employee's Provisional Payee shall die, (b) the Employee and the Provisional Payee shall be divorced under a final decree of divorce, or (c) the Retirement Board (or its delegee) shall have received the written Qualified Election of the Employee to rescind his election of payment and designation of a Provisional Payee in order to receive a single life annuity form of benefit. If such a Qualified Election to rescind is made by the Employee, his Retirement Income shall be reduced to reflect the protection afforded the Employee by any Provisional Payee designation during the period from its effective date to the date of the Retirement Board's (or its delegee's) receipt of the Employee's Qualified Election to rescind, if the option as to payments of reduced Retirement Income was in accordance with either Section 7.1(a), 7.6(a), or 7.6(b). If an Employee remarries subsequent to the death or divorce of his Provisional Payee and prior to the commencement of payments in accordance with this Article VII, then he shall be entitled to designate a new Provisional Payee in the manner set forth in Section 7.2. 7.4 Pre-retirement death benefit. If prior to his Normal Retirement Date (or his Deferred Retirement Date, if applicable), an Employee shall die while in the service of an Employing Company (or while in the service of an Affiliated Employer to which his employment had been transferred) and is survived by his spouse to whom he shall be married at the time of his death, there shall be payable to his surviving spouse (whom he shall be deemed to have designated as his Provisional Payee) Retirement Income determined in accordance with paragraph (a) or paragraph (c) of this Section 7.4, as applicable. Subject to Section 7.10, such Retirement Income shall commence on the first day of the month following the death of the Employee or the first day of the month following the date on which he would have attained his fiftieth (50th) birthday if he were still alive, whichever is later, and shall cease with the last payment preceding the death of his Provisional Payee. (a) The amount of Retirement Income payable to the Provisional Payee of a deceased Employee who prior to his death had attained his fiftieth (50th) birthday shall be equal to the amount payable to the Provisional Payee as calculated in Section 7.1(b) determined on the basis of his Accredited Service to the date of his death, or if the Employee shall have attained his fiftieth (50th) birthday and so elected prior to his death, such Retirement Income shall be equal to the amount set forth in Section 7.1(a) determined on the basis of his Accredited Service to the date of his death reduced as provided in the next sentence. If such election shall be made by the Employee, the Retirement Income which shall be payable to the Employee if he lives to his Early Retirement Date or the first day of the month following his attainment of age sixty-five (65), if later, shall be reduced by three-fourths of one percent (0.75%) for each year (prorated for a fraction of a year from the first day of the month following the effective date of the election) which has elapsed from the effective date of his election to the earlier of (1) the commencement of Retirement Income on or after his Early Retirement Date or the first day of the month following his attainment of age sixty-five (65), if later, or (2) the revocation of such election. If he shall die before the commencement of Retirement Income on or after his Early Retirement Date or the first day of the month following his attainment of age sixty-five (65), if later, his Retirement Income to the date of his death shall be reduced by three-quarters of one percent (0.75%) for each year (prorated for a fraction of a year from the first day of the month following the effective date of the election) between the effective date of his election and the first day of the month following his attainment of age sixty-five (65). No reduction in the Employee's Retirement Income shall be made for the period during which the election is in effect after the first day of the month following his attainment of age sixty-five (65). (b) Retirement Income shall not be payable under paragraph (a) of this Section 7.4 to the Provisional Payee of a deceased Employee if at the time of his death there was in effect a Qualified Election made after August 22, 1984 under this paragraph (b) that no Retirement Income shall be paid to his Provisional Payee in the event of his death while in the service of an Employing Company (or while in the service of an Affiliated Employer to which his employment had been transferred) as provided in paragraph (a), provided the Employee had received at least one hundred eighty (180) days prior to his fiftieth (50th) birthday a written explanation of: (1) the terms and conditions of the Retirement Income payable to his Provisional Payee as provided in paragraph (a); (2) the Employee's right to make, and the effect of, an election to waive the payment of Retirement Income to his Provisional Payee; (3) the rights of the Employee's Provisional Payee; and (4) the right to make, and the effect of, a revocation of a previous election to waive the payment of Retirement Income to the Employee's Provisional Payee. A revocation of a prior Qualified Election may be made by the Employee without the consent of the Employee's Provisional Payee at any time before the commencement of benefits. An election under this paragraph (b) may be made and such election may be revoked by an Employee during the period commencing ninety (90) days prior to the Employee's fiftieth (50th) birthday and ending on the date of the Employee's death. Notwithstanding the above provisions of this paragraph (b), such Employee shall not be entitled on or after September 1, 1996 to waive payment of Retirement Income to his Provisional Payee as provided in this Section 7.4. Any such election to waive payment of Retirement Income in effect on August 31, 1996 shall remain in effect unless subsequently revoked by the Employee. (c) For an Employee who dies while in the service of an Employing Company (or while in the service of an Affiliated Employer to which his employment had been transferred) prior to his fiftieth (50th) birthday after completing five (5) Vesting Years of Service, the amount of such Retirement Income payable to the Provisional Payee shall be calculated as provided in Section 7.1(b) determined on the basis of his Accredited Service to the date of his death. The payment of such Retirement Income to the Provisional Payee shall begin on the first day of the month following the date on which such deceased Employee would have attained his fiftieth (50th) birthday, subject, however, to Section 7.10. 7.5 Post-retirement death benefit - qualified joint and survivor annuity. If at his Early Retirement Date, Normal Retirement Date, or Deferred Retirement Date, as the case may be, an Employee is married and he has not: (a) designated a Provisional Payee in accordance with Section 7.1 in respect of payments to be made commencing on his Early, Normal, or Deferred Retirement Date or (b) made, subject to Section 7.4(b) a Qualified Election that payment be made to him in the mode of a single life annuity, he shall nevertheless be deemed to have made an effective designation of a Provisional Payee under this Section 7.5 and to have specified the payment of a benefit as provided in Section 7.1(b). 7.6 Election and designation by former Employee entitled to Retirement Income in accordance with Article VIII. If a former Employee is entitled to receive in accordance with Section 8.1 Retirement Income commencing at Normal Retirement Date, or sooner in accordance with Section 8.2, he may, on or after his fiftieth (50th) birthday, designate his spouse as his Provisional Payee and elect, subject to Section 7.11, to have his Retirement Income at the date of termination of his service actuarially adjusted to provide, at his option, in the event of the commencement of payment prior to his Normal Retirement Date either: (a) a reduced amount payable to him for his lifetime with the provision that such reduced amount will be continued after his death to his spouse as Provisional Payee until the death of such Provisional Payee; or (b) a reduced amount payable to him for his lifetime with the provision that one-half (1/2) of such reduced amount will be continued after his death to his spouse as Provisional Payee until the death of such Provisional Payee; or (c) a reduced amount payable to him for his lifetime with the provision that such reduced amount will be continued after his death to his spouse as Provisional Payee until the death of such Provisional Payee, or, if such Provisional Payee predeceases the former Employee, the former Employee's Retirement Income automatically increases to a monthly amount equal to the Retirement Income which would be payable to him had he not elected the form of benefit described in this Section 7.6(c) and instead had elected the single life annuity form of benefit; or (d) a reduced amount payable to him for his lifetime with the provision that one-half (1/2) of such reduced amount will be continued after his death to his spouse as Provisional Payee until the death of such Provisional Payee, or, if such Provisional Payee predeceases the former Employee, the former Employee's Retirement Income automatically increases to a monthly amount equal to the Retirement Income which would be payable to him had he not elected the form of benefit described in this Section 7.6(d) and instead had elected the single life annuity form of benefit. A former Employee's election and designation of his Provisional Payee made in accordance with this Section 7.6 shall be in writing on a prescribed form delivered to the Retirement Board (or its delegee) and shall become effective not sooner than the date received or the former Employee's fiftieth (50th) birthday, whichever is later, nor later than the date of commencement of payment in accordance with this Section 7.6. Notwithstanding the preceding sentence, an election under Section 7.6(c) or (d) is subject to Section 7.11, must be in the form of a written Qualified Election, and shall not become effective until commencement of Retirement Income payments under the Plan. If the former Employee dies prior to his Normal Retirement Date but after the effective date of his Provisional Payee designation, there will be payable to his Provisional Payee for life commencing on the first day of the calendar month after the former Employee's death Retirement Income in a reduced amount in accordance with the former Employee's election of payments to be made to his Provisional Payee after the death of the former Employee under paragraph (a), (b), (c), or (d) as the case may be, of this Section 7.6. Notwithstanding the preceding sentence, an election under Section 7.6(c) or (d) is subject to Section 7.11, must be in the form of a written Qualified Election, and shall not become effective until commencement of Retirement Income payments under the Plan. However, if prior to the former Employee's death, the Retirement Board (or its delegee) has not received such election, payment of a reduced amount of Retirement Income will be made in accordance with paragraph (b) of this Section 7.6 to his surviving spouse to whom he is married at the time of his death, unless (1) at the time of his death there is in effect a Qualified Election by the former Employee that reduced Retirement Income shall not be paid to his surviving spouse in accordance with this Section 7.6 should he die between his fiftieth (50th) birthday and his Normal Retirement Date without having elected that payment be made to a Provisional Payee and (2) at least one hundred eighty (180) days prior to his fiftieth (50th) birthday a written explanation is provided to the former Employee of: (A) the terms and conditions of the Retirement Income payable to his Provisional Payee as provided in this Section 7.6; (B) the former Employee's right to make, and the effect of, an election to waive the payment of Retirement Income to his Provisional Payee; (C) the rights of a former Employee's spouse; and (D) the right to make, and the effect of, a revocation of a previous election to waive the payment of Retirement Income to his Provisional Payee. If the former Employee is entitled to receive payment of Retirement Income in accordance with Section 8.2 after his fiftieth (50th) birthday and prior to his Normal Retirement Date and elects to do so, a reduced amount of Retirement Income determined in accordance with this Section 7.6, based upon his Retirement Income at the date of termination of his service (actuarially reduced in accordance with Section 8.2) will be payable to him commencing on the date on which payments commence prior to Normal Retirement Date in accordance with Section 8.2 with payments in the same or reduced amount to be continued to his Provisional Payee for life after the former Employee's death in accordance with his election under paragraph (a), (b), (c), or (d), as the case may be, of this Section 7.6. However, if the former Employee is married and he has not designated a Provisional Payee in respect of payments to commence to him prior to his Normal Retirement Date or elected that payment be made to him in the mode of a single life annuity pursuant to a Qualified Election, he shall be deemed to have designated a Provisional Payee pursuant to this Section 7.6 and thereby specified that a reduced Retirement Income shall be paid to him during his lifetime as provided in paragraph (b) of this Section 7.6 and continued after his death to his Provisional Payee as provided in paragraph (b) of this Section 7.6. If the former Employee is alive on his Normal Retirement Date and is married and payment of Retirement Income has not sooner commenced, the provisions of Section 7.5 shall be applicable to the payment of his Retirement Income, unless he shall elect at his Normal Retirement Date to receive payment of his Retirement Income pursuant to Section 7.1(a), (b), (c), or (d), subject to Section 7.11. However, if an election and designation in accordance with this Section 7.6 was in effect prior to his Normal Retirement Date, the former Employee's Retirement Income at his Normal Retirement Date shall be actuarially adjusted for the period the election and designation was in effect. 7.7 Death benefit for Provisional Payee of former Employee. If an Employee, whose service with an Employing Company terminates on or after January 1, 1989, shall die after such termination of employment, and prior to his death (a) shall have not attained his fiftieth (50th) birthday, (b) shall have completed at least five (5) Vesting Years of Service, and (c) shall be survived by his spouse to whom he shall be married at his death, then there shall be payable to his surviving spouse (whom he shall be deemed to have designated as his Provisional Payee) Retirement Income determined in accordance with this Section 7.7. Such Retirement Income shall be equal to one-half of the reduced amount, as actuarially adjusted to provide for the payment of such Retirement Income beginning as of the first day of the month following the date on which such deceased former Employee would have attained his fiftieth (50th) birthday and to provide for the determination of such Retirement Income on a joint and fifty percent (50%) survivor basis of the former Employee's Retirement Income, determined on the basis of his Accredited Service to the date of his death. Subject to Section 7.10, the Provisional Payee shall be eligible to commence receipt of such Retirement Income on the first day of the month following the date on which the former Employee would have attained his fiftieth (50th) birthday if he were still alive, or the first day of any subsequent month preceding what would have been the former Employee's Normal Retirement Date, and shall cease with the last payment preceding the death of his Provisional Payee. In any event, the Provisional Payee shall commence receipt of such Retirement Income no later than what would have been the former Employee's Normal Retirement Date. 7.8 Limitations on Employee's and Provisional Payee's benefits. (a) With respect to an Employee who does not elect a single life annuity, the limitation on benefits imposed under Article VI shall be applied as if such Employee had elected a benefit in the form of a single life annuity. (b) With respect to a Provisional Payee, the limitations on benefits imposed under Article VI shall be applied consistent with paragraph (a) above prorated to provide a limitation equal to, or one-half of, the Employee's limitation, as appropriate, in accordance with the annuity form of benefit elected by the Employee. 7.9 Effect of election under Article VII. An election of payment or a deemed election of payment in accordance with this Article VII shall be in lieu of any other form or method of payment of Retirement Income. 7.10 Effects of change in retirement at Early Retirement Date for certain Employees represented by the IBEW. (a) Retired or Terminated, Vested Employees. An IBEW Employee described below, other than an IBEW Employee represented by IBEW Local 1208, shall be allowed to elect to commence benefits as of the date indicated and receive the make-up payment described in Section 7.12, if applicable, provided such IBEW Employee is alive as of the Administrative Change Date. (1) An IBEW Employee who was actively employed by an Employing Company as of January 1, 2002 but who retires or terminates employment before the Administrative Change Date and who has not commenced payment of his Retirement Income before the Administrative Change Date shall be permitted to make a one-time election, prior to June 28, 2002, to retroactively commence payment of his Retirement Income as of the later of (i) January 1, 2002 or (ii) the first date he is eligible to retire under the terms of the Plan as restated herein. Notwithstanding the preceding, any such IBEW Employee who has attained his fifty-fifth (55th) birthday prior to the Administrative Change Date or has not yet attained his fiftieth (50th) birthday shall not be eligible to make such election. (2) An IBEW Employee who terminated employment on or after January 1, 2001 but before January 1, 2002 and who has not commenced payment of his Retirement Income as of the Administrative Change Date shall be permitted to make a one-time election, prior to June 28, 2002, to retroactively commence payment of his Retirement Income as of the later of (i) January 1, 2002, and (ii) the first day of the month following the month in which the Employee attains his fiftieth (50th) birthday and completes at least ten (10) years of Accredited Service. Notwithstanding the preceding, an IBEW Employee who attains his fifty-fifth (55th) birthday before the Administrative Change Date shall not be eligible to make such election. (3) An IBEW Employee who was actively employed on or after January 1, 1999, who terminated employment before January 1, 2001, and who has attained his fiftieth (50th) birthday and completed at least ten (10) years of Accredited Service as of the Administrative Change Date shall be permitted to make a one-time election, within an administratively feasible period of time following the Administrative Change Date, to retroactively commence payment of his Retirement Income as of the later of (i) January 1, 2002 or (ii) the first date he is eligible to retire under the terms of the Plan as restated herein. Notwithstanding the preceding, any such IBEW Employee who has attained his fifty-fifth (55th) birthday prior to the Administrative Change Date or has not yet attained his fiftieth (50th) birthday shall not be eligible to make such election. (b) Provisional Payees. (1) Inactive IBEW Employees. The Provisional Payee of an IBEW Employee who dies after retirement or termination of employment with a nonforfeitable right to Retirement Income shall be treated as if he were the Employee (as described in Section 7.10(a)(1), (2) or (3), whichever is applicable) for purposes of electing retroactive commencement of survivor benefits, except that such treatment shall apply without regard to whether or not the Employee had completed at least ten (10) years of Accredited Service. (2) Active IBEW Employees. (i) The Provisional Payee of an IBEW Employee who dies on or after January 1, 2001 but before the Administrative Change Date while actively employed by an Employing Company and who, but for his death, would have attained his fiftieth (50th) birthday but not his fifty-fifty (55th) birthday as of the Administrative Change Date shall retroactively commence the pre-retirement death benefit payable pursuant to Section 7.4 as of the latest of (i) January 1, 2002, (ii) the first day of the month following the month in which the IBEW Employee did attain, or would have attained, his fiftieth (50th) birthday, and (iii) the first day of the month following the month which includes the IBEW Employee's date of death, provided such pre-retirement death benefits have not commenced as of the Administrative Change Date. (ii) The Provisional Payee of an IBEW Employee who dies on or after January 1, 2001 but before the Administrative Change Date while actively employed by an Employing Company and who, but for his death, would have attained his fifty-fifth birthday before the Administrative Change Date shall commence the pre-retirement death benefit payable pursuant to Section 7.4 as of the date the IBEW Employee would have attained his fifty-fifth (55th) birthday. (iii) The Provisional Payee of an IBEW Employee who dies on or after January 1, 2001 but before the Administrative Change Date while actively employed by an Employing Company and who, but for his death, would not have attained his fiftieth (50th) birthday before the Administrative Change Date shall become eligible to commence his Retirement Income on the Date the IBEW Employee would have attained his fiftieth (50th) birthday. (iv) The Provisional Payee of an IBEW Employee who dies on or after January 1, 1999 but before January 1, 2001 while actively employed by an Employing Company and who, but for his death, would have attained his fiftieth (50th) birthday but not his fifty-fifth (55th) birthday before the Administrative Change Date shall retroactively commence the pre-retirement death benefit payable pursuant to Section 7.4 as of the later of (i) January 1, 2002, and (ii) the first day of the month following the month in which the IBEW Employee did attain, or would have attained, his fiftieth (50th) birthday. 7.11 Commencement of new optional forms of payment. The options for payment described in Sections 7.1(c) and (d) and Sections 7.6(c) and (d) may be elected only by an Employee who has an Hour of Service on or after January 1, 1996 and who (a) is not covered by the terms of a collective bargaining agreement or (b) is covered by the terms of a collective bargaining agreement but where the bargaining unit representative and an Employing Company have mutually agreed to participation in the Plan. An IBEW Employee, other than an IBEW Employee represented by IBEW Local 1208, may elect any benefits provided for in Article VII which are offered subject to this Section 7.11 only after the Administrative Change Date and only if such IBEW Employee (or his Provisional Payee) retired or terminated employment on or after January 1, 2001 and has not commenced payment of his Retirement Income as of the Administrative Change Date. 7.12 "Make-up" payments due to retroactive amendment and restatement of the Plan. As a result of certain design changes to the Plan and changes resulting from the terms of the 2002 pension agreements with the various locals of the IBEW, which are retroactively effective as indicated, a "make-up" payment shall be made to each Employee or Provisional Payee described below in the amounts described below. Each make-up payment under this Section 7.12 shall be determined with an adjustment for interest, if required, from the date the missed payment or payments would have been made to the date of the actual make-up payment and will be paid as soon as administratively practical following the Administrative Change Date. (a) An IBEW Employee, other than an IBEW Employee represented by IBEW Local 1208, who was actively employed by an Employing Company on January 1, 2002 and who retires or otherwise terminates employment before the Administrative Change Date shall be entitled to the following make-up payment. (1) An IBEW Employee who commenced payment of his Retirement Income on or after January 1, 2002 but prior to the Administrative Change Date shall receive a make-up payment in a single lump sum which is equal to the difference, if any, between the Retirement Income that would have been paid to such Employee under the terms of the Plan as amended and restated herein and the Retirement Income actually paid to him, determined from the date the IBEW Employee's actual payments began to the date the make-up payment is made. (2) An IBEW Employee who terminates employment with an Employing Company on or after January 1, 2002 after attaining his fiftieth (50th) birthday but before attaining his fifty-fifth (55th) birthday after having completed at least ten (10) years of Accredited Service and who has not commenced payment of his Retirement Income prior to the Administrative Change Date may elect to retroactively commence his benefits, as provided in Section 7.10(a)(1), and receive a make-up payment in a single lump sum equal to the Retirement Income that would have been paid to such Employee under the terms of the Plan as amended and restated herein, determined from his retroactive commencement date under Section 7.10(a)(1) to the date the make-up payment is made. (b) An IBEW Employee, other than an IBEW Employee represented by IBEW Local 1208, who terminated employment with an Employing Company on or after January 1, 2001 but before January 1, 2002 shall be entitled to the following make-up payment. (1) An IBEW Employee who has commenced payment of his Retirement Income before the Administrative Change Date shall receive a make-up payment in a single lump sum equal to the difference, if any, between the Retirement Income that would have been paid to such IBEW Employee under the terms of the Plan as amended and restated herein and the Retirement Income actually paid, determined for the period from the later of (i) January 1, 2002, or (ii) his benefit commencement date, to the date the make-up payment is made. (2) An IBEW Employee who has not commenced payment of his Retirement Income and who elects a retroactive benefit commencement date pursuant to Section 7.10(a)(2) shall receive a make-up payment in a single lump sum equal to the Retirement Income that would have been paid under the terms of the Plan as restated herein, determined for the period from the later of (i) January 1, 2002, or (ii) the first day of the month following the month in which such IBEW Employee attained his fiftieth (50th) birthday and completed ten (10) years of accredited service, to the date the make-up payment is made. (c) An IBEW Employee described in Section 7.10(a)(3), other than an IBEW Employee represented by IBEW Local 1208, who terminated employment with an Employing Company before January 1, 2001 shall receive a make-up payment in a single lump sum equal to the Retirement Income that would have been paid to the IBEW Employee under the terms of the 1997 Plan from his benefit commencement date pursuant to Section 7.10(a)(3) to the date the make-up payment is made. (d) An IBEW Employee who dies prior to the Administrative Change Date (or the later date provided for in Section 7.10(a)(3)) shall not be entitled to receive the retroactive benefit described in paragraphs (a), (b) or (c) above, whichever is applicable. However, his Provisional Payee shall receive the benefit described in paragraph (e). (e) The Provisional Payee of an IBEW Employee, other than an IBEW Employee represented by IBEW Local 1208, shall be entitled to the following make-up payment. (1) Inactive IBEW Employees. The Provisional Payee of an IBEW Employee who dies after retirement or termination of employment with a nonforfeitable right to Retirement Income shall be treated as if he were the Employee (as described in Section 7.12(a)) for purposes of determining eligibility to receive a lump sum payment equal to the retroactive survivor benefits, as provided for in Section 7.10(b), that would have been paid under Section 7.6(b) or 7.7, as applicable, of the Plan as amended and restated, except that such treatment shall apply without regard to whether the IBEW Employee had completed ten (10) years of Accredited Service. (2) Active IBEW Employees. (i) The Provisional Payee of an IBEW Employee who died on or after January 1, 2001 while actively employed by an Employing Company and who, but for his death, would have attained his fiftieth (50th) birthday but not his fifty-fifth (55th) birthday as of the Administrative Change Date shall retroactively commence payment of survivor benefits as of the date provided in Section 7.10(b)(2)(i) and receive a make-up payment in a single lump sum equal to the survivor benefit that would have been paid to the Provisional Payee under the terms of the Plan as amended and restated herein, determined from the later of (i) January 1, 2002, or (ii) the first day of the month following the month which includes the Employee's date of death, to the date the make-up payment is made. (ii) The Provisional Payee of an IBEW Employee who died on or after January 1, 2001 while actively employed by an Employing Company and who, but for his death, would have attained his fifty-fifth (55th) birthday as of the Administrative Change Date shall receive a make-up payment in a single lump sum equal to the difference, if any, between the payments that would have been paid to the Provisional Payee under the Plan as amended and restated herein and the survivor benefit actually paid, determined for the period from the later of (i) the date survivor benefits actually commenced to the Provisional Payee, and (ii) January 1, 2002, to the date the make-up payment is made. (iii) A Provisional Payee of an IBEW Employee who died on or after January 1, 1999 but before January 1, 2001 while actively employed by an Employing Company and who, but for his death, would have attained his fiftieth (50th) birthday but not his fifty-fifth (55th) birthday as of the Administrative Change Date shall retroactively commence payment of benefits as provided in Section 7.10(b)(2)(iv) and receive a make-up payment in a single lump sum which is equal to the survivor benefit that would have been paid to the Provisional Payee under the terms of the 1997 Plan, determined from the applicable date under Section 7.10(b)(2)(iv) to the date the make-up payment is made. (iv) Any Provisional Payee described above shall receive the benefit described in Section 7.4, 7.6(b) or 7.7, as applicable. (f) A former non-covered Employee, an IBEW Employee represented by IBEW Local 1208, an Employee represented by Local 455 of the Office and Professional Employees International Union, or an Employee represented by Local 576 of the International Union of Security Police and Fire Professionals of America who was actively employed on January 1, 2002, who retires or otherwise terminates employment before the Administrative Change Date, and who has commenced payment of his Retirement Income prior to the Administrative Change Date shall receive a make-up payment in a single lump sum equal to the difference, if any, between such Employee's Retirement Income determined under the terms of the Plan as amended and restated herein and the Retirement Income actually paid. (g) The Provisional Payee of a non-covered Employee, an IBEW Employee represented by Local 1208 - Savannah, an Employee represented by Local 455 of the Office and Professional Employees International Union, or an Employee represented by Local 576 of the International Union of Security Police and Fire Professionals of America who died after January 1, 2002 but before the Administrative Change Date shall receive a make-up payment in a single lump sum equal to the difference, if any, between the payments that would have been paid to the Provisional Payee under the Plan as amended and restated herein and the survivor benefit actually paid, determined for the period from the date survivor benefits actually commenced to the date the make-up payment is made. 7.13 Definitions. For purposes of Sections 7.10, 7.11 and 7.12, the following terms shall have the meanings below. (a) "Administrative Change Date" means the date the Plan's administration is modified to implement the changes to the Plan made pursuant to the 2002 pension agreements between certain Employing Companies and various locals of the IBEW and other Plan design changes authorized by the Board of Directors at its May 9, 2002 meeting. (b) "IBEW" means the International Brotherhood of Electrical Workers. (c) "IBEW Employee" means an Employee represented, or formerly represented, by the IBEW. (d) "1997 Plan" means the Plan as in effect immediately prior to this amendment and restatement. ARTICLE VIII Termination of Service 8.1 Vested interest. If an Employee included in the Plan terminates for any reason other than death or retirement as provided by Article III, and if such Employee has had at least five (5) Vesting Years of Service with any Affiliated Employer, whether or not Accredited Service, he will be entitled to receive, commencing at Normal Retirement Date (except as provided in Section 8.2 and subject to the provisions of Section 7.6) Retirement Income equal to his Retirement Income at the date of the termination of such service, provided that he makes application to the Retirement Board (or its delegee) for the payment of such Retirement Income. If proper application for payment of Retirement Income shall not be received by the Retirement Board (or its delegee) by the April 1 of the calendar year following the calendar year in which the Employee attains age 70 1/2, payments shall begin to the former Employee in accordance with Section 5.7(b). If the whereabouts of the Employee cannot be determined by the Retirement Board (or its delegee), Retirement Income shall be paid to the Employee's Provisional Payee, if any, and if surviving and the whereabouts known to the Retirement Board (or its delegee), or applied in such other manner as the Retirement Board shall deem appropriate. The payment of Retirement Income pursuant to this provision shall completely discharge all liability of the Retirement Board (or its delegee), the Employer, and the Trustee or other payor to the extent of the payments so made. If such Employee terminates with less than five (5) Vesting Years of Service with any Affiliated Employer, he shall immediately forfeit any Retirement Income under the Plan based upon his service prior to such termination. 8.2 Early distribution of vested benefit. If an Employee terminates from service before his fiftieth (50th) birthday and is entitled to receive, in accordance with Section 8.1, Retirement Income commencing at his Normal Retirement Date and at the time his service terminated he had at least ten (10) years of Accredited Service, he may, in lieu of receiving payment of such Retirement Income commencing at Normal Retirement Date, elect to receive such Retirement Income commencing as of the first day of any month after his fiftieth (50th) birthday but preceding his Normal Retirement Date. Such Retirement Income shall be paid in an amount equal to his Retirement Income at the date of termination of his service actuarially reduced in accordance with reasonable actuarial assumptions adopted by the Retirement Board for the period by which the Employee's Early Retirement Date precedes his Normal Retirement Date but follows the first day of the month following the month in which occurs the Employee's fifty-fifth (55th) birthday. Such Employee's Retirement Income shall be further reduced by three-tenths of one percent (0.3%) for each month by which his Early Retirement Date precedes the first day of the month following the month in which occurs the Employee's fifty-fifth (55th) birthday. An election pursuant to this Section 8.2 to have Retirement Income commence prior to Normal Retirement Date shall be made on a prescribed form and shall be filed with the Retirement Board (or its delegee) at least thirty (30) days before Retirement Income is to commence. 8.3 Years of Service of reemployed Employees. If an Employee whose service terminates is again employed by an Affiliated Employer as an Employee, his Years of Service with any Affiliated Employer and his Accredited Service immediately prior to the termination of his service shall be treated as provided in this Section 8.3, subject to the provisions of Section 8.4. (a) If at the time of his reemployment he has not incurred a One-Year Break in Service, his Years of Service with an Affiliated Employer and his Accredited Service will be restored whether or not he is entitled to receive Retirement Income in accordance with Section 8.1. (b) If at the time of termination of his service he is entitled to receive Retirement Income in accordance with the provisions of Section 8.1, upon his reemployment his Years of Service with an Affiliated Employer immediately prior to the termination of his service shall be restored whether or not he has incurred a One-Year Break in Service. (c) If at the time of reemployment he is not entitled to receive Retirement Income in accordance with Section 8.1 and he (1) has incurred less than five (5) consecutive One-Year Breaks in Service or (2) has incurred five (5) or more consecutive One-Year Breaks in Service, but his Years of Service prior to such One-Year Breaks in Service exceeded the consecutive One-Year Breaks in Service, then his Years of Service with an Affiliated Employer and his Accredited Service prior to the first One-Year Break in Service shall be restored, disregarding any Years of Service with an Affiliated Employer which are not required to be taken into account by reason of any previous One-Year Breaks in Service. (d) Years of Service and Accredited Service restored to an Employee in accordance with this Section 8.3 shall be aggregated with Years of Service and Accredited Service to which the Employee may be entitled after his reemployment. If, however, the Retirement Income so determined for the Employee upon his subsequent retirement or termination of service shall be less than the aggregate of: (1) his Retirement Income, if any, determined in respect of the period ending with his prior termination of service, and (2) his Retirement Income determined in respect of the period after his reemployment, the aggregate of such Retirement Incomes shall be deemed to be his Retirement Income upon such subsequent retirement or termination of service. In any event, his Retirement Income, however computed, shall be reduced by the Actuarial Equivalent of any Retirement Income he received with respect to his prior period of employment. 8.4 Cash-out and buy-back. (a) Notwithstanding any other provision of this Plan, if the present value of Retirement Income of an Employee whose service terminates for any reason other than transfer to an Affiliated Employer or retirement under Article III is not more than $5,000 (or such greater amount as permitted by the regulations prescribed by the Secretary of the Treasury), the present value of the Employee's Retirement Income shall be paid in a lump sum, in cash, to such terminated Employee. The present value of the Retirement Income shall be calculated as of the date of distribution of the lump sum applying the Actuarial Equivalency factors for distributions subject to Code Section 417(e). For purposes of this Section 8.4, if the present value of the Employee's vested Retirement Income is zero, the Employee shall be deemed to have received a distribution of such vested Retirement Income as of the date of his termination of employment. An Employee represented by the International Brotherhood of Electrical Workers who terminates employment with an Employing Company between January 1, 2002 and the date the Plan's administration is modified to implement the changes arising from the April 2002 collective bargaining agreement between the Employing Company(ies) and the International Brotherhood of Electrical Workers and who received a lump-sum distribution pursuant to this Section 8.4, shall receive a make-up distribution in the form of a lump-sum payment equal to the difference, if any, between the present value of his Retirement Income under the terms of the Plan in effect prior to January 1, 2002 and under the terms of the Plan in this restatement of the Plan. (b) A terminated Employee who has been paid a lump sum of the present value of his Retirement Income in accordance with paragraph (a) above shall not be entitled to repay this amount to the Trust. If such terminated Employee is subsequently reemployed and attains his Early Retirement Date, Normal Retirement Date, or Deferred Retirement Date, or terminates service for any reason subject to the requirements of Section 8.1 or 8.2, the Employee shall receive Retirement Income based on all Accredited Service, including Accredited Service earned prior to reemployment, but reduced by the Actuarial Equivalent of the lump sum payment made in accordance with paragraph (a). 8.5 Retirement Income under Prior Plans. Any person entitled to receive Retirement Income as a former Employee under the Prior Plans shall only be entitled to receive Retirement Income in accordance with the provisions of such Prior Plan in effect at the time his service was terminated, except that any such person whose service terminated prior to January 1, 1976: (a) with at least twenty (20) years of Accredited Service may elect to receive Retirement Income commencing prior to his Normal Retirement Date in accordance with Section 8.2; (b) who shall have returned to the employment of an Employing Company, whether before or after January 1, 1976, and shall be an Employee who is entitled to receive Retirement Income in respect of his Accredited Service after January 1, 1976, his years of Accredited Service under the Prior Plans with respect to his service before January 1, 1976, shall, for the purpose of calculating his Minimum Retirement Income, be aggregated with his years of Accredited Service after his reemployment. His Retirement Income to the date of termination of his service payable in accordance with the Prior Plans as a former Employee shall be treated as Prior Plan Retirement Income and his Years of Service prior to the date of termination of his service shall be restored to his credit. It shall be a condition of the treatment provided for in this paragraph (b) that: (1) the Employee rescind any election of payment and designation of a Provisional Payee which he shall have made under the Prior Plan and which shall be in effect at the time of his return to the employment of an Employing Company and (2) if he is receiving Retirement Income, his Retirement Income shall cease during his period of employment and any Retirement Income payable upon his subsequent retirement shall be reduced by the Actuarial Equivalent of any Retirement Income he received prior to his reemployment. 8.6 Requirement for Direct Rollovers. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Article VIII, a Distributee may elect on a prescribed form to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. (a) Definitions (1) Eligible Rollover Distribution An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: (A) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's spouse, or for a specified period of 10 years or more; (B) any distribution to the extent such distribution is required under Code Section 401(a)(9); (C) the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and (D) any hardship distribution described in Code Section 401(k)(2)(E)(i)(IV). (2) Eligible Retirement Plan An Eligible Retirement Plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), a plan described in Code Section 403(b), a plan described in Code Section 457(b) which is maintained by a state, an agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan, or a qualified trust described in Code Section 401(a) that accepts the Distributee's Eligible Rollover Distribution. This definition of Eligible Retirement Plan also shall apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p). (3) Distributee A Distributee includes an Employee or former Employee. In addition, a Distributee includes the Employee's or former Employee's spouse who is an alternate payee under a qualified domestic relations order, as defined in Code Section 414(p). (4) Direct Rollover A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. ARTICLE IX Contributions 9.1 Contributions generally. All contributions necessary to provide the Retirement Incomes under the Plan will be made from time to time by or on behalf of the Employing Companies and no contributions will be required of the Employees. All contributions shall be made to the Trustee under the Trust Agreement provided for in Article XI, and if a group annuity contract shall be entered into with a life insurance company ("contract with an insurance company"), contributions may also be made to the insurance company. The minimum amount of contributions to be made by or on behalf of the Employing Companies for any Plan Year of the Plan shall be such amount as is required to meet the minimum funding standards of ERISA and any regulations in respect thereto. However, the Employing Companies are under no obligation to make any contributions under the Plan after the Plan is terminated, whether or not Retirement Income accrued or vested prior to the date of termination has been fully funded. All contributions are expressly conditioned upon the deductibility of such contributions by the Employing Companies pursuant to Section 404 of the Code. 9.2 Return of Employing Company contributions. All contributions made pursuant to the Plan shall be held by the Trustee in accordance with the terms of the Trust Agreement for the exclusive benefit of those Employees who are participants under the Plan, including former Employees and their beneficiaries, and shall be applied to provide benefits under the Plan and to pay expenses of administration of the Plan and Trust, to the extent that such expenses are not otherwise paid. At no time prior to the satisfaction of all liabilities with respect to such Employees and their beneficiaries shall any part of the Trust Fund be used for, or diverted to, purposes other than for the exclusive benefit of such Employees and their beneficiaries. However, notwithstanding the provisions of this Section 9.2: (a) If a contribution is conditioned upon the deductibility of the contributions under Section 404 of the Code, then, to the extent the deduction is disallowed, the Trustee shall, upon written request of an Employing Company, return the contribution (to the extent disallowed) to such Employing Company within one year after the date the deduction is disallowed. (b) If a contribution or any portion thereof is made by an Employing Company by a mistake of fact, the Trustee shall, upon written request of such Employing Company, return the contribution or such portion to the Employing Company within one year after the date of payment to the Trustee. The amount which may be returned to an Employing Company under this Section 9.2 is the excess of (a) the amount contributed over (b) the amount that would have been contributed had there not occurred a mistake of fact or a mistake in determining the deduction. Earnings attributable to the excess contribution shall not be returned to such Employing Company, but losses attributable thereto shall reduce the amount to be so returned. (c) If permitted under Federal common law, the Employing Company may recover any other contributions to the Plan or payments to any other entity to the extent such contributions or payments unjustly enrich or otherwise gratuitously benefit such entity. 9.3 Expenses. Prior to termination of the Plan, all investment expenses (including brokerage costs, transfer taxes, shipping expenses, and charges of correspondent banks of the Trustee) and any taxes which may be levied against the Trust shall be charged to the Trust. All other expenses prior to the termination of the Plan shall either be paid by the Employing Companies or charged to or reimbursed by the Trust, as determined in the discretion of The Southern Company Pension Fund Investment Review Committee. After the termination of the Plan, all expenses shall be levied against the Trust and shall be charged to the Trust. ARTICLE X Administration of Plan 10.1 Retirement Board. The general administration of the Plan shall be placed in a Retirement Board of six (6) members who shall be appointed from time to time by the Board of Directors to serve at the pleasure of the Board of Directors. 10.2 Organization and transaction of business of Retirement Board. Any person appointed a member of the Retirement Board shall signify his acceptance by filing written acceptance with the Board of Directors. Any member of the Retirement Board may resign by delivering his written resignation to the Board of Directors, and such resignation shall become effective at delivery or at any later date specified therein. The members of the Retirement Board shall elect a Chairman from their number, and a Secretary who may be but need not be one of the members of the Retirement Board, and shall designate an actuary to act in actuarial matters relating to the Plan. They may appoint from their number such committees with such powers as they shall determine, may authorize one or more of their number or any agent to make any payment in their behalf, or to execute or deliver any instrument except that a requisition for funds from the Trustee shall be signed by two (2) members of the Retirement Board unless the Retirement Board determines in writing to delegate such requisition authority. The Retirement Board shall hold meetings upon such notice, at such place or places, and at such time or times as they may from time to time determine. A majority of the members of the Retirement Board at the time in office shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Retirement Board at any meeting shall be by the vote of a majority of the Retirement Board at the time in office. Any determination or action of the Retirement Board may be made or taken without a meeting by a resolution or written memorandum concurred upon by a majority of the members then in office. No member of the Retirement Board who is also an Employee of an Employing Company shall receive any compensation from the Plan for his service as such. No bond or other security need be required of any member in any jurisdiction except as may be required by ERISA. 10.3 Administrative responsibilities of Retirement Board. The Retirement Board, in addition to the functions and duties provided for elsewhere in the Plan, shall have exclusive discretionary authority for the following: (a) construing and interpreting the Plan; (b) determining all questions affecting the eligibility of any Employee, retired Employee, former Employee, Provisional Payee, or alternate payee; (c) determining all questions affecting the amount of the benefit payable hereunder; (d) ascertaining the persons to whom benefits shall be payable under the provisions hereof; (e) to the extent provided in the Plan, authorizing and directing disbursements of benefits from the Plan; (f) making final and binding determinations in connection with any questions of fact which may arise regarding the operation of the Plan; (g) making such rules and regulations with reference to the operation of the Plan as it may deem necessary or advisable, provided that such rules and regulations shall not be inconsistent with the express terms of the Plan or ERISA; (h) prescribing such procedures and adopting such forms as it determines necessary under the terms of the Plan; and (i) reviewing such denials of claims for benefits as may arise. Any action by the Retirement Board under this Section 10.3 shall be binding and conclusive. To the extent that the Retirement Board delegates any of the foregoing duties or functions to another party, the Retirement Board retains the ultimate authority to act in accordance with this Section 10.3. 10.4 Retirement Board, the "Administrator". For the purposes of compliance with the provisions of ERISA, the Retirement Board shall be deemed the "administrator" of the Plan as that term is defined in ERISA, and the Retirement Board shall be, with respect to the Plan, a "named fiduciary" as that term is defined in ERISA. For the purpose of carrying out its duties, the Retirement Board may, in its discretion, allocate responsibilities under the Plan among its members and may, in its discretion, designate in writing, as set forth in the records of the Retirement Board, persons other than members of the Retirement Board to carry out such responsibilities of the Retirement Board under the Plan as it may see fit. 10.5 Fiduciary responsibilities. It is intended that, to the maximum extent permitted by ERISA, each person who is a "fiduciary" with respect to the Plan as that term is defined in ERISA shall be responsible for the proper exercise of his own powers, duties, responsibilities, and obligations under the Plan and the Trust or other funding medium, as shall each person designated by any fiduciary to carry out any fiduciary responsibility with respect to the Plan, the Trust or other funding medium, and no fiduciary or other person to whom fiduciary responsibilities are allocated shall be liable for any act or omission of any other fiduciary or of any other person delegated to carry out any fiduciary or other responsibility under the Plan or the Trust or other funding medium. Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan and any fiduciary with respect to the Plan may serve as a fiduciary with respect to the Plan in addition to being an officer, employee, agent, or other representative of a "party in interest" as that term is defined in ERISA. 10.6 Employment of actuaries and others. The Retirement Board may employ such "enrolled actuaries" and independent "qualified public accountants," as such terms are defined in ERISA, legal counsel (who may be of counsel to an Employing Company), other specialists, and other persons as the Retirement Board deems necessary or desirable in connection with the administration of the Plan. The Retirement Board and any person to whom it may delegate any duty or power in connection with the administration of the Plan, an Employing Company, and the officers and directors thereof shall be entitled to rely conclusively upon and shall be fully protected in any action omitted, taken, or suffered by them in good faith in reliance upon any enrolled actuary, independent qualified public accountant, counsel, or other specialist or other person selected by the Retirement Board or in reliance upon any tables, evaluations, certificates, opinions, or reports which shall be furnished by any of them or by the Trustee or any insurance company. Any action so taken, omitted, or suffered in accordance with the provisions of this Section 10.6 shall be conclusive upon each Employee, former Employee, and Provisional Payee covered under the Plan. 10.7 Accounts and tables. The Retirement Board shall maintain accounts showing the fiscal transactions of the Plan, and shall keep in convenient form such data as may be necessary for actuarial valuations with respect to the operation and administration of the Plan. The Retirement Board shall annually report to the Board of Directors and provide a reasonable summary of the financial condition of the Trust and the operation of the Plan for the past year, and any further information which the Board of Directors may require. In addition, the Retirement Board shall annually report to the Compensation and Management Succession Committee of The Southern Company Board of Directors and provide a reasonable summary about significant matters concerning the operation of the Plan and the adoption of any amendments not otherwise required to be recommended by such Committee in accordance with Section 13.1. The Retirement Board may, with the advice of an enrolled actuary, adopt from time to time mortality and other tables as it may deem necessary or appropriate for use in calculating benefits under the Plan. 10.8 Indemnity of members of Retirement Board. To the extent not compensated for by any applicable insurance, the Employing Companies shall indemnify and hold harmless each member of the Retirement Board and each Employee of the Employing Companies designated by the Retirement Board to carry out any fiduciary responsibility with respect to the Plan from any and all claims, loss, damages, expense (including counsel fees approved by the Board of Directors) and liability (including any amount paid in settlement with the approval of the Board of Directors) arising from any act or omission of such member or Employee designated by the Retirement Board in connection with the Plan or the Trust, except where the same is determined by the Board of Directors or is judicially determined to be due to a failure to act in good faith or is due to the gross negligence or willful misconduct of such member or Employee. No assets of the Plan may be used for any such indemnification. 10.9 Areas in which the Retirement Board does not have responsibility. The Retirement Board shall not have responsibility with respect to control or management of the assets of the Plan insofar as such control or management is assigned under the Trust Agreement to a Person, including but not limited to an Asset Manager, as those terms are defined under the Trust Agreement. The responsibility for providing a procedure for establishing and carrying out a funding policy and method for the Plan consistent with the objectives of the Plan and the requirements of Title I of ERISA shall be that of The Southern Company Pension Fund Investment Review Committee. 10.10 Claims procedures. Consistent with the requirements of ERISA and the regulations thereunder of the Secretary of Labor from time to time in effect, the Retirement Board (or its delegee) shall: (a) provide adequate notice in writing to any Employee, former Employee, retired Employee, or Provisional Payee (each being hereinafter in the paragraph referred to as "participant") whose claim for benefit under the Plan has been denied, setting forth specific reasons for such denial, written in a manner calculated to be understood by such participant; and (b) afford a reasonable opportunity to any participant whose claim for benefits has been denied for a full and fair review of the decision denying the claim. ARTICLE XI Management of Trust 11.1 Trust. All assets of the Plan shall be held as a special trust for use in accordance with the Plan. The funds of the Plan shall be held by a Trustee in trust or held by a life insurance company in accordance with the provisions of a contract with such insurance company entered into by the Trustee or the Employer. The Trust Agreement and contract with an insurance company may from time to time be amended in the manner therein provided. 11.2 Disbursement of the Trust Fund. Subject to the provisions of the Trust Agreement or contract with an insurance company, the Retirement Board shall determine the manner in which the funds of the Plan shall be disbursed pursuant to the Plan, including the form of voucher or warrant to be used in making disbursements and the due qualification of persons authorized to approve and sign the same. The responsibility for the retention and investment of funds held by the Trustee shall lie with the Trustee and not with the Retirement Board, and the responsibility for the retention and investment of funds held by an insurance company shall lie with the insurance company and not with the Retirement Board. However, if in accordance with a Trust Agreement forming a part of the Plan (including any pooled trust agreement in which a trust forming a part of the Plan participates) a contract with an insurance company shall be held by the Trustee as an investment of the Trust, directions may be given from time to time to the Trustee by the Board of Directors or such committee, person, or persons as may be specified in the Trust Agreement to transfer funds of the Trust to the life insurance company which issued such contract or to transfer funds from the life insurance company to the Trustee, as the case may be. 11.3 Rights in the Trust. Under no circumstances shall amounts of money or other things of value contributed by the Employing Companies to the Plan, or any part of the corpus or income of the Trust held by the Trustee under the Plan, be recoverable by the Employing Companies from the Trustee or from any Employee, retired Employee, former Employee, or Provisional Payee, or be used for, or diverted to, purposes other than for the exclusive benefit of the Employees, retired Employees, former Employees, and Provisional Payees covered hereunder; provided, however, that, if after satisfaction of all liabilities of the Trust with respect to Employees, retired Employees, former Employees, and Provisional Payees under the Plan, there is any balance remaining, the Trustee shall return such balance to the Employing Companies. Notwithstanding the above, upon the approval of the Internal Revenue Service or the enactment or promulgation of any laws or regulations by any governmental authority, the Employing Companies shall be authorized to rededicate all or a portion of the assets allocated to fund Retirement Income under the Plan to the separate account to fund medical benefits under Schedule II of the Plan. 11.4 Merger of the Plan. The Plan shall not be merged or consolidated with, or any of its assets or liabilities transferred to, any other plan, unless each Employee included in the Plan would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan then terminated). ARTICLE XII Termination of the Plan 12.1 Termination of the Plan. The Plan may be terminated at any time by action of the Board of Directors in accordance with the amendment procedures provided in Section 13.1. Upon such termination or partial termination all Retirement Income of Employees to the date of such termination, to the extent then funded, shall become nonforfeitable and the assets of the Plan which have not previously been allocated to provide Retirement Income shall then be paid out to Employees, retired Employees, former Employees, and Provisional Payees in accordance with the applicable requirements of ERISA and regulations thereunder governing termination of "employee pension benefit plans" as defined in ERISA. If after satisfaction of all liabilities, as provided above, there is any balance remaining in the Trust, the Trustee shall return such balance to the Employing Companies. To the extent permitted by law, subject to the foregoing limitations, such remaining assets shall be allocated among all persons in the following categories for whom such Retirement Income or other benefits have not previously been provided, namely, (a) Employees who have been retired under the Plan, (b) Employees who at the date of termination of the Plan are included in the Plan, (c) former Employees who at the date of the termination of their employment were entitled to payment of Retirement Income in accordance with Article VIII, and (d) former Employees who have transferred to an Affiliated Employer. Retirement Income already purchased under any contract with an insurance company will be payable in accordance with the provisions of that contract. 12.2 Limitation on benefits for certain highly paid employees. (a) The annual payments to an Employee described in paragraph (b) below shall not exceed an amount equal to the payments that would be made to or on behalf of such Employee under a single life annuity that is the Actuarial Equivalent of the sum of the Employee's Retirement Income and the Employee's other benefits under this Plan (other than a Social Security supplement) and any Social Security supplement that the restricted Employee is entitled to receive. The restrictions in this paragraph (a) do not apply, however, if: (1) after payment to an Employee described in paragraph (b) of all benefits payable to such Employee under this Plan, the value of this Plan's assets equals or exceeds 110% of the value of current liabilities, as defined in Code Section 412(c)(7), or (2) the value of the benefits payable to such Employee under this Plan for an Employee described in paragraph (b) below is less than 1% of the value of current liabilities before distribution. (b) The Employees whose benefits are restricted on distribution include all highly compensated employees and highly compensated former employees (as such terms are defined in Treasury Regulation Section 1.401(a)(4)-12); provided, however, that Employees whose benefits are subject to restriction under this Section 12.2 shall be limited to only those Employees who in the current or in any previous Plan Year were one of the 25 non-excludable Employees of the Affiliated Employers with the greatest compensation from such Affiliated Employers. ARTICLE XIII Amendment of the Plan 13.1 Amendment of the Plan. (a) The Plan may be amended or modified at any time by the Board of Directors pursuant to its written resolutions to among other things (but without limiting the scope of the Board of Directors' authority) implement collectively bargained agreements, provide non-collectively bargained Employees those benefits granted collectively bargained Employees or such other benefits not granted collectively bargained Employees, change plan distribution options and the timing of distributions, provide for administrative efficiency, make any changes necessary or desirable to make the contributions to the Trust eligible for tax deductions, make the income of the Trust exempt from taxation, or bring the Plan into conformity or compliance with ERISA, the Code, or with other governmental regulations. Notwithstanding the foregoing, amendments or modifications which substantially increase on an on-going basis the contributions required under Article IX for any Employing Company or which significantly increase or decrease the future opportunity for Retirement Income for Employees of any Employing Company will be made by the Board of Directors, only after recommendation to and approval by the Compensation and Management Succession Committee of The Southern Company Board of Directors. (b) Notwithstanding paragraph (a) above, no amendment shall be made which has the effect of decreasing the Retirement Income of any Employee, retired Employee, former Employee, or Provisional Payee as provided under the limitations of Section 411(d)(6) of the Code. ARTICLE XIV Special Provisions 14.1 Exclusive benefit. The Employing Companies intend that the Plan (including the Trust forming a part thereof) be a pension plan maintained for the exclusive benefit of its Employees and their beneficiaries subject to Section 11.3, as provided for in Section 401 of the Code, and as may be provided for in any similar provisions of subsequent revenue laws, and that the Trust shall qualify as an employees' trust which shall be exempt under Section 501(a) of the Code, and any similar provisions of subsequent revenue laws, as a trust forming part of such a plan. 14.2 Assignment or alienation. No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment (either at law or in equity), pledge, encumbrance, charge, garnishment, levy, execution, or other legal or equitable process and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge, garnish, levy, execute, or enforce other legal or equitable process against the same shall be void, nor shall any such benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled to such benefit. If any Employee, former Employee, or retired Employee, or any Provisional Payee under the Plan is adjudicated bankrupt or attempts to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any benefit under the Plan or if any action shall be taken which is in violation of the provisions of the immediately preceding paragraph, then such benefit shall cease and terminate and in that event the Retirement Board shall hold or apply the same or any part thereof to or for the benefit of such Employee, former Employee, retired Employee, or Provisional Payee in such manner as the Retirement Board may think proper. Notwithstanding the above, the Retirement Board and Trustee shall comply with any "domestic relations order" (as defined in Section 414(p)(1)(B) of the Code) which is a "qualified domestic relations order" satisfying the requirements of Section 414(p) of the Code. The Retirement Board shall establish procedures for (a) notifying Employees and alternate payees who have or may have an interest in benefits which are the subject of domestic relations orders, (b) determining whether such domestic relations orders are qualified domestic relations orders under Section 414(p) of the Code, and (c) distributing benefits which are subject to qualified domestic relations orders. In addition, the Retirement Board and Trustee shall permit alienation, assignment or other attachment where otherwise permitted under Code Section 401(a)(13). 14.3 Voluntary undertaking. This Plan is strictly a voluntary undertaking on the part of the Employing Companies and shall not be deemed to constitute a contract between the Employing Companies or any other company and any Employee or to be a consideration for, or an inducement or condition of, the employment of any Employee. Nothing contained in this Plan shall be deemed to give any Employee the right to be retained in the service of an Employing Company or to interfere with the right of the Employing Companies to discharge any Employee at any time. Inclusion under the Plan will not give any Employee or Provisional Payee any right or claim to a Retirement Income except to the extent such right is specifically fixed under the terms of the Plan and there are funds available therefor in the hands of the Trustee or of any insurance company which may hold funds of the Plan. 14.4 Top-Heavy Plan requirements. For any Plan Year the Plan shall be determined to be a Top-Heavy Plan, the Plan shall provide the following: (a) the minimum benefit requirement of Section 14.6; and (b) the vesting requirement of Section 14.7. 14.5 Determination of Top-Heavy status. (a) The Plan shall be determined to be a "Top-Heavy Plan," if, as of the Determination Date, (1) the Present Value of Retirement Income of Key Employees or (2) the sum of the Aggregate Accounts of Key Employees under this Plan and any plan of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of Retirement Income or the Aggregate Accounts of all Employees entitled to participate in this Plan and any Plan of an Aggregation Group. (b) The Retirement Income of a Non-Key Employee shall be determined under the accrual method under the Plan. (c) The Plan shall be determined to be a "Super Top-Heavy Plan," if, as of the Determination Date, (1) the Present Value of Retirement Income of Key Employees or (2) the sum of the Aggregate Accounts of Key Employees under this Plan and any plan in an Aggregation Group, exceeds ninety percent (90%) of the Present Value of Retirement Income or the Aggregate Accounts of all Employees entitled to participate in this Plan and any plan of an Aggregation Group. For purposes of Sections 14.5(a) and 14.5(b), if any Employee is a Non-Key Employee for any Plan Year, but such Employee was a Key Employee for any prior Plan Year, such Employee's Present Value of Retirement Income and/ or Aggregate Account balance shall not be taken into account for purposes of determining whether this Plan is a Top-Heavy or Super Top-Heavy Plan (or whether any Aggregation Group which includes this Plan is a Top-Heavy Group). In addition, if an Employee or former Employee has not performed any services for an Employing Company or any Affiliated Employer maintaining the Plan or Prior Plans at any time during the one (1) year period ending on the Determination Date, the Aggregate Account and/or Present Value of Retirement Income for such Employee or former Employee shall not be taken into account for purposes of determining whether this Plan is a Top-Heavy or Super Top-Heavy Plan. (d) An Employee's "Aggregate Account" as of the Determination Date shall be determined under applicable provisions of the defined contribution plan used in determining Top-Heavy status. (e) An "Aggregation Group" shall mean either a Required Aggregation Group or a Permissive Aggregation Group as hereinafter determined. (1) Required Aggregation Group: In determining a Required Aggregation Group hereunder, each plan of the Affiliated Employers in which a Key Employee is a participant, and each other plan of the Affiliated Employers which enables any plan in which a Key Employee participates to meet the requirements of Code Sections 401(a)(4) or 410, will be required to be aggregated. Such group shall be known as a Required Aggregation Group. In the case of a Required Aggregation Group, each plan in the group will be considered a Top-Heavy Plan if the Required Aggregation Group is a Top-Heavy Group. No plan in the Required Aggregation Group will be considered a Top-Heavy Plan if the Aggregation Group is not a Top-Heavy Group. (2) Permissive Aggregation Group: The Affiliated Employers may also include any other plan not required to be included in the Required Aggregation Group, provided the resulting group, taken as a whole, would continue to satisfy the provisions of Code Sections 401(a)(4) or 410. Such group shall be known as a Permissive Aggregation Group. In the case of a Permissive Aggregation Group, only a plan that is part of the Required Aggregation Group will be considered a Top-Heavy Plan if the Permissive Aggregation Group is a Top-Heavy Group. A plan that is not part of the Required Aggregation Group but that has nonetheless been aggregated as part of the Permissive Aggregation Group will not be considered a Top-Heavy Plan even if the Permissive Group is a Top-Heavy Group. (3) Only those plans of the Affiliated Employers in which the Determination Dates fall within the same calendar year shall be aggregated in order to determine whether such plans are Top-Heavy Plans. (f) The "Determination Date" shall mean, with respect to any Plan Year, the last day of the preceding Plan Year, or in the case of the first Plan Year, the last day of such Plan Year. (g) With respect to any Plan Year beginning on or after January 1, 2002 (including for determining whether the Plan is a Top Heavy Plan for the first Plan Year beginning on or after January 1, 2002), a "Key Employee" shall mean any Employee or former Employee (or his Provisional Payee if he is deceased) considered to be a "key employee" with respect to an Employing Company at the time in question within the meaning of Section 416(i)(1) of the Code; and to the extent not inconsistent therewith, any Employee or former Employee (or his Provisional Payee if he is deceased) who at any time during the Plan Year, is or was: (1) One of the fifty (50) (or if less, the greater of three (3) or ten percent (10%) of total Employees, as determined for purposes of determining highly compensated employees, as defined in Code Section 414(p)) officers of the Employer having the largest annual compensation during any such Plan Year and having compensation in excess of $130,000 (as adjusted under Section 416(I)(1)(A) of the Code for Plan Years beginning after December 31, 2002 in $5,000 increments by the applicable adjustment factor on the base period of the calendar quarter beginning July 1, 2001); (2) A five percent (5%) owner, as defined in Code Section 416(i)(1)(B)(i), of any Employing Company; or (3) A one percent (1%) owner, as defined in Code Section 416(i)(1)(B)(ii), of an Employing Company having annual compensation of more than $150,000. (h) A "Non-Key Employee" shall mean any Employee who is not a Key Employee as defined in Section 14.5(g). (i) An Employee's "Present Value of Retirement Income" shall mean, as of the Determination Date, the sum of the following: (1) the Present Value of his Retirement Income as of the most recent valuation occurring within a twelve (12) month period ending on the Determination Date. (2) any Plan distributions made within the one-year period ending on the Determination Date. However, in the case of distributions made after the valuation date and prior to the Determination Date, such distributions are not included as distributions for Top-Heavy purposes to the extent that such distributions are already included in the Employee's Present Value of Retirement Income as of the valuation date. Notwithstanding anything herein to the contrary, all distributions, including distributions made prior to January 1, 1984, and distributions under a terminated plan which if it had not been terminated would have been required to be included in an Aggregation Group, will be counted. In the case of a distribution made for a reason other than separation from service, death or disability, the provision shall be applied by substituting "five-year period" for "one-year period" where it appears above. (3) any Employee contributions, whether voluntary or mandatory. However, amounts attributable to qualified deductible employee contributions shall not be considered to be a part of the Employee's Present Value of Retirement Income. (4) with respect to unrelated rollovers and plan-to-plan transfers (ones which are both initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another employer), if this Plan provides for rollovers or plan-to-plan transfers, it shall always consider such rollover or plan-to-plan transfer as a distribution for the purposes of this Section. If this Plan is the plan accepting such rollovers or plan-to-plan transfers, it shall not consider such rollovers or plan-to-plan transfers accepted after December 31, 1983 as part of the Employee's Present Value of Retirement Income. However, rollovers or plan-to-plan transfers accepted prior to January 1, 1984 shall be considered as part of the Employee's Present Value of Retirement Income. (5) with respect to related rollovers and plan-to-plan transfers (ones either not initiated by the Employee or made to a plan maintained by the same employer), if this Plan provides for rollovers or plan-to-plan transfers, it shall not be counted as a distribution for purposes of this Section. If this Plan is the plan accepting such rollover or plan-to-plan transfer, it shall consider such rollover or plan-to-plan transfer as part of the Employee's Present Value of Retirement Income, irrespective of the date on which such rollover or plan-to-plan transfer is accepted. (j) A "Top-Heavy Group" shall mean an Aggregation Group in which, as of the Determination Date, the sum of: (1) the Present Value of Retirement Income of Key Employees under all defined benefit plans included in that group, and (2) the Aggregate Accounts of Key Employees under all defined contribution plans included in the group, exceeds sixty percent (60%) of a similar sum determined for all Employees. 14.6 Minimum Retirement Income for Top-Heavy Plan Years. Notwithstanding anything herein to the contrary, for any Top-Heavy Plan Year, the minimum Retirement Income derived from Affiliated Employer contributions for each Non-Key Employee, including benefits accrued in years in which the Plan is not a Top-Heavy Plan, shall equal a percentage of such Non-Key Employee's highest average compensation not less than the lesser of: (a) two percent (2%) multiplied by the Employee's number of Years of Service with the Affiliated Employers, or (b) twenty percent (20%). For purposes of the minimum benefit, an Employee's Years of Service shall exclude (a) Plan Years in which the Plan is not a Top-Heavy Plan, and (b) Years of Service completed prior to January 1, 1984. The minimum benefit required by this Section 14.6 shall be calculated using the Employee's total compensation and expressed in the form of a single life annuity (with no ancillary benefits) beginning at such Employee's Normal Retirement Date. An Employee's average compensation shall be based on the five (5) consecutive years for which the Employee had the highest compensation. Notwithstanding the foregoing, in any Plan Year in which a Non-Key Employee is an Employee in both this Plan and a defined contribution plan, and both such plans are Top-Heavy Plans, the Affiliated Employers shall not be required to provide a Non-Key Employee with both the full separate minimum defined benefit and the full separate minimum defined contribution plan allocation. Therefore, if a Non-Key Employee is participating in a defined contribution plan maintained by the Affiliated Employers and the minimum allocation under Code Section 416(c)(2) is allocated to the Non-Key Employee under such defined contribution plan, the minimum Retirement Income provided for above shall not be applicable, and no minimum benefit shall accrue on behalf of the Non-Key Employee. Alternatively, the Affiliated Employers may satisfy the minimum benefit requirement of Code Section 416(c)(1) for the Non-Key Employee by providing any combination of benefits and/or contributions that satisfy the safe harbor rules of Treasury Regulation Section 1.416-1(m-12). 14.7 Vesting requirements for Top-Heavy Plan Years. Notwithstanding the provisions of Section 8.1, for any Top-Heavy Plan Year, the vested portion of an Employee's Retirement Income shall be determined on the basis of the Employee's Vesting Years of Service according to the following schedule: Years of Service Vested Percentage less than 1 0 1 20 2 40 3 60 4 80 5 or more 100 The minimum Retirement Income for any Top-Heavy Plan Year shall not be forfeited during any period for which the payment of the Employee's Retirement Income is required to be suspended under Section 5.8 of the Plan. If in any subsequent Plan Year, the Plan ceases to be a Top-Heavy Plan, the Retirement Board may, in its sole discretion, elect to (a) continue to apply this vesting schedule in determining the vested percentage of an Employee's Retirement Income or (b) revert to the vesting schedule in effect before the Plan became a Top-Heavy Plan. Any such reversion shall be treated as a Plan amendment pursuant to the terms of the Plan. No decrease in an Employee's nonforfeitable percentage may occur in the event the Plan's status as a Top-Heavy Plan changes for any Plan Year. 14.8 Adjustments to maximum benefits for Top-Heavy Plans. (a) For Limitation Years beginning on and after January 1, 2000, the limitations imposed under Code Section 416(h) applicable to Code Section 415(e) shall cease to apply to all former and current Employers who have an accrued benefit under the Plan immediately before such date. ARTICLE XV SEPCO Provisions 15.1 Definition of Terms Used in this Article XV and the SEPCO Schedule. (a) "SEPCO" shall mean Savannah Electric and Power Company. (b) "SEPCO Plan" shall mean the Employees' Retirement Plan of Savannah Electric and Power Company, as amended and restated January 1, 1997. (c) "SEPCO Schedule" shall mean Schedule I of the Plan, containing the provisions of the SEPCO Plan as merged into the Plan effective January 1, 1998 which shall apply to SEPCO Employees and Covered SEPCO Employees. (d) "SEPCO Employee" shall mean an Employee as defined in the SEPCO Plan having an Hour of Service under the SEPCO Plan on or after January 1, 1997. This shall include persons represented by a collective bargaining agent where such agent and SEPCO have mutually agreed to participate in the Plan. This shall not include employees who are hired or rehired at SEPCO after December 31, 1997 or rescind a waiver of participation under Section 3.8 of the SEPCO Plan or SEPCO Schedule on or after January 1, 1998 that was in effect on December 31, 1997. Notwithstanding anything to the contrary above, Covered SEPCO Employees shall be considered SEPCO Employees unless otherwise provided in this Article XV or otherwise required by law. (e) "Covered SEPCO Employee" shall mean an Employee or former Employee who is or was represented by the International Brotherhood of Electrical Workers ("IBEW") Local 1208 or the Office and Professional Employees International Union ("OPEIU") Local 455, who has an Hour of Service under the SEPCO Plan or SEPCO Schedule on or after January 1, 1997. An Employee who is represented by IBEW Local 1208 and is hired or re-hired on or after January 1, 1999 or who is represented by OPEIU Local 455 and is hired or re-hired on or after January 1, 2000 shall not be considered a Covered SEPCO Employee. Rather, such Employee shall be treated only as an Employee under the Plan. 15.2 SEPCO Employees' Benefits. SEPCO Employees shall be eligible for a benefit under the Plan as described in this Section 15.2, notwithstanding any other provision of the Plan or SEPCO Schedule to the contrary. (a) A SEPCO Employee shall be eligible to participate in the Plan and receive Retirement Income thereunder as determined under the Plan's terms and this Article XV. Notwithstanding the preceding sentence, if such SEPCO Employee's Allowance determined as of the earlier of his retirement or termination of employment with SEPCO or December 31, 2001 would be greater, such SEPCO Employee shall be entitled when eligible to commence payments of such greater Allowance upon his retirement or termination of employment with SEPCO or another Employing Company. (b) Notwithstanding paragraph (a) above, only with respect to SEPCO Employees who have attained his fiftieth (50th) birthday and have ten (10) or more years of Credited Service on or before January 1, 1997 or who have attained age 55 on or before January 1, 1997, such SEPCO Employees shall be entitled to receive the greater of their Allowance or Retirement Income upon retirement. (c) Covered SEPCO Employees (or their Provisional Payees) shall receive the monthly benefit described in paragraph (a) for months beginning on the later of (i) the first of the month following their retirement, or (ii) January 1, 1998. (d) A Covered SEPCO Employee who retires or terminates employment prior to (i) July 1, 1999 for Covered SEPCO Employees represented by IBEW and (ii) February 9, 2000 for Covered SEPCO Employees represented by OPEIU, and who commences payment of an Allowance under the SEPCO Schedule before such date shall receive a lump sum payment which is the actuarial equivalent of the difference, if any, between the benefits payable pursuant to paragraph (a) above and the Allowance they have previously received determined from their date of retirement to the earlier of their date of death or the date a lump sum payment is made pursuant to this paragraph (d). Such lump sum payments shall be made as soon as administratively feasible following adoption of these provisions. The monthly payments pursuant to paragraph (a) shall be made thereafter. (e) The Provisional Payee of a Covered SEPCO Employee who died prior to (i) July 1, 1999 for Covered SEPCO Employees represented by IBEW, and (ii) February 9, 2000 for Covered SEPCO Employees represented by OPEIU, after having commenced payment of an Allowance under the SEPCO Schedule shall receive a lump sum payment that is the actuarial equivalent of the difference, if any, between the survivor benefits under the Plan and the survivor benefits under the SEPCO Schedule that the Provisional Payee has previously received determined from the date of the Covered SEPCO Employee's death through the earlier of (i) the Provisional Payee's date of death, or (ii) the date payment is made to the Provisional Payee under this paragraph (e). Thereafter, monthly payments shall be made in accordance with Section 15.3(h) of this Article XV. (f) For purposes of subsections (d) and (e) of this Section 15.2, actuarial equivalent shall mean the value of such lump sum payment determined as of the date of distribution of the lump sum applying the Applicable Interest Rate and using the Applicable Mortality Table, each as defined in Section 1.2, in effect on the date as of which the present value is being determined. 15.3 Special Transition Rules. Notwithstanding any other provisions in the Plan to the contrary, SEPCO Employees who participate in the Plan shall be subject to the following transition rules. (a) In determining the greater benefit as required under Section 15.2, the form of payment and any early retirement reductions with respect to the payment of Retirement Income as set forth in Articles V and VII of the Plan and of an Allowance as set forth in Articles 5 and 7 of the SEPCO Schedule shall be considered. For purposes of making the preceding determination, (1) the applicable Allowance shall first be converted to a monthly payment, and (2) the Retirement Annuities described in Article 2 of the SEPCO Schedule shall be taken into account consistent with Section 5.01 of the SEPCO Schedule. (b) With respect to eligibility to participate in the Plan, all SEPCO Employees employed by SEPCO on December 31, 1997 who are not already eligible to participate in the Plan shall be immediately eligible to participate in the Plan. (c) SEPCO Employees who were eligible to participate in the SEPCO Plan on December 31, 1997 shall have their Vesting Years of Service determined as if their anniversary date of hire is January 1. All SEPCO Employees who participate in the Plan shall be credited with Vesting Years of Service based upon the terms of the Plan for periods of service on and after January 1, 1998, and based upon the Continuous Service such SEPCO Employees accrued under the SEPCO Plan prior to January 1, 1998. (d) (1) For SEPCO Employees (other than Covered SEPCO Employees): (A) For periods of service on and after January 1, 1998, Accredited Service for SEPCO Employees shall be determined in accordance with the Plan. (B) For periods of service on and after January 1, 1998, with respect to any Allowance a SEPCO Employee may be entitled to under the SEPCO Schedule, such Allowance shall be determined using Accredited Service in place of Credited Service. (C) For periods of service prior to January 1, 1998, the Credited Service of a SEPCO Employee shall be used to determine such SEPCO Employee's Allowance and Retirement Income accrued prior to January 1, 1998. (2) For Covered SEPCO Employees: (A) For periods of service on and after January 1, 2001, Accredited Service for Covered SEPCO Employees shall be determined in accordance with the Plan. (B) For periods of service on and after January 1, 2001, with respect to any Allowance a Covered SEPCO Employee may be entitled to under the SEPCO Schedule, such Allowance shall be determined using Accredited Service in place of Credited Service. (C) For periods of service prior to January 1, 2001, the Credited Service of a Covered SEPCO Employee shall be used to determine such Covered SEPCO Employee's Allowance and Retirement Income accrued prior to January 1, 2001. Such Credited Service shall count as Accredited Service to determine eligibility for retirement at age fifty pursuant to paragraph (g) below. (e) For purposes of calculating Retirement Income for a SEPCO Employee, Compensation determined under the SEPCO Plan, excluding unused accrued vacation, shall be used in place of Earnings for periods of service prior to January 1, 1998. (f) The Normal Retirement Date of a SEPCO Employee shall always be determined in accordance with the SEPCO Plan prior to January 1, 1998 and the SEPCO Schedule on and after January 1, 1998. (g) (1) A SEPCO Employee may retire if he has either attained his fifty-fifth (55th) birthday or attained his fiftieth (50th) birthday and has at least ten (10) years of Accredited Service as determined under this Article XV. A SEPCO Employee who retires because he has attained his fiftieth (50th) birthday and has ten (10) years of Accredited Service may not commence receipt of his Retirement Income or Allowance until on or after January 1, 1998. (2) A SEPCO Employee who retires under paragraph (1) above having at least ten (10) years of Accredited Service shall be entitled to the greater of his (A) Retirement Income determined under Section 5.3 (excluding the second paragraph thereof) and this Article XV or (B) Allowance determined under this Article XV and in addition applying a reduction of one-third of one percent (.333%) for each calendar month by which the commencement date precedes the first day of the month following any such Employee's attainment of his fifty-fifth (55th) birthday. However, effective for SEPCO Employees who retire on or after June 1, 2000, the term three-tenths of one percent (0.3%) shall replace one-third of one percent (.333%) in the preceding sentence. (3) A SEPCO Employee who retires or terminates under paragraph (1) above after attaining age 55 having less than ten (10) years of Accredited Service shall be entitled to the greater of his (A) Retirement Income determined under Section 8.2 (without regard to the ten (10) years of Accredited Service requirement) and this Article XV or (B) Allowance determined under this Article XV. (h) On and after January 1, 1998, the Provisional Payees of SEPCO Employees who are not Covered SEPCO Employees shall only be entitled to benefits as provided in Article VII of the Plan. Provisional Payees of Covered SEPCO Employees who retire, terminate employment or die on or after January 1, 2001 shall only be entitled to benefits as provided in Article VII of the Plan. (i) With respect to the accrual of Retirement Income or an Allowance during a period of total disability, SEPCO Employees incurring a disability on and after January 1, 1998 shall only be subject to the provisions of Section 4.4 of the Plan. Notwithstanding the above, a Covered SEPCO Employee who incurred a disability on or after January 1, 1998 but on or before December 31, 2000 shall accrue Retirement Income or an Allowance equal to the greater of : (i) his Retirement Income determined under Section 4.4 of the Plan, or (ii) his Allowance determined under the SEPCO Schedule. Covered SEPCO Employees who become disabled on or after January 1, 2001 shall only be entitled to benefits as provided in Section 4.4 of the Plan. (j) (1) The options for payment described in Sections 7.1(c) and (d) and Sections 7.6(c) and (d) may be elected by SEPCO Employees who are not Covered SEPCO Employees and who retire or terminate on or after January 1, 1998 and by Covered SEPCO Employees who retire or terminate on or after (i) July 1, 1999 for Covered SEPCO Employees represented by IBEW, and (ii) February 9, 2000 for Covered SEPCO Employees represented by OPEIU. (2) SEPCO Employees who terminate or retire in 1997 and Covered SEPCO Employees who terminate or retire prior to January 1, 2001 and commence receipt of an Allowance shall not be eligible to change the form of benefit elected under the SEPCO Plan even if such SEPCO Employees are entitled to receive Retirement Income under this Article XV. (3) Notwithstanding Section 7.07(a)(Option ii) of the SEPCO Schedule, SEPCO Employees who are not Covered SEPCO Employees shall not be eligible to elect a 75% joint and survivor annuity. Covered SEPCO Employees, however, shall be allowed to elect a 75% joint and survivor annuity pursuant to Section 7.07(a)(Option ii) before January 1, 2001. (k) SEPCO Employees may elect in accordance with the SEPCO Schedule to have their benefit, whether paid as Retirement Income or an Allowance, adjusted to take into account their old-age insurance benefit under Title II of the Social Security Act. In the event that a SEPCO Employee's Retirement Income is greater than his Allowance under Section 15.2, the old age insurance benefit used to compute such Retirement Income shall be used to determine the amount payable under Section 5.04 of the SEPCO Schedule. (l) Notwithstanding anything in this Article XV to the contrary, the Accrued Benefit of any SEPCO Employee shall not be less than the Accrued Benefit such SEPCO Employee derived under the SEPCO Plan as of the earlier of retirement, termination or December 31, 1997. 15.4 Transfers of SEPCO Employees. (a) With respect to a transfer of employment from an Employing Company other than SEPCO to SEPCO, (1) occurring prior to January 1, 1998, the person will be treated as a SEPCO Employee under this Article XV or (2) occurring on or after January 1, 1998, the person will be treated as an Employee under the terms of the Plan. Notwithstanding the foregoing, a person transferring to SEPCO as a Covered SEPCO Employee on or after January 1, 1998 will be treated as a SEPCO Employee. Only persons transferring to SEPCO as a Covered SEPCO Employee on or after January 1, 2001 will be treated as an Employee. (b) With respect to a transfer of employment from SEPCO to an Employing Company, (1) occurring prior to January 1, 1997, the person will be treated like an Employee under Sections 4.6(a), (c) and (d) of the Plan provided that any Retirement Income or Allowance payable to the Employee shall be determined in accordance with Section 15.3(a), (g), (j) and (k) or (2) occurring on or after January 1, 1997, the person will be treated as a SEPCO Employee or Covered SEPCO Employee, whichever is applicable, under this Article XV. 15.5 Application of Plan to SEPCO. To the extent not inconsistent with the provisions of this Article XV, all the provisions of the Plan are applicable to SEPCO Employees and Covered SEPCO Employees. IN WITNESS WHEREOF, the Board of Directors of Southern Company Services, Inc. through its authorized officer has adopted this amendment and restatement of The Southern Company Pension Plan this day of , 2002, to be effective January 1, 2002. SOUTHERN COMPANY SERVICES, INC. By: ----------------- Its: ----------------- ATTEST: By:...... ......... ----------------------------------- APPENDIX A THE SOUTHERN COMPANY PENSION PLAN EMPLOYING COMPANIES AS OF JANUARY 1, 2002 Alabama Power Company Georgia Power Company Gulf Power Company Mississippi Power Company Savannah Electric and Power Company Southern Communications Services, Inc. Southern Company Energy Solutions LLC Southern Company Services, Inc. Southern Nuclear Operating Company, Inc. APPENDIX B Nonproductive Pay Earnings Types Earnings Code Earnings Description 003 Salesperson - Hourly 092 Holiday Taken 093 Meetings 095 Meetings - Safety 096 Disability 100% 100 Disability Extended Approval 106 Leave - Death 108 Occupational Injury 111 Jury Duty 112 Training 113 Safety Training 115 Vacation 116 Vacation Special Circumstances 117 Vacation FMLA Employee 118 Vacation FMLA Family Care 119 Time Off With Pay 125 Holiday Banked - Taken 127 Vacation In Lieu Of Disability 442 DISABILITY FMLA EMPLOYEE EX-10.A.91 8 ex10a91.txt Exhibit 10(a)91 SOUTHERN COMPANY CHANGE IN CONTROL SEVERANCE PLAN Troutman Sanders LLP Bank of America Plaza, Suite 5200 600 Peachtree Street, N.E. Atlanta, Georgia 30308 Effective May 9, 2002 SOUTHERN COMPANY CHANGE IN CONTROL SEVERANCE PLAN ARTICLE 1 - PURPOSE AND ADOPTION OF PLAN 1.1 Adoption of Plan. Southern Company Services, Inc. hereby adopts this Southern Company Change in Control Severance Plan, effective as of the date of execution hereof. This Plan was originally effective December 7, 1998; it was amended by a First Amendment also effective December 7, 1998, and subsequently amended and restated effective July 10, 2000. This amended and restated Plan is effective May 9, 2002. The Plan shall be an unfunded severance pay plan that is a welfare plan as such term is defined by the Employee Retirement Income Security Act of 1974, the benefits of which shall be paid solely from the general assets of the respective Employing Companies. 1.2 Purpose. The Plan is primarily designed to provide benefits to certain employees of the Employing Companies, whose employment is terminated subsequent to a change in control of Southern or their respective Employing Company. ARTICLE 2 - DEFINITIONS 2.1 "Administrative Committee" shall mean the Board of Directors, plus, in the event of any act necessary to be taken in connection with the Plan relative to a particular Participant, the Chief Executive Officer of the Participant's Employing Company, if such Chief Executive Officer is not already a member of the Board of Directors. 2.2 "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. 2.3 "Board of Directors" shall mean the board of directors of the Company. 2.4 "Business Combination" shall mean a reorganization, merger or consolidation of Southern or sale or other disposition of all or substantially all of the assets of Southern. 2.5 "Change in Control" shall mean, (a) with respect to Southern, the occurrence of any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this Section 2.5(a)(i), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (A) any acquisition directly from Southern; (B) any acquisition by Southern; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary; (D) any acquisition by a qualified pension plan or publicly held mutual fund; (E) any acquisition by an employee of Southern or its subsidiary or affiliate or Group composed exclusively of such employees; or (F) any Business Combination which would not otherwise constitute a Change in Control because of the application of clauses (A), (B) and (C) of Section 2.5(a)(iii); (ii) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; or (iii) Consummation of a Business Combination, unless, following such Business Combination, all of the following three conditions are met: (A) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (B) no Person (excluding any corporation resulting from such Business Combination, any qualified pension plan, publicly held mutual fund, Group composed exclusively of Employees or employee benefit plan (or related trust) of Southern, any Southern Subsidiary or Surviving Company) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. (b) with respect to an Employing Company, the occurrence of any of the following: (i) Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of an Employing Company; provided, however, that for purposes of this Section 2.5(b)(i), any acquisition by an employee of Southern or its subsidiary or affiliate, or Group composed entirely of such employees, any qualified pension plan, any publicly held mutual fund or any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary shall not constitute a Change in Control; (ii) Consummation of a reorganization, merger or consolidation of an Employing Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern or a Southern Subsidiary Controls the corporation surviving or resulting from such Employing Company Business Combination; or (iii) Consummation of the sale or other disposition of all or substantially all of the assets of an Employing Company to an entity which Southern or a Southern Subsidiary does not Control. Notwithstanding the foregoing, in no event shall "Change in Control" mean an initial public offering or a spin-off of an Employing Company, 2.6 "COBRA Coverage" shall mean any continuation coverage to which a Participant or his dependents may be entitled pursuant to Code Section 4980B. 2.7 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.8 "Company" shall mean Southern Company Services, Inc., its successors and assigns. 2.9 "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or governmental agencies. 2.10 "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. 2.11 "Effective Date" shall mean the date of execution hereof. 2.12 "Employee" shall mean each regular full-time or regular part-time employee of an Employing Company of Grade 9 or below (or, if the Grade system is not used, below $130,000 of annual base salary rate for the twelve month period immediately preceding the Change in Control) not covered by a collective bargaining agreement between the Employing Company and a union or other employee representative. The Administrative Committee of the Southern Company Change in Control Benefit Determination Policy may deem one or more Employees (as defined in this Section 2.12 except not employed by an Employing Company) of a particular Southern Subsidiary, or corporation or entity Controlled by a Southern Subsidiary, to be employed by an Employing Company for certain purposes under this Plan. Such action shall be in writing and shall cause such an Employee to only be entitled to benefits under this Plan in the event of a Change in Control of his deemed Employing Company, and not his actual employing company. 2.13 "Employee Outplacement Program" shall mean the program established by the Employing Company from time to time for the purpose of assisting Participants covered by the Plan in finding employment outside of the Employing Company which provides for the following services: (a) self assessment, career decision and goal setting; (b) job market research and job sources; (c) networking and interviewing skills; (d) planning and implementation strategy; (e) resume writing, job hunting methods and salary negotiation; and (f) office support and job search resources. 2.14 "Employing Company" shall mean the Company, or any other Southern Subsidiary, which the Board of Directors may from time to time determine to bring under the Plan and which shall adopt the Plan, and any successor of any of them. The term "Employing Company" shall also mean any corporation or entity Controlled by a Southern Subsidiary which the Compensation Committee of the Southern Board has determined to bring under the Plan and which shall adopt the Plan, and any successor of any of them. 2.15 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 2.16 "Good Reason" shall mean, without an Employee's express written consent, after written notice to his Employing Company, and after a thirty (30) day opportunity for the Employee's Employing Company to cure, the continuing occurrence of any of the following events: (a) Reduced Salary. A reduction of five percent (5%) or more by the Employing Company in either of the following: (i) the Employee's annual base salary rate for the twelve month period immediately preceding the Change in Control ("Base Salary") (except for a less than ten percent (10%), across-the-board Base Salary reduction similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company) or (ii) the sum of the Employee's Base Salary plus target bonus under his Employing Company's short term bonus plan (e.g., the PPP under the Omnibus Plan), as in effect immediately prior to the Change in Control (except for a less than ten percent (10%), across-the-board reduction of Base Salary plus target bonus under such short term plans similarly affecting at least ninety-five (95%) of all Employees of the Employing Company); (b) Relocation. A change in an Employee's work location to a location more than fifty (50) miles from the facility where the Employee was located at the time of the Change in Control, unless such new work location is within fifty (50) miles from the Employee's principal place of residence at the time of the Change in Control. The acceptance, if any, by an Employee of employment by an Employing Company at a work location which is outside the fifty mile radius set forth in this Section 2.16(b) shall not be a waiver of the Employee's right to refuse subsequent transfer by an Employing Company to a location which is more than fifty (50) miles from the Employee's principal place of residence at the time of the Change in Control, and such subsequent unconsented transfer shall be "Good Reason" under this Agreement; (c) Compensation Plans. The failure by an Employing Company to continue in effect any "compensation plan or agreement" in which an Employee participates or the elimination of the Employee's participation in any such plan (except for across-the-board plan changes or terminations similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company); For purposes of this Section 2.16(c), the term "compensation plan or agreement" shall mean any written arrangement executed by an authorized officer of the Employing Company which provides for periodic, non-discretionary compensatory payments to Employees in the nature of bonuses. (d) Benefits and Perquisites. The taking of any action by the Employing Company that would directly or indirectly materially reduce the benefits enjoyed by an Employee under the Employing Company's retirement, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which the Employee was participating immediately prior to the Change in Control, or the failure by the Employing Company to provide an Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Employing Company in accordance with the Employing Company's normal vacation policy in effect immediately prior to the Change in Control (except for across-the-board plan or vacation policy changes or plan terminations similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company). 2.17 "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. 2.18 "Group Health Plan" shall mean the group health plan covering the Participant, as such plan may be amended from time to time. 2.19 "Group Life Insurance Plan" shall mean the group life insurance program covering the Participant, as such plan may be amended from time to time. 2.20 "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998, plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to the Effective Date whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. 2.21 "Month of Service" shall mean any calendar month during which a Participant has worked at least one (1) hour or was on approved leave of absence while in the employ of an Employing Company or any other Southern Subsidiary. 2.22 "Omnibus Plan" shall mean the Southern Company Omnibus Incentive Compensation, and the Design and Administrative Specifications duly adopted thereunder, as in effect on the date before the date of a Change in Control, as may be amended from time to time. 2.23 "Participant" shall mean an Employee or Support Employee who meets the eligibility requirements of Section 3.1 of this Plan. 2.24 "Pension Plan" shall mean The Southern Company Pension Plan or any successor thereto, as such plans may be amended from time to time. 2.25 "Performance Dividend Program" or "PDP" shall mean the Performance Dividend Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. 2.26 "Performance Pay Program" or "PPP" shall mean the Performance Pay Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. 2.27 "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of Exchange Act. 2.28 "Plan" shall mean the Southern Company Change in Control Severance Plan. 2.29 "Southern" shall mean The Southern Company, its successors and assigns. 2.30 "Southern Board" shall mean the board of directors of Southern. 2.31 "Southern Subsidiary" shall mean any corporation or other entity Controlled by Southern or another Southern Subsidiary. 2.32 "Straight Time Pay" shall mean a Participant's highest base salary during the calendar year in which his Termination Date occurs, plus the average of the most recent three years' commission pay (if employed less than three years, the average of the period of employment). Base salary shall include "add ons" such as monthly shift differential, monthly premium pay, etc., but shall not include overtime pay. For Participants who were part-time Employees "Straight Time Pay" shall mean the actual average salary, plus the average of the most recent three years' commission pay (if employed less than three years, the average of the period of employment), paid during the calendar year in which the Participant's Termination Date occurs. 2.33 "Support Employee" shall mean an Employee of the Company (which shall continue to be such Employee's Employing Company for purposes of this Plan) who: (a) Is involuntarily terminated without Cause within one year of the Change in Control of an Employing Company (other than the Company) and either (i) spent at least 40% of his working time performing services for such Employing Company at the time of the Change in Control and for the six months prior thereto, or (ii) is determined by the Administrative Committee to be involuntarily terminated without Cause as a result of such Change in Control; or (b) Voluntarily terminates with Good Reason within one year of the Change in Control of an Employing Company (other than the Company) and spent at least 40% of his working time performing services for such Employing Company at the time of the Change in Control and for the six months prior thereto. 2.34 "Termination for Cause" or "Cause" shall mean an Employee's termination of employment with his Employing Company upon the occurrence of any of the following: (a) The willful and continued failure by the Employee to substantially perform his duties with his Employing Company (other than any such failure resulting from the Employee's Total Disability or from the Employee's retirement or any such actual or anticipated failure resulting from termination by the Employee for Good Reason) after a written demand for substantial performance is delivered to him by the Employee's responsible corporate officer, which demand specifically identifies the manner in which such corporate officer believes the Employee has not substantially performed his duties; or (b) The willful engaging by the Employee in conduct that is demonstrably and materially injurious to his Employing Company, monetarily or otherwise, including but not limited to any of the following: (i) any willful act involving fraud or dishonesty in the course of an Employee's employment by his Employing Company; (ii) the willful carrying out of any activity or the making of any statement by an Employee which would materially prejudice or impair the good name and standing of his Employing Company, Southern or any other Southern Subsidiary or would bring his Employing Company, Southern or any other Southern Subsidiary into contempt, ridicule or would reasonably shock or offend any community in which his Employing Company, Southern or such other Southern Subsidiary is located; (iii) attendance by an Employee at work in a state of intoxication or otherwise being found in possession at his workplace of any prohibited drug or substance, possession of which would amount to a criminal offense; (iv) violation of his Employing Company's policies on drug and alcohol usage, fitness for duty requirements or similar policies as may exist from time to time as adopted by the Employing Company's safety officer; (v) assault or other act of violence by an Employee against any person during the course of employment; or (vi) an Employee's indictment for any felony or any misdemeanor involving moral turpitude. No act or failure to act by an Employee shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of his Employing Company. Notwithstanding the foregoing, an Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of the majority of the Administrative Committee at a meeting called and held for such purpose (after reasonable notice to the Employee and an opportunity for him, together with counsel, to be heard before the Administrative Committee), finding that, in the good faith opinion of the Administrative Committee, the Employee was guilty of conduct set forth in Section 2.34(a) or (b) hereof and specifying the particulars thereof in detail. 2.35 "Termination Date" shall mean the date on which a Participant is separated from his Employing Company's regular payroll; provided, however, that solely for purposes of Section 3.2(c) hereof, the Termination Date of Participants who are deemed to be retired pursuant to the provisions of Section 3.3 hereof, shall be the effective date of their retirement pursuant to the terms of the Pension Plan. 2.36 "Total Disability" shall mean total disability under the terms of the Pension Plan. 2.37 "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. 2.38 "Waiver and Release" shall mean the Waiver and Release attached hereto as Exhibit A. 2.39 "Year of Service" shall mean an Employee's Months of Service divided by twelve (12) rounded to the nearest whole year, rounding up if the remaining number of months is seven (7) or greater and rounding down if the remaining number of months is less than seven (7). If an Employee has a break in his service with his Employing Company, he will receive credit under this Plan for the service prior to the break in service only if the break in service was less than five years and his service prior to the break exceeds the length of the break in service. ARTICLE 3 - SEVERANCE BENEFITS 3.1 Eligibility. (a) Employees. Except as otherwise provided herein, any Employee whose employment is involuntarily terminated by his Employing Company at any time during the two year period following a Change in Control of Southern or his Employing Company for reasons other than Cause or who shall voluntarily terminate his employment with his Employing Company for Good Reason at any time during the two year period following a Change in Control of Southern or his Employing Company shall be entitled to participate in this Plan and receive the benefits described in Section 3.2 hereof, subject to the terms and conditions described in this Article 3. (b) Deemed Employees. An Employee who is deemed to be employed by a different Employing Company than his actual Employing Company under Section 2.12 hereof, shall be entitled to participate in this Plan and receive the benefits described in Section 3.2 hereof in the same manner as other Employees under Section 3.1(a) hereof; provided, however, that such deemed Employee will be considered to be an Employee of the deemed Employing Company solely for purposes of determining whether a Change in Control has occurred. For all other purposes under this Plan, such deemed Employee's actual Employing Company shall be considered. (c) Support Employees. A Support Employee shall be entitled to participate in this Plan and receive the benefits described in Section 3.2 hereof, subject to the terms and conditions described in this Article 3. (d) Limits on Eligibility. Notwithstanding anything to the contrary herein, an Employee or Support Employee shall not be eligible to receive benefits under this Plan if the Employee or Support Employee: (i) is not actively at work on his Termination Date, unless such Employee or Support Employee is capable of returning to work within twelve (12) weeks of the beginning of any leave of absence from work; (ii) voluntarily terminates his employment with his Employing Company for other than Good Reason; (iii) is terminated by his Employing Company for Cause; (iv) accepts the transfer of his employment to Southern, any Southern Subsidiary or any employer that acquires all or substantially all of the assets of Southern, a Southern Subsidiary or his Employing Company; (v) refuses an offer of continued employment with his Employing Company, Southern or a Southern Subsidiary, or any employer that acquires all or substantially all of the assets of Southern, a Southern Subsidiary or his Employing Company, under circumstances where such refusal would not amount to Good Reason for voluntary termination of employment and such employer agrees to adopt this Plan as it applies to such Participant; or (vi) elects to receive the benefits of any other voluntary or involuntary severance, separation or outplacement program, plan or agreement maintained by his Employing Company in lieu of benefits under this Plan; provided however, that the receipt of benefits under any retention plan or agreement shall not be deemed to be the receipt of benefits under any severance, separation or outplacement program for purposes of this Plan. 3.2 Benefits. Upon the Employing Company's receipt of an effective Waiver and Release, Participants shall be entitled to receive the following benefits: (a) Employee Outplacement Services. Each Participant shall be eligible to participate in the Employee Outplacement Program, which program shall not be less than six (6) months duration measured from the Participant's Termination Date. (b) Severance Benefit. Each Participant shall be paid a cash amount equal to the sum of the following amounts: (i) eight (8) weeks' Straight Time Pay, (ii) one (1) week's Straight Time Pay for each of the Participant's first five (5) Years of Service; (iii) two (2) weeks' Straight Time Pay for each of the Participant's sixth (6th) through tenth (10th) Years of Service; (iv) three (3) weeks' Straight Time Pay for each of the Participant's eleventh (11th) through fifteenth (15th) Years of Service; (v) five (5) weeks' Straight Time Pay for each of the Participant's sixteenth (16th) through twentieth (20th) Years of Service; and (vi) six (6) weeks' Straight Time Pay for each of the Participant's Years of Service in excess of twenty (20) Years of Service. (c) Welfare Benefit. (i) Except as provided in Section 3.3 hereof, each Participant shall be eligible to participate in the Employing Company's Group Health Plan for a period of six (6) months for each of the Participant's Years of Service, not to exceed a period of five (5) years, beginning on the first day of the first month following the Participant's Termination Date unless otherwise specifically provided under such plan, upon the Participant's payment of both the Employing Company's and the Participant's premium under such plan. A Participant who receives this extended medical coverage shall also be entitled to elect coverage under the Group Health Plan for his dependents who are participating in the Group Health Plan on the Participant's Termination Date (and for such other dependents as may be entitled to coverage under the provisions of the Health Insurance Portability and Accountability Act of 1996) for the duration of the Participant's extended medical coverage under this Section 3.2(c) to the extent such dependents remain eligible for dependent coverage under the terms of the Group Health Plan. (ii) The extended medical coverage afforded to a Participant pursuant to this Section 3.2(c) as well as the premiums to be paid by the Participant in connection with such coverage shall be determined in accordance with the terms of the Group Health Plan and shall be subject to any changes in the terms and conditions of the Group Health Plan as well as any future increases in premiums under the Group Health Plan. The premiums to be paid by the Participant in connection with this extended coverage shall be due on the first day of each month; provided, however, that if a Participant fails to pay his premium within thirty (30) days of its due date, such Participant's extended coverage shall be terminated. (iii) Any Group Health Plan coverage provided under this Section 3.2(c) shall be a part of and not in addition to any COBRA Coverage which a Participant or his dependent may elect. In the event that a Participant or his dependent becomes eligible to be covered, by virtue of re-employment or otherwise, by any employer-sponsored group health plan or is eligible for coverage under any government-sponsored health plan during the above period, coverage under the Employing Company's Group Health Plan available to the Participant or his dependent by virtue of the provisions of this Article 3 shall terminate, except as may otherwise be required by law, and shall not be renewed. It shall be the duty of a Participant to inform the Employing Company of his eligibility to participate in any such health plan. (iv) Except as otherwise provided in Section 3.3 hereof, regardless of whether a Participant elects the extended coverage described in Section 3.2(c) hereof, the Employing Company shall pay to each Participant a cash amount equal to the Employing Company's and the Participant's cost of premiums for coverage under the Group Health Plan and Group Life Insurance Plan, if the Participant was participating in such plans on his Termination Date, for a period equal to the total number of weeks of pay the Participant receives as a severance benefit under Section 3.2(b) hereof. (d) Stock Option Vesting. The provisions of this Section 3.2(d) shall apply to any Participant who, as of the date of the Change in Control, was a participant in the Omnibus Plan, the defined terms of which are incorporated in this Section 3.2(d) by reference. (i) Any of the Participant's Options and Stock Appreciation Rights outstanding as of the Termination Date which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Participant holding a Stock Appreciation Right who is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to the Participant under Section 16(b) of the Exchange Act, provided further, that any such actions not taken as a result of the rules under Section 16(b) of the Exchange Act shall be effected as of the first date that such activity would no longer result in liability under Section 16(b) of the Exchange Act. (ii) The restrictions and deferral limitations applicable to any of the Participant's Restricted Stock and Restricted Stock Units as of the Termination Date shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (e) Performance Pay Program. The provisions of this Section 3.2(e) shall apply to any Participant who, as of the date of the Change in Control, was a participant in the Performance Pay Program, the defined terms of which are incorporated in this Section 3.2(e) by reference. Provided the Participant is not entitled to a Cash-Based Award under the PPP, if the PPP is in place as of the Participant's Termination Date and to the extent the Participant is entitled to participate therein, the Participant shall be entitled to receive cash in an amount equal to a prorated payout of his Cash-Based Award under the PPP for the performance period in which the Termination Date shall have occurred, at target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (f) Performance Dividend Program. The provisions of this Section 3.2(f) shall apply to any Participant who, as of the date of the Change in Control, was a participant in the Performance Dividend Program, the defined terms of which are incorporated in this Section 3.2(f) by reference. Provided the Participant is not entitled to a Cash-Based Award under the PDP, if the PDP is in place through the Participant's Termination Date and to the extent the Participant is entitled to participate therein, the Participant shall be entitled to receive cash for each such Cash-Based Award under the PDP held as of such date based on a payout percentage of 50% under the PDP for the performance period in which the Termination Date shall have occurred, and the annual dividend declared prior to the Termination Date. (g) Other Short Term Incentives Under the Omnibus Plan. The provisions of this Section 3.2(g) shall apply to any Participant who, as of the date of the Change in Control is entitled to a Performance Unit or Performance Share award under the Omnibus Plan. Provided the Participant is not otherwise entitled to a Performance Unit/Share award under the Omnibus Plan, the Participant shall be entitled to receive cash in an amount equal to a prorated payout of the value of his Performance Units and/or Performance Shares for the performance period in which the Termination Date shall have occurred, at target performance and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (h) Other Short-Term Incentive Plans. The provisions of this Section 3.2(h) shall apply to any Participant who, as of the date of the Change in Control, is a participant in any other "short term incentive compensation plan" not otherwise previously referred to in this Section 3.2. Provided the Participant is not otherwise entitled to a plan payout under any change in control provisions of such plans, if the "short term incentive compensation plan" is in place through the Participant's Termination Date and to the extent the Participant is entitled to participate therein, the Participant shall be entitled to receive cash in an amount equal to his award under his respective Employing Company's "short term incentive compensation plan" for the annual performance period in which the Termination Date shall have occurred, at the Participant's target performance level and prorated by the number of months which have passed since the beginning of the annual performance period until the Termination Date. For purposes of this Section 3.2(h), the term "short term incentive compensation plan" shall mean any incentive compensation plan or arrangement adopted in writing by an Employing Company which provides for annual, recurring compensatory bonuses to participants based upon articulated performance criteria, and which have been identified by the Board of Directors and listed on Exhibit B hereto, which may be amended from time to time to reflect plan additions, terminations and amendments. 3.3 Coordination with Retiree Medical and Life Insurance Coverage. Notwithstanding anything to the contrary above, any Participant who is otherwise eligible to retire pursuant to the terms of the Pension Plan, shall be deemed to have retired for purposes of all employee benefit plans sponsored by the Employing Company of which the Participant is a participant. A Participant who is deemed to have retired in accordance with the preceding sentence shall not be eligible to receive the benefits described in Section 3.2(c) hereof if, upon his Termination Date, such Participant becomes eligible to receive the retiree medical and life insurance coverage provided to certain retirees pursuant to the terms of the Pension Plan, the Group Health Plan and the Group Life Insurance Plan. 3.4 Maximum Benefit. Notwithstanding anything to the contrary above, with respect to each Participant, the maximum benefit payable under this Article 3 shall be an amount equal to two (2) times such Participant's "annual compensation" as defined in Department of Labor Regulation Section 2510.3-2(b), which, for purposes of this Plan shall be no less than Straight Time Pay plus thirty percent (30%). When necessary, the Administrative Committee shall reduce the severance benefits described in Section 3.2(b) and 3.2(c)(iv) hereof to comply with this Section 3.4. 3.5 Payment of Benefits. The total amount payable under this Article 3 shall be paid to a Participant in one (1) lump sum payment within two (2) payroll periods of the later of the following to occur: (a) the Participant's Termination Date, or (b) the tender to the Employing Company by the Participant of an effective Waiver and Release (in the form of Exhibit A attached hereto) and the expiration of any applicable revocation period for such waiver. In the event of a dispute with respect to liability or amount of any benefit due hereunder, an effective Waiver and Release shall be tendered at the time of final resolution of any such dispute when payment is tendered by the Employing Company. 3.6 Benefits in the Event of Death. In the event of the Participant's death prior to the payment of all benefits due under this Article 3, the Participant's estate shall be entitled to receive as due any amounts not yet paid under this Article 3 upon the tender by the executor or administrator of the estate of an effective Waiver and Release. 3.7 Legal Fees. In the event of a dispute between a Participant and his Employing Company with regard to any amounts due hereunder, if any material issue in such dispute is finally resolved in the Participant's favor, his Employing Company shall reimburse the Participant's legal fees incurred with respect to all issues in such dispute in an amount not to exceed fifteen thousand dollars ($15,000). 3.8 No Mitigation. A Participant who receives benefits under Section 3.2 of this Plan shall have no duty or obligation to seek other employment following his Termination Date and, except as otherwise provided in Subsection 3.1(d) hereof, the amounts due a Participant hereunder shall not be reduced or suspended if such Participant accepts such subsequent employment. 3.9 Non-qualified Retirement and Deferred Compensation Plans. Subsequent to a Change in Control, any claims by a Participant for benefits under any of the Company's non-qualified retirement or deferred compensation plans shall be resolved through binding arbitration in accordance with the procedures and provisions set forth in Article 5 hereof and if any material issue in such dispute is finally resolved in the Participant's favor, the Company shall reimburse the Participant's legal fees in the manner provided in Section 3.7 hereof. ARTICLE 4 - ADMINISTRATION 4.1 Administrative Committee. The Administrative Committee shall be responsible for the general administration of the Plan and shall be a "named fiduciary" under Section 402 of the Employee Retirement Income Security Act of 1974, as amended. 4.2 Duties of the Administrative Committee. (a) The Administrative Committee shall be responsible for the daily administration of the Plan and may appoint other persons or entities to perform or assist in the performance of any of its fiduciary duties, subject to its review and approval. The Administrative Committee shall have the right to remove any such appointee from his position without cause upon notice. Any person, group of persons, or entity may serve in more than one fiduciary capacity. (b) The Administrative Committee shall maintain permanent records and accounts of Participants and of their rights under the Plan and of all receipts, disbursements, transfers, and other transactions concerning the Plan. Such accounts, books, and records relating thereto shall be open at all reasonable times to inspection and audit by the Company and any persons designated thereby. (c) The Administrative Committee shall take all steps necessary to ensure that the Plan complies with the law at all times, including the preparation and filing of all documents and forms required by any governmental agency; maintenance of adequate Participant records; recording and transmission of all notices required to be given to Participants and their beneficiaries; receipt and dissemination, if required, of all reports and information received from the Employing Companies; securing of such fidelity bonds as may be required by law; and doing such other acts necessary for the proper administration of the Plan. The Administrative Committee shall keep a record of all of its proceedings and acts, and shall keep all such books of accounts, records, and other data as may be necessary for proper administration of the Plan. The Administrative Committee shall notify the Employing Companies upon their request of any action taken by it, and when required, shall notify any other interested person or persons. 4.3 Powers. The Administrative Committee shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan as more particularly set forth herein. The Administrative Committee shall have the discretionary authority to interpret the Plan (including any ambiguities herein) and to determine all questions arising in the administration, interpretation, and application of the Plan. The Administrative Committee shall adopt such procedures and regulations necessary or desirable for the discharge of its duties hereunder and may appoint such accountants, counsel, actuaries, specialists, and other agents as it deems necessary or desirable in connection with the administration of this Plan. The Administrative Committee shall be the legal appointed agent for the service of process. 4.4 Compensation of the Administrative Committee. The Administrative Committee shall not receive any compensation from the Plan for its services. 4.5 Payment of Expenses. The Administrative Committee shall be reimbursed by the Employing Companies for its reasonable expenses incurred in the discharge of its duties. Such expenses shall include any expenses incident to its duties, including, but not limited to, fees of accountants, counsel, actuaries, and other specialists, and other costs of administering the Plan. 4.6 Indemnification. Each Employing Company shall indemnify the Administrative Committee against any and all claims, losses, damages, expenses, and liability arising from its actions or omissions, except when the same is finally adjudicated to be the result of gross negligence or willful misconduct. The Employing Companies may purchase at their own expense sufficient liability insurance for the Administrative Committee to cover any and all claims, losses, damages, and expenses arising from any action or omission in connection with the execution of the duties as the Administrative Committee. ARTICLE 5 - ARBITRATION 5.1 General. Any dispute, controversy or claim arising out of or relating to the Company's obligations to pay severance benefits under this Plan, or the breach thereof, shall be settled and resolved solely by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") except as otherwise provided herein. The arbitration shall be the sole and exclusive forum for resolution of any such claim for severance benefits and the arbitrators' award shall be final and binding. The provisions of this Article 5 are not intended to apply to any other disputes, claims or controversies arising out of or relating to a Participant's employment by an Employing Company or the termination thereof. 5.2 Demand for Arbitration. Arbitration shall be initiated by serving a written notice of demand for arbitration to the Participant, in the case of an Employing Company, or to the Administrative Committee, in the case of a Participant. 5.3 Law and Venue. The arbitrators shall apply the laws of the State of Georgia, except to the extent pre-empted by federal law, excluding any law which would require the use of the law of another state. The arbitration shall be held in Atlanta, Georgia. 5.4 Appointment of Arbitrators. Arbitrators shall be appointed within fifteen (15) business days following service of the demand for arbitration. The number of arbitrators shall be three. One arbitrator shall be appointed by the Participant, one arbitrator shall be appointed by the Employing Company, and the two arbitrators shall appoint a third. If the arbitrators cannot agree on a third arbitrator within thirty (30) business days after the service of demand for arbitration, the third arbitrator shall be selected by the AAA. 5.5 Costs. The arbitration filing fee shall be paid by the Participant. All other costs of arbitration shall be borne equally by the Participant and his Employing Company, provided, however, that such Employing Company shall reimburse such fees and costs in the event any material issue in such dispute is finally resolved in the Participant's favor and the Participant is reimbursed legal fees under Section 3.7 hereof. 5.6 Interim and Injunctive Relief. Nothing in this Article 5 is intended to preclude, upon application of either party, any court having jurisdiction from issuing and enforcing in any lawful manner such temporary restraining orders, preliminary injunctions, and other interim measures of relief as may be necessary to prevent harm to either party's interests or as otherwise may be appropriate pending the conclusion of arbitration proceedings pursuant to this Article 5 and nothing herein is intended to prevent any court from entering and enforcing in any lawful manner such judgments for permanent equitable relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate following the issuance of arbitral awards pursuant to this Article 5. ARTICLE 6 - MISCELLANEOUS 6.1 Funding of Benefits. Unless the Board of Directors in its discretion determines otherwise, the benefits payable to a Participant under the Plan shall not be funded in any manner and shall be paid by the Employing Companies out of their general assets, which assets are subject to the claims of the Employing Companies' creditors. 6.2 Withholding. There shall be deducted from the payment of any benefit due under the Plan the amount of any tax required by any governmental authority to be withheld and paid over by the Employing Companies to such governmental authority for the account of the Participant entitled to such payment. 6.3 Assignment. No Participant or beneficiary shall have any rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. 6.4 Amendment and Termination. The Plan may be amended or terminated at any time by the Board of Directors, provided, however, the Plan may not be amended in any material of respect or terminated within the two (2) year period following a Change in Control nor shall any amendment or termination impair the rights of any Participant which have accrued hereunder prior to any such amendment or termination. 6.5 Pooling Accounting. Notwithstanding anything to the contrary herein, if, but for any provision of this Plan, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Plan which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Plan, Pooling Accounting would be required for such Change in Control transaction. IN WITNESS WHEREOF, this Southern Company Change in Control Severance Plan has been executed by the Company through its duly authorized officers, this ____ day of ___________, 2002, to be effective as provided herein. SOUTHERN COMPANY SERVICES, INC. By: ____________________________________ Its: Senior Vice President ------------------------------------ Attest: By: -------------------------------------------- Its: -------------------------------------------- Exhibit A SOUTHERN COMPANY CHANGE IN CONTROL SEVERANCE PLAN Waiver and Release I understand that I am entitled to receive the severance benefits described in Article 3 of the Southern Company Change in Control Severance Plan (the "Plan") if I execute this Waiver and Release ("Waiver"). I understand that the benefits I have elected to receive under the Plan are in excess of those I would have received from ____________________ (the "Company") if I had not elected to participate in the Plan and sign this Waiver. I recognize that I may have a claim against the Company under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the Americans with Disabilities Act or other federal, state and local laws. In exchange for the benefits I elect to receive, I hereby irrevocably waive and release all claims, of any kind whatsoever, whether known or unknown in connection with any claim which I ever had, may have, or now have against The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company, Southern Communication Services, Inc. d/b/a Southern LINC, Southern Company Services, Inc., Southern Company Energy Solutions, LLC, Southern Nuclear Operating Company, Inc., Southern Telecom, Inc., Southern Company Management Development, Inc. and other current or former subsidiaries of The Southern Company and their past, present and future officers, directors, employees, agents and attorneys. Nothing in this Waiver shall be construed to release claims or causes of action under the Age Discrimination in Employment Act, which arise out of events occurring after the execution date of this Waiver. In further exchange for the benefits I elect to receive, I understand and agree that I will respect the proprietary and confidential nature of any information I have obtained in the course of my service with the Company or any subsidiary or affiliate of The Southern Company. I understand and agree that I am obligated to keep confidential and not disclose the terms of this Waiver, including, but not limited to, the benefits under this Plan, except to my attorneys, financial advisors, or except where such disclosure is required by law. However, nothing in this Waiver shall prohibit me from engaging in protected activities under applicable law or from communicating, either voluntary or otherwise, with any governmental agency concerning any potential violation of the law. In signing this Waiver, I am not releasing claims to any vested or accrued benefits that I have under any workers' compensation laws or any retirement plan or welfare benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, which is sponsored by or adopted by the Company and/or any of its direct or indirect subsidiaries; however, I understand and acknowledge that nothing herein is intended to or shall be construed to require the Company to institute or continue in effect any particular plan or benefit sponsored by the Company and the Company hereby reserves the right to amend or terminate any of its benefit programs at any time in accordance with the procedures set forth in such plans. In signing this Waiver, I realize that I am waiving and releasing, among other things, any claims to benefits under any and all bonus, severance, workforce reduction, early retirement, outplacement, or any other similar type plan sponsored by the Company except for programs specifically designed for participants in the Plan. Notwithstanding anything in this Waiver to the contrary, I understand that the Company is not discouraging me or prohibiting me from engaging in any protected activity described in Section 211 of the Energy Reorganization Act. I have been encouraged and advised in writing to seek advice from anyone of my choosing regarding this Waiver, including my attorney, and my accountant or tax advisor. Prior to signing this Waiver, I have been given the opportunity and sufficient time to seek such advice, and I fully understand the meaning and contents of this Waiver. I understand that I may take up to forty-five (45) calendar days to consider whether or not I desire to enter this Waiver. I was not coerced, threatened or otherwise forced to sign this Waiver. I have made my choice to sign this Waiver voluntarily and of my own free will. I understand that I may revoke this Waiver at any time during the seven (7) calendar day period after I sign and deliver this Waiver to the Company. If I revoke this Waiver, I must do so in writing delivered to the Company. I understand that this Waiver is not effective until the expiration of this seven (7) calendar day revocation period. I understand that upon the expiration of such seven (7) calendar day revocation period this entire Waiver will be binding upon me and will be irrevocable. I understand that by signing this Waiver I am giving up rights I may have. I understand I do not have to sign this Waiver. IN WITNESS WHEREOF, the undersigned hereby executes this Waiver this _____ day of ________________, in the year ___. Employee's signature Employee's printed name Acknowledged and Accepted by the Administrative Committee of the Southern Company Change in Control Severance Plan. By: ----------------------------------- Date: ----------------------------------- Attachment to Exhibit A TO: All Eligible Employees under the Southern Company Change in Control Severance Plan FROM: _____________________ RE: ADEA Information Notice DATE: _____________________ A severance plan known as the Southern Company Change in Control Severance Plan ("Plan") has been approved and established by The Southern Company, its affiliates and its direct and indirect subsidiaries (collectively the "Company"). You are eligible to participate in the Plan subject to the terms of the Plan. In accordance with the Age Discrimination in Employment Act ("ADEA"), the Company is providing you the following information pertaining to eligibility and participation in the Plan. This information, in conjunction with the information provided in the Plan, should allow you to make an informed decision concerning your options under the Plan. The purpose of the Plan is to provide benefits to certain employees of The Southern Company and certain subsidiaries of The Southern Company ("Employing Companies") whose employment is terminated subsequent to a change in control of The Southern Company or their respective Employing Company. A full description of the benefits under the Plan as well as any restrictions or limitations that may be applicable can be found in the Summary Plan Description you have been given. All eligible employees may elect to receive severance benefits under the Plan by signing an Election Form and Waiver Agreement no later than 45 calendar days from the date it is received. The Agreement will remain revocable by you for a seven day period after you sign it. Attached is a list sorted by job title and age of each employee eligible to participate in the Plan as well as a list of the ages of all employees in the same job classification who are not eligible to participate in the Plan. In furtherance of you making an informed decision, the Company urges you to seek a financial advisor, legal counsel and a qualified tax advisor to assist you in fully understanding your rights and benefits under the plan and the Election Form and Waiver Agreement that you will be required to sign to receive severance benefits under the Plan. If you have any questions or need additional information, please call me at _______________. Sincerely, - ---------------------- [Name] - ---------------------- [Title] ADEA INFORMATION NOTICE - ------------------------------------------------------- -------------------------------------------------------------- Job Title, Classification Age of or Category of Eligible Employees Eligible Employees - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- [List job classification, title or category of all [List corresponding age of each eligible employee] eligible employees] - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- Job Title, Classification Age of or Category of Ineligible Employees Ineligible Employees - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- - ------------------------------------------------------- -------------------------------------------------------------- [List job classification, title or category of all [List corresponding age of each ineligible employee] ineligible employees] - ------------------------------------------------------- --------------------------------------------------------------
Exhibit B SOUTHERN COMPANY CHANGE IN CONTROL SEVERANCE PLAN Short Term Incentive Compensation Plans EX-10.A.92 9 ex10a92.txt Exhibit 10(a)92 SOUTHERN COMPANY EXECUTIVE CHANGE IN CONTROL SEVERANCE PLAN Troutman Sanders LLP Bank of America Plaza, Suite 5200 600 Peachtree Street, N.E. Atlanta, Georgia 30308 Effective May 9, 2002 SOUTHERN COMPANY EXECUTIVE CHANGE IN CONTROL SEVERANCE PLAN ARTICLE 1 - PURPOSE AND ADOPTION OF PLAN 1.1 Adoption of Plan. Southern Company Services, Inc. hereby adopts this Southern Company Executive Change in Control Severance Plan. This Plan was originally effective December 7, 1998; it was amended by a First Amendment also effective December 7, 1998, and subsequently amended and restated effective July 10, 2000. This amended and restated Plan is effective May 9, 2002. The Plan shall be an unfunded "top hat" plan designed to provide certain severance benefits to a select group of management or highly compensated employees, to be paid solely from the general assets of the respective Employing Companies. 1.2 Purpose. The Plan is primarily designed to provide benefits to certain key employees of the Employing Companies, whose employment is terminated subsequent to a change in control of Southern or their respective Employing Company. ARTICLE 2 - DEFINITIONS 2.1 "Administrative Committee" shall mean the Board of Directors, plus, in the event of any act necessary to be taken in connection with the Plan relative to a particular Participant, the Chief Executive Officer of the Participant's Employing Company, if such Chief Executive Officer is not already a member of the Board of Directors. 2.2 "Annual Compensation" shall mean a Participant's highest annual base salary rate for the twelve month period immediately preceding the date of the Change in Control plus target bonus. 2.3 "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. 2.4 "Board of Directors" shall mean the board of directors of the Company. 2.5 "Business Combination" shall mean a reorganization, merger or consolidation of Southern or sale or other disposition of all or substantially all of the assets of Southern. 2.6 "Change in Control" shall mean, (a) with respect to Southern, the occurrence of any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this Section 2.6(a)(i), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (A) any acquisition directly from Southern; (B) any acquisition by Southern; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary; (D) any acquisition by a qualified pension plan or publicly held mutual fund; (E) any acquisition by an employee of Southern or its subsidiary or affiliate, or Group composed exclusively of such employees; or (F) any Business Combination which would not otherwise constitute a Change in Control because of the application of clauses (A), (B) and (C) of Section 2.6(a)(iii). (ii) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; or (iii) Consummation of a Business Combination, unless, following such Business Combination, all of the following three conditions are met: (A) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (B) no Person (excluding any corporation resulting from such Business Combination, any qualified pension plan, publicly held mutual fund, Group composed exclusively of Employees or employee benefit plan (or related trust) of Southern, any Southern Subsidiary or Surviving Company) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. (b) with respect to an Employing Company, the occurrence of any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of an Employing Company; provided, however, that for purposes of this Section 2.6(b)(i), any acquisition by an employee of Southern or its subsidiary or affiliate, or Group composed entirely of such employees, any qualified pension plan, any publicly held mutual fund or any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary shall not constitute a Change in Control; (ii) The Consummation of a reorganization, merger or consolidation of an Employing Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern or a Southern Subsidiary Controls the corporation surviving or resulting from such Employing Company Business Combination; or (iii) The Consummation of the sale or other disposition of all or substantially all of the assets of an Employing Company to an entity which Southern or a Southern Subsidiary does not Control. Notwithstanding the foregoing, in no event shall "Change in Control" mean an initial public offering or a spin-off of an Employing Company. 2.7 "COBRA Coverage" shall mean any continuation coverage to which a Participant or his dependents may be entitled pursuant to Code Section 4980B. 2.8 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.9 "Company" shall mean Southern Company Services, Inc., its successors and assigns. 2.10 "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or governmental agencies. 2.11 "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. 2.12 "Effective Date" shall mean the date of execution hereof. 2.13 "Employee" shall mean each regular full-time or regular part-time employee of an Employing Company of Grades 10 to 13 (or, if the Grade system is not used, $130,000 or more of annual base salary rate for the twelve month period immediately preceding the Change in Control who has not otherwise entered into a Change in Control agreement with his Employing Company and elects to receive benefits under such agreement) not covered by a collective bargaining agreement between the Employing Company and a union or other employee representative. The Administrative Committee of the Southern Company Change in Control Benefit Determination Policy may deem one or more Employees (as defined in this Section 2.13 except not employed by an Employing Company) of a particular Southern Subsidiary, or corporation or entity Controlled by a Southern Subsidiary, to be employed by an Employing Company for certain purposes under this Plan. Such action shall be in writing and shall cause such an Employee to only be entitled to benefits under this Plan in the event of a Change in Control of his deemed Employing Company, and not his actual employing company. 2.14 "Employee Outplacement Program" shall mean the program established by the Employing Company from time to time for the purpose of assisting Participants covered by the Plan in finding employment outside of the Employing Company which provides for the following services: (a) self assessment, career decision and goal setting; (b) job market research and job sources; (c) networking and interviewing skills; (d) planning and implementation strategy; (e) resume writing, job hunting methods and salary negotiation; and (f) office support and job search resources. 2.15 "Employing Company" shall mean the Company, or any other Southern Subsidiary, which the Board of Directors may from time to time determine to bring under the Plan and which shall adopt the Plan, and any successor of any of them. The term "Employing Company" shall also mean any corporation or entity Controlled by a Southern Subsidiary which the Compensation Committee of the Southern Board has determined to bring under the Plan and which shall adopt the Plan, and any successor of any of them. 2.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 2.17 "Good Reason" shall mean, without an Employee's express written consent, after written notice to his Employing Company, and after a thirty (30) day opportunity for the Employee's Employing Company to cure, the continuing occurrence of any of the following events: (a) Inconsistent Duties. A meaningful and detrimental alteration in the Employee's position or in the nature or status of his responsibilities from those in effect immediately prior to the Change in Control; (b) Reduced Salary. A reduction of five percent (5%) or more by the Employing Company in either of the following: (i) the Employee's annual base salary rate for the twelve month period immediately preceding the date of the Change in Control ("Base Salary") (except for a less than ten percent (10%), across-the-board Base Salary reduction similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company); or (ii) the sum of the Employee's Base Salary plus target bonus under his Employing Company's short term bonus plan (e.g., the PPP under the Omnibus Plan), as in effect immediately prior to the Change in Control (except for a less than ten percent (10%), across-the-board reduction of Base Salary plus target bonus under such short term plan similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company); (c) Compensation Plans. The failure by the Employing Company to continue in effect any "compensation plan or agreement" in which an Employee participates as of the date of the Change in Control or the elimination of the Employee's participation in any such plan, (except for across-the-board plan changes or terminations similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company); For purposes of this Section 2.17(c), the "compensation plan or agreement" shall mean any written arrangement executed by an authorized officer of the Employing Company which provides for periodic, non-discretionary compensatory payments to employees in the nature of bonuses. (d) Relocation. A change in an Employee's work location to a location more than fifty (50) miles from the facility where the Employee was located at the time of the Change in Control, unless such new work location is within fifty (50) miles from the Employee's principal place of residence at the time of the Change in Control. The acceptance, if any, by an Employee of employment by an Employing Company at a work location which is outside the fifty mile radius set forth in this Section 2.17(d) shall not be a waiver of the Employee's right to refuse subsequent transfer by an Employing Company to a location which is more than fifty (50) miles from the Employee's principal place of residence at the time of the Change in Control, and such subsequent, unconsented transfer shall be "Good Reason" under this Agreement; or (e) Benefits and Perquisites. The taking of any action by the Employing Company that would directly or indirectly materially reduce the benefits enjoyed by an Employee under the Employing Company's retirement, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which the Employee was participating immediately prior to the Change in Control, or the failure by the Employing Company to provide an Employee with the number of paid vacation days to which the Employee is entitled on the basis of years of service with the Employing Company in accordance with the Employing Company's normal vacation policy in effect immediately prior to the Change in Control (except for across-the-board plan or vacation policy changes or plan terminations similarly affecting at least ninety-five percent (95%) of all Employees of the Employing Company). 2.18 "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. 2.19 "Group Health Plan" shall mean the group health plan covering the Participant, as such plan may be amended from time to time. 2.20 "Group Life Insurance Plan" shall mean the group life insurance program covering the Participant, as such plan may be amended from time to time. 2.21 "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998 plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to the Effective Date whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. 2.22 "Month of Service" shall mean any calendar month during which a Participant has worked at least one (1) hour or was on approved leave of absence while in the employ of an Employing Company or any other Southern Subsidiary. 2.23 "Omnibus Plan" shall mean the Southern Company Omnibus Incentive Compensation Plan, and the Design and Administrative Specifications duly adopted thereunder, as in effect on the day before the date of a Change in Control, as may be amended from time to time. 2.24 "Participant" shall mean an Employee or Support Employee who meets the eligibility requirements of Section 3.1 of this Plan. 2.25 "Pension Plan" shall mean The Southern Company Pension Plan or any successor thereto, as such plans may be amended from time to time. 2.26 "Performance Dividend Program" or "PDP" shall mean the Performance Dividend Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. 2.27 "Performance Pay Program" or "PPP" shall mean the Performance Pay Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. 2.28 "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of Exchange Act. 2.29 "Plan" shall mean the Southern Company Executive Change in Control Severance Plan. 2.30 "Southern" shall mean The Southern Company, its successors and assigns. 2.31 "Southern Board" shall mean the board of directors of Southern. 2.32 "Southern Subsidiary" shall mean any corporation or other entity Controlled by Southern or another Southern Subsidiary. 2.33 "Support Employee" shall mean an Employee of the Company (which shall continue to be such Employee's Employing Company for purposes of this Plan) who: (a) Is involuntarily terminated without Cause within one year of the Change in Control of an Employing Company (other than the Company) and either (i) spent at least 40% of his working time performing services for such Employing Company at the time of the Change in Control and for the six months prior thereto, or (ii) is determined by the Administrative Committee to be involuntarily terminated without Cause as a result of such Change in Control; or (b) Voluntarily terminates with Good Reason within one year of the Change in Control of an Employing Company (other than the Company) and spent at least 40% of his working time performing services for such Employing Company at the time of the Change in Control and for the six months prior thereto. For purposes of this Section 2.33(b) only, Good Reason shall not include the provisions of Section 2.17(a), entitled "Inconsistent Duties." 2.34 "Termination for Cause" or "Cause" shall mean an Employee's termination of employment with his Employing Company upon the occurrence of any of the following: (a) The willful and continued failure by the Employee to substantially perform his duties with his Employing Company (other than any such failure resulting from the Employee's Total Disability or from the Employee's retirement or any such actual or anticipated failure resulting from termination by the Employee for Good Reason) after a written demand for substantial performance is delivered to him by the Administrative Committee, which demand specifically identifies the manner in which the Administrative Committee believes that he has not substantially performed his duties; or (b) The willful engaging by the Employee in conduct that is demonstrably and materially injurious to his Employing Company, monetarily or otherwise, including but not limited to any of the following: (i) any willful act involving fraud or dishonesty in the course of an Employee's employment by his Employing Company; (ii) the willful carrying out of any activity or the making of any statement by an Employee which would materially prejudice or impair the good name and standing of his Employing Company, Southern or any other Southern Subsidiary or would bring his Employing Company, Southern or any other Southern Subsidiary into contempt, ridicule or would reasonably shock or offend any community in which his Employing Company, Southern or such other Southern Subsidiary is located; (iii) attendance by an Employee at work in a state of intoxication or otherwise being found in possession at his workplace of any prohibited drug or substance, possession of which would amount to a criminal offense; (iv) violation of his Employing Company's policies on drug and alcohol usage, fitness for duty requirements or similar policies as may exist from time to time as adopted by the Employing Company's safety officer; (v) assault or other act of violence by an Employee against any person during the course of employment; or (vi) an Employee's indictment for any felony or any misdemeanor involving moral turpitude. No act or failure to act by an Employee shall be deemed "willful" unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of his Employing Company. Notwithstanding the foregoing, an Employee shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of the majority of the Administrative Committee at a meeting called and held for such purpose (after reasonable notice to the Employee and an opportunity for him, together with counsel, to be heard before the Administrative Committee), finding that, in the good faith opinion of the Administrative Committee, the Employee was guilty of conduct set forth in Section 2.34(a) or (b) hereof and specifying the particulars thereof in detail. 2.35 "Termination Date" shall mean the date on which a Participant is separated from his Employing Company's regular payroll; provided, however, that solely for purposes of Section 3.2(c) hereof, the Termination Date of Participants who are deemed to be retired pursuant to the provisions of Section 3.3 hereof, shall be the effective date of their retirement pursuant to the terms of the Pension Plan. 2.36 "Total Disability" shall mean total disability within the meaning of the Pension Plan. 2.37 "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. 2.38 "Waiver and Release" shall mean the Waiver and Release attached hereto as Exhibit A. 2.39 "Year of Service" shall mean an Employee's Months of Service divided by twelve (12) rounded to the nearest whole year, rounding up if the remaining number of months is seven (7) or greater and rounding down if the remaining number of months is less than seven (7). If an Employee has a break in his service with his Employing Company, he will receive credit under this Plan for the service prior to the break in service only if the break in service was less than five years and his service prior to the break exceeds the length of the break in service. ARTICLE 3 - SEVERANCE BENEFITS 3.1 Eligibility. (a) Employees. Except as otherwise provided herein, any Employee whose employment is involuntarily terminated by his Employing Company at any time during the two year period following a Change in Control of Southern or his Employing Company for reasons other than Cause or who shall voluntarily terminate his employment with his Employing Company for Good Reason at any time during the two year period following a Change in Control of Southern or his Employing Company, shall be entitled to participate in this Plan and receive the benefits described in Section 3.2 hereof, subject to the terms and conditions described in this Article 3. (b) Deemed Employees. An Employee who is deemed to be employed by a different Employing Company than his actual Employing Company under Section 2.13 hereof, shall be entitled to participate in this Plan and receive the benefits described in Section 3.2 hereof in the same manner as other Employees under Section 3.1(a) hereof; provided, however, that such deemed Employee will be considered to be an Employee of the deemed Employing Company solely for purposes of determining whether a Change in Control has occurred. For all other purposes under this Plan, such deemed Employee's actual Employing Company shall be considered. (c) Support Employees. A Support Employee shall be entitled to participate in this Plan and receive the benefits described in Section 3.2 hereof, subject to the terms and conditions described in this Article 3. (d) Limits on Eligibility. Notwithstanding anything to the contrary herein, an Employee or Support Employee shall not be eligible to receive benefits under this Plan if the Employee or Support Employee: (i) is not actively at work on his Termination Date, unless such Employee or Support Employee is capable of returning to work within twelve (12) weeks of the beginning of any leave of absence from work; (ii) voluntarily terminates his employment with his Employing Company for other than Good Reason; (iii) is terminated by his Employing Company for Cause; (iv) accepts the transfer of his employment to Southern, any Southern Subsidiary or any employer that acquires all or substantially all of the assets of Southern, a Southern Subsidiary or his Employing Company; (v) refuses an offer of continued employment with his Employing Company, Southern or a Southern Subsidiary, or any employer that acquires all or substantially all of the assets of Southern, a Southern Subsidiary or his Employing Company, under circumstances where such refusal would not amount to Good Reason for voluntary termination of employment and such employer agrees to adopt this Plan as it applies to such Participant; or (vi) elects to receive the benefits of any other voluntary or involuntary severance, separation or outplacement program, plan or agreement maintained by his Employing Company in lieu of benefits under this Plan; provided however, that the receipt of benefits under any retention plan or agreement shall not be deemed to be the receipt of benefits under any severance, separation or outplacement program for purposes of this Plan. 3.2 Benefits. Upon the Employing Company's receipt of an effective Waiver and Release, Participants shall be entitled to receive the following benefits: (a) Employee Outplacement Services. Each Participant shall be eligible to participate in the Employee Outplacement Program, which program shall not be less than six (6) months duration measured from the Participant's Termination Date. (b) Severance Benefit. Participants shall be paid in cash an amount equal to two times the Participant's Annual Compensation, but not in excess of the Capped Amount. For purposes of this Section 3.2(b), the Capped Amount shall be the amount otherwise payable under this Section 3.2(b), reduced in such amount and to such extent that no amount of the payment under this Section 3.2(b), plus all other "parachute payments" under Code Section 280G, would constitute an "excess parachute payment" under Code Section 280G, but only to the extent that if the payment under this Section 3.2(b) were increased by one additional dollar ($1.00), a portion of the payment under this Section 3.2(b) would be an "excess parachute payment" under Code Section 280G. The calculation of the Capped Amount and any other determinations relating to the applicability of Code Section 280G (and the rules and regulations promulgated thereunder) to the payments contemplated by this Plan shall be made by the tax department of the independent public accounting firm then responsible for preparing Southern's consolidated federal income tax return, and such determinations shall be binding upon the Participants, Southern and the Employing Company. (c) Welfare Benefit. (i) Except as provided in Section 3.3 hereof, each Participant shall be eligible to participate in the Employing Company's Group Health Plan for a period of six (6) months for each of the Participant's Years of Service, not to exceed a period of five (5) years, beginning on the first day of the first month following the Participant's Termination Date unless otherwise specifically provided under such plan, upon the Participant's payment of both the Employing Company's and the Participant's premium under such plan. A Participant who receives this extended medical coverage shall also be entitled to elect coverage under the Group Health Plan for his dependents who are participating in the Group Health Plan on the Participant's Termination Date (and for such other dependents as may be entitled to coverage under the provisions of the Health Insurance Portability and Accountability Act of 1996) for the duration of the Participant's extended medical coverage under this Section 3.2(c) to the extent such dependents remain eligible for dependent coverage under the terms of the Group Health Plan. (ii) The extended medical coverage afforded to a Participant pursuant to this Section 3.2(c) as well as the premiums to be paid by the Participant in connection with such coverage shall be determined in accordance with the terms of the Group Health Plan and shall be subject to any changes in the terms and conditions of the Group Health Plan as well as any future increases in premiums under the Group Health Plan. The premiums to be paid by the Participant in connection with this extended coverage shall be due on the first day of each month; provided, however, that if a Participant fails to pay his premium within thirty (30) days of its due date, such Participant's extended coverage shall be terminated. (iii) Any Group Health Plan coverage provided under this Section 3.2(c) shall be a part of and not in addition to any COBRA Coverage which a Participant or his dependent may elect. In the event that a Participant or his dependent becomes eligible to be covered, by virtue of re-employment or otherwise, by any employer-sponsored group health plan or is eligible for coverage under any government-sponsored health plan during the above period, coverage under the Employing Company's Group Health Plan available to the Participant or his dependent by virtue of the provisions of this Article 3 shall terminate, except as may otherwise be required by law, and shall not be renewed. It shall be the duty of a Participant to inform the Employing Company of his eligibility to participate in any such health plan. (iv) Except as otherwise provided in Section 3.3 hereof, regardless of whether a Participant elects the extended coverage described in Section 3.2(a) hereof, the Employing Company shall pay to each Participant a cash amount equal to the Employing Company's and the Participant's cost of premiums for two (2) years of coverage under the Group Health Plan and Group Life Insurance Plan, as such Plans were in effect as of the date of the Change in Control. (d) Stock Option Vesting. The provisions of this Section 3.2(d) shall apply to any Participant who, as of the date of the Change in Control, was a participant in the Omnibus Plan, the defined terms of which are incorporated in this Section 3.2(d) by reference. (i) Any of the Participant's Options and Stock Appreciation Rights outstanding as of the Termination Date which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Participant holding a Stock Appreciation Right who is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to the Participant under Section 16(b) of the Exchange Act, provided further that any such actions not taken as a result of the rules under Section 16(b) of the Exchange Act shall be effected as of the first date that such activity would no longer result in liability under Section 16(b) of the Exchange Act. (ii) The restrictions and deferral limitations applicable to any of the Participant's Restricted Stock and Restricted Stock Units as of the Termination Date shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (e) Performance Pay Program. The provisions of this Section 3.2(e) shall apply to any Participant who, as of the date of the Change in Control, was a participant in the Performance Pay Program, the defined terms of which are incorporated in this Section 3.2(e) by reference. Provided the Participant is not entitled to a Cash-Based Award under the PPP, if the PPP is in place as of the Participant's Termination Date and to the extent the Participant is entitled to participate therein, the Participant shall be entitled to receive cash in an amount equal to a prorated payout of his Cash-Based Award under the PPP for the performance period in which the Termination Date shall have occurred, at target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (f) Performance Dividend Program. The provisions of this Section 3.2(f) shall apply to any Participant who, as of the date of the Change in Control, was a participant in the Performance Dividend Program, the defined terms of which are incorporated in this Section 3.2(f) by reference. Provided the Participant is not entitled to a Cash-Based Award under the PDP, if the PDP is in place through the Participant's Termination Date and to the extent the Participant is entitled to participate therein, the Participant shall be entitled to receive cash for each such Cash-Based Award under the PDP held as of such date based on a payout percentage of 50% under the PDP for the performance period in which the Termination Date shall have occurred, and the annual dividend declared prior to the Termination Date. (g) Other Short Term Incentives Under the Omnibus Plan. The provisions of this Section 3.2(g) shall apply to any Participant who, as of the date of the Change in Control is entitled to a Performance Unit or Performance Share award under the Omnibus Plan. Provided the Participant is not otherwise entitled to a Performance Unit/Share award under the Omnibus Plan, the Participant shall be entitled to receive cash in an amount equal to a prorated payout of the value of his Performance Units and/or Performance Shares for the performance period in which the Termination Date shall have occurred, at target performance and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (h) Other Short-Term Incentive Plans. The provisions of this Section 3.2(h) shall apply to any Participant who, as of the date of the Change in Control, is a participant in any other "short term incentive compensation plan" not otherwise previously referred to in this Section 3.2. Provided the Participant is not otherwise entitled to a plan payout under any change in control provisions of such plans, if the "short term incentive compensation plan" is in place through the Participant's Termination Date and to the extent the Participant is entitled to participate therein, the Participant shall be entitled to receive cash in an amount equal to his award under his respective Employing Company's "short term incentive compensation plan" for the annual performance period in which the Termination Date shall have occurred, at the Participant's target performance level and prorated by the number of months which have passed since the beginning of the annual performance period until the Termination Date. For purposes of this Section 3.2(h), the term "short term incentive compensation plan" shall mean any incentive compensation plan or arrangement adopted in writing by an Employing Company which provides for annual, recurring compensatory bonuses to participants based upon articulated performance criteria, and which have been identified by the Board of Directors and listed on Exhibit B hereto, which may be amended from time to time to reflect plan additions, terminations and amendments. 3.3 Coordination with Retiree Medical and Life Insurance Coverage. Notwithstanding anything to the contrary above, any Participant who is otherwise eligible to retire pursuant to the terms of the Pension Plan shall be deemed to have retired for purposes of all employee benefit plans sponsored by the Employing Company of which the Participant is a participant. A Participant who is deemed to have retired in accordance with the preceding sentence shall not be eligible to receive the benefits described in Section 3.2(c) hereof if, upon his Termination Date, such Participant becomes eligible to receive the retiree medical and life insurance coverage provided to certain retirees pursuant to the terms of the Pension Plan, the Group Health Plan and the Group Life Insurance Plan. 3.4 Payment of Benefits. The amounts due a Participant under Sections 3.2(b) and (c) hereof shall be payable in one (1) lump sum payment as soon as administratively practicable within thirty (30) days of the later of the following to occur: (a) the Participant's Termination Date, or (b) the tender to the Employing Company by the Participant of an effective Waiver and Release in the form of Exhibit A attached hereto and the expiration of any applicable revocation period for such waiver. In the event of a dispute with respect to liability or amount of any benefit due hereunder, an effective Waiver and Release shall be tendered at the time of final resolution of any such dispute when payment is tendered by the Employing Company. 3.5 Benefits in the Event of Death. In the event of the Participant's death prior to the payment of all benefits due under this Article 3, the Participant's estate shall be entitled to receive as due any amounts not yet paid under this Article 3 upon the tender by the executor or administrator of the estate of an effective Waiver and Release. 3.6 Legal Fees. In the event of a dispute between a Participant and his Employing Company with regard to any amounts due hereunder, if any material issue in such dispute is finally resolved in the Participant's favor, his Employing Company shall reimburse the Participant's legal fees incurred with respect to all issues in such dispute in an amount not to exceed thirty thousand dollars ($30,000). 3.7 No Mitigation. A Participant who receives benefits under Section 3.2 of this Plan shall have no duty or obligation to seek other employment following his Termination Date and, except as otherwise provided in Subsection 3.1(d) hereof, the amounts due a Participant hereunder shall not be reduced or suspended if such Participant accepts such subsequent employment. 3.8 Non-qualified Retirement and Deferred Compensation Plans. Subsequent to a Change in Control, any claims by a Participant for benefits under any of the Company's non-qualified retirement or deferred compensation plans shall be resolved through binding arbitration in accordance with the procedures and provisions set forth in Article 5 hereof and if any material issue in such dispute is finally resolved in the Participant's favor, the Company shall reimburse the Participant's legal fees in the manner provided in Section 3.6 hereof. ARTICLE 4 - ADMINISTRATION 4.1 Administrative Committee. The Administrative Committee shall be responsible for the general administration of the Plan and may appoint other persons or entities to perform or assist in the performance of any of its duties, subject to its review and approval. The Administrative Committee shall have the right to remove any such appointee from his position without cause upon notice. ARTICLE 5 - ARBITRATION 5.1 General. Any dispute, controversy or claim arising out of or relating to the Company's obligations to pay severance benefits under this Plan, or the breach thereof, shall be settled and resolved solely by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") except as otherwise provided herein. The arbitration shall be the sole and exclusive forum for resolution of any such claim for severance benefits and the arbitrators' award shall be final and binding. The provisions of this Article 5 are not intended to apply to any other disputes, claims or controversies arising out of or relating to a Participant's employment by an Employing Company or the termination thereof. 5.2 Demand for Arbitration. Arbitration shall be initiated by serving a written notice of demand for arbitration to the Participant, in the case of an Employing Company, or to the Administrative Committee, in the case of a Participant. 5.3 Law and Venue. The arbitrators shall apply the laws of the State of Georgia, except to the extent pre-empted by federal law, excluding any law which would require the use of the law of another state. The arbitration shall be held in Atlanta, Georgia. 5.4 Appointment of Arbitrators. Arbitrators shall be appointed within fifteen (15) business days following service of the demand for arbitration. The number of arbitrators shall be three. One arbitrator shall be appointed by the Participant, one arbitrator shall be appointed by the Employing Company, and the two arbitrators shall appoint a third. If the arbitrators cannot agree on a third arbitrator within thirty (30) business days after the service of demand for arbitration, the third arbitrator shall be selected by the AAA. 5.5 Costs. The arbitration filing fee shall be paid by the Participant. All other costs of arbitration shall be borne equally by the Participant and his Employing Company, provided, however, that such Employing Company shall reimburse such fees and costs in the event any material issue in such dispute is finally resolved in the Participant's favor and the Participant is reimbursed legal fees under Section 3.6 hereof. 5.6 Interim and Injunctive Relief. Nothing in this Article 5 is intended to preclude, upon application of either party, any court having jurisdiction from issuing and enforcing in any lawful manner such temporary restraining orders, preliminary injunctions, and other interim measures of relief as may be necessary to prevent harm to either party's interests or as otherwise may be appropriate pending the conclusion of arbitration proceedings pursuant to this Article 5 and nothing herein is intended to prevent any court from entering and enforcing in any lawful manner such judgments for permanent equitable relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate following the issuance of arbitral awards pursuant to this Article 5. ARTICLE 6 - MISCELLANEOUS 6.1 Funding of Benefits. Unless the Board of Directors shall in its discretion determine otherwise, the benefits payable to a Participant under the Plan shall not be funded in any manner and shall be paid by the Employing Companies out of their general assets, which assets are subject to the claims of the Employing Companies' creditors. 6.2 Withholding. There shall be deducted from the payment of any benefit due under the Plan the amount of any tax required by any governmental authority to be withheld and paid over by the Employing Companies to such governmental authority for the account of the Participant entitled to such payment. 6.3 Assignment. No Participant or beneficiary shall have any rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. 6.4 Amendment and Termination. The Plan may be amended or terminated at any time by the Board of Directors, provided, however, the Plan may not be amended in any material respect or terminated within the two (2) year period following a Change in Control nor shall any amendment or termination impair the rights of any Participant which have accrued hereunder prior to any such amendment or termination. 6.5 Pooling Accounting. Notwithstanding anything to the contrary herein, if, but for any provision of this Plan, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Plan which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Plan, Pooling Accounting would be required for such Change in Control transaction. IN WITNESS WHEREOF, this Southern Company Executive Change in Control Severance Plan has been executed by the Company through its duly authorized officers, this ____ day of ___________, 2002, to be effective as provided herein. SOUTHERN COMPANY SERVICES, INC. By: __________________________________ Its: Senior Vice President ---------------------------------- Attest: By: -------------------------------------------- Its: -------------------------------------------- Exhibit A SOUTHERN COMPANY EXECUTIVE CHANGE IN CONTROL SEVERANCE PLAN Waiver and Release I understand that I am entitled to receive the Severance Benefits described in Article 3 of the Southern Company Executive Change in Control Severance Plan (the "Plan") if I execute this Waiver and Release ("Waiver"). I understand that the benefits I have elected to receive under the Plan are in excess of those I would have received from ________________________ (the "Company") if I had not elected to participate in the Plan and sign this Waiver. I recognize that I may have a claim against the Company under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the Americans with Disabilities Act or other federal, state and local laws. In exchange for the benefits I elect to receive, I hereby irrevocably waive and release all claims, of any kind whatsoever, whether known or unknown in connection with any claim which I ever had, may have, or now have against The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company, Southern Communication Services, Inc. d/b/a Southern LINC, Southern Company Services, Inc., Southern Company Energy Solutions, LLC, Southern Nuclear Operating Company, Inc., Southern Telecom, Inc., Southern Company Management Development, Inc., and other current or former subsidiaries of The Southern Company and their past, present and future officers, directors, employees, agents and attorneys. Nothing in this Waiver shall be construed to release claims or causes of action under the Age Discrimination in Employment Act which arise out of events occurring after the execution date of this Waiver. In further exchange for the benefits I elect to receive, I understand and agree that I will respect the proprietary and confidential nature of any information I have obtained in the course of my service with the Company or any subsidiary or affiliate of The Southern Company. I understand and agree that I am obligated to keep confidential and not disclose the terms of this Waiver, including, but not limited to, the benefits under this Plan, except to my attorneys, financial advisors, or except where such disclosure is required by law. However, nothing in this Waiver shall prohibit me from engaging in protected activities under applicable law or from communicating, either voluntary or otherwise, with any governmental agency concerning any potential violation of the law. In signing this Waiver, I am not releasing claims to any vested or accrued benefits that I have under any workers' compensation laws or any retirement plan or welfare benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, which is sponsored by or adopted by the Company and/or any of its direct or indirect subsidiaries; however, I understand and acknowledge that nothing herein is intended to or shall be construed to require the Company to institute or continue in effect any particular plan or benefit sponsored by the Company and the Company hereby reserves the right to amend or terminate any of its benefit programs at any time in accordance with the procedures set forth in such plans. In signing this Waiver, I realize that I am waiving and releasing, among other things, any claims to benefits under any and all bonus, severance, workforce reduction, early retirement, outplacement, or any other similar type plan sponsored by the Company except for programs specifically designed for participants in the Plan. Notwithstanding anything in this Waiver to the contrary, I understand that the Company is not discouraging or prohibiting me from engaging in any protected activity described in Section 211 of the Energy Reorganization Act. I have been encouraged and advised in writing to seek advice from anyone of my choosing regarding this Waiver, including my attorney, and my accountant or tax advisor. Prior to signing this Waiver, I have been given the opportunity and sufficient time to seek such advice, and I fully understand the meaning and contents of this Waiver. I understand that I may take up to forty-five (45) calendar days to consider whether or not I desire to enter this Waiver. I was not coerced, threatened or otherwise forced to sign this Waiver. I have made my choice to sign this Waiver voluntarily and of my own free will. I understand that I may revoke this Waiver at any time during the seven (7) calendar day period after I sign and deliver this Waiver to the Company. If I revoke this Waiver, I must do so in writing delivered to the Company. I understand that this Waiver is not effective until the expiration of this seven (7) calendar day revocation period. I understand that upon the expiration of such seven (7) calendar day revocation period this entire Waiver will be binding upon me and will be irrevocable. I understand that by signing this Waiver I am giving up rights I may have. I understand I do not have to sign this Waiver. IN WITNESS WHEREOF, the undersigned hereby executes this Waiver this day of - ---------- ------------------- , in the year ______. Employee's signature Employee's printed name WITNESS Acknowledged and Accepted by the Administrative Committee of the Southern Company Executive Change in Control Severance Plan. By: ----------------------------------- Date: ----------------------------------- Attachment to Exhibit A TO: All Eligible Employees under the Southern Company Executive Change in Control Severance Plan FROM: _____________________ RE: ADEA Information Notice DATE: _____________________ A severance plan known as the Southern Company Executive Change in Control Severance Plan ("Plan") has been approved and established by The Southern Company, its affiliates and its direct and indirect subsidiaries (collectively the "Company"). You are eligible to participate in the Plan subject to the terms of the Plan. In accordance with the Age Discrimination in Employment Act ("ADEA"), the Company is providing you the following information pertaining to eligibility and participation in the Plan. This information, in conjunction with the information provided in the Plan, should allow you to make an informed decision concerning your options under the Plan. The purpose of the Plan is to provide benefits to certain key employees of The Southern Company and certain subsidiaries of The Southern Company and its subsidiaries ("Employing Companies") whose employment is terminated subsequent to a change in control of The Southern Company or their respective Employing Company. You are eligible to participate in the Plan because your employment has been terminated under the terms of the Plan. All eligible employees may receive severance benefits under the Plan by signing a Waiver and Release no later than 45 calendar days from the date it is received. The Waiver and Release will remain revocable by you for a seven day period after you sign it. Attached is a list sorted by job title and age of each employee eligible to participate in the Plan as well as a list of the ages of all employees in the same job classification who are not eligible to participate in the Plan. In furtherance of you making an informed decision, the Company urges you to seek a financial advisor, legal counsel and a qualified tax advisor to assist you in fully understanding your rights and benefits under the plan and the Waiver and Release that you will be required to sign to receive severance benefits under the Plan. If you have any questions or need additional information, please call me at _______________. Sincerely, - ---------------------- [Name] - ---------------------- [Title] ADEA INFORMATION NOTICE - ------------------------------------- ---------------------------------- --------------------------------------------- Department Job Title, Classification Age of or Category of Eligible Employees Eligible Employees - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- [List department of each eligible [List job classification, title [List age of each eligible employee] employee] corresponding or category of all eligible employees] - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- Department Job Title, Classification Age of or Category of Ineligible Ineligible Employees Employees - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- - ------------------------------------- ---------------------------------- --------------------------------------------- [List department of each ineligible [List job classification, title [List age of each ineligible employee] employee] corresponding or category of all ineligible employees] - ------------------------------------- ---------------------------------- ---------------------------------------------
Exhibit B SOUTHERN COMPANY EXECUTIVE CHANGE IN CONTROL SEVERANCE PLAN Short Term Incentive Compensation Plans EX-10.A.105 10 ex10a105.txt Exhibit 10(a)105 SOUTHERN COMPANY CHANGE IN CONTROL BENEFIT PLAN DETERMINATION POLICY Troutman Sanders LLP Bank of America Plaza, Suite 5200 600 Peachtree Street, N.E. Atlanta, Georgia 30308 SOUTHERN COMPANY CHANGE IN CONTROL BENEFIT PLAN DETERMINATION POLICY AS AMENDED AND RESTATED ARTICLE I - PURPOSE AND ADOPTION OF POLICY 1.1 Adoption of Policy. Southern Company Services, Inc. hereby adopts this amended and restated Southern Company Change in Control Benefit Plan Determination Policy, originally effective July 10, 2000, as amended and restated effective May 9, 2002. 1.2 Purpose. The Policy is designed to govern the determination of a Change in Control of Southern and/or the Employing Companies, and the benefits to be provided to employees of Southern and the Employing Companies under certain employee benefit plans. ARTICLE II - DEFINITIONS 2.1 "Administrative Committee" shall mean the Vice President of Human Resources of Southern Company, Director of System Compensation and Benefits and the Comptroller of Southern Company. 2.2 "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. 2.3 "Business Combination" shall mean a reorganization, merger or consolidation of Southern Company or sale or other disposition of all or substantially all of the assets of Southern Company. 2.4 "Change in Control" shall mean a Southern Change in Control and/or a Subsidiary Change in Control, as applicable. 2.5 "Common Stock" shall mean the common stock of Southern Company. 2.6 "Company" shall mean Southern Company Services, Inc., its successors and assigns. 2.7 "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or agencies. 2.8 "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. 2.9 "Employee Benefit Plan(s)" shall mean, collectively, the Southern Company Omnibus Incentive Compensation Plan, the Southern Company Supplemental Benefit Plan, the Southern Company Supplemental Executive Retirement Plan and the Southern Company Deferred Compensation Plan, as may be amended from time to time in accordance with their terms. 2.10 "Employing Company" shall mean the Company, any other corporation or other entity Controlled by Southern Company, or any corporation or other entity Controlled by a subsidiary of Southern Company which the Compensation Committee of the Southern Company Board of Directors has authorized to participate in the Change in Control Program, which has adopted the Change in Control Program, and any successor of any of them. The Administrative Committee may deem one or more employees of a particular subsidiary or affiliate of Southern Company, or of any corporation or entity Controlled by a subsidiary or affiliate of Southern Company, to be employed by an Employing Company for purposes of being covered under this Policy. Such action shall be in writing and shall cause such an employee to only be entitled to benefits under this Policy in the event of a Change in Control of his deemed Employing Company, and not his actual employing company. 2.11 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 2.12 "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. 2.13 "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998, plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern Company's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to October 19, 1998, whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. 2.14 "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act. 2.15 "Plan Termination" shall mean the termination of an Employee Benefit Plan (or a specific program under the Omnibus Plan) by Southern Company or an Employing Company following a Southern Change in Control unless an equitable arrangement (embodied in an ongoing substitute or replacement plan) has been made with respect to the Employee Benefit Plan in connection with the Change in Control. For purposes of this Policy, an ongoing substitute or alternative plan shall be considered an "equitable arrangement" if a nationally recognized compensation consulting firm chosen by the Administrative Committee opines in writing that the post-Change in Control plan is an equitable substitute or replacement of the Employee Benefit Plan. 2.16 "Preliminary Change in Control" shall mean the occurrence of any of the following as determined by the Southern Committee. (1) Southern Company or an Employing Company has entered into a written agreement, such as, but not limited to, a letter of intent, which, if Consummated, would result in a Southern Change in Control or a Subsidiary Change in Control, as the case may be; (2) Southern Company, an Employing Company or any Person publicly announces an intention to take or to consider taking actions which, if Consummated, would result in a Southern Change of Control or a Subsidiary Change in Control under circumstances where the Consummation of the announced action or intended action is legally and financially possible; (3) Any Person achieves the Beneficial Ownership of fifteen percent (15%) or more of the Common Stock; or (4) The Southern Board or the board of directors of an Employing Company has declared that a Preliminary Change of Control has occurred. 2.17 "Southern Board" shall mean the board of directors of Southern Company. 2.18 "Southern Change in Control" shall mean any of the following: (a) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern Company's Voting Securities; provided, however, that for purposes of this subsection (a), the following acquisitions of Southern Company's Voting Securities shall not constitute a Change in Control: (i) any acquisition directly from Southern Company; (ii) any acquisition by Southern Company; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern Company or any corporation controlled by Southern Company; (iv) any acquisition by a qualified pension plan or publicly held mutual fund; (v) any acquisition by an employee of Southern Company or its subsidiary or affiliate, or Group composed exclusively of such employees; or (vi) any Business Combination which would not otherwise constitute a Change in Control because of the application of clauses (i), (ii) and (iii) of this Section; (b) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; or (c) Consummation of a Business Combination, unless, following such Business Combination, all of the following three conditions are met: (i) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern Company's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern Company's Voting Securities or all or substantially all of Southern Company's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Southern Company's Voting Securities; (ii) no Person (excluding any corporation resulting from such Business Combination, any qualified pension plan, publicly held mutual fund, Group composed exclusively of employees or employee benefit plan (or related trust) of Southern Company, its subsidiaries or Surviving Company) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. 2.19 "Southern Committee" shall mean the committee comprised of the Chairman of the Southern Board, Chief Financial Officer of Southern Company, General Counsel of Southern Company and the Chairman of the Administrative Committee. 2.20 "Southern Company" shall mean The Southern Company, its successors and assigns. 2.21 "Southern Termination" shall mean the following: (a) The Consummation of a reorganization, merger or consolidation of Southern Company under circumstances where either (i) Southern Company is not the surviving corporation or (ii) Southern Company's Voting Securities are no longer publicly traded; (b) The Consummation of a sale or other disposition of all or substantially all of Southern Company's assets; or (c) The Consummation of an acquisition by any Person of Beneficial Ownership of all of Southern Company's Voting Securities such that Southern Company's Voting Securities are no longer publicly traded. 2.22 "Subsidiary Change in Control" shall mean the following: (a) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of an Employing Company; provided, however, that for purposes of this Subsection 2.22, any acquisition by an employee of Southern Company or its subsidiary or affiliate, or Group composed entirely of such employees, any qualified pension plan, publicly held mutual fund or any employee benefit plan (or related trust) sponsored or maintained by Southern Company or any corporation Controlled by Southern Company shall not constitute a Change in Control; (b) Consummation of a reorganization, merger or consolidation of an Employing Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern Company Controls the corporation surviving or resulting from such Employing Company Business Combination, or (c) Consummation of the sale or other disposition of all or substantially all of the assets of an Employing Company to an entity which Southern Company does not Control. Notwithstanding the foregoing, in no event shall "Subsidiary Change in Control" mean an initial public offering or a spin-off of an Employing Company. 2.23 "Subsidiary Employee" shall mean an employee of an Employing Company which has undergone a Subsidiary Change in Control whose employment is not immediately transferred to another Employing Company upon such Subsidiary Change in Control. The Administrative Committee may deem one or more employees of a particular subsidiary or affiliate of Southern Company, or of any corporation or entity Controlled by a subsidiary or affiliate of Southern Company, to be employed by an Employing Company for purposes of being covered under this Policy. Such action shall be in writing and shall cause such an employee to only be entitled to benefits under this Policy in the event of a Change in Control of his deemed Employing Company, and not his actual employing company. 2.24 "Surviving Company" shall mean the corporation which either survives or results from any reorganization, merger or consolidation of which Southern Company is a party under circumstances where Southern Company does not survive. 2.25 "Trust" shall mean the Southern Company Deferred Compensation Trust. 2.26 "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. ARTICLE III - POOLING ACCOUNTING Notwithstanding anything to the contrary herein, if, but for any provision of this Policy, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Policy which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall automatically be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Policy, Pooling Accounting would be required for such Change in Control transaction and Pooling Accounting is in fact used for such Change in Control transaction. ARTICLE IV - OMNIBUS PLAN CHANGE IN CONTROL PROVISIONS 4.1 Application. The provisions of this Article IV apply to benefits payable under the Southern Company Omnibus Incentive Compensation Plan (the "Omnibus Plan") notwithstanding any provision in the Omnibus Plan to the contrary. The meaning of capitalized terms not defined herein are determined under the Omnibus Plan. 4.2 Stock-Based Awards. The provisions of this Section 4.2 apply to stock-based awards granted under the Omnibus Plan. (a) Subsidiary Change in Control. In the event of a Subsidiary Change in Control: (i) Any Options and Stock Appreciation Rights held by a Subsidiary Employee which are outstanding as of the date such Subsidiary Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Subsidiary Employee holding a Stock Appreciation Right who is actually subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable unless it shall have been outstanding for at least six months as of the date such Subsidiary Change in Control is determined to have occurred. (ii) The restrictions and deferral limitations applicable to any Restricted Stock and Restricted Stock Units held by a Subsidiary Employee shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (b) Southern Termination. In the event of a Southern Termination: (i) Any Options and Stock Appreciation Rights which are outstanding as of the date such Southern Termination is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Participant holding a Stock Appreciation Right who is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to the Participant under Section 16(b), provided further, that any such actions not taken as a result of the rules under Section 16(b) shall be effected as of the first date that such activity would no longer result in liability under such section. (ii) The restrictions and deferral limitations applicable to any Restricted Stock and Restricted Stock Units shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (iii) The restrictions and deferral limitations and other conditions applicable to any other Awards held by Subsidiary Employees shall lapse, and such other Awards shall become free of all restrictions, limitations or conditions and become fully vested and transferable to the full extent of the original grant. (iv) Any Options, Stock Appreciation Rights, Restricted Stock or Restricted Stock Units which are outstanding as of the date such Southern Termination is determined to have occurred, shall be converted into or replaced by options, stock appreciation rights, restricted stock or restricted stock units, as the case may be, in the Surviving Company, or the corporation which has acquired all of Southern Company's Common Stock or assets. In the event of such conversion or replacement, the terms of the replacement options or stock appreciation rights shall preserve with respect to each Option and each SAR the spread between the Fair Market Value of the shares subject to the Options or SARs and the Option Price or Base Value, as the case may be, as determined immediately prior to the Southern Termination. Similarly, the terms of replacement restricted stock or restricted stock units shall preserve the Fair Market Value of each share of Restricted Stock or Restricted Stock Unit as determined immediately prior to the Southern Termination. No replacement option, stock appreciation right, share of restricted stock or restricted stock unit received shall be subject to any terms which are less favorable than those which existed with respect to the original Option, SAR or share of Restricted Stock or Restricted Unit immediately prior to the Southern Termination. (v) In the event that it is not possible to effect the conversion set forth in Section 4.2(b)(iv) hereof, any and all outstanding Options, Stock Appreciation Rights, Restricted Stock and Restricted Stock Units as of the date of the Southern Termination which are not so converted shall be terminated and the affected Participants shall receive within thirty (30) days of the Southern Termination cash equal to the difference between the Option Price and Fair Market Value, in the case of Options, the Base Value and Fair Market Value, in the case of SARs and equal to the Fair Market Value, in the case of Restricted Stock and Restricted Stock Units. For purposes of this Section 4.2(b)(iv), Fair Market Value shall be determined as of the day prior to the date of the Southern Termination. 4.3 Application. The provisions of this Sections 4.3 apply to benefits payable under the Performance Pay Program under the Omnibus Plan (the "PPP"). (a) Southern Change in Control. In the event of a Southern Change in Control, if there is no Plan Termination with respect to the PPP, payout of Cash-Based Awards under the PPP to Participants for the performance period in which the Southern Change in Control shall have occurred shall be the greater of actual or target performance under the PPP. (b) Plan Termination. In the event of a Plan Termination with respect to the PPP within two (2) years following a Southern Change in Control, each Participant who is an Employee on the date of such Plan Termination shall be entitled to receive within thirty (30) days of the Plan Termination, cash in an amount equal to a pro-rated payout of his Cash-Based Award under the PPP for the performance period in which the Plan Termination shall have occurred, at the greater of target or actual performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the date of the Plan Termination. (c) Subsidiary Change in Control. In the event of a Subsidiary Change in Control, each Subsidiary Employee on the date of such Change in Control whose employment is not transferred upon such Subsidiary Change in Control to another Employing Company shall be entitled to receive within thirty (30) days of the Subsidiary Change in Control, cash in an amount equal to a prorated payout of his Cash-Based Award under the PPP for the performance period in which the Subsidiary Change in Control shall have occurred, at the greater of actual or target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the date of the Subsidiary Change in Control. (d) Southern Termination. In the event of a Southern Termination, each Participant on the date of such Southern Termination shall be entitled to receive within thirty (30) days of the Southern Termination, cash in an amount equal to a prorated payout of his Cash-Based Award under the PPP for the performance period in which the Southern Termination shall have occurred, at the greater of actual or target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the date of the Southern Termination. The PPP shall terminate immediately following the payments provided for in this Section 4.3(d). (e) Pro rata Calculation. For purposes of calculating any pro rata Cash-Based Awards under this Section 4.3, a month shall not be considered if the determining event occurs on or before the 14th day of the month, and a month shall be considered if the determining event occurs on or after the 15th day of the month. 4.4 Application. The provisions of this Section 4.4 apply to benefits payable under the Performance Dividend Program under the Omnibus Plan (the "PDP"). (a) Southern Change in Control. In the event of a Southern Change in Control, if there is no Plan Termination with respect to the PDP, payout of Cash-Based Awards under the PDP to Participants for the performance period in which the Southern Change in Control shall have occurred shall be based on actual performance under the PDP. (b) Plan Termination. In the event of a Plan Termination with respect to the PDP within two (2) years following a Southern Change in Control, each Participant who is an Employee on the date of such Plan Termination shall be entitled to receive within thirty (30) days of the Plan Termination, cash for each Cash-Based Award under the PDP held as of such date, based on actual performance under the PDP determined as of the date of the Plan Termination, and the annual dividend declared prior to the date of the Plan Termination. (c) Subsidiary Change in Control. In the event of a Subsidiary Change in Control, each Subsidiary Employee on the date of such Change in Control whose employment is not transferred upon such Subsidiary Change in Control to another Employing Company shall be entitled to receive within thirty (30) days of the Subsidiary Change in Control, cash for each Cash-Based Award under the PDP held as of such date, based on actual performance determined as of the date on which the Subsidiary Change in Control shall have occurred, and the annual dividend declared prior to the date of the Subsidiary Change in Control. (d) Southern Termination. In the event of a Southern Termination, each Participant who is an Employee on the date of such Southern Termination shall be entitled to receive within thirty (30) days of the Southern Termination, cash for each Cash-Based Award under the PDP held as of such date, based on actual performance determined as of the date on which the Southern Termination shall have occurred, and the annual dividend declared prior to the date of the Southern Termination. 4.5 Other Incentives. The provisions of this Section 4.5 shall apply to any employee of an Employing Company who, as of the date of the Change in Control, is entitled to a Performance Unit or Performance Share award under the Omnibus Plan, or any cash or stock-based award under any plan or program sponsored by an Employing Company, other than the Omnibus Plan. If and to the extent an employee of an Employing Company has received a stock-based award under any plan or program sponsored by his Employing Company, in the event of a Southern Change in Control, a Subsidiary Change in Control and/or a Southern Termination, such award shall be treated as if it were granted under the Omnibus Plan for purposes of this Policy, and any restrictions, limitations and deferral limitations shall lapse if and to the extent provided under Section 4.2 hereof. If and to the extent an employee of an Employing Company is entitled to a cash-based award under any plan or program sponsored by his Employing Company, in the event of a Southern Change in Control, a Subsidiary Change in Control and/or a Southern Termination, such award shall be treated as if it were granted under the Omnibus Plan for purposes of this Policy, and, provided such employee is not otherwise entitled to a plan payout under any change in control provision of such plan or program, such award shall be payable if and to the extent provided under Sections 4.3 and 4.4 hereof. ARTICLE V - SUPPLEMENTAL BENEFIT PLAN CHANGE IN CONTROL AND OTHER SPECIAL PROVISIONS 5.1 Application. The provisions of this Article V apply to benefits payable under The Southern Company Supplemental Benefit Plan (the "SBP"), notwithstanding any provision in the SBP to the contrary. The meaning of capitalized terms not defined herein are determined under the SBP. 5.2 General. Notwithstanding any other terms of the SBP to the contrary, upon a Southern Change in Control or a Subsidiary Change in Control, the provisions of this Article V shall become operative and apply to the calculation and payment of benefits under the SBP with respect to any Subsidiary Employee who is a Participant on such date. 5.3 Funding of Trust. The Trust has been established to hold assets of the Employing Companies under certain circumstances as a reserve for the discharge of the Employing Companies' obligations under the SBP. In the event of a Preliminary Change in Control of Southern Company, all Employing Companies shall be obligated to immediately contribute such amounts to the Trust as may be necessary to fully fund the Pension Benefit and Non-Pension Benefit payable under the SBP, the Pension Benefit to be determined under Section 5.5 hereof, in accordance with the procedures set forth in Section 5.4 hereof. In the event of a Preliminary Change in Control of an Employing Company, such Employing Company shall be obligated to immediately contribute such amounts to the Trust as may be necessary to fully fund the Pension Benefit and Non-Pension Benefit payable to its Subsidiary Employees under the SBP, the Pension Benefit to be determined under Section 5.6 hereof, in accordance with the procedures set forth in Section 5.4 hereof. In addition, in order to provide the added protections for certain individuals in accordance with Paragraph 7(b) of the Trust, the Employing Companies may fund the Trust prior to a Preliminary Change in Control of Southern Company or an Employing Company. All assets held in the Trust remain subject only to the claims of the Employing Companies' general creditors whose claims against the Employing Companies are not satisfied because of the Employing Companies' bankruptcy or insolvency (as those terms are defined in the Trust). No Participant has any preferred claim on, or beneficial ownership interest in, any assets of the Trust before the assets are paid to the Participant and all rights created under the Trust, as under the SBP, are unsecured contractual claims of the Participant against his Employing Company. 5.4 Calculation of Trust Contribution. As soon as practicable following either a Preliminary Change in Control of Southern Company or of an Employing Company, the affected Employing Companies shall contribute an amount based upon the funding strategy adopted by the Administrative Committee with the assistance of an appointed actuary necessary to fulfill the Employing Companies' obligations pursuant to this Article V. In the event of a dispute after a Change in Control over such actuary's determination, the respective Employing Company(ies) and any complaining Participant(s) shall refer such dispute to an independent, third-party actuarial consultant, chosen by the Employing Company and such Participant. If the Employing Company and the Participant cannot agree on an independent, third-party actuarial consultant, the actuarial consultant shall be chosen by lot from an equal number of actuaries submitted by the affected Employing Companies and the Trustee. Any such referral shall only occur once in total and the determination by the third-party actuarial consultant shall be final and binding upon both parties. The Employing Companies shall be responsible for all of the fees and expenses of the independent actuarial consultant. 5.5 Pension Benefit Upon Southern Change in Control. On the date of a Southern Change in Control, the Pension Benefit of each Participant who is an Employee of an Employing Company and who has a non-forfeitable right to Retirement Income under the Pension Plan, will be calculated based on such Participant's Earnings and Accredited Service on such date, regardless of whether such Participant is retirement eligible on such date. Each Participant, who is an Employee of an Employing Company, will be entitled to receive the amount of his Pension Benefit based on such Participant's Earnings and Accredited Service as of the date of a Southern Change in Control adjusted to take into account appropriate early reduction factors, if any, based on the Participant's commencement of benefits. Such benefit shall be paid in lump sum, upon termination of employment or retirement. Any benefits accrued under the SBP subsequent to the date of a Southern Change in Control will be calculated and distributed pursuant to the terms of the SBP, without regard to this Article V. 5.6 Pension Benefit Upon Subsidiary Change in Control. On the date of a Subsidiary Change in Control of an Employing Company, the Pension Benefit of each Participant who is an Employee of such Employing Company and who has a non-forfeitable right to Retirement Income under the Pension Plan, will be calculated based on such Participant's Earnings and Accredited Service on such date, regardless of whether such Participant is retirement eligible on such date. Each Participant, who is an Employee of such Employing Company, will be entitled to receive the amount of his Pension Benefit based on such Participant's Earnings and Accredited Service as of the date of a Subsidiary Change in Control adjusted to take into account appropriate early reduction factors, if any, based on the Participant's commencement of benefits. Such benefit shall be paid in lump sum, upon termination of employment or retirement. Any benefits accrued under the SBP subsequent to the date of a Subsidiary Change in Control will be calculated and distributed pursuant to the terms of the SBP, without regard to this Article V. 5.7 Non-Pension Benefit Distribution Election upon Change in Control. In the event of a Southern Change in Control or a Subsidiary Change in Control, notwithstanding anything to the contrary in the SBP, upon termination or retirement from employment, that Non-Pension Benefit of a Participant who was an Employee of an Employing Company affected by such a Change in Control shall be paid out in a lump sum if such Participant makes an election pursuant to procedures established by the Administrative Committee in its sole and absolute discretion. If no such election is made, the Participant shall receive payment of his Account solely in accordance with Article V of the SBP. ARTICLE VI - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN CHANGE IN CONTROL AND OTHER SPECIAL PROVISIONS 6.1 Application. The provisions of this Article VI apply to benefits payable under The Southern Company Supplemental Executive Retirement Plan (the "SERP"), notwithstanding any provision in the SERP to the contrary. The meaning of capitalized terms not defined herein are determined under the SERP. 6.2 General. Notwithstanding any other terms of the SERP to the contrary, upon a Southern Change in Control or a Subsidiary Change in Control, the provisions of this Article VI shall become operative and apply to the calculation and payment of benefits under the SERP with respect to any Subsidiary Employee who is a Participant on such date. 6.3 Funding of Trust. The Trust has been established to hold assets of the Employing Companies under certain circumstances as a reserve for the discharge of the Employing Companies' obligations under the SERP. In the event of a Preliminary Change in Control of Southern Company, all Employing Companies shall be obligated to immediately contribute such amounts to the Trust as may be necessary to fully fund all benefits payable under the SERP, as determined under Section 6.5 hereof, in accordance with the procedures set forth in Section 6.4 hereof. In the event of a Preliminary Change in Control of an Employing Company, such Employing Company shall be obligated to immediately contribute such amounts to the Trust as may be necessary to fully fund all benefits payable to its Subsidiary Employees under the SERP, as determined under Section 6.6 hereof, in accordance with the procedures set forth in Section 6.4 hereof. In addition, in order to provide the added protections for certain individuals in accordance with Paragraph 7(b) of the Trust, the Employing Companies may fund the Trust prior to a Preliminary Change in Control of Southern Company or an Employing Company. All assets held in the Trust remain subject only to the claims of the Employing Companies' general creditors whose claims against the Employing Companies are not satisfied because of the Employing Companies' bankruptcy or insolvency (as those terms are defined in the Trust). No Participant has any preferred claim on, or beneficial ownership interest in, any assets of the Trust before the assets are paid to the Participant and all rights created under the Trust, as under the SERP, are unsecured contractual claims of the Participant against his Employing Company. 6.4 Calculation of Trust Contribution. As soon as practicable following either a Preliminary Change in Control of Southern Company or of an Employing Company, the affected Employing Companies shall contribute an amount based upon the funding strategy adopted by the Administrative Committee with the assistance of an appointed actuary necessary to fulfill the Employing Companies' obligations pursuant to this Article VI. In the event of a dispute after a Change in Control over such actuary's determination, the respective Employing Company(ies) and any complaining Participant(s) shall refer such dispute to an independent, third-party actuarial consultant, chosen by the Employing Company and such Participant. If the Employing Company and the Participant cannot agree on an independent, third-party actuarial consultant, the actuarial consultant shall be chosen by lot from an equal number of actuaries submitted by the affected Employing Companies and the Trustee. Any such referral shall only occur once in total and the determination by the third-party actuarial consultant shall be final and binding upon both parties. The Employing Companies shall be responsible for all of the fees and expenses of the independent actuarial consultant. 6.5 SERP Benefit Upon Southern Change in Control. On the date of a Southern Change in Control, the SERP Benefit of each Participant, who is an Employee of an Employing Company and who has a non-forfeitable right to Retirement Income under the Pension Plan, will be calculated based on such Participant's Earnings and Accredited Service on such date, regardless of whether such Participant is retirement eligible on such date. Each such Participant, who is an Employee of an Employing Company, will be entitled to receive the amount of his SERP Benefit based on such Participant's Earnings and Accredited Service as of the date of a Southern Change in Control adjusted to take into account appropriate early reduction factors, if any, based on the Participant's commencement of benefits. Such benefit shall be paid in lump sum, upon termination of employment or retirement. Any benefits accrued under the SERP subsequent to the date of a Southern Change in Control will be calculated and distributed pursuant to the terms of the SERP, without regard to this Article VI. 6.6 SERP Benefit Upon Subsidiary Change in Control. On the date of a Subsidiary Change in Control of an Employing Company, the SERP Benefit of each Participant, who is an Employee of such Employing Company and who has a non-forfeitable right to Retirement Income under the Pension Plan, will be calculated based on such Participant's Earnings and Accredited Service on such date, regardless of whether such Participant is retirement eligible on such date. Each such Participant, who is an Employee of such Employing Company, will be entitled to receive the amount of his SERP Benefit based on such Participant's Earnings and Accredited Service as of the date of a Subsidiary Change in Control adjusted to take into account appropriate early reduction factors, if any, based on the Participant's commencement of benefits. Such benefit shall be paid in lump sum, upon termination of employment or retirement. Any benefits accrued under the SERP subsequent to the date of a Subsidiary Change in Control will be calculated and distributed pursuant to the terms of the SERP, without regard to this Article VI. ARTICLE VII - DEFERRED COMPENSATION PLAN CHANGE IN CONTROL AND OTHER SPECIAL PROVISIONS 7.1 Application. The provisions of this Article VII apply to benefits payable under the Southern Company Deferred Compensation Plan (the "DCP"), notwithstanding any provision in the DCP to the contrary. The meaning of capitalized terms not defined herein are determined under the DCP. 7.2 Notwithstanding any other terms of the DCP to the contrary, following a Southern Change in Control or a Subsidiary Change in Control, the provisions of this Article VII shall apply to the payment of benefits under the DCP with respect to any Subsidiary Employee who is a Participant on such date. 7.3 The Trust has been established to hold assets of the Employing Companies under certain circumstances as a reserve for the discharge of the Employing Companies' obligations under the DCP. In the event of a Preliminary Change in Control of Southern, all Employing Companies shall be obligated to immediately contribute such amounts to the Trust as may be necessary to fully fund all benefits payable under the DCP in accordance with the procedures set forth in Section 7.4 hereof. In the event of a Preliminary Change in Control of an Employing Company, such Employing Company shall be obligated to immediately contribute such amounts to the Trust as may be necessary to fully fund all benefits payable to its Subsidiary Employees under the DCP in accordance with the procedures set forth in Section 7.4 hereof. In addition, in order to provide the added protections for certain individuals in accordance with Paragraph 7(b) of the Trust, the Employing Companies may fund the Trust prior to a Preliminary Change in Control of Southern or an Employing Company in accordance with the terms of the Trust. All assets held in the Trust remain subject only to the claims of the Employing Companies' general creditors whose claims against the Employing Companies are not satisfied because of the Employing Companies' bankruptcy or insolvency (as those terms are defined in the Trust). No Participant has any preferred claim on, or beneficial ownership interest in, any assets of the Trust before the assets are paid to the Participant and all rights created under the Trust, as under the DCP, are unsecured contractual claims of the Participant against his Employing Company. 7.4 As soon as practicable following either a Preliminary Change in Control of Southern or of an Employing Company, the affected Employing Companies shall contribute an amount based upon the funding strategy adopted by the Committee with the assistance of an appointed actuary necessary to fulfill the Employing Companies' obligations pursuant to this Article VII. In the event of a dispute over such actuary's determination, the respective Employing Company(ies) and any complaining Participant(s) shall refer such dispute to an independent, third-party actuarial consultant, chosen by the Employing Company and such Participant. If the Employing Company and the Participant cannot agree on an independent, third-party actuarial consultant, the actuarial consultant shall be chosen by lot from an equal number of actuaries submitted by the Employing Company and the Trustee. Any such referral shall only occur once in total and the determination by the third-party actuarial consultant shall be final and binding upon both parties. The Employing Companies shall be responsible for all of the fees and expenses of the independent actuarial consultant. 7.5 In the event of a Southern Change in Control or a Subsidiary Change in Control, notwithstanding anything to the contrary in the DCP, upon termination or retirement from employment, the Account of a Participant who was an Employee of an Employing Company affected by such a Change in Control shall be paid out in a lump sum if such Participant makes an election pursuant to procedures established by the Committee in its sole and absolute discretion. If no such election is made, the Participant shall receive payment of his Account solely in accordance with Article VII of the DCP. ARTICLE VIII - ADMINISTRATION 8.1 Administrative Committee. The committee designated as administrator of each of the Employee Benefit Plans shall be responsible for the general administration of this Policy as it relates to such committee's respective Employee Benefit Plan. ARTICLE IX - MISCELLANEOUS 9.1 Amendment and Termination. This Policy may be amended or terminated at any time by the board of directors of Southern Company Services, Inc. (or its successors and assigns, if applicable), provided, however, the Policy may not be amended in any material respect or terminated within the two (2) year period following a Change in Control nor shall any amendment or termination impair the rights of any Participant in the Employee Benefit Plans which have accrued hereunder prior to any such amendment or termination. 9.2 Additional Rights. Nothing in the Policy shall interfere with or limit in any way the right of the Employing Companies to terminate any employee's employment at any time, or confer upon any employee any right to continue in the employ of the Employing Companies. IN WITNESS WHEREOF, this amended and restated Southern Company Change in Control Benefit Plan Determination Policy has been executed by duly authorized officers of Southern Company Services, Inc. pursuant to resolutions of the Board of Directors of Southern Company Services, Inc. this ______ day of ________________________, 2002. SOUTHERN COMPANY SERVICES, INC. By: ____________________________________ Its: Senior Vice President ------------------------------------ Attest: By: -------------------------------------------- Its: -------------------------------------------- EX-10.A.112 11 ex10a112.txt Exhibit 10(a)112 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT ("Agreement") made and entered into by and between The Southern Company ("Southern"), Mississippi Power Company (the "Company") and Mr. Michael D. Garrett. ("Mr. Garrett") (hereinafter collectively referred to as the "Parties") is effective May 1, 2001. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Mr. Garrett is President and Chief Executive Officer of the Company; WHEREAS, the Company wishes to provide to Mr. Garrett certain severance benefits under certain circumstances following a change in control (as defined herein) of Southern or the Company; NOW, THEREFORE, in consideration of the premises, and the agreements of the Parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Annual Compensation" shall mean Mr. Garrett's highest annual base salary rate for the twelve (12) month period immediately preceding the date of the Change in Control plus target bonus. (b) "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. (c) "Board" shall mean the board of directors of the Company. (d) "Business Combination" shall mean a reorganization, merger or consolidation of Southern or sale or other disposition of all or substantially all of the assets of Southern. (e) "Change in Control" shall mean any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this Paragraph 1.(e)(i), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (A) any acquisition directly from Southern; (B) any acquisition by Southern; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary; (D) any acquisition by a qualified pension plan or publicly held mutual fund; (E) any acquisition by a Group composed exclusively of employees of Southern, or any Southern Subsidiary; (F) any acquisition by Mr. Garrett or any Group of which Mr. Garrett is a party; or (G) any Business Combination which would not otherwise constitute a change in control because of the application of clauses (A), (B) and (C) of Paragraph 1.(e)(iii); (ii) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; (iii) Consummation of a Business Combination, provided, however, that such a Business Combination shall not constitute a Change in Control if all three (3) of the following conditions are met: (A) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (B) no Person (excluding any corporation resulting from such Business Combination, any employee benefit plan (or related trust) of Southern, any Southern Subsidiary or Surviving Company, Mr. Garrett, any Group of which Mr. Garrett is a party, any Group composed exclusively of Company employees, any qualified pension plan (or related trust) or any publicly held mutual fund) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. (iv) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of the Company; provided, however, that for purposes of this Paragraph 1.(e)(iv), any acquisition by Mr. Garrett, any Group composed exclusively of employees of the Company, any Group of which Mr. Garrett is a party, any qualified pension plan (or related trust), any publicly held mutual fund, any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary shall not constitute a Change in Control; (v) Consummation of a reorganization, merger or consolidation of the Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern Controls the corporation or other entity surviving or resulting from such Employing Company Business Combination; or (vi) Consummation of the sale or other disposition of all or substantially all of the assets of the Company to a corporation or other entity which Southern does not Control. Notwithstanding the foregoing, in no event shall "Change in Control" mean an initial public offering or a spin-off of the Company. (f) "COBRA Coverage" shall mean any continuation coverage to which Mr. Garrett or his dependents may be entitled pursuant to Code Section 4980B. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) "Company" shall mean Southern Company Services, Inc., its successors and assigns. (i) "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or governmental agencies. (j) "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. (k) "Effective Date" shall mean the date of execution of this Agreement. (l) "Employee Outplacement Program" shall mean the program established by the Company from time to time for the purpose of assisting participants covered by the plan in finding employment outside of the Company which provides for the following services: (i) self-assessment, career decision and goal setting; (ii) job market research and job sources; (iii) networking and interviewing skills; (iv) planning and implementation strategy; (v) resume writing, job hunting methods and salary negotiation; and (vi) office support and job search resources. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Good Reason" shall mean, without Mr. Garrett's express written consent, after written notice to the Board, and after a thirty (30) day opportunity for the Board to cure, the continuing occurrence of any of the following events: (i) Inconsistent Duties. A meaningful and detrimental alteration in Mr. Garrett's position or in the nature or status of his responsibilities from those in effect immediately prior to the Change in Control; (ii) Reduced Salary. A reduction of five percent (5%) or more by the Company in either of the following: (i) Mr. Garrett's annual base salary rate as in effect immediately prior to the Change in Control (except for a less than ten percent (10%), across-the-board annual base salary rate reduction similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); or (ii) the sum of Mr. Garrett's annual base salary rate plus target bonus under the PPP (except for a less than ten percent (10%), across-the-board reduction of annual base salary rate plus target bonus under the PPP similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); (iii) Pension and Compensation Plans. The failure by the Company to continue in effect any pension or compensation plan or agreement in which Mr. Garrett participates or is a party as of the date of the Change in Control or the elimination of Mr. Garrett's participation therein, (except for across-the-board plan changes or terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). For purposes of this Paragraph 1.(n), a "pension plan or agreement" shall mean any written arrangement executed by an authorized officer of the Company which provides for payments upon retirement; and a "compensation plan or arrangement" shall mean any written arrangement executed by an authorized officer of the Company which provides for periodic, non-discretionary compensatory payments in the nature of bonuses. (iv) Relocation. A change in Mr. Garrett's work location to a location more than fifty (50) miles from the office where Mr. Garrett is located at the time of the Change in Control, unless such new work location is within fifty (50) miles from Mr. Garrett's principal place of residence at the time of the Change in Control. The acceptance, if any, by Mr. Garrett of employment by the Company at a work location which is outside the fifty mile radius set forth in this Paragraph 1.(n)(iv) shall not be a waiver of Mr. Garrett's right to refuse subsequent transfer by the Company to a location which is more than fifty (50) miles from Mr. Garrett's principal place of residence at the time of the Change in Control, and such subsequent unconsented transfer shall be "Good Reason" under this Agreement; or (v) Benefits and Perquisites. The taking of any action by the Company which would directly or indirectly materially reduce the benefits enjoyed by Mr. Garrett under the Company's retirement, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which Mr. Garrett was participating immediately prior to the Change in Control; or the failure by the Company to provide Mr. Garrett with the number of paid vacation days to which Mr. Garrett is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control (except for across-the-board plan or vacation policy changes or plan terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). (vi) For purposes of this Paragraph 1.(n), the term "Executive Employee" shall mean those employees of the Company of Grade Level 10 or above. (o) "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. (p) "Group Health Plan" shall mean the group health plan covering Mr. Garrett, as such plan may be amended from time to time. (q) "Group Life Insurance Plan" shall mean the group life insurance program covering Mr. Garrett, as such plan may be amended from time to time. (r) "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998 plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to October 19, 1998 whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. (s) "Month of Service" shall mean any calendar month during which Mr. Garrett has worked at least one (1) hour or was on approved leave of absence while in the employ of the Company or any affiliate or subsidiary of Southern. (t) "Omnibus Plan" shall mean the Southern Company Omnibus Incentive Compensation Plan, and the Design and Administrative Specifications duly adopted thereunder, [as in effect on the day before the date of a Change in Control,] as may be amended from time to time. (u) "Pension Plan" shall mean The Southern Company Pension Plan, as such plan may be amended from time to time. (v) "Performance Dividend Program" shall mean the Performance Dividend Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (w) "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of Act. (x) "Performance Pay Program" or "PPP" shall mean the Performance Pay Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (y) "Southern" shall mean The Southern Company, its successors and assigns. (z) "Southern Board" shall mean the board of directors of Southern. (aa) "Southern Subsidiary" shall mean any corporation or other entity Controlled by Southern. (bb) "Termination for Cause" or "Cause" shall mean the termination of Mr. Garrett's employment by the Company upon the occurrence of any of the following: (i) The willful and continued failure by Mr. Garrett substantially to perform his duties with the Company (other than any such failure resulting from Mr. Garrett's Total Disability or from Mr. Garrett's retirement or any such actual or anticipated failure resulting from termination by Mr. Garrett for Good Reason) after a written demand for substantial performance is delivered to him by the Southern Board, which demand specifically identifies the manner in which the Southern Board believes that he has not substantially performed his duties; or (ii) The willful engaging by Mr. Garrett in conduct that is demonstrably and materially injurious to the Company, monetarily or otherwise, including, but not limited to any of the following: (A) any willful act involving fraud or dishonesty in the course of Mr. Garrett's employment by the Company; (B) the willful carrying out of any activity or the making of any statement which would materially prejudice or impair the good name and standing of the Company, Southern or any Southern Subsidiary or would bring the Company, Southern or any Southern Subsidiary into contempt, ridicule or would reasonably shock or offend any community in which the Company, Southern or such Southern Subsidiary is located; (C) attendance at work in a state of intoxication or otherwise being found in possession at his workplace of any prohibited drug or substance, possession of which would amount to a criminal offense; (D) violation of the Company's policies on drug and alcohol usage, fitness for duty requirements or similar policies as may exist from time to time as adopted by the Company's safety officer; (E) assault or other act of violence against any person during the course of employment; or (F) indictment of any felony or any misdemeanor involving moral turpitude. No act or failure to act by Mr. Garrett shall be deemed "willful" unless done, or omitted to be done, by Mr. Garrett not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Mr. Garrett shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Southern Board at a meeting of the Southern Board called and held for such purpose (after reasonable notice to Mr. Garrett and an opportunity for him, together with counsel, to be heard before the Southern Board), finding that, in the good faith opinion of the Southern Board, Mr. Garrett was guilty of conduct set forth above in clause (i) or (ii) of this Paragraph 1.(bb) and specifying the particulars thereof in detail. (cc) "Termination Date" shall mean the date on which Mr. Garrett's employment with the Company is terminated; provided, however, that solely for purposes of Paragraph 2.(c) hereof, the Termination Date shall be the effective date of his retirement pursuant to the terms of the Pension Plan. (dd) "Total Disability" shall mean Mr. Garrett's total disability within the meaning of the Pension Plan. (ee) "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. (ff) "Waiver and Release" shall mean the Waiver and Release attached hereto as Exhibit A. (gg) "Year of Service" shall mean Mr. Garrett's Months of Service divided by twelve (12) rounded to the nearest whole year, rounding up if the remaining number of months is seven (7) or greater and rounding down if the remaining number of months is less than seven (7). If Mr. Garrett has a break in his service with the Company, he will receive credit under this Agreement for service prior to the break in service only if the break in service is less than five years. 2. Severance Benefits. (a) Eligibility. Except as otherwise provided in this Paragraph 2.(a), if Mr. Garrett's employment is involuntarily terminated by the Company at any time during the two year period following a Change in Control for reasons other than Cause, or if Mr. Garrett voluntarily terminates his employment with the Company for Good Reason at any time during the two year period following a Change in Control, Mr. Garrett shall be entitled to receive the benefits described in this Agreement upon the Company's receipt of an effective Waiver and Release. Notwithstanding anything to the contrary herein, Mr. Garrett shall not be eligible to receive benefits under this Agreement if Mr. Garrett: (i) voluntarily terminates his employment with the Company for other than Good Reason; (ii) has his employment terminated by the Company for Cause; (iii) accepts the transfer of his employment to Southern, any Southern Subsidiary or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary; (iv) refuses an offer of continued employment with the Company, any Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern, or any Southern Subsidiary under circumstances where such refusal would not amount to Good Reason for voluntary termination of employment; or (v) elects to receive the benefits of any other voluntary or involuntary severance or separation program, plan or agreement maintained by the Company in lieu of benefits under this Agreement; provided however, that the receipt of benefits under the terms of any retention plan or agreement shall not be deemed to be the receipt of severance or separation benefits for purposes of this Agreement. (b) Severance Benefits. If Mr. Garrett meets the eligibility requirements of Paragraph 2.(a) hereof, he shall be entitled to a cash severance benefit in an amount equal to three times his Annual Compensation (the "Severance Amount"). If any portion of the Severance Amount constitutes an "excess parachute payment" (as such term is defined under Code Section 280G ("Excess Parachute Payment")), the Company shall pay to Mr. Garrett an additional amount calculated by determining the amount of tax under Code Section 4999 that he otherwise would have paid on any Excess Parachute Payment with respect to the Change in Control and dividing such amount by a decimal determined by adding the tax rate under Code Section 4999 ("Excise Tax"), the hospital insurance tax under Code Section 3101(b) ("HI Tax") and federal and state income tax measured at the highest marginal rates ("Income Tax") and subtracting such result from the number one (1) (the "280G Gross-up"); provided, however, that no 280G Gross-up shall be paid unless the Severance Amount plus all other "parachute payments" to Mr. Garrett under Code Section 280G exceeds three (3) times Mr. Garrett's "base amount" (as such term is defined under Code Section 280G ("Base Amount")) by ten percent (10%) or more; provided further, that if no 280G Gross-up is paid, the Severance Amount shall be capped at three (3) times Mr. Garrett's Base Amount, less all other "parachute payments" (as such term is defined under Code Section 280G) received by Mr. Garrett, less one dollar (the "Capped Amount"), if the Capped Amount, reduced by HI Tax and Income Tax, exceeds what otherwise would have been the Severance Amount, reduced by HI Tax, Income Tax and Excise Tax. For purposes of this Paragraph 2.(b), whether any amount would constitute an Excess Parachute Payment and any other calculations of tax, e.g., Excise Tax, HI Tax, Income Tax, etc., or other amounts, e.g., Base Amount, Capped Amount, etc., shall be determined by the tax department of the independent public accounting firm then responsible for preparing Southern's consolidated federal income tax return, and such calculations or determinations shall be binding upon the parties hereto. (c) Welfare Benefits. If Mr. Garrett meets the eligibility requirements of Paragraph 2.(a) hereof and is not otherwise eligible to receive retiree medical and life insurance benefits provided to certain retirees pursuant to the terms of the Pension Plan, the Group Health Plan and the Group Life Insurance Plan, he shall be entitled to the benefits set forth in this Paragraph 2.(c). (i) Mr. Garrett shall be eligible to participate in the Company's Group Health Plan, upon payment of both the Company's and his monthly premium under such plan, for a period of six (6) months for each of Mr. Garrett's Years of Service, not to exceed five (5) years. If Mr. Garrett elects to receive this extended medical coverage, he shall also be entitled to elect coverage under the Group Health Plan for his dependents who were participating in the Group Health Plan on Mr. Garrett's Termination Date (and for such other dependents as may be entitled to coverage under the provisions of the Health Insurance Portability and Accountability Act of 1996) for the duration of Mr. Garrett's extended medical coverage under this Paragraph 2.(c)(i) to the extent such dependents remain eligible for dependent coverage under the terms of the Group Health Plan. (A) The extended medical coverage afforded to Mr. Garrett pursuant to Paragraph 2.(c)(i), as well as the premiums to be paid by Mr. Garrett in connection with such coverage shall be determined in accordance with the terms of the Group Health Plan and shall be subject to any changes in the terms and conditions of the Group Health Plan as well as any future increases in premiums under the Group Health Plan. The premiums to be paid by Mr. Garrett in connection with this extended coverage shall be due on the first day of each month; provided, however, that if he fails to pay his premium within thirty (30) days of its due date, such extended coverage shall be terminated. (B) Any Group Health Plan coverage provided under Paragraph 2.(c)(i) shall be a part of and not in addition to any COBRA Coverage which Mr. Garrett or his dependents may elect. In the event that Mr. Garrett or his dependents become eligible to be covered, by virtue of re-employment or otherwise, by any employer-sponsored group health plan or is eligible for coverage under any government-sponsored health plan during the above period, coverage under the Company's Group Health Plan available to Mr. Garrett or his dependents by virtue of the provisions of Paragraph 2.(c)(i) shall terminate, except as may otherwise be required by law, and shall not be renewed. (ii) Mr. Garrett shall be entitled to receive cash in an amount equal to the Company's and Mr. Garrett's cost of premiums for three (3) years of coverage under the Group Health Plan and Group Life Insurance Plan in accordance with the terms of such plans as of the date of the Change in Control. (d) Incentive Plans. If Mr. Garrett meets the eligibility requirements of Paragraph 2.(a) hereof he shall be entitled to the following benefits under the Omnibus Plan: (i) Stock Options. (A) Any of Mr. Garrett's Options and Stock Appreciation Rights under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(i) by reference) which are outstanding as of the Termination Date and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Stock Appreciation Right, if Mr. Garrett is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to Mr. Garrett under Section 16(b) of the Exchange Act, provided further, that any such actions not taken as a result of the rules under Section 16(b) of the Exchange Act shall be effected as of the first date that such activity would no longer result in liability under Section 16(b) of the Exchange Act. (B) The restrictions and deferral limitations applicable to any of Mr. Garrett's Restricted Stock and Restricted Stock Units as of the Termination Date shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (ii) Performance Pay Program. Provided Mr. Garrett is not entitled to a Cash-Based Award under the PPP, (the defined terms of which are incorporated in this Paragraph 2.(d)(ii) by reference), if the PPP is in place through Mr. Garrett's Termination Date and to the extent Mr. Garrett is entitled to participate therein, Mr. Garrett shall be entitled to receive cash in an amount equal to a prorated payout of his Cash-Based Awards under the PPP for the performance period in which the Termination Date shall have occurred, at target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (iii) Performance Dividend Program. Provided Mr. Garrett is not entitled to a Cash-Based Award under the Performance Dividend Program (the defined terms of which are incorporated in this Paragraph 2.(d)(iii) by reference), if the Performance Dividend Program is in place through Mr. Garrett's Termination Date and to the extent Mr. Garrett is entitled to participate therein, Mr. Garrett shall be entitled to receive cash for each such Cash-Based Award under the Performance Dividend Program held by Mr. Garrett on his Termination Date, based on actual performance under the Performance Dividend Program determined as of the most recently completed calendar quarter of the performance period in which the Termination Date shall have occurred, and the annual dividend declared prior to the Termination Date. (iv) Other Short Term Incentives Under the Omnibus Plan. Provided Mr. Garrett is not entitled to a Performance Unit/Share award under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(iv) by reference), Mr. Garrett shall be entitled to receive cash in an amount equal to a prorated payout of the value of his Performance Units and/or Performance Shares for the performance period in which the Termination Date shall have occurred, at target performance and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (v) Other Short Term Incentive Plans. The provisions of this Paragraph 2.(d)(v) shall apply if and to the extent that Mr. Garrett is a participant in any other "short term compensation plan" not otherwise previously referred to in this Paragraph 2.(d). Provided Mr. Garrett is not otherwise entitled to a plan payout under any change of control provisions of such plans, if the "short term compensation plan" is in place as of the Termination Date and to the extent Mr. Garrett is entitled to participate therein, Mr. Garrett shall receive cash in an amount equal to his award under the Company's "short term incentive plan" for the annual performance period in which the Termination Date shall have occurred, at Mr. Garrett's target performance level and prorated by the number of months which have passed since the beginning of the annual performance period until his Termination Date. For purposes of this Paragraph 2.(d)(v) the term "short term incentive compensation plan" shall mean any incentive compensation plan or arrangement adopted in writing by the Company which provides for annual, recurring compensatory bonuses based upon articulated performance criteria. (e) Payment of Benefits. Any amounts due under this Agreement shall be paid in one (1) lump sum payment as soon as administratively practicable following the later of: (i) Mr. Garrett's Termination Date, or (ii) upon Mr. Garrett's tender of an effective Waiver and Release to the Company in the form of Exhibit A attached hereto and the expiration of any applicable revocation period for such waiver. In the event of a dispute with respect to liability or amount of any benefit due hereunder, an effective Waiver and Release shall be tendered at the time of final resolution of any such dispute when payment is tendered by the Company. (f) Benefits in the Event of Death. In the event of Mr. Garrett's death prior to the payment of all amounts due under this Agreement, Mr. Garrett's estate shall be entitled to receive as due any amounts not yet paid under this Agreement upon the tender by the executor or administrator of the estate of an effective Waiver and Release. (g) Legal Fees. In the event of a dispute between Mr. Garrett and the Company with regard to any amounts due hereunder, if any material issue in such dispute is finally resolved in Mr. Garrett's favor, the Company shall reimburse Mr. Garrett's legal fees incurred with respect to all issues in such dispute in an amount not to exceed fifty thousand dollars ($50,000). (h) Employee Outplacement Services. Mr. Garrett shall be eligible to participate in the Employee Outplacement Program, which program shall not be less than six (6) months duration measured from Mr. Garrett's Termination Date. (i) Non-qualified Retirement and Deferred Compensation Plans. The Parties agree that subsequent to a Change in Control, any claims by Mr. Garrett for benefits under any of the Company's non-qualified retirement or deferred compensation plans shall be resolved through binding arbitration in accordance with the provisions and procedures set forth in Paragraph 5 hereof and if any material issue in such dispute is finally resolved in Mr. Garrett's favor, the Company shall reimburse Mr. Garrett's legal fees in the manner provided in Paragraph 2.(g) hereof. 3. Transfer of Employment. In the event that Mr. Garrett's employment by the Company is terminated during the two year period following a Change in Control and Mr. Garrett accepts employment by Southern, a Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary, the Company shall assign this Agreement to Southern, such Southern Subsidiary, or successor employer, Southern shall accept such assignment or cause such Southern Subsidiary or successor employer to accept such assignment, and such assignee shall become the "Company" for all purposes hereunder. 4. No Mitigation. If Mr. Garrett is otherwise eligible to receive benefits under Paragraph 2 of this Agreement, he shall have no duty or obligation to seek other employment following his Termination Date and, except as otherwise provided in Paragraph 2.(a)(iii) hereof, the amounts due Mr. Garrett hereunder shall not be reduced or suspended if Mr. Garrett accepts such subsequent employment. 5. Arbitration. (a) Any dispute, controversy or claim arising out of or relating to the Company's obligations to pay severance benefits under this Agreement, or the breach thereof, shall be settled and resolved solely by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") except as otherwise provided herein. The arbitration shall be the sole and exclusive forum for resolution of any such claim for severance benefits and the arbitrators' award shall be final and binding. The provisions of this Paragraph 5 are not intended to apply to any other disputes, claims or controversies arising out of or relating to Mr. Garrett's employment by the Company or the termination thereof. (b) Arbitration shall be initiated by serving a written notice of demand for arbitration to Mr. Garrett, in the case of the Company, or to the Southern Board, in the case of Mr. Garrett. (c) The arbitration shall be held in Atlanta, Georgia. The arbitrators shall apply the law of the State of Georgia, to the extent not preempted by federal law, excluding any law which would require the application of the law of another state. (d) The parties shall appoint arbitrators within fifteen (15) business days following service of the demand for arbitration. The number of arbitrators shall be three. One arbitrator shall be appointed by Mr. Garrett, one arbitrator shall be appointed by the Company, and the two arbitrators shall appoint a third. If the arbitrators cannot agree on a third arbitrator within thirty (30) business days after the service of demand for arbitration, the third arbitrator shall be selected by the AAA. (e) The arbitration filing fee shall be paid by Mr. Garrett. All other costs of arbitration shall be borne equally by Mr. Garrett and the Company, provided, however, that the Company shall reimburse such fees and costs in the event any material issue in such dispute is finally resolved in Mr. Garrett's favor and Mr. Garrett is reimbursed legal fees under Paragraph 2.(g) hereof. (f) The parties agree that they will faithfully observe the rules that govern any arbitration between them, they will abide by and perform any award rendered by the arbitrators in any such arbitration, including any award of injunctive relief, and a judgment of a court having jurisdiction may be entered upon an award. (g) The parties agree that nothing in this Paragraph 5 is intended to preclude upon application of either party any court having jurisdiction from issuing and enforcing in any lawful manner such temporary restraining orders, preliminary injunctions, and other interim measures of relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate pending the conclusion of arbitration proceedings pursuant to this Agreement; regardless of whether an arbitration proceeding under this Paragraph 5 has begun. The parties further agree that nothing herein shall prevent any court from entering and enforcing in any lawful manner such judgments for permanent equitable relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate following the issuance of arbitral awards pursuant to this Paragraph 5. 6. Miscellaneous. (a) Funding of Benefits. Unless the Board in its discretion shall determine otherwise, the benefits payable to Mr. Garrett under this Agreement shall not be funded in any manner and shall be paid by the Company out of its general assets, which assets are subject to the claims of the Company's creditors. (b) Withholding. There shall be deducted from the payment of any benefit due under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Mr. Garrett. (c) Assignment. Mr. Garrett shall have no rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. (d) Amendment and Termination. The Agreement may be amended or terminated only by a writing executed by the parties. (e) Construction. This Agreement shall be construed in accordance with and governed by the laws of the State of Georgia, to the extent not preempted by federal law, disregarding any provision of law which would require the application of the law of another state. (f) Pooling Accounting. Notwithstanding anything to the contrary herein, if, but for any provision of this Agreement, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Agreement which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Agreement, Pooling Accounting would be required for such Change in Control transaction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this ____ day of __________________, 2002. THE SOUTHERN COMPANY By: ____________________________________ MISSISSIPPI POWER COMPANY By: ____________________________________ MR. GARRETT ----------------------------- MICHAEL D. GARRETT Exhibit A CHANGE IN CONTROL AGREEMENT Waiver and Release The attached Waiver and Release is to be given to Mr. Michael D. Garrett upon the occurrence of an event that triggers eligibility for severance benefits under the Change in Control Agreement, as described in Paragraph 2(a) of such agreement. CHANGE IN CONTROL AGREEMENT Waiver and Release I, Michael D. Garrett, understand that I am entitled to receive the severance benefits described in Section 2 of the Change in Control Agreement (the "Agreement") if I execute this Waiver and Release ("Waiver"). I understand that the benefits I will receive under the Agreement are in excess of those I would have received from The Southern Company and Southern Company Services, Inc. (collectively, the "Company") if I had not elected to sign this Waiver. I recognize that I may have a claim against the Company under the Civil Rights Act of 1964 and 1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the Energy Reorganization Act of 1974, as amended, the Americans with Disabilities Act or other federal, state and local laws. In exchange for the benefits I elect to receive, I hereby irrevocably waive and release all claims, of any kind whatsoever, whether known or unknown in connection with any claim which I ever had, may have, or now have against The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company, Southern Communication Services, Inc., Southern Company Services, Inc., Southern Energy Resources, Inc., Southern Company Energy Solutions, Inc., Southern Nuclear Operating Company, Inc., Southern Energy, Inc. and other direct or indirect subsidiaries of The Southern Company and their past, present and future officers, directors, employees, agents and attorneys. Nothing in this Waiver shall be construed to release claims or causes of action under the Age Discrimination in Employment Act or the Energy Reorganization Act of 1974, as amended, which arise out of events occurring after the execution date of this Waiver. In further exchange for the benefits I elect to receive, I understand and agree that I will respect the proprietary and confidential nature of any information I have obtained in the course of my service with the Company or any subsidiary or affiliate of The Southern Company. However, nothing in this Waiver shall prohibit me from engaging in protected activities under applicable law or from communicating, either voluntary or otherwise, with any governmental agency concerning any potential violation of the law. In signing this Waiver, I am not releasing claims to benefits that I am already entitled to under any workers' compensation laws or under any retirement plan or welfare benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, which is sponsored by or adopted by the Company and/or any of its direct or indirect subsidiaries; however, I understand and acknowledge that nothing herein is intended to or shall be construed to require the Company to institute or continue in effect any particular plan or benefit sponsored by the Company and the Company hereby reserves the right to amend or terminate any of its benefit programs at any time in accordance with the procedures set forth in such plans. In signing this Waiver, I realize that I am waiving and releasing, among other things, any claims to benefits under any and all bonus, severance, workforce reduction, early retirement, outplacement, or any other similar type plan sponsored by the Company. I have been encouraged and advised in writing to seek advice from anyone of my choosing regarding this Waiver, including my attorney, and my accountant or tax advisor. Prior to signing this Waiver, I have been given the opportunity and sufficient time to seek such advice, and I fully understand the meaning and contents of this Waiver. I understand that I may take up to twenty-one (21) calendar days to consider whether or not I desire to enter this Waiver. I was not coerced, threatened or otherwise forced to sign this Waiver. I have made my choice to sign this Waiver voluntarily and of my own free will. I understand that I may revoke this Waiver at any time during the seven (7) calendar day period after I sign and deliver this Waiver to the Company. If I revoke this Waiver, I must do so in writing delivered to the Company. I understand that this Waiver is not effective until the expiration of this seven (7) calendar day revocation period. I understand that upon the expiration of such seven (7) calendar day revocation period this entire Waiver will be binding upon me and will be irrevocable. I understand that by signing this Waiver I am giving up rights I may have. IN WITNESS WHEREOF, the undersigned hereby executes this Waiver this ____ day of ____________________, in the year _____. Michael D. Garrett Sworn to and subscribed to me this ____ day of ____________, _____. Notary Public My Commission Expires: (Notary Seal) Acknowledged and Accepted by the Company, as defined in the Waiver. By: ----------------------------------- Date: ----------------------------------- EX-10.A.113 12 ex10a113.txt Exhibit 10(a)113 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT ("Agreement") made and entered into by and between The Southern Company ("Southern"), Savannah Electric and Power Company (the "Company") and Mr. Anthony R. James. ("Mr. James") (hereinafter collectively referred to as the "Parties") is effective May 1, 2001. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Mr. James is President and Chief Executive Officer of the Company; WHEREAS, the Company wishes to provide to Mr. James certain severance benefits under certain circumstances following a change in control (as defined herein) of Southern or the Company; NOW, THEREFORE, in consideration of the premises, and the agreements of the Parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Annual Compensation" shall mean Mr. James' highest annual base salary rate for the twelve (12) month period immediately preceding the date of the Change in Control plus target bonus. (b) "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. (c) "Board" shall mean the board of directors of the Company. (d) "Business Combination" shall mean a reorganization, merger or consolidation of Southern or sale or other disposition of all or substantially all of the assets of Southern. (e) "Change in Control" shall mean any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this Paragraph 1.(e)(i), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (A) any acquisition directly from Southern; (B) any acquisition by Southern; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary; (D) any acquisition by a qualified pension plan or publicly held mutual fund; (E) any acquisition by a Group composed exclusively of employees of Southern, or any Southern Subsidiary; (F) any acquisition by Mr. James or any Group of which Mr. James is a party; or (G) any Business Combination which would not otherwise constitute a change in control because of the application of clauses (A), (B) and (C) of Paragraph 1.(e)(iii); (ii) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; (iii) Consummation of a Business Combination, provided, however, that such a Business Combination shall not constitute a Change in Control if all three (3) of the following conditions are met: (A) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (B) no Person (excluding any corporation resulting from such Business Combination, any employee benefit plan (or related trust) of Southern, any Southern Subsidiary or Surviving Company, Mr. James, any Group of which Mr. James is a party, any Group composed exclusively of Company employees, any qualified pension plan (or related trust) or any publicly held mutual fund) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. (iv) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of the Company; provided, however, that for purposes of this Paragraph 1.(e)(iv), any acquisition by Mr. James, any Group composed exclusively of employees of the Company, any Group of which Mr. James is a party, any qualified pension plan (or related trust), any publicly held mutual fund, any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary shall not constitute a Change in Control; (v) Consummation of a reorganization, merger or consolidation of the Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern Controls the corporation or other entity surviving or resulting from such Employing Company Business Combination; or (vi) Consummation of the sale or other disposition of all or substantially all of the assets of the Company to a corporation or other entity which Southern does not Control. Notwithstanding the foregoing, in no event shall "Change in Control" mean an initial public offering or a spin-off of the Company. (f) "COBRA Coverage" shall mean any continuation coverage to which Mr. James or his dependents may be entitled pursuant to Code Section 4980B. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) "Company" shall mean Savannah Electric and Power Company, its successors and assigns. (i) "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or governmental agencies. (j) "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. (k) "Effective Date" shall mean the date of execution of this Agreement. (l) "Employee Outplacement Program" shall mean the program established by the Company from time to time for the purpose of assisting participants covered by the plan in finding employment outside of the Company which provides for the following services: (i) self-assessment, career decision and goal setting; (ii) job market research and job sources; (iii) networking and interviewing skills; (iv) planning and implementation strategy; (v) resume writing, job hunting methods and salary negotiation; and (vi) office support and job search resources. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Good Reason" shall mean, without Mr. James' express written consent, after written notice to the Board, and after a thirty (30) day opportunity for the Board to cure, the continuing occurrence of any of the following events: (i) Inconsistent Duties. A meaningful and detrimental alteration in Mr. James' position or in the nature or status of his responsibilities from those in effect immediately prior to the Change in Control; (ii) Reduced Salary. A reduction of five percent (5%) or more by the Company in either of the following: (i) Mr. James' annual base salary rate as in effect immediately prior to the Change in Control (except for a less than ten percent (10%), across-the-board annual base salary rate reduction similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); or (ii) the sum of Mr. James' annual base salary rate plus target bonus under the PPP (except for a less than ten percent (10%), across-the-board reduction of annual base salary rate plus target bonus under the PPP similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); (iii) Pension and Compensation Plans. The failure by the Company to continue in effect any pension or compensation plan or agreement in which Mr. James participates or is a party as of the date of the Change in Control or the elimination of Mr. James' participation therein, (except for across-the-board plan changes or terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). For purposes of this Paragraph 1.(n), a "pension plan or agreement" shall mean any written arrangement executed by an authorized officer of the Company which provides for payments upon retirement; and a "compensation plan or arrangement" shall mean any written arrangement executed by an authorized officer of the Company which provides for periodic, non-discretionary compensatory payments in the nature of bonuses. (iv) Relocation. A change in Mr. James' work location to a location more than fifty (50) miles from the office where Mr. James is located at the time of the Change in Control, unless such new work location is within fifty (50) miles from Mr. James' principal place of residence at the time of the Change in Control. The acceptance, if any, by Mr. James of employment by the Company at a work location which is outside the fifty mile radius set forth in this Paragraph 1.(n)(iv) shall not be a waiver of Mr. James' right to refuse subsequent transfer by the Company to a location which is more than fifty (50) miles from Mr. James' principal place of residence at the time of the Change in Control, and such subsequent unconsented transfer shall be "Good Reason" under this Agreement; or (v) Benefits and Perquisites. The taking of any action by the Company which would directly or indirectly materially reduce the benefits enjoyed by Mr. James under the Company's retirement, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which Mr. James was participating immediately prior to the Change in Control; or the failure by the Company to provide Mr. James with the number of paid vacation days to which Mr. James is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control (except for across-the-board plan or vacation policy changes or plan terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). (vi) For purposes of this Paragraph 1.(n), the term "Executive Employee" shall mean those employees of the Company of Grade Level 10 or above. (o) "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. (p) "Group Health Plan" shall mean the group health plan covering Mr. James, as such plan may be amended from time to time. (q) "Group Life Insurance Plan" shall mean the group life insurance program covering Mr. James, as such plan may be amended from time to time. (r) "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998 plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to October 19, 1998 whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. (s) "Month of Service" shall mean any calendar month during which Mr. James has worked at least one (1) hour or was on approved leave of absence while in the employ of the Company or any affiliate or subsidiary of Southern. (t) "Omnibus Plan" shall mean the Southern Company Omnibus Incentive Compensation Plan, and the Design and Administrative Specifications duly adopted thereunder, [as in effect on the day before the date of a Change in Control,] as may be amended from time to time. (u) "Pension Plan" shall mean The Southern Company Pension Plan, as such plan may be amended from time to time. (v) "Performance Dividend Program" shall mean the Performance Dividend Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (w) "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of Act. (x) "Performance Pay Program" or "PPP" shall mean the Performance Pay Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (y) "Southern" shall mean The Southern Company, its successors and assigns. (z) "Southern Board" shall mean the board of directors of Southern. (aa) "Southern Subsidiary" shall mean any corporation or other entity Controlled by Southern. (bb) "Termination for Cause" or "Cause" shall mean the termination of Mr. James' employment by the Company upon the occurrence of any of the following: (i) The willful and continued failure by Mr. James substantially to perform his duties with the Company (other than any such failure resulting from Mr. James' Total Disability or from Mr. James' retirement or any such actual or anticipated failure resulting from termination by Mr. James for Good Reason) after a written demand for substantial performance is delivered to him by the Southern Board, which demand specifically identifies the manner in which the Southern Board believes that he has not substantially performed his duties; or (ii) The willful engaging by Mr. James in conduct that is demonstrably and materially injurious to the Company, monetarily or otherwise, including, but not limited to any of the following: (A) any willful act involving fraud or dishonesty in the course of Mr. James' employment by the Company; (B) the willful carrying out of any activity or the making of any statement which would materially prejudice or impair the good name and standing of the Company, Southern or any Southern Subsidiary or would bring the Company, Southern or any Southern Subsidiary into contempt, ridicule or would reasonably shock or offend any community in which the Company, Southern or such Southern Subsidiary is located; (C) attendance at work in a state of intoxication or otherwise being found in possession at his workplace of any prohibited drug or substance, possession of which would amount to a criminal offense; (D) violation of the Company's policies on drug and alcohol usage, fitness for duty requirements or similar policies as may exist from time to time as adopted by the Company's safety officer; (E) assault or other act of violence against any person during the course of employment; or (F) indictment of any felony or any misdemeanor involving moral turpitude. No act or failure to act by Mr. James shall be deemed "willful" unless done, or omitted to be done, by Mr. James not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Mr. James shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Southern Board at a meeting of the Southern Board called and held for such purpose (after reasonable notice to Mr. James and an opportunity for him, together with counsel, to be heard before the Southern Board), finding that, in the good faith opinion of the Southern Board, Mr. James was guilty of conduct set forth above in clause (i) or (ii) of this Paragraph 1.(bb) and specifying the particulars thereof in detail. (cc) "Termination Date" shall mean the date on which Mr. James' employment with the Company is terminated; provided, however, that solely for purposes of Paragraph 2.(c) hereof, the Termination Date shall be the effective date of his retirement pursuant to the terms of the Pension Plan. (dd) "Total Disability" shall mean Mr. James' total disability within the meaning of the Pension Plan. (ee) "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. (ff) "Waiver and Release" shall mean the Waiver and Release attached hereto as Exhibit A. (gg) "Year of Service" shall mean Mr. James' Months of Service divided by twelve (12) rounded to the nearest whole year, rounding up if the remaining number of months is seven (7) or greater and rounding down if the remaining number of months is less than seven (7). If Mr. James has a break in his service with the Company, he will receive credit under this Agreement for service prior to the break in service only if the break in service is less than five years. 2. Severance Benefits. (a) Eligibility. Except as otherwise provided in this Paragraph 2.(a), if Mr. James' employment is involuntarily terminated by the Company at any time during the two year period following a Change in Control for reasons other than Cause, or if Mr. James voluntarily terminates his employment with the Company for Good Reason at any time during the two year period following a Change in Control, Mr. James shall be entitled to receive the benefits described in this Agreement upon the Company's receipt of an effective Waiver and Release. Notwithstanding anything to the contrary herein, Mr. James shall not be eligible to receive benefits under this Agreement if Mr. James: (i) voluntarily terminates his employment with the Company for other than Good Reason; (ii) has his employment terminated by the Company for Cause; (iii) accepts the transfer of his employment to Southern, any Southern Subsidiary or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary; (iv) refuses an offer of continued employment with the Company, any Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern, or any Southern Subsidiary under circumstances where such refusal would not amount to Good Reason for voluntary termination of employment; or (v) elects to receive the benefits of any other voluntary or involuntary severance or separation program, plan or agreement maintained by the Company in lieu of benefits under this Agreement; provided however, that the receipt of benefits under the terms of any retention plan or agreement shall not be deemed to be the receipt of severance or separation benefits for purposes of this Agreement. (b) Severance Benefits. If Mr. James meets the eligibility requirements of Paragraph 2.(a) hereof, he shall be entitled to a cash severance benefit in an amount equal to three times his Annual Compensation (the "Severance Amount"). If any portion of the Severance Amount constitutes an "excess parachute payment" (as such term is defined under Code Section 280G ("Excess Parachute Payment")), the Company shall pay to Mr. James an additional amount calculated by determining the amount of tax under Code Section 4999 that he otherwise would have paid on any Excess Parachute Payment with respect to the Change in Control and dividing such amount by a decimal determined by adding the tax rate under Code Section 4999 ("Excise Tax"), the hospital insurance tax under Code Section 3101(b) ("HI Tax") and federal and state income tax measured at the highest marginal rates ("Income Tax") and subtracting such result from the number one (1) (the "280G Gross-up"); provided, however, that no 280G Gross-up shall be paid unless the Severance Amount plus all other "parachute payments" to Mr. James under Code Section 280G exceeds three (3) times Mr. James' "base amount" (as such term is defined under Code Section 280G ("Base Amount")) by ten percent (10%) or more; provided further, that if no 280G Gross-up is paid, the Severance Amount shall be capped at three (3) times Mr. James' Base Amount, less all other "parachute payments" (as such term is defined under Code Section 280G) received by Mr. James, less one dollar (the "Capped Amount"), if the Capped Amount, reduced by HI Tax and Income Tax, exceeds what otherwise would have been the Severance Amount, reduced by HI Tax, Income Tax and Excise Tax. For purposes of this Paragraph 2.(b), whether any amount would constitute an Excess Parachute Payment and any other calculations of tax, e.g., Excise Tax, HI Tax, Income Tax, etc., or other amounts, e.g., Base Amount, Capped Amount, etc., shall be determined by the tax department of the independent public accounting firm then responsible for preparing Southern's consolidated federal income tax return, and such calculations or determinations shall be binding upon the parties hereto. (c) Welfare Benefits. If Mr. James meets the eligibility requirements of Paragraph 2.(a) hereof and is not otherwise eligible to receive retiree medical and life insurance benefits provided to certain retirees pursuant to the terms of the Pension Plan, the Group Health Plan and the Group Life Insurance Plan, he shall be entitled to the benefits set forth in this Paragraph 2.(c). (i) Mr. James shall be eligible to participate in the Company's Group Health Plan, upon payment of both the Company's and his monthly premium under such plan, for a period of six (6) months for each of Mr. James' Years of Service, not to exceed five (5) years. If Mr. James elects to receive this extended medical coverage, he shall also be entitled to elect coverage under the Group Health Plan for his dependents who were participating in the Group Health Plan on Mr. James' Termination Date (and for such other dependents as may be entitled to coverage under the provisions of the Health Insurance Portability and Accountability Act of 1996) for the duration of Mr. James' extended medical coverage under this Paragraph 2.(c)(i) to the extent such dependents remain eligible for dependent coverage under the terms of the Group Health Plan. (A) The extended medical coverage afforded to Mr. James pursuant to Paragraph 2.(c)(i), as well as the premiums to be paid by Mr. James in connection with such coverage shall be determined in accordance with the terms of the Group Health Plan and shall be subject to any changes in the terms and conditions of the Group Health Plan as well as any future increases in premiums under the Group Health Plan. The premiums to be paid by Mr. James in connection with this extended coverage shall be due on the first day of each month; provided, however, that if he fails to pay his premium within thirty (30) days of its due date, such extended coverage shall be terminated. (B) Any Group Health Plan coverage provided under Paragraph 2.(c)(i) shall be a part of and not in addition to any COBRA Coverage which Mr. James or his dependents may elect. In the event that Mr. James or his dependents become eligible to be covered, by virtue of re-employment or otherwise, by any employer-sponsored group health plan or is eligible for coverage under any government-sponsored health plan during the above period, coverage under the Company's Group Health Plan available to Mr. James or his dependents by virtue of the provisions of Paragraph 2.(c)(i) shall terminate, except as may otherwise be required by law, and shall not be renewed. (ii) Mr. James shall be entitled to receive cash in an amount equal to the Company's and Mr. James' cost of premiums for three (3) years of coverage under the Group Health Plan and Group Life Insurance Plan in accordance with the terms of such plans as of the date of the Change in Control. (d) Incentive Plans. If Mr. James meets the eligibility requirements of Paragraph 2.(a) hereof he shall be entitled to the following benefits under the Omnibus Plan: (i) Stock Options. (A) Any of Mr. James' Options and Stock Appreciation Rights under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(i) by reference) which are outstanding as of the Termination Date and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Stock Appreciation Right, if Mr. James is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to Mr. James under Section 16(b) of the Exchange Act, provided further, that any such actions not taken as a result of the rules under Section 16(b) of the Exchange Act shall be effected as of the first date that such activity would no longer result in liability under Section 16(b) of the Exchange Act. (B) The restrictions and deferral limitations applicable to any of Mr. James' Restricted Stock and Restricted Stock Units as of the Termination Date shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (ii) Performance Pay Program. Provided Mr. James is not entitled to a Cash-Based Award under the PPP, (the defined terms of which are incorporated in this Paragraph 2.(d)(ii) by reference), if the PPP is in place through Mr. James' Termination Date and to the extent Mr. James is entitled to participate therein, Mr. James shall be entitled to receive cash in an amount equal to a prorated payout of his Cash-Based Awards under the PPP for the performance period in which the Termination Date shall have occurred, at target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (iii) Performance Dividend Program. Provided Mr. James is not entitled to a Cash-Based Award under the Performance Dividend Program (the defined terms of which are incorporated in this Paragraph 2.(d)(iii) by reference), if the Performance Dividend Program is in place through Mr. James' Termination Date and to the extent Mr. James is entitled to participate therein, Mr. James shall be entitled to receive cash for each such Cash-Based Award under the Performance Dividend Program held by Mr. James on his Termination Date, based on actual performance under the Performance Dividend Program determined as of the most recently completed calendar quarter of the performance period in which the Termination Date shall have occurred, and the annual dividend declared prior to the Termination Date. (iv) Other Short Term Incentives Under the Omnibus Plan. Provided Mr. James is not entitled to a Performance Unit/Share award under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(iv) by reference), Mr. James shall be entitled to receive cash in an amount equal to a prorated payout of the value of his Performance Units and/or Performance Shares for the performance period in which the Termination Date shall have occurred, at target performance and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (v) Other Short Term Incentive Plans. The provisions of this Paragraph 2.(d)(v) shall apply if and to the extent that Mr. James is a participant in any other "short term compensation plan" not otherwise previously referred to in this Paragraph 2.(d). Provided Mr. James is not otherwise entitled to a plan payout under any change of control provisions of such plans, if the "short term compensation plan" is in place as of the Termination Date and to the extent Mr. James is entitled to participate therein, Mr. James shall receive cash in an amount equal to his award under the Company's "short term incentive plan" for the annual performance period in which the Termination Date shall have occurred, at Mr. James' target performance level and prorated by the number of months which have passed since the beginning of the annual performance period until his Termination Date. For purposes of this Paragraph 2.(d)(v) the term "short term incentive compensation plan" shall mean any incentive compensation plan or arrangement adopted in writing by the Company which provides for annual, recurring compensatory bonuses based upon articulated performance criteria. (e) Payment of Benefits. Any amounts due under this Agreement shall be paid in one (1) lump sum payment as soon as administratively practicable following the later of: (i) Mr. James' Termination Date, or (ii) upon Mr. James' tender of an effective Waiver and Release to the Company in the form of Exhibit A attached hereto and the expiration of any applicable revocation period for such waiver. In the event of a dispute with respect to liability or amount of any benefit due hereunder, an effective Waiver and Release shall be tendered at the time of final resolution of any such dispute when payment is tendered by the Company. (f) Benefits in the Event of Death. In the event of Mr. James' death prior to the payment of all amounts due under this Agreement, Mr. James' estate shall be entitled to receive as due any amounts not yet paid under this Agreement upon the tender by the executor or administrator of the estate of an effective Waiver and Release. (g) Legal Fees. In the event of a dispute between Mr. James and the Company with regard to any amounts due hereunder, if any material issue in such dispute is finally resolved in Mr. James' favor, the Company shall reimburse Mr. James' legal fees incurred with respect to all issues in such dispute in an amount not to exceed fifty thousand dollars ($50,000). (h) Employee Outplacement Services. Mr. James shall be eligible to participate in the Employee Outplacement Program, which program shall not be less than six (6) months duration measured from Mr. James' Termination Date. (i) Non-qualified Retirement and Deferred Compensation Plans. The Parties agree that subsequent to a Change in Control, any claims by Mr. James for benefits under any of the Company's non-qualified retirement or deferred compensation plans shall be resolved through binding arbitration in accordance with the provisions and procedures set forth in Paragraph 5 hereof and if any material issue in such dispute is finally resolved in Mr. James' favor, the Company shall reimburse Mr. James' legal fees in the manner provided in Paragraph 2.(g) hereof. 3. Transfer of Employment. In the event that Mr. James' employment by the Company is terminated during the two year period following a Change in Control and Mr. James accepts employment by Southern, a Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary, the Company shall assign this Agreement to Southern, such Southern Subsidiary, or successor employer, Southern shall accept such assignment or cause such Southern Subsidiary or successor employer to accept such assignment, and such assignee shall become the "Company" for all purposes hereunder. 4. No Mitigation. If Mr. James is otherwise eligible to receive benefits under Paragraph 2 of this Agreement, he shall have no duty or obligation to seek other employment following his Termination Date and, except as otherwise provided in Paragraph 2.(a)(iii) hereof, the amounts due Mr. James hereunder shall not be reduced or suspended if Mr. James accepts such subsequent employment. 5. Arbitration. (a) Any dispute, controversy or claim arising out of or relating to the Company's obligations to pay severance benefits under this Agreement, or the breach thereof, shall be settled and resolved solely by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") except as otherwise provided herein. The arbitration shall be the sole and exclusive forum for resolution of any such claim for severance benefits and the arbitrators' award shall be final and binding. The provisions of this Paragraph 5 are not intended to apply to any other disputes, claims or controversies arising out of or relating to Mr. James' employment by the Company or the termination thereof. (b) Arbitration shall be initiated by serving a written notice of demand for arbitration to Mr. James, in the case of the Company, or to the Southern Board, in the case of Mr. James. (c) The arbitration shall be held in Atlanta, Georgia. The arbitrators shall apply the law of the State of Georgia, to the extent not preempted by federal law, excluding any law which would require the application of the law of another state. (d) The parties shall appoint arbitrators within fifteen (15) business days following service of the demand for arbitration. The number of arbitrators shall be three. One arbitrator shall be appointed by Mr. James, one arbitrator shall be appointed by the Company, and the two arbitrators shall appoint a third. If the arbitrators cannot agree on a third arbitrator within thirty (30) business days after the service of demand for arbitration, the third arbitrator shall be selected by the AAA. (e) The arbitration filing fee shall be paid by Mr. James. All other costs of arbitration shall be borne equally by Mr. James and the Company, provided, however, that the Company shall reimburse such fees and costs in the event any material issue in such dispute is finally resolved in Mr. James' favor and Mr. James is reimbursed legal fees under Paragraph 2.(g) hereof. (f) The parties agree that they will faithfully observe the rules that govern any arbitration between them, they will abide by and perform any award rendered by the arbitrators in any such arbitration, including any award of injunctive relief, and a judgment of a court having jurisdiction may be entered upon an award. (g) The parties agree that nothing in this Paragraph 5 is intended to preclude upon application of either party any court having jurisdiction from issuing and enforcing in any lawful manner such temporary restraining orders, preliminary injunctions, and other interim measures of relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate pending the conclusion of arbitration proceedings pursuant to this Agreement; regardless of whether an arbitration proceeding under this Paragraph 5 has begun. The parties further agree that nothing herein shall prevent any court from entering and enforcing in any lawful manner such judgments for permanent equitable relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate following the issuance of arbitral awards pursuant to this Paragraph 5. 6. Miscellaneous. (a) Funding of Benefits. Unless the Board in its discretion shall determine otherwise, the benefits payable to Mr. James under this Agreement shall not be funded in any manner and shall be paid by the Company out of its general assets, which assets are subject to the claims of the Company's creditors. (b) Withholding. There shall be deducted from the payment of any benefit due under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Mr. James. (c) Assignment. Mr. James shall have no rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. (d) Amendment and Termination. The Agreement may be amended or terminated only by a writing executed by the parties. (e) Construction. This Agreement shall be construed in accordance with and governed by the laws of the State of Georgia, to the extent not preempted by federal law, disregarding any provision of law which would require the application of the law of another state. (f) Pooling Accounting. Notwithstanding anything to the contrary herein, if, but for any provision of this Agreement, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Agreement which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Agreement, Pooling Accounting would be required for such Change in Control transaction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this ____ day of __________________, 2002. THE SOUTHERN COMPANY By: ____________________________________ SAVANNAH ELECTRIC AND POWER COMPANY By: ____________________________________ MR. JAMES ----------------------------- ANTHONY R. JAMES Exhibit A CHANGE IN CONTROL AGREEMENT Waiver and Release The attached Waiver and Release is to be given to Mr. Anthony R. James upon the occurrence of an event that triggers eligibility for severance benefits under the Change in Control Agreement, as described in Paragraph 2(a) of such agreement. CHANGE IN CONTROL AGREEMENT Waiver and Release I, Anthony R. James, understand that I am entitled to receive the severance benefits described in Section 2 of the Change in Control Agreement (the "Agreement") if I execute this Waiver and Release ("Waiver"). I understand that the benefits I will receive under the Agreement are in excess of those I would have received from The Southern Company and Savannah Electric and Power Company (collectively, the "Company") if I had not elected to sign this Waiver. I recognize that I may have a claim against the Company under the Civil Rights Act of 1964 and 1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the Energy Reorganization Act of 1974, as amended, the Americans with Disabilities Act or other federal, state and local laws. In exchange for the benefits I elect to receive, I hereby irrevocably waive and release all claims, of any kind whatsoever, whether known or unknown in connection with any claim which I ever had, may have, or now have against The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Savannah Electric and Power Company, Savannah Electric and Power Company, Southern Communication Services, Inc., Savannah Electric and Power Company, Southern Energy Resources, Inc., Southern Company Energy Solutions, Inc., Southern Nuclear Operating Company, Inc., Southern Energy, Inc. and other direct or indirect subsidiaries of The Southern Company and their past, present and future officers, directors, employees, agents and attorneys. Nothing in this Waiver shall be construed to release claims or causes of action under the Age Discrimination in Employment Act or the Energy Reorganization Act of 1974, as amended, which arise out of events occurring after the execution date of this Waiver. In further exchange for the benefits I elect to receive, I understand and agree that I will respect the proprietary and confidential nature of any information I have obtained in the course of my service with the Company or any subsidiary or affiliate of The Southern Company. However, nothing in this Waiver shall prohibit me from engaging in protected activities under applicable law or from communicating, either voluntary or otherwise, with any governmental agency concerning any potential violation of the law. In signing this Waiver, I am not releasing claims to benefits that I am already entitled to under any workers' compensation laws or under any retirement plan or welfare benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, which is sponsored by or adopted by the Company and/or any of its direct or indirect subsidiaries; however, I understand and acknowledge that nothing herein is intended to or shall be construed to require the Company to institute or continue in effect any particular plan or benefit sponsored by the Company and the Company hereby reserves the right to amend or terminate any of its benefit programs at any time in accordance with the procedures set forth in such plans. In signing this Waiver, I realize that I am waiving and releasing, among other things, any claims to benefits under any and all bonus, severance, workforce reduction, early retirement, outplacement, or any other similar type plan sponsored by the Company. I have been encouraged and advised in writing to seek advice from anyone of my choosing regarding this Waiver, including my attorney, and my accountant or tax advisor. Prior to signing this Waiver, I have been given the opportunity and sufficient time to seek such advice, and I fully understand the meaning and contents of this Waiver. I understand that I may take up to twenty-one (21) calendar days to consider whether or not I desire to enter this Waiver. I was not coerced, threatened or otherwise forced to sign this Waiver. I have made my choice to sign this Waiver voluntarily and of my own free will. I understand that I may revoke this Waiver at any time during the seven (7) calendar day period after I sign and deliver this Waiver to the Company. If I revoke this Waiver, I must do so in writing delivered to the Company. I understand that this Waiver is not effective until the expiration of this seven (7) calendar day revocation period. I understand that upon the expiration of such seven (7) calendar day revocation period this entire Waiver will be binding upon me and will be irrevocable. I understand that by signing this Waiver I am giving up rights I may have. IN WITNESS WHEREOF, the undersigned hereby executes this Waiver this ____ day of ____________________, in the year _____. Anthony R. James Sworn to and subscribed to me this ____ day of ____________, _____. Notary Public My Commission Expires: (Notary Seal) Acknowledged and Accepted by the Company, as defined in the Waiver. By: ----------------------------------- Date: ----------------------------------- EX-10.A.114 13 ex10a114.txt Exhibit 10(a)114 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT ("Agreement") made and entered into by and between The Southern Company ("Southern"), Southern Company Services, Inc. (the "Company") and Mr. William Paul Bowers. ("Mr. Bowers") (hereinafter collectively referred to as the "Parties") is effective May 1, 2001. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Mr. Bowers is Executive Vice President of the Company; WHEREAS, the Company wishes to provide to Mr. Bowers certain severance benefits under certain circumstances following a change in control (as defined herein) of Southern or the Company; NOW, THEREFORE, in consideration of the premises, and the agreements of the Parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Annual Compensation" shall mean Mr. Bowers' highest annual base salary rate for the twelve (12) month period immediately preceding the date of the Change in Control plus target bonus. (b) "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. (c) "Board" shall mean the board of directors of the Company. (d) "Business Combination" shall mean a reorganization, merger or consolidation of Southern or sale or other disposition of all or substantially all of the assets of Southern. (e) "Change in Control" shall mean any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this Paragraph 1.(e)(i), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (A) any acquisition directly from Southern; (B) any acquisition by Southern; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary; (D) any acquisition by a qualified pension plan or publicly held mutual fund; (E) any acquisition by a Group composed exclusively of employees of Southern, or any Southern Subsidiary; (F) any acquisition by Mr. Bowers or any Group of which Mr. Bowers is a party; or (G) any Business Combination which would not otherwise constitute a change in control because of the application of clauses (A), (B) and (C) of Paragraph 1.(e)(iii); (ii) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; (iii) Consummation of a Business Combination, provided, however, that such a Business Combination shall not constitute a Change in Control if all three (3) of the following conditions are met: (A) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (B) no Person (excluding any corporation resulting from such Business Combination, any employee benefit plan (or related trust) of Southern, any Southern Subsidiary or Surviving Company, Mr. Bowers, any Group of which Mr. Bowers is a party, any Group composed exclusively of Company employees, any qualified pension plan (or related trust) or any publicly held mutual fund) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. (iv) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of the Company; provided, however, that for purposes of this Paragraph 1.(e)(iv), any acquisition by Mr. Bowers, any Group composed exclusively of employees of the Company, any Group of which Mr. Bowers is a party, any qualified pension plan (or related trust), any publicly held mutual fund, any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary shall not constitute a Change in Control; (v) Consummation of a reorganization, merger or consolidation of the Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern Controls the corporation or other entity surviving or resulting from such Employing Company Business Combination; or (vi) Consummation of the sale or other disposition of all or substantially all of the assets of the Company to a corporation or other entity which Southern does not Control. Notwithstanding the foregoing, in no event shall "Change in Control" mean an initial public offering or a spin-off of the Company. (f) "COBRA Coverage" shall mean any continuation coverage to which Mr. Bowers or his dependents may be entitled pursuant to Code Section 4980B. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) "Company" shall mean Southern Company Services, Inc., its successors and assigns. (i) "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or governmental agencies. (j) "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. (k) "Effective Date" shall mean the date of execution of this Agreement. (l) "Employee Outplacement Program" shall mean the program established by the Company from time to time for the purpose of assisting participants covered by the plan in finding employment outside of the Company which provides for the following services: (i) self-assessment, career decision and goal setting; (ii) job market research and job sources; (iii) networking and interviewing skills; (iv) planning and implementation strategy; (v) resume writing, job hunting methods and salary negotiation; and (vi) office support and job search resources. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Good Reason" shall mean, without Mr. Bowers' express written consent, after written notice to the Board, and after a thirty (30) day opportunity for the Board to cure, the continuing occurrence of any of the following events: (i) Inconsistent Duties. A meaningful and detrimental alteration in Mr. Bowers' position or in the nature or status of his responsibilities from those in effect immediately prior to the Change in Control; (ii) Reduced Salary. A reduction of five percent (5%) or more by the Company in either of the following: (i) Mr. Bowers' annual base salary rate as in effect immediately prior to the Change in Control (except for a less than ten percent (10%), across-the-board annual base salary rate reduction similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); or (ii) the sum of Mr. Bowers' annual base salary rate plus target bonus under the PPP (except for a less than ten percent (10%), across-the-board reduction of annual base salary rate plus target bonus under the PPP similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); (iii) Pension and Compensation Plans. The failure by the Company to continue in effect any pension or compensation plan or agreement in which Mr. Bowers participates or is a party as of the date of the Change in Control or the elimination of Mr. Bowers' participation therein, (except for across-the-board plan changes or terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). For purposes of this Paragraph 1.(n), a "pension plan or agreement" shall mean any written arrangement executed by an authorized officer of the Company which provides for payments upon retirement; and a "compensation plan or arrangement" shall mean any written arrangement executed by an authorized officer of the Company which provides for periodic, non-discretionary compensatory payments in the nature of bonuses. (iv) Relocation. A change in Mr. Bowers' work location to a location more than fifty (50) miles from the office where Mr. Bowers is located at the time of the Change in Control, unless such new work location is within fifty (50) miles from Mr. Bowers' principal place of residence at the time of the Change in Control. The acceptance, if any, by Mr. Bowers of employment by the Company at a work location which is outside the fifty mile radius set forth in this Paragraph 1.(n)(iv) shall not be a waiver of Mr. Bowers' right to refuse subsequent transfer by the Company to a location which is more than fifty (50) miles from Mr. Bowers' principal place of residence at the time of the Change in Control, and such subsequent unconsented transfer shall be "Good Reason" under this Agreement; or (v) Benefits and Perquisites. The taking of any action by the Company which would directly or indirectly materially reduce the benefits enjoyed by Mr. Bowers under the Company's retirement, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which Mr. Bowers was participating immediately prior to the Change in Control; or the failure by the Company to provide Mr. Bowers with the number of paid vacation days to which Mr. Bowers is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control (except for across-the-board plan or vacation policy changes or plan terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). (vi) For purposes of this Paragraph 1.(n), the term "Executive Employee" shall mean those employees of the Company of Grade Level 10 or above. (o) "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. (p) "Group Health Plan" shall mean the group health plan covering Mr. Bowers, as such plan may be amended from time to time. (q) "Group Life Insurance Plan" shall mean the group life insurance program covering Mr. Bowers, as such plan may be amended from time to time. (r) "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998 plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to October 19, 1998 whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. (s) "Month of Service" shall mean any calendar month during which Mr. Bowers has worked at least one (1) hour or was on approved leave of absence while in the employ of the Company or any affiliate or subsidiary of Southern. (t) "Omnibus Plan" shall mean the Southern Company Omnibus Incentive Compensation Plan, and the Design and Administrative Specifications duly adopted thereunder, [as in effect on the day before the date of a Change in Control,] as may be amended from time to time. (u) "Pension Plan" shall mean The Southern Company Pension Plan, as such plan may be amended from time to time. (v) "Performance Dividend Program" shall mean the Performance Dividend Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (w) "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of Act. (x) "Performance Pay Program" or "PPP" shall mean the Performance Pay Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (y) "Southern" shall mean The Southern Company, its successors and assigns. (z) "Southern Board" shall mean the board of directors of Southern. (aa) "Southern Subsidiary" shall mean any corporation or other entity Controlled by Southern. (bb) "Termination for Cause" or "Cause" shall mean the termination of Mr. Bowers' employment by the Company upon the occurrence of any of the following: (i) The willful and continued failure by Mr. Bowers substantially to perform his duties with the Company (other than any such failure resulting from Mr. Bowers' Total Disability or from Mr. Bowers' retirement or any such actual or anticipated failure resulting from termination by Mr. Bowers for Good Reason) after a written demand for substantial performance is delivered to him by the Southern Board, which demand specifically identifies the manner in which the Southern Board believes that he has not substantially performed his duties; or (ii) The willful engaging by Mr. Bowers in conduct that is demonstrably and materially injurious to the Company, monetarily or otherwise, including, but not limited to any of the following: (A) any willful act involving fraud or dishonesty in the course of Mr. Bowers' employment by the Company; (B) the willful carrying out of any activity or the making of any statement which would materially prejudice or impair the good name and standing of the Company, Southern or any Southern Subsidiary or would bring the Company, Southern or any Southern Subsidiary into contempt, ridicule or would reasonably shock or offend any community in which the Company, Southern or such Southern Subsidiary is located; (C) attendance at work in a state of intoxication or otherwise being found in possession at his workplace of any prohibited drug or substance, possession of which would amount to a criminal offense; (D) violation of the Company's policies on drug and alcohol usage, fitness for duty requirements or similar policies as may exist from time to time as adopted by the Company's safety officer; (E) assault or other act of violence against any person during the course of employment; or (F) indictment of any felony or any misdemeanor involving moral turpitude. No act or failure to act by Mr. Bowers shall be deemed "willful" unless done, or omitted to be done, by Mr. Bowers not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Mr. Bowers shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Southern Board at a meeting of the Southern Board called and held for such purpose (after reasonable notice to Mr. Bowers and an opportunity for him, together with counsel, to be heard before the Southern Board), finding that, in the good faith opinion of the Southern Board, Mr. Bowers was guilty of conduct set forth above in clause (i) or (ii) of this Paragraph 1.(bb) and specifying the particulars thereof in detail. (cc) "Termination Date" shall mean the date on which Mr. Bowers' employment with the Company is terminated; provided, however, that solely for purposes of Paragraph 2.(c) hereof, the Termination Date shall be the effective date of his retirement pursuant to the terms of the Pension Plan. (dd) "Total Disability" shall mean Mr. Bowers' total disability within the meaning of the Pension Plan. (ee) "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. (ff) "Waiver and Release" shall mean the Waiver and Release attached hereto as Exhibit A. (gg) "Year of Service" shall mean Mr. Bowers' Months of Service divided by twelve (12) rounded to the nearest whole year, rounding up if the remaining number of months is seven (7) or greater and rounding down if the remaining number of months is less than seven (7). If Mr. Bowers has a break in his service with the Company, he will receive credit under this Agreement for service prior to the break in service only if the break in service is less than five years. 2. Severance Benefits. (a) Eligibility. Except as otherwise provided in this Paragraph 2.(a), if Mr. Bowers' employment is involuntarily terminated by the Company at any time during the two year period following a Change in Control for reasons other than Cause, or if Mr. Bowers voluntarily terminates his employment with the Company for Good Reason at any time during the two year period following a Change in Control, Mr. Bowers shall be entitled to receive the benefits described in this Agreement upon the Company's receipt of an effective Waiver and Release. Notwithstanding anything to the contrary herein, Mr. Bowers shall not be eligible to receive benefits under this Agreement if Mr. Bowers: (i) voluntarily terminates his employment with the Company for other than Good Reason; (ii) has his employment terminated by the Company for Cause; (iii) accepts the transfer of his employment to Southern, any Southern Subsidiary or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary; (iv) refuses an offer of continued employment with the Company, any Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern, or any Southern Subsidiary under circumstances where such refusal would not amount to Good Reason for voluntary termination of employment; or (v) elects to receive the benefits of any other voluntary or involuntary severance or separation program, plan or agreement maintained by the Company in lieu of benefits under this Agreement; provided however, that the receipt of benefits under the terms of any retention plan or agreement shall not be deemed to be the receipt of severance or separation benefits for purposes of this Agreement. (b) Severance Benefits. If Mr. Bowers meets the eligibility requirements of Paragraph 2.(a) hereof, he shall be entitled to a cash severance benefit in an amount equal to three times his Annual Compensation (the "Severance Amount"). If any portion of the Severance Amount constitutes an "excess parachute payment" (as such term is defined under Code Section 280G ("Excess Parachute Payment")), the Company shall pay to Mr. Bowers an additional amount calculated by determining the amount of tax under Code Section 4999 that he otherwise would have paid on any Excess Parachute Payment with respect to the Change in Control and dividing such amount by a decimal determined by adding the tax rate under Code Section 4999 ("Excise Tax"), the hospital insurance tax under Code Section 3101(b) ("HI Tax") and federal and state income tax measured at the highest marginal rates ("Income Tax") and subtracting such result from the number one (1) (the "280G Gross-up"); provided, however, that no 280G Gross-up shall be paid unless the Severance Amount plus all other "parachute payments" to Mr. Bowers under Code Section 280G exceeds three (3) times Mr. Bowers' "base amount" (as such term is defined under Code Section 280G ("Base Amount")) by ten percent (10%) or more; provided further, that if no 280G Gross-up is paid, the Severance Amount shall be capped at three (3) times Mr. Bowers' Base Amount, less all other "parachute payments" (as such term is defined under Code Section 280G) received by Mr. Bowers, less one dollar (the "Capped Amount"), if the Capped Amount, reduced by HI Tax and Income Tax, exceeds what otherwise would have been the Severance Amount, reduced by HI Tax, Income Tax and Excise Tax. For purposes of this Paragraph 2.(b), whether any amount would constitute an Excess Parachute Payment and any other calculations of tax, e.g., Excise Tax, HI Tax, Income Tax, etc., or other amounts, e.g., Base Amount, Capped Amount, etc., shall be determined by the tax department of the independent public accounting firm then responsible for preparing Southern's consolidated federal income tax return, and such calculations or determinations shall be binding upon the parties hereto. (c) Welfare Benefits. If Mr. Bowers meets the eligibility requirements of Paragraph 2.(a) hereof and is not otherwise eligible to receive retiree medical and life insurance benefits provided to certain retirees pursuant to the terms of the Pension Plan, the Group Health Plan and the Group Life Insurance Plan, he shall be entitled to the benefits set forth in this Paragraph 2.(c). (i) Mr. Bowers shall be eligible to participate in the Company's Group Health Plan, upon payment of both the Company's and his monthly premium under such plan, for a period of six (6) months for each of Mr. Bowers' Years of Service, not to exceed five (5) years. If Mr. Bowers elects to receive this extended medical coverage, he shall also be entitled to elect coverage under the Group Health Plan for his dependents who were participating in the Group Health Plan on Mr. Bowers' Termination Date (and for such other dependents as may be entitled to coverage under the provisions of the Health Insurance Portability and Accountability Act of 1996) for the duration of Mr. Bowers' extended medical coverage under this Paragraph 2.(c)(i) to the extent such dependents remain eligible for dependent coverage under the terms of the Group Health Plan. (A) The extended medical coverage afforded to Mr. Bowers pursuant to Paragraph 2.(c)(i), as well as the premiums to be paid by Mr. Bowers in connection with such coverage shall be determined in accordance with the terms of the Group Health Plan and shall be subject to any changes in the terms and conditions of the Group Health Plan as well as any future increases in premiums under the Group Health Plan. The premiums to be paid by Mr. Bowers in connection with this extended coverage shall be due on the first day of each month; provided, however, that if he fails to pay his premium within thirty (30) days of its due date, such extended coverage shall be terminated. (B) Any Group Health Plan coverage provided under Paragraph 2.(c)(i) shall be a part of and not in addition to any COBRA Coverage which Mr. Bowers or his dependents may elect. In the event that Mr. Bowers or his dependents become eligible to be covered, by virtue of re-employment or otherwise, by any employer-sponsored group health plan or is eligible for coverage under any government-sponsored health plan during the above period, coverage under the Company's Group Health Plan available to Mr. Bowers or his dependents by virtue of the provisions of Paragraph 2.(c)(i) shall terminate, except as may otherwise be required by law, and shall not be renewed. (ii) Mr. Bowers shall be entitled to receive cash in an amount equal to the Company's and Mr. Bowers' cost of premiums for three (3) years of coverage under the Group Health Plan and Group Life Insurance Plan in accordance with the terms of such plans as of the date of the Change in Control. (d) Incentive Plans. If Mr. Bowers meets the eligibility requirements of Paragraph 2.(a) hereof he shall be entitled to the following benefits under the Omnibus Plan: (i) Stock Options. (A) Any of Mr. Bowers' Options and Stock Appreciation Rights under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(i) by reference) which are outstanding as of the Termination Date and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Stock Appreciation Right, if Mr. Bowers is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to Mr. Bowers under Section 16(b) of the Exchange Act, provided further, that any such actions not taken as a result of the rules under Section 16(b) of the Exchange Act shall be effected as of the first date that such activity would no longer result in liability under Section 16(b) of the Exchange Act. (B) The restrictions and deferral limitations applicable to any of Mr. Bowers' Restricted Stock and Restricted Stock Units as of the Termination Date shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (ii) Performance Pay Program. Provided Mr. Bowers is not entitled to a Cash-Based Award under the PPP, (the defined terms of which are incorporated in this Paragraph 2.(d)(ii) by reference), if the PPP is in place through Mr. Bowers' Termination Date and to the extent Mr. Bowers is entitled to participate therein, Mr. Bowers shall be entitled to receive cash in an amount equal to a prorated payout of his Cash-Based Awards under the PPP for the performance period in which the Termination Date shall have occurred, at target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (iii) Performance Dividend Program. Provided Mr. Bowers is not entitled to a Cash-Based Award under the Performance Dividend Program (the defined terms of which are incorporated in this Paragraph 2.(d)(iii) by reference), if the Performance Dividend Program is in place through Mr. Bowers' Termination Date and to the extent Mr. Bowers is entitled to participate therein, Mr. Bowers shall be entitled to receive cash for each such Cash-Based Award under the Performance Dividend Program held by Mr. Bowers on his Termination Date, based on actual performance under the Performance Dividend Program determined as of the most recently completed calendar quarter of the performance period in which the Termination Date shall have occurred, and the annual dividend declared prior to the Termination Date. (iv) Other Short Term Incentives Under the Omnibus Plan. Provided Mr. Bowers is not entitled to a Performance Unit/Share award under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(iv) by reference), Mr. Bowers shall be entitled to receive cash in an amount equal to a prorated payout of the value of his Performance Units and/or Performance Shares for the performance period in which the Termination Date shall have occurred, at target performance and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (v) Other Short Term Incentive Plans. The provisions of this Paragraph 2.(d)(v) shall apply if and to the extent that Mr. Bowers is a participant in any other "short term compensation plan" not otherwise previously referred to in this Paragraph 2.(d). Provided Mr. Bowers is not otherwise entitled to a plan payout under any change of control provisions of such plans, if the "short term compensation plan" is in place as of the Termination Date and to the extent Mr. Bowers is entitled to participate therein, Mr. Bowers shall receive cash in an amount equal to his award under the Company's "short term incentive plan" for the annual performance period in which the Termination Date shall have occurred, at Mr. Bowers' target performance level and prorated by the number of months which have passed since the beginning of the annual performance period until his Termination Date. For purposes of this Paragraph 2.(d)(v) the term "short term incentive compensation plan" shall mean any incentive compensation plan or arrangement adopted in writing by the Company which provides for annual, recurring compensatory bonuses based upon articulated performance criteria. (e) Payment of Benefits. Any amounts due under this Agreement shall be paid in one (1) lump sum payment as soon as administratively practicable following the later of: (i) Mr. Bowers' Termination Date, or (ii) upon Mr. Bowers' tender of an effective Waiver and Release to the Company in the form of Exhibit A attached hereto and the expiration of any applicable revocation period for such waiver. In the event of a dispute with respect to liability or amount of any benefit due hereunder, an effective Waiver and Release shall be tendered at the time of final resolution of any such dispute when payment is tendered by the Company. (f) Benefits in the Event of Death. In the event of Mr. Bowers' death prior to the payment of all amounts due under this Agreement, Mr. Bowers' estate shall be entitled to receive as due any amounts not yet paid under this Agreement upon the tender by the executor or administrator of the estate of an effective Waiver and Release. (g) Legal Fees. In the event of a dispute between Mr. Bowers and the Company with regard to any amounts due hereunder, if any material issue in such dispute is finally resolved in Mr. Bowers' favor, the Company shall reimburse Mr. Bowers' legal fees incurred with respect to all issues in such dispute in an amount not to exceed fifty thousand dollars ($50,000). (h) Employee Outplacement Services. Mr. Bowers shall be eligible to participate in the Employee Outplacement Program, which program shall not be less than six (6) months duration measured from Mr. Bowers' Termination Date. (i) Non-qualified Retirement and Deferred Compensation Plans. The Parties agree that subsequent to a Change in Control, any claims by Mr. Bowers for benefits under any of the Company's non-qualified retirement or deferred compensation plans shall be resolved through binding arbitration in accordance with the provisions and procedures set forth in Paragraph 5 hereof and if any material issue in such dispute is finally resolved in Mr. Bowers' favor, the Company shall reimburse Mr. Bowers' legal fees in the manner provided in Paragraph 2.(g) hereof. 3. Transfer of Employment. In the event that Mr. Bowers' employment by the Company is terminated during the two year period following a Change in Control and Mr. Bowers accepts employment by Southern, a Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary, the Company shall assign this Agreement to Southern, such Southern Subsidiary, or successor employer, Southern shall accept such assignment or cause such Southern Subsidiary or successor employer to accept such assignment, and such assignee shall become the "Company" for all purposes hereunder. 4. No Mitigation. If Mr. Bowers is otherwise eligible to receive benefits under Paragraph 2 of this Agreement, he shall have no duty or obligation to seek other employment following his Termination Date and, except as otherwise provided in Paragraph 2.(a)(iii) hereof, the amounts due Mr. Bowers hereunder shall not be reduced or suspended if Mr. Bowers accepts such subsequent employment. 5. Arbitration. (a) Any dispute, controversy or claim arising out of or relating to the Company's obligations to pay severance benefits under this Agreement, or the breach thereof, shall be settled and resolved solely by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") except as otherwise provided herein. The arbitration shall be the sole and exclusive forum for resolution of any such claim for severance benefits and the arbitrators' award shall be final and binding. The provisions of this Paragraph 5 are not intended to apply to any other disputes, claims or controversies arising out of or relating to Mr. Bowers' employment by the Company or the termination thereof. (b) Arbitration shall be initiated by serving a written notice of demand for arbitration to Mr. Bowers, in the case of the Company, or to the Southern Board, in the case of Mr. Bowers. (c) The arbitration shall be held in Atlanta, Georgia. The arbitrators shall apply the law of the State of Georgia, to the extent not preempted by federal law, excluding any law which would require the application of the law of another state. (d) The parties shall appoint arbitrators within fifteen (15) business days following service of the demand for arbitration. The number of arbitrators shall be three. One arbitrator shall be appointed by Mr. Bowers, one arbitrator shall be appointed by the Company, and the two arbitrators shall appoint a third. If the arbitrators cannot agree on a third arbitrator within thirty (30) business days after the service of demand for arbitration, the third arbitrator shall be selected by the AAA. (e) The arbitration filing fee shall be paid by Mr. Bowers. All other costs of arbitration shall be borne equally by Mr. Bowers and the Company, provided, however, that the Company shall reimburse such fees and costs in the event any material issue in such dispute is finally resolved in Mr. Bowers' favor and Mr. Bowers is reimbursed legal fees under Paragraph 2.(g) hereof. (f) The parties agree that they will faithfully observe the rules that govern any arbitration between them, they will abide by and perform any award rendered by the arbitrators in any such arbitration, including any award of injunctive relief, and a judgment of a court having jurisdiction may be entered upon an award. (g) The parties agree that nothing in this Paragraph 5 is intended to preclude upon application of either party any court having jurisdiction from issuing and enforcing in any lawful manner such temporary restraining orders, preliminary injunctions, and other interim measures of relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate pending the conclusion of arbitration proceedings pursuant to this Agreement; regardless of whether an arbitration proceeding under this Paragraph 5 has begun. The parties further agree that nothing herein shall prevent any court from entering and enforcing in any lawful manner such judgments for permanent equitable relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate following the issuance of arbitral awards pursuant to this Paragraph 5. 6. Miscellaneous. (a) Funding of Benefits. Unless the Board in its discretion shall determine otherwise, the benefits payable to Mr. Bowers under this Agreement shall not be funded in any manner and shall be paid by the Company out of its general assets, which assets are subject to the claims of the Company's creditors. (b) Withholding. There shall be deducted from the payment of any benefit due under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Mr. Bowers. (c) Assignment. Mr. Bowers shall have no rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. (d) Amendment and Termination. The Agreement may be amended or terminated only by a writing executed by the parties. (e) Construction. This Agreement shall be construed in accordance with and governed by the laws of the State of Georgia, to the extent not preempted by federal law, disregarding any provision of law which would require the application of the law of another state. (f) Pooling Accounting. Notwithstanding anything to the contrary herein, if, but for any provision of this Agreement, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Agreement which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Agreement, Pooling Accounting would be required for such Change in Control transaction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this ____ day of __________________, 2002. THE SOUTHERN COMPANY By: ____________________________________ SOUTHERN COMPANY SERVICES, INC. By: ____________________________________ MR. BOWERS ----------------------------- WILLIAM PAUL BOWERS Exhibit A CHANGE IN CONTROL AGREEMENT Waiver and Release The attached Waiver and Release is to be given to Mr. William Paul Bowers upon the occurrence of an event that triggers eligibility for severance benefits under the Change in Control Agreement, as described in Paragraph 2(a) of such agreement. CHANGE IN CONTROL AGREEMENT Waiver and Release I, William Paul Bowers, understand that I am entitled to receive the severance benefits described in Section 2 of the Change in Control Agreement (the "Agreement") if I execute this Waiver and Release ("Waiver"). I understand that the benefits I will receive under the Agreement are in excess of those I would have received from The Southern Company and Southern Company Services, Inc. (collectively, the "Company") if I had not elected to sign this Waiver. I recognize that I may have a claim against the Company under the Civil Rights Act of 1964 and 1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the Energy Reorganization Act of 1974, as amended, the Americans with Disabilities Act or other federal, state and local laws. In exchange for the benefits I elect to receive, I hereby irrevocably waive and release all claims, of any kind whatsoever, whether known or unknown in connection with any claim which I ever had, may have, or now have against The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Southern Company Services, Inc., Savannah Electric and Power Company, Southern Communication Services, Inc., Southern Company Services, Inc., Southern Energy Resources, Inc., Southern Company Energy Solutions, Inc., Southern Nuclear Operating Company, Inc., Southern Energy, Inc. and other direct or indirect subsidiaries of The Southern Company and their past, present and future officers, directors, employees, agents and attorneys. Nothing in this Waiver shall be construed to release claims or causes of action under the Age Discrimination in Employment Act or the Energy Reorganization Act of 1974, as amended, which arise out of events occurring after the execution date of this Waiver. In further exchange for the benefits I elect to receive, I understand and agree that I will respect the proprietary and confidential nature of any information I have obtained in the course of my service with the Company or any subsidiary or affiliate of The Southern Company. However, nothing in this Waiver shall prohibit me from engaging in protected activities under applicable law or from communicating, either voluntary or otherwise, with any governmental agency concerning any potential violation of the law. In signing this Waiver, I am not releasing claims to benefits that I am already entitled to under any workers' compensation laws or under any retirement plan or welfare benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, which is sponsored by or adopted by the Company and/or any of its direct or indirect subsidiaries; however, I understand and acknowledge that nothing herein is intended to or shall be construed to require the Company to institute or continue in effect any particular plan or benefit sponsored by the Company and the Company hereby reserves the right to amend or terminate any of its benefit programs at any time in accordance with the procedures set forth in such plans. In signing this Waiver, I realize that I am waiving and releasing, among other things, any claims to benefits under any and all bonus, severance, workforce reduction, early retirement, outplacement, or any other similar type plan sponsored by the Company. I have been encouraged and advised in writing to seek advice from anyone of my choosing regarding this Waiver, including my attorney, and my accountant or tax advisor. Prior to signing this Waiver, I have been given the opportunity and sufficient time to seek such advice, and I fully understand the meaning and contents of this Waiver. I understand that I may take up to twenty-one (21) calendar days to consider whether or not I desire to enter this Waiver. I was not coerced, threatened or otherwise forced to sign this Waiver. I have made my choice to sign this Waiver voluntarily and of my own free will. I understand that I may revoke this Waiver at any time during the seven (7) calendar day period after I sign and deliver this Waiver to the Company. If I revoke this Waiver, I must do so in writing delivered to the Company. I understand that this Waiver is not effective until the expiration of this seven (7) calendar day revocation period. I understand that upon the expiration of such seven (7) calendar day revocation period this entire Waiver will be binding upon me and will be irrevocable. I understand that by signing this Waiver I am giving up rights I may have. IN WITNESS WHEREOF, the undersigned hereby executes this Waiver this ____ day of ____________________, in the year _____. William Paul Bowers Sworn to and subscribed to me this ____ day of ____________, _____. Notary Public My Commission Expires: (Notary Seal) Acknowledged and Accepted by the Company, as defined in the Waiver. By: ----------------------------------- Date: ----------------------------------- EX-10.A.115 14 ex10a115.txt Exhibit 10(a)115 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT ("Agreement") made and entered into by and between The Southern Company ("Southern"), Gulf Power Company (the "Company") and Mr. Thomas A. Fanning. ("Mr. Fanning") (hereinafter collectively referred to as the "Parties") is effective May 17, 2002. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Mr. Fanning is President and CEO of the Company; WHEREAS, the Company wishes to provide to Mr. Fanning certain severance benefits under certain circumstances following a change in control (as defined herein) of Southern or the Company; NOW, THEREFORE, in consideration of the premises, and the agreements of the Parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Annual Compensation" shall mean Mr. Fanning's highest annual base salary rate for the twelve (12) month period immediately preceding the date of the Change in Control plus target bonus. (b) "Beneficial Ownership" shall mean beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. (c) "Board" shall mean the board of directors of the Company. (d) "Business Combination" shall mean a reorganization, merger or consolidation of Southern or sale or other disposition of all or substantially all of the assets of Southern. (e) "Change in Control" shall mean any of the following: (i) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this Paragraph 1.(e)(i), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (A) any acquisition directly from Southern; (B) any acquisition by Southern; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary; (D) any acquisition by a qualified pension plan or publicly held mutual fund; (E) any acquisition by a Group composed exclusively of employees of Southern, or any Southern Subsidiary; (F) any acquisition by Mr. Fanning or any Group of which Mr. Fanning is a party; or (G) any Business Combination which would not otherwise constitute a change in control because of the application of clauses (A), (B) and (C) of Paragraph 1.(e)(iii); (ii) A change in the composition of the Southern Board whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Southern Board; (iii) Consummation of a Business Combination, provided, however, that such a Business Combination shall not constitute a Change in Control if all three (3) of the following conditions are met: (A) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (B) no Person (excluding any corporation resulting from such Business Combination, any employee benefit plan (or related trust) of Southern, any Southern Subsidiary or Surviving Company, Mr. Fanning, any Group of which Mr. Fanning is a party, any Group composed exclusively of Company employees, any qualified pension plan (or related trust) or any publicly held mutual fund) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern Board, providing for such Business Combination. (iv) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of the Company; provided, however, that for purposes of this Paragraph 1.(e)(iv), any acquisition by Mr. Fanning, any Group composed exclusively of employees of the Company, any Group of which Mr. Fanning is a party, any qualified pension plan (or related trust), any publicly held mutual fund, any employee benefit plan (or related trust) sponsored or maintained by Southern or any Southern Subsidiary shall not constitute a Change in Control; (v) Consummation of a reorganization, merger or consolidation of the Company (an "Employing Company Business Combination"), in each case, unless, following such Employing Company Business Combination, Southern Controls the corporation or other entity surviving or resulting from such Employing Company Business Combination; or (vi) Consummation of the sale or other disposition of all or substantially all of the assets of the Company to a corporation or other entity which Southern does not Control. Notwithstanding the foregoing, in no event shall "Change in Control" mean an initial public offering or a spin-off of the Company. (f) "COBRA Coverage" shall mean any continuation coverage to which Mr. Fanning or his dependents may be entitled pursuant to Code Section 4980B. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended. (h) "Company" shall mean Gulf Power Company, its successors and assigns. (i) "Consummation" shall mean the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or governmental agencies. (j) "Control" shall mean, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. (k) "Effective Date" shall mean the date of execution of this Agreement. (l) "Employee Outplacement Program" shall mean the program established by the Company from time to time for the purpose of assisting participants covered by the plan in finding employment outside of the Company which provides for the following services: (i) self-assessment, career decision and goal setting; (ii) job market research and job sources; (iii) networking and interviewing skills; (iv) planning and implementation strategy; (v) resume writing, job hunting methods and salary negotiation; and (vi) office support and job search resources. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Good Reason" shall mean, without Mr. Fanning's express written consent, after written notice to the Board, and after a thirty (30) day opportunity for the Board to cure, the continuing occurrence of any of the following events: (i) Inconsistent Duties. A meaningful and detrimental alteration in Mr. Fanning's position or in the nature or status of his responsibilities from those in effect immediately prior to the Change in Control; (ii) Reduced Salary. A reduction of five percent (5%) or more by the Company in either of the following: (i) Mr. Fanning's annual base salary rate as in effect immediately prior to the Change in Control (except for a less than ten percent (10%), across-the-board annual base salary rate reduction similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); or (ii) the sum of Mr. Fanning's annual base salary rate plus target bonus under the PPP (except for a less than ten percent (10%), across-the-board reduction of annual base salary rate plus target bonus under the PPP similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company); (iii) Pension and Compensation Plans. The failure by the Company to continue in effect any pension or compensation plan or agreement in which Mr. Fanning participates or is a party as of the date of the Change in Control or the elimination of Mr. Fanning's participation therein, (except for across-the-board plan changes or terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). For purposes of this Paragraph 1.(n), a "pension plan or agreement" shall mean any written arrangement executed by an authorized officer of the Company which provides for payments upon retirement; and a "compensation plan or arrangement" shall mean any written arrangement executed by an authorized officer of the Company which provides for periodic, non-discretionary compensatory payments in the nature of bonuses. (iv) Relocation. A change in Mr. Fanning's work location to a location more than fifty (50) miles from the office where Mr. Fanning is located at the time of the Change in Control, unless such new work location is within fifty (50) miles from Mr. Fanning's principal place of residence at the time of the Change in Control. The acceptance, if any, by Mr. Fanning of employment by the Company at a work location which is outside the fifty mile radius set forth in this Paragraph 1.(n)(iv) shall not be a waiver of Mr. Fanning's right to refuse subsequent transfer by the Company to a location which is more than fifty (50) miles from Mr. Fanning's principal place of residence at the time of the Change in Control, and such subsequent unconsented transfer shall be "Good Reason" under this Agreement; or (v) Benefits and Perquisites. The taking of any action by the Company which would directly or indirectly materially reduce the benefits enjoyed by Mr. Fanning under the Company's retirement, life insurance, medical, health and accident, disability, deferred compensation or savings plans in which Mr. Fanning was participating immediately prior to the Change in Control; or the failure by the Company to provide Mr. Fanning with the number of paid vacation days to which Mr. Fanning is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control (except for across-the-board plan or vacation policy changes or plan terminations similarly affecting at least ninety-five percent (95%) of the Executive Employees of the Company). (vi) For purposes of this Paragraph 1.(n), the term "Executive Employee" shall mean those employees of the Company of Grade Level 10 or above. (o) "Group" shall have the meaning set forth in Section 14(d) of the Exchange Act. (p) "Group Health Plan" shall mean the group health plan covering Mr. Fanning, as such plan may be amended from time to time. (q) "Group Life Insurance Plan" shall mean the group life insurance program covering Mr. Fanning, as such plan may be amended from time to time. (r) "Incumbent Board" shall mean those individuals who constitute the Southern Board as of October 19, 1998 plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern Board subsequent to October 19, 1998 whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the Regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern Board shall be a member of the Incumbent Board. (s) "Month of Service" shall mean any calendar month during which Mr. Fanning has worked at least one (1) hour or was on approved leave of absence while in the employ of the Company or any affiliate or subsidiary of Southern. (t) "Omnibus Plan" shall mean the Southern Company Omnibus Incentive Compensation Plan, and the Design and Administrative Specifications duly adopted thereunder, [as in effect on the day before the date of a Change in Control,] as may be amended from time to time. (u) "Pension Plan" shall mean The Southern Company Pension Plan, as such plan may be amended from time to time. (v) "Performance Dividend Program" shall mean the Performance Dividend Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (w) "Person" shall mean any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of Act. (x) "Performance Pay Program" or "PPP" shall mean the Performance Pay Program under the Omnibus Plan or any replacement thereto, as such plans may be amended from time to time. (y) "Southern" shall mean The Southern Company, its successors and assigns. (z) "Southern Board" shall mean the board of directors of Southern. (aa) "Southern Subsidiary" shall mean any corporation or other entity Controlled by Southern. (bb) "Termination for Cause" or "Cause" shall mean the termination of Mr. Fanning's employment by the Company upon the occurrence of any of the following: (i) The willful and continued failure by Mr. Fanning substantially to perform his duties with the Company (other than any such failure resulting from Mr. Fanning's Total Disability or from Mr. Fanning's retirement or any such actual or anticipated failure resulting from termination by Mr. Fanning for Good Reason) after a written demand for substantial performance is delivered to him by the Southern Board, which demand specifically identifies the manner in which the Southern Board believes that he has not substantially performed his duties; or (ii) The willful engaging by Mr. Fanning in conduct that is demonstrably and materially injurious to the Company, monetarily or otherwise, including, but not limited to any of the following: (A) any willful act involving fraud or dishonesty in the course of Mr. Fanning's employment by the Company; (B) the willful carrying out of any activity or the making of any statement which would materially prejudice or impair the good name and standing of the Company, Southern or any Southern Subsidiary or would bring the Company, Southern or any Southern Subsidiary into contempt, ridicule or would reasonably shock or offend any community in which the Company, Southern or such Southern Subsidiary is located; (C) attendance at work in a state of intoxication or otherwise being found in possession at his workplace of any prohibited drug or substance, possession of which would amount to a criminal offense; (D) violation of the Company's policies on drug and alcohol usage, fitness for duty requirements or similar policies as may exist from time to time as adopted by the Company's safety officer; (E) assault or other act of violence against any person during the course of employment; or (F) indictment of any felony or any misdemeanor involving moral turpitude. No act or failure to act by Mr. Fanning shall be deemed "willful" unless done, or omitted to be done, by Mr. Fanning not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, Mr. Fanning shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Southern Board at a meeting of the Southern Board called and held for such purpose (after reasonable notice to Mr. Fanning and an opportunity for him, together with counsel, to be heard before the Southern Board), finding that, in the good faith opinion of the Southern Board, Mr. Fanning was guilty of conduct set forth above in clause (i) or (ii) of this Paragraph 1.(bb) and specifying the particulars thereof in detail. (cc) "Termination Date" shall mean the date on which Mr. Fanning's employment with the Company is terminated; provided, however, that solely for purposes of Paragraph 2.(c) hereof, the Termination Date shall be the effective date of his retirement pursuant to the terms of the Pension Plan. (dd) "Total Disability" shall mean Mr. Fanning's total disability within the meaning of the Pension Plan. (ee) "Voting Securities" shall mean the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. (ff) "Waiver and Release" shall mean the Waiver and Release attached hereto as Exhibit A. (gg) "Year of Service" shall mean Mr. Fanning's Months of Service divided by twelve (12) rounded to the nearest whole year, rounding up if the remaining number of months is seven (7) or greater and rounding down if the remaining number of months is less than seven (7). If Mr. Fanning has a break in his service with the Company, he will receive credit under this Agreement for service prior to the break in service only if the break in service is less than five years. 2. Severance Benefits. (a) Eligibility. Except as otherwise provided in this Paragraph 2.(a), if Mr. Fanning's employment is involuntarily terminated by the Company at any time during the two year period following a Change in Control for reasons other than Cause, or if Mr. Fanning voluntarily terminates his employment with the Company for Good Reason at any time during the two year period following a Change in Control, Mr. Fanning shall be entitled to receive the benefits described in this Agreement upon the Company's receipt of an effective Waiver and Release. Notwithstanding anything to the contrary herein, Mr. Fanning shall not be eligible to receive benefits under this Agreement if Mr. Fanning: (i) voluntarily terminates his employment with the Company for other than Good Reason; (ii) has his employment terminated by the Company for Cause; (iii) accepts the transfer of his employment to Southern, any Southern Subsidiary or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary; (iv) refuses an offer of continued employment with the Company, any Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern, or any Southern Subsidiary under circumstances where such refusal would not amount to Good Reason for voluntary termination of employment; or (v) elects to receive the benefits of any other voluntary or involuntary severance or separation program, plan or agreement maintained by the Company in lieu of benefits under this Agreement; provided however, that the receipt of benefits under the terms of any retention plan or agreement shall not be deemed to be the receipt of severance or separation benefits for purposes of this Agreement. (b) Severance Benefits. If Mr. Fanning meets the eligibility requirements of Paragraph 2.(a) hereof, he shall be entitled to a cash severance benefit in an amount equal to three times his Annual Compensation (the "Severance Amount"). If any portion of the Severance Amount constitutes an "excess parachute payment" (as such term is defined under Code Section 280G ("Excess Parachute Payment")), the Company shall pay to Mr. Fanning an additional amount calculated by determining the amount of tax under Code Section 4999 that he otherwise would have paid on any Excess Parachute Payment with respect to the Change in Control and dividing such amount by a decimal determined by adding the tax rate under Code Section 4999 ("Excise Tax"), the hospital insurance tax under Code Section 3101(b) ("HI Tax") and federal and state income tax measured at the highest marginal rates ("Income Tax") and subtracting such result from the number one (1) (the "280G Gross-up"); provided, however, that no 280G Gross-up shall be paid unless the Severance Amount plus all other "parachute payments" to Mr. Fanning under Code Section 280G exceeds three (3) times Mr. Fanning's "base amount" (as such term is defined under Code Section 280G ("Base Amount")) by ten percent (10%) or more; provided further, that if no 280G Gross-up is paid, the Severance Amount shall be capped at three (3) times Mr. Fanning's Base Amount, less all other "parachute payments" (as such term is defined under Code Section 280G) received by Mr. Fanning, less one dollar (the "Capped Amount"), if the Capped Amount, reduced by HI Tax and Income Tax, exceeds what otherwise would have been the Severance Amount, reduced by HI Tax, Income Tax and Excise Tax. For purposes of this Paragraph 2.(b), whether any amount would constitute an Excess Parachute Payment and any other calculations of tax, e.g., Excise Tax, HI Tax, Income Tax, etc., or other amounts, e.g., Base Amount, Capped Amount, etc., shall be determined by the tax department of the independent public accounting firm then responsible for preparing Southern's consolidated federal income tax return, and such calculations or determinations shall be binding upon the parties hereto. (c) Welfare Benefits. If Mr. Fanning meets the eligibility requirements of Paragraph 2.(a) hereof and is not otherwise eligible to receive retiree medical and life insurance benefits provided to certain retirees pursuant to the terms of the Pension Plan, the Group Health Plan and the Group Life Insurance Plan, he shall be entitled to the benefits set forth in this Paragraph 2.(c). (i) Mr. Fanning shall be eligible to participate in the Company's Group Health Plan, upon payment of both the Company's and his monthly premium under such plan, for a period of six (6) months for each of Mr. Fanning's Years of Service, not to exceed five (5) years. If Mr. Fanning elects to receive this extended medical coverage, he shall also be entitled to elect coverage under the Group Health Plan for his dependents who were participating in the Group Health Plan on Mr. Fanning's Termination Date (and for such other dependents as may be entitled to coverage under the provisions of the Health Insurance Portability and Accountability Act of 1996) for the duration of Mr. Fanning's extended medical coverage under this Paragraph 2.(c)(i) to the extent such dependents remain eligible for dependent coverage under the terms of the Group Health Plan. (A) The extended medical coverage afforded to Mr. Fanning pursuant to Paragraph 2.(c)(i), as well as the premiums to be paid by Mr. Fanning in connection with such coverage shall be determined in accordance with the terms of the Group Health Plan and shall be subject to any changes in the terms and conditions of the Group Health Plan as well as any future increases in premiums under the Group Health Plan. The premiums to be paid by Mr. Fanning in connection with this extended coverage shall be due on the first day of each month; provided, however, that if he fails to pay his premium within thirty (30) days of its due date, such extended coverage shall be terminated. (B) Any Group Health Plan coverage provided under Paragraph 2.(c)(i) shall be a part of and not in addition to any COBRA Coverage which Mr. Fanning or his dependents may elect. In the event that Mr. Fanning or his dependents become eligible to be covered, by virtue of re-employment or otherwise, by any employer-sponsored group health plan or is eligible for coverage under any government-sponsored health plan during the above period, coverage under the Company's Group Health Plan available to Mr. Fanning or his dependents by virtue of the provisions of Paragraph 2.(c)(i) shall terminate, except as may otherwise be required by law, and shall not be renewed. (ii) Mr. Fanning shall be entitled to receive cash in an amount equal to the Company's and Mr. Fanning's cost of premiums for three (3) years of coverage under the Group Health Plan and Group Life Insurance Plan in accordance with the terms of such plans as of the date of the Change in Control. (d) Incentive Plans. If Mr. Fanning meets the eligibility requirements of Paragraph 2.(a) hereof he shall be entitled to the following benefits under the Omnibus Plan: (i) Stock Options. (A) Any of Mr. Fanning's Options and Stock Appreciation Rights under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(i) by reference) which are outstanding as of the Termination Date and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant; provided, that in the case of a Stock Appreciation Right, if Mr. Fanning is subject to Section 16(b) of the Exchange Act, such Stock Appreciation Right shall not become fully vested and exercisable at such time if such actions would result in liability to Mr. Fanning under Section 16(b) of the Exchange Act, provided further, that any such actions not taken as a result of the rules under Section 16(b) of the Exchange Act shall be effected as of the first date that such activity would no longer result in liability under Section 16(b) of the Exchange Act. (B) The restrictions and deferral limitations applicable to any of Mr. Fanning's Restricted Stock and Restricted Stock Units as of the Termination Date shall lapse, and such Restricted Stock and Restricted Stock Units shall become free of all restrictions and limitations and become fully vested and transferable to the full extent of the original grant. (ii) Performance Pay Program. Provided Mr. Fanning is not entitled to a Cash-Based Award under the PPP, (the defined terms of which are incorporated in this Paragraph 2.(d)(ii) by reference), if the PPP is in place through Mr. Fanning's Termination Date and to the extent Mr. Fanning is entitled to participate therein, Mr. Fanning shall be entitled to receive cash in an amount equal to a prorated payout of his Cash-Based Awards under the PPP for the performance period in which the Termination Date shall have occurred, at target performance under the PPP and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (iii) Performance Dividend Program. Provided Mr. Fanning is not entitled to a Cash-Based Award under the Performance Dividend Program (the defined terms of which are incorporated in this Paragraph 2.(d)(iii) by reference), if the Performance Dividend Program is in place through Mr. Fanning's Termination Date and to the extent Mr. Fanning is entitled to participate therein, Mr. Fanning shall be entitled to receive cash for each such Cash-Based Award under the Performance Dividend Program held by Mr. Fanning on his Termination Date, based on actual performance under the Performance Dividend Program determined as of the most recently completed calendar quarter of the performance period in which the Termination Date shall have occurred, and the annual dividend declared prior to the Termination Date. (iv) Other Short Term Incentives Under the Omnibus Plan. Provided Mr. Fanning is not entitled to a Performance Unit/Share award under the Omnibus Plan (the defined terms of which are incorporated in this Paragraph 2.(d)(iv) by reference), Mr. Fanning shall be entitled to receive cash in an amount equal to a prorated payout of the value of his Performance Units and/or Performance Shares for the performance period in which the Termination Date shall have occurred, at target performance and prorated by the number of months which have passed since the beginning of the performance period until the Termination Date. (v) Other Short Term Incentive Plans. The provisions of this Paragraph 2.(d)(v) shall apply if and to the extent that Mr. Fanning is a participant in any other "short term compensation plan" not otherwise previously referred to in this Paragraph 2.(d). Provided Mr. Fanning is not otherwise entitled to a plan payout under any change of control provisions of such plans, if the "short term compensation plan" is in place as of the Termination Date and to the extent Mr. Fanning is entitled to participate therein, Mr. Fanning shall receive cash in an amount equal to his award under the Company's "short term incentive plan" for the annual performance period in which the Termination Date shall have occurred, at Mr. Fanning's target performance level and prorated by the number of months which have passed since the beginning of the annual performance period until his Termination Date. For purposes of this Paragraph 2.(d)(v) the term "short term incentive compensation plan" shall mean any incentive compensation plan or arrangement adopted in writing by the Company which provides for annual, recurring compensatory bonuses based upon articulated performance criteria. (e) Payment of Benefits. Any amounts due under this Agreement shall be paid in one (1) lump sum payment as soon as administratively practicable following the later of: (i) Mr. Fanning's Termination Date, or (ii) upon Mr. Fanning's tender of an effective Waiver and Release to the Company in the form of Exhibit A attached hereto and the expiration of any applicable revocation period for such waiver. In the event of a dispute with respect to liability or amount of any benefit due hereunder, an effective Waiver and Release shall be tendered at the time of final resolution of any such dispute when payment is tendered by the Company. (f) Benefits in the Event of Death. In the event of Mr. Fanning's death prior to the payment of all amounts due under this Agreement, Mr. Fanning's estate shall be entitled to receive as due any amounts not yet paid under this Agreement upon the tender by the executor or administrator of the estate of an effective Waiver and Release. (g) Legal Fees. In the event of a dispute between Mr. Fanning and the Company with regard to any amounts due hereunder, if any material issue in such dispute is finally resolved in Mr. Fanning's favor, the Company shall reimburse Mr. Fanning's legal fees incurred with respect to all issues in such dispute in an amount not to exceed fifty thousand dollars ($50,000). (h) Employee Outplacement Services. Mr. Fanning shall be eligible to participate in the Employee Outplacement Program, which program shall not be less than six (6) months duration measured from Mr. Fanning's Termination Date. (i) Non-qualified Retirement and Deferred Compensation Plans. The Parties agree that subsequent to a Change in Control, any claims by Mr. Fanning for benefits under any of the Company's non-qualified retirement or deferred compensation plans shall be resolved through binding arbitration in accordance with the provisions and procedures set forth in Paragraph 5 hereof and if any material issue in such dispute is finally resolved in Mr. Fanning's favor, the Company shall reimburse Mr. Fanning's legal fees in the manner provided in Paragraph 2.(g) hereof. 3. Transfer of Employment. In the event that Mr. Fanning's employment by the Company is terminated during the two year period following a Change in Control and Mr. Fanning accepts employment by Southern, a Southern Subsidiary, or any employer that succeeds to all or substantially all of the assets of the Company, Southern or any Southern Subsidiary, the Company shall assign this Agreement to Southern, such Southern Subsidiary, or successor employer, Southern shall accept such assignment or cause such Southern Subsidiary or successor employer to accept such assignment, and such assignee shall become the "Company" for all purposes hereunder. 4. No Mitigation. If Mr. Fanning is otherwise eligible to receive benefits under Paragraph 2 of this Agreement, he shall have no duty or obligation to seek other employment following his Termination Date and, except as otherwise provided in Paragraph 2.(a)(iii) hereof, the amounts due Mr. Fanning hereunder shall not be reduced or suspended if Mr. Fanning accepts such subsequent employment. 5. Arbitration. (a) Any dispute, controversy or claim arising out of or relating to the Company's obligations to pay severance benefits under this Agreement, or the breach thereof, shall be settled and resolved solely by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") except as otherwise provided herein. The arbitration shall be the sole and exclusive forum for resolution of any such claim for severance benefits and the arbitrators' award shall be final and binding. The provisions of this Paragraph 5 are not intended to apply to any other disputes, claims or controversies arising out of or relating to Mr. Fanning's employment by the Company or the termination thereof. (b) Arbitration shall be initiated by serving a written notice of demand for arbitration to Mr. Fanning, in the case of the Company, or to the Southern Board, in the case of Mr. Fanning. (c) The arbitration shall be held in Atlanta, Georgia. The arbitrators shall apply the law of the State of Georgia, to the extent not preempted by federal law, excluding any law which would require the application of the law of another state. (d) The parties shall appoint arbitrators within fifteen (15) business days following service of the demand for arbitration. The number of arbitrators shall be three. One arbitrator shall be appointed by Mr. Fanning, one arbitrator shall be appointed by the Company, and the two arbitrators shall appoint a third. If the arbitrators cannot agree on a third arbitrator within thirty (30) business days after the service of demand for arbitration, the third arbitrator shall be selected by the AAA. (e) The arbitration filing fee shall be paid by Mr. Fanning. All other costs of arbitration shall be borne equally by Mr. Fanning and the Company, provided, however, that the Company shall reimburse such fees and costs in the event any material issue in such dispute is finally resolved in Mr. Fanning's favor and Mr. Fanning is reimbursed legal fees under Paragraph 2.(g) hereof. (f) The parties agree that they will faithfully observe the rules that govern any arbitration between them, they will abide by and perform any award rendered by the arbitrators in any such arbitration, including any award of injunctive relief, and a judgment of a court having jurisdiction may be entered upon an award. (g) The parties agree that nothing in this Paragraph 5 is intended to preclude upon application of either party any court having jurisdiction from issuing and enforcing in any lawful manner such temporary restraining orders, preliminary injunctions, and other interim measures of relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate pending the conclusion of arbitration proceedings pursuant to this Agreement; regardless of whether an arbitration proceeding under this Paragraph 5 has begun. The parties further agree that nothing herein shall prevent any court from entering and enforcing in any lawful manner such judgments for permanent equitable relief as may be necessary to prevent harm to a party's interests or as otherwise may be appropriate following the issuance of arbitral awards pursuant to this Paragraph 5. 6. Miscellaneous. (a) Funding of Benefits. Unless the Board in its discretion shall determine otherwise, the benefits payable to Mr. Fanning under this Agreement shall not be funded in any manner and shall be paid by the Company out of its general assets, which assets are subject to the claims of the Company's creditors. (b) Withholding. There shall be deducted from the payment of any benefit due under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Mr. Fanning. (c) Assignment. Mr. Fanning shall have no rights to sell, assign, transfer, encumber, or otherwise convey the right to receive the payment of any benefit due hereunder, which payment and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. (d) Amendment and Termination. The Agreement may be amended or terminated only by a writing executed by the parties. (e) Construction. This Agreement shall be construed in accordance with and governed by the laws of the State of Georgia, to the extent not preempted by federal law, disregarding any provision of law which would require the application of the law of another state. (f) Pooling Accounting. Notwithstanding anything to the contrary herein, if, but for any provision of this Agreement, a Change in Control transaction would otherwise be accounted for as a pooling-of-interests under APB No.16 ("Pooling Accounting") (after giving effect to any and all other facts and circumstances affecting whether such Change in Control transaction would use Pooling Accounting), such provision or provisions of this Agreement which would otherwise cause the Change in Control transaction to be ineligible for Pooling Accounting shall be void and ineffective in such a manner and to the extent that by eliminating such provision or provisions of this Agreement, Pooling Accounting would be required for such Change in Control transaction. IN WITNESS WHEREOF, the parties hereto have executed this Agreement this ____ day of __________________, 2002. THE SOUTHERN COMPANY By: ____________________________________ GULF POWER COMPANY By: ____________________________________ MR. FANNING ----------------------------- THOMAS A. FANNING Exhibit A CHANGE IN CONTROL AGREEMENT Waiver and Release The attached Waiver and Release is to be given to Mr. Thomas A. Fanning upon the occurrence of an event that triggers eligibility for severance benefits under the Change in Control Agreement, as described in Paragraph 2(a) of such agreement. CHANGE IN CONTROL AGREEMENT Waiver and Release I, Thomas A. Fanning, understand that I am entitled to receive the severance benefits described in Section 2 of the Change in Control Agreement (the "Agreement") if I execute this Waiver and Release ("Waiver"). I understand that the benefits I will receive under the Agreement are in excess of those I would have received from The Southern Company and Gulf Power Company (collectively, the "Company") if I had not elected to sign this Waiver. I recognize that I may have a claim against the Company under the Civil Rights Act of 1964 and 1991, the Age Discrimination in Employment Act, the Rehabilitation Act of 1973, the Energy Reorganization Act of 1974, as amended, the Americans with Disabilities Act or other federal, state and local laws. In exchange for the benefits I elect to receive, I hereby irrevocably waive and release all claims, of any kind whatsoever, whether known or unknown in connection with any claim which I ever had, may have, or now have against The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Gulf Power Company, Savannah Electric and Power Company, Southern Communication Services, Inc., Gulf Power Company, Southern Energy Resources, Inc., Southern Company Energy Solutions, Inc., Southern Nuclear Operating Company, Inc., Southern Energy, Inc. and other direct or indirect subsidiaries of The Southern Company and their past, present and future officers, directors, employees, agents and attorneys. Nothing in this Waiver shall be construed to release claims or causes of action under the Age Discrimination in Employment Act or the Energy Reorganization Act of 1974, as amended, which arise out of events occurring after the execution date of this Waiver. In further exchange for the benefits I elect to receive, I understand and agree that I will respect the proprietary and confidential nature of any information I have obtained in the course of my service with the Company or any subsidiary or affiliate of The Southern Company. However, nothing in this Waiver shall prohibit me from engaging in protected activities under applicable law or from communicating, either voluntary or otherwise, with any governmental agency concerning any potential violation of the law. In signing this Waiver, I am not releasing claims to benefits that I am already entitled to under any workers' compensation laws or under any retirement plan or welfare benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, which is sponsored by or adopted by the Company and/or any of its direct or indirect subsidiaries; however, I understand and acknowledge that nothing herein is intended to or shall be construed to require the Company to institute or continue in effect any particular plan or benefit sponsored by the Company and the Company hereby reserves the right to amend or terminate any of its benefit programs at any time in accordance with the procedures set forth in such plans. In signing this Waiver, I realize that I am waiving and releasing, among other things, any claims to benefits under any and all bonus, severance, workforce reduction, early retirement, outplacement, or any other similar type plan sponsored by the Company. I have been encouraged and advised in writing to seek advice from anyone of my choosing regarding this Waiver, including my attorney, and my accountant or tax advisor. Prior to signing this Waiver, I have been given the opportunity and sufficient time to seek such advice, and I fully understand the meaning and contents of this Waiver. I understand that I may take up to twenty-one (21) calendar days to consider whether or not I desire to enter this Waiver. I was not coerced, threatened or otherwise forced to sign this Waiver. I have made my choice to sign this Waiver voluntarily and of my own free will. I understand that I may revoke this Waiver at any time during the seven (7) calendar day period after I sign and deliver this Waiver to the Company. If I revoke this Waiver, I must do so in writing delivered to the Company. I understand that this Waiver is not effective until the expiration of this seven (7) calendar day revocation period. I understand that upon the expiration of such seven (7) calendar day revocation period this entire Waiver will be binding upon me and will be irrevocable. I understand that by signing this Waiver I am giving up rights I may have. IN WITNESS WHEREOF, the undersigned hereby executes this Waiver this ____ day of ____________________, in the year _____. Thomas A. Fanning Sworn to and subscribed to me this ____ day of ____________, _____. Notary Public My Commission Expires: (Notary Seal) Acknowledged and Accepted by the Company, as defined in the Waiver. By: ----------------------------------- Date: ----------------------------------- EX-10.A.116 15 ex10a116.txt Exhibit 10(a)116 DEFERRED COMPENSATION AGREEMENT THIS DEFERRED COMPENSATION AGREEMENT ("Agreement") made and entered into by and between The Southern Company ("Southern"), Southern Company Services, Inc. (the "Company") and Allen L. Leverett ("Mr. Leverett"), effective as of the 1st day of March, 2001. W I T N E S S E T H: - - - - - - - - - - WHEREAS, Mr. Leverett is the Vice President and Treasurer of the Company; WHEREAS, the Company and Southern wish to encourage Mr. Leverett to increase the profitability of the Company and to provide Mr. Leverett an interest in the Company's overall profitability; NOW, THEREFORE, in consideration of the premises, and the agreements of the parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. General Nature of Award. Subject to the terms and conditions of this Agreement, the Company shall establish and maintain on behalf of Mr. Leverett an account on the Company's books and records (the "Account") which, if Mr. Leverett continues to be an employee of the Company, or any affiliate or subsidiary of Southern (as set forth in Paragraph 15 hereof), shall entitle Mr. Leverett to receive on the fourth anniversary date of the effective date of this Agreement (such four year period to be referred to as the "Performance Period") an amount equal to the then Market Value (as defined below) of the equivalent of One Hundred Fifty Thousand Dollars ($150,000) of Market Value of Southern's common stock deemed to have been purchased as of the effective date of this Agreement, including reinvested dividends thereon, increased, if certain profitability goals are met, by estimated income tax expenses. 2. Investment. (a) As of the date hereof, the Company shall credit to Mr. Leverett's Account that number of deemed shares (including fractional shares) of Southern's common stock ("Common Stock") as shall equal $150,000 in Market Value (as defined herein) determined as of the effective date of this Agreement (such hypothetical shares to be referred to herein as the "Phantom Stock"). For purposes of this Agreement, "Market Value" shall mean the average closing price of the Common Stock as reported by the New York Stock Exchange for the ten trading days immediately preceding the respective valuation date. (b) As of the day of each calendar quarter in which occurs the payment of dividends on Common Stock, there shall be credited to Mr. Leverett's Account such additional shares of Phantom Stock (including fractional shares) as could have been purchased at the Market Value on such day as follows: (i) In the case of cash dividends, such additional shares of Phantom Stock as could have been purchased with the dividends payable on the number of shares of Phantom Stock credited to the Account immediately prior to the dividend; (ii) In the case of dividends payable in property other than cash or Common Stock, such additional shares of Phantom Stock as could have been purchased with the fair market value of the property which would have been payable as dividends on the number of shares of Phantom Stock credited to the Account immediately prior to the dividend; or (iii) In the case of dividends payable in Common Stock, such additional shares of Phantom Stock as would have been payable on the number of shares of Phantom Stock credited to the Account immediately prior to the dividend. (c) In the event that the number of outstanding shares of Common Stock is changed through merger, consolidation, reorganization, recapitalization, reincorporation, stock split, stock dividend (in excess of 2%) or other change in the capital structure of Southern without consideration, or upon the occurrence of any other extraordinary corporate event involving the Common Stock causing a reduction in the value of the Common Stock, such as a corporate spin off or split up, the number of shares of Common Stock credited to the Account shall be proportionately adjusted by the Company so as to preserve the value of the Account immediately prior to such event. 3. Vesting of Account. The Market Value of Mr. Leverett's Account shall vest on the fourth anniversary of the effective date of this Agreement (the "Vesting Date"), provided Mr. Leverett is then, and has been for the Performance Period, an employee of the Company, Southern, or an affiliate or subsidiary of the Company. 4. Valuation of Account. The value of Mr. Leverett's Account on any date shall be based on the Market Value on such date multiplied by the number of shares of Phantom Stock then credited to the Account, provided, however, that if the annual profitability goals established for the Company and for Mr. Leverett by the Chief Executive Officer of Southern have been equaled or exceeded for each fiscal year of the Company during the Performance Period as set forth on Exhibit A, and as annually documented on Exhibit B of this Agreement, (the "Profitability Goals"), the value of the Account shall be increased upon payout to cover Mr. Leverett's federal and state income tax expense as reasonably estimated by the Company for the year of payout (the "Tax Gross-up"). Failure to meet the Profitability Goals for any year of the Performance Period shall result in the forfeiture of the Tax Gross-up, provided, however, that Southern's Chief Executive Officer may, in his sole discretion, determine after the close of the Performance Period, that as a result of overall Company profitability and individual performance during the entire Performance Period, that all or a portion of the value of the Tax Gross-up shall nevertheless be paid. 5. Payment of Account Balance. Provided that Mr. Leverett is then an employee of the Company, Southern, or an affiliate or subsidiary of Southern, and, with respect to the Tax Gross-up amount, has also achieved the Profitability Goals, the Company shall pay to Mr. Leverett the value of his Account, and, if applicable, the Tax Gross-up amount, in cash within ten (10) days of the Vesting Date. 6. Election to Defer. By written election filed with Southern's Vice President, Human Resources no less than Three-Hundred Sixty-Six (366) days prior to the Vesting Date, Mr. Leverett may defer all or a portion of the amount to be received under this Agreement by having such amount contributed on his account to The Southern Company Deferred Compensation Plan, in accordance with the terms and conditions of such Plan. 7. Death, Permanent Disability, or Termination Without Cause. In the event of Mr. Leverett's termination of employment with the Company prior to the payout of the value of the Account for reasons of death, permanent disability, or termination by the Company without Cause, the Company shall pay to Mr. Leverett, or his estate in the event of death, the value of the Account determined as of the date of such termination, plus, if the Profitability Goals have been met as of such date, the Tax Gross-up amount. For purposes of this Section 7, the term "Cause" shall mean gross negligence or willful misconduct in the performance of the duties and services required in the course of employment by the Company; the final conviction of a felony or misdemeanor involving moral turpitude; the carrying out of any activity or the making of any statement which would prejudice the good name and standing of the Company, Southern or an affiliate or subsidiary of Southern (collectively, the "Companies") or would bring the Companies into contempt, ridicule or would reasonably shock or offend any community in which the Companies are located; a material breach of the fiduciary obligations owed by an officer and an employee to the Companies; or Mr. Leverett's unsatisfactory performance of the duties and services required by his or her employment. 8. Assignability. Neither Mr. Leverett, his estate, his beneficiaries, nor his legal representative shall have any rights to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the rights thereto are expressly declared to be nonassignable and nontransferable. Any attempt to assign or transfer the right to payments of this Agreement shall be void and have no effect. 9. Unsecured General Creditor. The Company shall neither reserve nor specifically set aside funds for the payment of its obligations under this Agreement, and such obligations shall be paid solely from the general assets of the Company. Notwithstanding that Mr. Leverett may be entitled to receive the value of his Account under the terms and conditions of this Agreement, the assets from which such amount may be paid shall at all times be subject to the claims of the Company's creditors. 10. Amendment; Modification; Termination. Except as otherwise provided herein, this Agreement may be amended, modified, or terminated only by a writing executed by the parties hereto. 11. No Effect On Other Arrangements. It is expressly understood and agreed that the payments made in accordance with this Agreement are in addition to any other benefits or compensation to which Mr. Leverett may be entitled or for which he may be eligible, whether funded or unfunded, by reason of his employment with the Company. 12. Tax Withholding. There shall be deducted from each payment under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Mr. Leverett. 13. Compensation. Any compensation contributed on behalf of Mr. Leverett under this Agreement shall not be considered "compensation," as the term is defined in The Southern Company Employee Savings Plan, The Southern Company Employee Stock Ownership Plan, or The Southern Company Pension Plan. Distributions from Mr. Leverett's Account shall not be considered wages, salaries or compensation under any other employee benefit plan. 14. No Guarantee of Employment. No provision of this Agreement shall be construed to affect in any manner the existing rights of the Company to suspend, terminate, alter, modify, whether or not for Cause, the employment relationship of Mr. Leverett and the Company. 15. Transfer of Employment to Southern or a Southern Subsidiary or Affiliate. In the event that Mr. Leverett's employment by the Company is terminated during the Performance Period and Mr. Leverett shall become immediately re-employed by Southern or a subsidiary or an affiliate of Southern, the Company shall assign this Agreement to Southern or such subsidiary or affiliate, Southern shall accept such assignment or cause such affiliate or subsidiary to accept such assignment, such assignee shall become the "Company" for all purposes hereunder and the profitability goals set forth on Exhibit A hereof shall be amended to appropriately reflect the performance of such assignee. In the event of such assignment, the expense of this Agreement shall be shared pro rata by the Company and any such assignee based upon the number of months during the Performance Period Mr. Leverett was employed by each. 16. Governing Law. This Agreement, and all its rights under it, shall be governed by and construed in accordance with the laws of the State of Georgia. IN WITNESS WHEREOF, this Agreement has been executed by the parties first listed above, this ___ day of March, 2001. THE SOUTHERN COMPANY By: -------------------------------------- Title: -------------------------------------- SOUTHERN COMPANY SERVICES, INC. By: -------------------------------------- Title: -------------------------------------- MR. LEVERETT ------------------------------ Allen L. Leverett ATTEST: By: -------------------------------------------- Exhibit A Deferred Compensation Agreement Schedule of Profitability Goals For Performance Period The Southern Company's "core business" shall earn its assigned share of The Southern Company's Earnings Per Share Goal for each of the calendar years in the Performance Period. Achievement of the goal shall be assessed annually by the Chief Financial Officer of The Southern Company and documented in Exhibit B. Exhibit B Deferred Compensation Agreement Annual Documentation of Profitability Goals For Performance Period EX-10.A.117 16 ex10a117.txt Exhibit 10(a)117 FIRST AMENDMENT TO AND ASSIGNMENT OF DEFERRED COMPENSATION AGREEMENT THIS FIRST AMENDMENT TO AND ASSIGMENT OF DEFERRED COMPENSATION AGREEMENT ("Amendment") made and entered into by and between The Southern Company ("Southern"), Southern Company Services, Inc. (the "Company"), Georgia Power Company ("GPC") and Allen L. Leverett ("Mr. Leverett"), effective as of the 25th day of May, 2002. W I T N E S S E T H: - - - - - - - - - - WHEREAS, The Southern Company, the Company and Mr. Leverett entered into that certain Deferred Compensation Agreement (the "Agreement") effective March 1, 2001; WHEREAS, the employment of Mr. Leverett has been transferred to GPC; WHEREAS, the parties wish to amend and assign the Agreement in connection with such transfer of employment; NOW, THEREFORE, in consideration of the premises, and the agreements of the parties set forth in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Pursuant to Section 15 of the Agreement, the Company assigns the Agreement to GPC and GPC shall be the Company under the Agreement for all purposes thereunder. 2. Pursuant to Section 15 of the Agreement, the profitability goals are amended as set forth on Exhibit A hereof to reflect Mr. Leverett's position with GPC. IN WITNESS WHEREOF, this First Amendment to and Assignment of Deferred Compensation Agreement has been executed by the parties, this ___ day of _____________, 2002. THE SOUTHERN COMPANY By: ______________________________ SOUTHERN COMPANY SERVICES, INC. By: -------------------------------------------- GEORGIA POWER COMPANY By: ______________________________ MR. LEVERETT ------------------------------ Allen L. Leverett Exhibit A Deferred Compensation Agreement Schedule of Profitability Goals For Performance Period The Southern Company shall earn its Earnings Per Share Goal and Georgia Power Company shall meet its annual commitment to Southern Company for each of the calendar years in the Performance Period. Achievement of the goal shall be assessed annually by the Chief Financial Officer of The Southern Company and documented in Exhibit B. Exhibit B Deferred Compensation Agreement Annual Documentation of Profitability Goals For Performance Period EX-10.A.118 17 ex10a118.txt Exhibit 10(a)118 DEFERRED COMPENSATION AGREEMENT THIS DEFERRED COMPENSATION AGREEMENT ("Agreement") made and entered into by and between THE SOUTHERN COMPANY ("Southern"), SOUTHERN COMPANY SERVICES, INC. (the "Company") and CHRISTOPHER C. WOMACK ("Employee"). W I T N E S S E T H WHEREAS, Employee is a highly compensated employee of the Company and is a member of its management; WHEREAS, the parties desire to provide Employee with additional deferred compensation for service he has or will provide for the Company; NOW, THEREFORE, in consideration of the premises, and the agreements of the parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby covenant and agree as follows: 1. Supplemental Pension Payment to Employee. If the Employee enters into a Release in the form attached hereto as Exhibit 1 upon his termination and allows such Release to become effective, the Company shall pay to the Employee an amount per month equal to the difference between the monthly amount payable to the Employee under the Southern Company Pension Plan (the "Plan") as it shall then be in effect at the time and the monthly amount which would have been payable to him under the Plan if the Employee's period of Accredited Service under the Plan included an additional eight (8) years. In addition, such additional service shall also be credited to Employee for purposes of calculating a benefit under the Southern Company Supplemental Executive Retirement Plan ("SERP") provided Employee otherwise becomes eligible for a benefit under the terms of the SERP. For the purpose of computing a monthly amount payable to the Employee under the Plan, no limitation on benefits imposed by the Internal Revenue Code as it now exists or is hereafter amended or any other limiting legislation shall be taken into account. Said amount shall be recalculated from time to time to reflect future increases, if any, in Retirement Income of retirees following the Employee's retirement. Employee covenants and agrees that the consideration set forth in this Paragraph 1 shall be in full satisfaction of all sums owed to Employee, if any, by the Company and shall constitute good and complete consideration for the release attached hereto as Exhibit 1, those non-disclosure and non-interference obligations under Paragraphs 5, 6, 7, 8, and 9 hereof, and all other obligations and covenants of Employee contained herein including, but not limited to, Paragraph 4. 2. Commencement and Form of Payment. (a) Commencement and Form of Payment. The benefit provided in accordance with Paragraph 1 above shall be paid in monthly installments on the first day of each month in the same manner and commence at the same time as the Employee's election to receive Retirement Income under the Plan, provided that the Employee or his spouse becomes eligible to receive such a Plan benefit. The Employee's benefit under this Agreement shall be subject to such early commencement reduction factors as would apply to a participant in the Plan based on the Employee's benefit commencement date under this Agreement. In the event the Employee is married, predeceases his spouse, and his spouse is entitled to payments as a Provisional Payee under the Plan, monthly payments shall be made in the same manner as provided by the Provisional Payee option elected by the Employee under the Plan taking into account the additional Accredited Service set forth in Paragraph 1 above. In the event the Employee shall not be married or shall not be survived by his spouse on the date payments commence under this Paragraph 2(a), the benefit described in the preceding sentence shall be forfeited. The Employee or his surviving spouse shall not, under any circumstances, have any option or right to require payments hereunder otherwise than in accordance with the terms hereof. (b) Misconduct. Notwithstanding the foregoing, in the event the Employee engages in Misconduct, as defined below, before or after the Employee's Termination Date but prior to receiving all of the payments described in Paragraph 1 above, the Company may cease making payments to the Employee under this Paragraph 2, and the Company shall have no further obligations with respect to any amounts under this Agreement. For purposes of this Paragraph 2(b), "Misconduct" shall mean (i) the final conviction of any felony, or (ii) the carrying out of any activity or the making of any public statement which materially diminishes or materially and untruthfully brings Southern into contempt, ridicule or materially and reasonably shocks or offends the community in which the Southern affiliate is located. 3. Publicity; No Disparaging Statement. Except as otherwise provided in Paragraph 13 hereof, Employee, Southern and the Company covenant and agree that they shall not engage in any communications which shall disparage one another or interfere with their existing or prospective business relationships. 4. No Employment. Employee agrees that he shall not seek re-employment as an employee or independent contractor with the Company or Southern or any of its subsidiaries or affiliates (collectively, for purposes of this Paragraph 4, "The Southern Company System"), for a period of twenty-four (24) months following the execution of the Release attached hereto as Exhibit 1. The Company or any member of The Southern Company System shall not rehire the Employee as an employee or independent contractor for a period of twenty-four (24) months following the Employee's execution of the Release attached hereto as Exhibit 1, unless an exceptional business reason exists for rehiring the Employee and a committee, comprised of (i) an officer from the business unit seeking to rehire the Employee and (ii) the Southern Company Vice President, Employee Relations & Associate General Counsel, approves of such rehiring. 5. Business Protection Provision Definitions. (a) Preamble. As a material inducement to the Company to enter into this Agreement, and its recognition of the valuable experience, knowledge and proprietary information Employee gained from his employment with the Company, Employee warrants and agrees he will abide by and adhere to the following business protection provisions in Paragraphs 5, 6, 7, 8 and 9 herein. (b) Definitions. For purposes of Paragraphs 5, 6, 7, 8 and 9 herein, the following terms shall have the following meanings: (i) "Competitive Position" shall mean any employment, consulting, advisory, directorship, agency, promotional or independent contractor arrangement between the Employee and any person or Entity engaged wholly or in material part in the business that the Company is engaged in (the "Business") whereby the Employee is required to or does perform services on behalf of or for the benefit of such person or Entity which are substantially similar to the services Employee participated in or directed while employed by the Company, Southern or any of their respective affiliates (collectively the "Southern Entities"). (ii) "Confidential Information" shall mean the proprietary or confidential data, information, documents or materials (whether oral, written, electronic or otherwise) belonging to or pertaining to the Company or other Southern Entities, other than "Trade Secrets" (as defined below), which is of tangible or intangible value to any of the Southern Entities and the details of which are not generally known to the competitors of the Southern Entities. Confidential Information shall also include: (A) any items that any of the Southern Entities have marked "CONFIDENTIAL" or some similar designation or are otherwise identified as being confidential; and (B) all non-public information known by or in the possession of Employee related to or regarding any proceedings involving or related to the Southern Affiliates before the Georgia Public Service Commission or other Entities. (iii) "Entity" or "Entities" shall mean any business, individual, partnership, joint venture, agency, governmental agency, body or subdivision, association, firm, corporation, limited liability company or other entity of any kind. (iv) "Territory" shall include the States of Georgia, Alabama, Mississippi or Florida. (v) "Trade Secrets" shall mean information or data of or about any of the Southern Entities, including, but not limited to, technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers that: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The Employee agrees that trade secrets include non-public information related to the rate making process of the Southern Entities and any other information which is defined as a "trade secret" under applicable law. (vi) "Work Product" shall mean all tangible work product, property, data, documentation, "know-how," concepts or plans, inventions, improvements, techniques and processes relating to the Southern Entities that were conceived, discovered, created, written, revised or developed by Employee during the term of his employment with the Company. 6. Nondisclosure: Ownership of Proprietary Property. (a) In recognition of the need of the Company to protect its legitimate business interests, Confidential Information and Trade Secrets, Employee hereby covenants and agrees that Employee shall regard and treat Trade Secrets and all Confidential Information as strictly confidential and wholly-owned by the Company and shall not, for any reason, in any fashion, either directly or indirectly, use, sell, lend, lease, distribute, license, give, transfer, assign, show, disclose, disseminate, reproduce, copy, misappropriate or otherwise communicate any such item or information to any third party or Entity for any purpose other than in accordance with this Agreement or as required by applicable law: (i) with regard to each item constituting a Trade Secret, at all times such information remains a "trade secret" under applicable law, and (ii) with regard to any Confidential Information, for a period of three (3) years following the Employee's termination date (hereafter the "Restricted Period"). (b) Employee shall exercise best efforts to ensure the continued confidentiality of all Trade Secrets and Confidential Information, and he shall immediately notify the Company of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which Employee becomes aware. Employee shall assist the Company, to the extent necessary, in the protection of or procurement of any intellectual property protection or other rights in any of the Trade Secrets or Confidential Information. (c) All Work Product shall be owned exclusively by the Company. To the greatest extent possible, any Work Product shall be deemed to be "work made for hire" (as defined in the Copyright Act, 17 U.S.C.A. ss. 101 et seq., as amended), and Employee hereby unconditionally and irrevocably transfers and assigns to the Company all right, title and interest Employee currently has or may have by operation of law or otherwise in or to any Work Product, including, without limitation, all patents, copyrights, trademarks (and the goodwill associated therewith), trade secrets, service marks (and the goodwill associated therewith) and other intellectual property rights. Employee agrees to execute and deliver to the Company any transfers, assignments, documents or other instruments which the Company may deem necessary or appropriate, from time to time, to protect the rights granted herein or to vest complete title and ownership of any and all Work Product, and all associated intellectual property and other rights therein, exclusively in the Company. (d) Employee represents and agrees that he will keep all terms and provisions of this Agreement completely confidential, except for possible disclosures to his legal advisors or to the extent required by law, and Employee further agrees that he will not disclose the terms, provisions or information contained in or concerning this Agreement to anyone, including, but not limited to, any past, present, or prospective employee or applicant for employment with the Company. Employee agrees that he may only disclose to future, potential employers of Employee that he participates in a Deferred Compensation Agreement with the Company which imposes certain restrictions on him. 7. Non-Interference With Employees. Employee covenants and agrees that during the Restricted Period he will not, either directly or indirectly, alone or in conjunction with any other person or Entity: (A) actively recruit, solicit, attempt to solicit, or induce any person who, during such Restricted Period, or within one year prior to the Employee's termination date, was an exempt employee of the Company or any of its subsidiaries, or was an officer of any of the other Southern Entities to leave or cease such employment for any reason whatsoever; or (B) hire or engage the services of any such person described in Paragraph 7(A) in any business substantially similar or competitive with that in which the Southern Entities were engaged during his employment. 8. Non-Interference With Customers. (a) Employee acknowledges that in the course of employment, he has learned about Company's business, services, materials, programs and products and the manner in which they are developed, marketed, serviced and provided. Employee knows and acknowledges that the Company has invested considerable time and money in developing its programs, agreements, offices, representatives, services, products and marketing techniques and that they are unique and original. Employee further acknowledges that the Company must keep secret all pertinent information divulged to Employee and Company's business concepts, ideas, programs, plans and processes, so as not to aid Company's competitors. Accordingly, Company is entitled to the following protection, which Employee agrees is reasonable: (b) Employee covenants and agrees that for a period of two (2) years following the Employee's termination date, he will not, on his own behalf or on behalf of any person or Entity, solicit, direct, appropriate, call upon, or initiate communication or contact with any person or entity or any representative of any person or entity, with whom Employee had contact during his employment, with a view toward the sale or the providing of any product, equipment or service sold or provided or under development by Company during the period of two (2) years immediately preceding the date of Employee's termination. The restrictions set forth in this section shall apply only to persons or entities with whom Employee had actual contact during the two (2) years prior to termination of employment with a view toward the sale or providing of any product, equipment or service sold or provided or under development by Company. 9. Non-Interference With Business. (a) Employee and Company expressly covenant and agree that the scope, territorial, time and other restrictions contained in this entire Agreement constitute the most reasonable and equitable restrictions possible to protect the business interest of the Company given: (i) the business of the Company; (ii) the competitive nature of the Company's industry; and (iii) that Employee's skills are such that he could easily find alternative, commensurate employment or consulting work in his field which would not violate any of the provisions of this Agreement. The Employee further acknowledges that the payments described in Paragraphs 1 and 2 are also in consideration of his covenants and agreements contained in Paragraphs 5 through 9 hereof. (b) Employee covenants and agrees to not obtain or work in a Competitive Position within the Territory for a period of two (2) years from his termination date. 10. Return of Materials. Upon the Employee's termination, or at any point after that time upon the specific request of the Company, Employee shall return to the Company all written or descriptive materials of any kind belonging or relating to the Company or its affiliates, including, without limitation, any originals, copies and abstracts containing any Work Product, intellectual property, Confidential Information and Trade Secrets in Employee's possession or control. 11. Cooperation. The parties agree that as a result of Employee's duties and activities during his employment, Employee's reasonable availability may be necessary for the Company to meaningfully respond to or address actual or threatened litigation, or government inquiries or investigations, or required filings with state, federal or foreign agencies (hereinafter "Company Matters"). Upon request of the Company, and at any point following termination of employment, Employee will make himself available to the Company for reasonable periods consistent with his future employment, if any, by other Entities and will cooperate with its agents and attorneys as reasonably required by such Company Matters. The Company will reimburse Employee for any reasonable out-of-pocket expenses associated with providing such cooperation. 12. Termination with Cause. In the event of Employee's termination of employment for Cause at any time, the Employee shall forfeit the entire benefit provided in Paragraphs 1 and 2, and the Company shall have no further obligations with respect to any amount under this Agreement. As used in this Agreement, the term "Cause" shall mean gross negligence or willful misconduct in the performance of the duties and services required in the course of employment by the Company; the final conviction of a felony or misdemeanor involving moral turpitude; the carrying out of any activity or the making of any statement which would prejudice the good name and standing of any of the Southern Entities or would bring any of the Southern Entities into contempt, ridicule or would reasonably shock or offend any community in which the any of the Southern Entities is located; a material breach of the fiduciary obligations owed by an officer and an employee to any of the Southern Entities; or the Employee's unsatisfactory performance of the duties and services required by his or her employment. 13. Confidentiality and Legal Process. Employee represents and agrees that he will keep the terms, amount and fact of this Agreement confidential and that he will not hereafter disclose any information concerning this Agreement to any one other than his personal agents, including, but not limited to, any past, present, or prospective employee or applicant for employment with Company. Notwithstanding the foregoing, nothing in this Agreement is intended to prohibit Employee from performing any duty or obligation that shall arise as a matter of law. Specifically, Employee shall continue to be under a duty to truthfully respond to any legal and valid subpoena or other legal process. This Agreement is not intended in any way to proscribe Employee's right and ability to provide information to any federal, state or local government in the lawful exercise of such governments' governmental functions. 14. Successors And Assigns; Applicable Law. This Agreement shall be binding upon and inure to the benefit of Employee and his heirs, administrators, representatives, executors, successors and assigns, and shall be binding upon and inure to the benefit of Southern, the Company and their officers, directors, employees, agents, shareholders, parent corporation and affiliates, and their respective predecessors, successors, assigns, heirs, executors and administrators and each of them, and to their heirs, administrators, representatives, executors, successors and assigns. This Agreement shall be construed and interpreted in accordance with the laws of the State of Georgia, United States of America (without giving effect to principles of conflicts of laws). 15. Complete Agreement. This Agreement shall constitute the full and complete Agreement between the parties concerning its subject matter and fully supersedes any and all other prior Agreements or understandings between the parties concerning the subject matter hereof. This Agreement shall not be modified or amended except by a written instrument signed by both Employee and an authorized representative of Southern and the Company. 16. Severability. The unenforceability or invalidity of any particular provision of this Agreement shall not affect its other provisions, and to the extent necessary to give such other provisions effect, they shall be deemed severable. The judicial body interpreting this Agreement shall be authorized and instructed to rewrite any of the sections which are enforceable as written in such a fashion so that they may be enforced to the greatest extent legally possible. Employee acknowledges and agrees that the covenants and agreements contained in this Agreement, including, without limitation, the covenants and agreements contained in Paragraphs 5, 6, 7, 8 and 9, shall be construed as covenants and agreements independent of each other or any other contract between the parties hereto and that the existence of any claim or cause of action by Employee against Company or Southern, whether predicted upon this Agreement or any other contract, shall not constitute a defense to the enforcement by Company or Southern of said covenants and agreements. 17. Waiver Of Breach; Specific Performance. The waiver of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other breach. Each of the parties to this Agreement will be entitled to enforce its or his rights under this Agreement, specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in its or his favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its or his sole discretion apply to any court of law or equity of competent jurisdiction for specific performance or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. 18. Unsecured General Creditor. The Company shall neither reserve nor specifically set aside funds for the payment of its obligations under this Agreement, and such obligations shall be paid solely from the general assets of the Company. Notwithstanding that Employee may be entitled to receive the value of his benefit under the terms and conditions of this Agreement, the assets from which such amount may be paid shall at all times be subject to the claims of the Company's creditors. 19. No Effect On Other Arrangements. It is expressly understood and agreed that the payments made in accordance with this Agreement are in addition to any other benefits or compensation to which Employee may be entitled or for which he may be eligible, whether funded or unfunded, by reason of his employment with the Company. 20. Tax Withholding. There shall be deducted from each payment under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Employee. 21. Compensation. Any compensation paid to Employee under this Agreement shall not be considered "compensation," as the term is defined in The Southern Company Employee Savings Plan, The Southern Company Employee Stock Ownership Plan, The Southern Company Performance Sharing Plan or The Southern Company Pension Plan. Payments under this Agreement shall not be considered wages, salaries or compensation under any other employee benefit plan. 22. No Guarantee of Employment. No provision of this Agreement shall be construed to affect in any manner the existing rights of the Company to suspend, terminate, alter, modify, whether or not for cause, the employment relationship of Employee and the Company. 23. Interpretation. The judicial body interpreting this Agreement shall not more strictly construe the terms of this Agreement against one party, it being agreed that both parties and/or their attorneys or agents have negotiated and participated in the preparation hereof. 24. Transfer of Employment to Southern or a Southern Subsidiary or Affiliate. In the event that Employee's employment by the Company is terminated and Employee shall become immediately re-employed by Southern or a subsidiary or an affiliate of Southern, the Company shall assign this Agreement to Southern or such subsidiary or affiliate, Southern shall accept such assignment or cause such affiliate or subsidiary to accept such assignment, such assignee shall become the "Company" for all purposes hereunder, including but not limited to the Release attached hereto and incorporated herein as Exhibit 1. In the event of such assignment, the expense of this Agreement shall be shared pro rata by the Company and any such assignee based upon the number of months after the effective date of this Agreement that the Employee is employed by the Company, and/or Southern and/or such affiliate or subsidiary of Southern, as the case may be. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, this ___ day of _______________, 2002. "SOUTHERN" THE SOUTHERN COMPANY By: ----------------------------------------------------- Its: ----------------------------------------------------- "COMPANY" SOUTHERN COMPANY SERVICES, INC. By: ----------------------------------------------------- Its: ----------------------------------------------------- "EMPLOYEE" CHRISTOPER C. WOMACK EXHIBIT 1 to Deferred Compensation Agreement with Christoper C. Womack RELEASE AGREEMENT THIS RELEASE ("Release') is made and entered into by and between CHRISTOPHER C. WOMACK ("Employee"), THE SOUTHERN COMPANY ("Southern") and SOUTHERN COMPANY SERVICES, INC. and its successor or assigns ("Company"). WHEREAS, Employee, Southern and Company have agreed that Employee's employment with _________________ shall terminate on _____________, _______; WHEREAS, Employee, Southern and the Company have previously entered into that certain Deferred Compensation Agreement, dated _______, 2002 ("Agreement"), that this Release is incorporated therein by reference; WHEREAS, Employee, Southern and Company desire to delineate their respective rights, duties and obligations attendant to such termination and desire to reach an accord and satisfaction of all claims arising from Employee's employment, and his termination of employment, with appropriate releases, in accordance with the Agreement; WHEREAS, the Company desires to provide Employee with deferred compensation in accordance with the Agreement for service he has or will provide for the Company; NOW, THEREFORE, in consideration of the premises and the agreements of the parties set forth in this Release, and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby covenant and agree as follows: 1. Release. Employee does hereby remise, release and forever discharge Southern and the Company and their officers, directors, employees, agents, shareholders, parent corporation and affiliates, and their respective predecessors, successors, assigns, heirs, executors and administrators (collectively, "Releasees"), of and from all manner of actions and causes of action, suits, debts, claims and demands whatsoever at law or in equity, known or unknown, actual or contingent, including, but not limited to, any claims which have been asserted, or could be asserted now or in the future, against any Releasees arising under any and all federal, state or local laws and any common law claims, and including, but not limited to, any claims Employee may have pursuant to the Age Discrimination in Employment Act and any claims to benefits under any and all offer letters, employment or separation agreements, or bonus, severance, workforce reduction, early retirement, out-placement, or other similar plans sponsored by the Company, now or hereafter recognized (collectively, "Claims"), which he ever had or now has or may in the future have, by reason of any matter, cause or thing arising out of his employment relationship and privileges, his serving as an employee of the Company or the separation from his employment relationship or affiliation as an employee of the Company as of the date of this Release against each of the Releasees. Notwithstanding the foregoing, Employee does not release any Claims under the Age Discrimination in Employment Act that may arise after his execution of this Release. 2. No Assignment of Claim. Employee represents that he has not assigned or transferred, or purported to assign or transfer, any Claims or any portion thereof or interest therein to any party prior to the date of this Release. 3. Deferred Compensation. In accordance with the Deferred Compensation Agreement, the Company agrees to pay the Employee or his spouse, as the case may be, the amounts provided in Paragraphs 1 and 2 of the Agreement. 4. No Admission Of Liability. This Release shall not in any way be construed as an admission by Southern, the Company or Employee of any improper actions or liability whatsoever as to one another, and each specifically disclaims any liability to or improper actions against the other or any other person, on the part of itself or himself, its or his employees or agents. 5. Voluntary Execution. Employee warrants, represents and agrees that he has been encouraged in writing to seek advice from anyone of his choosing regarding this Release, including his attorney and accountant or tax advisor prior to his signing it; that this Release represents written notice to do so; that he has been given the opportunity and sufficient time to seek such advice; and that he fully understands the meaning and contents of this Release. He further represents and warrants that he was not coerced, threatened or otherwise forced to sign this Release, and that his signature appearing hereinafter is voluntary and genuine. EMPLOYEE UNDERSTANDS THAT HE MAY TAKE UP TO TWENTY-ONE (21) DAYS TO CONSIDER WHETHER OR NOT HE DESIRES TO ENTER INTO THIS RELEASE. 6. Ability to Revoke Agreement. EMPLOYEE UNDERSTANDS THAT HE MAY REVOKE THIS RELEASE BY NOTIFYING THE COMPANY IN WRITING OF SUCH REVOCATION WITHIN SEVEN (7) DAYS OF HIS EXECUTION OF THIS RELEASE AND THAT THIS RELEASE IS NOT EFFECTIVE UNTIL THE EXPIRATION OF SUCH SEVEN (7) DAY PERIOD. HE UNDERSTANDS THAT UPON THE EXPIRATION OF SUCH SEVEN (7) DAY PERIOD THIS RELEASE WILL BE BINDING UPON HIM AND HIS HEIRS, ADMINISTRATORS, REPRESENTATIVES, EXECUTORS, SUCCESSORS AND ASSIGNS AND WILL BE IRREVOCABLE. Acknowledged and Agreed To: "SOUTHERN" THE SOUTHERN COMPANY By: -------------------------------------------- Its: -------------------------------------------- "COMPANY" SOUTHERN COMPANY SERVICES, INC. By: -------------------------------------------- Its: -------------------------------------------- I UNDERSTAND THAT BY SIGNING THIS RELEASE, I AM GIVING UP RIGHTS I MAY HAVE. I UNDERSTAND THAT I DO NOT HAVE TO SIGN THIS RELEASE. "EMPLOYEE" CHRISTOPHER C. WOMACK Date WITNESSED BY: Date EX-10.A.119 18 ex10a119.txt Exhibit 10(a)119 SUPPLEMENTAL PENSION AGREEMENT THIS AGREEMENT made and entered into this ____ day of February, 2002, by and between G. Edison Holland, Jr. ("Employee"), Southern Company Services, Inc. ("SCS"), Savannah Electric and Power Company ("Savannah") and Gulf Power Company ("Gulf") (SCS, Savannah and Gulf are each referred to herein individually as "Company" and collectively as "Companies"), to be effective April 28, 2001. WHEREAS, Employee is currently employed by SCS as its Executive Vice President and General Counsel; WHEREAS, Employee was previously employed by Savannah as its President and, before such employment with Savannah, by Gulf as its Vice President and General Counsel; WHEREAS, pursuant to Employee's prior employment with Gulf, Gulf and Employee entered into an agreement dated September 1, 1992 for the provision of certain supplemental retirement benefits and for other retirement benefits ("Gulf Agreement"); WHEREAS, in connection with Employee's transfer of employment from Gulf to Savannah, the Gulf Agreement was amended and restated, effective July 1, 1997, as an agreement by and among Employee and Gulf and Savannah ("Savannah Agreement") which provided benefits that were not available under the qualified and non-qualified retirement plans of Savannah and Gulf; and WHEREAS, Employee and the Companies wish to amend and restate the Savannah Agreement to provide certain supplemental benefits and other retirement benefits as set forth herein; and WHEREAS, Employee and SCS acknowledge and agree that Employee is a member of the management of SCS and is a highly compensated employee. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, Employee, SCS, Savannah and Gulf hereby agree as follows: 1. Upon Employee's retirement from SCS, the Companies agree to pay to Employee an amount equal to the difference between his Retirement Income or Allowance, as applicable, payable in accordance with the terms and provisions of The Southern Company Pension Plan, as may be amended from time to time ("Pension Plan"), and the amount of Retirement Income or Allowance Employee would have been entitled to receive under the Pension Plan if he had first been employed by the Companies on January 1, 1980. Said amount shall be recalculated from time to time to reflect future increases, if any, in Retirement Income or Allowance of retirees, as applicable, following Employee's retirement. 2. The benefits provided in accordance with Paragraph 1 shall be paid in monthly installments on the first day of each month in the same manner as Employee's election to receive his accrued benefit under the Pension Plan in effect on his commencement of benefits under the Agreement. In the event Employee is married, predeceases his spouse, and his spouse is living on the date payments would commence under this Paragraph 2, the monthly payments shall be paid in the same manner as provided by the Provisional Payee option available to Employee under the Pension Plan. In the event Employee is not married or is not survived by his spouse on the date payments commence under this Paragraph 2, the above benefit shall be paid only to Employee. Employee or his surviving spouse shall not, under any circumstances, have any option or right to require payments hereunder otherwise than in accordance with the terms hereof. 3. Upon Employee's retirement from SCS under the terms of the Pension Plan, Gulf agrees to pay Employee a cash lump sum amount equal to the value of the number of shares of Common Stock in The Southern Company which would have been allocated to Employee's account under The Southern Company Employee Stock Ownership Plan ("ESOP") had Employee been a participant in the ESOP during the 1992 plan year ("Shares"). For purposes of determining the lump sum value of the Shares, the Shares shall be deemed to have been invested as Phantom Common Stock under The Southern Company Supplemental Benefit Plan ("SBP") since the date on which such Shares would have been allocated to Employee's account under the ESOP. 4. Upon Employee's retirement from SCS under the terms of the Pension Plan, Gulf agrees to pay Employee a cash lump sum amount equal to six percent (6%) of Employee's annual compensation multiplied by the annual percentage of Gulf's Matching contribution allocated to employees' accounts under The Southern Company Employee Savings Plan ("Savings Plan") that would have been allocated to Employee's account under the Savings Plan if Employee had participated in the Savings Plan from the period beginning April 25, 1992 and ending on April 30, 1993. For purposes of this Paragraph 4, Employee shall be deemed to have invested the aforesaid funds in Phantom Common Stock under the SBP since April 25, 1992. 5. Employee shall be entitled to that amount of vacation time, in addition to regular holidays, to which he would be entitled if he had first been employed by SCS on January 1, 1980. 6. Employee shall be entitled to any service awards available to career employees of SCS recognizing their long term service as if Employee had first been employed by SCS on January 1, 1980. 7. SCS, Savannah and Gulf agree to share the cost of any payments to Employee under Paragraphs 1 and 2 of this Agreement in accordance with the terms of this Paragraph 7. Each Company's share of any payment to Employee under Paragraphs 1 and 2 herein shall be calculated by multiplying such payment by a fraction, where the numerator of such fraction is the base rate of pay received by Employee from the respective Company on his date of transfer or termination, as applicable, multiplied by Employee's Accredited Service at such Company, and where the denominator of such fraction is the sum of all numerators calculated for SCS, Savannah and Gulf. Gulf agrees to bear the cost of all payments to Employee under Paragraphs 3 and 4 of this Agreement. 8. Neither the entering into or termination of this Agreement for any reason shall affect Employee's right to such salary, fees or other compensation for services as an employee, officer or director of SCS, as may be agreed upon from time to time, nor his right to participate in all of the employee benefit plans maintained by SCS on the same basis as any other regular full-time employee of SCS. 9. Nothing contained in this Agreement shall be construed to affect in any manner the existing rights of SCS to suspend, terminate, alter or modify, whether or not for cause, Employee's employment relationship. 10. Neither Employee nor the Provisional Payee or other beneficiary under this Agreement shall have any right to sell, assign, transfer, encumber or otherwise convey the right to receive payment of any amounts payable hereunder, which payment and the right thereto are expressly declared to be nonassignable and nontransferable. Any attempt to do so shall be null and void and of no effect. 11. Neither SCS, Savannah nor Gulf shall reserve nor otherwise set aside funds for the payment of their obligations hereunder, which obligations shall be paid from their respective general assets. Notwithstanding that Employee shall be entitled to receive the entire amounts stated herein, the assets from which such amounts shall be paid shall at all times be subject to the claims of the respective Companies' creditors. 12. This Agreement shall be construed in accordance with and governed by the laws of the State of Georgia to the extent not preempted by ERISA. 13. This Agreement shall be binding upon and inure to the benefit of the parties hereto and any successor to the business of SCS, Savannah or Gulf, and in any event, the Agreement shall, if not sooner terminated, terminate for all purposes upon the death of Employee or, if his spouse shall survive Employee and shall be entitled to receive any payments hereunder, upon the death of Employee's surviving spouse, and the satisfaction by SCS, Savannah and Gulf of their obligations hereunder. IN WITNESS WHEREOF, SCS, Savannah and Gulf have caused this amended and restated Agreement to be executed by their duly authorized officers and Employee has executed this Agreement in quadruplicate on or as of the date and year first above written. EMPLOYEE: G. Edison Holland, Jr. Sworn to and subscribed before me this _____ day of February, 2002. Notary Public, State of Georgia My Commission Expires: (NOTARIAL SEAL) SOUTHERN COMPANY SERVICES, INC. By: ------------------------------ Its: ----------------------------- ATTEST: -------------------------- Its: ----------------------------- SAVANNAH ELECTRIC AND POWER COMPANY By: ------------------------------ Its: ----------------------------- ATTEST: -------------------------- Its: ----------------------------- GULF POWER COMPANY By: ------------------------------ Its: ----------------------------- ATTEST: -------------------------- Its: ----------------------------- EX-10.A.120 19 ex10a120.txt Exhibit 10(a)120 AMENDED AND RESTATED SUPPLEMENTAL PENSION AGREEMENT THIS AGREEMENT, made and entered into this ______day of ____________, 2001, by and between GEORGIA POWER COMPANY ("GPC"), THE SOUTHERN COMPANY ("Southern"), SOUTHERN COMPANY SERVICES, INC. ("SCS") (GPC, Southern and SCS are each referred to herein individually as "Company" and collectively as "Companies"), and C. B. HARRELD ("Harreld"). WITNESSETH: WHEREAS, Harreld's formal employment by GPC began on July 6, 1982; however, his valuable services to GPC actually commenced at a considerably earlier date with his employment on August 6, 1966 as an accountant with Arthur Andersen & Company; and WHEREAS, the knowledge of the affairs and business of GPC and Southern acquired by Harreld while in this capacity as an accountant has proven of great value to GPC and Southern in the years since his formal employment, and will, in the opinion of GPC and SCS, continue to do so in the future; and WHEREAS, GPC and Harreld entered into an agreement as of July 29, 1994, for the provision of certain supplemental retirement benefits ("GPC Agreement"); and WHEREAS, the GPC Agreement was amended and restated in order to recognize Harreld's transfer to Mirant Services LLC (formerly, Southern Electric International, Inc.) ("Mirant Services") on September 9, 1995 and to provide for Mirant Services' payment of its proportionate share of the supplemental retirement benefits previously agreed to be paid to Harreld by GPC in addition to any supplemental retirement benefits to which Harreld may be entitled to receive as an employee of Mirant Services ("Mirant Agreement"); and WHEREAS, Harreld was transferred to SCS on February 17, 2001, and SCS desires to pay for its proportionate share of the amounts previously agreed to be paid by GPC and Mirant Services in addition to any supplemental retirement benefits to which Harreld may be entitled to receive as an employee of SCS; and WHEREAS, Mirant Corporation (formerly known as Southern Energy, Inc.) ("Mirant") was spun-off from Southern on April 2, 2001, and in connection with such spin-off, Southern became liable for Mirant Services' proportionate share of the supplemental retirement benefits payable to Harreld under the Mirant Agreement; and WHEREAS, SCS, Southern and Harreld desire to amend and restate the Mirant Agreement in order to recognize Harreld's transfer to SCS and to provide for the payment by SCS and Southern of their proportionate shares of the benefits provided hereunder. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the Agreement is hereby amended and restated as follows: 1. If Harreld shall continue to serve SCS faithfully, diligently and competently to the best of his ability from the date of this Agreement until either (a) such date after his service as an employee shall terminate; or (b) his retirement in accordance with the provisions of The Southern Company Pension Plan ("Pension Plan"); or (c) his death while in the service of SCS, if his spouse is entitled to benefits as a Provisional Payee under the Pension Plan; then the provisions of Paragraphs 2 and 3 of this Agreement shall be operative. 2. GPC, SCS and Southern shall pay to Harreld commencing on his retirement date under the Pension Plan, if he shall retire in accordance with the provisions of the Pension Plan, and thereafter on the first day of each succeeding month during the lifetime of Harreld, an amount per month equal to the difference between the monthly amount payable to Harreld under the Pension Plan as it shall then be in effect at the time any monthly amount shall be payable in accordance with this Paragraph and the monthly amount which would have been payable to him under the Pension Plan if Harreld were given credit for ten additional years of Accredited Service under the Pension Plan in recognition of his time spent on utility industry matters at Arthur Andersen & Company, less any deductions hereinafter provided; provided, however, that for the purpose of computing a monthly amount payable to Harreld under the Pension Plan no limitation on benefits imposed by the Internal Revenue Code as it now exists or is hereafter amended or any other limiting legislation shall be taken into account. The computations required for the determination of the monthly payments hereunder and the periods used as periods of Accredited Service shall be calculated so as to give appropriate effect in each instance to the exclusion of any portions of such period on account of eligibility, military service, leave of absence, or otherwise as may be required under the Pension Plan as it shall be in effect at the time such monthly payment is to be made. Harreld's right to such payments shall not be absolute, and each payment thereof is contingent upon Harreld's having duly performed the services required of him pursuant to Paragraph 1 hereof as of the applicable payment date. 3. If, in accordance with the terms of the Pension Plan, Harreld shall have a Provisional Payee entitled to receive payments thereunder, then the Provisional Payee shall be entitled to payments under this Agreement which, when added to payments to her under the Pension Plan, would be appropriate if Harreld were given credit for ten additional years of Accredited Service under the Pension Plan in recognition of his time spent on utility industry matters at Arthur Andersen & Company. 4. The amounts payable to Harreld and any Provisional Payee pursuant to Paragraphs 2 and 3 of this Agreement shall be made by GPC, SCS and Southern in the same proportion as the Accredited Service credited to Harreld under the Pension Plan at each Company bears to the total Accredited Service credited to Harreld under the Pension Plan at all three Companies as of the date of Harreld's retirement from SCS. 5. Neither the entering into nor the termination of this Agreement for any cause shall affect Harreld's right to such salary, fees or other compensation for his services as an employee, officer or director of GPC or SCS as either has agreed or may agree to pay him prior to or subsequent to his termination of service, not his right to participate in and receive benefits under any plan or plans of GPC or SCS now existing, or which may hereafter exist, providing benefits for their employees. 6. Neither Harreld nor his Provisional Payee, if any, shall, under any circumstances, have any option or right to require payments hereunder otherwise than in accordance with the terms of this Agreement and after the terms and contingencies herein specified have been met. Except as specifically allowed by law, neither Harreld not any Provisional Payee shall have any power of anticipation, alienation, mortgage, pledge, encumbrance or assignment of payments contemplated hereunder, and all rights and benefits of Harreld and of any Provisional Payee shall be for his or her sole personal benefit, and no other person shall acquire any right, title or interest hereunder by reason of any sale, assignment, mortgage, pledge, encumbrance, transfer, claim or judgment or bankruptcy proceedings against Harreld or any Provisional Payee. Any attempt to do shall be null and void and of no effect. 7. Nothing contained in this Agreement shall be construed to affect in any manner the existing rights of SCS or Harreld to suspend, terminate, alter or modify, whether or not for cause, the employment relationship contemplated by Paragraph 1 hereof. 8. The failure of any party to insist in any one or more instances upon performance of any of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition, but the obligation of either party with respect thereto shall continue in full force and effect. 9. GPC, SCS and Southern shall not reserve or otherwise set aside funds for the payment of its obligations hereunder, which obligations shall be paid solely from the general assets of GPC, SCS and Southern. Notwithstanding that Harreld and any Provisional Payee shall be entitled to receive the entire amounts stated herein, the assets from which such amounts shall be paid shall at all times be subject to the claims of the creditors of GPC, SCS and Southern. 10. There shall be deducted from the amount of any payment payable under this Agreement the amount of any tax required by any governmental authority to be withheld and paid to such governmental authority for the account of Harreld or any Provisional Payee. 11. Harreld, GPC, SCS and Southern agree that the validity of this Agreement or any of the provisions hereof shall be determined under and according to the laws of the State of Georgia, and that the Agreement and its provisions shall be interpreted and construed in accordance with the laws of that State. 12. This Agreement shall be binding upon and inure to the benefit of the parties hereto and any successor to the business of GPC, SCS and Southern, but neither this Agreement nor any right hereunder may be assigned by Harreld or any Provisional Payee. This Agreement shall not be altered or amended except by an agreement in writing signed by all parties hereto. In any event, the Agreement shall, if not sooner terminated, terminate for all purposes upon the death of Harreld, or if his Provisional Payee shall survive him and shall be entitled to receive any payments hereunder, upon the death of the Provisional Payee, and the satisfaction by GPC, SCS and Southern of their obligations arising theretofore under the Agreement. IN WITNESS WHEREOF, Georgia Power Company, Southern Company Services, Inc. and The Southern Company have caused this amended and restated Agreement to be executed by their duly authorized officers and C. B. Harreld has executed this Agreement in quadruplicate on or as of the date and year first above written. GEORGIA POWER COMPANY By:____________________________ Its:_____________________________ ATTEST:________________________ Its:______________________________ SOUTHERN COMPANY SERVICES, INC. By:________________________________ Its:_________________________________ ATTEST:____________________________ Its:_________________________________ THE SOUTHERN COMPANY By:____________________________ Its:_____________________________ ATTEST:________________________ Its:______________________________ HARRELD --------------------------------- C. B. Harreld Sworn to and subscribed before me this __ day of _________, 200__. - ------------------------------- Notary Public, State of Georgia My Commission Expires: - --------------------------------- (NOTORIAL SEAL) EX-10.B.35 20 ex10b35.txt Exhibit 10(b)35 Charles D. McCrary President and Chief Executive Officer [Alabama Power Logo] 600 North 18th Street Post Office Box 2641 Birmingham, Alabama 35291-0001 August 22, 2002 Mr. William B. Hutchins, III Executive Vice President Dear Bruce: This letter will serve as confirmation of our discussions that began months ago and continue until this day. As an inducement for you to stay at Alabama Power Company as CFO until at least April of 2004, I commit to provide to you the Career Transition Package as defined August 19, 2002. Sincerely, EX-10.C.68 21 ex10c68.txt Exhibit 10(c)68 DEFERRED COMPENSATION PLAN FOR DIRECTORS OF GEORGIA POWER COMPANY Amended and Restated Effective January 13, 2003 SECTION 1 Definitions 1.1 "Beneficial Ownership" means beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act. 1.2 "Board" or "Board of Directors" means the Board of Directors of the Company. 1.3 "Business Combination" means a reorganization, merger or consolidation or sale of Southern, or a sale of all or substantially all of Southern's assets. 1.4 "Cash Compensation" means the annual retainer fees and meeting fees payable to a Director in cash. 1.5 "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. 1.6 "Committee" means the Compensation and Executive Committees of the Board, or such other committee as may be designated by the Board to be responsible for administering the Plan. 1.7 "Common Stock" means the common stock of Southern, including any shares into which it may be split, subdivided, or combined. 1.8 "Company" means the Georgia Power Company, or any successor thereto. 1.9 "Company Change in Control" means the following: (a) The Consummation of an acquisition by any Person of Beneficial Ownership of 50% or more of the combined voting power of the then outstanding Voting Securities of the Company; provided, however, that for purposes of this Section 1.9, any acquisition by an Employee, or Group composed entirely of Employees, any qualified pension plan, any publicly held mutual fund or any employee benefit plan (or related trust) sponsored or maintained by Southern or any corporation Controlled by Southern shall not constitute a Change in Control; (b) Consummation of a reorganization, merger or consolidation of the Company (a "Company Business Combination"), in each case, unless, following such Company Business Combination, Southern Controls the corporation surviving or resulting from such Company Business Combination; or (c) Consummation of the sale or other disposition of all or substantially all of the assets of the Company to an entity which Southern does not Control. 1.10 "Compensation Payment Date" means the date on which compensation, including cash retainer, meeting fees, and the Stock Retainer, is payable to a Director or compensation would otherwise be payable to a Director if an election to defer such compensation had not been made. 1.11 "Consummation" means the completion of the final act necessary to complete a transaction as a matter of law, including, but not limited to, any required approvals by the corporation's shareholders and board of directors, the transfer of legal and beneficial title to securities or assets and the final approval of the transaction by any applicable domestic or foreign governments or agencies. 1.12 "Control" means, in the case of a corporation, Beneficial Ownership of more than 50% of the combined voting power of the corporation's Voting Securities, or in the case of any other entity, Beneficial Ownership of more than 50% of such entity's voting equity interests. 1.13 "Deferred Cash Trust" means the Deferred Cash Compensation Trust for Directors of The Southern Company and its Subsidiaries. 1.14 "Deferred Compensation Account" means the Prime Rate Investment Account, the Phantom Stock Investment Account, the Deferred Stock Account, and/or the Subsidiary Company Investment Account. 1.15 "Deferred Pension Election" means the election by a Director under Section 5.3 in connection with the deferral of receipt of the Director's Pension Benefit until termination from the Board. 1.16 "Deferred Stock Account" means the bookkeeping account established under Section 6.3 on behalf of a Director and includes shares of Common Stock credited thereto to reflect the reinvestment of dividends pursuant to Section 6.3(a)(iii). 1.17 "Deferred Stock Trust" means the Deferred Stock Trust for Directors of The Southern Company and its Subsidiaries. 1.18 "Director" means a member of the Board. 1.19 "Distribution Election" means the designation by a Director of the manner of distribution of the amounts and quantities held in the Director's Deferred Compensation Accounts upon the director's termination from the Board pursuant to Section 5.4. 1.20 "Effective Date" of this amendment and restatement means January 13, 2003. 1.21 "Employee" means an employee of Southern or any of its subsidiaries that are "employing companies" as defined in the Southern Company Deferred Compensation Plan as amended and restated February 23, 2001, and as may be amended from time to time. 1.22 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1.23 "Group" has the meaning set forth in Section 14(d) of the Exchange Act. 1.24 "Incumbent Board" means those individuals who constitute the Southern board of directors as of October 19, 1998, plus any individual who shall become a director subsequent to such date whose election or nomination for election by Southern's shareholders was approved by a vote of at least 75% of the directors then comprising the Incumbent Board. Notwithstanding the foregoing, no individual who shall become a director of the Southern board of directors subsequent to October 19, 1998, whose initial assumption of office occurs as a result of an actual or threatened election contest (within the meaning of Rule 14a-11 of the regulations promulgated under the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Southern board of directors shall be a member of the Incumbent Board. 1.25 "Market Value" means the average of the high and low prices of the Common Stock, as published in the Wall Street Journal in its report of New York Stock Exchange composite transactions, on the date such Market Value is to be determined, as specified herein (or the average of the high and low sale prices on the trading day immediately preceding such date if the Common Stock is not traded on the New York Stock Exchange on such date). 1.26 "Participant" means a Director or former Director who has an unpaid Deferred Compensation Account balance under the Plan. 1.27 "Participating Companies" means those companies whose boards of directors have authorized the establishment of trust(s) for the funding of their respective directors' Deferred Compensation Accounts under their respective Deferred Compensation Plans for Directors, including the Company. 1.28 "Pension Benefit" means the U.S. dollar amount of the actuarially-determined present value of benefits based on a Director's expected service at the required retirement date under The Southern Company Outside Directors Pension Plan, as calculated as of the Termination Date, plus accrued earnings on such amount calculated as if invested at the Wachovia Bank of Georgia Prime Interest Rate from the Termination Date, until such amount is invested in Deferred Compensation Accounts pursuant to the provisions of Section 5.3. 1.29 "Pension Benefit Investment Date" means the date to be determined by the Committee, as of which the Director's Pension Benefit will be credited to a Deferred Compensation Account in accordance with the director's Deferred Pension Election under Section 5.3. 1.30 "Phantom Stock Investment Account" means the bookkeeping account established pursuant to Section 6.2 in which a Director may elect to defer Cash Compensation or make investments, and includes amounts credited thereto to reflect the reinvestment of dividends. 1.31 "Plan" means the Deferred Compensation Plan for Directors of Georgia Power Company as from time to time in effect. 1.32 "Plan Period" means the period designated in Section 4. 1.33 "Person" means any individual, entity or group within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act. 1.34 "Preliminary Change in Control" means the occurrence of any of the following as determined by the Southern Committee: (a) Southern or the Company has entered into a written agreement, such as, but not limited to, a letter of intent, which, if Consummated, would result in a Southern Change in Control or a Company Change in Control, as the case may be; (b) Southern, the Company or any Person publicly announces an intention to take or to consider taking actions which, if Consummated, would result in a Southern Change in Control or a Company Change in Control under circumstances where the Consummation of the announced action or intended action is legally and financially possible; (c) Any Person becomes the Beneficial Owner of fifteen percent (15%) or more of the Common Stock; or (d) The Southern board of directors or the board of directors of the Company has declared that a Preliminary Change in Control has occurred. 1.35 "Prime Interest Rate" means the prime rate of interest as listed with the Wachovia Bank of Georgia, or its successor on the 1st day of each quarter. 1.36 "Prime Rate Investment Account" means the bookkeeping account established pursuant to Section 6.1 in which a Director may elect to defer Cash Compensation or make investments, the investment return on which is computed at the Prime Interest Rate. 1.37 "Southern" means The Southern Company. 1.38 "Southern Change in Control" means any of the following: (a) The Consummation of an acquisition by any Person of Beneficial Ownership of 20% or more of Southern's Voting Securities; provided, however, that for purposes of this subsection (a), the following acquisitions of Southern's Voting Securities shall not constitute a Change in Control: (i) any acquisition directly from Southern, (ii) any acquisition by Southern, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Southern or any corporation controlled by Southern, (iv) any acquisition by a qualified pension plan or publicly held mutual fund, (v) any acquisition by an Employee or Group composed exclusively of Employees, or (vi) any Business Combination which would not otherwise constitute a Change in Control because of the application of clauses (i), (ii) and (iii) of Section 1.37(c); (b) A change in the composition of Southern's board of directors whereby individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of Southern's board of directors; or (c) Consummation of a Business Combination, unless, following such Business Combination, all of the following three conditions are met: (i) all or substantially all of the individuals and entities who held Beneficial Ownership, respectively, of Southern's Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, 65% or more of the combined voting power of the Voting Securities of the corporation surviving or resulting from such Business Combination, (including, without limitation, a corporation which as a result of such transaction holds Beneficial Ownership of all or substantially all of Southern's Voting Securities or all or substantially all of Southern's assets) (such surviving or resulting corporation to be referred to as "Surviving Company"), in substantially the same proportions as their ownership, immediately prior to such Business Combination, of Southern's Voting Securities; (ii) no Person (excluding any corporation resulting from such Business Combination, any qualified pension plan, publicly held mutual fund, Group composed exclusively of employees or employee benefit plan (or related trust) of Southern, its subsidiaries, or Surviving Company) holds Beneficial Ownership, directly or indirectly, of 20% or more of the combined voting power of the then outstanding Voting Securities of Surviving Company except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of Surviving Company were members of the Incumbent Board at the earlier of the date of execution of the initial agreement, or of the action of the Southern board of directors, providing for such Business Combination. 1.39 "Southern Committee" means Chairman of the Southern board of directors, Chief Financial Officer of Southern, General Counsel of Southern, and the Chairman of the "Administrative Committee", as defined in Section 3.1 of the Southern Company Deferred Compensation Plan, as restated and amended effective February 23, 2001, and as may be amended from time to time. 1.40 "Stock Retainer" means the annual Board retainer fee that is paid to the Director in the form of Common Stock. 1.41 "Subsidiary Company Investment Account" means the bookkeeping account(s) established pursuant to section 6.4 on behalf of a Director that is credited with shares of stock, other than Common Stock, distributed to holders of record of Common Stock on account of a spin-off of a Southern Company subsidiary. 1.42 "Termination Date" means January 1, 1997, the date as of which The Southern Company Outside Directors Pension Plan was effectively terminated. 1.43 "Transferred Amount" means an amount equal to the value of a Director's accounts under the applicable deferred compensation plan for directors of The Southern Company or one of its subsidiaries or affiliates, which has been transferred to the Plan in connection with the Director's transfer from the board of directors of The Southern Company or one of its subsidiaries or affiliates to the Board. 1.44 "Transferred Amount Investment Date" means the date as of which a Director's Transferred Amount will be credited to a Deferred Compensation Account in accordance with Section 5.4. 1.45 "Trust Administrator" means the individual or committee that is established in the Deferred Stock Trust and the Deferred Cash Trust, to administer such trusts on behalf of the Participating Companies. 1.46 "Voting Securities" means the outstanding voting securities of a corporation entitling the holder thereof to vote generally in the election of such corporation's directors. Where the context requires, words in the masculine gender shall include the feminine gender, words in the singular shall include the plural, and words in the plural shall include the singular. SECTION 2 Purpose The Plan provides a method of deferring payment to a Director of his compensation until a date following the termination of his membership on the Board. SECTION 3 Eligibility An individual who serves as a Director and is not otherwise actively employed by the Company or any of its subsidiaries or affiliates is eligible to participate in the Plan. SECTION 4 Plan Periods Except as pertains to a Director's initial Plan Period, all Plan Periods shall be on a calendar year basis. The initial Plan Period applicable to any person elected to the Board who was not a Director on the preceding December 31, shall begin on the first day of such Director's membership on the Board. SECTION 5 Elections 5.1 Cash Compensation (a) Prior to the beginning of a Plan Period, a Director may direct that payment of all or any portion of Cash Compensation that otherwise would be paid to the Director for the Plan Period, be deferred in amounts as designated by the Director, and credited to (i) a Prime Rate Investment Account, (ii) a Phantom Stock Investment Account, or, effective with compensation payable on or after January 1, 2001, (iii) a Deferred Stock Account. Upon the Director's termination from the Board of Directors, such deferred compensation and accumulated investment return held in the Director's Deferred Compensation Accounts shall be distributed to the Director in accordance with the Director's Distribution Election and the provisions of Section 7. (b) An election to defer Cash Compensation is irrevocable. Such an election shall continue from Plan Period to Plan Period unless the Director changes his election to defer cash compensation payable in a future Plan Period prior to the beginning of such future Plan Period. The new deferral election should not affect amounts previously deferred. (c) Cash Compensation deferred under this Section 5.1 shall be invested in Deferred Compensation Accounts as directed by the Director on the Compensation Payment Date. 5.2 Stock Retainer (a) Prior to the beginning of a Plan Period, a Director may direct that payment of all or none of the Stock Retainer that otherwise would be paid to the Director for the Plan Period, be deferred by the Directors, and credited to his Deferred Stock Account, such deferred compensation and accumulated investment return held in the Director's Deferred Stock Account shall be distributed to the Director in accordance with the Director's Distribution Election and the provisions of Section 7. (b) An election to defer the Stock Retainer is irrevocable. Such an election shall continue from Plan Period to Plan Period unless the Director changes his election to defer Stock Retainer paid in a future Plan Period prior to the beginning of such future Plan Period. The new deferral election should not affect amounts previously deferred. (c) Stock Retainer deferred under this Section 5.2 shall be invested in Deferred Stock Account as directed by the Director on the Compensation Payment Date. 5.3 Deferred Pension Election Any Director, who had a Pension Benefit as of the Termination Date, made a single one-time election, to credit all of his Pension Benefit into (i) a Prime Rate Investment Account or (ii) a Phantom Stock Investment Account. Upon the Director's termination from the Board, such Pension Benefit and accumulated investment return held in the Director's Deferred Compensation Accounts shall be distributed to the Director in accordance with the Director's Distribution Election made in accordance with Section 5.4(b) and the provisions of Section 7. 5.4 Distribution Election (a) Except as set forth in Section 5.4(b) and (c), prior to the initial establishment of a Deferred Compensation Account for a Director, the Director must elect, in writing, that upon termination from the Board of Directors the values and quantities held in the Directors Deferred Compensation Accounts be distributed to the Director, pursuant to the provisions of Section 7, in a lump sum or in a series of annual installments not to exceed ten (10). The time for the commencement of distribution shall not be later than the first day of the month coinciding with or next following the second anniversary of termination of Board membership. (b) Any Director who made a Deferred Pension Election in accordance with Section 5.3 made a Distribution Election at the time the Deferred Pension Election was made, attributable to the Pension Benefit and any accumulated investment return. (c) In the event a Director terminates from the Board with Deferred Compensation Accounts established under Section 6.5, the Transferred Amounts and accumulated investment return held in such Accounts shall be distributed to the Director in accordance with the Director's distribution election in effect under the applicable deferred compensation plan for directors of The Southern Company or one of its subsidiaries or affiliates on the date the Director is transferred to the Board and the provisions of Section 7, unless such election is changed pursuant to Section 5.4(d). (d) Distribution Elections made under Sections 5.4 (a), (b) and (c) are irrevocable except that a Director may amend any of the Distribution Elections then in effect while the Director is still a director of the Company as required under Section 9.5 and not later than the 361st day prior to the date of the earliest distribution elected and in place under the Plan. Any amendment to a Director's Distribution Election pursuant to the preceding sentence shall not accelerate the commencement of the Director's distribution to a date which is prior to the 13th month following the date of such amendment. In addition, any amendment to a Distribution Election must be made on a form prescribed by the Compensation Committee and delivered to the Secretary or Assistant Secretary. 5.5 Beneficiary Designation A Director or former Director may designate a beneficiary to receive distributions from the Plan in accordance with the provisions of Section 7 upon the death of the director. The beneficiary designation may be changed by a Director or former Director at any time, and without the consent of the prior beneficiary. 5.6 Form of Election All elections pursuant to the provisions of this Section 5 of the Plan shall be made in writing to the Secretary or Assistant Secretary of the Company on a form or forms available upon request of the Secretary or Assistant Secretary. SECTION 6 Accounts 6.1 Prime Rate Investment Account A Prime Rate Investment Account shall be established for each Director electing deferral of Cash Compensation for investment at the Prime Interest Rate. The amount directed by the Director to such account shall be credited to it as of the Pension Benefit Investment Date, Compensation Payment Date, or Transferred Amount Investment Date, as applicable, and credited thereafter with interest computed using the Prime Interest Rate. Interest shall be computed from the date such compensation is credited to the account and compounded quarterly at the end of each calendar quarter. The Prime Interest Rate in effect on the first day of a calendar quarter shall be deemed the Prime Interest Rate in effect for that entire quarter. Interest shall accrue and compound on any balance until the amount credited to the account is fully distributed. 6.2 Phantom Stock Investment Account The Phantom Stock Investment Account established for each Director electing deferral of Cash Compensation for investment at the Common Stock investment rate shall be credited with the number of shares (including fractional shares rounded to the nearest ten-thousandth) of Common Stock which could have been purchased on the Pension Benefit Investment Date, the Compensation Payment Date, or Transferred Amount Investment Date, as applicable, as determined by dividing the applicable compensation by the Market Value on such date. On the date of the payment of dividends on the Common Stock, the Director's Phantom Stock Investment Account shall be credited with additional shares (including fractional shares rounded to the nearest ten-thousandth) of Common Stock, as follows: (a) In the case of cash dividends, such additional shares as would have been purchased as of the Common Stock dividend record date as if the credited shares had been outstanding on such date and dividends reinvested thereon under the Southern Investment Plan; (b) In the case of dividends payable in property other than cash or Common Stock, such additional shares as could be purchased at the Market Value as of the date of payment with the fair market value of the property which would have been payable if the credited shares had been outstanding; and (c) In the case of dividends payable in Common Stock, such additional shares as would have been payable on the credited shares as if they had been outstanding. 6.3 Deferred Stock Account (a) A Director's Deferred Stock Account will be credited: (i) with the number of shares of Common Stock (rounded to the nearest ten thousandth of a share) determined by dividing the amount of Cash Compensation subject to deferral or investment in the Deferred Stock Account by the average price paid by the Trustee of the Deferred Stock Trust for shares of Common Stock with respect to the Pension Benefit Investment Date or the Compensation Payment Date, as applicable, as reported by the Trustee, or, if the Trustee shall not at such time purchase any shares of Common Stock, by the Market Value on such date; (ii) as of the date on which Stock Retainer is paid, the shares of Common Stock payable to the Director as his Stock Retainer; and (iii) as of each date on which dividends are paid on the Common Stock, with the number of shares of Common Stock (rounded to the nearest ten thousandth of a share) determined by multiplying the number of shares of Common Stock credited in the Director's Deferred Stock Account on the dividend record date, by the dividend rate per share of Common Stock, and dividing the product by the price per share of Common Stock attributable to the reinvestment of dividends on the shares of Common Stock held in the Deferred Stock Trust on the applicable dividend payment date or, if the Trustee of the Deferred Stock Trust has not reinvested in shares of Common Stock on the applicable dividend reinvestment date, the product shall be divided by the Market Value on the dividend payment date. (b) If Southern enters into transactions involving stock splits, stock dividends, reverse splits or any other recapitalization transactions, the number of shares of Common Stock credited to a Director's Deferred Stock Account will be adjusted (rounded to the nearest ten thousandth of a share) so that the Director's Deferred Stock Account reflects the same equity percentage interest in Southern after the recapitalization as was the case before such transaction. (c) If at least a majority of Southern's stock is sold or exchanged by its shareholders pursuant to an integrated plan for cash or property (including stock of another corporation) or if substantially all of the assets of Southern are disposed of and, as a consequence thereof, cash or property is distributed to Southern's shareholders, each Director's Deferred Stock Account will, to the extent not already so credited under this Section 6.3, be (i) credited with the amount of cash or property receivable by a Southern shareholder directly holding the same number of shares of Common Stock as is credited to such Director's Deferred Stock Account and (ii) debited by that number of shares of Common Stock surrendered by such equivalent Southern shareholder. (d) Each Director who has a Deferred Stock Account also shall be entitled to provide directions to the Trust Administrator to cause such committee to similarly direct the Trustee of the Deferred Stock Trust to vote, on any matter presented for a vote to the shareholders of Southern, that number of shares of Common Stock held by the Deferred Stock Trust equivalent to the number of shares of Common Stock credited to the Director's Deferred Stock Account. Such committee shall arrange for distribution to all Directors in a timely manner of all communications directed generally to the Southern shareholders as to which their votes are solicited. 6.4 Subsidiary Company Investment Account (a) A Director's Subsidiary Company Investment Account will be credited as of the date on which a distribution is paid to the Company's common stockholders in stock other than Common Stock with the number of shares of the other corporation's stock receivable by a Southern stockholder directly holding the same number of shares of Common Stock as is credited to such Director's Deferred Stock Account. (b) Each Director who has a Subsidiary Company Investment Account also shall be entitled to provide directions to the Trust Administrator to similarly direct the Trustee of the Deferred Stock Trust to vote on any matter presented for a vote to the applicable corporation's shareholders, that number of shares of the applicable corporation's common stock held by the Deferred Stock Trust equivalent to the number of shares credited to the Director's Subsidiary Company Investment Account. The Trust Administrator shall arrange for distribution to all Directors in a timely manner of all communications directed generally to the applicable corporation's shareholders as to which their votes are solicited. 6.5 Transferred Amounts (a) As soon as administratively practicable, the Company shall establish for a Director transferring to the Board from the board of directors of The Southern Company or any of its subsidiaries or affiliates such Deferred Compensation Accounts as are necessary to implement Section 6.5(b). (b) Any Transferred Amounts will be credited to the Deferred Compensation Account(s) established that are comparable to the deferred compensation accounts to which such amounts were credited under the applicable deferred compensation plan for directors of The Southern Company or one of its subsidiaries or affiliates, as soon as administratively practicable following the date the Transferred Amounts are transferred to the Plan. Thereafter, the Transferred Amounts shall be credited with investment returns as applicable under this Section 6 of the Plan. SECTION 7 Distributions 7.1 Upon the termination of a Director's membership on the Board the amount credited to a Director's Deferred Compensation Accounts will be paid to the Director or his beneficiary, as applicable, in the following manner: (a) the amount credited to a Director's Prime Rate Investment Account and Phantom Stock Investment Account shall be paid in cash; (b) the amount credited to a Director's Deferred Stock Account shall, except as otherwise provided in Section 6.3 and Section 9.5, or to the extent the Company is otherwise, in the reasonable judgment of the Committee, precluded from doing so, be paid in shares of Common Stock (with any fractional share interest therein paid in cash to the extent of the then Market Value thereof); and (c) the amount credited to a Subsidiary Company Investment Account shall, except as otherwise provided in section 9.5, be paid from the assets in the Deferred Stock Trust in shares of the applicable corporation, however if there is not a sufficient number of shares held in the Trust, the remainder shall be paid in cash based upon the average of the high and low price of the stock as reported in the Wall Street Journal on the business day immediately proceeding the distribution date. Such payments shall be from the general assets of the Company (including the Deferred Cash Trust and the Deferred Stock Trust) in accordance with this Section 7. Notwithstanding the foregoing, in the event the Company enters into an agreement described in Section 7.3 with respect to a Director prior to the Director's termination of membership, the Company shall have no obligation to make distributions to the Director under this Section 7.1 in connection with such Director's termination of membership on the Board. 7.2 Unless other arrangements are specified by the Committee on a uniform and nondiscriminatory basis, deferred amounts shall be paid in the form of (i) a lump sum payment, or (ii) in approximately equal annual installments, as elected by the Director pursuant to the provisions of Section 5.4. Such payments shall be made (or shall commence) as soon as practicable following the termination of Board membership or, if so elected in the Distribution Election, up to twenty-four (24) months following such termination. In the event a Director elected to receive the balance of his Deferred Compensation Accounts in a lump sum, distribution shall be made on the first day of the month selected by the Director on his Distribution Election, or as soon as reasonably possible thereafter. If the Director elected to receive annual installments, the first payment shall be made on the first day of the month selected by a Director, or as soon as reasonably possible thereafter, and shall be equal to the balance in the Director's Deferred Compensation Accounts on such date divided by the number of annual installment payments. Each subsequent annual payment shall be an amount equal to the balance in the Director's Deferred Compensation Accounts on the date of payment divided by the number of remaining annual payments and shall be paid on the anniversary of the preceding date of payment. The Market Value of any shares of Common Stock credited to a Director's Phantom Stock Investment Account shall be determined as of the twenty-fifth (25th) day of the month immediately preceding the date of any lump sum or installment distribution. Upon the death of a Director, or a former Director prior to the payment of all amounts credited to the Director's Deferred Compensation Accounts, the unpaid balance shall be paid in the sole discretion of the Committee (i) in a lump sum to the designated beneficiary of such Director or former Director within thirty (30) days of the date of death (or as soon as reasonably possible thereafter) or (ii) in accordance with the Distribution Election made by such Director or former Director. In the event a beneficiary designation has not been made, or the designated beneficiary is deceased or cannot be located, payment shall be made to the estate of the Director or former Director. The Market Value of any shares of Common Stock credited to a Director's Phantom Stock Investment Account shall be determined as of the twenty-fifth (25th) day of the month immediately preceding the date of any lump sum or installment distribution. 7.3 If the Company enters into a written agreement with a parent or affiliate of the Company under which the parent or affiliate assumes liability for a Director's benefits accrued under the Plan in connection with, but prior to, such Director's termination of membership on the Board and the Director either has been or will be elected to the Board of Directors of such parent or affiliate of the Company, the value of the Director's benefits which have accrued under the Plan as of the date the Director terminates from the Board shall be transferred from the Company to the parent or affiliate of the Company, and the Company shall have no further obligation to make any distributions to the Director under Section 7.1 or any other section herein. SECTION 8 Change in Control and Other Special Provisions 8.1 Notwithstanding any other terms of the Plan to the contrary, following a Southern Change in Control or a Company Change in Control, the provisions of this Section 8 shall apply to the payment of benefits under the Plan with respect to any Director who is a Participant on such date. 8.2 The Deferred Cash Trust and the Deferred Stock Trust (collectively "Trusts") have been established to hold assets of the Participating Companies under certain circumstances as a reserve for the discharge of the Company's obligations under the Plan. In the event of a Preliminary Change in Control of Southern or the Company, the Company shall be obligated to immediately contribute such amounts to the Trusts as may be necessary to fully fund all benefits payable under the Plan in accordance with the procedures set forth in Section 8.3 hereof. In addition, in order to provide the added protections for certain individuals in accordance with Paragraph 7(c) of the Trust, the Company may fund the Trusts prior to a Preliminary Change in Control of Southern or the Company in accordance with the terms of the Trusts. All assets held in the Trusts remain subject only to the claims of the Participating Companies' general creditors whose claims against the Participating Companies are not satisfied because of the Participating Companies' bankruptcy or insolvency (as those terms are defined in the Trust). No Participant has any preferred claim on, or beneficial ownership interest in, any assets of the Trusts before the assets are paid to the Participant and all rights created under the Trusts, as under the Plan, are unsecured contractual claims of the Participant against the Company. 8.3 As soon as practicable following either a Preliminary Change in Control of Southern or of the Company, the Company shall contribute an amount based upon the funding strategy adopted by the Trust Administrator necessary to fulfill the Company's obligations pursuant to this Section 8. In the event of a dispute over such actuary's determination, the Company and any complaining Participant(s) shall refer such dispute to an independent, third party actuarial consultant, chosen by the Company and such Participant. If the Company and the Participant cannot agree on an independent, third party actuarial consultant, the actuarial consultant shall be chosen by lot from an equal number of actuaries submitted by the Company and the applicable Trustee. Any such referral shall only occur once in total and the determination by the third-party actuarial consultant shall be final and binding upon both parties. The Company shall be responsible for all of the fees and expenses of the independent actuarial consultant. 8.4 In the event of a Southern Change in Control or a Company Change in Control, notwithstanding anything to the contrary in the Plan, upon termination as a Director, that amount in the Deferred Compensation Plan Account(s) of a Participant who was a Director determined as of such Change in Control shall be paid out in a lump sum if such Participant makes an election pursuant to procedures established by the Trust Administrator, in its sole and absolute discretion. If no such election is made, the Director shall receive payment of his Accounts solely in accordance with Section 7. SECTION 9 General Provisions 9.1 In the event that the Company shall decide to establish an advance accrual reserve on its books against the future expense of payments from any Deferred Compensation Accounts, such reserve shall not under any circumstances be deemed to be an asset of this Plan but, at all times, shall remain a part of the general assets of the Company, subject to claims of the Company's creditors. 9.2 A person entitled to any amount under this Plan shall be a general unsecured creditor of the Company with respect to such amount. Furthermore, a person entitled to a payment or distribution with respect to a Deferred Compensation Account shall have a claim upon the Company only to the extent of the balance in his Deferred Compensation Accounts. 9.3 All commissions, fees, and expenses that may be incurred in operating the Plan will be paid by the Company. 9.4 The Company will pay its prorated share of all commissions, fees, and expenses that may be incurred in operating any trust(s) established under the Plan (including the Deferred Stock Trust and the Deferred Cash Trust). 9.5 Notwithstanding any other provision of this Plan: (i) elections under this Plan may only be made by Directors while they are directors of the Company (with the exception of the designation of beneficiaries), and (ii) distributions otherwise payable to a Director in the form of Common Stock shall be delayed and/or instead paid in cash in an amount equal to the fair market value thereof if such payment in Common Stock would violate any federal or State securities laws (including Section 16(b) of the Securities Exchange Act of 1934, as amended) and/or rules and regulations promulgated thereunder. 9.6 Directors, their legal representatives and their beneficiaries shall have no right to anticipate, alienate, sell, assign, transfer, pledge or encumber their interests in the Plan, nor shall such interests be subject to attachment, garnishment, levy or execution by or on behalf of creditors of the Directors or of their beneficiaries. SECTION 10 Administration Subject to the express provisions of the Plan, the Committee shall have the exclusive right to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for the administration of the Plan. The decisions, actions and records of the Committee shall be conclusive and binding upon the Company and all persons having or claiming to have any right or interest in or under the Plan. The Committee may delegate to such officers, employees, or departments of the Company or Southern, such authority, duties, and responsibilities of the Committee as it, in its sole discretion, considers necessary or appropriate for the proper and efficient operation of the Plan, including, without limitation, (i) interpretation of the Plan, (ii) approval and payment of claims, and (iii) establishment of procedures for administration of the Plan. SECTION 11 Amendment, Termination and Effective Date 11.1 Amendment of the Plan Except for the provisions of Section 8, which may not be amended following a Southern Change in Control or Company Change in Control, and subject to the provisions of Section 11.3, the Plan may be wholly or partially amended or otherwise modified at any time by written action of the Board of Directors. 11.2 Termination of the Plan Subject to the provisions of Section 11.3 herein, the Plan may be terminated at any time by written action of the Board of Directors. 11.3 No Impairment of Benefits Notwithstanding the provisions of Sections 11.1 and 11.2, herein no amendment to or termination of the Plan shall impair any rights to benefits that have accrued hereunder. 11.4 Governing Law This Plan shall be construed in accordance with and governed by the laws of the State of Georgia. IN WITNESS WHEREOF, the Plan, as amended and restated effective January 13, 2003 has been executed pursuant to resolutions of the Board of Directors of Georgia Power Company, this ____ day of _______________, 2003. GEORGIA POWER COMPANY By: ________________________________ Attest: By: ___________________________ EX-10.D.30 22 ex10d30.txt Exhibit 10(d)30 DEFERRED COMPENSATION AGREEMENT THIS DEFERRED COMPENSATION AGREEMENT ("Agreement") made and entered into by and between GULF POWER COMPANY (the "Company") and TRAVIS JACKSON BOWDEN ("Employee"). W I T N E S S E T H WHEREAS, Employee has been employed by the Company for approximately twenty-six (26) years; WHEREAS, Employee is a highly compensated employee of the Company and is a member of its management; WHEREAS, in order to be eligible for benefits under this Agreement, the parties have agreed that Employee will terminate employment with the Company on June 1, 2002; WHEREAS, the parties desire to delineate their respective rights, duties, and obligations attendant to such termination of employment, and desire to reach an accord and satisfaction of all claims arising from Employee's employment and his termination of employment, with appropriate releases; and WHEREAS, the Company desires to compensate Employee for service he has provided or will provide for the Company; NOW, THEREFORE, in consideration of the premises, and the agreements of the parties set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby covenant and agree as follows: 1. Termination of Employment. Upon Employee's execution of this Agreement, voluntary termination of employment with the Company on June 1, 2002 (the Employee's "Termination Date"), and effectiveness of the Release attached hereto as Exhibit 1 (such effectiveness being no earlier than Employee's Termination Date), the Company agrees to pay to Employee or his spouse or his estate, as applicable, the amounts described in Paragraph 2 hereof. Employee covenants and agrees that the consideration set forth in Paragraph 2 is in full satisfaction of all sums owed to Employee, if any, by the Company, and constitutes good and complete consideration for his Release attached hereto as Exhibit 1, those non-disclosure and non-interference obligations under Paragraphs 5, 6, 7, 8 and 9 hereof and all other obligations and covenants of Employee contained herein, including, but not limited to, Paragraph 4. Employee agrees that this Agreement provides him certain benefits to which he would not otherwise be entitled. 2. Payments to Employee. (a) As soon as practicable following the effective date of the Release attached hereto as Exhibit 1 (such effective date being no earlier than Employee's Termination Date), the Company shall commence payment to Employee of five (5) annual installments in an amount equal to Two Hundred Twenty-Seven Thousand Five Hundred Sixty Dollars and No Cents ($227,560.00) per annual installment payment. In the event of a Southern Change in Control or a Subsidiary Change in Control affecting Employee as defined in the Southern Company Change in Control Benefit Plan Determination Policy, any unpaid amounts shall be paid in a lump sum as soon as practicable after the occurrence of such an event. The lump sum shall be equal to the present value of any unpaid amounts based on an effective interest rate of 7.5% per annum (0.6045% per month). In the event Employee dies before receiving payment of the amounts described in this Paragraph 2(a) hereof, such amounts shall be paid to Employee's spouse, if living, or if not, to the Employee's estate. In accordance with Paragraph 20, Employee shall be responsible for all state and federal income taxes and his share of FICA taxes owed on the foregoing amounts, and Company shall make appropriate withholding of these amounts. (b) Notwithstanding the foregoing, in the event Employee engages in Misconduct, as defined below, before or after Employee's Termination Date but prior to receiving the payments described in Paragraph 2(a) above, Company may not make the payments to Employee under this Paragraph 2, and Company shall have no further obligations with respect to any amounts under this Agreement. For purposes of this Paragraph 2(b), "Misconduct" shall mean (i) the final conviction of any felony, or (ii) the carrying out of any activity or the making of any public statement which materially diminishes or materially and untruthfully brings Southern into contempt, ridicule or materially and reasonably shocks or offends the community in which the Southern affiliate is located. 3. Publicity; No Disparaging Statement. Except as otherwise provided in Paragraph 13 hereof, Employee and the Company covenant and agree that they shall not engage in any communications which shall disparage one another or interfere with their existing or prospective business relationships. 4. No Employment. Employee agrees that he shall not seek re-employment as an employee or independent contractor with the Company or The Southern Company or any of its subsidiaries or affiliates (collectively, for purposes of this Paragraph 4, "The Southern Company System"), for a period of twenty-four (24) months following the execution of the Release attached hereto as Exhibit 1. The Company or any member of The Southern Company System shall not rehire the Employee as an employee or independent contractor for a period of twenty-four (24) months following the Employee's execution of the Release attached hereto as Exhibit 1, unless an exceptional business reason exists for rehiring the Employee and a committee, comprised of (i) an officer from the business unit seeking to rehire the Employee and (ii) the Southern Company Vice President, Employee Relations & Associate General Counsel, approves of such rehiring. 5. Business Protection Provision Definitions. (a) Preamble. As a material inducement to the Company to enter into this Agreement, and its recognition of the valuable experience, knowledge and proprietary information Employee gained from his employment with the Company, Employee warrants and agrees he will abide by and adhere to the following business protection provisions in Paragraphs 5, 6, 7, 8 and 9 herein. (b) Definitions. For purposes of Paragraphs 5, 6, 7, 8 and 9 herein, the following terms shall have the following meanings: (i) "Competitive Position" shall mean any employment, consulting, advisory, directorship, agency, promotional or independent contractor arrangement between the Employee and any person or Entity engaged wholly or in material part in the business that the Company is engaged in (the "Business") whereby the Employee is required to or does perform services on behalf of or for the benefit of such person or Entity which are substantially similar to the services Employee participated in or directed while employed by the Company, The Southern Company or any of their respective affiliates (collectively the "Southern Entities"). (ii) "Confidential Information" shall mean the proprietary or confidential data, information, documents or materials (whether oral, written, electronic or otherwise) belonging to or pertaining to the Company or other Southern Entities, other than "Trade Secrets" (as defined below), which is of tangible or intangible value to any of the Southern Entities and the details of which are not generally known to the competitors of the Southern Entities. Confidential Information shall also include: (A) any items that any of the Southern Entities have marked "CONFIDENTIAL" or some similar designation or are otherwise identified as being confidential; and (B) all non-public information known by or in the possession of Employee related to or regarding any proceedings involving or related to the Southern Affiliates before the Florida Public Service Commission or other Entities. (iii) "Entity" or "Entities" shall mean any business, individual, partnership, joint venture, agency, governmental agency, body or subdivision, association, firm, corporation, limited liability company or other entity of any kind. (iv) "Territory" shall include the States of Georgia, Alabama, Mississippi or Florida. (v) "Trade Secrets" shall mean information or data of or about any of the Southern Entities, including, but not limited to, technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans or lists of actual or potential customers or suppliers that: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The Employee agrees that trade secrets include non-public information related to the rate making process of the Southern Entities and any other information which is defined as a "trade secret" under applicable law. (vi) "Work Product" shall mean all tangible work product, property, data, documentation, "know-how," concepts or plans, inventions, improvements, techniques and processes relating to the Southern Entities that were conceived, discovered, created, written, revised or developed by Employee during the term of his employment with the Company. 6. Nondisclosure: Ownership of Proprietary Property. (a) In recognition of the need of the Company to protect its legitimate business interests, Confidential Information and Trade Secrets, Employee hereby covenants and agrees that Employee shall regard and treat Trade Secrets and all Confidential Information as strictly confidential and wholly-owned by the Company and shall not, for any reason, in any fashion, either directly or indirectly, use, sell, lend, lease, distribute, license, give, transfer, assign, show, disclose, disseminate, reproduce, copy, misappropriate or otherwise communicate any such item or information to any third party or Entity for any purpose other than in accordance with this Agreement or as required by applicable law: (i) with regard to each item constituting a Trade Secret, at all times such information remains a "trade secret" under applicable law, and (ii) with regard to any Confidential Information, for a period of three (3) years following the Termination Date (hereafter the "Restricted Period"). (b) Employee shall exercise best efforts to ensure the continued confidentiality of all Trade Secrets and Confidential Information, and he shall immediately notify the Company of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which Employee becomes aware. Employee shall assist the Company, to the extent necessary, in the protection of or procurement of any intellectual property protection or other rights in any of the Trade Secrets or Confidential Information. (c) All Work Product shall be owned exclusively by the Company. To the greatest extent possible, any Work Product shall be deemed to be "work made for hire" (as defined in the Copyright Act, 17 U.S.C.A. ss. 101 et seq., as amended), and Employee hereby unconditionally and irrevocably transfers and assigns to the Company all right, title and interest Employee currently has or may have by operation of law or otherwise in or to any Work Product, including, without limitation, all patents, copyrights, trademarks (and the goodwill associated therewith), trade secrets, service marks (and the goodwill associated therewith) and other intellectual property rights. Employee agrees to execute and deliver to the Company any transfers, assignments, documents or other instruments which the Company may deem necessary or appropriate, from time to time, to protect the rights granted herein or to vest complete title and ownership of any and all Work Product, and all associated intellectual property and other rights therein, exclusively in the Company. (d) Employee represents and agrees that he will keep all terms and provisions of this Agreement completely confidential, except for possible disclosures to his legal advisors or to the extent required by law, and Employee further agrees that he will not disclose the terms, provisions or information contained in or concerning this Agreement to anyone, including, but not limited to, any past, present, or prospective employee or applicant for employment with the Company. Employee agrees that he may only disclose to future, potential employers of Employee that he participates in a Deferred Compensation Agreement with the Company which imposes certain restrictions on him. 7. Non-Interference With Employees. Employee covenants and agrees that during the Restricted Period he will not, either directly or indirectly, alone or in conjunction with any other person or Entity: (A) actively recruit, solicit, attempt to solicit, or induce any person who, during such Restricted Period, or within one year prior to the Termination Date, was an exempt employee of the Company or any of its subsidiaries, or was an officer of any of the other Southern Entities to leave or cease such employment for any reason whatsoever; or (B) hire or engage the services of any such person described in Paragraph 7(A) in any business substantially similar or competitive with that in which the Southern Entities were engaged during his employment. 8. Non-Interference With Customers. (a) Employee acknowledges that in the course of employment, he has learned about Company's business, services, materials, programs and products and the manner in which they are developed, marketed, serviced and provided. Employee knows and acknowledges that the Company has invested considerable time and money in developing its programs, agreements, offices, representatives, services, products and marketing techniques and that they are unique and original. Employee further acknowledges that the Company must keep secret all pertinent information divulged to Employee and Company's business concepts, ideas, programs, plans and processes, so as not to aid Company's competitors. Accordingly, Company is entitled to the following protection, which Employee agrees is reasonable: (b) Employee covenants and agrees that for a period of two (2) years following the Termination Date, he will not, on his own behalf or on behalf of any person or Entity, solicit, direct, appropriate, call upon, or initiate communication or contact with any person or entity or any representative of any person or entity, with whom Employee had contact during his employment, with a view toward the sale or the providing of any product, equipment or service sold or provided or under development by Company during the period of two (2) years immediately preceding the date of Employee's termination. The restrictions set forth in this section shall apply only to persons or entities with whom Employee had actual contact during the two (2) years prior to termination of employment with a view toward the sale or providing of any product, equipment or service sold or provided or under development by Company. 9. Non-Interference With Business. (a) Employee and Company expressly covenant and agree that the scope, territorial, time and other restrictions contained in this entire Agreement constitute the most reasonable and equitable restrictions possible to protect the business interest of the Company given: (i) the business of the Company; (ii) the competitive nature of the Company's industry; and (iii) that Employee's skills are such that he could easily find alternative, commensurate employment or consulting work in his field which would not violate any of the provisions of this Agreement. The Employee further acknowledges that the payments described in Paragraph 2 are also in consideration of his covenants and agreements contained in Paragraphs 5 through 9 hereof. (b) Employee covenants and agrees to not obtain or work in a Competitive Position within the Territory for a period of two (2) years from the Termination Date. 10. Return of Materials. Upon the Employee's termination, or at any point after that time upon the specific request of the Company, Employee shall return to the Company all written or descriptive materials of any kind belonging or relating to the Company or its affiliates, including, without limitation, any originals, copies and abstracts containing any Work Product, intellectual property, Confidential Information and Trade Secrets in Employee's possession or control. 11. Cooperation. The parties agree that as a result of Employee's duties and activities during his employment, Employee's reasonable availability may be necessary for the Company to meaningfully respond to or address actual or threatened litigation, or government inquiries or investigations, or required filings with state, federal or foreign agencies (hereinafter "Company Matters"). Upon request of the Company, and at any point following termination of employment, Employee will make himself available to the Company for reasonable periods consistent with his future employment, if any, by other Entities and will cooperate with its agents and attorneys as reasonably required by such Company Matters. The Company will reimburse Employee for any reasonable out-of-pocket expenses associated with providing such cooperation. 12. Termination with Cause. In the event of Employee's termination of employment for Cause at any time, the Employee shall forfeit the entire benefit provided in Paragraph 2 and the Company shall have no further obligations with respect to any amount under this Agreement. As used in this Agreement, the term "Cause" shall mean gross negligence or willful misconduct in the performance of the duties and services required in the course of employment by the Company; the final conviction of a felony or misdemeanor involving moral turpitude; the carrying out of any activity or the making of any statement which would prejudice the good name and standing of any of the Southern Entities or would bring any of the Southern Entities into contempt, ridicule or would reasonably shock or offend any community in which any of the Southern Entities is located; a material breach of the fiduciary obligations owed by an officer and an employee to any of the Southern Entities; or the Employee's unsatisfactory performance of the duties and services required by his or her employment. 13. Confidentiality and Legal Process. Employee represents and agrees that he will keep the terms, amount and fact of this Agreement confidential and that he will not hereafter disclose any information concerning this Agreement to any one other than his personal agents, including, but not limited to, any past, present, or prospective employee or applicant for employment with Company. Notwithstanding the foregoing, nothing in this Agreement is intended to prohibit Employee from performing any duty or obligation that shall arise as a matter of law. Specifically, Employee shall continue to be under a duty to truthfully respond to any legal and valid subpoena or other legal process. This Agreement is not intended in any way to proscribe Employee's right and ability to provide information to any federal, state or local government in the lawful exercise of such governments' governmental functions. 14. Successors And Assigns; Applicable Law. This Agreement shall be binding upon and inure to the benefit of Employee and his heirs, administrators, representatives, executors, successors and assigns, and shall be binding upon and inure to the benefit of the Company and its officers, directors, employees, agents, shareholders, parent corporation and affiliates, and their respective predecessors, successors, assigns, heirs, executors and administrators and each of them, and to their heirs, administrators, representatives, executors, successors and assigns. This Agreement shall be construed and interpreted in accordance with the laws of the State of Florida, United States of America (without giving effect to principles of conflicts of laws). 15. Complete Agreement. This Agreement shall constitute the full and complete Agreement between the parties concerning its subject matter and fully supersedes any and all other prior Agreements or understandings between the parties concerning the subject matter hereof. This Agreement shall not be modified or amended except by a written instrument signed by both Employee and an authorized representative of the Company. 16. Severability. The unenforceability or invalidity of any particular provision of this Agreement shall not affect its other provisions, and to the extent necessary to give such other provisions effect, they shall be deemed severable. The judicial body interpreting this Agreement shall be authorized and instructed to rewrite any of the sections which are enforceable as written in such a fashion so that they may be enforced to the greatest extent legally possible. Employee acknowledges and agrees that the covenants and agreements contained in this Agreement, including, without limitation, the covenants and agreements contained in Paragraphs 5, 6, 7, 8 and 9, shall be construed as covenants and agreements independent of each other or any other contract between the parties hereto and that the existence of any claim or cause of action by Employee against Company, whether predicted upon this Agreement or any other contract, shall not constitute a defense to the enforcement by Company of said covenants and agreements. 17. Waiver Of Breach; Specific Performance. The waiver of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other breach. Each of the parties to this Agreement will be entitled to enforce its or his rights under this Agreement, specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in its or his favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its or his sole discretion apply to any court of law or equity of competent jurisdiction for specific performance or injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement. 18. Unsecured General Creditor. The Company shall neither reserve nor specifically set aside funds for the payment of its obligations under this Agreement, and such obligations shall be paid solely from the general assets of the Company. Notwithstanding that Employee may be entitled to receive the value of his benefit under the terms and conditions of this Agreement, the assets from which such amounts may be paid shall at all times be subject to the claims of the Company's creditors. 19. No Effect On Other Arrangements. It is expressly understood and agreed that the payments made in accordance with this Agreement are in addition to any other benefits or compensation to which Employee may be entitled or for which he may be eligible, whether funded or unfunded, by reason of his employment with the Company. 20. Tax Withholding. There shall be deducted from the payments under this Agreement the amount of any tax required by any governmental authority to be withheld and paid over by the Company to such governmental authority for the account of Employee. 21. Compensation. Any compensation paid on behalf of Employee under this Agreement shall not be considered "compensation," as the term is defined in The Southern Company Employee Savings Plan, The Southern Company Employee Stock Ownership Plan, The Southern Company Performance Sharing Plan or The Southern Company Pension Plan. The payments under this Agreement shall not be considered wages, salaries or compensation under any other employee benefit plan. 22. No Guarantee of Employment. No provision of this Agreement shall be construed to affect in any manner the existing rights of the Company to suspend, terminate, alter, modify, whether or not for cause, the employment relationship of Employee and the Company. 23. Interpretation. The judicial body interpreting this Agreement shall not more strictly construe the terms of this Agreement against one party, it being agreed that both parties and/or their attorneys or agents have negotiated and participated in the preparation hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, this ___ day of ________________, 2002. "COMPANY" GULF POWER COMPANY By: -------------------- Its: "EMPLOYEE" TRAVIS JACKSON BOWDEN EXHIBIT 1 to Deferred Compensation Agreement with Travis Jackson Bowden RELEASE AGREEMENT THIS RELEASE ("Release") is made and entered into by and between TRAVIS JACKSON BOWDEN ("Employee") and GULF POWER COMPANY, and its successor or assigns ("Company"). WHEREAS, Employee and Company have agreed that Employee's employment with Gulf Power Company shall terminate on June 1, 2002; WHEREAS, Employee and the Company have previously entered into that certain Deferred Compensation Agreement, dated _________________, 2002 ("Agreement"), that this Release is incorporated therein by reference; WHEREAS, Employee and Company desire to delineate their respective rights, duties and obligations attendant to such termination and desire to reach an accord and satisfaction of all claims arising from Employee's employment, and his termination of employment, with appropriate releases, in accordance with the Agreement; WHEREAS, the Company desires to compensate Employee in accordance with the Agreement for service he has or will provide for the Company; NOW, THEREFORE, in consideration of the premises and the agreements of the parties set forth in this Release, and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby covenant and agree as follows: 1. Release. Employee does hereby remise, release and forever discharge the Company and its officers, directors, employees, agents, shareholders, parent corporation and affiliates, and their respective predecessors, successors, assigns, heirs, executors and administrators (collectively, "Releasees"), of and from all manner of actions and causes of action, suits, debts, claims and demands whatsoever at law or in equity, known or unknown, actual or contingent, including, but not limited to, any claims which have been asserted, or could be asserted now or in the future, against any Releasees arising under any and all federal, state or local laws and any common law claims, and including, but not limited to, any claims Employee may have pursuant to the Age Discrimination in Employment Act and any claims to benefits under any and all offer letters, employment or separation agreements, or bonus, severance, workforce reduction, early retirement, out-placement, or other similar plans sponsored by the Company, now or hereafter recognized (collectively, "Claims"), which he ever had or now has or may in the future have, by reason of any matter, cause or thing arising out of his employment relationship and privileges, his serving as an employee of the Company or the separation from his employment relationship or affiliation as an employee of the Company as of the date of this Release against each of the Releasees. Notwithstanding the foregoing, Employee does not release any Claims under the Age Discrimination in Employment Act that may arise after his execution of this Release. 2. No Assignment of Claim. Employee represents that he has not assigned or transferred, or purported to assign or transfer, any Claims or any portion thereof or interest therein to any party prior to the date of this Release. 3. Compensation. In accordance with the Deferred Compensation Agreement, the Company agrees to pay the Employee, his spouse or his estate, as the case may be, the amounts provided in Paragraph 2 of the Agreement. 4. No Admission Of Liability. This Release shall not in any way be construed as an admission by the Company or Employee of any improper actions or liability whatsoever as to one another, and each specifically disclaims any liability to or improper actions against the other or any other person, on the part of itself or himself, its or his employees or agents. 5. Voluntary Execution. Employee warrants, represents and agrees that he has been encouraged in writing to seek advice from anyone of his choosing regarding this Release, including his attorney and accountant or tax advisor prior to his signing it; that this Release represents written notice to do so; that he has been given the opportunity and sufficient time to seek such advice; and that he fully understands the meaning and contents of this Release. He further represents and warrants that he was not coerced, threatened or otherwise forced to sign this Release, and that his signature appearing hereinafter is voluntary and genuine. EMPLOYEE UNDERSTANDS THAT HE MAY TAKE UP TO TWENTY-ONE (21) DAYS TO CONSIDER WHETHER OR NOT HE DESIRES TO ENTER INTO THIS RELEASE. 6. Ability to Revoke Agreement. EMPLOYEE UNDERSTANDS THAT HE MAY REVOKE THIS RELEASE BY NOTIFYING THE COMPANY IN WRITING OF SUCH REVOCATION WITHIN SEVEN (7) DAYS OF HIS EXECUTION OF THIS RELEASE AND THAT THIS RELEASE IS NOT EFFECTIVE UNTIL THE EXPIRATION OF SUCH SEVEN (7) DAY PERIOD. HE UNDERSTANDS THAT UPON THE EXPIRATION OF SUCH SEVEN (7) DAY PERIOD THIS RELEASE WILL BE BINDING UPON HIM AND HIS HEIRS, ADMINISTRATORS, REPRESENTATIVES, EXECUTORS, SUCCESSORS AND ASSIGNS AND WILL BE IRREVOCABLE. Acknowledged and Agreed To: "COMPANY" GULF POWER COMPANY By: -------------------------- Its: -------------------------- I UNDERSTAND THAT BY SIGNING THIS RELEASE, I AM GIVING UP RIGHTS I MAY HAVE. I UNDERSTAND THAT I DO NOT HAVE TO SIGN THIS RELEASE. "EMPLOYEE" TRAVIS JACKSON BOWDEN - ------------------------------------ ----------------------------------- Date_____ WITNESSED BY: - -------------------------------------------- EX-21.A 23 ex21a.txt Exhibit 21(a) Subsidiaries of the Registrant.* Jurisdiction of Name of Company Organization - ------------------------------------------------- --------------- The Southern Company Delaware Southern Company Capital Trust I Delaware Southern Company Capital Trust II Delaware Southern Company Capital Trust IV Delaware Southern Company Capital Trust V Delaware Southern Company Capital Trust VI Delaware Southern Company Capital Trust VII Delaware Southern Company Capital Trust VIII Delaware Southern Company Capital Trust IX Delaware Southern Company Holdings, Inc. Delaware Alabama Power Company Alabama Alabama Power Capital Trust IV Delaware Alabama Power Capital Trust V Delaware Alabama Power Capital Trust VI Delaware Alabama Power Capital Trust VII Delaware Alabama Power Capital Trust VIII Delaware Alabama Property Company Alabama Southern Electric Generating Company Alabama Georgia Power Company Georgia Georgia Power Capital Trust IV Delaware Georgia Power Capital Trust V Delaware Georgia Power Capital Trust VI Delaware Georgia Power Capital Trust VII Delaware Georgia Power Capital Trust VIII Delaware Piedmont-Forrest Corporation Georgia Southern Electric Generating Company Alabama Gulf Power Company Maine Gulf Power Capital Trust I Delaware Gulf Power Capital Trust II Delaware Gulf Power Capital Trust III Delaware Gulf Power Capital Trust IV Delaware Mississippi Power Company Mississippi Mississippi Power Capital Trust II Delaware Mississippi Power Capital Trust III Delaware Savannah Electric and Power Company Georgia Savannah Electric Capital Trust I Delaware Savannah Electric Capital Trust II Delaware Southern Power Company Delaware Southern Company - Florida LLC Delaware - ------------------------------------------------------------------------------ *This information is as of December 31, 2002. In addition, this list omits certain subsidiaries pursuant to paragraph (b)(21)(ii) of Regulation S-K, Item 601. EX-23.A.1 24 ex23a1.txt Deloitte & Touche LLP Exhibit 23(a)1 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 Deloitte & Touche INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 2-78617, 33-54415, 33-58371, 33-60427, 333-31808, 333-44127, 333-44261, 333-73462 and 333-96883 of The Southern Company on Form S-8 and Registration Nos. 33-3546, 33-57951,333-09077, 333-64871, 333-65178 and 333-101349 of The Southern Company on Form S-3, of our reports dated February 17, 2003, appearing in this Annual Report on Form 10-K of The Southern Company for the year ended December 31, 2002. /s/Deloitte & Touche LLP Deloitte & Touche LLP Atlanta, Georgia March 7, 2003 EX-23.A.2 25 ex23a2.txt EXHIBIT 23(a)2 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that at the time a registration statement becomes effective, if it contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. On March 28, 2002, Southern Company's Board of Directors, upon recommendation of its Audit Committee, decided not to engage Arthur Andersen LLP ("Andersen") as the principal public accountants for Southern Company and its subsidiaries. For more information, see the Current Reports on Form 8-K dated March 28, 2002 of Southern Company and each of the operating companies. Southern Company, Alabama Power, Georgia Power, Gulf Power and Mississippi Power have not obtained a reissued audit report from Andersen and have been unable to obtain, after reasonable efforts, Andersen's written consent to incorporate by reference Andersen's audit reports with respect to their financial statements as of and for the fiscal years ended December 31, 2001 and 2000. Under these circumstances, Rule 437a under the Securities Act permits this Annual Report on Form 10-K to be filed without a written consent from Andersen. Because such companies have not been able to obtain Andersen's consent, you will not be able to recover against Andersen under Section 11 of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Andersen or any omissions to state a material fact required to be stated therein. To the extent provided in Section 11(b)(3)(C) of the Securities Act, however, other persons who are liable under Section 11(a) of the Securities Act, including Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's and Mississippi Power's officers and directors, may still rely on Andersen's original audit report as being made by an expert for purposes of establishing a due diligence defense under Section 11(b) of the Securities Act. EX-23.B.1 26 ex23b1.txt Deloitte & Touche LLP Exhibit 23(b)1 Suite 1000 417 North 20th Street Birmingham, Alabama 35203-3289 Deloitte & Touche INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-100721 of Alabama Power Company on Form S-3, of our reports dated February 17, 2003, appearing in this Annual Report on Form 10-K of Alabama Power Company for the year ended December 31, 2002. /s/Deloitte & Touche LLP Deloitte & Touche LLP Birmingham, Alabama March 7, 2003 EX-23.C.1 27 ex23c1.txt Deloitte & Touche LLP Exhibit 23(c)1 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 Deloitte & Touche INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-102839 of Georgia Power Company on Form S-3, of our reports dated February 17, 2003, appearing in this Annual Report on Form 10-K of Georgia Power Company for the year ended December 31, 2002. /s/Deloitte & Touche LLP Deloitte & Touche LLP Atlanta, Georgia March 7, 2003 EX-23.D.1 28 ex23d1.txt Deloitte & Touche LLP Exhibit 23(d)1 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 Deloitte & Touche INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-59942 of Gulf Power Company on Form S-3, of our reports dated February 17, 2003, appearing in this Annual Report on Form 10-K of Gulf Power Company for the year ended December 31, 2002. /s/Deloitte & Touche LLP Deloitte & Touche LLP Atlanta, Georgia March 7, 2003 EX-23.E.1 29 ex23e1.txt Deloitte & Touche LLP Exhibit 23(e)1 191 Peachtree Street, NE Suite 1500 Atlanta, Georgia 30303-1924 Deloitte & Touche INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-45069 of Mississippi Power Company on Form S-3, of our reports dated February 17, 2003, appearing in this Annual Report on Form 10-K of Mississippi Power Company for the year ended December 31, 2002. /s/Deloitte & Touche LLP Deloitte & Touche LLP Atlanta, Georgia March 7, 2003 EX-24.A 30 ex24a.txt Exhibit 24(a) February 17, 2003 Tommy Chisholm, and Wayne Boston Dear Sirs: The Southern Company proposes to file or join in the filing of reports under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission with respect to the following: (1) the filing of this Company's Annual Report on Form 10-K for the year ended December 31, 2002 and (2) the filing of Quarterly Reports on Form 10-Q during 2003 and any Current Reports on Form 8-K. The Southern Company and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K, said Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any necessary or appropriate amendment or amendments to any such reports, to be accompanied in each case by any necessary or appropriate exhibits or schedules thereto. Yours very truly, THE SOUTHERN COMPANY By /s/H. Allen Franklin H. Allen Franklin Chairman of the Board, President and Chief Executive Officer - 2 - /s/Daniel P. Amos /s/Zack T. Pate Daniel P. Amos Zack T. Pate /s/Dorrit J. Bern /s/Gerald J. St. Pe' Dorrit J. Bern Gerald J. St. Pe' /s/Thomas F. Chapman /s/J. Neal Purcell Thomas F. Chapman J. Neal Purcell /s/H. Allen Franklin /s/G. Edison Holland, Jr. H. Allen Franklin G. Edison Holland, Jr. ________________________________ /s/Gale E. Klappa Bruce S. Gordon Gale E. Klappa /s/L. G. Hardman III /s/Tommy Chisholm L. G. Hardman III Tommy Chisholm /s/Donald M. James /s/W. Dean Hudson Donald M. James W. Dean Hudson - 3 - Extract from minutes of meeting of the board of directors of The Southern Company. - - - - - - - - - - RESOLVED: That for the purpose of signing the Company's Annual Report on Form 10-K for the year ended December 31, 2002, 2003 Form 10-Q's and Form 8-K's and any necessary or appropriate amendment or amendments to any such reports, this Company, the members of its board of directors, and its officers, are authorized to give their several powers of attorney to Tommy Chisholm and Wayne Boston. - - - - - - - - - - The undersigned officer of The Southern Company does hereby certify that the foregoing is a true and correct copy of a resolution duly and regularly adopted at a meeting of the board of directors of The Southern Company, duly held on February 17, 2003, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated March 10, 2003 THE SOUTHERN COMPANY By /s/Tommy Chisholm Tommy Chisholm Secretary EX-24.B 31 ex24b.txt Exhibit 24(b) January 24, 2003 Gale E. Klappa Wayne Boston 270 Peachtree Street, N.W. 241 Ralph McGill Blvd. NE Atlanta, Georgia 30303 Atlanta, Georgia 30308-3374 Dear Sirs: Alabama Power Company proposes to file with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, (1) its Annual Report on Form 10-K for the year ended December 31, 2002, and (2) its quarterly reports on Form 10-Q during 2003. Alabama Power Company and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint Gale E. Klappa and Wayne Boston our true and lawful Attorneys for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K, quarterly reports on Form 10-Q, and any appropriate amendment or amendments thereto and any necessary exhibits. Yours very truly, ALABAMA POWER COMPANY By /s/Charles D. McCrary Charles D. McCrary President and Chief Executive Officer - 2 - /s/Whit Armstrong /s/Mayer Mitchell Whit Armstrong Mayer Mitchell /s/David J. Cooper /s/Robert D. Powers David J. Cooper Robert D. Powers /s/H. Allen Franklin ______________________________ H. Allen Franklin Andreas Renschler /s/R. Kent Henslee /s/C. Dowd Ritter R. Kent Henslee C. Dowd Ritter /s/Carl E. Jones, Jr /s/James H. Sanford Carl E. Jones, Jr James H. Sanford /s/Patricia M. King /s/John Cox Webb, IV Patricia M. King John Cox Webb, IV /s/James K. Lowder /s/James W. Wright James K. Lowder James W. Wright /s/Charles D. McCrary /s/William B. Hutchins, III Charles D. McCrary William B. Hutchins, III /s/Wallace D. Malone, Jr. /s/Art P. Beattie Wallace D. Malone, Jr. Art P. Beattie Extract from minutes of meeting of the board of directors of Alabama Power Company. - - - - - - - - - - RESOLVED: That for the purpose of signing and filing with the Securities and Exchange Commission under the Securities Exchange Act of 1934, Alabama Power Company's annual report on Form 10-K for the year ended December 31, 2002, and its 2003 quarterly reports on Form 10-Q, and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, Alabama Power Company, the members of its Board of Directors, and its officers are authorized to give their several powers of attorney to Gale E. Klappa and Wayne Boston, in substantially the form of power of attorney presented to this meeting. - - - - - - - - - - The undersigned officer of Alabama Power Company does hereby certify that the foregoing is a true and correct copy of resolution duly and regularly adopted at a meeting of the board of directors of Alabama Power Company, duly held on January 24, 2003, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated: March 10, 2003 ALABAMA POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary EX-24.C 32 ex24c.txt Exhibit 24(c) February 19, 2003 Allen L. Leverett, Gale Klappa and Wayne Boston Dear Sirs: Georgia Power Company proposes to file or join in the filing of reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission with respect to the following: (1) the filing of its Annual Report on Form 10-K for the year ended December 31, 2002, and (2) the filing of its quarterly reports on Form 10-Q during 2003. Georgia Power Company and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K, quarterly reports on Form 10-Q and any appropriate amendment or amendments thereto and any necessary exhibits. Yours very truly, GEORGIA POWER COMPANY By /s/David M. Ratcliffe David M. Ratcliffe President and Chief Executive Officer - 2 - /s/Juanita P. Baranco /s/William Jerry Vereen Juanita P. Baranco William Jerry Vereen /s/Anna R. Cablik /s/Carl Ware Anna R. Cablik Carl Ware /s/H. Allen Franklin /s/E. Jenner Wood, III H. Allen Franklin E. Jenner Wood, III /s/L. G. Hardman III /s/Allen L. Leverett L. G. Hardman III Allen L. Leverett /s/G. Joseph Prendergast /s/W. Ron Hinson G. Joseph Prendergast W. Ron Hinson /s/David M. Ratcliffe /s/Janice G. Wolfe David M. Ratcliffe Janice G. Wolfe /s/Richard W. Ussery Richard W. Ussery Extract from minutes of meeting of the board of directors of Georgia Power Company. - - - - - - - - - - RESOLVED: That for the purpose of signing reports under the Securities Exchange Act of 1934 to be filed with the Securities and Exchange Commission with respect to (a) the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2002, and (b) quarterly filings on Form 10-Q during 2003; and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company and the members of its Board of Directors authorize their several powers of attorney to Allen L. Leverett, Gale E. Klappa and Wayne Boston. - - - - - - - - - - The undersigned officer of Georgia Power Company does hereby certify that the foregoing is a true and correct copy of resolution duly and regularly adopted at a meeting of the board of directors of Georgia Power Company, duly held on February 19, 2003, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated March 10, 2003 GEORGIA POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary EX-24.D 33 ex24d.txt Exhibit 25(d) February 27, 2003 Mr. Gale E. Klappa Mr. Wayne Boston The Southern Company Southern Company Services, Inc. 270 Peachtree Street, N.W. 241 Ralph McGill Blvd. NE Atlanta GA 30303 Atlanta GA 30308-3374 Dear Sirs: Re: Forms 10-K and 10-Q Gulf Power Company proposes to file or join in the filing of reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission with respect to the following: (1) its Annual Report on Form 10-K for the year ended December 31, 2002, and (2) its 2003 quarterly reports on Form 10-Q. Gulf Power Company and the undersigned Directors and Officers of said Company, individually as a Director and/or as an Officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K, quarterly reports on Form 10-Q and any appropriate amendment or amendments thereto and any necessary exhibits. Sincerely, By /s/Thomas A. Fanning Thomas A. Fanning President and Chief Executive Officer - 2 - /s/C. LeDon Anchors /s/William A. Pullum C. LeDon Anchors William A. Pullum /s/William C. Cramer, Jr. /s/Joseph K. Tannehill, Sr. William C. Cramer, Jr. Joseph K. Tannehill, Sr. /s/Fred C. Donovan, Sr. /s/Ronnie R. Labrato Fred C. Donovan, Sr. Ronnie R. Labrato /s/Thomas A. Fanning /s/Warren E. Tate Thomas A. Fanning Warren E. Tate /s/H. Allen Franklin H. Allen Franklin Extract from minutes of meeting of the board of directors of Gulf Power Company. - - - - - - - - - - RESOLVED, That for the purpose of signing the reports under the Securities Exchange Act of 1934 to be filed with the Securities and Exchange Commission with respect to the filing of this Company's Annual Report on Form 10-K for the year ended December 31, 2002, and its 2003 quarterly reports on Form 10-Q, and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company, the members of its Board of Directors, and its Officers, are authorized to give their several powers of attorney to Gale E. Klappa and Wayne Boston. - - - - - - - - - - The undersigned officer of Gulf Power Company does hereby certify that the foregoing is a true and correct copy of resolution duly and regularly adopted at a meeting of the board of directors of Gulf Power Company, duly held on February 27, 2003, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated March 10, 2003 GULF POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary EX-24.E 34 ex24e.txt Exhibit 24(e) February 26, 2003 Gale E. Klappa and Wayne Boston Dear Sirs: Mississippi Power Company proposes to file or join in the filing of reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission with respect to the following: (1) the filing of its Annual Report on Form 10-K for the year ended December 31, 2002, and (2) the filing of its quarterly reports on Form 10-Q during 2003. Mississippi Power Company and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K, quarterly reports on Form 10-Q and any appropriate amendment or amendments thereto and any necessary exhibits. Yours very truly, MISSISSIPPI POWER COMPANY By /s/Michael D. Garrett Michael D. Garrett President and Chief Executive Officer - 2 - /s/Tommy E. Dulaney /s/Philip J. Terrell Tommy E. Dulaney Philip J. Terrell /s/Michael D. Garrett /s/Gene Warr Michael D. Garrett Gene Warr ____________________________ /s/Michael W. Southern Linda T. Howard Michael W. Southern Robert C. Khayat /s/Frances V. Turnage /s/Robert C. Khayat Frances V. Turnage /s/Aubrey K. Lucas /s/Vicki L. Pierce Aubrey K. Lucas Vicki L. Pierce /s/George A. Schloegel George A. Schloegel Extract from minutes of meeting of the board of directors of Mississippi Power Company. - - - - - - - - - - RESOLVED, That for the purpose of signing the reports under the Securities Exchange Act of 1934 to be filed with the Securities and Exchange Commission with respect to the filing of this Company's Annual Report on Form 10-K for the year ended December 31, 2002, and its 2003 quarterly reports on Form 10-Q, and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company, the members of its Board of Directors, and its Officers, are authorized to give their several powers of attorney to Gale E. Klappa and Wayne Boston. - - - - - - - - - - The undersigned officer of Mississippi Power Company does hereby certify that the foregoing is a true and correct copy of resolution duly and regularly adopted at a meeting of the board of directors of Mississippi Power Company, duly held on February 26, 2003, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated March 10, 2003 MISSISSIPPI POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary EX-24.F 35 ex24f.txt Exhibit 24(f) February 27, 2003 Gale E. Klappa and Wayne Boston Dear Sirs: Savannah Electric and Power Company proposes to file with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, (1) its Annual Report on Form 10-K for the year ended December 31, 2002, and (2) its quarterly reports on Form 10-Q during 2003. Savannah Electric and Power Company and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint Gale E. Klappa and Wayne Boston our true and lawful Attorneys for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K, quarterly reports on Form 10-Q, and any appropriate amendment or amendments thereto and any necessary exhibits. Yours very truly, SAVANNAH ELECTRIC AND POWER COMPANY By /s/Anthony R. James Anthony R. James President and Chief Executive Officer - 2 - /s/Gus H. Bell III /s/Robert B. Miller III Gus H. Bell III Robert B. Miller III /s/Anthony R. James /s/Arnold M. Tenenbaum Anthony R. James Arnold M. Tenenbaum /s/Archie H. Davis /s/K. R. Willis Archie H. Davis K. R. Willis /s/Walter D. Gnann /s/Nancy E. Frankenhauser Walter D. Gnann Nancy E. Frankenhauser Extract from minutes of meeting of the board of directors of Savannah Electric and Power Company. - - - - - - - - - - RESOLVED: That for the purpose of signing reports required to be filed by the Company under the Securities Exchange Act of 1934 to be filed with the Securities and Exchange Commission including (a) the filing of this Company's Annual Report on Form 10-K for the year ended December 31, 2002, and (b) quarterly reports on Form 10-Q during calendar year 2003; and of remedying any deficiencies with respect thereto by appropriate amendment or amendments, this Company and the members of its Board of Directors, and its officers, be and they are hereby authorized to give their several powers of attorney to Gale E. Klappa and Wayne Boston for the purposes set out above. - - - - - - - - - - The undersigned officer of Savannah Electric and Power Company does hereby certify that the foregoing is a true and correct copy of resolution duly and regularly adopted at a meeting of the board of directors of Savannah Electric and Power Company, duly held on February 27, 2002, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated March 10, 2003 SAVANNAH ELECTRIC AND POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary EX-24.G 36 ex24g.txt Exhibit 24(g) February 4, 2003 Tommy Chisholm and Wayne Boston Dear Sirs: Southern Power Company proposes to file or join in the filing of reports under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission with respect to the following: (1) the filing of this Company's Annual Report on Form 10-K for the year ended December 31, 2002 and (2) the filing of Quarterly Reports on Form 10-Q during 2003. Southern Power Company and the undersigned directors and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said Annual Report on Form 10-K and said Quarterly Reports on Form 10-Q and any necessary or appropriate amendment or amendments to any such reports, to be accompanied in each case by any necessary or appropriate exhibits or schedules thereto. Yours very truly, SOUTHERN POWER COMPANY By /s/William Paul Bowers William Paul Bowers President and Chief Executive Officer - 2 - /s/William Paul Bowers /s/Charles D. McCrary William Paul Bowers Charles D. McCrary /s/H. Allen Franklin /s/David M. Ratcliffe H. Allen Franklin David M. Ratcliffe /s/Gale E. Klappa /s/Cliff S. Thrasher Gale E. Klappa Cliff S. Thrasher Extract from minutes of meeting of the board of directors of Southern Power Company. - - - - - - - - - - RESOLVED: That for the purpose of signing the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and 2003 Form 10-Q's and any necessary or appropriate amendment or amendments to any such reports, this Company, the members of its board of directors, and its officers, are authorized to give their several powers of attorney to Tommy Chisholm and Wayne Boston. - - - - - - - - - - The undersigned officer of Southern Power Company does hereby certify that the foregoing is a true and correct copy of a resolution duly and regularly adopted at a meeting of the board of directors of Southern Power Company, duly held on February 4, 2003, at which a quorum was in attendance and voting throughout, and that said resolution has not since been rescinded but is still in full force and effect. Dated: March 10, 2003 SOUTHERN POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----