-----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, NZwO2lfhMy7X1v9jynLexnax0qQCuXX5DCkwU/z3yHCZBTVxrZWF6RsLvZ3Sjbdd WtNTcZUjckNg6bPw2hPVvQ== 0000092122-97-000058.txt : 19971117 0000092122-97-000058.hdr.sgml : 19971117 ACCESSION NUMBER: 0000092122-97-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580690070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03526 FILM NUMBER: 97720671 BUSINESS ADDRESS: STREET 1: 270 PEACHTREE ST CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 7703930650 MAIL ADDRESS: STREET 1: 270 PEACHTREE STREET CITY: ATLANTA STATE: GA ZIP: 30303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA POWER CO CENTRAL INDEX KEY: 0000003153 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 630004250 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03164 FILM NUMBER: 97720672 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052501000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGIA POWER CO CENTRAL INDEX KEY: 0000041091 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580257110 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06468 FILM NUMBER: 97720673 BUSINESS ADDRESS: STREET 1: 333 PIEDMONT AVE NE CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045266526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF POWER CO CENTRAL INDEX KEY: 0000044545 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590276810 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02429 FILM NUMBER: 97720674 BUSINESS ADDRESS: STREET 1: 500 BAYFRONT PKWY CITY: PENSACOLA STATE: FL ZIP: 32501 BUSINESS PHONE: 9044446111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSISSIPPI POWER CO CENTRAL INDEX KEY: 0000066904 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 640205820 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11229 FILM NUMBER: 97720675 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 6018641211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAVANNAH ELECTRIC & POWER CO CENTRAL INDEX KEY: 0000086940 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580418070 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05072 FILM NUMBER: 97720676 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 10-Q 1 THIRD QUARTER 1997 ===============================================================================
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1997 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 (770) 393-0650 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) 333 Piedmont Avenue, N.E. Atlanta, Georgia 30308 (404) 526-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) 500 Bayfront Parkway Pensacola, Florida 32501 (850) 444-6111 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (601) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 ==============================================================================
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No____
Description of Shares Outstanding Registrant Common Stock at October 31, 1997 The Southern Company Par Value $5 Per Share 690,113,512 Alabama Power Company Par Value $40 Per Share 5,608,955 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635 This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Savannah Electric and Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 1997
Page Number DEFINITIONS........................................................................................................ 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) and Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The Southern Company and Subsidiary Companies Condensed Consolidated Statements of Income........................................................ 6 Condensed Consolidated Statements of Cash Flows.................................................... 7 Condensed Consolidated Balance Sheets.............................................................. 8 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 10 Alabama Power Company Condensed Statements of Income..................................................................... 17 Condensed Statements of Cash Flows................................................................. 18 Condensed Balance Sheets........................................................................... 19 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 21 Exhibit 1 - Report of Independent Public Accountants............................................... 25 Georgia Power Company Condensed Statements of Income..................................................................... 27 Condensed Statements of Cash Flows................................................................. 28 Condensed Balance Sheets........................................................................... 29 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 31 Exhibit 1 - Report of Independent Public Accountants............................................... 36 Gulf Power Company Condensed Statements of Income..................................................................... 38 Condensed Statements of Cash Flows................................................................. 39 Condensed Balance Sheets........................................................................... 40 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 42 Mississippi Power Company Condensed Statements of Income..................................................................... 47 Condensed Statements of Cash Flows................................................................. 48 Condensed Balance Sheets........................................................................... 49 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 51 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 56 Condensed Statements of Cash Flows................................................................. 57 Condensed Balance Sheets........................................................................... 58 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 60 Notes to the Condensed Financial Statements........................................................... 63 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 71 Item 2. Changes in Securities..................................................................................... Inapplicable Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders....................................................... Inapplicable Item 5. Other Information......................................................................................... 71 Item 6. Exhibits and Reports on Form 8-K.......................................................................... 72 Signatures ............................................................................................... 73
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DEFINITIONS TERM MEANING affiliates.................................. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH ALABAMA..................................... Alabama Power Company CEPA........................................ Consolidated Electric Power Asia Clean Air Act............................... Clean Air Act Amendments of 1990 ECO Plan.................................... Environmental Compliance Overview Plan Energy Act.................................. Energy Policy Act of 1992 EWG......................................... Exempt wholesale generator FASB........................................ Financial Accounting Standards Board FERC........................................ Federal Energy Regulatory Commission Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended December 31, 1996 FUCO........................................ Foreign utility company GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company MEAG........................................ Municipal Electric Authority of Georgia MISSISSIPPI................................. Mississippi Power Company OPC......................................... Oglethorpe Power Corporation operating affiliates........................ see affiliates operating companies......................... see affiliates PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission SAVANNAH.................................... Savannah Electric and Power Company SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company Southern Energy............................. Southern Energy, Inc. (formerly Southern Electric International, Inc.), including SOUTHERN subsidiaries managed or controlled by Southern Energy SWEB........................................ South Western Electricity plc (United Kingdom) TVA......................................... Tennessee Valley Authority
4 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 OPERATING REVENUES $ 4,071,204 $ 2,932,556 $ 9,372,813 $ 7,925,418 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 694,152 642,408 1,697,158 1,700,439 Purchased power 1,138,447 256,463 2,079,864 766,914 Other (Note H) 480,519 460,975 1,364,054 1,387,718 Maintenance 164,748 169,856 567,593 553,573 Depreciation and amortization 357,564 249,915 936,595 745,751 Amortization of deferred Plant Vogtle costs (Note M) 37,580 34,077 112,791 101,070 Taxes other than income taxes 145,668 162,836 436,635 485,044 Income taxes 332,182 290,600 632,070 661,523 -------------- -------------- -------------- -------------- Total operating expenses 3,350,860 2,267,130 7,826,760 6,402,032 -------------- -------------- -------------- -------------- OPERATING INCOME 720,344 665,426 1,546,053 1,523,386 OTHER INCOME: Allowance for equity funds used during construction 2,649 1,169 4,272 2,213 Interest income 30,027 11,783 78,250 39,590 Other, net (3,678) 18,832 28,921 48,333 Income taxes applicable to other income 14,354 (19,264) 27,402 2,681 United Kingdom Windfall Profit Tax (Note R) (148,062) - (148,062) - -------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 615,634 677,946 1,536,836 1,616,203 -------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 160,891 126,428 478,236 389,774 Allowance for debt funds used during construction (1,840) (4,400) (10,424) (15,189) Interest on notes payable 26,406 30,288 81,834 95,095 Amortization of debt discount, premium and expense, net 9,395 15,560 25,750 36,500 Other interest charges 15,947 12,326 44,815 40,478 Minority interest in subsidiaries (15,454) 3,765 12,888 4,591 Distributions on capital and preferred securities of subsidiary companies 34,572 4,183 84,965 11,823 Preferred dividends of subsidiary companies 11,007 22,356 42,254 65,556 -------------- -------------- -------------- -------------- Interest charges and other, net 240,924 210,506 760,318 628,628 -------------- -------------- -------------- -------------- CONSOLIDATED NET INCOME $ 374,710 $ 467,440 $ 776,518 $ 987,575 ============== ============== ============== ============== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (Thousands) 687,159 673,651 682,924 671,838 EARNINGS PER SHARE OF COMMON STOCK $0.55 $0.69 $1.14 $1.47 CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $0.325 $0.315 $0.975 $0.945 The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: Consolidated net income $ 776,518 $ 987,575 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 1,112,051 913,122 Deferred income taxes and investment tax credits (16,696) 67,694 Allowance for equity funds used during construction (4,272) (2,213) Amortization of deferred Plant Vogtle costs (Note M) 112,791 101,070 Gain on asset sales (16,167) (62,787) Other, net 76,471 39,254 Changes in certain current assets and liabilities-- Receivables, net (420,068) (75,918) Fossil fuel stock 33,942 64,170 Materials and supplies 18,553 22,266 Prepayments (24,433) (29,748) Payables 34,266 (136,168) Customer deposits 2,418 (83,360) Taxes Accrued 478,208 159,459 Other 85,096 (82,096) ---------------- ---------------- Net cash provided from operating activities 2,248,678 1,882,320 ---------------- ---------------- INVESTING ACTIVITIES: Gross property additions (1,220,017) (911,435) Southern Energy business acquisitions (2,812,404) - Sales of property 33,270 209,558 Other (42,086) (98,990) ---------------- ---------------- Net cash used for investing activities (4,041,237) (800,867) ---------------- ---------------- FINANCING ACTIVITIES: Proceeds-- Common stock 270,632 95,873 Capital and preferred securities 1,321,250 322,000 First mortgage bonds - 60,000 Pollution control obligations 339,500 146,100 Other long-term debt 1,827,088 319,148 Retirements-- Preferred stock (428,440) (78,897) First mortgage bonds (112,409) (377,149) Pollution control obligations (289,500) (91,460) Other long-term debt (534,095) (1,116,073) Special deposits-redemption funds (6,877) (61,480) Notes payable, net 316,104 (40,027) Payment of common stock dividends (664,718) (634,553) Miscellaneous (70,453) (16,318) ---------------- ---------------- Net cash provided from (used for) financing activities 1,968,082 (1,472,836) ---------------- ---------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 175,523 (391,383) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 444,832 772,340 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 620,355 $ 380,957 ================ ================ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $674,499 $545,845 Income taxes $427,029 $458,731 Southern Energy business acquisitions-- Fair value of assets acquired $4,795,324 - Less cash paid for common stock 2,812,404 - -------------- -------------- Liabilities assumed $1,982,920 - ============== ============== The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1997 At December 31, (Unaudited) 1996 ----------------- ------------------ UTILITY PLANT: Plant in service $ 33,702,312 $ 33,260,914 Less accumulated provision for depreciation 11,727,455 10,921,242 --------------- ---------------- 21,974,857 22,339,672 Nuclear fuel, at amortized cost 202,134 245,702 Construction work in progress 845,908 683,924 --------------- ---------------- Total 23,022,899 23,269,298 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Goodwill, being amortized 1,886,188 318,142 Leasehold interests 1,818,598 415,600 Equity investments in subsidiaries 1,160,461 227,097 Long-term notes receivable 582,530 - Nuclear decommissioning trusts, at market 365,338 278,938 Miscellaneous 269,313 261,175 --------------- ---------------- Total 6,082,428 1,500,952 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 620,355 444,832 Special deposits 169,472 139,387 Receivables, less accumulated provisions for uncollectible accounts of $78,063 at September 30, 1997 and $31,587 at December 31, 1996 2,064,490 1,363,159 Fossil fuel stock, at average cost 236,604 269,940 Materials and supplies, at average cost 494,834 509,409 Prepayments 294,201 252,977 Vacation pay deferred 75,690 77,195 --------------- ---------------- Total 3,955,646 3,056,899 --------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 1,244,490 1,302,342 Deferred Plant Vogtle costs (Note M) 58,198 170,988 Debt expense, being amortized 101,742 78,042 Premium on reacquired debt, being amortized 284,613 289,019 Miscellaneous 634,204 624,262 --------------- ---------------- Total 2,323,247 2,464,653 --------------- ---------------- TOTAL ASSETS $ 35,384,220 $ 30,291,802 =============== ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1997 At December 31, (Unaudited) 1996 ---------------- ---------------- CAPITALIZATION: Common stock, par value $5 per share- Authorized -- 1 billion shares Outstanding -- September 30, 1997: 689,591,537 shares -- December 31, 1996: 677,035,961 shares $ 3,447,958 $ 3,385,180 Paid-in capital 2,265,204 2,067,228 Retained earnings 3,875,410 3,763,987 ---------------- ---------------- 9,588,572 9,216,395 Preferred stock of subsidiaries 695,702 979,527 Subsidiary obligated mandatorily redeemable capital and preferred securities (Note I) 1,742,020 422,000 Long-term debt 10,055,279 7,935,269 ---------------- ---------------- Total 22,081,573 18,553,191 ---------------- ---------------- CURRENT LIABILITIES: Preferred stock of subsidiaries due within one year 28,913 173,528 Long-term debt due within one year 679,670 191,411 Notes payable 1,871,505 1,482,822 Accounts payable 896,628 787,809 Customer deposits 133,962 131,544 Taxes accrued-- Income taxes 395,708 11,965 Other 315,110 192,921 Interest accrued 191,525 187,152 Vacation pay accrued 104,240 103,514 Miscellaneous 858,090 535,366 ---------------- ---------------- Total 5,475,351 3,798,032 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 4,580,072 4,738,085 Deferred credits related to income taxes 844,343 879,090 Accumulated deferred investment tax credits 764,915 787,545 Employee benefits provisions 488,647 439,176 Minority interests in subsidiaries 394,750 374,922 Prepaid capacity revenues 113,206 122,496 Department of Energy assessments 80,523 80,523 Disallowed Plant Vogtle capacity buyback costs 56,316 57,250 Storm damage reserves 37,852 35,112 Miscellaneous 466,672 426,380 ---------------- ---------------- Total 7,827,296 7,940,579 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $ 35,384,220 $ 30,291,802 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Earnings SOUTHERN's consolidated net income for the third quarter and year-to-date 1997 was $375 million ($0.55 per share) and $777 million ($1.14 per share), respectively, compared to $467 million ($0.69 per share) and $988 million ($1.47 per share) for the corresponding periods of 1996. Earnings decreased 19.8% and 21.4% for the quarter and year-to-date, respectively due to several factors. These factors included a windfall profit tax imposed by the government of the United Kingdom on SWEB and increased depreciation and amortization expenses. The windfall profit tax caused a one-time charge in the third quarter reducing earnings by $111 million or about $0.16 per share, after giving effect to minority interest. SOUTHERN's traditional core business is primarily represented by its five domestic electric utility operating companies, which provide electric service in four Southeastern states. Another significant portion of SOUTHERN's business is its non-traditional business primarily represented by Southern Energy, which owns and manages international and domestic businesses for SOUTHERN. Businesses acquired by Southern Energy have been included in the consolidated statements of income since the date of acquisition. Certain changes in operating revenues and expenses from the prior period are the result of such acquisitions. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Operating revenues............................... $1,138,648 38.8 $1,447,395 18.3 Purchased power expense.......................... 881,984 343.9 1,312,950 171.2 Depreciation and amortization expense............ 107,649 43.1 190,844 25.6 Taxes other than income taxes.................... (17,168) (10.5) (48,409) (10.0) Interest income.................................. 18,244 154.8 38,660 97.7 Income taxes applicable to other income.......... 33,618 (174.5) 24,721 N/M United Kingdom Windfall Profit Tax............... (148,062) N/A (148,062) N/A Interest on long-term debt....................... 34,463 27.3 88,462 22.7 Interest on notes payable........................ (3,882) (12.8) (13,261) (13.9) Minority interest in subsidiaries................ (19,219) N/M 8,297 180.7 Distributions on capital and preferred securities of subsidiary companies............ 30,389 N/M 73,142 N/M Preferred dividends of subsidiary companies..................................... (11,349) (50.8) (23,302) (35.5) N/M - Not meaningful. N/A - Not applicable.
10 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating revenues. Operating revenues for the traditional core business for the third quarter increased $207 million or 8.1% and year-to-date decreased $33 million or 0.5%, compared to the corresponding periods of 1996. Operating revenues for non-traditional business were up $931 million or 260.2% for the quarter and $1.480 billion or 128.5% for year-to-date. The increase in third quarter traditional core revenues was mainly due to a 5.6% increase in energy sales during the quarter. Energy sales to the residential, commercial and industrial sectors increased by 5.7%, 5.4% and 4.1%, respectively. The decrease in year-to-date traditional core revenues was mainly due to the 5.2% decrease in energy sales to residential customers. This decrease in energy sales was a result of milder-than-normal weather experienced throughout the operating companies' service areas. Non-traditional operating revenues increased for the quarter and year-to-date due primarily to increased sales by Southern Energy's energy marketing organization. These revenues were $883 million and $1.313 billion for the current quarter and year-to-date 1997, respectively. Purchased power expense. For the third quarter, purchased power expenses for the traditional core business rose by 35.3% while year-to-date traditional core business purchased power expenses fell by 5.5%. The increase for the quarter was primarily due to increased energy sales to residential, commercial and industrial customers. The decrease year-to-date was primarily due to decreased energy sales to residential customers. For non-traditional business, purchased power expenses rose 466.9% and 225.8% for the quarter and year-to-date 1997. These increases are primarily due to the power purchasing activities of Southern Energy's energy marketing organization. These power purchases rose by $866 million for the quarter and $1.288 billion year-to-date. Depreciation and amortization expense. Depreciation and amortization expense of the traditional core business for the quarter and year-to-date increased compared to the corresponding periods in 1996. These increases can be attributed primarily to additional depreciation charges of $76.7 million and $104.9 million, respectively for the quarter and year-to-date 1997 pursuant to GEORGIA's retail accounting order as discussed in Note (L) in the "Notes to the Condensed Financial Statements" herein. Additions to utility plant further contributed to the increase in depreciation and amortization for the quarter and year-to-date 1997. The acquisition of CEPA is the primary cause for the increases in non-traditional business depreciation and amortization expense for the quarter and year-to-date. These expenses increased by $23.6 million and $63.0 million for the respective periods. Taxes other than income taxes. Taxes other than income taxes decreased for the third quarter and year-to-date 1997 when compared to the same periods of 1996 primarily due to reductions of $17.7 million for the quarter and $51.4 million year-to-date attributable to SWEB. These decreases resulted from the lowering, in November 1996, of the taxes on electricity sales in the United Kingdom from 10% to 3.7%. Interest income. The increase in interest income for the quarter and year-to-date as compared to the corresponding periods of 1996, is due to a $14.2 million increase for the quarter and a $33.4 million increase year-to-date in interest income for the non-traditional business, primarily CEPA. 11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Income taxes applicable to other income. The decreases for the quarter and year-to-date 1997 when compared to the same periods in 1996 is primarily due to increased tax benefits from increased interest expense at the corporate level and to taxes relating to the sale, in July 1996, of a 25% interest in SWEB. United Kingdom Windfall Profit Tax. This item represents 100% of the Windfall Profit Tax applicable to SWEB before giving effect to a 25% minority interest ownership. See Note (R) in the "Notes to the Condensed Financial Statements" herein for further details. Interest on long-term debt. Interest on long-term debt for the quarter and year-to-date 1997 compared to the same periods of 1996, increased primarily due to the CEPA acquisition. Southern Energy's interest on long-term debt increased $43.3 million for the quarter and $92.6 million year-to-date 1997 compared to the corresponding periods in 1996, mainly as a result of that acquisition. Interest on notes payable. The decreases for the quarter and year-to-date when compared to the same periods of 1996, is primarily due to a reduction in the amount of notes payable outstanding for the non-traditional business. Minority interest in subsidiaries. The decrease in minority interest for the quarter results from the recording of the effect of the windfall profit tax. Such tax also affected year-to-date 1997 results; however, its effect was somewhat offset due to minority interests in other consolidated subsidiaries. Distributions on capital and preferred securities of subsidiaries. This increase for the quarter and year-to-date 1997 resulted from the sales of securities in 1996 and the first half of 1997. See Note (I) in the "Notes to the Condensed Financial Statements" herein for additional information. Preferred dividends of subsidiary companies. The decrease in this item for the quarter and year-to-date when compared to the corresponding periods in 1997 is due to redemptions of preferred stock, including redemptions during the first, second and third quarters of 1997. See "Financing Activities" herein for additional information. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment, with non-traditional business becoming more significant. On September 29, 1997, SOUTHERN, through Southern Energy, completed its purchase of 26% of the outstanding common stock of Berliner Kraft und Licht AG (Bewag), the vertically integrated electric utility that serves Berlin, Germany, for approximately $820 million. That investment is accounted for under the equity method. 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In July 1997, Southern Energy entered into an agreement to acquire Hopewell Holdings Limited's (Hopewell) 19.99% share of CEPA. Under this agreement, which closed on August 13, 1997, Southern Energy bought from Hopewell its CEPA shares in exchange for $150 million and CEPA's 80% interest in the Tanjung Jati B Project. The Tanjung Jati B Project is a 1,320 megawatt coal-fired power station under development in Central Java, Indonesia. As a result of the transaction, Southern Energy now owns over 99.9% of CEPA's shares. In August 1997, Southern Energy entered into an agreement with Vastar Resources Inc. (Vastar) providing for the organization of a limited partnership to which the parties are to contribute their gas and power trading and marketing businesses. Southern Energy and Vastar initially acquired indirect ownership interests of 60% and 40%, respectively, of the new entity. In September 1997, Southern Energy contributed its gas marketing operations to the partnership and made a cash payment of $40 million into escrow for Vastar's account. For additional information relating to non-traditional business activities, including information relating to the acquisition of Southern Energy's interest in CEPA, see Item 1 - BUSINESS - "New Business Development" in the Form 10-K. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, SOUTHERN is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of SOUTHERN in the Form 10-K. In July 1997, the United States Environmental Protection Agency ("EPA") published revisions to the ambient air quality standards for ozone and particulate matter, making the standards significantly more stringent. In addition, in October 1997, EPA issued a proposed rule which, if implemented as proposed, would require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the above-described standards and proposed rules would result in increased compliance costs and capital expenditures for the operating companies in amounts that cannot be determined at this time. In February, 1997, the FASB issued Statement No. 128, Earnings Per Share. The standard simplifies the computation of earnings per share (EPS) required by existing rules. SOUTHERN will adopt this standard on December 31, 1997. If EPS amounts were computed as specified by Statement No. 128, basic EPS and diluted EPS would be equal, and would equal the amounts currently reported in the "Condensed Statements of Income." In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity, and its components. SOUTHERN will adopt the standard in 1998. 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131, which supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. SOUTHERN is in the process of evaluating Statement No. 131 and its impact and will adopt the standard by 1998. Reference is made to Notes (B), (C), (D), (G), (J), (K), (L), (M), (N) and (P) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first nine months of 1997 included the addition of approximately $1.2 billion to utility plant and the acquisition of CEPA. The funds for these additions and other capital requirements were from operations and sales of securities. See SOUTHERN's Condensed Statements of Cash Flows for further details. Financing Activities During the first nine months of 1997, retirements of the operating companies' first mortgage bonds totaled $109 million and redemptions of preferred stock totaled $428 million. Subsidiaries of SOUTHERN, ALABAMA, GEORGIA, GULF and MISSISSIPPI have formed statutory business trusts which sold, during the first nine months of 1997, an aggregate of $1.3 billion of trust preferred or capital securities. See Note (I) in the "Notes to the Condensed Financial Statements" herein for further details. During the first nine months of 1997, SOUTHERN raised $271 million from the issuance of new common stock under SOUTHERN's various stock plans. The market price of SOUTHERN's common stock at September 30, 1997 was $22.5625 per share and the book value was $13.90 per share, representing a market-to-book ratio of 162%, compared to $22.625, $13.61 and 166%, respectively, at the end of 1996. The dividend for the third quarter of 1997 was $0.325 per share. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of SOUTHERN under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of the Southern electric system's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturing debt. Approximately $709 million will be required by September 30, 1998, for present sinking fund requirements, redemption of preferred stock and redemptions and maturities of long-term debt. Also, the operating companies plan to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. 14 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital In addition to the financing activities previously described, SOUTHERN may require additional equity capital during the remainder of the year. The amounts and timing of additional equity capital to be raised in 1997, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, each of the operating companies expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1999. See Item 1 BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, the SOUTHERN system had at September 30, 1997, approximately $620 million of cash and cash equivalents and approximately $4,265 million of unused credit arrangements with banks (including $1,160 million of such arrangements under which borrowings may be made only to fund purchase obligations of the operating companies relating to variable rate pollution control bonds). At September 30, 1997, the system companies had outstanding approximately $218 million of short-term notes payable and $1,653 million of commercial paper. Since SOUTHERN's construction program with respect to major generating projects in the traditional core business has been completed, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. See Note (D) in the "Notes to the Condensed Financial Statements" herein for discussion of financial derivative contracts entered into by SOUTHERN. 15 ALABAMA POWER COMPANY 16
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 OPERATING REVENUES: $ 932,313 $ 869,950 $ 2,289,637 $ 2,253,194 Revenues 30,133 43,358 105,666 172,510 Revenues from affiliates ------------ ------------ -------------- -------------- Total operating revenues 962,446 913,308 2,395,303 2,425,704 ------------ ------------ -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 253,645 245,386 660,216 668,034 Purchased power from non-affiliates 25,036 11,795 33,180 31,651 Purchased power from affiliates 25,313 27,502 70,822 67,365 Other 125,618 124,623 367,622 375,808 Maintenance 47,171 62,361 193,668 193,354 Depreciation and amortization 82,346 80,142 247,628 239,859 Taxes other than income taxes 43,161 46,507 138,553 140,244 Federal and state income taxes 110,669 92,469 184,922 193,141 ------------ ------------ -------------- -------------- Total operating expenses 712,959 690,785 1,896,611 1,909,456 ------------ ------------ -------------- -------------- OPERATING INCOME 249,487 222,523 498,692 516,248 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction - 161 - 594 Income from subsidiary 876 944 2,861 2,885 Interest income 7,879 6,521 23,626 21,506 Other, net (5,993) (7,907) (20,642) (30,526) Income taxes applicable to other income 7,033 1,368 7,419 15,463 ------------ ------------ -------------- -------------- INCOME BEFORE INTEREST CHARGES 259,282 223,610 511,956 526,170 ------------ ------------ -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 41,618 42,179 124,846 127,067 Allowance for debt funds used during construction (299) (1,390) (2,679) (5,112) Interest on interim obligations 7,144 5,374 18,016 16,852 Amortization of debt discount, premium and expense, net 2,403 10,165 7,201 19,809 Other interest charges 7,382 6,221 21,345 21,179 Distributions on preferred securities of subsidiary trusts 5,588 1,788 16,174 4,928 ------------ ------------ -------------- -------------- Total Interest charges and other 63,836 64,337 184,903 184,723 ------------ ------------ -------------- -------------- NET INCOME 195,446 159,273 327,053 341,447 DIVIDENDS ON PREFERRED STOCK 3,646 6,684 14,309 19,921 ------------ ------------ -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 191,800 $ 152,589 $ 312,744 $ 321,526 ============ ============ ============== ==============
17
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: Net income $ 327,053 $ 341,447 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 294,436 303,893 Deferred income taxes and investment tax credits, net 1,147 (50) Allowance for equity funds used during construction - (594) Other, net (911) 22,666 Changes in certain current assets and liabilities-- Receivables, net (75,636) (39,366) Inventories 2,439 40,621 Prepayments (37,607) (27,527) Payables (76,033) (71,740) Taxes accrued 114,784 81,314 Energy cost recovery, retail (3,015) 25,186 Other (17,027) (9,764) ------------- ------------- Net cash provided from operating activities 529,630 666,086 -------------- -------------- INVESTING ACTIVITIES: Gross property additions (290,200) (325,313) Other (32,258) (34,838) ------------- ------------- Net cash used for investing activities (322,458) (360,151) -------------- -------------- FINANCING ACTIVITIES: Proceeds-- Company obligated mandatorily redeemable preferred securities 200,000 97,000 Retirements-- Preferred stock (162,000) - First mortgage bonds (19,801) (83,797) Other long-term debt (693) (706) Interim obligations, net 55,083 (58,637) Payment of preferred stock dividends (17,027) (19,945) Payment of common stock dividends (251,800) (228,800) Miscellaneous (6,407) (3,042) ------------- ------------- Net cash used for financing activities (202,645) (297,927) -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 4,527 8,008 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,587 12,616 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,114 $ 20,624 ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 162,897 $ 152,197 Income taxes 97,705 135,370 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
18
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1997 At December 31, (Unaudited) 1996 ---------------- ----------------- UTILITY PLANT: Plant in service $ 10,981,995 $ 10,806,921 Less accumulated provision for depreciation 4,322,467 4,113,622 ---------------- --------------- 6,659,528 6,693,299 Nuclear fuel, at amortized cost 89,597 123,862 Construction work in progress 298,087 256,802 ---------------- --------------- Total 7,047,212 7,073,963 ---------------- --------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 25,093 26,032 Nuclear decommissioning trusts 173,558 148,760 Miscellaneous 21,844 20,243 ---------------- --------------- Total 220,495 195,035 ---------------- --------------- CURRENT ASSETS: Cash and cash equivalents 14,114 9,587 Receivables-- Customer accounts receivable 400,392 334,150 Other accounts and notes receivable 50,128 28,524 Affiliated companies 42,318 47,630 Accumulated provision for uncollectible accounts (2,213) (1,171) Refundable income taxes - 5,856 Fossil fuel stock, at average cost 90,611 81,704 Materials and supplies, at average cost 156,446 167,792 Prepayments 169,477 131,870 Vacation pay deferred 27,083 28,369 ---------------- --------------- Total 948,356 834,311 ---------------- --------------- DEFERRED CHARGES: Deferred charges related to income taxes 407,858 410,010 Debt expense, being amortized 7,399 7,398 Premium on reacquired debt, being amortized 79,245 84,149 Uranium enrichment decontamination and decommissioning fund 37,490 37,490 Miscellaneous 95,940 91,490 ---------------- --------------- Total 627,932 630,537 ---------------- --------------- TOTAL ASSETS $ 8,843,995 $ 8,733,846 ================ =============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 19
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1997 At December 31, (Unaudited) 1996 -------------- ---------------- CAPITALIZATION: Common stock equity-- Common stock (par value $40 per share)-- authorized 6,000,000 shares; outstanding 5,608,955 shares $ 224,358 $ 224,358 Paid-in capital 1,304,645 1,304,645 Premium on preferred stock 99 146 Retained earnings 1,246,219 1,185,128 -------------- -------------- 2,775,321 2,714,277 Preferred stock 278,400 340,400 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes (Note I) 297,000 97,000 Long-term debt 2,219,594 2,354,006 -------------- -------------- Total 5,570,315 5,505,683 -------------- -------------- CURRENT LIABILITIES: Preferred stock due within one year - 100,000 Long-term debt due within one year 130,576 20,753 Commercial paper 419,936 364,853 Accounts payable-- Affiliated companies 65,950 64,307 Other 102,620 182,563 Customer deposits 34,410 32,003 Taxes accrued-- Federal and state income 98,660 35,638 Other 57,259 15,271 Interest accrued 46,645 51,941 Vacation pay accrued 27,083 28,369 Miscellaneous 76,513 96,485 -------------- -------------- Total 1,059,652 992,183 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 1,199,126 1,177,687 Accumulated deferred investment tax credits 285,664 294,071 Prepaid capacity revenues, net 113,206 122,496 Uranium enrichment decontamination and decommissioning fund 33,741 33,741 Deferred credits related to income taxes 352,121 364,792 Natural disaster reserve 21,809 20,757 Miscellaneous 208,361 222,436 -------------- -------------- Total 2,214,028 2,235,980 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 8,843,995 $ 8,733,846 ============== ============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 20
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the third quarter and year-to-date 1997 was $191.8 million and $312.7 million, respectively, compared to $152.6 million and $321.5 million for the corresponding periods of 1996. Earnings increased 25.7% for this quarter due primarily to a rise in energy sales. Year-to-date earnings decreased 2.7% when compared to the corresponding period in 1996 due mainly to milder-than-normal temperatures during the first half of 1997 . Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------- Third Quarter Year-To-Date -------------------------- ----------------------------- (in thousands) % (in thousands) % Revenues............................................. $62,363 7.2 $36,443 1.6 Revenues from affiliates............................. (13,225) (30.5) (66,844) (38.7) Purchased power from non-affiliates.................. 13,241 112.3 1,529 4.8 Maintenance.......................................... (15,190) (24.4) 314 0.2 Income taxes applicable to other income.............. 5,665 414.1 (8,044) (52.0) Amortization of debt discount, premium and expense net................................. (7,762) (76.4) (12,608) (63.6) Distributions on preferred securities of subsidiary trusts................................. 3,800 212.5 11,246 228.2 Dividends on preferred stock......................... (3,038) (45.5) (5,612) (28.2)
Revenues. Excluding fuel revenues, which represent the pass-through of fuel expenses and do not affect net income, revenues for the third quarter increased $28.7 million and decreased for year-to-date 1997 $27.8 million, compared to the corresponding periods of 1996. The increase in third quarter revenues can be attributed primarily to a 6.7% increase in total retail energy sales. The increase in retail energy sales is due primarily to relatively normal weather compared to milder weather in the third quarter of 1996. Energy sales to residential, commercial, and industrial customers were up by 5.8%, 6.3% and 7.7%, respectively for the quarter. The drop in year-to-date revenues resulted primarily from decreases in prices charged to industrial and commercial customers and a decrease in energy sales to residential customers of 5.2%. The decrease in energy sales to residential customers is primarily due to milder-than-normal temperatures during the first half of 1997. Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system will vary from period to period depending on demand, the availability, and cost of generating resources at each company. These transactions did not have a significant impact on earnings. 21 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power from non-affiliates. The increase for the quarter compared to the corresponding period of 1996 resulted primarily from increased purchases in connection with power marketing activities, the majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Maintenance expense. The decrease during the third quarter when compared to the same period in 1996 was due to the reclassification in 1996 of expenses charged to operations and the write-off of obsolete steam generating plant inventory, accompanied by overall cost reduction efforts in 1997. Income taxes applicable to other income. This increase for the quarter when compared to the corresponding period in 1996 is primarily a result of increased tax benefits from losses of the parent company allocated to ALABAMA under the joint consolidated income tax agreement between SOUTHERN and its subsidiaries . The year-to-date decrease in income taxes applicable to other income can be attributed to ALABAMA's donation, in June 1996, of certain nonutility property which resulted in a reduction of income taxes applicable to other income of approximately $10.6 million. Amortization of debt discount, premium and expense, net. The decrease in this item for the current quarter and year-to-date compared to the same periods of 1996 is the result of ALABAMA's reducing the asset account related to premiums incurred in connection with the refinancing of high cost debt by $5.0 million and $8.0 million in February and July 1996, respectively, as allowed by the Alabama PSC. See Note (J) in the "Notes to the Condensed Financial Statements herein for further details. Distributions on preferred securities of subsidiary trusts. The change in this item resulted primarily from the issuance of additional mandatorily redeemable preferred securities. For additional information, see Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Structure" of ALABAMA in the Form 10-K. Dividends on preferred stock. The decrease for the quarter and year-to-date 1997, compared to the corresponding periods of 1996, resulted from redemptions of preferred stock in the first nine months of 1997. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of ALABAMA in the Form 10-K. 22 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In July 1997, the United States Environmental Protection Agency ("EPA") published revisions to the ambient air quality standards for ozone and particulate matter, making the standards significantly more stringent. In addition, in October 1997, EPA issued a proposed rule which, if implemented as proposed, would require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the above-described standards and proposed rules would result in increased compliance costs and capital expenditures for the operating companies in amounts that cannot be determined at this time. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity, and its components. The standard is effective in 1998. It is not expected to affect ALABAMA's financial reporting. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131, which supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. ALABAMA is in the process of evaluating Statement No. 131 and its impact and will adopt the standard by 1998. Reference is made to Notes (B), (C), (G), (H), (J) and (K) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first nine months of 1997 included the addition of approximately $290.2 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities During the first nine months of 1997, redemptions of first mortgage bonds and preferred stock of ALABAMA totaled $181.8 million. Also, Alabama Power Capital Trust II, a statutory business trust established for the purpose of holding ALABAMA's junior subordinated notes and issuing trust preferred securities and common securities, sold $200.0 million of its 7.60% trust originated preferred securities which are guaranteed by ALABAMA. For additional information, see Note (I) in the "Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Structure" of ALABAMA in the Form 10-K. In addition, ALABAMA has announced its plans to redeem an aggregate of approximately $80.0 million of first mortgage bonds in November 1997 and January 1998. ALABAMA will continue to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital, if market conditions permit. 23 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Capital expenditures are estimated to be $463 million for 1997, $615 million for 1998, and $723 million for 1999. The total is $1.8 billion for the three years. Actual capital costs may vary from this estimate because of factors such as changes in business conditions; revised load growth projections; changes in environmental regulations; changes in the existing nuclear plant to meet new regulatory requirements; increasing cost of 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. ALABAMA will replace all six steam generators at Plant Farley at a total cost of approximately $202 million. Additionally, subject to requisite regulatory approval, ALABAMA plans to construct and install new generating capacity and transmission facilities at Plant Barry. The increase in projected capital expenditures for this project is approximately $85 million. Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA under "Capital Requirements," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of ALABAMA's capital requirements for its construction program, maturing debt and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, ALABAMA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, ALABAMA expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1999. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, ALABAMA had at September 30, 1997, approximately $14.1 million of cash and cash equivalents and had unused committed lines of credit of approximately $813.6 million (including $208.2 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds) with regulatory authority for up to $750 million of short-term borrowings. At September 30, 1997, ALABAMA had no outstanding short-term notes payable to banks and $419.9 million of commercial paper. 24 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO ALABAMA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of ALABAMA POWER COMPANY as of September 30, 1997, and the related condensed statements of income and cash flows for the three-month and nine-month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1996 (not presented herein) and, in our report dated February 12, 1997, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1996 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Arthur Andersen LLP Birmingham, Alabama November 7, 1997 25 GEORGIA POWER COMPANY 26
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 OPERATING REVENUES: Revenues $ 1,396,896 $ 1,303,783 $ 3,352,311 $ 3,444,445 Revenues from affiliates 9,736 7,044 28,379 29,367 -------------- -------------- -------------- -------------- Total operating revenues 1,406,632 1,310,827 3,380,690 3,473,812 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 276,814 245,635 657,443 648,320 Purchased power from non-affiliates 54,624 46,563 113,293 124,335 Purchased power from affiliates 45,148 51,592 118,732 174,349 Provision for separation benefits (Note H) 1,641 7,947 4,512 34,821 Other 178,451 171,032 490,337 532,035 Maintenance 71,565 65,014 225,852 217,617 Depreciation and amortization 187,710 108,556 434,537 323,824 Amortization of deferred Plant Vogtle costs (Note M) 37,580 34,077 112,791 101,070 Taxes other than income taxes 55,829 56,725 159,846 163,585 Federal and state income taxes 179,637 184,787 361,037 390,026 -------------- -------------- -------------- -------------- Total operating expenses 1,088,999 971,928 2,678,380 2,709,982 -------------- -------------- -------------- -------------- OPERATING INCOME 317,633 338,899 702,310 763,830 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 2,610 912 3,849 1,167 Equity in earnings of unconsolidated subsidiary 876 944 2,861 2,885 Interest income 3,317 1,002 6,187 3,916 Other, net (8,330) (20,281) (19,180) (29,671) Income taxes applicable to other income 14,739 7,800 18,706 10,326 -------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 330,845 329,276 714,733 752,453 -------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 48,092 51,492 146,904 157,602 Allowance for debt funds used during construction (1,500) (2,724) (7,426) (9,215) Interest on interim obligations 356 3,500 6,794 14,657 Amortization of debt discount, premium and expense, net 3,388 3,597 10,879 11,069 Other interest charges 4,332 3,122 10,316 11,370 Distributions on preferred securities of subsidiary companies 13,601 2,395 33,767 6,895 -------------- -------------- -------------- -------------- Interest charges and other, net 68,269 61,382 201,234 192,378 -------------- -------------- -------------- -------------- NET INCOME 262,576 267,894 513,499 560,075 DIVIDENDS ON PREFERRED STOCK 5,132 12,415 19,510 35,906 -------------- -------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 257,444 $ 255,479 $ 493,989 $ 524,169 ============== ============== ============== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 27
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: Net income $ 513,499 $ 560,075 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 519,380 384,726 Deferred income taxes and investment tax credits, net (35,910) 45,883 Allowance for equity funds used during construction (3,849) (1,167) Amortization of deferred Plant Vogtle costs (Note M) 112,791 101,070 Other, net 55,703 42,855 Changes in certain current assets and liabilities-- Receivables, net (62,023) (55,008) Inventories 27,651 27,632 Payables (29,752) (58,218) Taxes accrued 159,873 125,462 Energy cost recovery, retail (11,887) (9,416) Other (41,386) (15,161) -------------- -------------- Net cash provided from operating activities 1,204,090 1,148,733 -------------- -------------- INVESTING ACTIVITIES: Gross property additions (327,768) (328,219) Other (20,831) (49,167) -------------- -------------- Net cash used for investing activities (348,599) (377,386) -------------- -------------- FINANCING ACTIVITIES: Proceeds-- Preferred securities 364,250 225,000 Pollution control bonds 284,700 112,825 First mortgage bonds - 10,000 Retirements-- Preferred stock (191,940) (78,897) Pollution control bonds (234,700) (58,185) First mortgage bonds (60,258) (210,860) Special deposits - redemption funds (5,546) (61,480) Interim obligations, net (430,496) (298,117) Payment of preferred stock dividends (21,665) (35,705) Payment of common stock dividends (385,500) (365,700) Miscellaneous (18,815) (8,409) -------------- -------------- Net cash used for financing activities (699,970) (769,528) -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 155,521 1,819 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,356 28,930 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 170,877 $ 30,749 ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 204,091 $ 199,603 Income taxes (net of refunds) 264,593 261,270 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 28
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1997 At December 31, (Unaudited) 1996 ---------------- ----------------- UTILITY PLANT: Plant in service $ 14,982,122 $ 14,769,573 Less accumulated provision for depreciation 5,219,574 4,793,638 ---------------- ---------------- 9,762,548 9,975,935 Nuclear fuel, at amortized cost 112,537 121,840 Construction work in progress 256,423 256,141 ---------------- ---------------- Total 10,131,508 10,353,916 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 25,093 26,032 Nuclear decommissioning trusts, at market 191,780 130,178 Miscellaneous 87,210 103,787 ---------------- ---------------- Total 304,083 259,997 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 170,877 15,356 Receivables-- Customer accounts receivable 495,687 392,328 Other accounts and notes receivable 117,572 159,499 Affiliated companies 14,717 20,095 Accumulated provision for uncollectible accounts (3,000) (4,000) Fossil fuel stock, at average cost 95,164 117,382 Materials and supplies, at average cost 253,387 258,820 Prepayments 91,199 109,771 Vacation pay deferred 39,746 39,965 ---------------- ---------------- Total 1,275,349 1,109,216 ---------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 763,247 818,418 Deferred Plant Vogtle costs (Note M) 58,198 170,988 Premium on reacquired debt, being amortized 167,354 166,670 Debt expense, being amortized 41,235 32,693 Miscellaneous 151,516 159,153 ---------------- ---------------- Total 1,181,550 1,347,922 ---------------- ---------------- TOTAL ASSETS $ 12,892,490 $ 13,071,051 ================ ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 29
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1997 At December 31, (Unaudited) 1996 ---------------- ----------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized 15,000,000 shares; outstanding 7,761,500 shares $ 344,250 $ 344,250 Paid-in capital 2,134,971 2,134,886 Premium on preferred stock 371 371 Retained earnings 1,783,246 1,674,774 ---------------- ---------------- 4,262,838 4,154,281 Preferred stock 292,786 464,611 Company obligated mandatorily redeemable preferred securities of subsidiaries substantially all of whose assets are junior subordinated debentures or notes (Note I) 689,250 325,000 Long-term debt 3,102,481 3,200,419 ---------------- ---------------- Total 8,347,355 8,144,311 ---------------- ---------------- CURRENT LIABILITIES: Preferred stock due within one year 28,913 49,028 Long-term debt due within one year 150,388 60,622 Notes payable to banks - 207,300 Commercial paper - 223,196 Accounts payable-- Affiliated companies 74,009 66,821 Other 206,952 263,093 Customer deposits 68,320 64,901 Taxes accrued-- Federal and state income 129,145 15,497 Other 146,886 100,661 Interest accrued 66,200 79,936 Vacation pay accrued 31,666 38,597 Miscellaneous 97,900 114,530 ---------------- ---------------- Total 1,000,379 1,284,182 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 2,415,183 2,522,945 Accumulated deferred investment tax credits 404,413 415,477 Deferred credits related to income taxes 363,810 382,381 Employee benefits provisions 184,873 186,319 Disallowed Plant Vogtle capacity buyback costs 56,316 57,250 Miscellaneous 120,161 78,186 ---------------- ---------------- Total 3,544,756 3,642,558 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $ 12,892,490 $ 13,071,051 ================ ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 30
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the third quarter and year-to-date 1997 was $257.4 million and $494.0 million, respectively, compared to $255.5 million and $524.2 million for the corresponding periods in 1996. Earnings for this quarter increased slightly above the same period in 1996 while year-to-date earnings decreased 5.8% compared to the same period in 1996. This year-to-date earnings decrease resulted primarily from lower revenues due to milder-than-normal weather and additional depreciation charges pursuant to a Georgia PSC retail accounting order discussed below. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ------------------------------------------------------- Third Quarter Year-To-Date -------------------------- ---------------------------- (in thousands) % (in thousands) % Revenues............................................. $93,113 7.1 $(92,134) (2.7) Revenues from affiliates............................. 2,692 38.2 (988) (3.4) Fuel expense......................................... 31,179 12.7 9,123 1.4 Purchased power from non-affiliates.................. 8,061 17.3 (11,042) (8.9) Purchased power from affiliates...................... (6,444) (12.5) (55,617) (31.9) Maintenance expense.................................. 6,551 10.1 8,235 3.8 Depreciation and amortization expense................ 79,154 72.9 110,713 34.2 Other, net........................................... (11,951) (58.9) (10,491) (35.4) Income taxes applicable to other income.............. 6,939 89.0 8,380 81.2 Distributions on preferred securities of subsidiary companies........................... 11,206 467.9 26,872 389.7 Dividends on preferred stock......................... (7,283) (58.7) (16,396) (45.7)
Revenues. Excluding fuel revenues, which represent the pass-through of fuel expenses and do not affect income, revenues for the third quarter of 1997 increased $62.4 million and for year-to-date 1997 decreased $45.7 million, compared to the corresponding periods of 1996. Retail revenues, excluding fuel revenues, increased 6.8%, or $63.7 million for the current quarter and decreased 1.7%, or $40.9 million year-to-date as compared to the corresponding periods of 1996. The increase in third quarter retail revenues was primarily due to increased energy sales to residential, commercial and industrial customers of 5.5%, 4.6% and 1.3%, respectively. The decrease in year-to-date retail revenues can be attributed to lower energy sales in the residential sector as well as industrial customers taking advantage of load management rates. Year-to-date sales to residential customers dropped 5.7% while sales to commercial and industrial customers increased slightly by 0.5% and 1.5%, respectively. The year-to-date decrease in residential sales is a result of the milder-than-normal temperatures experienced during 1997. 31 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. The increase for the current quarter is primarily due to increased generation resulting from higher energy sales. Purchased power from non-affiliates. The current quarter increase in purchased power from non-affiliates is primarily due to an increase in energy purchases in connection with power marketing activities, the majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Maintenance expense. The increase in the current quarter from the corresponding period of 1996 is primarily due to an increase in transmission and distribution line maintenance. Depreciation and amortization expense. The increase in depreciation and amortization for the current quarter and year-to-date compared to the same period of 1996 is primarily due to additional depreciation charges of $76.7 million and $104.9 million, respectively, pursuant to a Georgia PSC retail accounting order discussed below. See "Future Earnings Potential" below and Note (L) in the "Notes to the Condensed Financial Statements" herein for further details. Other, net. The decrease for the current quarter and year-to-date is primarily the result of expenses incurred in connection with activities related to the 1996 Summer Olympic games. Income taxes applicable to other income. The change for the current quarter and year-to-date is primarily the result of increased tax benefits from losses of the parent company allocated to GEORGIA under the joint consolidated income tax agreement between SOUTHERN and its subsidiaries. Distributions on preferred securities of subsidiary companies. The increase in this item resulted primarily from the issuance of additional mandatorily redeemable preferred securities in August 1996, January 1997 and June 1997. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activities" of GEORGIA in the Form 10-K, and Note (I) in the "Notes to the Condensed Financial Statements" herein. Dividends on preferred stock. The decrease in dividends on preferred stock for the current quarter and year-to-date results from the redemption of various issues of such securities. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including regulatory matters and energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. 32 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Effective January 1, 1996, GEORGIA began operating under a three-year retail accounting order. Under the order, GEORGIA's earnings are evaluated against a retail return on common equity range of 10% to 12.5%. GEORGIA is required to absorb cost increases of approximately $29.0 million annually during the order's three-year operation, including $14.0 million annually of accelerated depreciation of electric plant. Reference is made to Note (L) in the "Notes to the Condensed Financial Statements" herein for additional information. The staff of the Georgia PSC has issued a report regarding its prudence review of the Rocky Mountain pumped storage hydroelectric plant. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Issues" of GEORGIA in the Form 10-K. In July 1997, the United States Environmental Protection Agency ("EPA") published revisions to the ambient air quality standards for ozone and particulate matter, making the standards significantly more stringent. In addition, in October 1997, EPA issued a proposed rule which, if implemented as proposed, would require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the above-described standards and proposed rules would result in increased compliance costs and capital expenditures for the operating companies in amounts that cannot be determined at this time. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity, and its components. The standard is effective in 1998. It is not expected to affect GEORGIA's financial reporting. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131, which supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. GEORGIA is in the process of evaluating Statement No. 131 and its impact and will adopt the standard by 1998. Reference is made to Notes (B), (C), (G) and (L) through (P) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first nine months of 1997 was the addition of approximately $327.8 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See GEORGIA's Condensed Statements of Cash Flows for further details. 33 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities During the first nine months of 1997, maturities and redemptions of first mortgage bonds and preferred stock by GEORGIA totaled $252.2 million. In January 1997, Georgia Power Capital Trust II, a statutory business trust established for the purpose of holding GEORGIA's junior subordinated notes and issuing trust preferred securities and common securities, sold $175.0 million of its 7.60% trust preferred securities, which are guaranteed by GEORGIA. (See Note (I) in the " Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activities" of GEORGIA in the Form 10-K for further details.) In April 1997, GEORGIA sold, through public authorities, $90.0 million of variable rate pollution control revenue bonds due 2032. The proceeds were applied to the redemption on July 1, 1997 of $90.0 million outstanding principal amount of 8.375% pollution control revenue bonds. In June 1997, Georgia Power Capital Trust III , a statutory business trust established for the purpose of holding GEORGIA's junior subordinated notes and issuing trust preferred securities and common securities, sold $189.3 million of its 7.75% quarterly income preferred securities, which are guaranteed by GEORGIA. (See Note (I) in the " Notes to the Condensed Financial Statements" for further details.) In September 1997, GEORGIA sold, through public authorities, $194.7 million of variable rate pollution control revenue bonds with $144.7 million due in 2029 and $50.0 million due in 2034. The proceeds were used to redeem $105.9 million aggregate principal amount of 6.20% pollution control revenue bonds and $38.8 million aggregate principal amount of 5.70% pollution control revenue bonds in September 1997. The remaining proceeds will be used to redeem $50.0 million aggregate principal amount of 9 3/8% pollution control revenue bonds in December 1997. GEORGIA has announced the planned redemption of $28.9 million of preferred stock in December 1997. GEORGIA plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, GEORGIA expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1999. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 34 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, GEORGIA had at September 30, 1997, approximately $170.9 million of cash and cash equivalents and approximately $1,143.9 million of unused credit arrangements with banks (including $878.9 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At September 30, 1997, GEORGIA had no outstanding short-term notes payable to banks or commercial paper. Since GEORGIA has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 35 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO GEORGIA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of GEORGIA POWER COMPANY (a Georgia corporation) as of September 30, 1997, and the related condensed statements of income and cash flows for the three-month and nine-month periods ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1996 (not presented herein), and, in our report dated February 12, 1997, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1996, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Arthur Andersen LLP Atlanta, Georgia November 7, 1997 36 GULF POWER COMPANY 37
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 OPERATING REVENUES: Revenues $ 187,841 $ 173,993 $ 467,488 $ 477,986 Revenues from affiliates 5,869 5,626 12,888 10,375 ------------- ------------- ------------ ------------ Total operating revenues 193,710 179,619 480,376 488,361 ------------- ------------- ------------ ------------ OPERATING EXPENSES: Operation-- Fuel 60,938 56,105 138,712 140,240 Purchased power from non-affiliates 6,908 2,941 9,697 6,804 Purchased power from affiliates 4,482 6,835 19,381 32,177 Other 31,414 28,324 93,241 83,062 Maintenance 9,731 8,998 32,532 38,360 Depreciation and amortization 14,470 14,199 43,362 42,373 Taxes other than income taxes 14,736 14,527 39,775 40,377 Federal and state income taxes 16,281 15,122 29,561 30,634 ------------- ------------- ------------ ------------ Total operating expenses 158,960 147,051 406,261 414,027 ------------- ------------- ------------ ------------ OPERATING INCOME 34,750 32,568 74,115 74,334 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction - 1 2 12 Interest income 387 376 895 1,142 Other, net (81) (294) (274) (1,041) Income taxes applicable to other income 979 (74) 758 (167) ------------- ------------- ------------ ------------ INCOME BEFORE INTEREST CHARGES 36,035 32,577 75,496 74,280 ------------- ------------- ------------ ------------ INTEREST CHARGES AND OTHER: Interest on long-term debt 5,691 5,880 16,978 18,264 Other interest charges 438 288 1,960 793 Interest on notes payable 242 716 764 1,845 Amortization of debt discount, premium, and expense, net 592 524 1,728 1,567 Allowance for debt funds used during construction - (3) (6) (61) Distributions on preferred securities of subsidiary trust 763 - 2,042 - ------------- ------------- ------------ ------------ Interest charges and other, net 7,726 7,405 23,466 22,408 ------------- ------------- ------------ ------------ NET INCOME 28,309 25,172 52,030 51,872 DIVIDENDS ON PREFERRED STOCK 825 1,451 3,420 4,312 ------------- ------------- ------------ ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 27,484 $ 23,721 $ 48,610 $ 47,560 ============= ============= ============ ============ The accompanying notes as they relate to GULF are an integral part of these condensed statements. 38
GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: Net income $ 52,030 $ 51,872 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 54,642 56,903 Deferred income taxes (3,573) 559 Allowance for equity funds used during construction (2) (12) Deferred costs of 1995 coal contract renegotiation 1,246 7,172 Other, net 3,522 5,841 Changes in certain current assets and liabilities-- Receivables, net (7,590) (7,868) Inventories 8,610 14,132 Payables 1,531 (9,553) Taxes accrued 23,368 16,987 Current costs of 1995 coal contract renegotiation 10,529 (5,157) Other (5,043) (3,000) ------------- ----------- Net cash provided from operating activities 139,270 127,876 -------------- ------------ INVESTING ACTIVITIES: Gross property additions (31,968) (49,747) Other (1,709) (3,533) ------------- ----------- Net cash used for investing activities (33,677) (53,280) -------------- ------------ FINANCING ACTIVITIES: Proceeds-- Preferred securities 40,000 - First mortgage bonds - 30,000 Pollution control bonds 40,930 33,275 Other long-term debt 20,000 22,148 Retirements-- Preferred stock (39,500) - First mortgage bonds (25,000) (1,750) Pollution control bonds (40,930) (33,275) Other long-term debt (13,482) (32,588) Notes payable, net (25,000) (43,000) Payment of preferred stock dividends (4,148) (4,312) Payment of common stock dividends (50,500) (37,100) Miscellaneous (3,413) (1,852) ------------- ----------- Net cash used for financing activities (101,043) (68,454) -------------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 4,550 6,142 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 807 680 -------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,357 $ 6,822 ============== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 17,572 $ 19,269 Income taxes 17,644 20,846 The accompanying notes as they relate to GULF are an integral part of these condensed statements. 39
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1997 At December 31, (Unaudited) 1996 -------------- ---------------- UTILITY PLANT: Plant in service $ 1,748,011 $ 1,734,510 Less accumulated provision for depreciation 728,541 694,245 -------------- -------------- 1,019,470 1,040,265 Construction work in progress 30,296 23,465 -------------- -------------- Total 1,049,766 1,063,730 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 623 652 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 5,357 807 Receivables-- Customer accounts receivable 74,833 67,727 Other accounts and notes receivable 2,831 3,098 Affiliated companies 2,483 1,821 Accumulated provision for uncollectible accounts (700) (789) Fossil fuel stock, at average cost 20,204 28,352 Materials and supplies, at average cost 29,790 30,252 Current portion of deferred coal contract costs 4,982 16,389 Regulatory clauses under recovery 3,046 4,144 Prepaid income taxes - 353 Other prepayments 11,045 8,833 Vacation pay deferred 4,055 4,055 -------------- -------------- Total 157,926 165,042 -------------- -------------- DEFERRED CHARGES: Deferred charges related to income taxes 28,038 28,313 Debt expense and loss, being amortized 23,350 23,308 Deferred coal contract costs 4,521 13,126 Deferred storm charges 895 3,275 Miscellaneous 11,683 10,920 -------------- -------------- Total 68,487 78,942 -------------- -------------- TOTAL ASSETS $ 1,276,802 $ 1,308,366 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. 40
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1997 At December 31, (Unaudited) 1996 -------------- ---------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized and outstanding--992,717 shares $ 38,060 $ 38,060 Paid-in capital 218,438 218,438 Premium on preferred stock 44 81 Retained earnings 187,325 179,179 -------------- -------------- 443,867 435,758 Preferred stock 50,102 65,102 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes (Note I) 40,000 - Long-term debt 296,911 331,880 -------------- -------------- Total 830,880 832,740 -------------- -------------- CURRENT LIABILITIES: Preferred stock due within one year - 24,500 Long-term debt due within one year 55,817 40,972 Notes payable - 25,000 Accounts payable-- Affiliated companies 11,712 10,274 Other 21,648 22,496 Customer deposits 13,825 13,464 Taxes accrued-- Federal and state income 12,308 - Other 16,976 8,342 Interest accrued 6,767 7,629 Regulatory clauses over recovery 4,617 5,884 Vacation pay accrued 4,055 4,055 Dividends declared 725 11,453 Miscellaneous 2,629 5,668 -------------- -------------- Total 151,079 179,737 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 164,913 163,857 Deferred credits related to income taxes 61,524 64,354 Accumulated deferred investment tax credits 32,104 33,760 Accumulated provision for postretirement benefits 20,022 18,339 Miscellaneous 16,280 15,579 -------------- -------------- Total 294,843 295,889 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,276,802 $ 1,308,366 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. 41
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the third quarter and year-to-date 1997 was $27.5 million and $48.6 million, respectively, compared to $23.7 million and $47.6 million for the corresponding periods of 1996. Earnings for the quarter and year-to-date 1997 compared to the same periods in 1996 increased 15.9% and 2.2%, respectively. The increase for the current quarter was due primarily to increased energy sales. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ---------------------------------------------------------- Third Quarter Year-To-Date ------------------------------ --------------------------- (in thousands) % (in thousands) % Revenues......................................... $13,848 8.0 $(10,498) (2.2) Revenues from affiliates......................... 243 4.3 2,513 24.2 Fuel expense..................................... 4,833 8.6 (1,528) (1.1) Purchased power from non-affiliates.............. 3,967 134.9 2,893 42.5 Purchased power from affiliates.................. (2,353) (34.4) (12,796) (39.8) Other operation expense.......................... 3,090 10.9 10,179 12.3 Maintenance expense.............................. 733 8.1 (5,828) (15.2) Income taxes applicable to other income.......... 1,053 N/M 925 N/M Distributions on preferred securities of subsidiary trust............................. 763 N/A 2,042 N/A Dividends on preferred stock..................... (626) (43.1) (892) (20.7) N/A - Not applicable N/M - Not meaningful
Revenues. Excluding fuel and other revenues which represent the pass-through of fuel expense and certain other expenses and do not affect net income, revenues increased $6.3 million or 6.2% for the third quarter and decreased $3.5 million or 1.3% year-to-date 1997, compared to the corresponding periods of 1996. Retail revenues rose 4.9% for the current quarter primarily due to an increase in retail sales as a result of warmer weather during the third quarter; however, retail revenues fell 1.6% year-to-date primarily due to a decrease in energy sales to residential customers reflecting the impact of milder-than-normal temperatures during the first half of 1997. Energy sales to industrial customers increased 7.2% and 4.6% for the quarter and year-to-date, respectively; however, revenues from this sector increased by only 2.0% for the quarter and decreased by 0.3% year-to-date 1997. The disparity between industrial energy sales and industrial revenues is primarily due to increased participation in the Real-Time-Pricing program. See Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K for information on initiatives to remain competitive and to meet conservation goals set by the Florida PSC. 42 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from affiliates and Purchased power from affiliates. The year-to-date decrease in purchased power from affiliates compared to the corresponding period in 1996 can be attributed to maintenance outages at Plant Crist and Plant Daniel during the first half of 1996. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. The current quarter increase in fuel expense is due to increased generation as a result of warmer weather and increased energy sales during the third quarter. Purchased power from non-affiliates. The increases in purchased power from non-affiliates can primarily be attributed to an increase in energy purchases due to increased power marketing activities, the majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Other operation expense. The current quarter and year-to-date increases were primarily due to an increase in amortization costs related to the buyout and renegotiation of a coal supply contract. Maintenance expense. The increase in maintenance expense for the third quarter is primarily due to routine maintenance, while the year-to-date decrease is primarily attributed to the scheduled maintenance on production facilities which occurred in the first half of 1996 at Plant Crist and Plant Daniel. Income taxes applicable to other income. The change for the third quarter and year-to-date when compared to the corresponding periods of 1996 is primarily due to increased tax benefits from losses of the parent company allocated to GULF under the joint consolidated income tax agreement between SOUTHERN and its subsidiaries. Distributions on preferred securities of subsidiary trust. See "Financing Activities" herein for details relating to the January 1997 issuance by Gulf Power Capital Trust I of its 7.625% trust preferred securities. Dividends on preferred stock. Current quarter and year-to-date preferred stock dividends decreased when compared to the same periods in 1996 due to redemptions of preferred stock in March and August of 1997. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a potentially less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs are not fully recovered through GULF's Environmental Cost Recovery Clause. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of GULF in the Form 10-K. 43 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In July 1997, the United States Environmental Protection Agency ("EPA") published revisions to the ambient air quality standards for ozone and particulate matter, making the standards significantly more stringent. In addition, in October 1997, EPA issued a proposed rule which, if implemented as proposed, would require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the above-described standards and proposed rules would result in increased compliance costs and capital expenditures for the operating companies in amounts that cannot be determined at this time. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity, and its components. The standard is effective in 1998. It is not expected to affect GULF's financial reporting. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131, which supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. GULF is in the process of evaluating Statement No. 131 and its impact and will adopt the standard by 1998. Reference is made to Notes (B) and (G) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first nine months of 1997 included the addition of approximately $32.0 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See GULF's Condensed Statements of Cash Flows for further details. Financing Activities During the first quarter of 1997, Gulf Power Capital Trust I, a statutory business trust established for the purpose of holding GULF's junior subordinated notes and issuing trust preferred securities and common securities, sold $40 million of its 7.625% trust preferred securities which are guaranteed by GULF. For additional information, see Note (I) in the "Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Sources of Capital" of GULF in the Form 10-K. A portion of these proceeds was used to redeem $5 million of 7.88% cumulative preferred stock, $5 million of 7.52% cumulative preferred stock and $14.5 million of 7.00% cumulative preferred stock during the first quarter of 1997 and $15 million of 7.30% cumulative preferred stock in August 1997. On July 1, 1997, GULF sold, through public authorities, $40.93 million of variable rate pollution control revenue refunding bonds due July 1, 2022. The proceeds were used to redeem $32 million aggregate principal amount of 8.25% pollution control revenue refunding bonds; $5 million aggregate principal amount of 6.75% pollution control revenue refunding bonds; and $3.93 million aggregate principal amount of 6.75% pollution control revenue refunding bonds. 44 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Also, on August 1, 1997, GULF sold $20 million of Series B 7.50% Junior Subordinated Notes due June 30, 2037. The proceeds were used to pay a portion of the scheduled maturity of $25 million of 5.875% first mortgage bonds that were due on August 1, 1997. GULF plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of GULF's capital requirements for its construction program, environmental compliance efforts and maturing debt. GULF's capital requirements for its construction program for 1997 through 1999 were increased in October 1997 by $43 million primarily due to production project costs at Plant Daniel and additional costs related to a new company-owned cogeneration facility being built at an industrial customer's site. GULF's gross property additions, including those amounts related to environmental compliance, are now budgeted at $185 million for 1997 through 1999 ($55 million in 1997, $68 million in 1998, and $62 million in 1999). Approximately $55.8 million will be required through September 30, 1998, for maturities of long-term debt. Sources of Capital In addition to the financing activities previously described herein, GULF plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, GULF expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1999. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GULF had at September 30, 1997, approximately $5.4 million of cash and cash equivalents and $103.4 million of unused committed lines of credit with banks (including $61.9 million liquidity support for variable rate pollution control bonds). At September 30, 1997, GULF had no outstanding short-term notes payable to banks. Since GULF has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 45 MISSISSIPPI POWER COMPANY 46
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 OPERATING REVENUES: Revenues $ 163,622 $ 148,125 $ 408,761 $ 403,425 Revenues from affiliates 8,252 8,478 8,931 16,881 ------------ ------------ ------------- ------------ Total operating revenues 171,874 156,603 417,692 420,306 ------------ ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 49,858 40,029 109,888 106,506 Purchased power from non-affiliates 10,721 11,075 12,919 17,011 Purchased power from affiliates 5,295 5,840 26,438 26,359 Other 27,241 25,686 71,912 76,958 Maintenance 10,423 10,278 32,427 35,116 Depreciation and amortization 11,417 11,559 34,010 34,912 Taxes other than income taxes 11,736 11,082 33,916 32,532 Federal and state income taxes 14,742 13,384 29,269 27,477 ------------ ------------ ------------- ------------ Total operating expenses 141,433 128,933 350,779 356,871 ------------ ------------ ------------- ------------ OPERATING INCOME 30,441 27,670 66,913 63,435 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 11 29 22 153 Interest income 182 23 544 201 Other, net 955 787 2,575 3,519 Income taxes applicable to other income 615 40 (157) (983) ------------ ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 32,204 28,549 69,897 66,325 ------------ ------------ ------------- ------------ INTEREST CHARGES AND OTHER: Interest on long-term debt 4,968 4,691 14,857 15,119 Allowance for debt funds used during construction (22) (225) (45) (541) Interest on notes payable 40 488 96 1,339 Amortization of debt discount, premium, and expense, net 408 390 1,182 1,159 Other interest charges 125 196 439 696 Distributions on preferred securities of subsidiary trust 699 - 1,670 - ------------ ------------ ------------- ------------ Interest charges and other, net 6,218 5,540 18,199 17,772 ------------ ------------ ------------- ------------ NET INCOME 25,986 23,009 51,698 48,553 DIVIDENDS ON PREFERRED STOCK 823 1,225 3,272 3,674 ------------ ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 25,163 $ 21,784 $ 48,426 $ 44,879 ============ ============ ============= ============ The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 47
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: Net income $ 51,698 $ 48,553 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 37,082 39,372 Deferred income taxes 1,042 (2,757) Allowance for equity funds used during construction (22) (153) Other, net 249 113 Changes in certain current assets and liabilities-- Receivables, net (10,340) 1,751 Inventories 2,044 4,765 Payables (7,213) (1,489) Taxes accrued 5,675 2,834 Other 309 327 ------------ ------------ Net cash provided from operating activities 80,524 93,316 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (38,509) (43,879) Other (144) (2,765) ------------ ------------ Net cash used for investing activities (38,653) (46,644) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- Capital contribution - 27 Preferred securities 35,000 - Other long-term debt - 30,000 Retirements-- Preferred stock (35,000) - First mortgage bonds - (45,447) Other long-term debt - (20,000) Notes payable, net - 16,500 Payment of preferred stock dividends (3,272) (3,674) Payment of common stock dividends (35,600) (31,900) Miscellaneous (1,283) (2,932) ------------ ------------ Net cash used for financing activities (40,155) (57,426) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 1,716 (10,754) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,058 12,641 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,774 $ 1,887 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 2,864 $ 16,715 Income taxes 16,310 22,240 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 48
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1997 At December 31, (Unaudited) 1996 -------------- ---------------- UTILITY PLANT: Plant in service, at original cost $ 1,504,021 $ 1,483,875 Less accumulated provision for depreciation 556,110 526,776 -------------- -------------- 947,911 957,099 Construction work in progress 47,118 35,100 -------------- -------------- Total 995,029 992,199 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 2,976 3,054 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 8,774 7,058 Receivables-- Customer accounts receivable 34,599 26,364 Regulatory clauses under recovery 8,257 7,300 Other accounts and notes receivable 6,671 7,468 Affiliated companies 8,287 6,329 Accumulated provision for uncollectible accounts (852) (839) Fossil fuel stock, at average cost 11,328 12,168 Materials and supplies, at average cost 19,879 21,083 Current portion of accumulated deferred income taxes 4,107 7,227 Prepayments 3,647 4,744 Vacation pay deferred 4,806 4,806 -------------- -------------- Total 109,503 103,708 -------------- -------------- DEFERRED CHARGES: Debt expense and loss, being amortized 12,552 12,220 Deferred charges related to income taxes 23,072 22,274 Long-term notes receivable 2,990 3,737 Work Force Reduction Plan of 1997 15,700 - Miscellaneous 7,932 5,135 -------------- -------------- Total 62,246 43,366 -------------- -------------- TOTAL ASSETS $ 1,169,754 $ 1,142,327 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 49
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1997 At December 31, (Unaudited) 1996 -------------- ---------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized 1,130,000 shares; outstanding 1,121,000 shares $ 37,691 $ 37,691 Paid-in capital 179,389 179,389 Premium on preferred stock 372 372 Retained earnings 179,108 166,282 -------------- -------------- 396,560 383,734 Preferred stock 39,414 74,414 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes (Note I) 35,000 - Long-term debt 291,609 326,379 -------------- -------------- Total 762,583 784,527 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 35,010 10 Accounts payable-- Affiliated companies 5,626 4,136 Regulatory clauses over recovery 6,756 8,788 Other 31,829 38,720 Customer deposits 3,475 3,154 Taxes accrued-- Federal and state income 10,725 - Other 27,395 32,445 Interest accrued 4,035 4,384 Miscellaneous 13,094 13,942 -------------- -------------- Total 137,945 105,579 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 132,962 133,437 Accumulated deferred investment tax credits 27,423 28,333 Deferred credits related to income taxes 39,764 40,568 Postretirement benefits 22,644 21,850 Accumulated provision for property damage 14,080 12,955 Work Force Reduction Plan of 1997 15,700 - Miscellaneous 16,653 15,078 -------------- -------------- Total 269,226 252,221 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,169,754 $ 1,142,327 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 50
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the third quarter and year-to-date 1997 was $25.2 million and $48.4 million, respectively, compared to $21.8 million and $44.9 million for the corresponding periods of 1996. Earnings for the current quarter increased by 15.5% primarily as a result of increased operating revenues. Year-to-date earnings increased 7.9% due primarily to lower operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------- Third Quarter Year-To-Date --------------------------- ---------------------------- (in thousands) % (in thousands) % Revenues........................................... $15,497 10.5 $5,336 1.3 Revenues from affiliates........................... (226) (2.7) (7,950) (47.1) Fuel expense....................................... 9,829 24.6 3,382 3.2 Purchased power from non-affiliates................ (354) (3.2) (4,092) (24.1) Other operation expense............................ 1,555 6.1 (5,046) (6.6)
Revenues. The increase in revenues for the third quarter was primarily due to increased energy sales to retail customers. Energy sales increased 1.9%, 5.4% and 2.1% to residential, commercial and industrial customers, respectively. The revenue increases associated with these sales were 6.6%, 7.4% and 5.3%. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $3.0 million for the quarter due to increased energy sales and decreased $1.4 million for year-to-date 1997 primarily due to milder temperatures experienced during this period as compared to 1996. Third quarter and year-to-date revenues from territorial wholesale customers, excluding fuel revenues which do not affect income, increased $4.5 million and decreased $1.1 million, respectively, compared to the same periods of 1996, with a increase in energy sales of 8.1% and 0.7%, respectively. Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. In addition, the third quarter and year-to-date 1997 periods reflect adjustments in affiliated billings. These transactions do not have a significant impact on earnings. Fuel expense. The increases in fuel expense was due to increased generation resulting from a rise in retail and territorial wholesale energy sales. 51 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power from non-affiliates. Purchased power from non-affiliates decreased in both the current quarter and year-to-date when compared to the same periods in 1996 due to MISSISSIPPI's purchase during the third quarter 1996 of capacity and energy from another utility. Other operation expense. The current quarter increase in other operation expense was primarily due to higher administrative and general expenses. The year-to-date decrease can be primarily attributed to lower administrative and general expenses in 1997. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. Operating revenues will be affected by any changes in rates under the PEP and ECO plans. The PEP has proven to be a stabilizing force on electric rates, with only moderate changes in rates taking place. MISSISSIPPI's 1997 annual filing under the ECO Plan with the Mississippi PSC resulted in an approved annual revenue requirement increase of $0.9 million, effective April 1997. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. The Mississippi PSC has initiated a docket to study retail access in order to determine a position on electric deregulation which best serves the State. Hearings have been and will continue to be held in which interested parties including MISSISSIPPI are participating. The Public Utilities Staff of the Mississippi PSC has issued without recommendation a proposed deregulation plan for comment from interested parties and to form a basis for future hearings of the Mississippi PSC. No conclusion by the Mississippi PSC is anticipated during this year. Further hearings will be held in 1998. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. In July 1997, the United States Environmental Protection Agency ("EPA") published revisions to the ambient air quality standards for ozone and particulate matter, making the standards significantly more stringent. In addition, in October 1997, EPA issued a proposed rule which, if implemented as proposed, would require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the above-described standards and proposed rules would result in increased compliance costs and capital expenditures for the operating companies in amounts that cannot be determined at this time. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity, and its components. The standard is effective in 1998. It is not expected to affect MISSISSIPPI's financial reporting. 52 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131, which supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. MISSISSIPPI is in the process of evaluating Statement No. 131 and its impact and will adopt the standard by 1998. One hundred employees of MISSISSIPPI, in certain areas, including finance, environmental quality and external affairs, have accepted a workforce reduction plan. This voluntary plan was an effort to find appropriate ways to reduce fixed costs, while at the same time providing employees with choices about their future. The total cost to be incurred in connection with this voluntary plan is expected to be within the range of $16 million to $19 million and will be deferred and amortized, pending regulatory approval. See Note (H) in the "Notes to the Condensed Financial Statements" herein for additional information. Reference is made to Notes (B), (G) and (H) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first nine months of 1997 included the addition of approximately $38.5 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities During the first quarter of 1997, Mississippi Power Capital Trust I, a statutory business trust established for the purpose of holding MISSISSIPPI's junior subordinated notes and issuing trust preferred securities and common securities, sold $35 million of its 7.75% trust originated preferred securities which are guaranteed by MISSISSIPPI. For additional information, see Note (I) in the "Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Sources of Capital" of MISSISSIPPI in the Form 10-K. MISSISSIPPI plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of MISSISSIPPI under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of MISSISSIPPI's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturities of long-term debt. 53 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION MISSISSIPPI has applied for a certificate of public convenience and necessity to the Mississippi PSC to build up to 1,000 MW of natural gas-fired combined cycle generation at Plant Daniel. The estimated capital cost associated with construction of this additional generation at Plant Daniel is approximately $450 million. MISSISSIPPI would own two-thirds of the new generation, with an affiliate owning the other one-third. This two-thirds share results in an estimated capital cost of approximately $300 million. Hearings on MISSISSIPPI's certificate request are expected in November 1997. Sources of Capital In addition to the financing activities previously described herein, MISSISSIPPI plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, MISSISSIPPI expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1999. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, MISSISSIPPI had at September 30, 1997, approximately $8.8 million of cash and cash equivalents and approximately $76.3 million of unused committed credit arrangements with banks (including $10.8 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At September 30, 1997, MISSISSIPPI had no short-term borrowings outstanding. Since MISSISSIPPI has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 54 SAVANNAH ELECTRIC AND POWER COMPANY 55
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 OPERATING REVENUES: Revenues $ 78,716 $ 72,676 $ 173,901 $ 183,226 Revenues from affiliates 1,184 683 1,460 2,614 ----------- ---------- ------------ ------------- Total operating revenues 79,900 73,359 175,361 185,840 ----------- ---------- ------------ ------------- OPERATING EXPENSES: Operation-- Fuel 16,609 11,482 27,063 24,174 Purchased power from non-affiliates 1,669 802 2,351 2,014 Purchased power from affiliates 11,756 14,395 31,786 45,915 Other 11,737 10,624 33,379 32,317 Maintenance 2,991 3,064 9,551 9,515 Depreciation and amortization 5,027 4,525 15,047 14,329 Taxes other than income taxes 3,208 3,195 8,823 9,373 Federal and state income taxes 9,372 8,730 15,087 15,313 ----------- ---------- ------------ ------------- Total operating expenses 62,369 56,817 143,087 152,950 ----------- ---------- ------------ ------------- OPERATING INCOME 17,531 16,542 32,274 32,890 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 11 48 216 229 Interest income 41 24 165 129 Other, net (767) (747) (858) (1,465) Income taxes applicable to other income 1,046 607 1,033 840 ----------- ---------- ------------ ------------- INCOME BEFORE INTEREST CHARGES 17,862 16,474 32,830 32,623 ----------- ---------- ------------ ------------- INTEREST CHARGES: Interest on long-term debt 2,677 2,769 8,289 8,787 Allowance for debt funds used during construction (8) (46) (149) (222) Interest on notes payable 54 81 174 219 Amortization of debt discount, premium, and expense, net 186 185 552 396 Other interest charges 96 89 264 286 ----------- ---------- ------------ ------------- Net interest charges 3,005 3,078 9,130 9,466 ----------- ---------- ------------ ------------- NET INCOME 14,857 13,396 23,700 23,157 DIVIDENDS ON PREFERRED STOCK 581 581 1,743 1,743 ----------- ---------- ------------ ------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 14,276 $ 12,815 $ 21,957 $ 21,414 =========== ========== ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 56
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, 1997 1996 OPERATING ACTIVITIES: Net income $ 23,700 $ 23,157 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 15,712 15,248 Deferred income taxes and investment tax credits, net 2,179 5,974 Allowance for equity funds used during construction (216) (229) Other, net 1,304 1,983 Changes in certain current assets and liabilities-- Receivables, net (10,197) (6,668) Inventories 464 (1,022) Payables 5,231 (171) Taxes accrued 6,772 5,689 Other (173) (3,594) ------------- ------------ Net cash provided from operating activities 44,776 40,367 ------------- ------------ INVESTING ACTIVITIES: Gross property additions (14,938) (21,078) Other (1,385) (4,774) ------------- ------------ Net cash used for investing activities (16,323) (25,852) ------------- ------------ FINANCING ACTIVITIES: Proceeds-- First mortgage bonds - 20,000 Other long-term debt 13,870 17,000 Retirements-- First mortgage bonds - (29,400) Other long-term debt (14,263) (403) Notes payable, net (5,000) (2,500) Payment of preferred stock dividends (1,743) (1,743) Payment of common stock dividends (16,000) (14,400) Miscellaneous (350) (2,241) ------------- ------------ Net cash used for financing activities (23,486) (13,687) ------------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 4,967 828 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,214 877 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,181 $ 1,705 ============= ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 9,457 $ 10,987 Income taxes 5,382 6,070 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 57
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1997 At December 31, (Unaudited) 1996 ------------- -------------- UTILITY PLANT: Plant in service, at original cost $ 753,043 $ 739,461 Less accumulated provision for depreciation 317,355 304,760 ------------- ------------ 435,688 434,701 Construction work in progress 12,166 13,463 ------------- ------------ Total 447,854 448,164 ------------- ------------ OTHER PROPERTY AND INVESTMENTS: 1,784 1,785 ------------- ------------ CURRENT ASSETS: Cash and cash equivalents 10,181 5,214 Special deposits 250 1,395 Receivables-- Customer accounts receivable 26,608 18,827 Other accounts and notes receivable 2,060 769 Affiliated companies 2,597 844 Accumulated provision for uncollectible accounts (515) (632) Fuel cost under recovery 7,689 7,289 Fossil fuel stock, at average cost 6,051 5,892 Materials and supplies, at average cost 7,390 8,013 Prepayments 6,086 6,135 ------------- ------------ Total 68,397 53,746 ------------- ------------ DEFERRED CHARGES: Deferred charges related to income taxes 18,741 19,167 Premium on reacquired debt, being amortized 7,288 7,142 Cash surrender value of life insurance for deferred compensation plans 10,288 10,288 Miscellaneous 2,196 2,003 ------------- ------------ Total 38,513 38,600 ------------- ------------ TOTAL ASSETS $ 556,548 $ 542,295 ============= ============ The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 58
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1997 At December 31, (Unaudited) 1996 ------------ -------------- CAPITALIZATION: Common stock equity-- Common stock (par value $5 per share)-- authorized 16,000,000 shares; outstanding 10,844,635 shares $ 54,223 $ 54,223 Paid-in capital 8,688 8,688 Retained earnings 115,329 109,373 ------------ ------------- 178,240 172,284 Preferred stock 35,000 35,000 Long-term debt 140,651 161,801 ------------ ------------- Total 353,891 369,085 ------------ ------------- CURRENT LIABILITIES: Long-term debt due within one year 21,742 637 Notes payable - 5,000 Accounts payable-- Affiliated companies 5,424 6,374 Other 15,011 10,201 Customer deposits 5,481 5,232 Taxes accrued-- Federal and state income 3,796 - Other 3,991 1,015 Interest accrued 4,377 5,275 Vacation pay accrued 2,149 2,038 Miscellaneous 6,900 7,470 ------------ ------------- Total 68,871 43,242 ------------ ------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 79,377 76,654 Accumulated deferred investment tax credits 12,773 13,271 Deferred credits related to income taxes 22,710 22,792 Deferred compensation plans 9,206 8,602 Postretirement benefits 6,251 5,472 Miscellaneous 3,469 3,177 ------------ ------------- Total 133,786 129,968 ------------ ------------- TOTAL CAPITALIZATION AND LIABILITIES $ 556,548 $ 542,295 ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 59
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1997 vs. THIRD QUARTER 1996 AND YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996 RESULTS OF OPERATIONS Earnings SAVANNAH's net income after dividends on preferred stock for the third quarter and year-to-date 1997 was $14.3 million and $22.0 million, respectively, as compared to $12.8 million and $21.4 million for the corresponding periods of 1996. For the quarter, earnings increased 11.4% due to increased operating revenues during this period. Year-to-date earnings increased 2.5% primarily as a result of lower interest charges and an increase in other income during this period. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------- Third Quarter Year-To-Date --------------------------- ----------------------------- (in thousands) % (in thousands) % Revenues....................................... $6,040 8.3 $(9,325) (5.1) Revenues from affiliates....................... 501 73.4 (1,154) (44.1) Fuel expense................................... 5,127 44.7 2,889 12.0 Purchased power from affiliates................ (2,639) (18.3) (14,129) (30.8) Other operation expense........................ 1,113 10.5 1,062 3.3 Income taxes applicable to other income........ 439 72.3 193 23.0
Revenues. Excluding fuel revenues, which represent the pass-through of fuel expenses and do not affect income, revenues increased $4.3 million for the quarter and increased $1.4 million year-to-date when compared to the same periods of 1996. Revenues for the current quarter of 1997 were up primarily because of increased energy sales to residential, commercial and industrial customers. Energy sales to these customers increased 3.7%, 5.4% and 14.7%, respectively, resulting in revenue increases of 4.4%, 6.9% and 11.8%, respectively. Year-to-date revenues for 1997 increased primarily because of a $0.5 million increase in other operating revenues and a $1.0 million increase in revenues from non-affiliates. Retail revenues, excluding fuel revenues were down slightly primarily because of a 5.5% decrease in energy sales to residential customers offset somewhat by increased energy sales of 1.0% in the commercial sector and 3.5% in the industrial sector. Energy sales to residential customers were impacted by the milder-than-normal temperatures experienced during 1997. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. In addition, the year-to-date 1997 reflects an adjustment in affiliated billings. These transactions do not have a significant impact on earnings. Fuel expenses. The increases for the quarter and year-to-date can be attributed to higher generation. 60 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other operation expense. The current quarter and year-to-date increases when compared to the same periods in 1996 are due primarily to higher administrative and general expense due to expenses associated with the voluntary severance plan during this quarter. Income taxes applicable to other income. The increases in this item for the quarter and year-to-date can be attributed to increased tax benefits from losses of the parent company allocated to SAVANNAH under the joint consolidated income tax agreement between SOUTHERN and its subsidiaries. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of SAVANNAH in the Form 10-K. In July 1997, the United States Environmental Protection Agency ("EPA") published revisions to the ambient air quality standards for ozone and particulate matter, making the standards significantly more stringent. In addition, in October 1997, EPA issued a proposed rule which, if implemented as proposed, would require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the above-described standards and proposed rules would result in increased compliance costs and capital expenditures for the operating companies in amounts that cannot be determined at this time. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of "comprehensive income," which is the total of net income and all other non-owner changes in stockholders' equity, and its components. The standard is effective in 1998. It is not expected to affect SAVANNAH's financial reporting. In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. Statement No. 131, which supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for segment reporting, using the "management approach," in which reportable segments are based on the same criteria on which management disaggregates a business for making operating decisions and assessing performance. SAVANNAH is in the process of evaluating Statement No. 131 and its impact and will adopt the standard by 1998. Reference is made to Notes (B) and (Q) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. 61 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first nine months of 1997 included the addition of approximately $14.9 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities In April 1997, SAVANNAH sold, through a public authority, $13.87 million of variable rate pollution control revenue bonds due 2037. The proceeds were applied to the redemption in May 1997 of $13.87 million of 6 3/4% pollution control revenue bonds. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. Sources of Capital SAVANNAH plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, SAVANNAH expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1999. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, SAVANNAH had at September 30, 1997, approximately $10.2 million of cash and cash equivalents and approximately $40.5 million of unused credit arrangements with banks. At September 30, 1997, SAVANNAH had no short-term notes payable to banks. Since SAVANNAH has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit. 62 NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, R ALABAMA A, B, C, G, H, I, J, K GEORGIA A, B, C, G, H, I, L, M, N, O, P GULF A, B, G, H, I MISSISSIPPI A, B, G, H, I SAVANNAH A, B, H, Q
63 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (A) The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments (which included only normal recurring adjustments) necessary to present fairly the results for the periods ended September 30, 1997 and 1996. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in each registrant's latest annual report on Form 10-K. Certain prior-period amounts have been reclassified to conform with current-period presentation. The condensed financial statements of ALABAMA and GEORGIA included herein have been reviewed by ALABAMA's and GEORGIA's independent public accountants as set forth in their reports included herein as Exhibit 1 to ALABAMA's and GEORGIA's condensed financial statements. (B) SOUTHERN's operating affiliates are subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of a company's operations is no longer subject to these provisions, the company would be required to write off related unrecoverable regulatory assets and liabilities, and determine if any other assets have been impaired. For additional information, see Note 1 to the financial statements of each registrant in Item 8 of the Form 10-K. (C) The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry--including SOUTHERN's--regarding the recognition, measurement and classification of decommissioning costs for nuclear generating facilities in the financial statements. In response to these questions, the FASB has decided to review the accounting for liabilities related to closure and removal of long-lived assets, including nuclear decommissioning. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. (D) SOUTHERN engages in price risk management activities for trading and non-trading purposes. Reference is made to Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K for a discussion of these activities. Activities for non-trading purposes consist of transactions that are employed to mitigate SOUTHERN's risk related to interest rate and foreign currency fluctuations. At September 30, 1997, the status of outstanding non-trading related derivative contracts was as follows: 64 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Year of Maturity or Notional Unrealized Type Termination Amount Gain (Loss) (in thousands) Interest rate swaps 2002-2012 $777,408 $(25,644) 2001-2012 (pound)500,000 $(50,890) 2002-2007 DM691,000 $(2,189) Cross currency swaps 2001-2007 (pound)439,300 $9,777 Cross currency swaption 2003 DM570,000 $(5,522) (pound) - Denotes British pounds sterling. DM - Denotes Deutschemark.
Net unrealized gains and losses on outstanding positions with respect to trading activities were not material at September 30, 1997. (E) On January 29, 1997, Southern Energy, a wholly-owned subsidiary of SOUTHERN, completed the acquisition of an 80% interest in CEPA for a total net investment of approximately $2.0 billion. On August 13, 1997, an additional 19.99% interest was acquired for $150 million plus an interest in a project under development. (Reference is made to the Current Report on Form 8-K of SOUTHERN dated October 9, 1996 for a more detailed description of the acquisition. In addition, reference is also made to "Management's Discussion and Analysis - Future Earnings Potential" of SOUTHERN herein for more information relating to the acquisition in August 1997 by Southern Energy of an additional 19.99% interest in CEPA.) The acquisition of CEPA was accounted for as a purchase with the $1.6 billion excess of the acquisition cost over the preliminary estimate of the fair value of CEPA's net assets being assigned to goodwill. The allocation of the purchase price is preliminary and may be revised at a later date. Goodwill will be amortized on a straight-line basis over 40 years. Results of operations of CEPA are included in the condensed consolidated financial statements subsequent to January 29, 1997. The following unaudited pro forma combined results of operations for the three months ended September 30, 1997 and 1996 and the nine months ended September 30, 1997 and 1996 have been prepared assuming the acquisition of CEPA had occurred at the beginning of each period. The pro forma results assume acquisition financing of $916 million of short-term borrowings, $792 million of long-term notes and $400 million of capital securities and SOUTHERN's assumed effective composite interest rate on these obligations for each period presented was 6.62%. Eventually, the existing borrowing may be replaced by some other combination of long-term debt and equity. 65 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) The pro forma results are provided for information only. The results are not necessarily indicative of the actual results that would have been realized had the acquisition occurred on the indicated dates, nor are they necessarily indicative of future results of operations of the combined companies.
As Reported and Pro Forma Information (Unaudited) (Stated in Thousands of Dollars, except per share) For the Three Months Ended September 30, 1997 1996 As Reported Pro Forma As Reported Pro Forma Operating revenues $4,071,204 $4,071,204 $2,932,556 $2,989,161 Consolidated Net Income $374,710 $378,257 $467,440 $467,681 Earnings Per Share of Common Stock $0.55 $0.55 $0.69 $0.69 For the Nine Months Ended September 30, 1997 1996 As Reported Pro Forma As Reported Pro Forma Operating revenues $9,372,813 $9,393,470 $7,925,418 $8,015,914 Consolidated Net Income $776,518 $781,471 $987,575 $963,476 Earnings Per Share of Common Stock $1.14 $1.14 $1.47 $1.43
66 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (F) SOUTHERN's principal business segment -- or its traditional core business -- is the five electric utility operating companies, which provide electric service in four southeastern states. The other reportable business segment is Southern Energy, which owns and operates power production and delivery facilities in the United States and various international markets. Southern Energy's energy trading activities also play an important role in its business. Financial data for business segments and geographic areas are as follows: (in thousands)
Business Segments Operating Operating Operating Operating Total Revenues Income Revenues Income Assets For the Three Months Ended For the Nine Months Ended At September 30, 1997 September 30, 1997 September 30, 1997 ------------------------------ ------------------------------- ------------------ Traditional core business $2,782,063 $637,650 $6,741,141 $1,336,423 $25,100,862 Southern Energy 1,289,141 82,694 2,631,672 209,630 10,283,358 ------------ ---------- ----------- ------------ ------------- Consolidated $4,071,204 $720,344 $9,372,813 $1,546,053 $35,384,220 ========== ======== ========== ========== =========== For the Three Months Ended For the Nine Months Ended At September 30, 1996 September 30, 1996 December 31, 1996 ------------------------------ ------------------------------- ----------------- Traditional core business $2,574,656 $627,831 $6,773,828 $1,427,607 $25,367,558 Southern Energy 357,900 37,595 1,151,590 95,779 4,924,244 ------------ ---------- -------------- ------------- ------------- Consolidated $2,932,556 $665,426 $7,925,418 $1,523,386 $30,291,802 ========== ======== ========== ========== =========== Geographic Areas Operating Operating Operating Operating Total Revenues Income Revenues Income Assets For the Three Months Ended For the Nine Months Ended At September 30, 1997 September 30, 1997 September 30, 1997 ------------------------------ ------------------------------- ------------------ Domestic $3,686,108 $640,266 $8,117,898 $1,344,696 $25,996,233 International: Europe 254,265 35,301 911,649 106,482 3,593,606 Asia 56,892 30,328 170,597 76,834 4,289,286 Other 73,939 14,449 172,669 18,041 1,505,095 ------------- ---------- ------------- ------------- ------------- Total $4,071,204 $720,344 $9,372,813 $1,546,053 $35,384,220 ========== ======== ========== ========== =========== For the Three Months Ended For the Nine Months Ended At September 30, 1996 September 30, 1996 December 31, 1996 ------------------------------ ------------------------------- ----------------- Domestic $2,606,715 $632,428 $6,852,782 $1,446,420 $25,868,253 International: Europe 276,703 30,965 918,813 68,472 2,965,578 Asia - - - - - Other 49,138 2,033 153,823 8,494 1,457,971 ------------- ----------- ------------ -------------- ------------- Total $2,932,556 $665,426 $7,925,418 $1,523,386 $30,291,802 ========== ======== ========== ========== ===========
(G) Reference is made to Note 3 to each of the registrant's financial statements, except SAVANNAH's, in Item 8 of the Form 10-K for a discussion of the proceedings initiated by the FERC regarding the reasonableness of the return on common equity on certain of the Southern electric system's wholesale rate schedules and contracts. 67 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (H) Certain of the registrants and other SOUTHERN subsidiaries have instituted work force reduction programs. The expenses recognized under these programs and the unamortized balance of expenses deferred under regulatory orders were as follows: (in thousands)
Three Months Ended Nine Months Ended Unamortized Balance September 30, September 30, at September 30, 1997 ----------------------- -------------------- ----------------------- 1997 1996 1997 1996 ---- ---- ---- ---- ALABAMA $8,759 $5,951 $26,242 $18,360 $25,304 GEORGIA 1,641 7,947 4,512 34,821 - GULF 950 238 2,192 2,472 - MISSISSIPPI 1,088 1,847 1,192 3,625 16,696* SAVANNAH 378 28 1,185 262 - OTHER 74 129 121 343 - --------- ------- --------- -------- ------- SOUTHERN system $12,890 $16,140 $35,444 $59,883 $42,000 ======= ======= ======= ======= =======
* Of this amount, $15.7 million relates to the current workforce reduction plan. The remainder, $996,000, relates to workforce reduction programs initiated in previous years. (I) During the first nine months of 1997, statutory business trusts formed by ALABAMA, GEORGIA, GULF, MISSISSIPPI, Southern Investments UK plc ("SIUK") and Southern Company Capital Funding, Inc. ("Southern Capital"), of which the respective companies own all the common securities, issued mandatorily redeemable preferred or capital securities as follows: (in thousands)
Maturity Date Date of Issue Amount Rate Notes of Notes ALABAMA 1/16/97 $200,000 7.60% $206,000 12/31/2036 GEORGIA 1/16/97 175,000 7.60 180,000 12/31/2036 GULF 1/31/97 40,000 7.625 41,000 12/31/2036 MISSISSIPPI 2/26/97 35,000 7.75 36,000 2/15/2037 SIUK 1/29/97 82,000 8.23 85,000 2/1/2027 Southern Capital 2/4/97 325,000 8.19 335,000 2/1/2037 Southern Capital 2/4/97 75,000 8.14 77,000 2/15/2027 GEORGIA 6/11/97 189,250 7.75 195,000 3/31/2037 Southern Capital 6/6/97 200,000 7.75 206,000 3/31/2037
Substantially all the assets of each trust are junior subordinated notes issued by the related company in the respective approximate principal amounts set forth above. The notes of Southern Capital are guaranteed by SOUTHERN. ALABAMA, GEORGIA, GULF, MISSISSIPPI, SIUK and SOUTHERN each considers that the mechanisms and obligations relating to the preferred or capital securities issued for its benefit, taken together, constitute a full and unconditional guarantee by it of the respective trusts' payment obligations with respect to the preferred or capital securities. Reference is also made to Note 9 to the financial statements of ALABAMA and GEORGIA in the Form 10-K. 68 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (J) In June 1995, the Alabama PSC issued a rate order granting ALABAMA's request for gradual adjustments to move toward parity among customer classes. This order also calls for a moratorium on any periodic retail rate increases (but not decreases) until July 2001. In December 1995, the Alabama PSC issued an order authorizing ALABAMA to reduce balance sheet items--such as plant and deferred charges--at any time ALABAMA's actual base rate revenues exceed the budgeted revenues. Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for additional information. In April 1997, the Alabama PSC issued an additional order authorizing ALABAMA to reduce balance sheet asset items. This order authorizes the reduction of such items up to an amount equal to 5 times the total estimated annual revenue reduction resulting from future rate reductions. (K) In 1996, legal actions against ALABAMA were filed in several counties in Alabama charging ALABAMA with fraud and non-compliance with regulatory statutes relating to the offer, sale and financing of "extended service contracts" in connection with the sale of electric appliances. See Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for additional information. (L) In February 1996, the Georgia PSC approved a three-year accounting order, effective January 1, 1996. In November 1996, on appeal by a consumer group, the Superior Court of Fulton County, Georgia reversed the accounting order and remanded the matter to the Georgia PSC. In October 1997, the Georgia Court of Appeals upheld the accounting order and reversed the Superior Court's decision. GEORGIA continued to recognize expenses in accordance with the accounting order while it was under appeal. Under the order, earnings in excess of a 12.5% retail return on common equity will be used to accelerate the amortization of regulatory assets or depreciation of electric plant. Accordingly, for earnings in excess of the 12.5% return, GEORGIA recorded charges of $76.7 million and $104.9 million, respectively, for the three months and nine months ended September 30, 1997 (presented in the accompanying financial statements as depreciation expense of electric plant and as an addition to the reserve for depreciation). For additional information, reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K. (M) In 1987 and 1989, the Georgia PSC ordered that the allowed costs of Plant Vogtle, a two-unit nuclear facility of which GEORGIA owns 45.7%, be phased into rates. Pursuant to the orders, GEORGIA recorded a deferred return under phase-in plans until October 1991 when the allowed investment was fully reflected in rates. In 1991, the Georgia PSC levelized the remaining Plant Vogtle declining capacity buyback expenses over a six-year period. In addition, GEORGIA deferred certain Plant Vogtle operating expenses and financing costs under accounting orders issued by the Georgia PSC. These Georgia PSC orders provide for the recovery of deferred costs within 10 years. The unamortized balance of these deferred costs at September 30, 1997, was $58.2 million. (N) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning the recovery by GEORGIA of its costs associated with the Rocky Mountain pumped storage hydroelectric plant. At September 30, 1997, GEORGIA's net investment in the plant was approximately $163 million. In August 1997, the staff of the Georgia PSC issued a report regarding its prudence review of the plant. The report recommends that of GEORGIA's initial $202 million investment in the plant, approximately $79 million be allowed in rate base, with a disallowance of approximately $123 million. The report also concludes that GEORGIA should be allowed to retain the benefits of the plant's lower fuel costs (as compared to alternative sources of generation). The report states that as an alternative, it may be reasonable to provide a larger allowance in rate base and allow customers to receive the benefit of the fuel savings. GEORGIA estimates the present value of the fuel benefits over the 69 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) life of the plant to be in the range of approximately $50 million to $70 million. The Georgia PSC intends to conclude hearings on this matter in December 1997, at which time the Georgia PSC will take the matter under advisement for future action. While GEORGIA disagrees with the Georgia PSC staff's conclusions, the outcome of this matter cannot now be determined. (O) Reference is made to Note 3 to the financial statements of GEORGIA in Item 8 of the Form 10-K for information relating to an agreement reached January 10, 1997, between GEORGIA and MEAG relating to a new power supply relationship. A power supply contract entered into between GEORGIA and MEAG has been approved by FERC and was implemented in August 1997. (P) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's designation as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and other environmental contingencies. (Q) On November 7, 1997, SAVANNAH filed with the Georgia PSC to request an accounting order to make certain accounting adjustments including implementation of new depreciation rates, to increase the provision in the storm damage reserve, and to provide a process to address SAVANNAH's level of earnings in the future. On November 10, 1997, SAVANNAH filed for a rate reduction, of approximately $1.0 million, targeted to the small business class. (R) In July 1997, the new Labor government in the United Kingdom introduced its first budget which became effective July 31, 1997. This budget included a one-time windfall profit tax on privatized utilities. As reflected in the "Condensed Consolidated Statements of Income", the effect of this tax, approximately (pound)90 million ($148 million), was recorded in the quarter ended September 30, 1997. The tax is payable in two equal installments on or before December 1, 1997 and December 1, 1998. 70 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. (2) Reference is made to Item 3 - LEGAL PROCEEDINGS in the Form 10-K for information regarding a tax deficiency notice issued by the Internal Revenue Service claiming that GEORGIA and SOUTHERN owed additional taxes for the years 1984 through 1987 and regarding GEORGIA's and SOUTHERN's claims for tax refunds for such years. In August 1997, SOUTHERN and the Internal Revenue Service entered into a settlement agreement which is subject to the review and approval of the Joint Congressional Committee on Taxation. If approved by the Joint Committee, the agreement would resolve all issues in the case for the years before the Tax Court, resulting in a refund to SOUTHERN in an amount which is not expected to have a material effect on earnings. There can be no assurance that such Joint Committee approval will be received. (3) ALABAMA, GEORGIA and MISSISSIPPI, et al. v. TVA (U.S. District Court for the Northern District of Alabama) On July 24, 1997, ALABAMA, GEORGIA, MISSISSIPPI and other plaintiffs entered into an agreement with TVA that will settle the action filed in April 1997, which sought to enjoin TVA from violating a 1959 act that prohibits TVA from selling power outside the area that was being served by it in 1957. In the settlement agreement, TVA agrees that it will enter into exchange power arrangements only with authorized entities to which it may lawfully sell such power under the 1959 act, and that it will not knowingly engage in such transactions where the authorized entity is reselling that power to unauthorized entities. Item 5. Other Information. On November 3, 1997, SOUTHERN commenced offers to purchase for cash (the "Offers") certain series of the preferred stocks of ALABAMA, GEORGIA, GULF and MISSISSIPPI. The Offers are being made for one series ($36.4 million aggregate par value) in the case of ALABAMA, nine series ($95.8 million aggregate stated value) in the case of GEORGIA, five series ($50.1 million aggregate par value or stated capital) in the case of GULF and three series ($11.0 million aggregate par value) in the case of MISSISSIPPI. SOUTHERN will sell any shares purchased by it pursuant to the Offers to the respective subsidiary companies at the purchase price paid by SOUTHERN plus expenses, and the respective subsidiary companies will thereupon retire and cancel such shares. Concurrently with the Offers, the subsidiary companies are soliciting proxies on behalf of their respective boards of directors in connection with special meetings of stockholders scheduled to be held on December 10, 1997. The purpose of the special meetings is to consider a proposed 71 Item 5. Other Information. (Continued) amendment to each such subsidiary company's charter to eliminate certain provisions restricting its ability to issue unsecured indebtedness, to sell assets, merge or consolidate without preferred stockholder approval under certain circumstances and to pay dividends on its common stock. For further information with regard to this matter, including the terms and conditions of the Offers, reference is made to the four Issuer Tender Offer Statements on Schedule 13E-4 filed by SOUTHERN with the SEC on November 3, 1997. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 24 - Powers of Attorney and resolutions. (Designated in the Form 10-K for the year ended December 31, 1996, File Nos. 1-3526, 1-3164, 1-6468, 0-2429, 0-6849 and 1-5072 as Exhibits 24(a), 24(b), 24(c), 24(d), 24(e) and 24(f), respectively, and incorporated herein by reference.) Exhibits 27 - Financial Data Schedules (a) SOUTHERN (b) ALABAMA (c) GEORGIA (d) GULF (e) MISSISSIPPI (f) SAVANNAH (b) Reports on Form 8-K. GULF filed a Current Report on Form 8-K dated July 28, 1997: Items reported: Item 5 Item 7 Financial statements filed: None 72 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. THE SOUTHERN COMPANY By A. W. Dahlberg Chairman, President and Chief Executive Officer (Principal Executive Officer) By W. L. Westbrook Financial Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1997 - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANY By Elmer B. Harris President and Chief Executive Officer (Principal Executive Officer) By William B. Hutchins, III Executive Vice President and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1997 73 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANY By H. Allen Franklin President and Chief Executive Officer (Principal Executive Officer) By Warren Y. Jobe Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1997 - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By A. E. Scarbrough Vice President - Finance (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1997 74 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. MISSISSIPPI POWER COMPANY By Dwight H. Evans President and Chief Executive Officer (Principal Executive Officer) By Michael W. Southern Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1997 - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. SAVANNAH ELECTRIC AND POWER COMPANY By /s/ G. Edison Holland, Jr. President and Chief Executive Officer (Principal Executive Officer) By Kirby R. Willis Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1997 75 EX-27 2 FINANCIAL DATA SCHEDULE - SOUTHERN COMPANY
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000092122 THE SOUTHERN COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 23,022,899 6,082,428 3,955,646 2,323,247 0 35,384,220 3,447,958 2,265,204 3,875,410 9,588,572 1,742,020 695,702 6,587,169 218,538 3,322,367 1,652,967 676,605 28,913 145,743 3,065 10,722,559 35,384,220 9,372,813 632,070 7,194,690 7,826,760 1,546,053 (9,217) 1,536,836 718,064 818,772 42,254 776,518 664,718 0 2,248,678 1.14 0
EX-27 3 FINANCIAL DATA SCHEDULE - ALABAMA POWER COMPANY
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000003153 ALABAMA POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 7,047,212 220,495 948,356 627,932 0 8,843,995 224,358 1,304,744 1,246,219 2,775,321 297,000 278,400 2,213,207 0 0 419,936 129,600 0 6,387 976 2,723,168 8,843,995 2,395,303 184,922 1,711,689 1,896,611 498,692 13,264 511,956 184,903 327,053 14,309 312,744 251,800 0 529,630 0 0
EX-27 4 FINANCIAL DATA SCHEDULE - GEORGIA POWER COMPANY
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000041091 GEORGIA POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 10,131,508 304,083 1,275,349 1,181,550 0 12,892,490 344,250 2,135,342 1,783,246 4,262,838 689,250 292,786 3,016,103 0 0 0 150,000 28,913 86,378 388 4,365,834 12,892,490 3,380,690 361,037 2,317,343 2,678,380 702,310 12,423 714,733 201,234 513,499 19,510 493,989 385,500 0 1,204,090 0 0
EX-27 5 FINANCIAL DATA SCHEDULE - GULF POWER COMPANY
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 1,049,766 623 157,926 68,487 0 1,276,802 38,060 218,482 187,325 443,867 40,000 50,102 249,911 0 47,000 0 55,817 0 0 0 390,105 1,276,802 480,376 29,561 376,700 406,261 74,115 1,381 75,496 23,466 52,030 3,420 48,610 50,500 0 139,270 0 0
EX-27 6 FINANCIAL DATA SCHEDULE - MISSISSIPPI POWER COMPAN
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 995,029 2,976 109,503 62,246 0 1,169,754 37,691 179,761 179,108 396,560 35,000 39,414 211,609 0 80,000 0 35,010 0 0 0 372,161 1,169,754 417,692 29,269 321,510 350,779 66,913 2,984 69,897 18,199 51,698 3,272 48,426 35,600 0 80,524 0 0
EX-27 7 FINANCIAL DATA SCHEDULE - SAVANNAH ELECTRIC AND
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000086940 SAVANNAH ELECTRIC AND POWER COMPANY 1,000 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 447,854 1,784 68,397 38,513 0 556,548 54,223 8,688 115,329 178,240 0 35,000 124,599 0 10,000 0 21,100 0 6,052 642 180,915 556,548 175,361 15,087 128,000 143,087 32,274 556 32,830 9,130 23,700 1,743 21,957 16,000 0 44,776 0 0
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