==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
------------ --------------------------------------- ------------------
1-3526 The Southern Company 58-0690070
(A Delaware Corporation)
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(404) 506-5000
1-3164 Alabama Power Company 63-0004250
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35291
(205) 257-1000
1-6468 Georgia Power Company 58-0257110
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
0-2429 Gulf Power Company 59-0276810
(A Maine Corporation)
One Energy Place
Pensacola, Florida 32520
(850) 444-6111
0-6849 Mississippi Power Company 64-0205820
(A Mississippi Corporation)
2992 West Beach
Gulfport, Mississippi 39501
(228) 864-1211
1-5072 Savannah Electric and Power Company 58-0418070
(A Georgia Corporation)
600 East Bay Street
Savannah, Georgia 31401
(912) 644-7171
===============================================================================
<PAGE>
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____
<TABLE>
<CAPTION>
Description of Shares Outstanding
Registrant Common Stock at October 31, 2000
<S> <C> <C>
The Southern Company Par Value $5 Per Share 650,878,248
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
</TABLE>
This combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company and Savannah Electric and Power Company. Information contained
herein relating to any individual company is filed by such company on its own
behalf. Each company makes no representation as to information relating to the
other companies.
2
<PAGE>
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2000
<TABLE>
<CAPTION>
Page
Number
<S> <C>
DEFINITIONS........................................................................................................ 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
Condensed Consolidated Statements of Income........................................................ 7
Condensed Consolidated Statements of Cash Flows.................................................... 8
Condensed Consolidated Balance Sheets.............................................................. 9
Condensed Consolidated Statements of Comprehensive Income and
Accumulated Other Comprehensive Income.......................................................... 11
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 12
Alabama Power Company
Condensed Statements of Income..................................................................... 22
Condensed Statements of Cash Flows................................................................. 23
Condensed Balance Sheets........................................................................... 24
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 26
Exhibit 1 - Report of Independent Public Accountants............................................... 30
Georgia Power Company
Condensed Statements of Income..................................................................... 32
Condensed Statements of Cash Flows................................................................. 33
Condensed Balance Sheets........................................................................... 34
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 36
Exhibit 1 - Report of Independent Public Accountants............................................... 40
Gulf Power Company
Condensed Statements of Income..................................................................... 42
Condensed Statements of Cash Flows................................................................. 43
Condensed Balance Sheets........................................................................... 44
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 46
Mississippi Power Company
Condensed Statements of Income..................................................................... 51
Condensed Statements of Cash Flows................................................................. 52
Condensed Balance Sheets........................................................................... 53
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 55
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 61
Condensed Statements of Cash Flows................................................................. 62
Condensed Balance Sheets........................................................................... 63
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 65
Notes to the Condensed Financial Statements........................................................... 69
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 77
Item 2. Changes in Securities and Use of Proceeds................................................................. Inapplicable
Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders....................................................... Inapplicable
Item 5. Other Information......................................................................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 77
Signatures ............................................................................................... 78
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DEFINITIONS
TERM MEANING
<S> <C>
ALABAMA..................................... Alabama Power Company
BEWAG....................................... Bewag AG
Clean Air Act............................... Clean Air Act Amendments of 1990
ECO Plan.................................... Environmental Compliance Overview Plan
Energy Act.................................. Energy Policy Act of 1992
EPA......................................... U. S. Environmental Protection Agency
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, 1999
GEORGIA..................................... Georgia Power Company
GULF........................................ Gulf Power Company
integrated Southeast utilities.............. ALABAMA, GEORGIA, GULF, MISSISSIPPI, and SAVANNAH
MISSISSIPPI................................. Mississippi Power Company
Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services
Holdings, Inc.
PEP......................................... Performance Evaluation Plan
PSC......................................... Public Service Commission
RTO......................................... Regional Transmission Organization
SAVANNAH.................................... Savannah Electric and Power Company
SCEM........................................ Southern Company Energy Marketing L.P.
SCS......................................... Southern Company Services, Inc.
SEC......................................... Securities and Exchange Commission
SOUTHERN.................................... The Southern Company
Southern Energy............................. Southern Energy, Inc. including SOUTHERN subsidiaries managed or controlled by
Southern Energy
SOUTHERN system............................. SOUTHERN, integrated Southeast utilities, Southern Energy, and other subsidiaries
SWEB........................................ South Western Electricity plc
WPD......................................... Western Power Distribution (United Kingdom)
</TABLE>
4
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements
in addition to historical information. In some cases, forward-looking statements
can be identified by terminology such as "may," "will," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these terms or other comparable terminology. The
registrants caution that there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. These factors include the impact of recent and future federal
and state regulatory change, including legislative and regulatory initiatives
regarding deregulation and restructuring of the electric utility industry and
also changes in environmental and other laws and regulations to which SOUTHERN
and its subsidiaries are subject, as well as changes in application of existing
laws and regulations; current and future litigation, including the pending EPA
civil action against GEORGIA and potentially other of SOUTHERN's subsidiaries
and the diversity litigation against certain of SOUTHERN's subsidiaries; the
extent and timing of the entry of additional competition in the markets of
SOUTHERN's subsidiaries; potential business strategies, including acquisitions
or dispositions of assets or businesses, which cannot be assured to be completed
or beneficial; internal restructuring or other restructuring options, that may
be pursued by the registrants; state and federal rate regulation in the United
States and in foreign countries in which the subsidiaries operate; political,
legal and economic conditions and developments in the United States and in
foreign countries in which the subsidiaries operate; financial market conditions
and the results of financing efforts; changes in commodity prices and interest
rates; weather and other natural phenomena; the performance of projects
undertaken by the non-traditional business and the success of efforts to invest
in and develop new opportunities; the ability of SOUTHERN to obtain additional
generating capacity at competitive prices; the ability of SOUTHERN to meet the
conditions to the spin-off of Southern Energy, which include regulatory and
other approvals; and other factors discussed elsewhere herein and in other
reports (including Form 10-K) filed from time to time by the registrants with
the SEC.
5
<PAGE>
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
6
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ------------------- ------------
(in thousands) (in thousands)
Operating Revenues:
<S> <C> <C> <C> <C>
Retail sales $2,732,295 $2,631,031 $6,703,288 $6,294,259
Sales for resale 325,136 297,661 732,253 658,515
Southern Energy revenues 4,281,602 686,478 5,475,493 1,711,341
Other revenues 139,944 121,479 336,179 305,179
---------------- -------------------------------- ----------------
Total operating revenues 7,478,977 3,736,649 13,247,213 8,969,294
---------------- -------------------------------- ----------------
Operating Expenses:
Operation --
Fuel 2,433,071 893,394 3,945,069 2,062,750
Purchased power 1,893,531 350,731 2,178,390 869,309
Other 1,108,631 623,581 2,158,688 1,629,858
Maintenance 208,979 195,224 702,779 650,455
Depreciation and amortization 376,300 335,731 1,147,739 975,975
Taxes other than income taxes 181,376 159,199 499,038 450,521
Write down of assets 8,895 68,999 8,895 68,999
---------------- -------------------------------- ----------------
Total operating expenses 6,210,783 2,626,859 10,640,598 6,707,867
---------------- -------------------------------- ----------------
Operating Income 1,268,194 1,109,790 2,606,615 2,261,427
Other Income:
Interest income 36,641 45,910 98,766 115,538
Equity in earnings of unconsolidated subsidiaries 64,544 7,926 115,359 150,849
Other, net 26,188 276,150 92,544 314,460
---------------- -------------------------------- ----------------
Earnings Before Interest and Income Taxes 1,395,567 1,439,776 2,913,284 2,842,274
---------------- -------------------------------- ----------------
Interest Charges and Other:
Interest on long-term debt 212,726 164,769 621,643 495,477
Interest on notes payable 81,076 53,648 226,393 125,163
Amortization of debt discount, 11,471 10,159 30,594 29,170
premium and expense, net
Other interest charges, net 9,798 22,350 15,890 51,603
Minority interests in subsidiaries 16,893 118,518 59,870 154,702
Distributions on capital and preferred 44,015 46,248 132,346 136,196
securities of subsidiaries
Preferred dividends of subsidiaries 4,801 5,462 14,259 15,683
---------------- -------------------------------- ----------------
Total interest charges and other, net 380,780 421,154 1,100,995 1,007,994
---------------- -------------------------------- ----------------
Earnings Before Income Taxes 1,014,787 1,018,622 1,812,289 1,834,280
Income taxes 401,254 403,439 611,408 680,796
---------------- -------------------------------- ----------------
Consolidated Net Income $613,533 $615,183 $1,200,881 $1,153,484
================ ================================ ================
Common Stock Data:
Average number of shares of 649,347 678,472 650,392 690,155
common stock outstanding (in thousands)
Basic and diluted earnings $0.95 $0.90 $1.85 $1.67
per share of common stock
Cash dividends paid $0.335 $0.335 $1.005 $1.005
per share of common stock
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
----------------- ------------------
(in thousands)
Operating Activities:
<S> <C> <C>
Consolidated net income $1,200,881 $1,153,484
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Depreciation and amortization 1,149,878 1,048,897
Deferred income taxes and investment tax credits 167,965 155,668
Write down of assets 8,895 68,999
Equity in earnings of unconsolidated subsidiaries (115,478) (150,849)
Other, net 144,840 (144,154)
Changes in certain current assets and liabilities
excluding effects from acquisitions --
Receivables, net (974,202) (442,855)
Risk management activities, net 85,654 -
Fossil fuel stock 60,301 21,310
Materials and supplies (16,483) (8,123)
Accounts payable 366,297 (296,444)
Other 229,361 535,508
----------------- ------------------
Net cash provided from operating activities 2,307,909 1,941,441
----------------- ------------------
Investing Activities:
Gross property additions (1,918,577) (1,695,779)
Southern Energy business acquisitions, net of cash acquired (291,713) (1,472,217)
Other (41,841) 214,575
----------------- ------------------
Net cash used for investing activities (2,252,131) (2,953,421)
----------------- ------------------
Financing Activities:
Increase (decrease) in notes payable, net 1,602,577 1,569,554
Proceeds --
Other long-term debt 1,031,848 2,081,778
Capital and preferred securities - 250,000
Common stock 60,470 23,793
Retirements/repurchases --
First mortgage bonds (211,009) (889,800)
Other long-term debt (640,204) (754,137)
Preferred stock (383) (85,980)
Common stock repurchased (414,643) (648,764)
Payment of common stock dividends (655,135) (696,014)
Other (447,612) 59,690
----------------- ------------------
Net cash provided from financing activities 325,909 910,120
----------------- ------------------
Effect of exchange rate changes on cash (13,429) (1,872)
----------------- ------------------
Net Increase (Decrease) in Cash and Cash Equivalents 368,258 (103,732)
Cash and Cash Equivalents at Beginning of Year 466,416 871,353
----------------- ------------------
Cash and Cash Equivalents at End of Year $834,674 $767,621
================= ==================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $1,034,023 $764,750
Income taxes (net of refunds) $326,385 $311,336
Southern Energy business acquisitions --
Fair value of assets acquired $2,544,722 $1,505,042
Less cash paid for common stock 291,713 1,472,217
----------------- ------------------
Liabilities assumed $2,253,009 $32,825
================= ==================
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
------------------- ------------------
(in thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 834,674 $ 466,416
Special deposits 73,743 72,490
Receivables, less accumulated provisions for uncollectible accounts
of $62,526 at September 30, 2000 and $65,420 at December 31, 1999 3,896,731 1,645,325
Under recovered retail fuel clause revenue 449,395 243,791
Assets from risk management activities, current 950,299 -
Fossil fuel stock, at average cost 330,969 310,635
Materials and supplies, at average cost 601,272 585,080
Other 329,993 198,823
------------------- ------------------
Total current assets 7,467,076 3,522,560
------------------- ------------------
Property, Plant, and Equipment:
In service 38,123,219 36,763,700
Less accumulated provision for depreciation 14,803,574 14,075,044
------------------- ------------------
23,319,645 22,688,656
Nuclear fuel, at amortized cost 198,807 226,124
Construction work in progress 1,600,914 1,629,701
------------------- ------------------
Total property, plant, and equipment 25,119,366 24,544,481
------------------- ------------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 1,244,175 1,376,357
Property rights, net of accumulated amortization
of $201,263 at September 30, 2000 and $226,866 at December 31, 1999 1,845,931 2,202,206
Goodwill, net of accumulated amortization
of $201,620 at September 30, 2000 and $163,560 at December 31, 1999 2,256,330 2,105,859
Other intangibles, net of accumulated amortization
of $28,262 at September 30, 2000 and $13,308 at December 31, 1999 515,639 446,927
Nuclear decommissioning trusts 727,690 658,567
Leveraged leases 580,973 556,419
Assets from risk management activities, noncurrent 534,593 -
Other 693,791 578,231
------------------- ------------------
Total other property and investments 8,399,122 7,924,566
------------------- ------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 944,541 987,144
Prepaid pension costs 692,098 590,274
Debt expense, being amortized 144,528 145,092
Premium on reacquired debt, being amortized 284,896 217,125
Other 480,282 457,770
------------------- ------------------
Total deferred charges and other assets 2,546,345 2,397,405
------------------- ------------------
Total Assets $43,531,909 $38,389,012
=================== ==================
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
------------------- ------------------
(in thousands)
Current Liabilities:
<S> <C> <C>
Securities due within one year $ 342,291 $ 576,299
Notes payable 5,517,798 3,915,258
Accounts payable 2,260,873 895,456
Liabilities from risk management activities, current 1,070,447 -
Customer deposits 142,901 132,555
Taxes accrued --
Income taxes 588,923 155,326
Other 323,376 263,899
Interest accrued 231,215 281,272
Vacation pay accrued 122,169 120,360
Other 655,158 793,334
------------------- ------------------
Total current liabilities 11,255,151 7,133,759
------------------- ------------------
Long-term debt 11,947,225 11,746,596
------------------- ------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,524,911 4,504,896
Deferred credits related to income taxes 591,255 639,921
Accumulated deferred investment tax credits 671,033 693,422
Employee benefits provisions 547,754 513,395
Liabilities from risk management activities, noncurrent 439,555 -
Prepaid capacity revenues 63,914 79,703
Other 748,136 453,034
------------------- ------------------
Total deferred credits and other liabilities 7,586,558 6,884,371
------------------- ------------------
Minority interests in subsidiaries 674,987 724,610
------------------- ------------------
Company or subsidiary obligated mandatorily redeemable
capital and preferred securities 2,320,175 2,326,835
------------------- ------------------
Cumulative preferred stock of subsidiaries 368,126 368,509
------------------- ------------------
Common Stockholders' Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- September 30, 2000: 700,622,308 shares;
-- December 31, 1999: 700,620,486 shares 3,503,112 3,503,102
Paid-in capital 2,490,083 2,480,198
Treasury, at cost -- September 30, 2000: 50,076,315 shares;
-- December 31, 1999: 34,824,901 shares (1,284,349) (918,972)
Retained earnings 4,777,956 4,232,399
Accumulated other comprehensive income (107,115) (92,395)
------------------- ------------------
Total common stockholders' equity 9,379,687 9,204,332
------------------- ------------------
Total Liabilities and Stockholders' Equity $43,531,909 $38,389,012
=================== ==================
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Nine Months
Ended September 30,
----------------------------------------
2000 1999
----------------------------------------
(in thousands)
<S> <C> <C>
Consolidated net income $1,200,881 $1,153,484
Other comprehensive income:
Foreign currency translation adjustments (22,837) (158,245)
Unrealized Gain/Loss on Investments 190 -
Related income tax benefits 7,927 55,386
------------------ ------------------
CONSOLIDATED COMPREHENSIVE INCOME $1,186,161 $1,050,625
================== ==================
</TABLE>
<TABLE>
<CAPTION>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
At September 30,
2000 At December 31,
(Unaudited) 1999
------------------ ------------------
(in thousands)
<S> <C> <C>
Balance at beginning of period ($92,395) $15,400
Change in current period (14,720) (107,795)
------------------ ------------------
BALANCE AT END OF PERIOD ($107,115) ($92,395)
================== ==================
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
</TABLE>
11
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
SOUTHERN's traditional business is primarily represented by
its five integrated Southeast utilities, which provide electric service in four
states. Another significant portion of SOUTHERN's business is represented by
Southern Energy, which develops and manages domestic and international
electricity and other energy-related businesses for SOUTHERN. Businesses
acquired by Southern Energy have been included in the consolidated statements of
income since the date of acquisition. Certain changes in operating revenues and
expenses from the prior period result from such acquisitions. Effective August
10, 2000, Southern Energy acquired the remaining outstanding 40% interest in
SCEM for $250 million. As a result of this transaction, SCEM became a wholly
owned indirect subsidiary and is consolidated in the accompanying financial
statements as of the effective date. Prior to August 10, 2000, SOUTHERN's
investment in SCEM was accounted for under the equity method of accounting.
Reference is made to Note (J) in the "Notes to the Condensed Financial
Statements" herein for additional information on the SCEM acquisition. On
October 2, 2000, the initial public offering ("IPO") of 19.7% of Southern
Energy's shares was completed; therefore, effective as of that date, SOUTHERN's
financial statements will exclude the minority share sold in the IPO. Reference
is made to Note (N) in the "Notes to the Condensed Financial Statements" herein
for additional information relating to the IPO and the planned spin-off of
Southern Energy.
Earnings
SOUTHERN's reported consolidated net income for the third quarter and
year-to-date 2000 was $614 million ($0.95 per share) and $1.2 billion ($1.85 per
share), respectively, compared to $615 million ($0.90 per share) and $1.2
billion ($1.67 per share) for the corresponding periods of 1999. Excluding
charges related to Southern Energy's transition to becoming a public company and
other non-operating items, SOUTHERN's earnings from operations for the third
quarter and year-to-date 2000 would have been $668 million ($1.03 per share) and
$1.25 billion ($1.92 per share), respectively, compared to $622 million ($0.91
per share) and $1.16 billion ($1.68 per share) for the corresponding periods of
1999. The transition costs amounted to $45 million ($0.07 per share), including
a charge of $17 million ($0.03 per share) related to Southern Energy's tax
planning strategies, which changed as a result of the IPO and planned spin-off.
This change involves the repatriation of cash from Asia and will have an impact
on SOUTHERN in each quarter until the planned spin-off is completed.
Southern Energy's consolidated net income for the third quarter and year-to-date
2000 was $98 million and $292 million, respectively, compared to $156 million
and $305 million for the corresponding periods of 1999. Earnings decreased by
$58 million, or 37.2%, and $13 million, or 4.3%, for the third quarter and
year-to-date 2000, respectively, when compared to the same periods of the
previous year, primarily due to the sale of the SWEB supply business in the
third quarter of 1999, which increased prior year net income by $78 million, and
transition costs related to Southern Energy becoming a publicly traded company.
These decreases in earnings were partially offset by increased market demand and
strong performance from Southern Energy's assets and marketing and risk
management operations in California and New York as well as the commercial
operation of new plants in North America.
12
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For the integrated Southeast utilities, earnings were down by $7 million, or
1.2%, for the third quarter and up by $17 million, or 1.7%, year-to-date 2000
when compared to the same periods in 1999. The third quarter decrease is
primarily attributed to higher operating expenses which fully offset increases
in operating revenues. The year-to-date 2000 increase is primarily attributed to
increased operating revenues which were in large part offset by higher operating
expenses.
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
<S> <C> <C> <C> <C>
Operating revenues............................... $3,742,328 100.2 $4,277,919 47.7
Fuel expense..................................... 1,539,677 172.3 1,882,319 91.3
Purchased power expense.......................... 1,542,800 439.9 1,309,081 150.6
Other operation expense.......................... 485,050 77.8 528,830 32.4
Maintenance expense.............................. 13,755 7.0 52,324 8.0
Depreciation and amortization expense............ 40,569 12.1 171,764 17.6
Equity in earnings of unconsolidated
subsidiaries.................................. 56,618 714.3 (35,490) (23.5)
Other, net....................................... (249,962) (90.5) (221,916) (70.6)
Interest on long-term debt....................... 47,957 29.1 126,166 25.5
Interest on notes payable........................ 27,428 51.1 101,230 80.9
Minority interest in subsidiaries................ (101,625) (85.7) (94,832) (61.3)
</TABLE>
Operating revenues. The increases in the operating revenues for the third
quarter and year-to-date 2000 are primarily attributed to Southern Energy.
Southern Energy's revenues were up by $3.6 billion and $3.8 billion,
respectively, for the current quarter and year-to-date 2000, when compared to
the same periods in 1999. These increases are primarily related to Southern
Energy's acquisition, effective August 10, 2000, of the remaining 40% of SCEM
which is now consolidated in Southern Energy's financial statements. Reference
is made to Note (J) in the "Notes to the Condensed Financial Statements"
contained herein for additional information regarding this acquisition. For the
integrated Southeast utilities, operating revenues were up by $151 million, or
5.0%, for the third quarter 2000 and $503 million, or 7.1%, year-to-date 2000
due primarily to increased energy sales to SOUTHERN's customers in the
Southeast.
Fuel expense. For the third quarter and year-to-date 2000, fuel expense
increases are mainly attributed to Southern Energy's acquisition of SCEM, as
mentioned previously, higher natural gas prices and increased electricity market
demand at Southern Energy's plants in California, as well as commencement of
commercial operation of new plants in North America, partially offset by a
decrease due to the sale of the SWEB supply business, when compared to the
corresponding periods in 1999. For the integrated Southeast utilities, fuel
expense was up by $50 million, or 6.9%, for the current quarter 2000 and $157
million, or 8.8%, year-to-date 2000 as a result of higher energy demands and
higher natural gas and oil prices when compared to the same periods in 1999.
13
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased power expense. During the third quarter and year-to-date 2000,
this expense increased due primarily to Southern Energy's acquisition of SCEM,
partially offset by a decrease due to the sale of the SWEB supply business. For
the integrated Southeast utilities, purchased power expense increased for both
the current quarter by $116 million, or 56.6%, and year-to-date 2000 by $215
million, or 63.9%, due mainly to increased demand for energy.
Other operation expense. The third quarter and year-to-date 2000 increases
are primarily attributed to Southern Energy. Increases in Southern Energy's
other operation expense result from the commencement of commercial operations of
new plants in North America and the Philippines, additional variable marketing
costs, increased market demand associated with Southern Energy's generating
plants in North America, the acquisition of the remaining 40% of SCEM, and
provisions taken related to revenues of the California operations under
reliability-must-run contracts. For additional information on the matter in
California, see Note (O) in the "Notes to the Condensed Financial Statements"
contained herein.
Maintenance expense. For the integrated Southeast utilities, maintenance
expense was up $9 million, or 5.5%, and $28 million, or 5.1%, for the third
quarter and year-to-date 2000, respectively. These increases are attributed to
higher costs related to scheduled maintenance on steam and other power
generation facilities. Southern Energy's maintenance expenses increased during
third quarter and year-to-date 2000 by $4 million and $23 million, respectively,
when compared to the same periods in 1999 due primarily to the acquisitions in
1999 of generating assets in California and New York.
Depreciation and amortization expense. For the integrated Southeast
utilities, this item increased $12 million, or 4.5%, in the third quarter of
2000 and $82 million, or 10.4%, year-to-date 2000 primarily as a result of
increased property, plant and equipment and accelerated amortization and
depreciation by GEORGIA in accordance with the three-year rate order approved by
the Georgia PSC. See Note (F) in the "Notes to the Condensed Financial
Statements" herein for further details regarding the retail rate order. Southern
Energy's depreciation and amortization expense was higher for the current
quarter by $22 million and $66 million year-to-date 2000 due to the commencement
of commercial operations of new plants in North America and the Philippines.
Southern Energy's year-to-date 2000 increase is also attributed to the
acquisitions of plants in California and New York.
Equity in earnings of unconsolidated subsidiaries. The changes for both the
current quarter and year-to-date 2000 are attributed to Southern Energy. The
third quarter 2000 increase is mainly due to increased income from Southern
Energy's equity investments in China and in SCEM, prior to the acquisition of
the remaining 40% of SCEM in August 2000. The year-to-date 2000 decrease when
compared to the same period in 1999 is primarily related to the successful
resolution in 1999 of a dispute related to Southern Energy's operations in
China.
Other, net. The decreases in this item for the third quarter and
year-to-date 2000, when compared to the same periods in 1999, are primarily
related to Southern Energy's gain on the sale of the SWEB supply business in
1999, which resulted in a gain of $286 million prior to taxes and other
expenses.
14
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Interest on long-term debt. The third quarter and year-to-date 2000
increases are primarily attributed to interest on higher borrowings by Southern
Energy used to finance acquisitions, fund dividends paid to SOUTHERN and
commence commercial operations of new plants in North America and the
Philippines. The integrated Southeast utilities also contributed to these
increases due primarily to the issuances of senior notes by ALABAMA, during the
last half of 1999 and the second quarter of 2000, and GEORGIA and MISSISSIPPI
during the first quarter of 2000.
Interest on notes payable. The increases for the third quarter and
year-to-date 2000 are mainly due to Southern Energy's increased borrowings to
finance business activities, as mentioned above. SOUTHERN also contributed to
the year-to-date 2000 increase due to a higher average short-term debt
outstanding and higher interest rates on these borrowings.
Minority interests in subsidiaries. For the third quarter and year-to-date
2000, these items were lower due primarily to the sale of the SWEB supply
business in 1999, as mentioned previously. The year-to-date 2000 decrease was
partially offset by increased minority interest in income from operations in the
Philippines and South America.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from weather to energy sales growth to a less regulated, more
competitive environment. For additional information relating to Southern Energy
and other businesses, see Item 1 - BUSINESS - "Southern Energy" and "Other
Business" in the Form 10-K. Also, reference is made to Note (N) in the "Notes to
the Condensed Financial Statements" herein for information relating to Southern
Energy's IPO and the planned spin-off of Southern Energy.
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 December 1999, the FERC issued its final rule on RTOs and on October 16,
2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a
proposal for the creation of a RTO. The proposal calls for the formation of a
for-profit company that would have control of the bulk power transmission system
of participating utilities, which will have the option to divest, sell or lease
their assets to the RTO. If the FERC accepts the proposal as filed, the creation
of the RTO is not expected to have a material impact on the financial statements
of ALABAMA, GEORGIA, GULF, MISSISSIPPI, SAVANNAH or SOUTHERN. However, the
ultimate outcome of this matter is uncertain. For more information on the FERC's
rule, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of SOUTHERN in the Form 10-K.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Protection Agency Litigation" and Note 3 to the financial
statements of SOUTHERN in the Form 10-K for information on EPA litigation.
15
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 2000, Southern Energy announced an agreement with Potomac Electric
Power Company ("PEPCO") to purchase PEPCO's generating business in Maryland and
Virginia, assume PEPCO's entitlements under various power purchase agreements,
operate two power stations in Washington, D.C. retained by PEPCO and supply
PEPCO with power required to meet its retail obligations for up to four years
pursuant to transition power agreements. The purchase price of this transaction
is $2.65 billion plus amounts to be determined for working capital and
reimbursement of capital expenditures, and approximately $260 million in the
event a certain power purchase agreement is not transferred to Southern Energy.
This transaction is expected to close later this year.
On October 30, 2000, Southern Energy and PPL Global, through a
jointly-owned subsidiary, finalized the acquisition of Hyder plc. Hyder plc
provides water and sewerage, electricity distribution and other services to
customers in Wales. For additional information, reference is made to Note (R) to
the "Notes to the Condensed Financial Statements" contained herein.
Reference is made to Notes (B) through (G) and (J) through (S) 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.
New Accounting Standard
In June 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and for hedging activities. SFAS No. 133 requires that certain
derivative instruments be recorded in the balance sheet as either an asset or
liability measured at fair value and that changes in the fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SOUTHERN intends to adopt the provisions of SFAS No. 133 on January 1,
2001.
SOUTHERN utilizes financial instruments to reduce its exposure to changes
in interest rates and foreign currency exchange rates. SOUTHERN also enters into
commodity related derivatives to limit exposure to changing prices on certain
inventory purchases and electricity purchases and sales. Upon adoption, these
instruments will qualify as cash flow hedges under SFAS No. 133, resulting in
the deferral of related gains and losses in other comprehensive income until the
hedged transactions occur. Any ineffectiveness will be recognized currently in
net income.
Substantially all of SOUTHERN's bulk energy purchases and sales meet the
definition of a derivative under SFAS No. 133. In many cases, such transactions
will meet the normal purchase and sale exception and the related contracts will
continue to be accounted for under the accrual method. However, others will be
required to be marked to market through current period income. The majority of
such contracts are used by Southern Energy in its trading and marketing business
and are already being marked to market in accordance with existing accounting
requirements.
Management continues to assess the effects of adopting SFAS No. 133, but
currently expects the impact to be immaterial to SOUTHERN's financial
statements. The application of SFAS No. 133 is still evolving and further
guidance from the FASB is expected. When established, this further guidance may
have additional impacts on SOUTHERN's financial statements.
16
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in SOUTHERN's financial condition during the first nine months of
2000 included $1.9 billion used for gross property additions to utility plant.
The funds for these additions and other capital requirements were from
operations, short-term borrowings and other long-term debt. See SOUTHERN's
Condensed Consolidated Statements of Cash Flows for further details. Reference
is made to SOUTHERN's Condensed Consolidated Statements of Comprehensive Income
herein for information relating to other comprehensive income.
Financing Activities
During the first nine months of 2000, maturities of the integrated Southeast
utilities' first mortgage bonds totaled $200 million. In February 2000, GEORGIA
issued $300 million of floating rate senior notes due February 22, 2002. The
proceeds of the sale were used to repay a portion of GEORGIA's outstanding
short-term indebtedness. In March 2000, MISSISSIPPI issued $100 million of
floating rate senior notes due March 28, 2002. The proceeds were used to prepay
bank loans of $45 million maturing in November 2001 and $5 million maturing in
October 2002. The balance was used to repay a portion of MISSISSIPPI's
outstanding short-term indebtedness. In May 2000, ALABAMA issued $250 million of
7.85% senior notes due May 15, 2003. The proceeds of the sale were used to repay
a portion of ALABAMA's outstanding short-term indebtedness.
In August 2000, GEORGIA sold, through public authorities, $78.725 million
of 4.53% pollution control revenue bonds due September 1, 2030. The initial
interest rate is effective through March 1, 2002, at which time the bonds will
bear interest at either a variable rate or a new fixed rate. The proceeds were
used to refund $28.725 million aggregate principal amount of 6 5/8% pollution
control revenue bonds which were called for redemption in October 2000 and $50
million aggregate principal amount of 4 3/8% pollution control revenue bonds
which matured on November 1, 2000.
Reference is made to "Future Earnings Potential" herein for the discussion
of the agreement between SOUTHERN, through its subsidiary Southern Energy, and
PEPCO. To fund the purchase price of this transaction, Southern Energy plans to
enter into lease financing arrangements for a significant portion of the PEPCO
assets, which are expected to provide $1.5 billion; to issue $1.02 billion of
debt through one of its subsidiaries, of which approximately $938 million will
be drawn at closing; and to provide the balance from committed credit lines.
See Note (K) in the "Notes to the Condensed Financial Statements" herein
for discussion of certain financial derivative contracts entered into by
SOUTHERN.
In April 1999, SOUTHERN's board approved the repurchase of up to 50 million
shares of SOUTHERN's common stock over the next two years through open market or
privately negotiated transactions. The repurchase program was completed during
the first quarter 2000.
The market price of SOUTHERN's common stock at September 30, 2000 was
$32.46 per share and the book value was $14.42 per share, representing a
market-to-book ratio of 225%, compared to $23.50, $13.82 and 170%, respectively,
at the end of 1999. The dividend for the third quarter of 2000 was $0.335 per
share.
17
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital
Requirements for Construction", "Other Capital Requirements" and "Environmental
Matters" of SOUTHERN in the Form 10-K for a description of the SOUTHERN system's
capital requirements for its construction program, sinking fund requirements and
maturing debt, and environmental compliance efforts. Approximately $342 million
will be required by September 30, 2001 for redemptions and maturities of
long-term debt. Also, the integrated Southeast utilities plan to continue, to
the extent possible, a program to retire higher-cost debt and preferred stock
and replace these securities with lower-cost capital.
Sources of Capital
In addition to the financing activities previously described, SOUTHERN may
require additional equity capital during the remainder of the year. The amounts
and timing of additional equity capital to be raised in 2000, as well as in
subsequent years, will be contingent on SOUTHERN's investment opportunities. The
integrated Southeast utilities plan to obtain the funds required for
construction and other purposes from sources similar to those used in the past.
The amount, type and timing of any financings--if needed--will depend upon
maintenance of adequate earnings, regulatory approval, prevailing market
conditions and other factors. See Item 1 - BUSINESS - "Financing Programs" in
the Form 10-K for additional information.
To meet short-term cash needs and contingencies, the SOUTHERN system had at
September 30, 2000 approximately $835 million of cash and cash equivalents and
approximately $5.9 billion of unused credit arrangements with banks. These
unused credit arrangements also provide liquidity support to variable rate
pollution control bonds and commercial paper programs. At September 30, 2000,
the SOUTHERN system had outstanding approximately $3.5 billion of short-term
notes payable and $2.0 billion of commercial paper. Management believes that the
need for working capital can be adequately met by utilizing lines of credit
without maintaining large cash balances.
18
<PAGE>
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
As part of its energy marketing activities, Southern Energy enters into a
variety of contractual commitments, such as swaps, swap options, cap and floor
agreements, futures contracts, forward purchase and sale agreements, and option
contracts. These contracts generally require future settlement and are either
executed on an exchange or traded as over-the-counter instruments. Contractual
commitments have widely varying terms and have durations that range from a few
days to a number of years, depending on the instrument.
Southern Energy records all contractual commitments used for trading
purposes, including those used to hedge trading positions, at fair value.
Consequently, changes in the amounts recorded in the accompanying consolidated
balance sheets resulting from movements in fair value are included in revenues
in the period in which they occur. Contractual commitments expose Southern
Energy to both market risk and credit risk.
Market Risk
Market risk is the potential loss that Southern Energy may incur as a result of
changes in the fair value of a particular instrument or commodity. All financial
and commodities-related instruments, including derivatives, are subject to
market risk. Southern Energy's exposure to market risk is determined by a number
of factors, including the size, duration, composition, and diversification of
positions held and the absolute and relative levels of interest rates, as well
as market volatility and liquidity. For instruments such as options, the time
period during which the option may be exercised and the relationship between the
current market price of the underlying instrument and the option's contractual
strike or exercise price also affects the level of market risk. The most
significant factor influencing the overall level of market risk to which
Southern Energy is exposed is its use of various risk management techniques.
Southern Energy manages market risk by actively monitoring compliance with
stated risk management policies as well as monitoring the effectiveness of its
hedging policies and strategies. Southern Energy's risk management policies
limit the amount of total net exposure and rolling net exposure during the
stated periods. These policies, including related risk limits, are approved by
regional boards and are regularly assessed by management to ensure their
appropriateness given Southern Energy's objectives.
Net notional amounts of electricity, natural gas and crude oil at
September 30, 2000 are as follows:
Net Notional Amounts Unit of Measure
Electricity 5,050,659 MwH
Natural gas 16,872,820 MmBTUs
Crude oil (1,027,319) Barrels
The determination of net notional amounts does not consider any of the
market risk factors discussed above. Net notional amounts are indicative only of
the volume of activity and are not a measure of market risk. Market risk is also
influenced by the relationship among the various off-balance sheet categories,
as well as by the relationship between off-balance sheet items and items
recorded in the accompanying consolidated balance sheets. For all of these
reasons, the interpretation of notional amounts as a measure of market risk
could be misleading. The net notional amounts of Southern Energy's other
commodity positions were immaterial at September 30, 2000.
19
<PAGE>
Item 3. Quantitative And Qualitative Disclosures About Market Risk. (Continued)
The fair values of Southern Energy's assets from risk management activities
recorded in the accompanying consolidated balance sheets at September 30, 2000
were comprised primarily of approximately 43% electricity and 48% natural gas.
The fair values of the liabilities from risk management activities recorded in
the accompanying consolidated balance sheets at September 30, 2000 were
comprised primarily of approximately 48% electricity and 44% natural gas.
Credit Risk
In conducting its energy marketing and risk management activities, Southern
Energy regularly transacts business with a broad range of entities and a wide
variety of end users, trading companies, and financial institutions. Credit risk
is measured by the loss Southern Energy would record if its counterparties
failed to perform pursuant to the terms of their contractual obligations and the
value of collateral held, if any, were not adequate to cover such losses.
Southern Energy has established controls to determine and monitor the
creditworthiness of counterparties, as well as the quality of pledged
collateral, and uses master netting agreements whenever possible to mitigate
Southern Energy's exposure to counterparty credit risk. Master netting
agreements enable Southern Energy to net certain assets and liabilities by
counterparty. Southern Energy also nets across product lines and against cash
collateral, provided such provisions are established in the master netting and
cash collateral agreements. Additionally, Southern Energy may require
counterparties to pledge additional collateral when deemed necessary.
Concentrations of credit risk from financial instruments, including
contractual commitments, exist when groups of counterparties have similar
business characteristics or are engaged in like activities that would cause
their ability to meet their contractual commitments to be adversely affected, in
a similar manner, by changes in the economy or other market conditions. Southern
Energy monitors credit risk on both an individual basis and a group counterparty
basis.
No single counterparty represents 10% or more of Southern Energy's credit
exposure at September 30, 2000. Southern Energy's overall exposure to credit
risk may be impacted, either positively or negatively, because its
counterparties may be similarly affected by changes in economic, regulatory, or
other conditions.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative
Financial Instruments" and Note 1 to the financial statements of SOUTHERN in
Item 8 of the Form 10-K. Additional reference is made to Note (K) in the "Notes
to the Condensed Financial Statements" contained herein for additional
information regarding commodity-related marketing and price risk management
activities.
20
<PAGE>
ALABAMA POWER COMPANY
21
<PAGE>
<TABLE>
<CAPTION>
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ---------------
(in thousands) (in thousands)
Operating Revenues:
<S> <C> <C> <C> <C>
Retail sales $945,964 $950,428 $2,299,660 $2,208,371
Sales for resale --
Non-affiliates 140,726 136,562 350,542 315,135
Affiliates 25,954 14,192 73,046 83,476
Other revenues 24,651 14,793 60,682 45,933
---------------- ---------------- ---------------- ---------------
Total operating revenues 1,137,295 1,115,975 2,783,930 2,652,915
---------------- ---------------- ---------------- ---------------
Operating Expenses:
Operation --
Fuel 285,316 256,249 698,711 656,083
Purchased power --
Non-affiliates 75,066 53,476 130,939 79,051
Affiliates 53,798 82,404 134,585 145,922
Other 126,654 139,956 374,263 392,454
Maintenance 60,021 59,922 220,617 205,735
Depreciation and amortization 92,760 86,286 274,458 261,102
Taxes other than income taxes 53,773 50,153 160,013 153,815
---------------- ---------------- ---------------- ---------------
Total operating expenses 747,388 728,446 1,993,586 1,894,162
---------------- ---------------- ---------------- ---------------
Operating Income 389,907 387,529 790,344 758,753
Other Income (Expense):
Interest income 8,943 21,215 23,420 44,983
Equity in earnings of unconsolidated subsidiaries 847 589 2,344 2,066
Other, net 1,298 (7,939) 109 (16,238)
---------------- ---------------- ---------------- ---------------
Earnings Before Interest and Income Taxes 400,995 401,394 816,217 789,564
---------------- ---------------- ---------------- ---------------
Interest Charges and Other:
Interest on long-term debt 56,685 48,260 163,199 139,286
Interest on notes payable 1,681 3,348 8,857 8,908
Amortization of debt discount, premium and expense, net 3,037 2,816 8,762 8,306
Other interest charges, net 2,171 14,896 5,661 31,774
Distributions on preferred securities of subsidiary 6,418 6,253 19,125 18,286
---------------- ---------------- ---------------- ---------------
Total interest charges and other, net 69,992 75,573 205,604 206,560
---------------- ---------------- ---------------- ---------------
Earnings Before Income Taxes 331,003 325,821 610,613 583,004
Income taxes 118,201 120,272 219,120 213,616
---------------- ---------------- ---------------- ---------------
Net Income 212,802 205,549 391,493 369,388
Dividends on Preferred Stock 4,076 4,728 12,080 12,455
---------------- ---------------- ---------------- ---------------
Net Income After Dividends on Preferred Stock $208,726 $200,821 $379,413 $356,933
================ ================ ================ ===============
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
----------------- ------------------
(in thousands)
Operating Activities:
<S> <C> <C>
Net income $391,493 $369,388
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 309,042 306,408
Deferred income taxes and investment tax credits, net 48,140 57,901
Other, net (19,326) 24,653
Changes in certain current assets and liabilities --
Receivables, net (115,011) (51,759)
Fossil fuel stock 9,362 3,981
Materials and supplies (5,995) (15,315)
Accounts payable (16,369) (69,441)
Energy cost recovery, retail (71,436) (83,174)
Other 128,000 33,767
----------------- ------------------
Net cash provided from operating activities 657,900 576,409
----------------- ------------------
Investing Activities:
Gross property additions (622,469) (563,946)
Other (47,449) (44,503)
----------------- ------------------
Net cash used for investing activities (669,918) (608,449)
----------------- ------------------
Financing Activities:
Increase in notes payable, net 45,527 88,421
Proceeds --
Other long-term debt 250,000 751,650
Preferred securities - 50,000
Capital contributions from parent company 167,004 -
Redemptions --
First mortgage bonds (111,009) (470,000)
Other long-term debt (4,141) (104,457)
Preferred stock - (50,000)
Payment of preferred stock dividends (11,988) (11,921)
Payment of common stock dividends (313,200) (296,100)
Other (951) (15,425)
----------------- ------------------
Net cash provided from (used for) financing activities 21,242 (57,832)
----------------- ------------------
Net Change in Cash and Cash Equivalents 9,224 (89,872)
Cash and Cash Equivalents at Beginning of Period 19,475 134,248
----------------- ------------------
Cash and Cash Equivalents at End of Period $ 28,699 $ 44,376
================= ==================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $163,022 $167,163
Income taxes (net of refunds) $60,777 $94,202
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
------------------- --------------------
(in thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 28,699 $ 19,475
Receivables --
Customer accounts receivable 364,811 265,900
Under recovered retail fuel clause revenue 240,063 168,627
Other accounts and notes receivable 57,547 42,137
Affiliated companies 59,272 40,083
Accumulated provision for uncollectible accounts (6,764) (4,117)
Refundable income taxes 2,145 17,997
Fossil fuel stock, at average cost 75,220 84,582
Materials and supplies, at average cost 173,632 167,637
Other 61,529 46,011
------------------- --------------------
Total current assets 1,056,154 848,332
------------------- --------------------
Property, Plant, and Equipment:
In service 12,267,485 11,783,078
Less accumulated provision for depreciation 5,099,351 4,901,384
------------------- --------------------
7,168,134 6,881,694
Nuclear fuel, at amortized cost 85,940 106,836
Construction work in progress 737,912 715,153
------------------- --------------------
Total property, plant, and equipment 7,991,986 7,703,683
------------------- --------------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 37,549 34,891
Nuclear decommissioning trusts 321,313 286,653
Other 11,794 12,156
------------------- --------------------
Total other property and investments 370,656 333,700
------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 325,720 330,405
Prepaid pension costs 254,687 213,971
Debt expense, being amortized 8,951 9,563
Premium on reacquired debt, being amortized 77,997 83,895
Department of Energy assessments 27,685 27,685
Other 110,847 97,470
------------------- --------------------
Total deferred charges and other assets 805,887 762,989
------------------- --------------------
Total Assets $10,224,683 $9,648,704
=================== ====================
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
------------------- --------------------
(in thousands)
Current Liabilities:
<S> <C> <C>
Securities due within one year $ 844 $100,943
Notes payable 142,351 96,824
Accounts payable --
Affiliated 93,061 91,315
Other 118,102 140,842
Customer deposits 35,597 31,704
Taxes accrued --
Income taxes 233,376 100,569
Other 69,592 18,295
Interest accrued 46,288 26,365
Vacation pay accrued 30,022 30,112
Other 57,695 84,267
------------------- --------------------
Total current liabilities 826,928 721,236
------------------- --------------------
Long-term debt 3,426,643 3,190,378
------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,259,277 1,240,344
Deferred credits related to income taxes 252,164 265,102
Accumulated deferred investment tax credits 252,052 260,367
Employee benefits provisions 83,650 82,298
Prepaid capacity revenues 63,914 79,703
Other 173,653 155,901
------------------- --------------------
Total deferred credits and other liabilities 2,084,710 2,083,715
------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 347,000 347,000
------------------- --------------------
Cumulative preferred stock 317,512 317,512
------------------- --------------------
Common Stockholder's Equity:
Common stock, par value $40 per share --
Authorized - 6,000,000 shares
Outstanding - 5,608,955 shares
Par value 224,358 224,358
Paid-in capital 1,705,996 1,538,992
Premium on preferred stock 99 99
Retained earnings 1,291,437 1,225,414
------------------- --------------------
Total common stockholder's equity 3,221,890 2,988,863
------------------- --------------------
Total Liabilities and Stockholder's Equity $10,224,683 $9,648,704
=================== ====================
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
</TABLE>
25
<PAGE>
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
Earnings
ALABAMA's net income after dividends on preferred stock for the third quarter
and year-to-date 2000 was $208.7 million and $379.4 million, respectively,
compared to $200.8 million and $356.9 million for the corresponding periods of
1999. Earnings for the current quarter 2000 increased $7.9 million, or 3.9%, due
primarily to a decrease in non-fuel operation expenses. Year-to-date, earnings
increased $22.5 million, or 6.3%, due primarily to an increase in retail sales.
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
<S> <C> <C> <C> <C>
Retail sales..................................... $(4,464) (0.5) $91,289 4.1
Sales for resale - affiliates.................... 11,762 82.9 (10,430) (12.5)
Fuel expense..................................... 29,067 11.3 42,628 6.5
Purchased power - non-affiliates................. 21,590 40.4 51,888 65.6
Purchased power - affiliates..................... (28,606) (34.7) (11,337) (7.8)
Other operation expense.......................... (13,302) (9.5) (18,191) (4.6)
Depreciation and amortization.................... 6,474 7.5 13,356 5.1
Interest income.................................. (12,272) (57.8) (21,563) (47.9)
Other, net....................................... 9,237 116.3 16,347 100.7
Interest on long-term debt....................... 8,425 17.5 23,913 17.2
Other interest charges, net...................... (12,725) (85.4) (26,113) (82.2)
</TABLE>
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenues were relatively unchanged for the third quarter
2000 when compared to the same period in 1999. The increase in year-to-date 2000
retail sales revenue, excluding fuel revenue, is primarily due to increased
energy sales of 2.9%.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies within the SOUTHERN system, as
well as purchases of energy, will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions did not have a significant impact on earnings.
26
<PAGE>
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. Increased generation from gas-fueled plants at a time of
increased natural gas prices resulted in higher fuel expense for the third
quarter and year-to-date 2000 when compared to the same periods in 1999. Since
energy expenses are generally offset by energy revenues, these expenses do not
have a significant impact on earnings.
Purchased power - non-affiliates. Purchased power from non-affiliates
increased for the current quarter 2000 due primarily to higher costs associated
with these energy purchases and to offset decreased hydro power generation.
Hydro power generation was lower as a result of hot, dry weather in ALABAMA's
service territory. The year-to-date 2000 increase was to offset decreased
nuclear and hydro power generation related to a refueling and steam generator
replacement outage and lower stream flows, respectively.
Other operation expense. These costs were lower for the current quarter and
year-to-date 2000, when compared to the corresponding periods in 1999, due
primarily to a decrease in administrative and general expenses. Lower
administrative and general expenses for the third quarter and year-to-date 2000
are due to a reduction in computer-related expenses and a decrease in expenses
associated with employee benefits. The year-to-date 2000 decrease in
administrative and general expenses also includes a nuclear insurance refund.
Depreciation and amortization. The third quarter and year-to-date 2000
increases are attributed to increased property, plant and equipment when
compared to the same periods in 1999.
Interest income. The current quarter and year-to-date 2000 decreases are
primarily due to gains recognized in 1999 on investments held by the nuclear
decommissioning trusts which were offset by a concurrent reduction of other
interest charges in accordance with FERC requirements.
Other, net. Third quarter and year-to-date 2000 increases are primarily
attributed to an increase in Allowance for Funds Used During Construction and a
gain on disposition of property.
Interest on long-term debt. Interest on long-term debt increased in the
third quarter and year-to-date 2000 primarily due to the issuances of $450
million of senior notes in the last half of 1999 and $250 million in the second
quarter of 2000.
Other interest charges, net. The third quarter and year-to-date 2000
decreases result from an increase in Allowance for Funds Used During
Construction resulting in a larger credit to interest expense than was recorded
in the corresponding periods for 1999. Additionally, there was a decrease in
interest charges related to the nuclear decommissioning trusts, which was offset
by a concurrent reduction of interest income in accordance with FERC
requirements.
27
<PAGE>
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from weather to energy sales growth to a less regulated, more
competitive environment.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, ALABAMA is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" of ALABAMA in the Form 10-K.
In December 1999, the FERC issued its final rule on RTOs and on October 16,
2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a
proposal for the creation of a RTO. The proposal calls for the formation of a
for-profit company that would have control of the bulk power transmission system
of participating utilities, which will have the option to divest, sell or lease
their assets to the RTO. If the FERC accepts the proposal as filed, the creation
of the RTO is not expected to have a material impact on the financial statements
of ALABAMA. However, the ultimate outcome of this matter is uncertain. For more
information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form
10-K.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of ALABAMA in the
Form 10-K for information on EPA litigation.
Reference is made to Notes (B), (C), (D) and (E) in the "Notes to the
Condensed Financial Statements" herein for discussion of various contingencies
and other matters which may affect future earnings potential.
New Accounting Standard
In June 2000, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires that certain derivative instruments be
recorded in the balance sheet as either an asset or liability measured at fair
value and that changes in the fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. ALABAMA intends to adopt the
provisions of SFAS No. 133 on January 1, 2001.
Substantially all of ALABAMA's bulk energy purchases and sales meet the
definition of a derivative under SFAS No. 133. In most cases, such transactions
will meet the normal purchase and sale exception and the related contracts will
continue to be accounted for under the accrual method. However, a limited number
of contracts will be required to be accounted for as derivatives in accordance
with SFAS No. 133. Upon adoption, certain of these contracts will qualify as
cash flow hedges, resulting in the deferral of related gains and losses in other
comprehensive income until the hedged transactions occur. Any ineffectiveness
will be recognized currently in net income.
28
<PAGE>
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management continues to assess the effects of adopting SFAS No. 133, but
currently expects the impact to be immaterial to ALABAMA's financial statements.
The application of SFAS No. 133 is still evolving and further guidance from the
FASB is expected. When established, this further guidance may have additional
impacts on ALABAMA's financial statements.
FINANCIAL CONDITION
Overview
Major changes in ALABAMA's financial condition during the first nine months of
2000 included the addition of approximately $622.5 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operating activities and capital contributions from SOUTHERN. See ALABAMA's
Condensed Statements of Cash Flows for further details.
Financing Activities
During the first nine months of 2000, maturities of first mortgage bonds by
ALABAMA totaled $100 million. In May 2000, ALABAMA issued $250 million of 7.85%
senior notes due May 15, 2003. The proceeds of the sale were used to repay a
portion of ALABAMA's outstanding short-term indebtedness. ALABAMA will continue
to retire higher-cost debt and preferred stock and replace these securities with
lower-cost capital as market conditions permit.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA
under "Capital Requirements," "Other Capital Requirements" and "Environmental
Matters" in the Form 10-K for a description of ALABAMA's capital requirements
for its construction program, maturing debt and environmental compliance
efforts.
Sources of Capital
In addition to the financing activities previously described herein, ALABAMA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, ALABAMA had at September
30, 2000 approximately $28.7 million of cash and cash equivalents, had unused
committed lines of credit of approximately $924 million (including $418 million
of such lines under which borrowings may be made only to fund purchase
obligations relating to variable rate pollution control bonds) and an extendible
commercial note program. ALABAMA has regulatory authority for up to $750 million
of short-term borrowings. At September 30, 2000, ALABAMA had outstanding $142.4
million of commercial paper.
29
<PAGE>
ARTHUR ANDERSEN
Exhibit 1
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, 2000, and the related condensed statements of income
for the three-month and nine-month periods ended September 30, 2000 and 1999 and
cash flows for the nine-month periods ended September 30, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of ALABAMA POWER COMPANY as of
December 31, 1999 (not presented herein), and, in our report dated February 16,
2000, 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, 1999, 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, 2000
30
<PAGE>
GEORGIA POWER COMPANY
31
<PAGE>
<TABLE>
<CAPTION>
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ----------------- -----------------
(in thousands) (in thousands)
Operating Revenues:
<S> <C> <C> <C> <C>
Retail sales $1,361,515 $1,291,275 $3,365,826 $3,143,387
Sales for resale --
Non-affiliates 112,899 97,023 218,698 192,639
Affiliates 35,617 42,217 78,770 64,605
Other revenues 35,273 35,492 94,326 87,854
---------------- ---------------- ----------------- -----------------
Total operating revenues 1,545,304 1,466,007 3,757,620 3,488,485
---------------- ---------------- ----------------- -----------------
Operating Expenses:
Operation --
Fuel 320,827 299,684 801,130 715,470
Purchased power --
Non-affiliates 158,999 90,284 287,539 170,194
Affiliates 49,153 39,051 138,621 137,822
Other 193,885 200,575 554,397 553,178
Maintenance 83,777 81,445 270,318 263,918
Depreciation and amortization 144,411 140,538 475,981 412,262
Taxes other than income taxes 57,094 56,974 158,603 155,127
---------------- ---------------- ----------------- -----------------
Total operating expenses 1,008,146 908,551 2,686,589 2,407,971
---------------- ---------------- ----------------- -----------------
Operating Income 537,158 557,456 1,071,031 1,080,514
Other Income (Expense):
Interest income 815 1,151 2,001 3,516
Equity in earnings of unconsolidated subsidiaries 747 651 2,276 2,115
Other, net (4,593) (7,734) (8,863) (17,760)
---------------- ---------------- ----------------- -----------------
Earnings Before Interest and Income Taxes 534,127 551,524 1,066,445 1,068,385
---------------- ---------------- ----------------- -----------------
Interest Charges and Other:
Interest on long-term debt 43,521 40,050 125,795 124,033
Interest on notes payable 5,672 4,399 21,747 14,233
Amortization of debt discount, premium and expense, net 3,602 3,835 10,818 11,435
Other interest charges, net 2,035 (43) (3,419) 684
Distributions on preferred securities of subsidiary 14,776 17,026 44,328 49,023
---------------- ---------------- ----------------- -----------------
Total interest charges and other, net 69,606 65,267 199,269 199,408
---------------- ---------------- ----------------- -----------------
Earnings Before Income Taxes 464,521 486,257 867,176 868,977
Income taxes 180,861 189,704 340,945 340,893
---------------- ---------------- ----------------- -----------------
Net Income 283,660 296,553 526,231 528,084
Dividends on Preferred Stock 168 177 507 1,556
---------------- ---------------- ----------------- -----------------
Net Income After Dividends on Preferred Stock $ 283,492 $ 296,376 $ 525,724 $ 526,528
================ ================ ================= =================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
---------------- ---------------
(in thousands)
Operating Activities:
<S> <C> <C>
Net income $526,231 $528,084
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 409,514 405,738
Deferred income taxes and investment tax credits, net (12,955) (45,534)
Other, net 193,014 167,383
Changes in certain current assets and liabilities --
Receivables, net (129,937) (102,460)
Fossil fuel stock 25,852 (20,304)
Materials and supplies (5,287) (11,213)
Accounts payable (6,112) (34,894)
Energy cost recovery, retail (113,011) (6,116)
Other 147,355 292,086
---------------- ---------------
Net cash provided from operating activities 1,034,664 1,172,770
---------------- ---------------
Investing Activities:
Gross property additions (728,116) (516,767)
Other (26,399) (30,043)
---------------- ---------------
Net cash used for investing activities (754,515) (546,810)
---------------- ---------------
Financing Activities:
Increase (decrease) in notes payable, net (238,842) (23,413)
Proceeds --
Other long-term debt 378,725 338,000
Preferred securities - 200,000
Capital contributions from parent company 268,799 -
Retirements --
First mortgage bonds (100,000) (404,000)
Other long-term debt (78,725) (235,000)
Preferred stock (383) (35,980)
Payment of preferred stock dividends (508) (707)
Payment of common stock dividends (412,700) (402,300)
Other (87,848) (29,500)
---------------- ---------------
Net cash used for financing activities (271,482) (592,900)
---------------- ---------------
Net Change in Cash and Cash Equivalents 8,667 33,060
Cash and Cash Equivalents at Beginning of Period 34,660 16,272
---------------- ---------------
Cash and Cash Equivalents at End of Period $ 43,327 $ 49,332
================ ===============
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $169,221 $191,792
Income taxes (net of refunds) $195,055 $210,944
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
------------------- --------------------
(in thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 43,327 $ 34,660
Receivables --
Customer accounts receivable 524,431 401,773
Under recovered retail fuel clause revenue 149,399 36,388
Other accounts and notes receivable 112,548 102,544
Affiliated companies 10,854 16,006
Accumulated provision for uncollectible accounts (5,100) (7,000)
Fossil fuel stock, at average cost 100,446 126,298
Materials and supplies, at average cost 259,181 253,894
Other 61,180 63,990
------------------- --------------------
Total current assets 1,256,266 1,028,553
------------------- --------------------
Property, Plant, and Equipment:
In service 16,336,967 15,798,624
Less accumulated provision for depreciation 6,864,909 6,538,574
------------------- --------------------
9,472,058 9,260,050
Nuclear fuel, at amortized cost 112,867 119,288
Construction work in progress 505,686 425,975
------------------- --------------------
Total property, plant, and equipment 10,090,611 9,805,313
------------------- --------------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 28,642 25,024
Nuclear decommissioning trusts 406,377 371,914
Other 32,097 33,766
------------------- --------------------
Total other property and investments 467,116 430,704
------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 572,019 590,893
Prepaid pension costs 188,685 145,801
Debt expense, being amortized 54,424 55,824
Premium on reacquired debt, being amortized 175,578 99,331
Other 119,836 120,441
------------------- --------------------
Total deferred charges and other assets 1,110,542 1,012,290
------------------- --------------------
Total Assets $12,924,535 $12,276,860
=================== ====================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholder's Equity (Unaudited) 1999
------------------- --------------------
(in thousands)
Current Liabilities:
<S> <C> <C>
Securities due within one year $ 1,524 $155,772
Notes payable and commercial paper 397,399 636,241
Accounts payable --
Affiliated 88,966 76,591
Other 307,887 346,785
Customer deposits 77,605 74,695
Taxes accrued --
Income taxes 166,758 7,914
Other 145,769 127,414
Interest accrued 77,896 58,665
Vacation pay accrued 37,927 38,143
Other 100,231 153,767
------------------- --------------------
Total current liabilities 1,401,962 1,675,987
------------------- --------------------
Long-term debt 3,042,476 2,688,358
------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,177,256 2,202,565
Deferred credits related to income taxes 253,124 267,083
Accumulated deferred investment tax credits 355,982 367,114
Employee benefits provisions 193,211 181,529
Other 376,672 151,812
------------------- --------------------
Total deferred credits and other liabilities 3,356,245 3,170,103
------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 789,250 789,250
------------------- --------------------
Preferred stock 14,569 14,952
------------------- --------------------
Common Stockholder's Equity
Common stock, without par value--
Authorized - 15,000,000 shares
Outstanding - 7,761,500 shares 344,250 344,250
Paid-in capital 2,084,782 1,815,983
Premium on preferred stock 40 40
Retained earnings 1,890,961 1,777,937
------------------- --------------------
Total common stockholder's equity 4,320,033 3,938,210
------------------- --------------------
Total Liabilities and Stockholder's Equity $12,924,535 $12,276,860
=================== ====================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
</TABLE>
35
<PAGE>
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
Earnings
GEORGIA's net income after dividends on preferred stock for the third quarter
and year-to-date 2000 was $283.5 million and $525.7 million, respectively,
compared to $296.4 million and $526.5 million for the corresponding periods in
1999. Earnings decreased during the third quarter due primarily to lower retail
revenues excluding fuel revenues, which generally represent the direct recovery
of fuel expense and do not affect net income.
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
<S> <C> <C> <C> <C>
Retail sales..................................... $70,240 5.4 $222,439 7.1
Sales for resale - non-affiliates............... 15,876 16.4 26,059 13.5
Sales for resale - affiliates.................... (6,600) (15.6) 14,165 21.9
Fuel expense..................................... 21,143 7.1 85,660 12.0
Purchased power - non-affiliates................. 68,715 76.1 117,345 68.9
Purchased power - affiliates..................... 10,102 25.9 799 0.6
Depreciation and amortization.................... 3,873 2.8 63,719 15.5
</TABLE>
Retail sales. Retail sales revenue increased for the third quarter and
year-to-date 2000 due primarily to higher fuel revenues, which generally do not
affect net income. Non-fuel revenues for the third quarter 2000 decreased $22.2
million primarily due to changes in pricing for large commercial and industrial
customers partially offset by increased sales of 1.1%. Year-to-date 2000
non-fuel revenues increased by $54.4 million primarily due to increased energy
sales of 4.2% partially offset by changes in pricing, as mentioned above.
Sales for resale - non-affiliates. The third quarter and year-to-date 2000
increases in these sales to non-affiliates resulted from higher demand for
energy by non-affiliates. These transactions did not have a significant impact
on earnings.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions did not have a significant impact on earnings.
36
<PAGE>
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. Increased generation from fossil-fueled plants to meet higher
energy demands at a time of increased natural gas and oil prices resulted in
higher fuel expense for the third quarter and year-to-date 2000 when compared to
the same periods in 1999. Since energy expenses are generally offset by energy
revenues, these expenses do not have a significant impact on earnings.
Purchased power from non-affiliates. For the third quarter and year-to-date
2000, this expense increased due primarily to increased demand for energy as
well as the drought in GEORGIA's service area, and increased prices for natural
gas and oil. These expenses do not have a significant impact on earnings since
energy expenses are generally offset by energy revenues.
Depreciation and amortization. For the third quarter and year-to-date 2000,
the increases in this expense were attributable to accelerated amortization and
depreciation required by the three-year rate order which became effective
January 1, 1999 and increased in-service property, plant and equipment. See Note
(F) in the "Notes to the Condensed Financial Statements" herein for further
details regarding the retail rate order.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including weather, regulatory matters and energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, GEORGIA is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form
10-K.
Effective January 1, 1999, GEORGIA began operating under a new three-year
retail rate order. Under the order, GEORGIA's earnings are evaluated against a
retail return on common equity range of 10% to 12.5%. In compliance with the
order, retail rates were decreased by $24 million on an annual basis effective
January 1, 2000. Reference is made to Note (F) in the "Notes to the Condensed
Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of GEORGIA in the Form 10-K for additional
information.
In December 1999, the FERC issued its final rule on RTOs and on October 16,
2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a
proposal for the creation of a RTO. The proposal calls for the formation of a
for-profit company that would have control of the bulk power transmission system
of participating utilities, which will have the option to divest, sell or lease
their assets to the RTO. If the FERC accepts the proposal as filed, the creation
of the RTO is not expected to have a material impact on the financial statements
of GEORGIA. However, the ultimate outcome of this matter is uncertain. For more
information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form
10-K.
37
<PAGE>
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Compliance costs related to the Clean Air Act and other environmental
issues could affect earnings. For additional information, see Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Issues" of GEORGIA in the
Form 10-K.
Reference is made to Notes (B), (C), (D), (F) and (G) in the "Notes to the
Condensed Financial Statements" herein for discussion of various contingencies
and other matters which may affect future earnings potential.
New Accounting Standard
In June 2000, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires that certain derivative instruments be
recorded in the balance sheet as either an asset or liability measured at fair
value and that changes in the fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. GEORGIA intends to adopt the
provisions of SFAS No. 133 on January 1, 2001.
Substantially all of GEORGIA's bulk energy purchases and sales meet the
definition of a derivative under SFAS No. 133. In most cases, such transactions
will meet the normal purchase and sale exception and the related contracts will
continue to be accounted for under the accrual method. However, a limited number
of contracts will be required to be accounted for as derivatives in accordance
with SFAS No. 133. Upon adoption, certain of these contracts will qualify as
cash flow hedges, resulting in the deferral of related gains and losses in other
comprehensive income until the hedged transactions occur. Any ineffectiveness
will be recognized currently in net income.
Management continues to assess the effects of adopting SFAS No. 133, but
currently expects the impact to be immaterial to GEORGIA's financial statements.
The application of SFAS No. 133 is still evolving and further guidance from the
FASB is expected. When established, this further guidance may have additional
impacts on GEORGIA's financial statements.
FINANCIAL CONDITION
Overview
The major change in GEORGIA's financial condition during the first nine months
of 2000 was the addition of approximately $728.1 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations and capital contributions from SOUTHERN. See GEORGIA's Condensed
Statements of Cash Flows for further details.
Financing Activities
During the first nine months of 2000, maturities of first mortgage bonds by
GEORGIA totaled $100 million. In February 2000, GEORGIA issued $300 million of
floating rate senior notes due February 22, 2002. The proceeds of the sale were
used to repay a portion of GEORGIA's outstanding short-term indebtedness. In
August 2000, GEORGIA sold, through public authorities, $78.725 million of 4.53%
pollution control revenue bonds due September 1, 2030. The initial interest rate
is effective through March 1, 2002, at which time the
38
<PAGE>
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
bonds will bear interest at either a variable rate or a new fixed rate. The
proceeds were used to refund $28.725 million aggregate principal amount of 6
5/8% pollution control revenue bonds which were called for redemption in October
2000 and $50 million aggregate principal amount of 4 3/8% pollution control
revenue bonds which matured on November 1, 2000.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA
under "Liquidity and Capital Requirements" and "Environmental Issues" in the
Form 10-K for a description of GEORGIA's capital requirements for its
construction program and environmental compliance efforts.
Sources of Capital
In addition to the financing activities previously described herein, GEORGIA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GEORGIA had at September
30, 2000 approximately $43.3 million of cash and cash equivalents and
approximately $1.8 billion of unused credit arrangements with banks. The credit
arrangements provide liquidity support to GEORGIA's obligations with respect to
variable rate pollution control bonds and its commercial paper program. At
September 30, 2000, GEORGIA had outstanding $397.4 million of commercial paper.
Management believes that the need for working capital can be adequately met by
utilizing lines of credit without maintaining large cash balances.
39
<PAGE>
Arthur Andersen
Exhibit 1
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, 2000, and the related
condensed statements of income for the three-month and nine-month periods ended
September 30, 2000 and 1999 and cash flows for the nine-month periods ended
September 30, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet of GEORGIA POWER COMPANY as of
December 31, 1999 (not presented herein), and, in our report dated February 16,
2000, 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, 1999, 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, 2000
40
<PAGE>
GULF POWER COMPANY
41
<PAGE>
<TABLE>
<CAPTION>
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- --------------- ---------------
(in thousands) (in thousands)
Operating Revenues:
<S> <C> <C> <C> <C>
Retail sales $169,975 $160,196 $429,142 $395,691
Sales for resale --
Non-affiliates 21,480 19,698 49,067 45,824
Affiliates 18,602 25,485 47,835 46,166
Other revenues 22,476 12,885 27,107 31,904
---------------- ---------------- --------------- ---------------
Total operating revenues 232,533 218,264 553,151 519,585
---------------- ---------------- --------------- ---------------
Operating Expenses:
Operation --
Fuel 63,767 64,223 162,430 156,184
Purchased power --
Non-affiliates 40,144 26,009 62,539 39,303
Affiliates 5,217 3,309 11,953 9,984
Other 27,671 29,055 84,838 83,977
Maintenance 10,527 10,203 40,049 42,699
Depreciation and amortization 16,489 16,198 49,299 48,310
Taxes other than income taxes 16,104 14,838 42,917 39,781
---------------- ---------------- --------------- ---------------
Total operating expenses 179,919 163,835 454,025 420,238
---------------- ---------------- --------------- ---------------
Operating Income 52,614 54,429 99,126 99,347
Other Income (Expense):
Interest income 164 427 891 928
Other, net (1,731) 3 (3,169) (900)
---------------- ---------------- --------------- ---------------
Earnings Before Interest and Income Taxes 51,047 54,859 96,848 99,375
---------------- ---------------- --------------- ---------------
Interest Charges and Other:
Interest on long-term debt 5,680 5,598 17,026 15,580
Interest on notes payable 662 649 2,445 2,005
Amortization of debt discount, premium and expense, net 508 499 1,543 1,488
Other interest charges, net 200 223 600 834
Distributions on preferred securities of subsidiary 1,550 1,550 4,650 4,650
---------------- ---------------- --------------- ---------------
Total interest charges and other, net 8,600 8,519 26,264 24,557
---------------- ---------------- --------------- ---------------
Earnings Before Income Taxes 42,447 46,340 70,584 74,818
Income taxes 15,955 17,704 26,404 28,049
---------------- ---------------- --------------- ---------------
Net Income 26,492 28,636 44,180 46,769
Dividends on Preferred Stock 54 54 162 162
---------------- ---------------- --------------- ---------------
Net Income After Dividends on Preferred Stock $26,438 $28,582 $44,018 $46,607
================ ================ =============== ===============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
---------------- ----------------
(in thousands)
Operating Activities:
<S> <C> <C>
Net income $44,180 $46,769
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 52,317 51,368
Deferred income taxes and investment tax credits, net (3,492) (3,133)
Other, net 7,925 4,803
Changes in certain current assets and liabilities --
Receivables, net (3,443) (14,063)
Fossil fuel stock 11,403 (6,585)
Materials and supplies 1,508 (1,934)
Accounts payable 3,635 (8,403)
Other 13,792 24,007
---------------- ----------------
Net cash provided from operating activities 127,825 92,829
---------------- ----------------
Investing Activities:
Gross property additions (67,119) (48,442)
Other (9,832) (12,753)
---------------- ----------------
Net cash used for investing activities (76,951) (61,195)
---------------- ----------------
Financing Activities:
Increase (decrease) in notes payable, net (27,500) (31,500)
Proceeds --
Other long-term debt - 49,950
Capital contributions from parent company 8,683 -
Retirements --
Other long-term debt (1,442) -
Payment of preferred stock dividends (162) (162)
Payment of common stock dividends (44,300) (45,400)
Other (22) (233)
---------------- ----------------
Net cash used for financing activities (64,743) (27,345)
---------------- ----------------
Net Change in Cash and Cash Equivalents (13,869) 4,289
Cash and Cash Equivalents at Beginning of Period 15,753 969
---------------- ----------------
Cash and Cash Equivalents at End of Period $1,884 $5,258
================ ================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $25,851 $20,197
Income taxes (net of refunds) 20,222 12,754
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
---------------- --------------------
(in thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,884 $ 15,753
Receivables --
Customer accounts receivable 64,141 55,108
Other accounts and notes receivable 3,271 4,325
Affiliated companies 3,126 7,104
Accumulated provision for uncollectible accounts (1,584) (1,026)
Fossil fuel stock, at average cost 18,466 29,869
Materials and supplies, at average cost 28,580 30,088
Regulatory clauses under recovery 15,687 11,611
Other 5,833 5,354
---------------- --------------------
Total current assets 139,404 158,186
---------------- --------------------
Property, Plant, and Equipment:
In service 1,884,030 1,853,664
Less accumulated provision for depreciation 864,214 821,970
---------------- --------------------
1,019,816 1,031,694
Construction work in progress 62,956 34,164
---------------- --------------------
Total property, plant, and equipment 1,082,772 1,065,858
---------------- --------------------
Other Property and Investments 4,485 1,481
---------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 16,234 25,264
Prepaid pension costs 22,051 17,734
Debt expense, being amortized 2,431 2,526
Premium on reacquired debt, being amortized 16,234 17,360
Other 12,967 20,086
---------------- --------------------
Total deferred charges and other assets 69,917 82,970
---------------- --------------------
Total Assets $1,296,578 $1,308,495
================ ====================
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholder's Equity (Unaudited) 1999
---------------- --------------------
(in thousands)
Current Liabilities:
<S> <C> <C>
Notes payable $ 27,500 $ 55,000
Accounts payable --
Affiliated 16,433 14,878
Other 19,755 22,581
Customer deposits 13,375 12,778
Taxes accrued --
Income taxes 14,461 4,889
Other 17,637 7,707
Interest accrued 7,344 9,255
Vacation pay accrued 4,199 4,199
Other 5,209 4,961
---------------- --------------------
Total current liabilities 125,913 136,248
---------------- --------------------
Long-term debt 366,307 367,449
---------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 161,015 162,776
Deferred credits related to income taxes 39,039 49,693
Accumulated deferred investment tax credits 26,272 27,712
Employee benefits provisions 33,988 31,735
Other 24,094 21,333
---------------- --------------------
Total deferred credits and other liabilities 284,408 293,249
---------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 85,000 85,000
---------------- --------------------
Preferred stock 4,236 4,236
---------------- --------------------
Common Stockholder's Equity
Common stock, without par value--
Authorized - 992,717 shares
Outstanding - 992,717 shares 38,060 38,060
Paid-in capital 229,937 221,254
Premium on preferred stock 12 12
Retained earnings 162,705 162,987
---------------- --------------------
Total common stockholder's equity 430,714 422,313
---------------- --------------------
Total Liabilities and Stockholder's Equity $1,296,578 $1,308,495
================ ====================
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
</TABLE>
45
<PAGE>
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
Earnings
GULF's net income after dividends on preferred stock for the third quarter and
year-to-date 2000 was $26.4 million and $44 million, respectively, compared to
$28.6 million and $46.6 million for the same periods in 1999. Earnings were down
for both the current quarter and year-to-date 2000 primarily due to expenses
related to the discontinuance of GULF's appliance sales division.
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
<S> <C> <C> <C> <C>
Retail sales..................................... $9,779 6.1 $33,451 8.5
Sales for resale - non-affiliates................ 1,782 9.0 3,243 7.1
Sales for resale - affiliates.................... (6,883) (27.0) 1,669 3.6
Other revenues................................... 9,591 74.4 (4,797) (15.0)
Purchased power - non-affiliates................. 14,135 54.3 23,236 59.1
Purchased power - affiliates..................... 1,908 57.7 1,969 19.7
Taxes other than income taxes.................... 1,266 8.5 3,136 7.9
Other, net....................................... (1,734) N/M (2,269) (252.1)
Interest on long-term debt....................... 82 1.5 1,446 9.3
</TABLE>
N/M - Not meaningful
Retail sales. Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales increased 2.1% during the
third quarter and 3.9% year-to-date 2000 when compared to the same periods of
1999. The main reason for the increase in retail energy sales is the growth in
the number of residential customers served by GULF.
Sales for resale - non-affiliates. In the third quarter and year-to-date
2000, increased unit power energy sales were the primary cause of the increases
in sales for resale to non-affiliates when compared to the same periods in 1999.
This energy is usually sold at variable cost and has no significant impact on
net income.
46
<PAGE>
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
Other revenues. The third quarter 2000 increase in other revenues is
primarily attributed to higher revenues associated with the fuel, conservation
and capacity clauses. For the year-to-date 2000, these revenues were down due
mainly to a decrease in fuel, conservation and capacity clause revenues. The
changes in these revenues were a result of adjustments to reflect differences
between recoverable costs and the amounts actually reflected in current rates.
The recovery provisions generally equal the related expenses and have no
material effect on net income.
Purchased power from non-affiliates. The increases during the third quarter
and year-to-date 2000 are primarily attributed to an increase in capacity and
energy purchases to meet territorial and non-affiliated third party demand.
These transactions had no significant effect on net income.
Taxes other than income taxes. Third quarter and year-to-date 2000
increases result from higher franchise fees and gross receipt taxes related to
increases in GULF's billed revenues. These collections are also included in
retail sales and other revenues and have no impact on earnings.
Other, net. Decreases for the third quarter and year-to-date 2000, when
compared to the corresponding periods in 1999, result from expenses related to
the discontinuance of GULF's appliance sales division.
Interest on long-term debt. The year-to-date 2000 increase, when compared
to the corresponding period in 1999, was mainly due to the issuance of senior
notes during the last half of 1999.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from weather to energy sales growth to a less regulated, more
competitive environment.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, GULF is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form
10-K.
47
<PAGE>
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Compliance costs related to the Clean Air Act could affect earnings if such
costs are not fully recovered through GULF's Environmental Cost Recovery Clause.
For additional information about the Clean Air Act and other environmental
issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" of GULF in the Form 10-K.
On November 4, 1999, the Florida PSC approved GULF's plan to reduce its
authorized rate of return, reduce retail base rates and share revenues with its
customers. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K.
In December 1999, the FERC issued its final rule on RTOs and on October 16,
2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a
proposal for the creation of a RTO. The proposal calls for the formation of a
for-profit company that would have control of the bulk power transmission system
of participating utilities, which will have the option to divest, sell or lease
their assets to the RTO. If the FERC accepts the proposal as filed, the creation
of the RTO is not expected to have a material impact on the financial statements
of GULF. However, the ultimate outcome of this matter is uncertain. For more
information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Protection Agency Litigation" and Note 3 to the financial
statements of GULF in the Form 10-K for information on EPA litigation.
Reference is made to Notes (B) and (D) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
New Accounting Standard
In June 2000, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires that certain derivative instruments be
recorded in the balance sheet as either an asset or liability measured at fair
value and that changes in the fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. GULF intends to adopt the
provisions of SFAS No. 133 on January 1, 2001.
Substantially all of GULF's bulk energy purchases and sales meet the
definition of a derivative under SFAS No. 133. In most cases, such transactions
will meet the normal purchase and sale exception and the related contracts will
continue to be accounted for under the accrual method. However, a limited number
of contracts will be required to be accounted for as derivatives in accordance
with SFAS No. 133. Upon adoption, certain of these contracts will qualify as
cash flow hedges, resulting in the deferral of related gains and losses in other
comprehensive income until the hedged transactions occur. Any ineffectiveness
will be recognized currently in net income.
48
<PAGE>
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management continues to assess the effects of adopting SFAS No. 133, but
currently expects the impact to be immaterial to GULF's financial statements.
The application of SFAS No. 133 is still evolving and further guidance from the
FASB is expected. When established, this further guidance may have additional
impacts on GULF's financial statements.
FINANCIAL CONDITION
Overview
Major changes in GULF's financial condition during the first nine months of 2000
included the addition of approximately $67.1 million to utility plant. The funds
for these additions and other capital requirements were derived primarily from
operations. See GULF's Condensed Statements of Cash Flows for further details.
Financing Activities
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" and "Environmental Matters" in the Form
10-K for a description of GULF's capital requirements for its construction
program, environmental compliance efforts and maturing debt.
Sources of Capital
In addition to the financing activities previously described herein, GULF plans
to obtain the funds required for construction and other purposes from sources
similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GULF had at September 30,
2000 approximately $1.9 million of cash and cash equivalents and $61.5 million
of unused committed lines of credit with banks in addition to $61.9 million of
liquidity support for GULF's obligations with respect to variable rate pollution
control bonds. At September 30, 2000, GULF had $27.5 million outstanding of
notes payable to banks. Management believes that the need for working capital
can be adequately met by utilizing lines of credit without maintaining large
cash balances.
49
<PAGE>
MISSISSIPPI POWER COMPANY
50
<PAGE>
<TABLE>
<CAPTION>
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ---------------
(in thousands) (in thousands)
Operating Revenues:
<S> <C> <C> <C> <C>
Retail sales $159,862 $141,519 $393,573 $353,584
Sales for resale --
Non-affiliates 48,058 43,194 110,407 102,501
Affiliates 8,022 13,154 16,906 17,446
Other revenues 4,177 3,727 9,966 9,088
---------------- ---------------- ---------------- ---------------
Total operating revenues 220,119 201,594 530,852 482,619
---------------- ---------------- ---------------- ---------------
Operating Expenses:
Operation --
Fuel 56,878 54,224 146,451 132,452
Purchased power --
Non-affiliates 32,578 26,457 49,738 35,964
Affiliates 12,948 8,609 36,003 25,008
Other 27,531 30,479 82,216 85,209
Maintenance 10,732 5,741 40,916 31,607
Depreciation and amortization 12,537 11,884 37,758 35,453
Taxes other than income taxes 12,972 12,591 37,104 35,906
---------------- ---------------- ---------------- ---------------
Total operating expenses 166,176 149,985 430,186 381,599
---------------- ---------------- ---------------- ---------------
Operating Income 53,943 51,609 100,666 101,020
Other Income:
Interest income 117 53 257 203
Other, net 530 704 1,321 1,925
---------------- ---------------- ---------------- ---------------
Earnings Before Interest and Income Taxes 54,590 52,366 102,244 103,148
---------------- ---------------- ---------------- ---------------
Interest Charges and Other:
Interest on long-term debt 6,432 5,072 18,260 15,116
Interest on notes payable 535 751 2,204 2,037
Amortization of debt discount, premium and expense, net 366 358 1,089 1,075
Other interest charges, net (587) 581 (364) 759
Distributions on preferred securities of subsidiary 636 699 2,034 2,097
---------------- ---------------- ---------------- ---------------
Total interest charges and other, net 7,382 7,461 23,223 21,084
---------------- ---------------- ---------------- ---------------
Earnings Before Income Taxes 47,208 44,905 79,021 82,064
Income taxes 17,943 17,089 29,795 31,095
---------------- ---------------- ---------------- ---------------
Net Income 29,265 27,816 49,226 50,969
Dividends on Preferred Stock 503 503 1,510 1,510
---------------- ---------------- ---------------- ---------------
Net Income After Dividends on Preferred Stock $28,762 $ 27,313 $47,716 $ 49,459
================ ================ ================ ===============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
-------------- --------------
(in thousands)
Operating Activities:
<S> <C> <C>
Net income $49,226 $50,969
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 41,118 38,592
Deferred income taxes and investment tax credits, net 797 3,853
Other, net 6,502 (6,115)
Changes in certain current assets and liabilities --
Receivables, net (20,436) (28,547)
Fossil fuel stock 9,821 (4,013)
Materials and supplies (950) (1,362)
Accounts payable (8,091) (6,018)
Other 17,887 19,737
-------------- --------------
Net cash provided from operating activities 95,874 67,096
-------------- --------------
Investing Activities:
Gross property additions (60,282) (52,099)
Other (10,602) (2,827)
-------------- --------------
Net cash used for investing activities (70,884) (54,926)
-------------- --------------
Financing Activities:
Increase (decrease) in notes payable, net (40,500) 30,200
Proceeds --
Other long-term debt 100,000 -
Capital contributions from parent company 9,770 -
Retirements --
Other long-term debt (51,176) (184)
Payment of preferred stock dividends (1,510) (1,510)
Payment of common stock dividends (41,100) (41,600)
Other (465) (242)
-------------- --------------
Net cash used for financing activities (24,981) (13,336)
-------------- --------------
Net Change in Cash and Cash Equivalents 9 (1,166)
Cash and Cash Equivalents at Beginning of Period 173 1,327
-------------- --------------
Cash and Cash Equivalents at End of Period $182 $161
============== ==============
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $20,679 $19,310
Income taxes (net of refunds) $3,425 $7,207
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
-------------------- --------------------
(in thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 182 $ 173
Receivables --
Customer accounts receivable 58,251 40,233
Under recovered regulatory clauses 33,467 21,041
Other accounts and notes receivable 19,401 23,490
Affiliated companies 10,062 16,097
Accumulated provision for uncollectible accounts (604) (697)
Fossil fuel stock, at average cost 15,976 25,797
Materials and supplies, at average cost 21,588 20,638
Other 9,265 10,013
-------------------- --------------------
Total current assets 167,588 156,785
-------------------- --------------------
Property, Plant, and Equipment:
In service 1,661,517 1,601,399
Less accumulated provision for depreciation 658,615 626,841
-------------------- --------------------
1,002,902 974,558
Construction work in progress 63,473 68,721
-------------------- --------------------
Total property, plant, and equipment 1,066,375 1,043,279
-------------------- --------------------
Other Property and Investments 2,290 1,389
-------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 14,097 21,557
Prepaid pension costs 5,546 2,488
Debt expense, being amortized 4,685 4,355
Premium on reacquired debt, being amortized 7,309 8,154
Other 8,650 13,129
-------------------- --------------------
Total deferred charges and other assets 40,287 49,683
-------------------- --------------------
Total Assets $1,276,540 $1,251,136
==================== ====================
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
-------------------- --------------------
(in thousands)
Current Liabilities:
<S> <C> <C>
Securities due within one year $ 30,020 $ 30,020
Notes payable 17,000 57,500
Accounts payable --
Affiliated 13,558 17,002
Other 33,560 43,105
Customer deposits 4,878 3,749
Taxes accrued --
Income taxes 35,899 6,865
Other 29,876 35,534
Interest accrued 5,940 6,733
Vacation pay accrued 5,218 5,218
Other 6,161 7,497
-------------------- --------------------
Total current liabilities 182,110 213,223
-------------------- --------------------
Long-term debt 370,712 321,802
-------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 135,527 139,564
Deferred credits related to income taxes 26,213 34,765
Accumulated deferred investment tax credits 23,785 24,695
Employee benefits provisions 34,909 34,268
Workforce reduction plan 10,113 11,272
Other 18,008 12,770
-------------------- --------------------
Total deferred credits and other liabilities 248,555 257,334
-------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding company junior
subordinated notes 35,000 35,000
-------------------- --------------------
Preferred stock 31,809 31,809
-------------------- --------------------
Common Stockholder's Equity
Common stock equity --
Authorized - 1,130,000 shares
Outstanding - 1,121,000 shares
Par value 37,691 37,691
Paid-in capital 191,272 181,502
Premium on preferred stock 326 326
Retained earnings 179,065 172,449
-------------------- --------------------
Total common stockholder's equity 408,354 391,968
-------------------- --------------------
Total Liabilities and Stockholder's Equity $1,276,540 $1,251,136
==================== ====================
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
</TABLE>
54
<PAGE>
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
Earnings
MISSISSIPPI's net income after dividends on preferred stock for the third
quarter and year-to-date 2000 was $28.8 million and $47.7 million, respectively,
compared to $27.3 million and $49.5 million for the corresponding periods of
1999. Earnings for the third quarter 2000 were positively impacted by the $18.5
million, or 9.2%, increase in operating revenues which were partially offset by
increased operating expenses of $16.2 million, or 10.8%. Despite higher
operating revenues, year-to-date 2000 earnings were down due to an even greater
increase in operating expenses.
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
<S> <C> <C> <C> <C>
Retail sales..................................... $18,343 13.0 $39,989 11.3
Sales for resale - non-affiliates................ 4,864 11.3 7,906 7.7
Sales for resale - affiliates.................... (5,132) (39.0) (540) (3.1)
Fuel expense..................................... 2,654 4.9 13,999 10.6
Purchased power - non-affiliates................. 6,121 23.1 13,774 38.3
Purchased power - affiliates..................... 4,339 50.4 10,995 44.0
Other operation expense.......................... (2,948) (9.7) (2,993) (3.5)
Maintenance expense.............................. 4,991 86.9 9,309 29.5
Depreciation and amortization expense............ 653 5.5 2,305 6.5
Interest on long-term debt....................... 1,360 26.8 3,144 20.8
Other interest charges, net...................... (1,168) (201.0) (1,123) (148.0)
</TABLE>
Retail sales. The increases in retail sales revenue for the current quarter
and year-to-date 2000 when compared to the corresponding periods in 1999 reflect
increased total retail energy sales of 1.5% and 5.2%, respectively. These
increases for the quarter and year-to-date 2000 are primarily due to growth in
the number of residential and commercial customers.
Sales for resale - non-affiliates. Third quarter and year-to-date 2000
increases reflect the continued economic growth in the areas served by rural
cooperatives in Mississippi.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
55
<PAGE>
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. Fuel expense increased during the third quarter and
year-to-date 2000 due mainly to the higher unit cost of fuel when compared to
the same periods in 1999.
Purchased power - non-affiliates. During the third quarter and year-to-date
2000, purchased power from non-affiliates increased as a result of increased
demand for energy when compared to the corresponding periods of 1999. These
transactions do not have a significant impact on net income.
Other operation expense. The decreases for the third quarter and
year-to-date 2000 primarily represent reductions in sales and production
expenses.
Maintenance expense. For the third quarter and year-to-date 2000, these
costs increased primarily due to scheduled maintenance performed on steam and
other power generation facilities.
Depreciation and amortization expense. This item increased for the current
quarter and year-to-date 2000 when compared to the same periods in 1999 as a
result of additional distribution facilities and a new higher depreciation rate
approved by the Mississippi PSC.
Interest on long-term debt. These interest payments were higher in the
third quarter and year-to-date 2000 due mainly to higher interest rates being
charged on a variable rate long-term debt outstanding.
Other interest charges, net. The third quarter and year-to-date 2000
decreases, when compared to the corresponding periods in 1999, are primarily
attributed to lower interest related to tax assessments.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from weather to energy sales growth to a less regulated, more
competitive environment. Operating revenues will be affected by any changes in
rates under the PEP and ECO plans. The PEP has proven to be a stabilizing force
on electric rates, with only moderate changes in rates taking place. For
additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of MISSISSIPPI in the Form 10-K. See Note (H) in the
"Notes to the Condensed Financial Statements" herein for information regarding
an agreement between MISSISSIPPI and certain of its wholesale customers to
reduce rates and Note (I) for information on ratemaking and the allocation of
costs between wholesale and retail customers for both new and existing
generating facilities.
56
<PAGE>
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, MISSISSIPPI is positioning
the business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be recovered. MISSISSIPPI's 2000 ECO Plan filing was approved, as
filed, by the Mississippi PSC on March 22, 2000 and resulted in a slight
decrease in customer prices. For additional information about the Clean Air Act
and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K.
In December 1999, the FERC issued its final rule on RTOs and on October 16,
2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a
proposal for the creation of a RTO. The proposal calls for the formation of a
for-profit company that would have control of the bulk power transmission system
of participating utilities, which will have the option to divest, sell or lease
their assets to the RTO. If the FERC accepts the proposal as filed, the creation
of the RTO is not expected to have a material impact on the financial statements
of MISSISSIPPI. However, the ultimate outcome of this matter is uncertain. For
more information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form
10-K.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of MISSISSIPPI in
the Form 10-K for information on EPA litigation.
In May 2000, the Mississippi PSC ordered that its docket reviewing
restructuring of the electric industry in the State of Mississippi be suspended.
The Mississippi PSC found that retail competition may not be in the public
interest at this time and ordered that no further formal hearings would be held
on this subject. It found that the current regulatory structure had produced
reliable low cost power and "should not be changed without clear and convincing
demonstration that change would be in the public interest." The Mississippi PSC
will continue to monitor retail and wholesale restructuring activities
throughout the United States and reserved "its right to order further formal
hearings on the matter should new evidence demonstrate that retail competition
would be in the public interest and all customers could receive a reduction in
the total cost of their electric service."
Reference is made to Notes (B), (D), (H) and (I) in the "Notes to the
Condensed Financial Statements" herein for discussion of various contingencies
and other matters which may affect future earnings potential.
New Accounting Standard
In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that certain derivative instruments be recorded in the balance
sheet as either an asset or liability measured at fair value and that changes in
the fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. MISSISSIPPI intends to adopt the provisions of SFAS
No. 133 on January 1, 2001.
57
<PAGE>
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Substantially all of MISSISSIPPI's bulk energy purchases and sales meet the
definition of a derivative under SFAS No. 133. In most cases, such transactions
will meet the normal purchase and sale exception and the related contracts will
continue to be accounted for under the accrual method. However, a limited number
of contracts will be required to be accounted for as derivatives in accordance
with SFAS No. 133. Upon adoption, certain of these contracts will qualify as
cash flow hedges, resulting in the deferral of related gains and losses in other
comprehensive income until the hedged transactions occur. Any ineffectiveness
will be recognized currently in net income.
Management continues to assess the effects of adopting SFAS No. 133, but
currently expects the impact to be immaterial to MISSISSIPPI's financial
statements. The application of SFAS No. 133 is still evolving and further
guidance from the FASB is expected. When established, this further guidance may
have additional impacts on MISSISSIPPI's financial statements.
FINANCIAL CONDITION
Overview
Major changes in MISSISSIPPI's financial condition during the first nine months
of 2000 included the addition of approximately $60.3 million to utility plant.
The funds for these additions and other capital requirements were derived
primarily from operations and capital contributions from SOUTHERN. See
MISSISSIPPI's Condensed Statements of Cash Flows for further details.
Financing Activities
In March 2000, MISSISSIPPI issued $100 million of floating rate senior notes due
March 28, 2002. The proceeds were used to prepay bank loans of $45 million
maturing in November 2001 and $5 million maturing in October 2002. The balance
was used to repay a portion of MISSISSIPPI's outstanding short-term
indebtedness. MISSISSIPPI plans to continue, to the extent possible, a program
to retire higher-cost debt and replace these securities with lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of
MISSISSIPPI under "Capital Requirements for Construction," "Environmental
Matters" and "Other Capital Requirements" and Note 3 to the financial statements
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.
Sources of Capital
In addition to the financing activities previously described herein, MISSISSIPPI
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- BUSINESS - "Financing Programs" in the Form 10-K for additional information.
58
<PAGE>
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet short-term cash needs and contingencies, MISSISSIPPI had at
September 30, 2000 approximately $182 thousand of cash and cash equivalents and
approximately $82.3 million of unused committed credit arrangements with banks.
At September 30, 2000, MISSISSIPPI had short-term notes payable outstanding of
$17 million. Management believes that the need for working capital can be
adequately met by utilizing lines of credit without maintaining large cash
balances.
59
<PAGE>
SAVANNAH ELECTRIC
AND
POWER COMPANY
60
<PAGE>
<TABLE>
<CAPTION>
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- --------------- ---------------
(in thousands) (in thousands)
Operating Revenues:
<S> <C> <C> <C> <C>
Retail sales $94,979 $87,613 $215,087 $193,226
Sales for resale --
Non-affiliates 1,973 1,184 3,539 2,416
Affiliates 1,297 2,283 4,051 3,227
Other revenues 600 769 1,342 1,770
---------------- ---------------- --------------- ---------------
Total operating revenues 98,849 91,849 224,019 200,639
---------------- ---------------- --------------- ---------------
Operating Expenses:
Operation --
Fuel 19,676 20,998 46,186 38,542
Purchased power --
Non-affiliates 14,510 8,842 22,103 12,295
Affiliates 12,518 9,184 29,138 28,637
Other 13,538 13,460 38,186 37,344
Maintenance 4,653 3,016 14,797 12,214
Depreciation and amortization 6,309 5,950 18,927 17,893
Taxes other than income taxes 3,585 3,640 9,939 9,467
---------------- ---------------- --------------- ---------------
Total operating expenses 74,789 65,090 179,276 156,392
---------------- ---------------- --------------- ---------------
Operating Income 24,060 26,759 44,743 44,247
Other Income (Expense):
Interest income 51 62 130 125
Other, net (124) (489) (528) (764)
---------------- ---------------- --------------- ---------------
Earnings Before Interest and Income Taxes 23,987 26,332 44,345 43,608
---------------- ---------------- --------------- ---------------
Interest Charges and Other:
Interest on long-term debt 2,323 2,110 6,935 7,048
Interest on notes payable 666 334 1,700 532
Amortization of debt discount, premium and expense, net 241 241 722 709
Other interest charges, net (40) 722 33 780
Distributions on preferred securities of subsidiary 685 685 2,055 2,055
---------------- ---------------- --------------- ---------------
Total interest charges and other, net 3,875 4,092 11,445 11,124
---------------- ---------------- --------------- ---------------
Earnings Before Income Taxes 20,112 22,240 32,900 32,484
Income taxes 7,761 8,535 12,619 12,302
---------------- ---------------- --------------- ---------------
Net Income $ 12,351 $ 13,705 $ 20,281 $ 20,182
================ ================ =============== ===============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2000 1999
---------------- ----------------
(in thousands)
Operating Activities:
<S> <C> <C>
Net income $20,281 $20,182
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 20,161 19,027
Deferred income taxes and investment tax credits, net 235 1,881
Other, net 4,602 1,980
Changes in certain current assets and liabilities --
Receivables, net (22,257) (19,828)
Fossil fuel stock 770 (2,450)
Materials and supplies (802) (320)
Accounts payable (266) 5,501
Other 4,006 6,261
---------------- ----------------
Net cash provided from operating activities 26,730 32,234
---------------- ----------------
Investing Activities:
Gross property additions (20,325) (21,536)
Other, net (2,504) (3,205)
---------------- ----------------
Net cash used for investing activities (22,829) (24,741)
---------------- ----------------
Financing Activities:
Increase (decrease) in notes payable, net 15,800 26,100
Retirements --
First mortgage bonds - (15,800)
Other long-term debt (374) (288)
Payment of common stock dividends (18,300) (18,700)
Other (12) 251
---------------- ----------------
Net cash used for financing activities (2,886) (8,437)
---------------- ----------------
Net Change in Cash and Cash Equivalents 1,015 (944)
Cash and Cash Equivalents at Beginning of Period 6,553 5,962
---------------- ----------------
Cash and Cash Equivalents at End of Period $7,568 $5,018
================ ================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $9,036 $10,126
Income taxes (net of refunds) 10,955 3,925
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Assets (Unaudited) 1999
------------------------ --------------------
(in thousands)
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 7,568 $ 6,553
Receivables --
Customer accounts receivable 34,637 20,752
Under recovered retail fuel clause revenue 29,911 21,089
Other accounts and notes receivable 2,860 3,505
Affiliated companies 1,500 1,195
Accumulated provision for uncollectible accounts (347) (237)
Fossil fuel stock, at average cost 6,339 7,109
Materials and supplies, at average cost 9,204 8,402
Other 691 2,869
------------------------ --------------------
Total current assets 92,363 71,237
------------------------ --------------------
Property, Plant, and Equipment:
In service 817,882 804,096
Less accumulated provision for depreciation 377,161 360,639
------------------------ --------------------
440,721 443,457
Construction work in progress 12,040 6,561
------------------------ --------------------
Total property, plant, and equipment 452,761 450,018
------------------------ --------------------
Other Property and Investments 2,035 1,506
------------------------ --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 13,509 16,063
Cash surrender value of life insurance for deferred compensation plans 16,305 16,305
Debt expense, being amortized 3,041 3,155
Premium on reacquired debt, being amortized 7,778 8,385
Other 2,246 3,549
------------------------ --------------------
Total deferred charges and other assets 42,879 47,457
------------------------ --------------------
Total Assets $590,038 $570,218
======================== ====================
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
At September 30,
2000 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 1999
------------------------ --------------------
(in thousands)
Current Liabilities:
<S> <C> <C>
Securities due within one year $ 30,711 $ 704
Notes payable 50,100 34,300
Accounts payable --
Affiliated 6,128 4,632
Other 7,851 11,118
Customer deposits 5,656 5,426
Taxes accrued --
Income taxes 1,835 3,046
Other 4,120 3,013
Interest accrued 4,489 3,237
Vacation pay accrued 2,206 2,142
Other 5,793 5,742
------------------------ --------------------
Total current liabilities 118,889 73,360
------------------------ --------------------
Long-term debt 116,766 147,147
------------------------ --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 80,947 80,318
Deferred credits related to income taxes 17,073 19,687
Accumulated deferred investment tax credits 10,782 11,280
Deferred compensation plans 11,401 10,624
Employee benefits provisions 8,919 7,805
Other 8,445 5,150
------------------------ --------------------
Total deferred credits and other liabilities 137,567 134,864
------------------------ --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 40,000 40,000
------------------------ --------------------
Common Stockholder's Equity
Common stock, par value $5 per share --
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares
Par value 54,223 54,223
Paid-in capital 9,776 9,787
Retained earnings 112,817 110,837
------------------------ --------------------
Total common stockholder's equity 176,816 174,847
------------------------ --------------------
Total Liabilities and Stockholder's Equity $590,038 $570,218
======================== ====================
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
</TABLE>
64
<PAGE>
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2000 vs. THIRD QUARTER 1999
AND
YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999
RESULTS OF OPERATIONS
Earnings
SAVANNAH's net income for the third quarter and year-to-date 2000 was $12.4
million and $20.3 million, respectively, as compared to $13.7 million and $20.2
million for the corresponding periods of 1999. Earnings for the third quarter
2000 were down due primarily to an increase in maintenance expenses.
Year-to-date 2000 earnings remained relatively flat reflecting an increase in
operating revenues which was partially offset by increased maintenance expenses.
Significant income statement items appropriate for discussion include the
following:
<TABLE>
<CAPTION>
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
<S> <C> <C> <C> <C>
Retail sales..................................... $7,366 8.4 $21,861 11.3
Sales for resale - non-affiliates................ 789 66.6 1,123 46.5
Sales for resale - affiliates.................... (986) (43.2) 824 25.5
Fuel expense..................................... (1,322) (6.3) 7,644 19.8
Purchased power - non-affiliates................. 5,668 64.1 9,808 79.8
Purchased power - affiliates..................... 3,334 36.3 501 1.7
Maintenance expense.............................. 1,637 54.3 2,583 21.1
Interest on notes payable........................ 332 99.4 1,168 219.5
Other interest charges, net...................... (762) (105.5) (747) (95.8)
</TABLE>
Retail sales. Excluding fuel revenues, which do not affect net income,
retail sales revenue increased by $0.5 million for the current quarter and $6.9
million year-to-date 2000 due mainly to increases in total retail energy sales
of 1.8% and 5.6%, respectively. The increases in total retail sales, when
compared to the corresponding periods in 1999, are primarily attributed to
growth in the number of customers served by SAVANNAH.
Sales for resale - non-affiliates. The third quarter and year-to-date 2000
increases primarily represent increased demand for energy during the third
quarter of 2000 when compared to the same period in 1999.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
65
<PAGE>
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. This expense decreased during the third quarter due primarily
to a decrease in the amount of energy generated as compared to the same period
of 1999. For the year-to-date 2000, fuel expense increased due principally to
higher gas prices and increased generation when compared to the corresponding
period in 1999.
Purchased power - non-affiliates. For the third quarter and year-to-date
2000, this item increased due to reduced generation by SAVANNAH and higher
demand for energy and higher purchased power costs. These transactions do not
have a significant impact on earnings since energy expenses are generally offset
by energy revenues.
Maintenance expense. The third quarter and year-to-date 2000 increases in
maintenance expense were mainly due to a maintenance outage at one of SAVANNAH's
older plants and a major boiler outage at one of the coal plants.
Interest on notes payable. The third quarter and year-to-date 2000
increases, when compared to the same periods in 1999, result from the increased
outstanding amount of short-term debt and higher interest rates in 2000.
Other interest charges, net. The decreases in these charges for the third
quarter and year-to-date 2000, when compared to the same periods in 1999, are
related to a potential tax audit settlement accounted for in 1999.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from weather to energy sales growth to a less regulated, more
competitive environment.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, SAVANNAH is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" of SAVANNAH in the Form 10-K.
In December 1999, the FERC issued its final rule on RTOs and on October 16,
2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a
proposal for the creation of a RTO. The proposal calls for the formation of a
for-profit company that would have control of the bulk power transmission system
of participating utilities, which will have the option to divest, sell or lease
their assets to the RTO. If the FERC accepts the proposal as filed, the creation
of the RTO is not expected to have a material impact on the financial
66
<PAGE>
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
statements of SAVANNAH. However, the ultimate outcome of this matter is
uncertain. For more information on the FERC's rule, reference is made to Item 7
- MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH
in the Form 10-K.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of SAVANNAH in
the Form 10-K for information on EPA litigation.
Reference is made to Notes (B) and (D) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
New Accounting Standard
In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that certain derivative instruments be recorded in the balance
sheet as either an asset or liability measured at fair value and that changes in
the fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. SAVANNAH intends to adopt the provisions of SFAS
No. 133 on January 1, 2001.
Substantially all of SAVANNAH's bulk energy purchases and sales meet the
definition of a derivative under SFAS No. 133. In most cases, such transactions
will meet the normal purchase and sale exception and the related contracts will
continue to be accounted for under the accrual method. However, a limited number
of contracts will be required to be accounted for as derivatives in accordance
with SFAS No. 133. Upon adoption, certain of these contracts will qualify as
cash flow hedges, resulting in the deferral of related gains and losses in other
comprehensive income until the hedged transactions occur. Any ineffectiveness
will be recognized currently in net income.
Management continues to assess the effects of adopting SFAS No. 133, but
currently expects the impact to be immaterial to SAVANNAH's financial
statements. The application of SFAS No. 133 is still evolving and further
guidance from the FASB is expected. When established, this further guidance may
have additional impacts on SAVANNAH's financial statements.
FINANCIAL CONDITION
Overview
Major changes in SAVANNAH's financial condition during the first nine months of
2000 included the addition of approximately $20.3 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations and credit arrangements with banks. See SAVANNAH's Condensed
Statements of Cash Flows for further details.
Financing Activities
SAVANNAH plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these obligations with lower-cost capital.
67
<PAGE>
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sources of Capital
SAVANNAH plans to obtain the funds required for construction and other purposes
from sources similar to those used in the past. The amount, type and timing of
any financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, SAVANNAH had at September
30, 2000 approximately $7.6 million of cash and cash equivalents and
approximately $63.5 million of unused committed credit arrangements with banks.
At September 30, 2000, SAVANNAH had $50.1 million outstanding of notes payable
to banks. Since SAVANNAH has no major generating plants under construction,
management believes that the need for working capital can be adequately met by
utilizing lines of credit.
68
<PAGE>
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, J, K, L, M, N, O, P, Q, R, S
ALABAMA A, B, C, D, E
GEORGIA A, B, C, D, F, G
GULF A, B, D
MISSISSIPPI A, B, D, H, I
SAVANNAH A, B, D
69
<PAGE>
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) The condensed financial statements of the registrants included herein have
been prepared by each registrant, without audit, pursuant to the rules and
regulations of the SEC. In the opinion of each registrant's management, the
information regarding such registrant furnished herein reflects all
adjustments necessary to present fairly the results of operations for the
periods ended September 30, 2000 and 1999. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations, although each registrant believes that the disclosures
regarding such registrant are adequate to make the information presented
not misleading. It is suggested that these condensed financial statements
of each registrant be read in conjunction with the financial statements of
such registrant and the notes thereto included in the Form 10-K. Certain
prior period amounts have been reclassified to conform with current period
presentation. Due to seasonal variations in the demand for energy,
operating results for the periods presented do not necessarily indicate
operating results for the entire year.
The condensed financial statements of ALABAMA and GEORGIA included herein
have been reviewed by ALABAMA's and GEORGIA's independent public
accountants as set forth in their reports included herein as Exhibit 1 to
ALABAMA's and GEORGIA's condensed financial statements.
(B) The integrated Southeast utilities are subject to the provisions of FASB
Statement No. 71, Accounting for the Effects of Certain Types of
Regulation. In the event that a portion of a company's operations is no
longer subject to these provisions, the company would be required to write
off related unrecoverable regulatory assets and liabilities, and determine
if any other assets have been impaired. For additional information, see
Note 1 to the financial statements of each registrant in Item 8 of the
Form 10-K.
(C) The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry--including
SOUTHERN's--regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating facilities in the financial
statements. In response to these questions, the FASB has decided to review
the accounting for obligations related to the retirement of long-lived
assets, including nuclear decommissioning. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial
statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and
Nuclear Decommissioning" in Item 8 of the Form 10-K.
(D) Reference is made to Note 3 to the financial statements of SOUTHERN,
ALABAMA , GEORGIA, GULF, MISSISSIPPI and SAVANNAH in Item 8 of the Form
10-K for information on EPA litigation. On August 1, 2000, the U.S.
District Court granted ALABAMA's motion to dismiss for lack of
jurisdiction in Georgia and granted SCS's motion to dismiss on the grounds
that it neither owned nor operated the generating units involved in the
proceedings.
70
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(E) Reference is made to Note 3 to the financial statements of SOUTHERN and
ALABAMA in Item 8 of the Form 10-K for information relating to a judgment
against ALABAMA arising from discharges into Lake Martin. On August 4,
2000, the Supreme Court of Alabama reversed the judgment against ALABAMA
and the other defendants, and rendered a judgment in favor of all
defendants.
(F) Reference is made to Note 3 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information concerning a three-year
rate order approved by the Georgia PSC effective January 1, 1999. The order
decreased annual retail rates by $262 million effective January 1, 1999 and
by an additional $24 million effective January 1, 2000. The order further
provides for $85 million each year, plus up to $50 million annually of any
earnings above a 12.5% retail return on common equity during the second and
third years, to be applied to accelerated amortization or depreciation of
assets. In May 2000, the Georgia PSC ordered that these funds be maintained
in a regulatory liability account instead of being applied to premium on
reacquired debt as proposed by GEORGIA and ordered that interest be accrued
on this account at the prime rate. These amounts are reflected on the
balance sheets in deferred credits and other liabilities, other. Two-thirds
of any additional earnings above the 12.5% return will be applied to rate
reductions and the remaining one-third retained by GEORGIA. Pursuant to
this provision, GEORGIA recognized accelerated amortization of $25.9
million in the third quarter and $113.8 million year-to-date 2000 and $21.3
million in the third quarter and $63.8 million year-to-date 1999.
(G) 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.
(H) In April 2000, MISSISSIPPI reached an agreement with certain of its
wholesale customers to reduce its rates effective January 1, 2000. The
agreement results in an annual rate reduction of approximately $3 million
and a temporary annualized rate reduction of approximately $3 million for
a period of 18 months ending June 30, 2001. In addition, MISSISSIPPI and
its customers agreed that neither party would seek a unilateral change to
the new rates prior to January 1, 2002, except for changes due to the
operation of the fuel cost adjustment clause under the tariff. In July
2000, the FERC accepted MISSISSIPPI's settlement with its customers as
filed. The new rates were placed into effect in July 2000, and
approximately $3 million in revenues collected subject to refund was
refunded to the wholesale customers.
(I) Reference is made to Note 3 to the financial statements of MISSISSIPPI in
Item 8 of the Form 10-K regarding the approval of new capacity. In
September 2000, MISSISSIPPI and the Mississippi Public Utilities Staff
entered, and the Mississippi PSC in October 2000 approved, a new
stipulation that modifies a January 1999 stipulation and order covering
cost allocation. The 1999 stipulation and Commission order would have
excluded the new capacity from retail ratebase and would have assigned
MISSISSIPPI's existing generating facilities entirely to the retail
jurisdiction. The new stipulation and order allocates a pro-rata share of
the new capacity along with MISSISSIPPI's existing generating capacity to
the retail jurisdiction.
71
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(J) In January 1998, Southern Energy and Vastar Resources, Inc. ("Vastar")
combined their energy trading and marketing activities to form a joint
venture, SCEM. Southern Energy's 60% investment in the joint venture was
accounted for under the equity method of accounting. Effective August 10,
2000, Southern Energy acquired Vastar's 40% interest in SCEM for $250
million and began consolidating the results of SCEM's operations. As part
of the transaction, Southern Energy was relieved of any financial
obligations to Vastar under the SCEM partnership agreement, including any
guaranteed minimum cash distributions and any outstanding arbitration.
(K) SOUTHERN engages in price risk management activities. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative Financial Instruments"
and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form
10-K for a discussion of these activities. Activities for non-trading
purposes consist of transactions to mitigate SOUTHERN's risk related to
interest rate and foreign currency exchange rate fluctuations. At
September 30, 2000, the status of outstanding non-trading related
derivative contracts was as follows:
<TABLE>
<CAPTION>
Year of
Maturity or Interest Number of Notional Unrecognized
Type Termination Rates Counterparties Amount Gain (Loss)
---- ------------ ----- -------------- ------ -----------
(in millions)
<S> <C> <C> <C> <C> <C>
Interest rate swaps 2002-2012 6.55%-7.12% 9 $2,150 $(13)
2001-2012 6.56%-8.17% 5 (pound)600 (52)
2002-2007 4.98%-5.79% 2 DM691 -
Cross currency swaps 2001-2007 - 7 (pound)394 65
Cross currency swaption 2003 - 2 DM435 44
Currency forwards 2000-2003 - 1 CAD20 -
2000 - 3 (pound)91 (3)
Currency options 2000 - 21 E35 (1)
(pound) - Denotes British pounds sterling.
CAD - Denotes Canadian dollars.
DM - Denotes Deutschemark.
E - Denotes Euro dollars.
</TABLE>
Southern Energy engages in commodity-related marketing and price risk
management activities. Southern Energy uses a systematic approach to the
evaluation and management of risk associated with its marketing and risk
management related commodity contracts, including value-at-risk ("VAR").
VAR is defined as the maximum loss that is not expected to be exceeded
with a given degree of confidence and within a specified holding period.
Southern Energy uses a 95% confidence interval and holding periods that
vary by commodity and tenor to evaluate its risks with respect to VAR.
Based on a 95% confidence interval and employing a one-day holding period,
Southern Energy's portfolio of positions had a VAR of $13 million at
September 30, 2000. During the three-month period ended September 30,
2000, the actual daily change in fair value never exceeded this daily VAR
calculation. Southern Energy also utilizes additional risk control
mechanisms such as commodity position limits and stress testing
SOUTHERN has extended contingent performance guarantees and trade credits
on behalf of SCEM. At September 30, 2000, outstanding guarantees related
to the estimated fair value of SCEM's contractual commitments were
approximately $358 million. In addition, Southern Energy has outstanding
guarantees to various third parties totaling approximately $279 million at
September 30, 2000.
72
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Vastar and Southern Energy have issued certain financial guarantees made in
the ordinary course of business, on behalf of Southern Energy's
counterparties, to financial institutions and other credit grantors.
Southern Energy has agreed to indemnify Vastar against losses under such
guarantees in proportion to Vastar's former ownership percentage of SCEM.
At September 30, 2000, such guarantees amounted to approximately $322
million.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of SOUTHERN in Item 7 and Notes 1 and 5 to the
financial statements of SOUTHERN under the captions "Financial Instruments
for Trading Activities" and "Energy Trading and Marketing Commitments",
respectively, in Item 8 of the Form 10-K.
(L) Reference is made to Note 3 to the financial statements of SOUTHERN in Item
8 and to Legal Proceedings in Item 3 of the Form 10-K for information
relating to (i) petitions for Chapter 11 bankruptcy relief which were filed
in the U. S. Bankruptcy Court for the Southern District of Alabama and (ii)
proposed settlement discussions among the affected parties. At September
30, 2000, Mobile Energy had total assets of $385 million and senior debt
outstanding of $190 million of first mortgage bonds and $72 million related
to tax-exempt bonds. In connection with the bond financings, SOUTHERN
provided certain limited guarantees, in lieu of funding debt service and
maintenance reserve accounts with cash. As of September 30, 2000, under an
agreement with the bondholders, SOUTHERN had paid $41 million pursuant to
the guarantees. SOUTHERN continues to have guarantees outstanding of
certain potential environmental and other obligations of Mobile Energy that
represent a maximum contingent liability of $18.5 million at September 30,
2000. The final outcome of this matter cannot now be determined. On August
4, 2000, Mobile Energy and its immediate parent, Mobile Energy Services
Holdings, Inc., filed a joint proposed plan of reorganization with the
bankruptcy court. That proposed plan of reorganization was amended on
September 15, 2000. If approved as proposed, that plan would result in a
termination of SOUTHERN's direct and indirect ownership interests in both
entities. That proposed plan of reorganization, however, would not affect
SOUTHERN's ongoing guarantee obligations related to Mobile Energy that are
described above.
(M) In April 1999, SOUTHERN's board approved the repurchase of up to 50
million shares of SOUTHERN's common stock over the next two years through
open market or privately negotiated transactions. The repurchase program
was completed during the first quarter 2000.
(N) On April 17, 2000, SOUTHERN announced that its board of directors approved
an initial public offering of up to 19.9 percent of Southern Energy.
SOUTHERN also announced that it is planning to spin-off to holders of
SOUTHERN common stock the remaining ownership of Southern Energy within 12
months of the initial public offering. The spin-off will be subject to a
number of market and other conditions.
On October 2, 2000, the initial public offering of Southern Energy was
completed. Southern Energy sold 66.7 million shares of common stock,
representing 19.7% of the 338.7 million shares outstanding, for gross
proceeds of approximately $1.467 billion. Concurrent with the stock
offering, Southern Energy also sold 6.9 million of convertible trust
preferred securities for approximately $345 million in gross proceeds.
73
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(O) In March 2000, an administrative law judge ("ALJ") held hearings in
connection with a FERC proceeding to determine the percentage of a settled
$158.8 million revenue requirement for Southern Energy's generation assets
in California to be paid to Southern Energy under reliability must-run
agreements with the California Independent System Operator (the "CAISO").
The decision in this case affects the amount the CAISO will pay for the
period June 1, 1999 through December 31, 2001. Southern Energy had proposed
to allocate approximately 75% of the responsibility for payment of the
revenue requirement to the CAISO. On June 7, 2000, the ALJ presiding over
this proceeding issued an initial decision allocating responsibility for
payment of approximately 3% of the revenue requirement to the CAISO. On
July 7, 2000, Southern Energy appealed the ALJ's decision to the FERC. A
final FERC order in this proceeding may be appealed to the U.S. Court of
Appeals. If Southern Energy is ultimately unsuccessful in its appeal of the
ALJ's decision, it will be required to refund certain amounts of the
revenue requirement billed to the CAISO for the period from June 1, 1999
until the final disposition of the appeal. The amount of this refund as of
September 30, 2000 would have been approximately $118 million, however,
there would have been no material effect on net income. This amount does
not include interest that may be payable in the event of a refund. If
Southern Energy is unsuccessful in its appeal, it plans to pursue other
options available under the reliability must-run agreements to mitigate the
impact of the ALJ's decision upon its future operations. The outcome of
this appeal cannot now be determined.
(P) On August 23, 2000, the FERC initiated an investigation of the California
power markets after denying a complaint that sought to extend the CAISO
market's $250 price cap to all California energy and ancillary service
markets. On November 1, 2000, the FERC released a Staff Report detailing
the results of its investigation, together with an "Order Proposing
Remedies for California Wholesale Markets". The FERC concluded in this
order that the California power market structure and market rules are
seriously flawed, and that these flaws, together with short supply relative
to demand, resulted in unusually high energy prices. The order also
proposed specific remedies to the identified market flaws. While the FERC
concluded that it lacked the legal authority to order retroactive refunds,
it established October 2, 2000 as the "refund effective date." Rates for
service after that date will remain subject to a refund condition until
December 31, 2002. The FERC will receive comments on its order for a
three-week period and will issue a final order by the end of the year. The
ultimate outcome of this matter cannot now be determined.
(Q) Reference is made to Note 13 to the financial statements of SOUTHERN in
Item 8 of the Form 10-K for information concerning assets for sale by
Southern Energy. In August 2000, Southern Energy completed the sale of its
assets in Argentina to The AES Corporation for $205 million, including the
assumption of debt and the buy-out of minority partners. As part of the
sale, Southern Energy was released from $200 million of credit support
obligations. The sale had no material impact on the financial statements
of Southern Energy or SOUTHERN.
74
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(R) On August 23, 2000, WPD Limited ("WPDL"), through Southern Energy, made an
offer to acquire all of the outstanding shares of Hyder plc ("Hyder") for a
total purchase price of approximately(pound)585 million (approximately $878
million), including fees and expenses, or 365 pence (approximately $5.47)
per Hyder share plus the assumption of approximately(pound)2.1 billion
(approximately $3.2 billion) of gross debt as of March 31, 2000. On
September 15, 2000, WPDL committed unconditionally to purchase any shares
of Hyder tendered by Hyder shareholders. As of September 30, 2000, WPDL had
purchased from shareholders approximately 71% of the Hyder shares. On
October 30, 2000, WPDL finalized the acquisition of Hyder by making payment
for the additional shares needed to bring WPDL's ownership over 90%. The
acquisition of more than 90% allowed WPDL, under UK company law, to acquire
the remaining shares and on October 31, 2000, WPDL sent notification to the
outstanding shareholders exercising this right.
WPDL has replaced Hyder's board of directors with employees of WPD,
Southern Energy and PPL Global. Following the completion of the
acquisition, WPD will provide management oversight for WPDL's electricity
distribution business. Southern Energy will make an equity investment of
(pound)56 million (approximately $84 million) and will own 40% of the
economic interest in WPDL and PPL Global will own 60%, with each owning
50% of the voting interest. Southern Energy will also have a call right to
acquire an additional 9% economic interest in WPDL from PPL Global. With
the completion of the Hyder acquisition and with the approval of lenders,
Southern Energy and PPL Global, effective December 2000, will modify their
ownership of voting shares of WPD Holdings (WPD's parent) to 50% each so
that neither party will have operational or management control of WPD
Holdings. Therefore, the results of operations for WPD, which are
currently consolidated, will be accounted for under the equity method as
of that date.
(S) SOUTHERN's principal business segment -- or its traditional business -- is
the five integrated Southeast utilities that provide electric service in
four states. The other reportable business segment is non-traditional
energy services provided by Southern Energy, which develops and manages
electricity and other energy-related projects both in the United States
and abroad. Intersegment revenues are not material. Financial data for
business segments for the periods covered in the Form 10-Q are as follows:
<TABLE>
<CAPTION>
Integrated All
Southeast Southern Other Reconciling
Utilities Energy (Note) Eliminations Consolidated
------------ ---------- --------- ------------- ---------------
(in millions)
Three Months Ended September 30, 2000:
<S> <C> <C> <C> <C> <C>
Operating revenues $ 3,142 $ 4,281 $ 65 $ (9) $ 7,479
Segment net income (loss) 559 98 (53) 10 614
Nine Months Ended September 30, 2000:
Operating revenues 7,619 5,475 184 (31) 13,247
Segment net income (loss) 1,017 292 (108) - 1,201
Total assets at September 30, 2000 26,526 17,715 489 (1,198) 43,532
----------------------------------------- ------------ ---------- --------- ------------- ---------------
Three Months Ended September 30, 1999:
Operating revenues $ 2,991 $ 686 $ 66 $ (7) $3,736
Segment net income (loss) 568 157 (102) (8) 615
Nine Months Ended September 30, 1999:
Operating revenues 7,116 1,711 165 (23) 8,969
Segment net income (loss) 1,000 306 (131) (22) 1,153
Total assets at December 31, 1999 25,251 13,863 455 (1,180) 38,389
------------------------------------------ ----------- ---------- --------- ------------- ----------------
</TABLE>
75
<PAGE>
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(Note) The all other category includes parent SOUTHERN, which does not
allocate operating expenses to business segments. Also, this category
includes segments below the quantitative threshold for separate
disclosure. These segments include a wireless communication company and a
developmental company for energy products and services. Amounts for
Southern Energy exclude interest expense to parent SOUTHERN.
76
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(1) Cooper et al.vs. GEORGIA, SOUTHERN, SCS and Southern Company Energy
Solutions, Inc.
(Superior Court of Fulton County, Georgia)
On July 28, 2000, a lawsuit alleging race discrimination was
filed by three GEORGIA employees against GEORGIA, SOUTHERN and
SCS. The lawsuit also raised claims on behalf of a purported
class. The plaintiffs seek compensatory and punitive damages
in an unspecified amount, as well as injunctive relief. On
August 14, 2000, the lawsuit was amended to add four more
plaintiffs and a new defendant, Southern Company Energy
Solutions, Inc., a subsidiary of SOUTHERN. The final outcome
of this case cannot now be determined.
(2) Reference is made to the Notes to the Condensed Financial Statements
herein for information regarding certain legal and administrative
proceedings in which SOUTHERN and its reporting subsidiaries are involved.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
Exhibits 15 - Letter re: unaudited interim financial information
(a) ALABAMA
(b) GEORGIA
Exhibit 24 - (a) Powers of Attorney and resolutions.
(Designated in the Form 10-K for the year
ended December 31, 1999, 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 Schedule
(a) SOUTHERN
(b) ALABAMA
(c) GEORGIA
(d) GULF
(e) MISSISSIPPI
(f) SAVANNAH
(b) Reports on Form 8-K.
-------------------
SOUTHERN filed a Current Report on Form 8-K dated
September 27, 2000:
Items reported: Items 5 and 7
Financial statements filed: None
77
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
THE SOUTHERN COMPANY
By A. W. Dahlberg
Chairman and Chief Executive Officer
(Principal Executive Officer)
By W. L. Westbrook
Financial Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 13, 2000
-------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
ALABAMA POWER COMPANY
By Elmer B. Harris
President and Chief Executive Officer
(Principal Executive Officer)
By William B. Hutchins, III
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 13, 2000
78
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GEORGIA POWER COMPANY
By David M. Ratcliffe
President and Chief Executive Officer
(Principal Executive Officer)
By Thomas A. Fanning
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 13, 2000
-------------------------------------------------------------------------------
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 Ronnie Labrato
Comptroller and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 13, 2000
79
<PAGE>
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 13, 2000
-------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
SAVANNAH ELECTRIC AND POWER COMPANY
By G. Edison Holland, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
By Kirby R. Willis
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 13, 2000
80
