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