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 12, 1997
------------------------------
THE SOUTHERN COMPANY
(Exact name of registrant as specified in its charter)
Delaware 1-3526 58-0690070
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
270 Peachtree Street, NW, Atlanta, Georgia 30303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 393-0650
-------------------------
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 The Southern
Company as of December 31, 1996.
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.
THE SOUTHERN COMPANY
By /s/ W. Dean Hudson
W. Dean Hudson
Comptroller
Date: March 3, 1997
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 12, 1997 on the financial statements of The
Southern Company and its subsidiaries, included in this Form 8-K, into The
Southern Company's previously filed Registration Statement File Nos. 2-78617,
33-3546, 33-30171, 33-51433, 33-54415, 33-57951, 33-58371, 33-60427, 333-07539
and 333-09077.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 27, 1997
<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> 0000092122
<NAME> The Southern COMPANY
<MULTIPLIER> 1,000,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 23,269
<OTHER-PROPERTY-AND-INVEST> 1,501
<TOTAL-CURRENT-ASSETS> 3,057
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<TOTAL-ASSETS> 30,292
<COMMON> 3,385
<CAPITAL-SURPLUS-PAID-IN> 2,067
<RETAINED-EARNINGS> 3,764
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422
1,153
<LONG-TERM-DEBT-NET> 7,040
<SHORT-TERM-NOTES> 828
<LONG-TERM-NOTES-PAYABLE> 935
<COMMERCIAL-PAPER-OBLIGATIONS> 655
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(173)
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85
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</TABLE>
MANAGEMENT'S REPORT
Southern Company and Subsidiary Companies 1996 Annual Report
The management of Southern Company has prepared -- and is responsible for -- the
consolidated financial statements and related information included in this
report. These statements were prepared in accordance with generally accepted
accounting principles appropriate in the circumstances and necessarily include
amounts that are based on the best estimates and judgments of management.
Financial information throughout this annual report is consistent with the
financial statements.
The company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that books and records
reflect only authorized transactions of the company. Limitations exist in any
system of internal controls, however, based on a recognition that the cost of
the system should not exceed its benefits. The company believes its system of
internal accounting controls maintains an appropriate cost/benefit relationship.
The company's system of internal accounting controls is evaluated on an
ongoing basis by the company's internal audit staff. The company's independent
public accountants also consider certain elements of the internal control system
in order to determine their auditing procedures for the purpose of expressing an
opinion on the financial statements.
The audit committee of the board of directors, composed of five 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 consolidated financial statements present
fairly, in all material respects, the financial position, results of operations,
and cash flows of Southern Company and its subsidiary companies in conformity
with generally accepted accounting principles.
/s/ A. W. Dahlberg
A. W. Dahlberg
Chairman, President, and Chief Executive Officer
/s/ W. L. Westbrook
W. L. Westbrook
Financial Vice President, Chief Financial Officer,
and Treasurer
February 12, 1997
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and to the Stockholders of Southern Company:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Southern Company (a Delaware corporation) and
subsidiary companies as of December 31, 1996 and 1995, and the related
consolidated statements of income, retained earnings, paid-in capital, and cash
flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements (pages 10-31) referred
to above present fairly, in all material respects, the financial position of
Southern Company and subsidiary companies as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 12, 1997
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Southern Company and Subsidiary Companies 1996 Annual Report
RESULTS OF OPERATIONS
Earnings and Dividends
Southern Company's 1996 financial results exceeded the strong performance
recorded in 1995. The traditional core business of selling electricity in the
Southeast remained strong, while non-traditional business results reflected a
full year of South Western Electricity's (SWEB) operations. The acquisition of
SWEB in late 1995 by Southern Energy, Inc. (Southern Energy) made a significant
positive impact on non-traditional earnings. Net income of over $1.1 billion
and earnings per share of $1.68 for 1996 both established record highs. Net
income increased $24 million compared with the amount reported for 1995.
Continued cost controls, steady demand for electricity, and growth in the
non-traditional business were the dominant forces that favorably affected
1996 earnings.
Costs related to work force reduction programs decreased earnings by $53
million or 8 cents per share and $17 million or 2 cents per share in 1996 and
1995, respectively. These costs are expected to be recovered through future
savings in approximately two years following each program's implementation.
In 1995, earnings were $1.1 billion or $1.66 per share -- up 14 cents from
the per share amount reported in 1994. Earnings in 1995 were affected by a
reduction in costs related to work force reduction programs, and much hotter
temperatures when compared with 1994 results.
Dividends paid on common stock during 1996 were $1.26 per share or 31 1/2
cents per quarter. During 1995 and 1994, dividends paid per share were $1.22 and
$1.18, respectively. In January 1997, the Southern Company board of directors
raised the quarterly dividend to 32 1/2 cents per share or an annual rate of
$1.30 per share.
Acquisitions
Southern Energy owns and manages international and domestic non-traditional
electric power production and delivery facilities for Southern Company. Southern
Energy's acquisition of Consolidated Electric Power Asia (CEPA) closed in
January 1997, and is not included in Southern Company's 1996 results. Southern
Energy did acquire several businesses in late 1995 and 1994. These businesses
have been included in the consolidated financial statements since the date of
acquisition and are not reflected in prior periods. Therefore, changes in
revenues and expenses for 1996 and for 1995 reflect significant amounts related
to acquisitions, which were not fully reflected in each year being compared. To
facilitate discussing the results of operations, Southern Energy's variances are
shown separately and are predominantly acquisition related.
Revenues
Operating revenues increased in 1996 and 1995 as a result of the following
factors:
Increase (Decrease)
From Prior Year
---------------------------------
1996 1995 1994
----------------------------------
Retail -- (in millions)
Change in base rates $ (18) $ - $ 3
Sales growth 142 177 153
Weather (64) 143 (177)
Fuel cost recovery and
other 2 134 (107)
---------------------------------------------------------------
Total retail 62 454 (128)
---------------------------------------------------------------
Sales for resale --
Within service area 10 39 (87)
Outside service area 14 (90) (108)
---------------------------------------------------------------
Total sales for resale 24 (51) (195)
Southern Energy 1,040 458 131
Other operating revenues 52 22 -
---------------------------------------------------------------
Total operating revenues $1,178 $883 $192)
===============================================================
Percent change 12.8% 10.6% (2.3)%
---------------------------------------------------------------
Retail revenues of $7.7 billion in 1996 increased 0.8 percent from last
year, compared with an increase of 6.4 percent in 1995. Under fuel cost recovery
provisions, fuel revenues generally equal fuel expense -- including the fuel
component of purchased energy -- and do not affect net income.
Sales for resale revenues within the service area were $409 million in 1996,
up 2.5 percent from the prior year. Revenues from sales for resale within the
service area were $399 million in 1995, up 11 percent from the prior year. This
increase in 1995 resulted primarily from the prolonged hot summer weather, which
increased the demand for electricity.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
Revenues from sales to utilities outside the service area under long-term
contracts consist of capacity and energy components. Capacity revenues reflect
the recovery of fixed costs and a return on investment under the contracts.
Energy is generally sold at variable cost.
1996 1995 1994
----------------------------------
(in millions)
Capacity $217 $237 $276
Energy 176 151 176
-------------------------------------------------------
Total $393 $388 $452
=======================================================
Capacity revenues decreased in 1996 because the amount of capacity under
contract declined slightly in 1996 and by 100 megawatts in 1995. Additional
declines in capacity are not scheduled until after 1999.
Changes in traditional core business revenues are influenced heavily by the
amount of energy sold each year. Kilowatt-hour sales for 1996 and the percent
change by year were as follows:
(billions of
kilowatt-hours) Amount Percent Change
------------- ----------------------------
1996 1996 1995 1994
------------- ----------------------------
Residential 40.1 2.5% 9.2% (2.6)%
Commercial 38.0 5.7 5.5 3.8
Industrial 52.8 2.2 2.7 3.2
Other 0.9 5.7 2.1 3.8
-------------
Total retail 131.8 3.3 5.4 1.6
Sales for resale --
Within service area 10.9 15.4 16.2 (38.5)
Outside service area 10.8 17.9 (15.1) (13.5)
-------------
Total 153.5 5.0 4.4 (3.4)
===================================================================
The rate of increase in 1996 retail energy sales continued to be strong. The
number of customers served increased by nearly 71,000 during the year.
Residential energy sales experienced only moderate gains as a result of milder
summer weather in 1996, compared with the extremely hot summer of 1995.
Commercial and industrial sales continue to show slight gains in excess of the
national average. This reflects the strength of business and economic conditions
in Southern Company's traditional service area. Energy sales to retail customers
are projected to increase at an average annual rate of 2.1 percent during the
period 1997 through 2007.
Energy sales for resale outside the service area are predominantly unit
power sales under long-term contracts to Florida utilities. Economy sales and
amounts sold under short-term contracts are also sold for resale outside the
service area. Sales to customers outside the service area increased in 1996 and
declined in 1995 when compared with the prior year. However, these fluctuations
in energy sales have minimal effect on earnings because Southern Company is paid
for dedicating specific amounts of its generating capacity to these utilities
outside the service area.
Expenses
Total operating expenses of $8.5 billion for 1996 increased $1.2 billion
compared with the prior year. Traditional core business expenses increased $240
million. Southern Energy's expenses increased $970 million. The large increase
for Southern Energy resulted primarily from SWEB, which was acquired in late
1995. The costs to produce and deliver electricity for the traditional core
business in 1996 increased by $79 million to meet higher energy demands. Also,
costs related to work force reduction programs increased expenses by $58
million. Depreciation expenses and property taxes increased by $50 million as a
result of additional utility plant being placed into service. The amortization
of deferred expenses related to Plant Vogtle increased by $13 million in 1996
when compared with the prior year.
In 1995, operating expenses of $7.3 billion increased 11 percent compared
with 1994. Traditional core business expenses increased $322 million. Southern
Energy's expenses increased $390 million. Total production costs for the core
business were up $120 million. Depreciation expense and taxes other than income
taxes increased $78 million. Also, the amortization of deferred Plant Vogtle
expenses increased $49 million compared with the amount in 1994.
Fuel costs constitute the single largest expense for Southern Company. The
mix of fuel sources for generation of electricity is determined primarily by
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
system load, the unit cost of fuel consumed, and the availability of hydro and
nuclear generating units. The amount and sources of generation and the average
cost of fuel per net kilowatt-hour generated -- within the core business service
area -- were as follows:
1996 1995 1994
----------------------------
Total generation
(billions of kilowatt-hours) 156 147 142
Sources of generation
(percent) --
Coal 77 77 75
Nuclear 17 17 19
Hydro 4 4 5
Oil and gas 2 2 1
Average cost of fuel per net
kilowatt-hour generated
(cents) --
Coal 1.65 1.73 1.80
Nuclear 0.52 0.56 0.56
Oil and gas 5.20 3.37 3.99
Total 1.48 1.53 1.56
- ---------------------------------------------------------------
Fuel and purchased power costs of $3.3 billion in 1996 increased $731 million
compared with 1995. Traditional core business increased $49 million and Southern
Energy increased $682 million because of the acquisition of SWEB in late 1995.
The traditional core business's customer demand for electricity rose by 7.9
billion kilowatt-hours more than in 1995. The additional cost to meet the demand
was offset slightly by a lower average cost of fuel per net kilowatt-hour
generated. Fuel and purchased power expenses of $2.6 billion in 1995 increased
$282 million compared with the prior year. Traditional core business accounted
for $73 million of the increase because of higher energy sales.
For 1996, total income taxes decreased $12 million compared with the prior
year. Traditional core business income taxes decreased $47 million, and Southern
Energy increased $35 million. The decrease was attributable to less taxable
income from core business operations. For 1995, income taxes rose $84 million
above the amount reported for 1994. Traditional core business increased $65
million and Southern Energy accounted for the remainder.
Total gross interest charges and preferred stock dividends increased $19
million from amounts reported in the previous year. These costs for core
business continued to decline by $71 million, but Southern Energy's interest
charges increased. The decline in costs for core business was attributable to
lower interest rates and continued refinancing activities in 1996. In 1995,
these costs for core business decreased $12 million. As a result of favorable
market conditions, $574 million in 1996, $1.1 billion in 1995, and $1.0 billion
in 1994 of senior securities were issued for the primary purpose of retiring
higher-cost securities.
Effects of Inflation
Southern Company is subject to rate regulation and income tax laws that are
based on the recovery of historical costs. Therefore, inflation creates an
economic loss because the company is recovering its costs of investments in
dollars that have less purchasing power. While the inflation rate has been
relatively low in recent years, it continues to have an adverse effect on
Southern Company because of the large investment in long-lived utility plant.
Conventional accounting for historical cost does not recognize this economic
loss nor the partially offsetting gain that arises through financing facilities
with fixed-money obligations such as long-term debt and preferred 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 energy sales growth to a less regulated more
competitive environment, with non-traditional business becoming more
significant.
Work force reduction programs have reduced earnings by $53 million, $17
million, and $61 million for the years 1996, 1995, and 1994, respectively. These
actions will assist in efforts to control growth in future operating expenses.
Future earnings in the near term will depend upon growth in energy sales,
which are subject to a number of factors. Traditionally, these factors have
included weather, competition, changes in contracts with neighboring utilities,
energy conservation practiced by customers, the elasticity of demand, and the
rate of economic growth in the company's service area. However, the Energy
Policy Act of 1992 (Energy Act) is having a dramatic effect on the future of the
electric utility industry. The Energy Act promotes energy efficiency,
alternative fuel use, and increased competition for electric utilities. Southern
Company is positioning its business to meet the challenge of this major change
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
in the traditional practice of selling electricity. 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 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. Southern Company is aggressively working to maintain and
expand its share of wholesale sales in the Southeastern power markets.
Various federal and state initiatives designed to promote wholesale
and retail competition, among other things, include proposals that would allow
customers to choose their electricity provider. As the initiatives materialize,
the structure of the utility industry could radically change. Certain
initiatives could result in a change in the ownership and/or operation of
generation and transmission facilities. Numerous issues must be resolved,
including significant ones relating to transmission pricing and recovery of
stranded investments. Being a low-cost producer could provide significant
opportunities to increase market share and profitability in markets that evolve
with changing regulation. Unless Southern Company 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 Energy Act amended the Public Utility Holding Company Act of 1935
(PUHCA). The amendment allows holding companies to form exempt wholesale
generators and foreign utility companies to sell power largely free of
regulation under PUHCA. These entities are able to sell power to affiliates --
under certain restrictions -- and to own and operate power generating facilities
in other domestic and international markets. To take advantage of existing and
evolving opportunities, Southern Energy-- founded in 1981 -- is focusing on
international and domestic cogeneration, the independent power market, and the
privatization of generating and distribution facilities in the international
market. As the marketplace evolves, Southern Energy is positioning the company
to become a major competitor for providing energy-related services, including
energy trading and marketing. Also, Southern Energy is expanding the business
through acquisitions. In late 1995, SWEB was acquired for approximately $1.8
billion. In July 1996, a 25 percent interest in SWEB was sold. The acquisition
of an 80 percent interest in CEPA for a total net investment of some $2.1
billion was completed in early 1997. For additional information on these
acquisitions, see Note 14 to the financial statements.
The CEPA acquisition is expected to be slightly dilutive in the near term.
However, Southern Energy's investments should increase the opportunities for
long-term future earnings growth. At December 31, 1996, Southern Energy's total
assets amounted to $4.9 billion, and with the inclusion of CEPA assets will be
nearly $10 billion.
Rates to retail customers served by the system operating companies are
regulated by the respective state public service commissions in Alabama,
Florida, Georgia, and Mississippi. Rates for Alabama Power and Mississippi Power
are adjusted periodically within certain limitations based on earned retail rate
of return compared with an allowed return. See Note 3 to the financial
statements for information about other retail and wholesale regulatory matters.
The staff of the Securities and Exchange Commission has questioned certain of
the current accounting practices of the electric utility industry -- including
Southern Company's -- regarding the recognition, measurement, and classification
of decommissioning costs for nuclear generating facilities in the financial
statements. In response to these questions, the Financial Accounting Standards
Board (FASB) has decided to review the accounting for liabilities related to
closure and removal of long-lived assets, including nuclear decommissioning. If
the FASB issues new accounting rules, the estimated costs of closing and
removing Southern Company's nuclear and other facilities may be required to be
recorded as liabilities in the Consolidated Balance Sheets. Also, the annual
provisions for such costs could change. Because of the company's current ability
to recover closure and removal costs through rates, these changes would not have
a significant adverse effect on results of operations. See Note 1 to the
financial statements under "Depreciation and Nuclear Decommissioning" for
additional information.
Southern Company is involved in various matters being litigated. See Note 3
to the financial statements for information regarding material issues that could
possibly affect future earnings.
Compliance costs related to the Clean Air Act Amendments of 1990 (Clean Air
Act) could affect earnings if such costs are not fully recovered. The Clean Air
Act and other important environmental items are discussed later under
"Environmental Matters."
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
The operating companies are subject to the provisions of FASB Statement No.
71, Accounting for the Effects of Certain Types of Regulation. In the event that
a portion of a company's operations is no longer subject to these provisions,
the company would be required to write off related regulatory assets and
liabilities, and determine if any other assets have been impaired. See Note 1 to
the financial statements under "Regulatory Assets and Liabilities" for
additional information.
FINANCIAL CONDITION
Overview
Southern Company's financial condition continues to remain strong. Earnings per
share set a record high in 1996. Net income continued to increase in 1996 and
exceeded $1.1 billion. Based on this performance, in January 1997, the Southern
Company board of directors increased the common stock dividend for the sixth
consecutive year.
Gross property additions to utility plant were $1.2 billion. The majority of
funds needed for gross property additions since 1993 have been provided from
operating activities, principally from earnings and non-cash charges to income
such as depreciation and deferred income taxes. The Consolidated Statements of
Cash Flows provide additional details.
Southern Company uses financial derivatives on a limited basis to mitigate
business risks. At December 31, 1996, the credit and price risks for derivatives
outstanding were not material to the financial statements. See Note 1 to the
financial statements under "Financial Instruments" for additional information.
Capital Structure
Southern Company achieved a ratio of common equity to total capitalization --
including short-term debt -- of 45.1 percent in 1996, compared with 42.4 percent
in 1995, and 44.4 percent in 1994. The company's goal is to maintain the common
equity ratio generally within a range of 40 percent to 45 percent.
During 1996, the subsidiary companies sold $85 million of first mortgage
bonds and, through public authorities, $167 million of pollution control revenue
bonds. Preferred securities of $322 million were issued in 1996. The companies
continued to reduce financing costs by retiring higher-cost bonds and preferred
stock. Retirements, including maturities, of bonds totaled $600 million during
1996, $1.3 billion during 1995, and $973 million during 1994. Retirements of
preferred stock totaled $179 million during 1996, and $1 million a year during
1995 and 1994. As a result, the composite interest rate on long-term debt
decreased from 7.6 percent at December 31, 1993, to 6.9 percent at December 31,
1996. During this same period, the composite dividend rate on preferred stock
declined from 6.4 percent to 6.2 percent.
In 1996, Southern Company raised $171 million from the issuance of new
common stock under the company's various stock plans. At the close of 1996, the
company's common stock had a market value of 225/8 per share, compared with a
book value of $13.61 per share. The market-to-book value ratio was 166 percent
at the end of 1996, compared with 188 percent at year-end 1995, and 160 percent
at year-end 1994.
Capital Requirements for Construction
The construction program of Southern Company is budgeted at $1.4 billion for
1997, $1.3 billion for 1998, and $1.4 billion for 1999. The total is $4.1
billion for the three years. Actual construction costs may vary from this
estimate because of changes in such factors as: business conditions;
environmental regulations; nuclear plant regulations; load projections; the cost
and efficiency of construction labor, equipment, and materials; and the cost of
capital. In addition, there can be no assurance that costs related to capital
expenditures for the operating companies will be fully recovered.
The operating companies do not have any traditional baseload generating
plants under construction, and current energy demand forecasts do not require
any traditional baseload facilities until well into the future. Significant
construction of transmission and distribution facilities and upgrading of
generating plants will be continuing.
Other Capital Requirements
In addition to the funds needed for the construction program, approximately $1.2
billion will be required by the end of 1999 for present sinking fund
requirements and maturities of long-term debt. Also, the subsidiaries will
continue to retire higher-cost debt and preferred stock and replace these
obligations with lower-cost capital if market conditions permit.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
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 -- impacts 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 units of Southern Company. As
a result of the 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.
In 1995, the Environmental Protection Agency (EPA) began issuing annual
sulfur dioxide emission allowances through the allowance trading program. An
emission allowance is the authority to emit one ton of sulfur dioxide during a
calendar year. The sulfur dioxide emission allowance program is expected to
minimize the cost of compliance. Southern Company's sulfur dioxide compliance
strategy is designed to use allowances as a compliance option.
Southern Company achieved Phase I sulfur dioxide compliance at the affected
plants by switching to low-sulfur coal, which required some equipment upgrades.
This compliance strategy resulted in unused emission allowances being banked for
later use. Construction expenditures for Phase I compliance totaled
approximately $310 million.
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. Also, equipment to control nitrogen oxide
emissions will be installed on additional system fossil-fired units as required
to meet Phase II limits. Therefore, current compliance strategy could require
total Phase II estimated construction expenditures of approximately $80 million,
of which $60 million remains to be spent. However, the full impact of Phase II
compliance cannot now be determined with certainty, pending the continuing
development of a market for emission allowances, the completion of EPA
regulations, and the possibility of new emission reduction technologies.
An average increase of up to 1 percent in revenue requirements from
customers could be necessary to fully recover the cost of compliance for both
Phase I and Phase II of Title IV of the Clean Air Act. Compliance costs include
construction expenditures, increased costs for switching to low-sulfur coal, and
costs related to emission allowances.
A significant portion of costs related to the acid rain provision of the
Clean Air Act is expected to be recovered through existing ratemaking
provisions. However, there can be no assurance that all Clean Air Act costs will
be recovered.
The EPA and state environmental regulatory agencies are reviewing and
evaluating various matters including: revisions to the ambient air quality
standards for ozone and particulate matter; 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.
Southern 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 subsidiaries could incur substantial costs to clean up
properties. The subsidiaries conduct studies to determine the extent of any
required cleanup costs and have recognized in their respective financial
statements costs to clean up known sites. These costs for Southern Company
amounted to $8 million a year for 1995 and 1994. In 1996, the company was
reimbursed $6 million for amounts previously expensed. Additional sites may
require environmental remediation for which the subsidiaries may be liable for a
portion or all required cleanup costs. See Note 3 to the financial statements
for information regarding Georgia Power's potentially responsible party status
at a site in Brunswick, Georgia.
Several major pieces of environmental legislation are being considered for
reauthorization or amendment by Congress. These include: the Clean Air Act; the
Clean Water Act; the Comprehensive Environmental Response, Compensation, and
Liability Act; the Resource Conservation and Recovery Act; the Toxic Substances
Control Act; and the Endangered Species Act. Changes to these laws could affect
many areas of Southern 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 Southern Company. The impact of new legislation -- if
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
any -- will depend on the subsequent development and implementation of
applicable regulations. In addition, the potential exists for liability as the
result of lawsuits alleging damages caused by electromagnetic fields.
Sources of Capital
Southern Company plans to issue additional equity capital in 1997. The amount
and timing of additional equity capital to be raised in 1997 -- as well as in
subsequent years -- will be contingent on Southern Company's investment
opportunities. Equity capital can be provided from any combination of public
offerings, private placements, or the company's stock plans. Any portion of the
common stock required during 1997 for the company's stock plans that is not
provided from the issuance of new stock will be acquired on the open market in
accordance with the terms of such plans.
The operating companies plan to obtain the funds required for construction
and other purposes from sources similar to those used in the past, which was
primarily from internal sources. However, the type and timing of any financings
- -- if needed -- will depend on market conditions and regulatory approval.
To meet short-term cash needs and contingencies, Southern Company had
approximately $445 million of cash and cash equivalents and $4.1 billion of
unused credit arrangements with banks at the beginning of 1997.
To issue additional first mortgage bonds and preferred stock, the operating
companies must comply with certain earnings coverage requirements designated in
their mortgage indentures and corporate charters. The ability to issue
securities in the future will depend on coverages at that time. Currently, each
of the operating companies expects to have adequate coverage ratios for
anticipated requirements through at least 1999.
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1996, 1995, and 1994
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
(in millions)
Operating Revenues $10,358 $9,180 $8,297
- -------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 2,245 2,126 2,058
Purchased power 1,103 491 277
Other 1,860 1,626 1,505
Maintenance 782 683 660
Depreciation and amortization 996 904 821
Amortization of deferred Plant Vogtle costs, net 137 124 75
Taxes other than income taxes 634 535 475
Income taxes 747 805 711
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,504 7,294 6,582
- -------------------------------------------------------------------------------------------------------------------------------
Operating Income 1,854 1,886 1,715
Other Income:
Allowance for equity funds used during construction 4 5 11
Interest income 54 38 32
Other, net 42 (65) (28)
Income taxes applicable to other income (10) 36 26
- -------------------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 1,944 1,900 1,756
- -------------------------------------------------------------------------------------------------------------------------------
Interest Charges and Other:
Interest on long-term debt 530 557 568
Allowance for debt funds used during construction (19) (20) (18)
Interest on notes payable 107 63 33
Amortization of debt discount, premium, and expense, net 33 44 30
Other interest charges 46 43 47
Minority interest in subsidiaries 13 13 20
Distributions on preferred securities of subsidiary companies 22 9 -
Preferred dividends of subsidiary companies 85 88 87
- -------------------------------------------------------------------------------------------------------------------------------
Interest charges and other, net 817 797 767
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated Net Income $ 1,127 $1,103 $ 989
===============================================================================================================================
Common Stock Data:
Average number of shares of common stock outstanding (in millions) 673 665 650
Earnings per share of common stock $1.68 $1.66 $1.52
Cash dividends paid per share of common stock $1.26 $1.22 $1.18
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1996, 1995, and 1994
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $3,483 $3,191 $2,968
Consolidated net income 1,127 1,103 989
- -------------------------------------------------------------------------------------------------------------------------------
4,610 4,294 3,957
Cash dividends on common stock 846 811 766
Balance at End of Year (Note 9) $3,764 $3,483 $3,191
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(in millions)
Operating Activities:
Consolidated net income $ 1,127 $ 1,103 $ 989
Adjustments to reconcile consolidated net income
to net cash provided by operating activities --
Depreciation and amortization 1,201 1,134 1,050
Deferred income taxes and investment tax credits 57 117 (4)
Allowance for equity funds used during construction (4) (5) (11)
Amortization of deferred Plant Vogtle costs, net 137 124 75
Gain on asset sales (59) (33) (52)
Other, net 79 (52) 45
Changes in certain current assets and liabilities --
Receivables, net (92) (109) 114
Fossil fuel stock 57 28 (110)
Materials and supplies 47 11 (18)
Accounts payable 19 (138) 81
Other (168) 135 (48)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 2,401 2,315 2,111
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (1,229) (1,401) (1,536)
Southern Energy business acquisitions - (1,416) (405)
Sales of property 211 287 171
Other (275) 153 (87)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,293) (2,377) (1,857)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds --
Common stock 171 277 279
Preferred securities 322 - 100
First mortgage bonds 85 375 185
Other long-term debt 1,570 1,805 1,188
Retirements --
Preferred stock (179) (1) (1)
First mortgage bonds (426) (538) (241)
Other long-term debt (1,754) (902) (1,039)
Increase (decrease) in notes payable, net (268) 727 37
Payment of common stock dividends (846) (811) (766)
Miscellaneous (110) (237) (35)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities (1,435) 695 (293)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (327) 633 (39)
Cash and Cash Equivalents at Beginning of Year 772 139 178
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 445 $ 772 $ 139
===========================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the year for --
Interest (net of amount capitalized) $677 $622 $618
Income taxes $652 $645 $716
Southern Energy business acquisitions --
Fair value of assets acquired $- $2,745 $604
Less cash paid for common stock - 1,416 405
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $- $1,329 $199
===========================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
At December 31, 1996 and 1995
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Assets 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(in millions)
Utility Plant:
Plant in service (Note 1) $33,260 $31,878
Less accumulated provision for depreciation 10,921 10,067
- ------------------------------------------------------------------------------------------------------------------
22,339 21,811
Nuclear fuel, at amortized cost 246 225
Construction work in progress (Note 4) 684 990
- ------------------------------------------------------------------------------------------------------------------
Total 23,269 23,026
- ------------------------------------------------------------------------------------------------------------------
Other Property and Investments:
Argentine operating concession, being amortized 416 431
Goodwill (Note 14) 318 344
Nuclear decommissioning trusts 279 201
Miscellaneous 488 317
- ------------------------------------------------------------------------------------------------------------------
Total 1,501 1,293
- ------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 445 772
Special deposits 44 156
Receivables, less accumulated provisions for uncollectible accounts
of $32 million in 1996 and $37 million in 1995 1,458 1,366
Fossil fuel stock, at average cost 270 327
Materials and supplies, at average cost 510 552
Prepayments 253 266
Vacation pay deferred 77 74
- ------------------------------------------------------------------------------------------------------------------
Total 3,057 3,513
- ------------------------------------------------------------------------------------------------------------------
Deferred Charges:
Deferred charges related to income taxes (Note 8) 1,302 1,386
Deferred Plant Vogtle costs 171 308
Debt expense, being amortized 78 68
Premium on reacquired debt, being amortized 289 295
Miscellaneous 625 633
- ------------------------------------------------------------------------------------------------------------------
Total 2,465 2,690
- ------------------------------------------------------------------------------------------------------------------
Total Assets $30,292 $30,522
==================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
12
<PAGE>
CONSOLIDATED BALANCE SHEETS
At December 31, 1996 and 1995
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
(in millions)
Capitalization (See accompanying statements):
Common stock equity $ 9,216 $ 8,772
Preferred stock of subsidiaries 980 1,332
Subsidiary obligated mandatorily redeemable preferred securities 422 100
Long-term debt 7,935 8,274
- ----------------------------------------------------------------------------------------------------------------------
Total 18,553 18,478
- ----------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Amount of securities due within one year 364 509
Notes payable 1,483 1,670
Accounts payable 788 785
Customer deposits 132 216
Taxes accrued-
Federal and state income 12 93
Other 193 179
Interest accrued 187 199
Vacation pay accrued 104 100
Miscellaneous 535 530
- ----------------------------------------------------------------------------------------------------------------------
Total 3,798 4,281
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes (Note 8) 4,738 4,611
Deferred credits related to income taxes (Note 8) 879 936
Accumulated deferred investment tax credits 788 820
Employee benefits provisions 439 431
Minority interest 375 231
Prepaid capacity revenues 122 131
Department of Energy assessments 81 86
Disallowed Plant Vogtle capacity buyback costs 57 59
Storm damage reserves 35 31
Miscellaneous 427 427
- ----------------------------------------------------------------------------------------------------------------------
Total 7,941 7,763
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Matters (Notes 1, 2, 3, 4, 5, 7, 13, and 14)
Total Capitalization and Liabilities $30,292 $30,522
======================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
13
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1996 and 1995
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Common Stock Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Outstanding -- 1996: 677 million shares
1995: 670 million shares $3,385 $3,348
Paid-in capital 2,067 1,941
Retained earnings (Note 9) 3,483
- ------------------------------------------------------------------------------------------------------------------------
Total common stock equity 9,216 8,772 49.7% 47.5%
- ------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock of Subsidiaries:
$100 par or stated value --
4.20% to 5.96% 199 199
6.32% to 7.88% 130 205
$25 par or stated value --
$1.90 to $2.125 191 295
6.40% to 7.60% 323 323
Auction rates -- at January 1, 1997:
4.01% to 4.09% 70 70
Adjustable rates -- at January 1, 1997:
5.01% to 5.66% 240 240
- ------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $72 million) 1,153 1,332
Less amount due within one year 173 -
- ------------------------------------------------------------------------------------------------------------------------
Total excluding amount due within one year 980 1,332 5.3 7.2
- ------------------------------------------------------------------------------------------------------------------------
Subsidiary Obligated Mandatorily
Redeemable Preferred Securities (Note 10):
$25 liquidation value
7.375% 97 -
7.75% 225 -
9% 100 100
- ------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $34 million) 422 100 2.3 0.5
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At December 31, 1996 and 1995
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Long-Term Debt of Subsidiaries:
First mortgage bonds --
Maturity Interest Rates
1996 4 1/2 % - 60
1996 4 3/4 % - 150
1996 8.665% - 6
1997 5 7/8 % 25 25
1997 8.665% 7 7
1998 5% to 8.665% 238 238
1999 6 1/8% to 8.665% 373 373
2000 6% to 8.665% 349 349
2001 8.665% 9 9
2002 through 2006 6.07% to 8.665% 1,017 962
2007 through 2011 6 7/8% to 9% 292 293
2012 through 2016 8.665% 85 85
2017 through 2021 8.665% to 9 1/4% 228 376
2022 through 2026 6 7/8% to 9% 1,497 1,528
- -----------------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 4,120 4,461
Other long-term debt (Note 11) 4,084 4,403
Unamortized debt premium (discount), net (78) (81)
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $564 million) 8,126 8,783
Less amount due within one year (Note 12) 191 509
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding amount due within one year 7,935 8,274 42.7 44.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $18,553 $18,478 100.0% 100.0%
===================================================================================================================================
CONSOLIDATED STATEMENTS OF PAID-IN CAPITAL
For the Years Ended December 31, 1996, 1995, and 1994
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $1,941 $1,712 $1,503
Proceeds from sales of common stock over the par value -- 7.5 million,
13.0 million, and 13.9 million shares in 1996, 1995, and 1994, respectively 133 212 209
Miscellaneous (7) 17 -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $2,067 $1,941 $1,712
===================================================================================================================================
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Southern Company and Subsidiary Companies 1996 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Southern Company is the parent company of five operating companies, a system
service company, Southern Communications Services (Southern Communications),
Southern Energy, Inc. (Southern Energy), Southern Nuclear Operating Company
(Southern Nuclear), The Southern Development and Investment Group (Southern
Development), and other direct and indirect subsidiaries. The operating
companies -- Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and
Savannah Electric -- provide electric service in four southeastern states.
Contracts among the operating 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) or the
Securities and Exchange Commission (SEC). The system service company provides,
at cost, specialized services to Southern Company and subsidiary companies.
Southern Communications provides digital wireless communications services to the
operating companies and also markets these services to the public within the
Southeast. Southern Energy designs, builds, owns, and operates power production
and delivery facilities and provides a broad range of energy related services in
the United States and international markets. Southern Nuclear provides services
to Southern Company's nuclear power plants. Southern Development 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 the company and its subsidiaries are
subject to the regulatory provisions of the PUHCA. The operating companies also
are subject to regulation by the FERC and their respective state regulatory
commissions. The companies follow generally accepted accounting principles and
comply with the accounting policies and practices prescribed by their 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. All material intercompany items
have been eliminated in consolidation.
The consolidated financial statements reflect investments in majority-owned
or controlled subsidiaries on a consolidated basis and other investments on an
equity basis. Certain prior years' data presented in the consolidated financial
statements have been reclassified to conform with current year presentation.
Regulatory Assets and Liabilities
The operating companies are subject to the provisions of Financial Accounting
Standards Board (FASB) Statement No. 71, Accounting for the Effects of Certain
Types of Regulation. Regulatory assets represent probable future revenues to the
operating companies 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 to be credited to customers through the ratemaking process. Regulatory
assets and (liabilities) reflected in the Consolidated Balance Sheets at
December 31 relate to the following:
1996 1995
------------------------
(in millions)
Deferred income taxes $1,302 $1,386
Deferred Plant Vogtle costs 171 308
Premium on reacquired debt 289 295
Demand-side programs 44 79
Department of Energy assessments 69 73
Vacation pay 77 74
Deferred fuel charges 29 49
Postretirement benefits 38 53
Work force reduction costs 48 56
Deferred income tax credits (879) (936)
Storm damage reserves (32) (23)
Other, net 114 98
- -----------------------------------------------------------------
Total $1,270 $1,512
=================================================================
In the event that a portion of the operating companies' operations is no
longer subject to the provisions of Statement No. 71, the companies would be
required to write off related regulatory assets and liabilities. In addition,
the operating companies would be required to determine any impairment to other
assets, including plant, and write down the assets, if impaired, to their fair
value.
Revenues and Fuel Costs
The operating companies accrue revenues for service rendered but unbilled at the
end of each fiscal period. Fuel costs are expensed as the fuel is used. The
operating companies' electric rates include provisions to adjust billings for
fluctuations in fuel and the energy component of purchased power costs. Revenues
16
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
are adjusted for differences between recoverable fuel costs and amounts actually
recovered in current rates.
The operating companies have a diversified base of customers. No single
customer or industry comprises 10 percent or more of revenues. In 1996,
uncollectible accounts continued to average less than 1 percent of revenues.
Fuel expense includes the amortization of the cost of nuclear fuel and a
charge, based on nuclear generation, for the permanent disposal of spent nuclear
fuel. Total charges for nuclear fuel included in fuel expense amounted to $142
million in 1996, $140 million in 1995, and $152 million in 1994. Alabama Power
and Georgia Power have contracts with the U.S. Department of Energy (DOE) that
provide for the permanent disposal of spent nuclear fuel. Although disposal was
scheduled to begin in 1998, the actual year this service will begin is
uncertain. Sufficient storage capacity currently is available to permit
operation into 2003 at Plant Hatch, into 2008 at Plant Vogtle, and into 2010 and
2013 at Plant Farley units 1 and 2, respectively. Activities for adding dry cast
storage capacity at Plant Hatch by as early as 1999 are in progress.
Also, the Energy Policy Act of 1992 required the establishment in 1993 of a
Uranium Enrichment Decontamination and Decommissioning Fund, which is to be
funded in part by a special assessment on utilities with nuclear plants. This
assessment is being paid over a 15-year period, which began in 1993. This fund
will be used by the DOE for the decontamination and decommissioning of its
nuclear fuel enrichment facilities. The law provides that utilities will recover
these payments in the same manner as any other fuel expense. Alabama Power and
Georgia Power -- based on its ownership interests -- estimate their respective
remaining liability at December 31, 1996, under this law to be approximately $37
million and $30 million, respectively. These obligations are recorded in the
Consolidated Balance Sheets.
Depreciation and Nuclear Decommissioning
Depreciation of the original cost of depreciable utility plant in service is
provided primarily by using composite straight-line rates, which approximated
3.3 percent in 1996, 3.3 percent in 1995, and 3.2 percent in 1994. 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 costs
of decommissioning nuclear facilities and removal of other facilities.
Georgia Power recorded additional depreciation of electric plant amounting
to $24 million in 1996 and $6 million in 1995. See Note 3 under "Georgia Power
Retail Accounting Order" for additional information.
In 1988, the Nuclear Regulatory Commission (NRC) adopted regulations
requiring all licensees operating commercial power reactors to establish a plan
for providing, with reasonable assurance, funds for decommissioning. Alabama
Power and Georgia Power have external trust funds to comply with the NRC's
regulations. Amounts previously recorded in internal reserves are being
transferred into the external trust funds over periods approved by the
respective state public service commissions. The NRC's minimum external funding
requirements are based on a generic estimate of the cost to decommission the
radioactive portions of a nuclear unit based on the size and type of reactor.
Alabama Power and Georgia Power have filed plans with the NRC to ensure that --
over time -- the deposits and earnings of the external trust funds will provide
the minimum funding amounts prescribed by the NRC.
Site study cost is the estimate to decommission a specific facility as of
the site study year, and ultimate cost is the estimate to decommission a
specific facility as of retirement date. The estimated costs of decommissioning
17
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
- -- both site study costs and ultimate costs -- at December 31, 1996, for Alabama
Power's Plant Farley and Georgia Power's ownership interests in plants Hatch and
Vogtle were as follows:
Plant Plant Plant
Farley Hatch Vogtle
--------------------------------
Site study basis (year) 1993 1994 1994
Decommissioning periods:
Beginning year 2017 2014 2027
Completion year 2029 2027 2038
- -----------------------------------------------------------------
(in millions)
Site study costs:
Radiated structures $489 $294 $233
Non-radiated structures 89 41 52
- -----------------------------------------------------------------
Total $578 $335 $285
=================================================================
Ultimate costs:
Radiated structures $1,504 $781 $1,018
Non-radiated structures 274 111 230
- -----------------------------------------------------------------
Total $1,778 $892 $1,248
=================================================================
Plant Plant Plant
Farley Hatch Vogtle
---------------------------
(in millions)
Amount expensed in 1996 $18 $11 $9
Accumulated provisions:
Balance in external trust
funds $149 $ 79 $51
Balance in internal reserves 47 27 13
- ----------------------------------------------------------------
Total $196 $106 $64
================================================================
Significant assumptions:
Inflation rate 4.5% 4.4% 4.4%
Trust earning rate 7.0 6.0 6.0
- ----------------------------------------------------------------
Annual provisions for nuclear decommissioning are based on an annuity method
as approved by the respective state public service commissions. All of Alabama
Power's decommissioning costs are approved for ratemaking. For Georgia Power,
only the costs to decommission the radioactive portion of the plants are
included in cost of service. Alabama Power and Georgia Power expect their
respective state public service commissions to periodically review and adjust,
if necessary, the amounts collected in rates for the anticipated cost of
decommissioning.
The decommissioning cost estimates are based on prompt dismantlement and
removal of the plant from service. The actual decommissioning costs may vary
from the above estimates because of changes in the assumed date of
decommissioning, changes in NRC requirements, or changes in the assumptions used
in making estimates.
Income Taxes
Southern Company uses the liability method of accounting for deferred income
taxes and provides deferred income taxes for all significant income tax
temporary differences. Investment tax credits utilized are deferred and
amortized to income over the average lives of the related property.
Plant Vogtle Phase-In Plans
In 1987, 1989, and 1991, the Georgia Public Service Commission (GPSC) ordered
that the allowed costs of Plant Vogtle, a two-unit nuclear facility of which
Georgia Power owns 45.7 percent, be phased into rates. Each GPSC order called
for recovery of deferred costs within 10 years. Under these plans, all allowed
costs will be recovered by 1999.
Allowance for Funds Used During Construction (AFUDC)
AFUDC represents the estimated debt and equity costs of capital funds that are
necessary to finance the construction of new facilities. While cash is not
realized currently from such allowance, it increases the revenue requirement
over the service life of the plant through a higher rate base and higher
depreciation expense. The composite rates used by the operating companies to
calculate AFUDC during the years 1994 through 1996 ranged from a
before-income-tax rate of 5.1 percent to 9.8 percent. AFUDC, net of income tax,
as a percent of consolidated net income was 1.4 percent in 1996, 1.6 percent in
1995, and 2.3 percent in 1994.
Utility Plant
Utility plant is stated at original cost less regulatory disallowances. Original
cost includes: materials; labor; minor items of property; appropriate
administrative and general costs; payroll-related costs such as taxes, pensions,
and other benefits; and the estimated cost of funds used during construction.
The cost of maintenance, repairs, and replacement of minor items of property is
18
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
charged to maintenance expense. 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 Consolidated 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
Southern Company engages in price risk management activities for trading and
non-trading purposes. Activities for non-trading purposes consist of
transactions that are employed to mitigate Southern Company's risk related to
interest rate and foreign currency fluctuations. Gains and losses arising from
effective hedges of existing assets, liabilities, or firm commitments are
deferred and recognized when the offsetting gains and losses are recognized on
the related hedged items. At December 31, 1996, the credit risk for derivatives
outstanding was not material to the financial statements. Southern Company
regularly monitors its foreign currency exposure and ensures that hedge contract
amounts do not exceed the amount of underlying exposures. At December 31, 1996,
the status of outstanding non-trading related derivative contracts was as
follows:
Year Of
Maturity or Notional Unrealized
Type Termination Amount Gain (Loss)
- ---------------------------------- ---------------------------
(in millions)
Interest rate
swaps: 1999-2011 $158 $(7)
2001-2012 (pound)500 $(13)
Cross currency
swaps 2001-2006 (pound)405 $(38)
- -----------------------------------------------------------------
(pound) - Denotes British pound sterling.
During 1996, Southern Energy began trading activities by offering price risk
management services related to commodities associated with the domestic energy
industry -- electricity and natural gas. Southern Energy provides these services
through a variety of financial instruments. These transactions are accounted for
using the mark-to-market method of accounting. Under this method, unrealized
gains or losses resulting from the impact of price movements are recognized as
net gains or losses in the consolidated statements of income. The market prices
used to value these transactions reflect management's best estimates considering
various factors including: closing exchange quotations, over-the-counter
quotations, liquidity of the position, time value, and volatility factors
underlying the commitments. Net trading gains and losses were insignificant to
the financial statements for the year ended December 31, 1996. Also, outstanding
contracts at December 31, 1996, were not material to the financial statements.
South Western Electricity (SWEB)--a British distribution company owned by
Southern Energy--has contracts to mitigate its exposure to volatility in the
prices of electricity purchased through the wholesale electricity market. These
contracts are in place to hedge a portion of electricity purchases of
approximately 28 billion kilowatt-hours through the year 2008. This represents
approximately two years of electricity purchases for SWEB based on current
volumes. Accordingly, the gains or losses realized on such contracts are
deferred and recognized as electricity is purchased. It is not possible to
estimate the fair value of these contracts due to the absence of a trading
market.
Other Southern Company financial instruments for which the carrying amount
did not equal fair value at December 31 were as follows:
Carrying Fair
Amount Value
--------------------------
(in millions)
Long-term debt:
At December 31, 1996 $7,975 $8,122
At December 31, 1995 8,636 8,935
Preferred securities:
At December 31, 1996 422 427
At December 31, 1995 100 114
- -----------------------------------------------------------------
The fair values for long-term debt and preferred securities were 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
installed.
19
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
2. RETIREMENT BENEFITS
Pension Plan
The system companies have defined benefit, trusteed, pension plans that cover
substantially all regular employees. Benefits are based on one of the following
formulas: years of service and final average pay or years of service and a
flat-dollar benefit. Primarily, the companies use the "entry age normal method
with a frozen initial liability" actuarial method for funding purposes, subject
to limitations under federal income tax regulations. Amounts funded to the
pension trusts are primarily invested in equity and fixed-income securities.
FASB Statement No. 87, Employers' Accounting for Pensions, requires use of the
"projected unit credit" actuarial method for financial reporting purposes.
Postretirement Benefits
In the United States, Southern 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. Trusts are funded to the
extent deductible under federal income tax regulations or to the extent required
by the operating companies' respective regulatory commissions. Amounts funded
are primarily invested in debt and equity securities.
FASB Statement No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, requires that medical care and life insurance benefits for
retired employees be accounted for on an accrual basis using a specified
actuarial method, "benefit/years-of-service." In October 1993, the GPSC ordered
Georgia Power to phase in the adoption of Statement No. 106 to cost of service
over a five-year period, whereby one-fifth of the additional costs was expensed
in 1993 and the remaining costs were deferred. An additional one-fifth of the
costs is being expensed each succeeding year until the costs are fully reflected
in cost of service in 1997. The costs deferred during the five-year period will
be amortized to expense over a 15-year period beginning in 1998. For the other
operating companies, the cost of postretirement benefits is reflected in rates
on a current basis.
Funded Status and Cost of Benefits
The following tables show actuarial results and assumptions for pension and
postretirement insurance benefits as computed under the requirements of
FASB Statement Nos. 87 and 106, respectively. The funded status of the
plans at December 31 was as follows:
Pension
-----------------------
1996 1995
-----------------------
(in millions)
Actuarial present value of benefit obligation:
Vested benefits $2,730 $2,643
Non-vested benefits 119 97
- ------------------------------------------------------------------
Accumulated benefit obligation 2,849 2,740
Additional amounts related to
projected salary increases 775 705
- ------------------------------------------------------------------
Projected benefit obligation 3,624 3,445
Less:
Fair value of plan assets 5,212 4,725
Unrecognized net gain (1,314) (1,025)
Unrecognized prior service cost 135 60
Unrecognized transition asset (114) (126)
- ------------------------------------------------------------------
Prepaid asset recognized in the
Consolidated Balance Sheets $ 295 $ 189
==================================================================
Postretirement Benefits
----------------------------
1996 1995
--------------- ------------
(in millions)
Actuarial present value of benefit obligation:
Retirees and dependents $409 $394
Employees eligible to retire 78 63
Other employees 383 392
- ------------------------------------------------------------------
Accumulated benefit obligation 870 849
Less:
Fair value of plan assets 260 205
Unrecognized net loss (gain) 79 85
Unrecognized prior service cost (5) (4)
Unrecognized transition
obligation 249 292
- -------------------------------------------------------------------
Accrued liability recognized in the
Consolidated Balance Sheets $287 $271
===================================================================
In 1995, the system companies announced a cost sharing program for
postretirement benefits. The program established limits on amounts the companies
will pay to provide future retiree postretirement benefits. This change reduced
the 1995 accumulated postretirement benefit obligation by approximately $186
million.
20
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
The weighted average rates assumed in the actuarial calculations were:
1996 1995 1994
---------------------------------
Discount 7.8% 7.3% 8.0%
Annual salary increase 5.3 4.8 5.5
Long-term return on
plan assets 8.5 8.5 8.5
- ----------------------------------------------------------------
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of 9.3
percent for 1996, decreasing gradually to 5.8 percent through the year 2005 and
remaining at that level thereafter. An annual increase in the assumed medical
care cost trend rate of 1 percent would increase the accumulated benefit
obligation at December 31, 1996, by $77 million and the aggregate of the service
and interest cost components of the net retiree cost by $8 million.
Components of the plans' net costs are shown below:
Pension
---------------------------
1996 1995 1994
---------------------------
(in millions)
Benefits earned during the year $ 99 $ 79 $ 77
Interest cost on projected
benefit obligation 267 193 160
Actual (return) loss on plan assets (564) (730) 75
Net amortization and deferral 152 412 (351)
- ------------------------------------------------------------------
Net pension cost (income) $ (46) $ (46) $ (39)
==================================================================
Of the above net pension income, $37 million in 1996, $30 million in 1995,
and $29 million in 1994 were recorded in operating expenses, and the remainder
was recorded in construction and other accounts.
Postretirement Benefits
---------------------------
1996 1995 1994
---------------------------
(in millions)
Benefits earned during the year $ 20 $ 28 $ 31
Interest cost on accumulated
benefit obligation 60 67 64
Amortization of transition
obligation 15 27 27
Actual (return) loss on plan
assets (17) (23) 2
Net amortization and deferral 6 12 (10)
- ------------------------------------------------------------------
Net postretirement costs $ 84 $111 $114
==================================================================
Of the above net postretirement costs, $64 million in 1996, $78 million in
1995, and $77 million in 1994 were charged to operating expenses. In addition,
$3 million in 1996, $11 million in 1995, and $18 million in 1994 were deferred,
and the remainder was charged to construction and other accounts.
Work Force Reduction Programs
The system companies have incurred additional costs for work force reduction
programs. The costs related to these programs were $85 million, $42 million, and
$112 million for the years 1996, 1995, and 1994, respectively. In addition,
certain costs of these programs were deferred and are being amortized in
accordance with regulatory treatment. The unamortized balance of these costs was
$48 million at December 31, 1996.
3. LITIGATION AND REGULATORY MATTERS
Stockholder Suit Concluded
In April 1991, two Southern Company stockholders filed a derivative action suit
in the U.S. District Court for the Southern District of Georgia against certain
current and former directors and officers of Southern Company. The suit alleges
violations of the Federal Racketeer Influenced and Corrupt Organizations Act
(RICO) by officers and breaches of fiduciary duty and gross negligence by all
defendants resulting from alleged fraudulent accounting for spare parts, illegal
political campaign contributions, violations of federal securities laws
involving misrepresentations and omissions in SEC filings, and concealment of
the foregoing acts. The complaint sought damages -- including treble damages
pursuant to RICO -- in an unspecified amount, which if awarded, would have been
payable to Southern Company. The court ruled the plaintiffs had failed to
present adequately their allegation that Southern Company board of directors'
refusal of an earlier demand by the plaintiffs was wrongful. In April 1994, the
U.S. Court of Appeals for the 11th Circuit reversed the dismissal and remanded
the case to the trial court, finding that allegations by the plaintiffs created
a reasonable doubt that the board validly exercised its business judgment in
refusing the earlier demand. In June 1995, for the second time, the trial court
dismissed the suit, and the plaintiffs appealed. A panel of the court of appeals
in May 1996 affirmed the trial court's dismissal. The plaintiffs' request for a
rehearing was denied. This matter is now concluded.
21
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
Alabama Power Appliance Warranty Litigation
In 1996, legal actions against Alabama Power were filed in several counties in
Alabama charging Alabama Power with fraud and non-compliance with regulatory
statutes relating to the offer, sale, and financing of "extended service
contracts" in connection with the sale of electric appliances. Some of these
suits were filed as class actions, while others were filed on behalf of multiple
individual plaintiffs. The plaintiffs seek damages for an unspecified amount.
Alabama Power has offered extended service agreements to its customers since
January 1984, and approximately 175,000 extended service agreements could be
involved in these proceedings. The final outcome of these cases cannot now be
determined.
Georgia Power Potentially Responsible Party Status
In January 1995, Georgia Power and four other unrelated entities were notified
by the Environmental Protection Agency (EPA) that they have been designated as
potentially responsible parties under the Comprehensive Environmental Response,
Compensation, and Liability Act with respect to a site in Brunswick, Georgia. As
of December 31, 1996, Georgia Power had recorded approximately $5 million in
expenses associated with the site. This represents Georgia Power's agreed upon
share of removal and remedial investigation and feasibility study costs.
The final outcome of this matter cannot now be determined. However, based on
the nature and extent of Georgia Power's activities relating to the site,
management believes that the company's portion of any remaining remediation
costs should not be material to the financial statements.
Georgia Power Investment in Rocky Mountain
In its 1985 financing order, the GPSC concluded that completion of the Rocky
Mountain pumped storage hydroelectric plant in 1991 as then planned was not
economically justifiable and reasonable and withheld authorization for Georgia
Power to spend funds from approved securities issuances on that plant. In 1988,
Georgia Power and Oglethorpe Power Corporation (OPC) entered into a joint
ownership agreement for OPC to assume responsibility for the construction and
operation of the plant. However, full recovery of Georgia Power's costs depends
on the GPSC's treatment of the plant's costs and the disposition of the plant's
capacity output. In June 1996, the GPSC initiated a review of this plant. In the
event the GPSC does not allow full recovery of the plant costs, then the portion
not allowed may have to be written off. In 1995, the plant went into commercial
operation. At December 31, 1996, Georgia Power's net investment in the plant was
approximately $175 million.
The final outcome of this matter cannot now be determined. Accordingly, no
provision for any write-down of the investment in the plant has been made.
FERC Reviews Equity Returns
In May 1991, the FERC ordered that hearings be conducted concerning the
reasonableness of the operating companies' wholesale rate schedules and
contracts that have a return on common equity of 13.75 percent or greater. The
contracts that could be affected by the hearings include substantially all of
the transmission, unit power, long-term power, and other similar contracts.
In August 1992, a FERC administrative law judge issued an opinion that
changes in rate schedules and contracts were not necessary and that the FERC
staff failed to show how any changes were in the public interest. The FERC staff
has filed exceptions to the administrative law judge's opinion, and the matter
remains pending before the FERC.
In August 1994, the FERC instituted another proceeding based on
substantially the same issues as in the 1991 proceeding. In November 1995, a
FERC administrative law judge issued an opinion that the FERC staff failed to
meet its burden of proof, and therefore, no change in the equity return was
necessary. The FERC staff has filed exceptions to the administrative law judge's
opinion, and the matter is pending before the FERC.
If the rates of return on common equity recommended by the FERC staff were
applied to all of the schedules and contracts involved in both proceedings--as
well as to certain other contracts that reference these proceedings in
determining return on common equity--and if refunds were ordered, the amount of
refunds could range up to approximately $160 million at December 31, 1996.
However, management believes that rates are not excessive and that refunds are
not justified.
22
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
Alabama Power Rate Adjustment Procedures
In November 1982, the Alabama Public Service Commission (APSC) adopted rates
that provide for periodic adjustments based upon Alabama Power's earned return
on end-of-period retail common equity. The rates also provide for adjustments to
recognize the placing of new generating facilities in retail service. Both
increases and decreases have been placed into effect since the adoption of these
rates. The rate adjustment procedures allow a return on common equity range of
13.0 percent to 14.5 percent and limit increases or decreases in rates to 4
percent in any calendar year.
In June 1995, the APSC issued a rate order granting Alabama Power's request
for gradual adjustments to move toward parity among customer classes. This order
also calls for a moratorium on any periodic retail rate increases (but not
decreases) until July 2001.
In December 1995, the APSC issued an order authorizing Alabama Power to
reduce balance sheet items -- such as plant and deferred charges -- at any time
the company's actual base rate revenues exceed the budgeted revenues.
The ratemaking procedures will remain in effect until the APSC votes to
modify or discontinue them.
Georgia Power Retail Accounting Order
In February 1996, the GPSC approved an accounting order, which will be in effect
for three years beginning January 1, 1996. Under the accounting order, Georgia
Power's earnings are evaluated against a retail return on common equity range of
10 percent to 12.5 percent. Earnings in excess of 12.5 percent will be used to
accelerate the amortization of regulatory assets or to accelerate the
depreciation of electric plant. At its option, Georgia Power may also accelerate
amortization or depreciation of assets while within the range allowed on common
equity. Georgia Power is required to absorb cost increases of approximately $29
million annually during the three-year period, including $14 million annually of
accelerated depreciation of electric plant. Under the accounting order, Georgia
Power will not file for a general base rate increase unless its projected retail
return on common equity falls below 10 percent. On July 1, 1998, Georgia Power
is required to file a general rate case. In response, the GPSC would be expected
to either continue the provisions of the accounting order or adopt new ones.
A consumer group appealed the GPSC's decision to the Superior Court of
Fulton County, Georgia. In 1996, the court ruled that statutory requirements
applicable to rates cases were not followed and remanded the matter to the GPSC.
Both the GPSC and Georgia Power appealed the court's decision to the Georgia
Court of Appeals. Georgia Power is continuing to record expenses in accordance
with the accounting order pending the outcome of this matter.
4. CONSTRUCTION PROGRAM
The system companies are engaged in continuous construction programs, currently
estimated to total some $1.4 billion in 1997, $1.3 billion in 1998, and $1.4
billion in 1999. The construction programs are subject to periodic review and
revision, and actual construction costs may vary from the above estimates
because of numerous factors. These factors include: changes in business
conditions; revised load growth estimates; changes in environmental regulations;
changes in existing nuclear plants to meet new regulatory requirements;
increasing costs of labor, equipment, and materials; and cost of capital. At
December 31, 1996, significant purchase commitments were outstanding in
connection with the construction program. The operating companies do not have
any traditional baseload generating plants under construction. However,
significant construction will continue related to transmission and distribution
facilities and the upgrading of generating plants.
See Management's Discussion and Analysis under "Environmental Matters" for
information on the impact of the Clean Air Act Amendments of 1990 and other
environmental matters.
5. FINANCING, INVESTMENTS, AND COMMITMENTS
General
Southern Company plans to issue equity capital in 1997. The amount and timing of
additional equity capital to be raised in 1997 -- as well as in subsequent years
- -- will be contingent on Southern Company's investment opportunities. Equity
capital can be provided from any combination of public offerings, private
placements, or the company's stock plans.
The operating companies' construction programs are expected to be financed
primarily from internal sources. Short-term debt is often utilized and the
amounts available are discussed below. The companies may issue additional
23
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
long-term debt and preferred securities primarily for the purposes of debt
maturities and for redeeming higher-cost securities if market conditions permit.
Bank Credit Arrangements
At the beginning of 1997, unused credit arrangements with banks totaled $4.1
billion, of which approximately $1.7 billion expires at various times during
1997 and 1998; $1.0 billion in syndicated credit arrangements expires April 19,
2001; and the remaining $1.4 billion is under revolving credit agreements.
The revolving credit agreements are as follows:
Amount of Credit
-------------------------------------
Company Total Unused Expires
- ------------ -------------------- -------------
(in millions)
Georgia Power $ 60 $ 49 5-01-99
Mississippi Power 40 20 12-01-99
Savannah Electric 20 15 12-31-98
Southern Company 300 300 7-01-99
Southern Company 300 300 11-30-99
Southern Energy 520 215 11-05-99
Southern Energy 283 64 Various
Combined 400 400 6-30-99
- ----------------------------------------------
Total $1,923 $1,363
==============================================
Combined unused revolving credit agreements of $400 million expiring in 1999
are with several banks that provide Southern Company, Alabama Power, and Georgia
Power up to $100 million, $135 million, and $165 million, respectively, for
available credit to provide liquidity support for commercial paper programs.
Most of the revolving credit 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 calendar quarter after the
applicable termination date or at an earlier date at the companies' option. In
addition, these agreements require payment of commitment fees based on the
unused portions of the commitments or the maintenance of compensating balances
with the banks.
Southern Company's $1.0 billion syndicated credit arrangement allows for
revolving loans and competitive bid loans, provided that the sum of the
aggregate amount of revolving loans outstanding plus the aggregate amount of
competitive bid loans outstanding shall not exceed the revolving loan commitment
of $1.0 billion. This agreement requires payment of commitment fees based on the
unused portion of the commitments. Southern Company also pays an agent fee in
connection with this arrangement.
In connection with all other lines of credit, the companies have the option
of paying fees or maintaining compensating balances, which are substantially all
the cash of the companies except for daily working funds and similar items.
These balances are not legally restricted from withdrawal.
A portion of the $4.1 billion unused credit arrangements with banks --
discussed earlier -- is allocated to provide liquidity support to the companies'
variable rate pollution control bonds. At December 31, 1996, the amount of
credit lines allocated was $829 million.
In addition, the companies from time to time borrow under uncommitted lines
of credit with banks and in the case of Southern Company, Alabama Power, and
Georgia Power, through commercial paper programs that have the liquidity support
of committed bank credit arrangements.
Assets Subject to Lien
Each of Southern Company's subsidiaries is organized as a legal entity,
separate, and apart from Southern Company and its other subsidiaries. The
subsidiary companies' mortgages, which secure the first mortgage bonds issued by
the companies, constitute a direct first lien on substantially all of the
companies' respective fixed property and franchises. There are no agreements or
other arrangements among the subsidiary companies under which the assets of one
company have been pledged or otherwise made available to satisfy obligations of
Southern Company or any of its subsidiaries.
Fuel and Purchased Power Commitments
To supply a portion of the fuel requirements of the generating plants, Southern
Company has entered into various long-term commitments for the procurement of
fossil and nuclear fuel. In most cases, these contracts contain provisions for
price escalations, minimum purchase levels, and other financial commitments.
24
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
Also, Southern Company has entered into various long-term commitments for the
purchase of electricity. Total estimated long-term obligations at December 31,
1996, were as follows:
Purchased
Year Fuel Power
- -------- ---------------------------------
(in millions)
1997 $ 1,908 $ 553
1998 1,674 249
1999 1,251 162
2000 794 167
2001 748 169
2002 and thereafter 4,797 1,845
- -------------------------------------------------------------
Total commitments $11,172 $3,145
=============================================================
Operating Leases
Southern Company has operating lease agreements with various terms and
expiration dates. These expenses totaled $23 million, $17 million, and $15
million, for 1996, 1995, and 1994, respectively. At December 31, 1996, estimated
minimum rental commitments for noncancelable operating leases were as follows:
Year Amounts
- -------- ---------------
(in millions)
1997 $ 25
1998 24
1999 25
2000 24
2001 23
2002 and thereafter 333
- -----------------------------------------------------------
Total minimum payments $454
===========================================================
6. FACILITY SALES AND JOINT OWNERSHIP AGREEMENTS
In 1992, Alabama Power sold an undivided interest in units 1 and 2 of Plant
Miller and related facilities to Alabama Electric Cooperative, Inc.
Since 1975, Georgia Power has sold undivided interests in plants Vogtle,
Hatch, Scherer, and Wansley in varying amounts, together with transmission
facilities, to OPC, the Municipal Electric Authority of Georgia, and the city of
Dalton, Georgia. In addition, Georgia Power has joint ownership agreements with
OPC for the Rocky Mountain project and with Florida Power Corporation (FPC) for
a combustion turbine unit at Intercession City, Florida.
At December 31, 1996, Alabama Power's and Georgia Power's ownership and
investment (exclusive of nuclear fuel) in jointly owned facilities with the
above entities were as follows:
Jointly Owned Facilities
-------------------------------------------------
Percent Amount of Accumulated
Ownership Investment Depreciation
---------------- -------------------------------
Plant Vogtle (in millions)
(nuclear) 45.7% $3,299 $843
Plant Hatch
(nuclear) 50.1 854 436
Plant Miller
(coal)
Units 1 and 2 91.8 714 296
Plant Scherer
(coal)
Units 1and 2 8.4 112 42
Plant Wansley
(coal) 53.5 301 134
Rocky Mountain
(pumped storage) 25.4 202 27
- -------------------------------------------------------------------
In 1994, Georgia Power and FPC entered into a joint ownership agreement
regarding the Intercession City combustion turbine unit. The unit went into
commercial operation in early 1997 and will be operated and maintained by FPC.
Georgia Power has an approximate interest of 33 percent in the 150-megawatt
unit, with retention of 100 percent of the capacity from June through September.
FPC has the capacity the remainder of the year. Georgia Power's investment in
the unit is $13 million.
Alabama Power and Georgia Power have contracted to operate and maintain the
jointly owned facilities -- except for the Rocky Mountain project and
Intercession City -- as agents for their respective co-owners. The companies'
proportionate share of their plant operating expenses is included in the
corresponding operating expenses in the Consolidated Statements of Income.
25
<PAGE>
7. LONG-TERM POWER SALES AGREEMENTS
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
The operating companies have long-term contractual agreements for the sale of
capacity and energy to certain non-affiliated utilities located outside the
system's service area. These agreements -- expiring at various dates discussed
below -- are firm and pertain to capacity related to specific generating units.
Because the energy is generally sold at cost under these agreements,
profitability is primarily affected by revenues from capacity sales. The
capacity revenues have been as follows:
Unit Other
Year Power Long-Term Total
----- ---------------------------------------
(in millions)
1996 $217 $ - $217
1995 237 - 237
1994 257 19 276
Unit power from specific generating plants is currently being sold to
Florida Power & Light Company (FP&L), FPC, Jacksonville Electric Authority
(JEA), and the city of Tallahassee, Florida. Under these agreements,
approximately 1,600 megawatts of capacity is scheduled to be sold annually
through 1999. Thereafter, these sales will decline to some 1,500 megawatts and
remain at that approximate level -- unless reduced by FP&L, FPC, and JEA for the
periods after 1999 with a minimum of three years notice -- until the expiration
of the contracts in 2010.
8. INCOME TAXES
At December 31, 1996, the tax- related regulatory assets and liabilities were
$1.3 billion and $879 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 as follows:
1996 1995 1994
-----------------------------
(in millions)
Total provision for income taxes:
Federal --
Currently payable $569 $567 $598
Deferred -- current year 116 184 67
-- reversal of
prior years (74) (111) (75)
Deferred investment tax
credits - 1 -
- -------------------------------------------------------------------
611 641 590
- -------------------------------------------------------------------
State --
Currently payable 82 90 86
Deferred -- current year 23 26 15
-- reversal of
prior years (9) (12) (11)
- -------------------------------------------------------------------
96 104 90
- -------------------------------------------------------------------
International 50 24 5
- -------------------------------------------------------------------
Total 757 769 685
Less income taxes charged
(credited) to other income 10 (36) (26)
- -------------------------------------------------------------------
Total income taxes charged
to operations $747 $805 $711
===================================================================
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:
1996 1995
---------- ------------
(in millions)
Deferred tax liabilities:
Accelerated depreciation $2,981 $2,795
Property basis differences 2,154 2,175
Deferred plant costs 54 100
Other 308 247
- -------------------------------------------------------------------
Total 5,497 5,317
- -------------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 110 107
Other property basis differences 253 273
Deferred costs 139 118
Pension and other benefits 68 66
Other 214 192
- -------------------------------------------------------------------
Total 784 756
- -------------------------------------------------------------------
Net deferred tax liabilities 4,713 4,561
Portion included in current assets, net 25 50
- -------------------------------------------------------------------
Accumulated deferred income taxes
in the Consolidated Balance Sheet $4,738 $4,611
===================================================================
26
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
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 Consolidated Statements of Income. Credits amortized in this
manner amounted to $33 million in 1996, $38 million in 1995, and $42 million in
1994. At December 31, 1996, 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:
1996 1995 1994
---------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income tax,
net of federal deduction 3.2 3.4 3.3
Non-deductible book
depreciation 1.8 1.6 1.8
Difference in prior years'
deferred and current tax rate (1.0) (1.1) (1.5)
Other (0.5) 0.3 0.3
- ------------------------------------------------------------------
Effective income tax rate 38.5% 39.2% 38.9%
==================================================================
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. COMMON STOCK
Shares Reserved
At December 31, 1996, a total of 59 million shares was reserved for issuance
pursuant to the Southern Investment Plan, the Employee Savings Plan, the Outside
Directors Stock Plan, and the Executive Stock Option Plan.
Executive Stock Option Plan
Southern Company's Executive Stock Option Plan authorizes the granting of
non-qualified stock options to key employees of Southern Company, including
officers. As of December 31, 1996, 249 current and former employees participated
in the plan. The maximum number of shares of common stock that may be issued
under the Executive Stock Option Plan may not exceed 6 million. The prices of
options granted to date have been at the fair market value of the shares on the
dates of grant. Options granted to date become exercisable pro rata over a
maximum period of four years from the date of grant. Options outstanding will
expire no later than 10 years after the date of grant, unless terminated earlier
by the board of directors in accordance with the plan. Stock option activity in
1995 and 1996 is summarized below:
Shares Average
Subject Option Price
To Option Per Share
----------------------------------
Balance at December 31, 1994 1,736,604 $17.39
Options granted 1,161,174 21.63
Options canceled (8,088) 21.63
Options exercised (413,391) 14.34
- --------------------------------------------------------------------
Balance at December 31, 1995 2,476,299 19.87
Options granted 1,460,731 23.00
Options canceled (16,862) 22.23
Options exercised (97,988) 17.94
- --------------------------------------------------------------------
Balance at December 31, 1996 3,822,180 $21.11
====================================================================
Shares reserved for future grants:
At December 31, 1994 3,268,001
At December 31, 1995 2,114,915
At December 31, 1996 671,046
- --------------------------------------------------------------------
Options exercisable:
At December 31, 1995 831,227
At December 31, 1996 1,276,846
- --------------------------------------------------------------------
The pro forma impact on net income of fair-value accounting for options
granted -- as required by FASB Statement No. 123, Accounting for Stock-Based
Compensation -- is not significant to the financial statements.
Common Stock Dividend Restrictions
The income of Southern Company is derived primarily from equity in earnings of
its subsidiaries. At December 31, 1996, consolidated retained earnings included
$3.3 billion of undistributed retained earnings of the subsidiaries. Of this
amount, $2.0 billion was restricted against the payment by the subsidiary
companies of cash dividends on common stock under terms of bond indentures or
charters.
10. PREFERRED SECURITIES
The subsidiary obligated mandatorily redeemable preferred securities were issued
by special purpose financing entities. Substantially all the assets of these
entities are $100 million and $335 million aggregate principal amount of Alabama
Power or Georgia Power junior subordinated debt, respectively. Alabama Power and
Georgia Power each considers that the mechanisms and obligations relating to the
preferred securities issued for its benefit, taken together, constitute a full
27
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
and unconditional guarantee, by the respective companies of the issuing
entities' payment obligations with respect to such preferred securities.
11. OTHER LONG-TERM DEBT
Details of other long-term debt at December 31 are as follows:
1996 1995
--------------------
(in millions)
Obligations incurred in connection
with the sale by public authorities
of tax-exempt pollution control
revenue bonds:
Collateralized --
4.375% to 9.375% due
2000-2026 $1,403 $1,466
Variable rates (3.2% to 5.25%
at 1/1/97) due 2011-2025 639 639
Non-collateralized --
7.25% due 2003 1 1
6.75% to 8.375% due 2015-2020 200 277
5.8% due 2022 10 10
Variable rates (4.65% to 5.25%
at 1/1/97) due 2021-2026 265 132
- ----------------------------------------------------------------
2,518 2,525
- ----------------------------------------------------------------
Capitalized lease obligations 151 147
- ----------------------------------------------------------------
Notes payable:
4.62% to 10% due 1996-1999 230 252
6.375% to 11% due 2000-2008 864 240
Adjustable rates (4% to 13% at
1/1/97) due 1996-1999 210 190
Adjustable rates (5.775% to
7.5625% at 1/1/97) due
2000-2002 96 938
Adjustable rate (7.38% at
1/1/97) due 2004-2006 15 111
- ----------------------------------------------------------------
1,415 1,731
- ----------------------------------------------------------------
Total $4,084 $4,403
================================================================
With respect to the collateralized pollution control revenue bonds, the
operating companies have authenticated and delivered to trustees a like
principal amount of first mortgage bonds as security for obligations under
installment sale or loan agreements. The principal and interest on the first
mortgage bonds will be payable only in the event of default under the
agreements.
Sinking fund requirements and/or serial maturities through 2001 applicable to
other long-term debt are as follows: $79 million in 1997; $96 million in 1998;
$279 million in 1999; $160 million in 2000; and $205 million in 2001.
12. 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 at December 31 is as follows:
1996 1995
----------------
(in millions)
Bond improvement fund requirements $ 40 $ 43
Less:
Portion to be satisfied by certifying
property additions 4 18
- -----------------------------------------------------------------
Cash sinking fund requirements 36 25
First mortgage bond maturities
and redemptions 76 220
Other long-term debt maturities
(Note 11) 79 264
- -----------------------------------------------------------------
Total $191 $509
=================================================================
The first mortgage bond improvement (sinking) fund requirements amount to 1
percent of each outstanding series of bonds authenticated under the indentures
prior to January 1 of each year, other than those issued to collateralize
pollution control and other obligations. The requirements may be satisfied by
depositing cash or reacquiring bonds, or by pledging additional property equal
to 166 2/3 percent of such requirements.
13. NUCLEAR INSURANCE
Under the Price-Anderson Amendments Act of 1988, Alabama Power and Georgia Power
maintain agreements of indemnity with the NRC that, together with private
insurance, cover third-party liability arising from any nuclear incident
occurring at the companies' nuclear power plants. The act provides funds up to
$8.9 billion for public liability claims that could arise from a single nuclear
incident. Each nuclear plant is insured against this liability to a maximum of
$200 million by private insurance, with the remaining coverage provided by a
mandatory program of deferred premiums that could be assessed, after a nuclear
incident, against all owners of nuclear reactors. A company could be assessed up
to $79 million per incident for each licensed reactor it operates, but not more
than an aggregate of $10 million per incident to be paid in a calendar year for
each reactor. Such maximum assessment, excluding any applicable state premium
taxes, for Alabama Power and Georgia Power -- based on its ownership and buyback
28
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
interests -- is $159 million and $162 million, respectively, per incident, but
not more than an aggregate of $20 million per company to be paid for each
incident in any one year.
Alabama Power and Georgia Power are members of Nuclear Mutual Limited (NML),
a mutual insurer established to provide property damage insurance in an amount
up to $500 million for members' nuclear generating facilities. The members are
subject to a retrospective premium assessment in the event that losses exceed
accumulated reserve funds. Alabama Power's and Georgia Power's maximum annual
assessments are limited to $9 million and $11 million, respectively, under
current policies.
Additionally, both companies have policies that currently provide
decontamination, excess property insurance, and premature decommissioning
coverage up to $2.25 billion for losses in excess of the $500 million NML
coverage. This excess insurance is provided by Nuclear Electric Insurance
Limited (NEIL), a mutual insurance company.
NEIL also covers the additional costs that would be incurred in obtaining
replacement power during a prolonged accidental outage at a member's nuclear
plant. Members can be insured against increased costs of replacement power in an
amount up to $3.5 million per week -- starting 21 weeks after the outage -- for
one year and up to $2.8 million per week for the second and third years.
Under each of the NEIL policies, members are subject to assessments if
losses each year exceed the accumulated funds available to the insurer under
that policy. The maximum annual assessments under current policies for Alabama
Power and Georgia Power for excess property damage would be $15 million and $16
million, respectively. The maximum replacement power assessments are $8 million
for Alabama Power and $12 million for Georgia Power.
For all on-site property damage insurance policies for commercial nuclear
power plants, the NRC requires that the proceeds of such policies issued or
renewed on or after April 2, 1991, shall be dedicated first for the sole purpose
of placing the reactor in a safe and stable condition after an accident. Any
remaining proceeds are to be applied next toward the costs of decontamination
and debris removal operations ordered by the NRC, and any further remaining
proceeds are to be paid either to the company or to its bond trustees as may be
appropriate under the policies and applicable trust indentures.
Alabama Power and Georgia Power participate in an insurance program for
nuclear workers that provides coverage for worker tort claims filed for bodily
injury caused at commercial nuclear power plants. In the event that claims for
this insurance exceed the accumulated reserve funds, Alabama Power and Georgia
Power could be subject to a maximum total assessment of approximately $6 million
each.
All retrospective assessments -- whether generated for liability, property,
or replacement power -- may be subject to applicable state premium taxes.
29
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
14. ACQUISITIONS
In 1995, Southern Energy acquired SWEB for approximately $1.8 billion. This
British utility distributes electricity to some 1.3 million customers.
The acquisition has been accounted for under the purchase method of
accounting. The acquisition cost exceeded the fair market value of net assets by
$287 million. This amount is considered goodwill and is being amortized on a
straight-line basis over 40 years. A preliminary estimate of $333 million of
goodwill was originally reported and later revised in 1996.
SWEB has been included in the consolidated financial statements since
September 1995. The following unaudited pro forma results of operations for the
years 1995 and 1994 have been prepared assuming the acquisition of SWEB,
effective January 1, 1994, and assuming 100 percent short-term debt financing.
The proforma results are not necessarily indicative of the actual results that
would have been realized had the acquisition occurred on the assumed date, nor
are they necessarily indicative of future results. Pro forma operating results
are for information purposes only and are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1995 1994
--------------------------------------------------------------------------
As Pro As Pro
Reported Forma Reported Forma
------------- ----------- -------------- ---------------
Operating revenues (in millions) $9,180 $10,013 $8,297 $9,493
Consolidated net income (in millions) $1,103 $1,144 $989 $1,053
Earnings per share $1.66 $1.72 $1.52 $1.62
On January 29, 1997, Southern Energy completed the acquisition of an 80 percent interest in Consolidated Electric Power Asia
(CEPA) for a total net investment of some $2.1 billion. CEPA is the largest independent power producer in Asia. CEPA is not
included in Southern Company's 1996 consolidated financial statements.
</TABLE>
15. SEGMENT INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Southern Company's principal business segment -- or its traditional core business -- is the five electric utility operating
companies, which provide electric service in four southeastern states. The other reportable business segment is Southern
Energy, which owns and operates power production and delivery facilities in the United States and various international markets.
Financial data for business segments and geographic areas are as follows:
Business Segments
Gross Depreciation
Operating Operating Total Property and
Year Revenues Income Assets Additions Amortization
- --------------------- -------------------------------------------------------------------------------------
(in millions)
1996
Traditional core business $ 8,675 $1,678 $25,368 $1,064 $1,081
Southern Energy 1,683 176 4,924 165 120
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated $10,358 $1,854 $30,292 $1,229 $1,201
================================================================================================================================
1995
Traditional core business $8,537 $1,781 $25,500 $1,265 $1,075
Southern Energy 643 105 5,022 136 59
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated $9,180 $1,886 $30,522 $1,401 $1,134
================================================================================================================================
1994
Traditional core business $8,112 $1,678 $25,466 $1,529 $1,026
Southern Energy 185 37 1,576 7 24
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated $8,297 $1,715 $27,042 $1,536 $1,050
================================================================================================================================
</TABLE>
30
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
Geographic Areas
<S> <C> <C> <C> <C> <C>
Gross Depreciation
Operating Operating Total Property and
Year Revenues Income Assets Additions Amortization
- ------------------ -----------------------------------------------------------------------
(in millions)
1996
Domestic $ 8,836 $1,713 $25,869 $1,072 $1,094
International:
Europe 1,311 141 2,966 105 68
Other 211 - 1,457 52 39
- ---------------------------------------------------------------------------------------------------
Total $10,358 $1,854 $30,292 $1,229 $1,201
===================================================================================================
1995
Domestic $8,619 $1,813 $25,995 $1,278 $1,087
International:
Europe 372 38 3,385 33 16
Other 189 35 1,142 90 31
- ---------------------------------------------------------------------------------------------------
Total $9,180 $1,886 $30,522 $1,401 $1,134
===================================================================================================
1994
Domestic $8,116 $1,679 $25,875 $1,531 $1,028
International:
Europe - - - - -
Other 181 36 1,167 5 22
- ---------------------------------------------------------------------------------------------------
Total $8,297 $1,715 $27,042 $1,536 $1,050
===================================================================================================
</TABLE>
16. QUARTERLY FINANCIAL INFORMATION (Unaudited)
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1996 and 1995 are as follows:
<S> <C> <C> <C> <C> <C> <C> <C>
Per Common Share
---------------------------------------------------
Operating Operating Consolidated Price Range
Quarter Ended Revenues Income Net Income Earnings Dividends High Low
- --------------- ------------------------------------------- ---------------------------------------------------
(in millions)
March 1996 $2,416 $418 $233 $0.35 $0.315 25 7/8 22 3/8
June 1996 2,538 468 287 0.43 0.315 24 5/8 21 1/4
September 1996 2,917 684 468 0.69 0.315 24 5/8 21 3/4
December 1996 2,487 284 139 0.21 0.315 23 1/8 21 1/8
March 1995 $1,929 $385 $206 $0.31 $0.305 21 1/2 19 3/8
June 1995 2,184 454 268 0.40 0.305 22 7/8 20 1/8
September 1995 2,759 673 469 0.71 0.305 24 21 1/8
December 1995 2,308 374 160 0.24 0.305 25 22 3/4
- ----------------------------------------------------------------------------------------------------------------------------------
The company's business is influenced by seasonal weather conditions.
</TABLE>
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1986 - 1996
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $10,358 $9,180 $8,297
Consolidated Net Income (in millions) $1,127 $1,103 $989
Earnings Per Share of Common Stock $1.68 $1.66 $1.52
Cash Dividends Paid Per Share of Common Stock $1.26 $1.22 $1.18
Return on Average Common Equity (percent) 12.53 13.01 12.47
Total Assets (in millions) $30,292 $30,522 $27,042
Gross Property Additions (in millions) $1,229 $1,401 $1,536
- -----------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $9,216 $8,772 $8,186
Preferred stock and securities 1,402 1,432 1,432
Long-term debt 7,935 8,274 7,593
- -----------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $18,553 $18,478 $17,211
=======================================================================================================================
Capitalization Ratios (percent):
Common stock equity 49.7 47.5 47.6
Preferred stock and securities 7.6 7.7 8.3
Long-term debt 42.7 44.8 44.1
- -----------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0
=======================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $13.61 $13.10 $12.47
Market price per share:
High 25 7/8 25 22
Low 21 1/8 19 3/8 17
Close 22 5/8 24 5/8 20
Market-to-book ratio (year-end) (percent) 166.2 188.0 160.4
Price-earnings ratio (year-end) (times) 13.5 14.8 13.2
Dividends paid (in millions) $846 $811 $766
Dividend yield (year-end) (percent) 5.6 5.0 5.9
Dividend payout ratio (percent) 75.1 73.5 77.5
Cash coverage of dividends (year-end) (times) 2.9 2.9 2.7
Proceeds from sales of stock (in millions) $171 $277 $279
Shares outstanding (in thousands):
Average 672,590 665,064 649,927
Year-end 677,036 669,543 656,528
Stockholders of record (year-end) 215,246 225,739 234,927
- -----------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $85 $375 $185
Retired 426 538 241
Preferred Stock and Securities (in millions):
Issued $322 $-- $100
Retired 179 1 1
- -----------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 3,157 3,100 3,046
Commercial 464 450 439
Industrial 17 17 17
Other 5 5 5
- -----------------------------------------------------------------------------------------------------------------------
Total 3,643 3,572 3,507
=======================================================================================================================
Employees (year-end):
Traditional core business 25,034 26,452 27,480
Southern Energy 4,212 5,430 1,400
- -----------------------------------------------------------------------------------------------------------------------
Total 29,246 31,882 28,880
=======================================================================================================================
</TABLE>
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1986 - 1996
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $8,489 $8,073 $8,050 $8,053
Consolidated Net Income (in millions) $1,002 $953 $876 $604
Earnings Per Share of Common Stock $1.57 $1.51 $1.39 $0.96
Cash Dividends Paid Per Share of Common Stock $1.14 $1.10 $1.07 $1.07
Return on Average Common Equity (percent) 13.43 13.42 12.74 8.85
Total Assets (in millions) $25,911 $20,038 $19,863 $19,955
Gross Property Additions (in millions) $1,441 $1,105 $1,123 $1,185
- ------------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $7,684 $7,234 $6,976 $6,783
Preferred stock and securities 1,333 1,359 1,333 1,358
Long-term debt 7,412 7,241 7,992 8,458
- ------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $16,429 $15,834 $16,301 $16,599
==============================================================================================================================
Capitalization Ratios (percent):
Common stock equity 46.8 45.7 42.8 40.9
Preferred stock and securities 8.1 8.6 8.2 8.2
Long-term debt 45.1 45.7 49.0 50.9
- ------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0 100.0
==============================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $11.96 $11.43 $11.05 $10.74
Market price per share:
High 23 5/8 19 1/2 17 3/8 14 5/8
Low 18 3/8 15 1/8 12 7/8 11 1/2
Close 22 19 1/4 17 1/8 13 7/8
Market-to-book ratio (year-end) (percent) 183.9 168.4 155.5 129.7
Price-earnings ratio (year-end) (times) 14.0 12.7 12.4 14.6
Dividends paid (in millions) $726 $695 $676 $676
Dividend yield (year-end) (percent) 5.2 5.7 6.2 7.7
Dividend payout ratio (percent) 72.4 72.9 77.1 111.8
Cash coverage of dividends (year-end) (times) 2.9 2.8 2.5 2.8
Proceeds from sales of stock (in millions) $204 $30 $-- $--
Shares outstanding (in thousands):
Average 637,319 631,844 631,307 631,307
Year-end 642,662 632,917 631,307 631,307
Stockholders of record (year-end) 237,105 247,378 254,568 263,046
- ------------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $2,185 $1,815 $380 $300
Retired 2,178 2,575 881 146
Preferred Stock and Securities (in millions):
Issued $426 $410 $100 $--
Retired 516 326 125 96
- ------------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 2,996 2,950 2,903 2,865
Commercial 427 414 403 396
Industrial 18 18 18 18
Other 4 4 4 4
- ------------------------------------------------------------------------------------------------------------------------------
Total 3,445 3,386 3,328 3,283
==============================================================================================================================
Employees (year-end):
Traditional core business 28,516 28,872 30,144 30,087
Southern Energy 745 213 258 176
- ------------------------------------------------------------------------------------------------------------------------------
Total 29,261 29,085 30,402 30,263
==============================================================================================================================
33A
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1986 - 1996
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $7,620 $7,287 $7,204 $7,033
Consolidated Net Income (in millions) $846 $846 $577 $903
Earnings Per Share of Common Stock $1.34 $1.36 $0.96 $1.56
Cash Dividends Paid Per Share of Common Stock $1.07 $1.07 $1.07 $1.0325
Return on Average Common Equity (percent) 12.49 13.03 9.27 15.61
Total Assets (in millions) $20,092 $19,731 $19,518 $18,483
Gross Property Additions (in millions) $1,346 $1,754 $1,853 $2,367
- ------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $6,861 $6,686 $6,307 $6,133
Preferred stock and securities 1,400 1,465 1,363 1,392
Long-term debt 8,575 8,433 8,333 7,812
- ------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $16,836 $16,584 $16,003 $15,337
========================================================================================================================
Capitalization Ratios (percent):
Common stock equity 40.8 40.3 39.4 40.0
Preferred stock and securities 8.3 8.8 8.5 9.1
Long-term debt 50.9 50.9 52.1 50.9
- ------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0 100.0
========================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $10.87 $10.60 $10.28 $10.35
Market price per share:
High 14 7/8 12 1/8 14 1/2 13 5/8
Low 11 10 1/8 8 7/8 10 1/8
Close 14 1/2 11 1/8 11 1/8 12 5/8
Market-to-book ratio (year-end) (percent) 134.0 105.5 108.8 122.5
Price-earnings ratio (year-end) (times) 10.9 8.2 11.7 8.2
Dividends paid (in millions) $675 $661 $628 $583
Dividend yield (year-end) (percent) 7.3 9.6 9.6 8.4
Dividend payout ratio (percent) 79.8 78.1 108.9 64.6
Cash coverage of dividends (year-end) (times) 2.6 2.3 2.0 2.7
Proceeds from sales of stock (in millions) $4 $194 $247 $379
Shares outstanding (in thousands):
Average 631,303 622,292 601,390 580,252
Year-end 631,307 630,898 613,565 592,364
Stockholders of record (year-end) 273,751 290,725 296,079 297,302
- ------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $280 $335 $700 $735
Retired 201 273 369 875
Preferred Stock and Securities (in millions):
Issued $-- $120 $125 $100
Retired 21 10 160 53
- ------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 2,824 2,781 2,733 2,675
Commercial 392 384 374 362
Industrial 18 18 18 17
Other 4 4 4 4
- ------------------------------------------------------------------------------------------------------------------------
Total 3,238 3,187 3,129 3,058
========================================================================================================================
Employees (year-end):
Traditional core business 30,368 32,366 32,557 32,321
Southern Energy 162 157 55 37
- ------------------------------------------------------------------------------------------------------------------------
Total 30,530 32,523 32,612 32,358
========================================================================================================================
33B
</TABLE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1986 - 1996 (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,894 $2,840 $2,560
Commercial 2,559 2,485 2,357
Industrial 2,136 2,206 2,162
Other 76 72 70
- ------------------------------------------------------------------------------------------------------------------------
Total retail 7,665 7,603 7,149
Sales for resale within service area 409 399 360
Sales for resale outside service area 429 415 505
- ------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 8,503 8,417 8,014
Other revenues 1,855 763 283
- ------------------------------------------------------------------------------------------------------------------------
Total $10,358 $9,180 $8,297
========================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 40,117 39,147 35,836
Commercial 37,993 35,938 34,080
Industrial 52,798 51,644 50,311
Other 911 863 844
- ------------------------------------------------------------------------------------------------------------------------
Total retail 131,819 127,592 121,071
Sales for resale within service area 10,935 9,472 8,151
Sales for resale outside service area 10,777 9,143 10,769
- ------------------------------------------------------------------------------------------------------------------------
Total 153,531 146,207 139,991
========================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.21 7.25 7.14
Commercial 6.74 6.91 6.92
Industrial 4.04 4.27 4.30
Total retail 5.81 5.96 5.90
Sales for resale 3.86 4.38 4.57
Total sales 5.54 5.76 5.72
Average Annual Kilowatt-Hour Use Per Residential Customer 12,824 12,722 11,851
Average Annual Revenue Per Residential Customer $925.12 $922.83 $846.48
Plant Nameplate Capacity Ratings (year-end) (megawatts) 31,076 30,733 29,932
Maximum Peak-Hour Demand (megawatts):
Winter 22,631 21,422 22,254
Summer 27,190 27,420 24,546
System Reserve Margin (at peak)(percent) 14.0 9.4 19.3
Annual Load Factor (percent) 62.3 59.5 63.5
Plant Availability (percent):
Fossil-steam 86.4 86.7 85.2
Nuclear 89.7 88.3 89.8
- ------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 73.3 72.5 70.8
Nuclear 16.7 16.4 17.9
Hydro 4.1 4.1 4.7
Oil and gas 1.5 1.7 0.9
Purchased power 4.4 5.3 5.7
- ------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0
========================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,257 10,099 10,010
Cost of fuel per million BTU (cents) 144.02 151.70 155.81
Average cost of fuel per net kilowatt-hour generated (cents) 1.48 1.53 1.56
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
SELECTED CONSOLIDARED FINANCIAL AND OPERATING DATA 1986-1996 (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,696 $2,402 $2,391 $2,342
Commercial 2,313 2,181 2,122 2,062
Industrial 2,200 2,126 2,088 2,085
Other 68 64 65 64
- ------------------------------------------------------------------------------------------------------------------------
Total retail 7,277 6,773 6,666 6,553
Sales for resale within service area 447 409 417 412
Sales for resale outside service area 613 797 884 977
- ------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 8,337 7,979 7,967 7,942
Other revenues 152 94 83 111
- ------------------------------------------------------------------------------------------------------------------------
Total $8,489 $8,073 $8,050 $8,053
========================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 36,807 33,627 33,622 33,118
Commercial 32,847 31,025 30,379 29,658
Industrial 48,738 47,816 46,050 45,974
Other 814 777 817 806
- ------------------------------------------------------------------------------------------------------------------------
Total retail 119,206 113,245 110,868 109,556
Sales for resale within service area 13,258 12,107 12,320 11,134
Sales for resale outside service area 12,445 16,632 19,839 24,402
- ------------------------------------------------------------------------------------------------------------------------
Total 144,909 141,984 143,027 145,092
========================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.32 7.14 7.11 7.07
Commercial 7.04 7.03 6.99 6.96
Industrial 4.51 4.45 4.53 4.53
Total retail 6.10 5.98 6.01 5.98
Sales for resale 4.12 4.20 4.05 3.91
Total sales 5.75 5.62 5.57 5.47
Average Annual Kilowatt-Hour Use Per Residential Customer 12,378 11,490 11,659 11,637
Average Annual Revenue Per Residential Customer $906.60 $820.67 $829.18 $822.93
Plant Nameplate Capacity Ratings (year-end) (megawatts) 29,513 29,830 29,915 29,532
Maximum Peak-Hour Demand (megawatts):
Winter 19,432 19,121 19,166 17,629
Summer 25,937 24,146 25,261 25,981
System Reserve Margin (at peak)(percent) 13.2 14.3 16.5 14.0
Annual Load Factor (percent) 59.4 60.3 58.3 56.6
Plant Availability (percent):
Fossil-steam 87.9 88.6 91.3 91.9
Nuclear 85.9 85.2 83.4 83.0
- ------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 73.0 71.7 72.6 72.1
Nuclear 16.3 16.2 16.2 15.6
Hydro 3.9 4.6 4.4 4.4
Oil and gas 0.9 0.5 0.6 1.3
Purchased power 5.9 7.0 6.2 6.6
- ------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0
========================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 9,994 9,976 10,022 10,065
Cost of fuel per million BTU (cents) 166.85 162.58 168.28 172.81
Average cost of fuel per net kilowatt-hour generated (cents) 1.67 1.62 1.69 1.74
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
35A
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATE 1986 - 1996 (continued)
Southern Company and Subsidiary Companies 1996 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,194 $2,103 $2,042 $1,996
Commercial 1,965 1,835 1,692 1,613
Industrial 2,011 1,945 1,870 1,845
Other 60 56 54 52
- ---------------------------------------------------------------------------------------------------------------------------
Total retail 6,230 5,939 5,658 5,506
Sales for resale within service area 401 480 461 511
Sales for resale outside service area 928 777 1,028 957
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 7,559 7,196 7,147 6,974
Other revenues 61 91 57 59
- ---------------------------------------------------------------------------------------------------------------------------
Total $7,620 $7,287 $7,204 $7,033
===========================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 31,627 31,041 30,583 29,501
Commercial 28,454 27,005 25,593 24,166
Industrial 45,022 43,675 42,113 40,503
Other 787 763 737 723
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Total retail 105,890 102,484 99,026 94,893
Sales for resale within service area 11,419 14,806 13,282 14,347
Sales for resale outside service area 24,228 15,860 22,905 16,909
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Total 141,537 133,150 135,213 126,149
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Average Revenue Per Kilowatt-Hour (cents):
Residential 6.94 6.77 6.68 6.77
Commercial 6.91 6.79 6.61 6.67
Industrial 4.47 4.45 4.44 4.56
Total retail 5.88 5.80 5.71 5.80
Sales for resale 3.73 4.10 4.11 4.69
Total sales 5.34 5.40 5.29 5.53
Average Annual Kilowatt-Hour Use Per Residential Customer 11,287 11,255 11,307 11,157
Average Annual Revenue Per Residential Customer $782.90 $762.42 $754.96 $754.93
Plant Nameplate Capacity Ratings (year-end) (megawatts) 29,532 27,552 27,610 26,262
Maximum Peak-Hour Demand (megawatts):
Winter 20,772 18,685 18,185 19,665
Summer 24,399 23,641 23,194 23,255
System Reserve Margin (at peak) (percent) 21.0 15.0 16.2 11.4
Annual Load Factor (percent) 58.6 59.8 58.7 57.2
Plant Availability (percent):
Fossil-steam 92.2 91.3 91.2 90.3
Nuclear 87.0 78.4 84.5 74.2
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Source of Energy Supply (percent):
Coal 71.5 77.7 77.8 79.4
Nuclear 15.7 14.5 13.1 11.5
Hydro 5.2 2.3 3.3 2.2
Oil and gas 1.1 0.7 0.6 0.9
Purchased power 6.5 4.8 5.2 6.0
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Total 100.0 100.0 100.0 100.0
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Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,086 10,094 10,122 10,171
Cost of fuel per million BTU (cents) 171.00 170.36 176.64 185.89
Average cost of fuel per net kilowatt-hour generated (cents) 1.72 1.72 1.78 1.89
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35B
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