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 11, 1998
----------------------------
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, 1997.
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 4, 1998
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 11, 1998 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, 333-09077,
333-44127 and 333-44261.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 26, 1998
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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.
</LEGEND>
<CIK> 000092122
<NAME> Southern COMPANY
<MULTIPLIER> 1,000,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 23,652
<OTHER-PROPERTY-AND-INVEST> 5,574
<TOTAL-CURRENT-ASSETS> 3,603
<TOTAL-DEFERRED-CHARGES> 2,442
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 35,271
<COMMON> 3,467
<CAPITAL-SURPLUS-PAID-IN> 2,338
<RETAINED-EARNINGS> 3,842
<TOTAL-COMMON-STOCKHOLDERS-EQ> 9,647
1,744
493
<LONG-TERM-DEBT-NET> 6,528
<SHORT-TERM-NOTES> 690
<LONG-TERM-NOTES-PAYABLE> 3,610
<COMMERCIAL-PAPER-OBLIGATIONS> 1,374
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<CAPITAL-LEASE-OBLIGATIONS> 136
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<TOTAL-OPERATING-EXPENSES> 10,671
<OPERATING-INCOME-LOSS> 1,940
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43
<EARNINGS-AVAILABLE-FOR-COMM> 972
<COMMON-STOCK-DIVIDENDS> 889
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<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
MANAGEMENT'S REPORT
Southern Company and Subsidiary Companies 1997 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 11, 1998
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, 1997 and 1996, 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, 1997. 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 12-35) referred
to above present fairly, in all material respects, the financial position of
Southern Company and subsidiary companies as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 11, 1998
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Southern Company and Subsidiary Companies 1997 Annual Report
RESULTS OF OPERATIONS
Earnings and Dividends
Southern Company reported 1997 earnings of $972 million or $1.42 for both basic
and diluted earnings per share. The traditional core business of selling
electricity in the southeastern United States remained strong, while
non-traditional business results were adversely affected by a $111 million,
after taxes, windfall profits tax assessed against South Western Electricity
(SWEB) in the United Kingdom. SWEB is a subsidiary of Southern Energy, Inc.
(Southern Energy). Excluding the windfall profits tax, Southern Energy's
earnings account for 10 percent of consolidated net income in 1997.
Consolidated net income decreased by $155 million compared with the amount
reported for 1996. Continued cost controls and steady demand for electricity
were offset by increased financing costs for the non-traditional business and
the windfall profits tax.
Costs related to work force reduction programs decreased earnings by $31
million or 5 cents per share and $53 million or 8 cents per share in 1997 and
1996, respectively. These costs are expected to be recovered through future
savings in approximately two years following each program's implementation.
In 1996, earnings were $1.1 billion or $1.68 for both basic and diluted
earnings per share -- up 2 cents from the per share amount reported in 1995.
Earnings in 1996, when compared with 1995 results, were affected by increased
energy sales and growth in the non-traditional business.
Dividends paid on common stock during 1997 were $1.30 per share or 321/2
cents per quarter. During 1996 and 1995, dividends paid per share were $1.26 and
$1.22, respectively. In January 1998, the Southern Company raised the quarterly
dividend to 331/2 cents per share or an annual rate of $1.34 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 acquisitions of 100 percent of Consolidated Electric Power Asia (CEPA)
and a 26 percent interest in a German utility were completed in 1997. Also,
Southern Energy acquired SWEB in late 1995. These businesses have been included
in the consolidated financial statements since the dates of acquisition and are
not reflected in prior periods. As a result, changes in revenues and expenses
for Southern Energy in 1997 and 1996 reflect significant amounts related to
acquisitions, which were not fully reflected in each year being compared.
Therefore, to facilitate discussing the results of operations for business
segments, Southern Energy's variances are primarily driven by the above reason
unless otherwise noted.
Revenues
Operating revenues increased in 1997 and 1996 as a result of the following
factors:
Increase (Decrease)
From Prior Year
---------------------------------
1997 1996 1995
---------------------------------
Retail -- (in millions)
Growth and price
change $ 105 $ 124 $ 177
Weather (110) (64) 143
Fuel cost recovery and
other (13) 2 134
---------------------------------------------------------------
Total retail (18) 62 454
---------------------------------------------------------------
Sales for resale --
Within service area (28) 10 39
Outside service area 76 14 (90)
---------------------------------------------------------------
Total sales for resale 48 24 (51)
Southern Energy 2,154 1,040 458
Other operating revenues 69 52 22
---------------------------------------------------------------
Total operating revenues $2,253 $1,178 $ 883
===============================================================
Percent change 21.8% 12.8% 10.6%
---------------------------------------------------------------
Retail revenues of $7.6 billion declined slightly compared with last year.
Continued growth in the traditional service area was offset by the negative
impact of weather on energy sales and by industrial and commercial customers
taking advantage of lower load management rates. This trend will probably
continue as the utility industry becomes much more competitive. In 1996, retail
revenues barely increased by 0.8 percent compared with the year 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 $381 million in 1997,
down 7.1 percent from the prior year. This decrease resulted primarily from
supplying less electricity under contractual agreements with certain wholesale
customers in 1997. Revenues from sales for resale within the service area were
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
$409 million in 1996, up 2.5 percent from the prior year.
Revenues from sales to utilities outside the service area under long-term
contracts consist of capacity and energy components. Capacity revenues reflect
the recovery of fixed costs and a return on investment under the contracts.
Energy is generally sold at variable cost. The capacity and energy components
were as follows:
1997 1996 1995
------------------------------------
(in millions)
Capacity $203 $217 $237
Energy 183 176 151
---------------------------------------------------------
Total $386 $393 $388
=========================================================
Capacity revenues decreased in 1997 and 1996 because the amount of capacity
under contract declined slightly during 1996. Additional declines in capacity
are not scheduled until after 1999.
Southern Energy's revenues have escalated to $3.8 billion and $1.7 billion
in 1997 and 1996, respectively. These rapid increases are primarily attributable
to the development and growth of energy trading and marketing activities,
primarily in 1997. Also, revenues have increased as a result of international
acquisitions. In 1997, energy trading and marketing revenues increased $1.9
billion compared with amounts recorded in 1996. However, these revenues were
substantially offset by purchased power expenses incurred in completing these
trading and marketing transactions. Energy trading and marketing -- similar to
other low margin sales activities -- is dependent on huge volumes for
profitability.
Changes in traditional core business revenues are influenced heavily by the
amount of energy sold each year. Kilowatt-hour sales for 1997 and the percent
change by year were as follows:
(billions of
kilowatt-hours) Amount Percent Change
---------- ----------------------------
1997 1997 1996 1995
---------- ----------------------------
Residential 39.2 (2.2)% 2.5% 9.2%
Commercial 38.9 2.5 5.7 5.5
Industrial 54.2 2.6 2.2 2.7
Other 0.9 (1.1) 5.7 2.1
----------
Total retail 133.2 1.1 3.3 5.4
Sales for resale --
Within service area 9.9 (9.6) 15.4 16.2
Outside service area 13.3 23.6 17.9 (15.1)
----------
Total 156.4 1.9 5.0 4.4
===================================================================
The rate of increase in 1997 retail energy sales was significantly lower
than the past two years. Although the total number of residential customers
served increased by 63,000 during the year, residential energy sales experienced
a decline as a result of milder weather in 1997, compared with closer to normal
weather in 1996. Commercial and industrial sales both in 1997 and 1996 continued
to show slight gains in excess of the national averages. 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 1998 through 2008.
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 both 1997
and 1996 and declined in 1995 when compared with the respective prior year.
However, these fluctuations in energy sales under long-term contracts 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 $10.7 billion for 1997 increased $2.2 billion
compared with the prior year. Traditional core business expenses increased $69
million. Southern Energy's expenses increased almost $2.1 billion. The sharp
increase for Southern Energy resulted primarily from two factors. First, the
acquisition of CEPA is reflected only in 1997 expenses. Second, nearly $1.9
billion relates to energy trading and marketing activities, which is included in
purchased power expenses. The costs to produce and deliver electricity for the
traditional core business in 1997 increased by $37 million to meet higher energy
demands. Also, costs related to work force reduction programs decreased in 1997
by $35 million. Traditional core business depreciation expenses and taxes other
than income taxes increased by $158 million as a result of additional utility
plant being placed into service and increased accelerated depreciation of
certain assets.
In 1996, operating expenses of $8.5 billion increased 16.6 percent compared
with 1995. Traditional core business expenses increased $173 million. Southern
Energy's expenses increased $976 million. The large increase for Southern Energy
resulted primarily from SWEB, which was acquired in late 1995. The costs to
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
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 compared with
such expenses in 1995. Depreciation expense and taxes other than income taxes
increased $39 million.
Fuel costs constitute the single largest expense for Southern Company's
traditional core business. The mix of fuel sources for generation of electricity
is determined primarily by system load, the unit cost of fuel consumed, and the
availability of hydro and nuclear generating units. The amount and sources of
generation and the average cost of fuel per net kilowatt-hour generated --
within the core business service area -- were as follows:
1997 1996 1995
--------------------------
Total generation
(billions of kilowatt-hours) 160 156 147
Sources of generation
(percent) --
Coal 77 77 77
Nuclear 17 17 17
Hydro 4 4 4
Oil and gas 2 2 2
Average cost of fuel per net
kilowatt-hour generated
(cents) --
Coal 1.63 1.65 1.73
Nuclear 0.53 0.52 0.56
Total 1.46 1.48 1.53
- --------------------------------------------------------------
Total fuel and purchased power expenses of $5.3 billion in 1997 increased
$2.0 billion compared with the prior year. These expenses for traditional core
business increased $32 million and, Southern Energy's portion increased $1.9
billion. The traditional core business's customer demand for electricity rose by
1.6 billion kilowatt-hours more than in 1996. The additional cost to meet the
demand was offset slightly by a lower average cost of fuel per net kilowatt-hour
generated. Southern Energy's increase in expenses escalated as a result of
energy trading and marketing activities discussed earlier. 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.
Excluding the windfall profits tax in the United Kingdom, total income taxes
in 1997 declined by $66 million compared with the amount in 1996. Southern
Energy's portion was a reduction of $37 million. For 1996, traditional core
business income taxes decreased $40 million, and Southern Energy increased $41
million.
Total net interest charges and capital and preferred stock expenses
increased $248 million from amounts reported in the previous year. These costs
for traditional core business overall netted out to be nearly flat compared with
the reported amounts in 1996. Southern Energy's costs increased $221 million
related primarily to financing acquisitions. In 1996, these same costs for
traditional core business declined by $69 million, but Southern Energy's
interest charges increased $85 million. The decline in costs for core business
was attributable to lower interest rates and continued refinancing activities in
1996. As a result of favorable market conditions, $1.7 billion in 1997, $574
million in 1996, and $1.1 billion in 1995 of traditional senior securities were
issued for the primary purpose of retiring higher-cost securities.
Effects of Inflation
Southern Company's traditional core business 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 Southern Company's future
earnings depends on numerous factors. Two major factors are: achieving energy
sales growth in a less regulated, more competitive environment; and operating
non-traditional business activities successfully.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
Southern Company continues to position its business to meet the challenges of
a new competitive environment. Work force reduction programs have reduced
earnings by $31 million, $53 million, and $17 million for the years 1997, 1996,
and 1995, respectively. These actions -- in conjunction with other cost
containment programs -- will assist efforts to continue being a low-cost
provider of electricity.
The operating companies currently operate as vertically integrated companies
providing electricity to customers within the traditional service area of the
southeastern United States. Prices for electricity provided by the operating
companies to retail customers are set by state public service commissions under
cost-based regulatory principles.
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. Georgia Power is required to file a general rate case by July
1, 1998. See Note 3 to the financial statements for information about other
retail and wholesale regulatory matters.
Future earnings for the operating companies in the near term will depend upon
growth in energy sales, which is subject to a number of factors. These factors
include weather, competition, changes in contracts with neighboring utilities,
energy conservation practiced by customers, the elasticity of demand, and the
rate of economic growth in the company's service area.
The electric utility industry in the United States is currently undergoing a
period of dramatic change as a result of regulatory and competitive factors.
Among the primary agents of change has been the Energy Policy Act of 1992
(Energy Act). The Energy Act allows independent power producers (IPPs) to access
a utility's transmission network in order to sell electricity to other
utilities. This enhances the incentive for IPPs to build cogeneration plants for
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.
Although the Energy Act does not permit retail customer access, it was a
major catalyst for the current restructuring and consolidation taking place
within the utility industry. Numerous federal and state initiatives are in
varying stages to promote wholesale and retail competition. Among other things,
these initiatives allow customers to choose their electricity provider. As these
initiatives materialize, the structure of the utility industry could radically
change. Some states have approved initiatives that result in a separation of the
ownership and/or operation of generating facilities from the ownership and/or
operation of transmission and distribution facilities. While various
restructuring and competition initiatives have been or are being discussed in
Alabama, Florida, Georgia, and Mississippi, none have been enacted to date.
Enactment would require numerous issues to be resolved, including significant
ones relating to transmission pricing and recovery of any stranded investments.
The inability of an operating company to recover its investments, including the
regulatory assets described in Note 1 to the financial statements, could have a
material adverse effect on the financial condition of that operating company.
The operating companies are attempting to minimize or reduce their cost
exposure. See Note 3 to the financial statements for information regarding these
efforts.
Continuing to be a low-cost producer could provide opportunities to increase
market share and profitability in markets that evolve with changing regulation.
Conversely, 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.
To adapt to a less regulated, more competitive environment, Southern Company
continues to evaluate and consider a wide array of potential business
strategies. These strategies may include business combinations, acquisitions
involving other utility or non-utility businesses or properties, internal
restructuring, disposition of certain assets, or some combination thereof.
Furthermore, Southern Company may engage in other new business ventures that
arise from competitive and regulatory changes in the utility industry. Pursuit
of any of the above strategies, or any combination thereof, may significantly
affect the business operations and financial condition of Southern Company.
The Energy Act amended the Public Utility Holding Company Act of 1935
(PUHCA). 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
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
evolving opportunities, Southern Energy -- founded in 1981 -- is focused on
several key international and domestic business lines, including energy
distribution, integrated utilities, stand-alone generation, and other
energy-related products and services. As the energy marketplace evolves,
Southern Energy is positioning the company to become a major competitor in
energy trading and marketing activities. As part of this strategy, Southern
Energy entered into a joint venture with Vastar Resources effective in January
1998. The two companies combined their energy trading and marketing operations
to form a new full-service energy provider, Southern Company Energy Marketing.
Also, Southern Energy is expanding its international business through
acquisitions. In September 1997, Southern Energy acquired a 26 percent interest
in a German utility for approximately $820 million. Also, the acquisition of
CEPA for a total net investment of some $2.1 billion was completed in mid-1997.
In late 1995, SWEB was acquired for approximately $1.8 billion. In July 1996, a
25 percent interest in SWEB was sold. For additional information on
acquisitions, see Note 14 to the financial statements.
The CEPA acquisition has a slightly dilutive impact on earnings in the near
term. However, Southern Energy's investments should strengthen the opportunities
for Southern Company's long-term future earnings growth. At December 31, 1997,
Southern Energy's total assets amounted to $11 billion.
The depreciation of southeast Asian currencies is likely to increase the
cost of electricity that nationally owned utilities purchase from independent
power projects relative to the prices received by those utilities from their
customers. This could cause a deterioration in the financial condition of
nationally owned utilities, which could potentially impact these
utilities' ability to meet their obligations under existing contracts and could
reduce the near-term opportunities for greenfield independent power projects in
the region. However, fewer greenfield opportunities may, to some extent, be
offset by increased opportunities for CEPA to acquire projects from regional
developers who have been adversely affected by the financial crisis, and also
by a possible increase in the pace of privatizations by regional governments
needing to raise capital.
Also during 1997, there was a substantial depreciation of the Philippine
peso relative to the U.S. dollar. However, the long-term power sales contracts
that govern CEPA's revenues from existing projects in the Philippines provide
for U.S. dollar payments, or indexing to the U.S. dollar. This should
sufficiently cover foreign currency costs of operation, including debt service
and return on and of capital. The National Power Corporation, whose obligations
are guaranteed by the Republic of the Philippines, is the counterparty to these
contracts.
The staff of the Securities and Exchange Commission (SEC) 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 heavily dependent upon complex computer systems for all
phases of its operations. The year 2000 issue --common to most corporations --
concerns the inability of certain software and databases to properly recognize
date-sensitive information related to the year 2000 and thereafter. This problem
could result in a material disruption to the company's operations, if not
corrected. Southern Company has assessed and developed a detailed strategy to
prevent or at least minimize problems related to the year 2000 issue. In 1997,
resources were committed and implementation began to modify the affected
information systems. Total costs related to the project are estimated to be
approximately $85 million, of which $8 million was spent in 1997. Most all
remaining costs will be expensed in 1998. Implementation is currently on
schedule. Although the degree of success of this project cannot be determined at
this time, management believes there will be no significant effect on the
company's operations.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
Southern Company is involved in various matters being litigated. See Note 3
to the financial statements for information regarding material issues that
could possibly affect future earnings.
Compliance costs related to current and future environmental laws and
regulations could affect earnings if such costs are not fully recovered. The
Clean Air Act and other important environmental items are discussed later under
"Environmental Matters."
The operating companies are subject to the provisions of FASB Statement No.
71, Accounting for the Effects of Certain Types of Regulation. In the event that
a portion of a company's operations is no longer subject to these provisions,
the company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable, and determine if any other
assets have been impaired. See Note 1 to the financial statements under
"Regulatory Assets and Liabilities" for additional information.
New Accounting Standard
The FASB has issued Statement No. 130, Reporting Comprehensive Income, which
will be effective in 1998. This statement establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. The objective of the statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners
(comprehensive income). Comprehensive income is the total of net income and all
other non-owner changes in equity. Southern Company will adopt this statement in
1998.
FINANCIAL CONDITION
Overview
Southern Company's financial condition continues to remain strong. The company's
common stock closed 1997 with the highest year-end closing price in history.
Earnings, excluding the windfall profits tax, were some $1.1 billion. Based on
this performance, in January 1998, the Southern Company board of directors
increased the common stock dividend for the seventh consecutive year.
Gross property additions to utility plant were $1.9 billion in 1997. The
majority of funds needed for gross property additions since 1994 has been
provided from operating activities, principally from earnings and non-cash
charges to income. Southern Energy's business acquisitions in 1997 amounted to
approximately $2.9 billion. The Consolidated Statements of Cash Flows provide
additional details.
Derivative Financial Instruments
Southern Company is exposed to market risks in both its trading and non-trading
operations. The non-trading operations are exposed to market risks, including
changes in interest rates, currency exchange rates, and certain commodity
prices. To mitigate changes in cash flows attributable to these exposures, the
company has entered into various derivative financial instruments. Company
policy for non-trading activities stipulates that derivatives are to be used
only for hedging purposes. Derivative positions are monitored using techniques
that include market value and sensitivity analysis.
Interest rate swaps are used to hedge underlying debt obligations. These
swaps hedge specific debt issuances and therefore qualify for hedge accounting.
The company has interest rate swaps in various currencies. These match debt
issued in the same currency. In cases where debt is issued in currencies other
than the functional currency, currency swaps convert the exposure to that of the
functional currency. For qualifying hedges, the interest rate differential is
reflected as an adjustment to interest expense over the life of the instruments.
If the company sustained a 100 basis point change in interest rates for all
variable rate debt in all currencies, the change would affect annualized
interest expense by approximately $35 million at December 31, 1997. Based on the
company's overall interest rate exposure at December 31, 1997, including
derivative and other interest rate sensitive instruments, a near-term 100 basis
point change in interest rates would not materially affect the consolidated
financial statements.
The company has investments in various emerging market countries where the
net investments are not hedged, including Argentina, Chile, Trinidad, Bahamas,
Philippines, and China. The company relies on either currency pegs or
contractual or regulatory links to the U.S. dollar to mitigate currency risk
attributable to these investments. The company does not believe it has a
material exposure to changes in exchange rates between the U.S. dollar and the
currencies of these countries. The company also has investments in the United
Kingdom and Germany, and for these investments the company uses long-term
cross-currency agreements to reduce a substantial portion of its exposure to
fluctuations in the British pound sterling and German Deutschemark. These
instruments are used to hedge its net investments in these countries. As a
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
result of these swaps, a 10 percent sustained decline of the British pound
sterling and German Deutschemark versus the U.S. dollar would not materially
affect the consolidated financial statements.
The company also uses currency swaps and forward agreements to hedge dollar
denominated debt issued by subsidiaries with different functional currency.
These swaps offset the dollar flows, thereby effectively converting debt to the
appropriate currency. Gains and losses related to qualified hedges of foreign
currency firm commitments are deferred and included in the basis of the
underlying transactions.
In addition to the non-trading activities, the company is exposed to market
risks through its electricity and natural gas commodity trading business. To
estimate and manage the market risk of its trading and marketing portfolio,
Southern Energy employs a daily Value at Risk (VAR) methodology. VAR is used to
describe a probabilistic approach to measuring the exposure to market risk. VAR
models are relatively sophisticated. However, the quantitative risk information
is limited by the parameters established in creating the model. The instruments
being evaluated may have features that may trigger a potential loss in excess of
calculated amounts if the changes in commodity prices exceed the confidence
level of the model used. The calculation utilizes the standard deviation of
seasonally adjusted historical changes in the value of the market risk sensitive
commodity-based financial instruments to estimate the amount of change (i.e.,
volatility) in the current value of these instruments that could occur at a
specified confidence level over a specified holding interval. The parameters
used in the calculation include holding intervals ranging from five to 20 days,
depending upon the type of instrument, the term of the instrument, the liquidity
of the underlying market, and other factors. The models employed a 95 percent
confidence level based on historical price movement. Based on the company's VAR
analysis of its overall commodity price risk exposure at December 31, 1997,
management does not anticipate a materially adverse effect on the company's
consolidated financial statements as a result of market fluctuations.
In the United Kingdom, the company utilizes 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 electricity
purchases on approximately 20 billion kilowatt-hours through the year 2008. The
gains or losses realized on such contracts are deferred and recognized as
electricity is purchased. Because of the absence of a trading market, it is not
practicable to estimate the fair value of these contracts.
Due to cost-based rate regulations, the operating companies have limited
exposure to market volatility in interest rates and prices of electricity. To
mitigate residual risks relative to movements in electricity prices, the
operating companies enter into fixed price contracts for the purchase and sale
of electricity through the wholesale electricity market. Realized gains and
losses are recognized in the income statement as incurred. At December 31, 1997,
exposure from these activities was not material to the consolidated financial
statements.
For additional information, see Note 1 to the financial statements under
"Financial Instruments for Non-Trading and Trading."
Capital Structure
Southern Company achieved a ratio of common equity to total capitalization --
including short-term debt -- of 38.6 percent in 1997, compared with 45.1 percent
in 1996, and 42.4 percent in 1995.
During 1997, the subsidiary companies sold, through public authorities, $404
million of pollution control revenue bonds. Preferred securities of $1.3 billion
were issued in 1997. The companies continued to reduce financing costs by
retiring higher-cost bonds and preferred stock. Retirements, including
maturities, of bonds totaled $507 million during 1997, $600 million during 1996,
and $1.3 billion during 1995. As a result, the composite interest rate on
long-term debt decreased from 7.2 percent at December 31, 1994 to 6.6 percent
at December 31, 1997. Retirements of preferred stock totaled $660 million during
1997, $179 million during 1996, and $1 million during 1995.
In 1997, Southern Company raised $360 million from the issuance of new
common stock under the company's various stock plans. At the close of 1997, the
company's common stock had a market value of 257/8 per share, compared with a
book value of $13.91 per share. The market-to-book value ratio was 186 percent
at the end of 1997, compared with 166 percent at year-end 1996, and 188 percent
at year-end 1995.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
Capital Requirements for Construction
The construction program of Southern Company is budgeted at $2.0 billion for
1998, $2.0 billion for 1999, and $1.6 billion for 2000. 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 will be fully recovered.
The operating companies have approximately 1,600 megawatts of combined cycle
generation scheduled to be placed in service by 2001. Southern Energy has under
construction some 1,400 megawatts of owned capacity. Significant construction of
transmission and distribution facilities and upgrading of generating plants will
be continuing for the core business in the Southeast.
Other Capital Requirements
In addition to the funds needed for the construction program, approximately $2.5
billion will be required by the end of 2000 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.
Environmental Matters
In November 1990, the Clean Air Act was signed into law. Title IV of the Clean
Air Act -- the acid rain compliance provision of the law -- significantly
affected 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.
Southern Company achieved Phase I sulfur dioxide compliance at the affected
plants by switching to low-sulfur coal, which required some equipment upgrades.
Construction expenditures for Phase I compliance totaled approximately $300
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 necessary
to meet Phase II limits and ozone non-attainment requirements for metropolitan
Atlanta through 2000. Current compliance strategy for Phase II and ozone
non-attainment could require total estimated construction expenditures of
approximately $70 million, of which $55 million remains to be spent.
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.
In July 1997, the Environmental Protection Agency (EPA) revised the national
ambient air quality standards for ozone and particulate matter. This revision
makes the standards significantly more stringent. Also, in October 1997, the EPA
issued a proposed regional ozone rule -- if implemented -- that could make
substantial further reductions in NOx emissions from fossil-fueled generating
facilities. Implementation of the standards and the proposed rule could result
in significant additional compliance costs and capital expenditures that cannot
be determined at this time.
The EPA and state environmental regulatory agencies are reviewing and
evaluating various other matters including: emission control strategies for
ozone non-attainment areas; additional controls for hazardous air pollutant
emissions; and hazardous waste disposal requirements. The impact of new
standards will depend on the development and implementation of applicable
regulations.
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 $4 million in 1997 and $8 million in 1995. In 1996, the company was
reimbursed $6 million for amounts previously expensed. Additional sites may
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
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
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
The amount and timing of additional equity capital to be raised in 1998 -- 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 1998 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 were
primarily from internal sources. However, the type and timing of any financings
- -- if needed -- will depend on market conditions and regulatory approval.
The operating companies historically have relied on issuances of first
mortgage bonds and preferred stock, in addition to pollution control revenue
bonds issued for their benefit by public authorities, to meet their long-term
external financing requirements. Recently, the operating companies' financings
have consisted of unsecured debt and trust preferred securities. In this regard,
the operating companies -- except Savannah Electric -- sought and obtained
stockholder approval in 1997 to amend their respective corporate charters
eliminating restrictions on the amounts of unsecured indebtedness they may
incur.
To meet short-term cash needs and contingencies, Southern Company had
approximately $601 million of cash and cash equivalents and $4.9 billion of
unused credit arrangements with banks at the beginning of 1998.
Cautionary Statement Regarding Forward-Looking
Information
Southern Company's 1997 Annual Report contains forward-looking statements in
addition to historical information. The company cautions that there are various
important factors that could cause actual results to differ materially from
those indicated in the forward-looking statements; accordingly, there can be no
assurance that such indicated results will be realized. These factors include
legislative and regulatory initiatives regarding deregulation and restructuring
of the electric utility industry; the extent and timing of the entry of
additional competition in the markets of the subsidiary companies; potential
business strategies -- including acquisitions or dispositions of assets or
internal restructuring -- that may be pursued by the company; state and federal
rate regulation in the United States; changes in or application of environmental
and other laws and regulations to which the company and its subsidiaries are
subject; political, legal and economic conditions and developments in the United
States and in foreign countries in which the subsidiaries operate; financial
market conditions and the results of financing efforts; changes in commodity
prices and interest rates; weather and other natural phenomena; the performance
of projects undertaken by the non-traditional business and the success of
efforts to invest in and develop new opportunities; and other factors discussed
in the reports -- including Form 10-K -- filed from time to time by the company
with the SEC.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996, and 1995
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
================================================================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(in millions)
Operating Revenues $ 12,611 $ 10,358 $9,180
- --------------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 2,281 2,245 2,126
Purchased power 3,033 1,103 491
Other 1,930 1,860 1,626
Maintenance 763 782 683
Depreciation and amortization 1,246 996 904
Amortization of deferred Plant Vogtle costs, net 121 137 124
Taxes other than income taxes 572 634 535
Income taxes 725 747 805
- --------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 10,671 8,504 7,294
- --------------------------------------------------------------------------------------------------------------------------------
Operating Income 1,940 1,854 1,886
Other Income:
Allowance for equity funds used during construction 6 4 5
Interest income 152 54 38
Other, net 53 42 (65)
Income taxes applicable to other income 34 (10) 36
Windfall profits tax assessed in United Kingdom (Note 8) (148) - -
-------------------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 2,037 1,944 1,900
- --------------------------------------------------------------------------------------------------------------------------------
Interest Charges and Other:
Interest on long-term debt 678 530 557
Allowance for debt funds used during construction (14) (19) (20)
Interest on notes payable 112 107 63
Amortization of debt discount, premium, and expense, net 34 33 44
Other interest charges 63 46 43
Minority interest in subsidiaries 29 13 13
Distributions on capital and preferred securities of subsidiary companies 120 22 9
Preferred dividends of subsidiary companies 43 85 88
- --------------------------------------------------------------------------------------------------------------------------------
Interest charges and other, net 1,065 817 797
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated Net Income $ 972 $ 1,127 $1,103
================================================================================================================================
Common Stock Data: (Note 9)
Average number of shares of common stock outstanding (in millions) 685 673 665
Basic and diluted earnings per share of common stock $1.42 $1.68 $1.66
Cash dividends paid per share of common stock $1.30 $1.26 $1.22
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1997, 1996, and 1995
================================================================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $ 3,764 $ 3,483 $3,191
Consolidated net income 972 1,127 1,103
- --------------------------------------------------------------------------------------------------------------------------------
4,736 4,610 4,294
Cash dividends on common stock 889 846 811
Capital and preferred stock transactions, net 5 - -
- --------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year (Note 9) $ 3,842 $ 3,764 $3,483
================================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
================================================================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(in millions)
Operating Activities:
Consolidated net income $ 972 $ 1,127 $ 1,103
Adjustments to reconcile consolidated net income
to net cash provided by operating activities --
Depreciation and amortization 1,471 1,201 1,134
Deferred income taxes and investment tax credits (5) 57 117
Allowance for equity funds used during construction (6) (4) (5)
Amortization of deferred Plant Vogtle costs, net 121 137 124
Gain on asset sales (25) (59) (33)
Other, net (61) 54 (121)
Changes in certain current assets and liabilities
excluding effects from acquisitions --
Receivables, net (238) (92) (109)
Fossil fuel stock 56 57 28
Materials and supplies 21 47 11
Accounts payable 138 19 (138)
Other 181 (143) 204
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 2,625 2,401 2,315
- --------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (1,859) (1,229) (1,401)
Southern Energy business acquisitions, net of cash acquired (2,925) - (1,416)
Sales of property 32 211 287
Other (13) (275) 153
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4,765) (1,293) (2,377)
- --------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds --
Common stock 360 171 277
Capital and preferred securities 1,321 322 -
First mortgage bonds - 85 375
Other long-term debt 2,499 1,570 1,805
Retirements --
Preferred stock (660) (179) (1)
First mortgage bonds (168) (426) (538)
Other long-term debt (802) (1,754) (902)
Increase (decrease) in notes payable, net 509 (268) 727
Payment of common stock dividends (889) (846) (811)
Miscellaneous 126 (110) (237)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities 2,296 (1,435) 695
- --------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 156 (327) 633
Cash and Cash Equivalents at Beginning of Year 445 772 139
- --------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 601 $ 445 $ 772
================================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the year for --
Interest (net of amount capitalized) $876 $677 $622
Income taxes $823 $706 $645
Southern Energy business acquisitions --
Fair value of assets acquired $4,768 $- $2,745
Less cash paid for common stock 2,925 - 1,416
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $1,843 $- $1,329
================================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
At December 31, 1997 and 1996
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C>
=======================================================================================================================
Assets 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
(in millions)
Utility Plant:
Plant in service (Note 1) $34,044 $33,260
Less accumulated provision for depreciation 11,934 10,921
- -----------------------------------------------------------------------------------------------------------------------
22,110 22,339
Nuclear fuel, at amortized cost 230 246
Construction work in progress (Note 4) 1,312 684
- -----------------------------------------------------------------------------------------------------------------------
Total 23,652 23,269
- -----------------------------------------------------------------------------------------------------------------------
Other Property and Investments:
Goodwill, being amortized (Note 14) 1,888 318
Leasehold interests, being amortized 1,389 416
Equity investments in subsidiaries 1,168 227
Nuclear decommissioning trusts 387 279
Miscellaneous 742 261
- -----------------------------------------------------------------------------------------------------------------------
Total 5,574 1,501
- -----------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 601 445
Special deposits 17 62
Receivables, less accumulated provisions for uncollectible accounts
of $77 million in 1997 and $32 million in 1996 2,100 1,440
Fossil fuel stock, at average cost 214 270
Materials and supplies, at average cost 493 510
Prepayments 99 87
Vacation pay deferred 79 77
- -----------------------------------------------------------------------------------------------------------------------
Total 3,603 2,891
- -----------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes (Note 8) 1,142 1,238
Prepaid pension costs 399 341
Deferred Plant Vogtle costs 50 171
Debt expense, being amortized 101 81
Premium on reacquired debt, being amortized 285 289
Miscellaneous 465 449
- -----------------------------------------------------------------------------------------------------------------------
Total 2,442 2,569
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $35,271 $30,230
=======================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
At December 31, 1997 and 1996
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C>
===============================================================================================================================
Capitalization and Liabilities 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(in millions)
Capitalization (See(Seeoaccompanyingtstatements):
Common stock equity $ 9,647 $ 9,216
Preferred stock of subsidiaries 493 980
Company or subsidiary obligated mandatorily redeemable capital and preferred securities 1,744 422
Long-term debt 10,274 7,938
- -------------------------------------------------------------------------------------------------------------------------------
Total 22,158 18,556
- -------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Amount of securities due within one year 784 364
Notes payable 2,064 1,483
Accounts payable 1,049 788
Customer deposits 133 132
Taxes accrued-
Federal and state income 120 12
Other 259 193
Interest accrued 262 187
Vacation pay accrued 108 104
Miscellaneous 608 535
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,387 3,798
- -------------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes (Note 8) 4,650 4,738
Deferred credits related to income taxes (Note 8) 746 814
Accumulated deferred investment tax credits 754 788
Employee benefits provisions 447 439
Minority interests in subsidiaries 435 375
Prepaid capacity revenues 110 122
Department of Energy assessments 72 81
Disallowed Plant Vogtle capacity buyback costs 56 57
Storm damage reserves 38 35
Miscellaneous 418 427
- -------------------------------------------------------------------------------------------------------------------------------
Total 7,726 7,876
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Matters (Notes 1, 2, 3, 4, 5, 7, 13, and 14)
Total Capitalization and Liabilities $ 35,271 $ 30,230
===============================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1997 and 1996
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C> <C>
==============================================================================================================================
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Common Stock Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Outstanding -- 1997: 693 million shares
1996: 677 million shares $ 3,467 $ 3,385
Paid-in capital 2,338 2,067
Retained earnings (Note 9) 3,842 3,764
- -------------------------------------------------------------------------------------------------------------------------------
Total common stock equity 9,647 9,216 43.5% 49.7%
- -------------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock of Subsidiaries:
$100 par or stated value --
4.20% to 5.96% 89 199
6.32% to 7.88% 47 130
$25 par or stated value --
$1.90 to $1.9875 - 191
6.40% to 7.60% 131 323
Auction rates -- at January 1, 1998:
4.20% to 4.235% 70 70
Adjustable rates -- at January 1, 1998:
4.67% to 5.27% 156 240
- -------------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $27 million) 493 1,153
Less amount due within one year - 173
- -------------------------------------------------------------------------------------------------------------------------------
Total excluding amount due within one year 493 980 2.2 5.3
- -------------------------------------------------------------------------------------------------------------------------------
Company or Subsidiary Obligated Mandatorily
Redeemable Capital and Preferred Securities (Note 10):
$25 liquidation value --
7.375% 97 97
7.60% to 7.625 % 415 -
7.75% 649 225
8.14% to 9% 583 100
- -------------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $138 million) 1,744 422 7.9 2.3
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At December 31, 1997 and 1996
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C> <C>
===================================================================================================================================
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Long-Term Debt of Subsidiaries:
First mortgage bonds --
Maturity Interest Rates
1997 5 7/8 % - 25
1997 8.665% - 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 6.85% to 8.665% 260 260
2003 through 2007 6.07% to 8.665% 944 944
2008 through 2012 6 7/8% to 8.665% 121 121
2013 through 2017 8.665% 73 73
2018 through 2022 8.30% to 9 1/4% 476 612
2023 through 2026 6 7/8% to 9% 1,109 1,109
- -----------------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 3,952 4,120
Other long-term debt (Note 11) 7,191 4,084
Unamortized debt premium (discount), net (85) (75)
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $738 million) 11,058 8,129
Less amount due within one year (Note 12) 784 191
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding amount due within one year 10,274 7,938 46.4 42.7
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $ 22,158 $ 18,556 100.0% 100.0%
===================================================================================================================================
CONSOLIDATED STATEMENTS OF PAID-IN CAPITAL
For the Years Ended December 31, 1997, 1996, and 1995
===================================================================================================================================
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $2,067 $1,941 $1,712
Proceeds from sales of common stock over the par value -- 16.4 million,
7.5 million, and 13.0 million shares in 1997, 1996, and 1995, respectively 278 133 212
Miscellaneous (7) (7) 17
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $2,338 $2,067 $1,941
===================================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Southern Company and Subsidiary Companies 1997 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 Company Energy Solutions, Southern Energy, Inc. (Southern Energy),
Southern Nuclear Operating Company (Southern Nuclear), 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) and/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 Company
Energy Solutions develops new business opportunities related to energy products
and services. Worldwide, Southern Energy develops and manages electricity and
other energy related projects, including domestic energy trading and marketing.
Southern Nuclear provides services to Southern Company's nuclear power plants.
Southern 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 controlled
subsidiaries on a consolidated basis and other investments on an equity basis.
Effective in January 1998, Southern Energy and Vastar Resources combined their
energy trading and marketing activities to form a joint venture. Southern
Energy's investment in the joint venture will be accounted for under the equity
method of accounting. Certain prior years' data presented in the consolidated
financial statements have been reclassified to conform with the 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 expected to be credited to customers through the ratemaking process.
Regulatory assets and (liabilities) reflected in the Consolidated Balance Sheets
at December 31 relate to the following:
1997 1996
------------------------
(in millions)
Deferred income taxes $1,142 $1,238
Deferred Plant Vogtle costs 50 171
Premium on reacquired debt 285 289
Demand-side programs 11 44
Department of Energy assessments 63 69
Vacation pay 79 77
Deferred fuel charges 4 29
Postretirement benefits 38 38
Work force reduction costs 37 48
Deferred income tax credits (746) (814)
Storm damage reserves (36) (32)
Other, net 152 114
- -----------------------------------------------------------------
Total $1,079 $1,271
=================================================================
In the event that a portion of an operating company's operations is no
longer subject to the provisions of FASB Statement No. 71, the company would be
required to write off related net regulatory assets and liabilities that are not
specifically recoverable through regulated rates. In addition, the company would
be required to determine if any impairment to other assets exists, including
plant, and write down the assets, if impaired, to their fair value.
18
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
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, the energy component of purchased power costs, and certain
other costs. Revenues are adjusted for differences between recoverable fuel
costs and amounts actually recovered in current rates.
Southern Energy's revenues for product sales and marketing services are
recognized when title passes to the customer or when service is performed.
The operating companies have a diversified base of customers. No single
customer or industry comprises 10 percent or more of revenues. In 1997,
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 $144
million in 1997, $142 million in 1996, and $140 million in 1995. 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 cask
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 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, 1997, under this law to be approximately $34 million
and $27 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
3.4 percent in 1997 and 3.3 percent in 1996 and 1995. 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 $159 million in 1997, $24 million in 1996, and $6 million in 1995. See Note 3
under "Georgia Power Retail Accounting Order" for additional information.
The Nuclear Regulatory Commission (NRC) requires 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
19
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
specific facility as of retirement date. The estimated costs of decommissioning
- -- both site study costs and ultimate costs -- at December 31, 1997, 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 1997 1997
Decommissioning periods:
Beginning year 2017 2014 2027
Completion year 2029 2027 2038
- -----------------------------------------------------------------
(in millions)
Site study costs:
Radiated structures $489 $372 $317
Non-radiated structures 89 33 44
- -----------------------------------------------------------------
Total $578 $405 $361
=================================================================
Ultimate costs:
Radiated structures $1,504 $722 $922
Non-radiated structures 274 65 129
- -----------------------------------------------------------------
Total $1,778 $787 $1,051
=================================================================
Plant Plant Plant
Farley Hatch Vogtle
-----------------------------
(in millions)
Amount expensed in 1997 $ 18 $ 11 $ 9
Accumulated provisions:
Balance in external trust
funds $193 $118 $76
Balance in internal reserves 44 23 13
- ------------------------------------------------------------------
Total $237 $141 $89
==================================================================
Significant assumptions:
Inflation rate 4.5% 3.6% 3.6%
Trust earning rate 7.0 6.5 6.5
- ------------------------------------------------------------------
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
currently included in cost of service. Georgia Power's decommissioning costs
currently included in cost of service are $320 million and $267 million for
plants Hatch and Vogtle, respectively. The estimated ultimate costs associated
with the amounts currently included in cost of service are $781 million and
$1.1 billion for plants Hatch and Vogtle, respectively. Alabama Power and
Georgia Power expect their respective state public service commissions to
periodically review and adjust, if necessary, the amounts collected in rates for
the anticipated cost of decommissioning.
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 these 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 1995 through 1997 ranged from a
before-income-tax rate of 5.8 percent to 9.8 percent. AFUDC, net of income tax,
as a percent of consolidated net income was 1.6 percent in 1997, 1.4 percent in
1996, and 1.6 percent in 1995.
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
charged to maintenance expense. The cost of replacements of property --
exclusive of minor items of property -- is charged to utility plant.
20
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
Leasehold Interests
Leasehold interests include Southern Energy's power generation facilities that
are developed under build, operate, and transfer agreements with foreign
governments. Southern Energy's construction costs are initially recorded as
construction work in progress, and -- after completion -- these costs are
recorded as leasehold interests. These costs are amortized over the length of
time the facility is operated before transferring ownership to the local
government.
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.
Foreign Currency Translation
Assets and liabilities of Southern Company's international operations, where the
local currency is the functional currency, have been translated at year-end
exchange rates, and revenues and expenses have been translated using average
exchange rates prevailing during the year. Adjustments resulting from
translation have been recorded in stockholders' equity. The financial statements
of international operations, where the U.S. dollar is the functional currency
and when certain transactions are denominated in a local currency, are
remeasured in U.S. dollars. The remeasurement of local currencies into U.S.
dollars creates adjustments. These adjustments and all gains and losses from
foreign currency transactions are included in consolidated net income. Foreign
exchange gains and losses are not material for all periods presented.
Financial Instruments for Non-Trading
Non-trading derivative financial instruments are used to hedge exposures to
fluctuations in interest rates, foreign currency exchange rates, and certain
commodity prices. Gains and losses on qualifying hedges are deferred and
recognized either in income or as an adjustment to the carrying amount when the
hedged transaction occurs.
The company utilizes interest rate swaps and cross currency interest rate
swaps to minimize borrowing costs by changing the interest rate and currency of
the original borrowing. For qualifying hedges, the interest rate differential is
reflected as an adjustment to interest expense over the life of the swaps.
Southern Company's international operations are exposed to the effects of
foreign exchange rate fluctuations. To protect against this exposure, the
company utilizes currency swaps to hedge its net investment in certain foreign
subsidiaries, which has the effect of converting foreign currency cash inflows
into U.S. dollars at fixed exchange rates. Gains or losses on these currency
swaps, designated as hedges of net investment, are offset against the
translation effects reflected in stockholders' equity, net of tax.
Non-trading financial derivative instruments held at December 31, 1997, were
as follows:
Year of Unrecognized
Maturity or Notional Gain
Type Termination Amount (Loss)
- ------------------------------------ ---------------------------
(in millions)
Interest rate
swaps:
2002-2012 $710 $(33)
2001-2012 (pound)500 $(52)
2002-2007 DM691 $(3)
Cross currency
swaps 2001-2007 (pound)439 $6
Cross currency
swaption 2003 DM570 $1
- ---------------------------------------------------------------
(pound) - Denotes British pound sterling.
DM - Denotes Deutschemark.
The company is exposed to losses related to financial instruments in the
event of counterparties' nonperformance. The company has established controls to
determine and monitor the creditworthiness of counterparties in order to
mitigate the company's exposure to counterparty credit risk. The company does
not expect any of the counterparties to fail to meet their obligations.
In the United Kingdom, the company utilizes 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 electricity
purchases of approximately 20 billion kilowatt-hours through the year 2008. The
gains or losses realized on such contracts are deferred and recognized as
electricity is purchased. Because of the absence of a trading market, it is not
practicable to estimate the fair value of these contracts .
21
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
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, 1997 $10,916 $11,160
At December 31, 1996 7,975 8,122
Capital and preferred securities:
At December 31, 1997 1,744 1,826
At December 31, 1996 422 427
- -----------------------------------------------------------------
The fair values for long-term debt and capital and preferred securities were
based on either closing market price or closing price of comparable instruments.
Financial Instruments for Trading
Derivative financial instruments used for trading purposes primarily relate to
commodities associated with the energy sector, such as electricity, natural gas,
and crude oil. These instruments are recorded at fair value for balance sheet
purposes. The determination of fair value considers various factors, such as
closing exchange prices, broker price quotations, and model pricing. Model
pricing considers time value and volatility factors underlying any options and
contractual commitments. These transactions are accounted for using the
mark-to-market method of accounting in which the unrealized gains or losses
resulting from the impact of price movements are recognized as net gains or
losses in the consolidated statements of income. If the company has a master
netting agreement with counterparties, net positions are recognized for
consolidated balance sheet and income statement purposes.
The company provides price risk management services by entering into a
variety of contractual commitments such as price cap and floor agreements,
futures contracts, forward purchase and sale agreements, and option contracts.
These contracts generally require future settlement, and are either executed on
an exchange or traded as over-the-counter (OTC) instruments. Contractual
commitments have widely varying terms and durations that range from a few hours
to a number of years depending on the instrument. The majority of the company's
transactions are short-term in duration, with a weighted average maturity of
approximately 1.3 years and 0.6 years at December 31, 1997 and 1996,
respectively.
All contractual commitments used for trading purposes are recorded at fair
value. Contracts in a net receivable position, as well as options held, are
reported as assets. Similarly, contractual commitments in a net payable
position, as well as options written, are reported as liabilities. The net
unrealized gain from risk management services amounted to $8 million at December
31, 1997. Southern Company has made guarantees to certain counterparties
regarding performance of contractual commitments by its affiliates related to
trading and marketing activities. Contractual commitments reflected in the
Consolidated Balance Sheets at December 31 were as follows:
Net Fair Value
Notional -------------------------
Amounts
1997 (Kilowatt-Hours) Assets Liabilities
- ---------- ---------------------------------------------
(in millions)
Exchange-issued
products:
Futures
contracts 904 $14 $15
Other 958 1 1
- -------------------------------------------------------------------
Total 1,862 15 16
- -------------------------------------------------------------------
OTC products:
Forward
contracts 2,643 69 62
Swaps (473) 1 -
Other 639 9 8
- -------------------------------------------------------------------
Total 2,809 79 70
- -------------------------------------------------------------------
Total 4,671 $94 $86
===================================================================
Net Fair Value
Notional -----------------------
Amounts
1996 (Kilowatt-Hours) Assets Liabilities
- ------------ ---------------------------------------------
(in millions)
Exchange-issued
products:
Futures
contracts 42 $ 3 $ 3
Other 105 - -
- -------------------------------------------------------------------
Total 147 3 3
- -------------------------------------------------------------------
OTC products:
Forward
contracts 56 15 15
Swaps - - -
Other 51 - -
- -------------------------------------------------------------------
Total 107 15 15
- -------------------------------------------------------------------
Total 254 $18 $18
===================================================================
22
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
Notional amounts -- stated in equivalent millions of kilowatt-hours -- are
indicative only of the volume of activity and are not a measure of market risk.
Notional amounts of natural gas and crude oil positions are reflected in
equivalent kilowatt-hours based on standard conversion rates. The company has
established controls to determine and monitor the creditworthiness of
counterparties in order to mitigate the company's exposure to counterparty
credit risk. A concentration of counterparties may impact the company's overall
exposure to credit risk, either positively or negatively, in that the
counterparties may be similarly affected by changes in economic, regulatory, or
other conditions.
The annual average gross balances of the company's options and contractual
commitments used for trading purposes, based on month-end balances were as
follows:
Average Fair Value
-------------------------
1997 Assets Liabilities
- ----------- -------------------------
(in millions)
Commodity instruments:
Electricity $97 $94
Gas 6 6
Other 7 6
Average Fair Value
-------------------------
1996 Assets Liabilities
- ----------- -------------------------
(in millions)
Commodity instruments:
Electricity $19 $18
Gas 1 1
Other - -
- ----------------------------------------------------------------
Materials and Supplies
Generally, materials and supplies include the costs of transmission,
distribution, and generating plant materials. Materials are charged to inventory
when purchased and then expensed or capitalized to plant, as appropriate, when
installed.
2. RETIREMENT BENEFITS
Pension Plans
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. The operating companies fund
trusts to the extent deductible under federal income tax regulations or to the
extent required by their 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 was expensed each succeeding year until the costs were 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.
23
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
Funded Status and Cost of Benefits
The funded status of the plans and reconciliation to amounts reflected in the
Consolidated Balance Sheets at December 31 were as follows:
Pension
-----------------------
1997 1996
-----------------------
(in millions)
Actuarial present value of
benefit obligation:
Vested benefits $ 2,891 $ 2,730
Non-vested benefits 83 119
- ------------------------------------------------------------------
Accumulated benefit obligation 2,974 2,849
Additional amounts related to
projected salary increases 728 775
- ------------------------------------------------------------------
Projected benefit obligation 3,702 3,624
Less:
Fair value of plan assets 5,953 5,258
Unrecognized net gain (1,877) (1,314)
Unrecognized prior service cost 126 135
Unrecognized transition asset (101) (114)
- ------------------------------------------------------------------
Prepaid asset recognized in the
Consolidated Balance Sheets $ 399 $ 341
==================================================================
Postretirement Benefits
----------------------------
1997 1996
--------------- ------------
(in millions)
Actuarial present value of
benefit obligation:
Retirees and dependents $477 $409
Employees eligible to retire 85 78
Other employees 373 383
- -------------------------------------------------------------------
Accumulated benefit obligation 935 870
Less:
Fair value of plan assets 335 260
Unrecognized net loss (gain) 68 79
Unrecognized prior service cost (4) (5)
Unrecognized transition
obligation 233 249
- -------------------------------------------------------------------
Accrued liability recognized in the
Consolidated Balance Sheets $303 $287
===================================================================
The weighted average rates assumed in the actuarial calculations were:
1997 1996 1995
---------------------------------
Discount 7.5% 7.8% 7.3%
Annual salary increase 5.0 5.3 4.8
Long-term return on
plan assets 8.5 8.5 8.5
- -----------------------------------------------------------------
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of 8.8
percent for 1997, decreasing gradually to 5.5 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, 1997, by $80 million and the aggregate of the service
and interest cost components of the net retiree cost by $7 million.
Components of the plans' net costs are shown below:
Pension
---------------------------
1997 1996 1995
---------------------------
(in millions)
Benefits earned during the year $ 94 $ 99 $ 79
Interest cost on projected
benefit obligation 271 267 193
Actual return on plan assets (856) (564) (730)
Net amortization and deferral 417 152 412
- -------------------------------------------------------------------
Net pension cost (income) $ (74) $ (46) $ (46)
===================================================================
Of the above net pension income, $52 million in 1997, $37 million in 1996,
and $30 million in 1995 were recorded in operating expenses, and the remainder
was recorded in construction and other accounts.
Postretirement Benefits
---------------------------
1997 1996 1995
---------------------------
(in millions)
Benefits earned during the year $ 18 $ 20 $ 28
Interest cost on accumulated
benefit obligation 67 60 67
Amortization of transition
obligation 15 15 27
Actual return on plan assets (28) (17) (23)
Net amortization and deferral 12 6 12
- ------------------------------------------------------------------
Net postretirement costs $ 84 $ 84 $111
==================================================================
Of the above net postretirement costs, $70 million in 1997, $64 million in
1996, and $78 million in 1995 were charged to operating expenses, and $3 million
in 1996 and $11 million in 1995 were deferred. The remainder for each year 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 $50 million, $85 million, and
$42 million for the years 1997, 1996, and 1995, respectively. In addition,
certain costs of these programs were deferred and are being amortized in
24
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
accordance with regulatory treatment. The unamortized balance of these costs was
$37 million at December 31, 1997.
3. LITIGATION AND REGULATORY MATTERS
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, 1997, 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. The plant went into commercial operation in 1995.
In June 1996, the GPSC initiated a review of this plant. On January 14,
1998, the GPSC ordered that Georgia Power be allowed to include approximately
$108 million of its $143 million investment in rate base as of December 31,
1998. Georgia Power has appealed the GPSC's order to the Superior Court of
Fulton County, Georgia. If the order is upheld, Georgia Power will be required
to record a write-off currently estimated to be approximately $29 million, after
taxes.
The final outcome of this matter cannot now be determined. Accordingly, no
provision related to the GPSC's disallowance has been recorded.
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
25
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
of refunds could range up to approximately $194 million at December 31, 1997.
Although management believes that rates are not excessive and that refunds are
not justified, the final outcome of this matter cannot now be determined.
Southern Company Tax Litigation
In August 1997, Southern Company and the Internal Revenue Service (IRS) entered
into a settlement agreement related to tax issues for the years 1984 through
1987. The agreement is subject to the review and approval by the Joint
Congressional Committee on Taxation. If approved by the Joint Committee, the
agreement would resolve all issues in the case for the years before the U.S. Tax
Court, resulting in a refund to Southern Company of approximately $162 million.
This amount includes interest of $76 million. The tax litigation was related to
a timing issue as to when taxes should have been paid; therefore, only the
interest portion will affect future income. There can be no assurance that such
Joint Committee approval will be received.
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. In April
1997, the APSC issued an additional order authorizing Alabama Power to reduce
balance sheet asset items. This order authorizes the reduction of such items up
to an amount equal to five times the total estimated annual revenue reduction
resulting from future rate reductions initiated by Alabama Power.
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 a three-year accounting order, effective
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 superior court ruled that statutory
requirements applicable to rate cases were not followed and remanded the matter
to the GPSC. In October 1997, the Georgia Court of Appeals upheld the accounting
order and reversed the superior court's decision. This matter is now concluded.
4. CONSTRUCTION PROGRAM
The system companies are engaged in continuous construction programs, currently
estimated to total some $2.0 billion in 1998, $2.0 billion in 1999, and $1.6
billion in 2000. 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, 1997, significant purchase commitments were outstanding in
connection with the construction program. The operating companies have
approximately 1,600 megawatts of combined cycle generation scheduled to be
placed in service by 2001. Southern Energy has under construction some 1,400
26
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
megawatts of owned capacity. In addition, 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
The amount and timing of additional equity capital to be raised in 1998 -- 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
long-term debt and preferred securities primarily for debt maturities and for
redeeming higher-cost securities if market conditions permit.
Bank Credit Arrangements
At the beginning of 1998, unused credit arrangements with banks totaled $4.9
billion, of which $3.0 billion expires during 1998, $800 million during 1999 to
2001, and $1.0 billion during 2002. The following table outlines the credit
arrangements by company:
Amount of Credit
-----------------------------------------
Expires
--------------------
1999 &
Company Total Unused 1998 beyond
- ------------- -----------------------------------------
(in millions)
Alabama Power $ 814 $ 814 $ 679 $ 135
Georgia Power 1,144 1,144 919 225
Gulf Power 103 94 94 -
Mississippi Power 96 76 56 20
Savannah Electric 41 41 21 20
Southern Company 2,000 2,000 1,000 1,000
Southern Energy 1,038 635 193 442
Other 70 66 66 -
------------------------------------------
Total $5,306 $4,870 $3,028 $1,842
==========================================
Approximately $2.1 billion of the credit facilities allows for term loans
ranging from one to three years. Most of the agreements include stated
borrowing rates but also allow for competitive bid loans.
All of the credit arrangements require payment of commitment fees based on
the unused portion of the commitments or the maintenance of compensating
balances with the banks. These balances are not legally restricted from
withdrawal. Of Southern Company's credit facilities, $1.7 billion is a
syndicated credit arrangement which also requires the payment of agent fees.
A portion of the $4.9 billion unused credit with banks is allocated to
provide liquidity support to the companies' variable rate pollution control
bonds. At December 31, 1997, the amount of the credit lines allocated for this
purpose was $1.2 billion.
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,
Georgia Power, and Southern Energy, 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.
27
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 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,
1997, were as follows:
Purchased
Year Fuel Power
- ----------- ------------------------------
(in millions)
1998 $ 2,081 $ 338
1999 1,596 164
2000 1,235 175
2001 1,122 178
2002 1,005 182
2003 and thereafter 4,580 1,720
- -------------------------------------------------------------
Total commitments $11,619 $2,757
=============================================================
Operating Leases
Southern Company has operating lease agreements with various terms and
expiration dates. These expenses totaled $33 million, $23 million, and $17
million for 1997, 1996, and 1995, respectively. At December 31, 1997, estimated
minimum rental commitments for noncancelable operating leases were as follows:
Year Amounts
- -------- -----------------
(in millions)
1998 $ 39
1999 37
2000 32
2001 28
2002 28
2003 and thereafter 291
- -------------------------------------------------------------
Total minimum payments $455
=============================================================
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, 1997, 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 $1,100
Plant Hatch
(nuclear) 50.1 840 477
Plant Miller
(coal)
Units 1 and 2 91.8 717 311
Plant Scherer
(coal)
Units 1 and 2 8.4 112 44
Plant Wansley
(coal) 53.5 298 136
Rocky Mountain
(pumped storage) 25.4 202 44
Intercession City
(combustion turbine) 33.3 13 *
- ------------------------------------------------------------------
*Less than $1 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.
7. LONG-TERM POWER SALES
AGREEMENTS
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 amounted to $203 million in 1997, $217 million in 1996, and
$237 million in 1995.
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
28
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
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, 1997, the tax-related regulatory assets and liabilities were
$1.1 billion and $746 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 income tax provisions are as follows:
1997 1996 1995
-----------------------------
(in millions)
Total provision for income taxes:
Federal --
Currently payable $ 547 $569 $ 567
Deferred -- current year 188 116 185
-- reversal of
prior years (160) (74) (111)
- --------------------------------------------------------------------
575 611 641
- --------------------------------------------------------------------
State --
Currently payable 104 82 90
Deferred -- current year 15 23 26
-- reversal of
prior years (19) (9) (12)
- --------------------------------------------------------------------
100 96 104
- --------------------------------------------------------------------
International -
Windfall profits tax
assessed in United Kingdom 148 - -
Other 16 50 24
- --------------------------------------------------------------------
Total 839 757 769
Less income taxes charged
(credited) to other income 114 10 (36)
- --------------------------------------------------------------------
Total income taxes charged
to operations $ 725 $747 $ 805
====================================================================
The first half of the windfall profits tax assessed in the United Kingdom
was paid in December 1997, and the remainder is due December 1998.
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:
1997 1996
---------------------
(in millions)
Deferred tax liabilities:
Accelerated depreciation $3,345 $2,981
Property basis differences 1,756 2,154
Other 269 362
- -----------------------------------------------------------------
Total 5,370 5,497
- -----------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 108 110
Other property basis differences 245 253
Deferred costs 116 139
Pension and other benefits 72 68
Other 197 214
- -----------------------------------------------------------------
Total 738 784
- -----------------------------------------------------------------
Net deferred tax liabilities 4,632 4,713
Portion included in current assets, net 18 25
- -----------------------------------------------------------------
Accumulated deferred income taxes
in the Consolidated Balance Sheets $4,650 $4,738
=================================================================
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 $30 million in 1997, $33 million in 1996, and $38 million in
1995. At December 31, 1997, 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:
1997 1996 1995
-------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income tax,
net of federal deduction 3.4 3.2 3.4
Non-deductible book
depreciation 2.3 1.8 1.6
Windfall profits tax 8.0 - -
Difference in prior years'
deferred and current tax rate (1.5) (1.0) (1.1)
Other (1.9) (0.5) 0.3
- ----------------------------------------------------------------------
Effective income tax rate 45.3% 38.5% 39.2%
======================================================================
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.
29
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
9. COMMON STOCK
Shares Reserved
At December 31, 1997, a total of 49 million shares was reserved for issuance
pursuant to the Southern Investment Plan, the Employee Savings Plan, the Outside
Directors Stock Plan, and the Performance Stock Plan.
Performance Stock Plan
Southern Company's Executive Stock Option Plan was replaced by the Performance
Stock Plan effective February 17, 1997. As of December 31, 1997, 283 current and
former employees participated in the plan. The maximum number of shares of
common stock that may be issued under the new plan may not exceed 40 million.
The prices of options granted to date have been at the fair market value of the
shares on the dates of grant. The first grant under the new plan was in July
1997. 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 Southern
Company Board of Directors in accordance with the plan. Stock option activity
in 1996 and 1997 for both plans are summarized below:
Shares Average
Subject Option Price
To Option Per Share
----------------------------------
Balance at December 31, 1995 2,476,299 $19.87
Options granted 1,460,731 23.00
Options canceled (13,878) 22.35
Options exercised (97,988) 17.94
- --------------------------------------------------------------------
Balance at December 31, 1996 3,825,164 21.11
Options granted 1,776,094 21.25
Options canceled (51,913) 21.83
Options exercised (137,426) 19.72
- --------------------------------------------------------------------
Balance at December 31, 1997 5,411,919 $21.18
====================================================================
Shares reserved for future grants:
At December 31, 1995 2,114,915
At December 31, 1996 668,062
At December 31, 1997 38,234,044
- --------------------------------------------------------------------
Options exercisable:
At December 31, 1996 1,279,830
At December 31, 1997 1,996,724
- --------------------------------------------------------------------
Southern Company accounts for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25. Accordingly, no
compensation expense has been recognized.
The pro forma impact on earnings of fair-value accounting for options
granted -- as required by FASB Statement No. 123, Accounting for Stock-Based
Compensation -- is less than 1 cent per share and is not significant to the
consolidated financial statements.
Earnings Per Share
In 1997, Southern Company adopted FASB Statement No. 128, Earnings per Share.
This statement simplifies the methodology for computing both basic and diluted
earnings per share. The only difference in the two methods for computing
Southern Company's per share amounts is attributable to outstanding options,
under the Performance Stock Plan. The effect of the stock options was determined
using the treasury stock method. Consolidated net income as reported was not
affected. Shares used to compute diluted earnings per share are as follows:
Average Common Stock Shares
--------------------------------------
1997 1996 1995
--------------------------------------
(in thousands)
As reported shares 685,033 672,590 665,064
Effect of options 191 200 170
--------------------------------------
Diluted shares 685,224 672,790 665,234
======================================
Common Stock Dividend Restrictions
The income of Southern Company is derived primarily from equity in earnings of
its subsidiaries. At December 31, 1997, consolidated retained earnings included
$3.8 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.
10. CAPITAL AND PREFERRED SECURITIES
Company or subsidiary obligated mandatorily redeemable capital and preferred
securities have been issued by special purpose financing entities of Southern
Company and its subsidiaries. Substantially all the assets of these special
financing entities are junior subordinated notes issued by the related company
seeking financing. Each of these companies considers that the mechanisms and
obligations relating to the capital or preferred securities issued for its
30
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
benefit, taken together, constitute a full and unconditional guarantee by it of
the respective special financing entities' payment obligations with respect to
the capital or preferred securities. At December 31, 1997, preferred securities
of $1.1 billion and capital securities of $600 million were outstanding.
Southern Company guarantees the notes related to $600 million of capital
securities issued on its behalf.
11. OTHER LONG-TERM DEBT
Details of other long-term debt at December 31 are as follows:
1997 1996
--------------------
(in millions)
Obligations incurred in connection
with the sale by public authorities
of pollution control
revenue bonds:
Collateralized --
4.375% to 9.375% due
2000-2026 $1,154 $1,403
Variable rates (3.85% to 5.20%
at 1/1/98) due 2011-2025 639 639
Non-collateralized --
7.25% due 2003 1 1
6.75% to 8.375% due 2015-2020 109 200
5.8% due 2022 10 10
Variable rates (4.50% to 5.90%
at 1/1/98) due 2021-2037 670 265
- ----------------------------------------------------------------
2,583 2,518
- ----------------------------------------------------------------
Capitalized lease obligations 142 151
- ----------------------------------------------------------------
Long-term notes payable:
4% to 11% due 1997-2000 295 301
5.502% to 10.56% due 2001-2037 1,741 793
7.125% due 2047 194 -
Adjustable rates (5.70% to 13% at
1/1/98) due 1997-2000 703 240
Adjustable rates (3.77% to
8.0781% at 1/1/98) due
2001-2007 1,533 81
- ----------------------------------------------------------------
4,466 1,415
- ----------------------------------------------------------------
Total $7,191 $4,084
================================================================
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 2002 applicable to
other long-term debt are as follows: $400 million in 1998; $610 million in 1999;
$364 million in 2000; $323 million in 2001; and $939 million in 2002.
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:
1997 1996
----------------
(in millions)
Bond improvement fund requirements $ 38 $ 40
Less:
Portion to be satisfied by certifying
property additions 3 4
- -----------------------------------------------------------------
Cash sinking fund requirements 35 36
First mortgage bond maturities
and redemptions 349 76
Other long-term debt maturities
(Note 11) 400 79
- -----------------------------------------------------------------
Total $784 $191
=================================================================
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
31
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
than an aggregate of $10 million per incident to be paid in a calendar year for
each reactor. Such maximum assessment, excluding any applicable state premium
taxes, for Alabama Power and Georgia Power -- based on its ownership and buyback
interests -- is $159 million and $160 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 Electric Insurance
Limited (NEIL), a mutual insurer established to provide property damage
insurance in an amount up to $500 million for members' nuclear generating
facilities. 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 $8 million and $10 million,
respectively, under current primary 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 primary
coverage. This excess insurance is also provided by NEIL.
NEIL also covers the additional costs that would be incurred in obtaining
replacement power during a prolonged accidental outage at a member's nuclear
plant. Members can be insured against increased costs of replacement power in an
amount up to $3.5 million per week -- starting 17 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 $10 million and $11
million, respectively. The maximum replacement power assessments are $8 million
for Alabama Power and $11 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.
All retrospective assessments -- whether generated for liability, property,
or replacement power -- may be subject to applicable state premium taxes.
14. ACQUISITIONS
In 1997, Southern Energy acquired a 26 percent interest in an integrated utility
in Berlin, Germany for approximately $820 million. Southern Energy also
completed in 1997 the acquisition of a 100 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. The acquisition has been
accounted for under the purchase method of accounting. The acquisition cost
exceeded the fair market value of net assets by approximately $1.6 billion. This
amount is considered goodwill and is being amortized on a straight-line basis
over 40 years.
CEPA has been included in the consolidated financial statements since
January 29, 1997. The following unaudited pro forma results of operations for
the years 1997 and 1996 have been prepared assuming the acquisition of CEPA,
effective January 1, 1996. The pro forma results assume acquisition financing of
$716 million of short-term borrowings, $792 million of long-term notes, and $600
million of capital securities. Southern Company's assumed effective composite
interest rate on these obligations for each period was 6.82 percent.
In 1995, Southern Energy acquired SWEB for approximately $1.8 billion. The
British utility distributes electricity to some 1.3 million customers. The
acquisition has been accounted for under the purchase method of accounting.
Goodwill of $287 million is being amortized over 40 years. SWEB has been
included in the consolidated financial statements since September 1995. The
following pro forma results of operations for the year 1995 has been prepared
assuming the acquisition of SWEB, effective January 1, 1994, and assuming 100
percent short-term debt financing.
These unaudited pro forma results are not necessarily indicative of the
actual results that would have been realized had the acquisitions occurred on
the assumed dates, nor are they necessarily indicative of future results. Pro
forma operating results are for information purposes only and are as follows:
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
-----------------------------------------------------------------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-----------------------------------------------------------------------------------
Operating revenues (in millions) $12,611 $12,632 $10,358 $10,506 $9,180 $10,013
Consolidated net income (in millions) $972 $977 $1,127 $1,109 $1,103 $1,144
Earnings per share $1.42 $1.43 $1.68 $1.65 $1.66 $1.72
15. SEGMENT AND RELATED INFORMATION
Effective December 31, 1997, Southern Company adopted FASB Statement No. 131, Disclosure About Segments of an Enterprise and
Related Information. Southern Company's principal business segment -- or its traditional core business -- is the five regulated
electric utility operating companies that provide electric service in four southeastern states. The other reportable business
segment is non-traditional energy services provided by Southern Energy, which develops and manages electricity and other
energy-related projects both in the United States and abroad including domestic energy trading and marketing. Intersegment revenues
are not material. Financial data for business segments, products and services, and geographic areas are as follows:
</TABLE>
Business Segments
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Regulated
Domestic Non-Traditional Services All
Electric ------------------------------------ Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- -------------------------------- ----------------------------------------------------------------------------------------------
1997
- ---- (in millions)
Operating revenues $ 8,688 $1,748 $2,089 $ 3,837 $ 98 $ (12) $12,611
Depreciation and amortization 1,038 179 15 194 14 - 1,246
Interest income 51 96 42 138 21 (58) 152
Net interest charges 588 289 73 362 84 (41) 993
Income taxes from operations 735 24 (11) 13 (17) (6) 725
Windfall profits tax - 148 - 148 - - 148
Net income from equity
method subsidiaries - 41 7 48 - - 48
Segment net income (loss) 1,105 (4) 5 1 (123) (11) 972
Total assets 24,555 9,225 1,832 11,057 1,224 (1,565) 35,271
Investments in equity
method subsidiaries - 1,023 135 1,158 - 10 1,168
Gross property additions 1,080 720 1 721 58 - 1,859
Increase in goodwill - 1,649 - 1,649 - - 1,649
- -------------------------------------------------------------------------------------------------- ------------- --------------
1996
- -----
Operating revenues $ 8,639 $1,506 $177 $1,683 $ 50 $(14) $10,358
Depreciation and amortization 879 95 13 108 9 - 996
Interest income 36 15 2 17 20 (19) 54
Net interest charges 546 126 31 157 18 (2) 719
Income taxes from operations 755 16 (4) 12 (14) (6) 747
Net income from equity
method subsidiaries - 11 - 11 - - 11
Segment net income (loss) 1,086 88 4 92 (40) (11) 1,127
Total assets 24,899 4,320 604 4,924 450 (43) 30,230
Investments in equity
method subsidiaries - 227 - 227 - - 227
Gross property additions 1,033 157 8 165 31 - 1,229
Increase in goodwill - - - - - - -
- -------------------------------------------------------------------------------------------------- ------------- ---------------
</TABLE>
33
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
<TABLE>
<CAPTION>
Business Segments
<S> <C> <C> <C> <C> <C>
Regulated
Domestic Non-Traditional Services All
Electric -------------------------------------- Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- -------------------------------- --------------------------------------------------------------------------------------------
1995 (in millions)
Operating revenues $ 8,537 $ 561 $ 82 $ 643 $ - $ - $ 9,180
Depreciation and amortization 847 46 11 57 - - 904
Interest income 23 12 2 14 9 (8) 38
Net interest charges 611 54 19 73 20 (8) 696
Income taxes from operations 771 25 9 34 - - 805
Net income from equity
method subsidiaries - 11 - 11 - - 11
Segment net income (loss) 1,103 31 7 38 (38) - 1,103
Total assets 25,414 4,495 495 4,990 638 (520) 30,522
Investments in equity
method subsidiaries - 122 - 122 - 6 128
Gross property additions 1,213 123 13 136 52 - 1,401
Increase in goodwill - 287 - 287 - - 287
- --------------------------------------------------------------------------------------------------------------------------------
(Note) The all other category includes parent Southern Company, which does not allocate operating expenses to business segments.
Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include a wireless
communication company and a developmental company for energy products and services. Non-traditional services exclude interest
expense to parent Southern Company.
</TABLE>
Products and Services
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Revenues
------------------------------------------------------------------------------------------
Non-Traditional Energy Services
Regulated ------------------------------------------------------------------------
Domestic Energy
Electric Trading
Year Utilities Generation Distribution Marketing Other Total
- --------------- ------------------------------------------------------------------------------------------
(in millions)
1997 $8,688 $513 $1,282 $1,982 $60 $3,837
1996 8,639 242 1,309 77 55 1,683
1995 8,537 234 372 - 37 643
Geographic Areas
Revenues
- --------------------------------------------------------------------------------------------------------------------------------
International
---------------------------------------------------------------
United Southeast All
Year Domestic Kingdom Asia Other Total Consolidated
- --------- ----------------------------------------------------------------------------------------------------------
(in millions)
1997 $10,863 $1,282 $247 $219 $1,748 $12,611
1996 8,852 1,309 - 197 1,506 10,358
1995 8,619 372 - 189 561 9,180
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Long-Lived Assets
----------------------------------------------------------------------------------------------------------
International
---------------------------------------------------------------
United Southeast All
Year Domestic Kingdom Asia Other Total Consolidated
- --------- ----------------------------------------------------------------------------------------------------------
(in millions)
1997 $21,282 $2,428 $3,628 $1,888 $7,944 $29,226
1996 21,190 2,473 108 999 3,580 24,770
1995 21,114 2,232 - 973 3,205 24,319
16. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Summarized quarterly financial data for 1997 and 1996 are as follows:
Per Common Share
----------------------------------------------------
Price Range
-----------------
Operating Operating Consolidated
Quarter Ended Revenues Income Net Income Earnings Dividends High Low
- ---------------------- --------------------------------------------- ----------------------------------------------------
(in millions)
March 1997 $2,585 $397 $187 $0.28 $0.325 233/8 203/4
June 1997 2,717 429 215 0.31 0.325 221/4 197/8
September 1997 4,071 720 375 0.55 0.325 23 2013/16
December 1997 3,238 394 195 0.28 0.325 261/4 22
March 1996 $2,429 $408 $233 $0.35 $0.315 257/8 223/8
June 1996 2,564 450 287 0.43 0.315 245/8 211/4
September 1996 2,932 665 468 0.69 0.315 245/8 213/4
December 1996 2,433 331 139 0.21 0.315 231/8 211/8
- ----------------------------------------------------------------------------------------------------------------------------------
Southern Company's business is influenced by seasonal weather conditions.
Earnings for the third quarter 1997 declined by $111 million or 16 cents per share as a result of a windfall profits tax being
assessed in the United Kingdom.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
===================================================================================================================================
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $12,611 $10,358 $9,180
Consolidated Net Income (in millions) $972 $1,127 $1,103
Basic and Diluted Earnings Per Share of Common Stock $1.42 $1.68 $1.66
Cash Dividends Paid Per Share of Common Stock $1.30 $1.26 $1.22
Return on Average Common Equity (percent) 10.30 12.53 13.01
Total Assets (in millions) $35,271 $30,230 $30,522
Gross Property Additions (in millions) $1,859 $1,229 $1,401
- ----------------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $9,647 $9,216 $8,772
Preferred stock and securities 2,237 1,402 1,432
Long-term debt 10,274 7,938 8,274
- ----------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $22,158 $18,556 $18,478
==================================================================================================================================
Capitalization Ratios (percent):
Common stock equity 43.5 49.7 47.5
Preferred stock and securities 10.1 7.6 7.7
Long-term debt 46.4 42.7 44.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0
==================================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $13.91 $13.61 $13.10
Market price per share:
High 26 1/4 25 7/8 25
Low 19 7/8 21 1/8 19 3/8
Close 25 7/8 22 5/8 24 5/8
Market-to-book ratio (year-end) (percent) 186.0 166.2 188.0
Price-earnings ratio (year-end) (times) 18.2 13.5 14.8
Dividends paid (in millions) $889 $846 $811
Dividend yield (year-end) (percent) 5.0 5.6 5.0
Dividend payout ratio (percent) 91.5 75.1 73.5
Cash coverage of dividends (year-end) (times) 2.8 2.9 2.9
Proceeds from sales of stock (in millions) $360 $171 $277
Shares outstanding (in thousands):
Average 685,033 672,590 665,064
Year-end 693,423 677,036 669,543
Stockholders of record (year-end) 200,508 215,246 225,739
- ----------------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $- $85 $375
Retired 168 426 538
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $1,322 $322 $--
Retired 660 179 1
- ----------------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 3,220 3,157 3,100
Commercial 479 464 450
Industrial 16 17 17
Other 5 5 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total 3,720 3,643 3,572
==================================================================================================================================
Employees (year-end):
Traditional core business 24,667 25,034 26,452
Southern Energy 6,089 4,212 5,430
- ----------------------------------------------------------------------------------------------------------------------------------
Total 30,756 29,246 31,882
==================================================================================================================================
36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
==========================================================================================================================
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $8,297 $8,489 $8,073
Consolidated Net Income (in millions) $989 $1,002 $953
Basic and Diluted Earnings Per Share of Common Stock $1.52 $1.57 $1.51
Cash Dividends Paid Per Share of Common Stock $1.18 $1.14 $1.10
Return on Average Common Equity (percent) 12.47 13.43 13.42
Total Assets (in millions) $27,042 $25,911 $20,038
Gross Property Additions (in millions) $1,536 $1,441 $1,105
- -------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $8,186 $7,684 $7,234
Preferred stock and securities 1,432 1,333 1,359
Long-term debt 7,593 7,412 7,241
- -------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $17,211 $16,429 $15,834
=========================================================================================================================
Capitalization Ratios (percent):
Common stock equity 47.6 46.8 45.7
Preferred stock and securities 8.3 8.1 8.6
Long-term debt 44.1 45.1 45.7
- -------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0
=========================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $12.47 $11.96 $11.43
Market price per share:
High 22 23 5/8 19 1/2
Low 17 18 3/8 15 1/8
Close 20 22 19 1/4
Market-to-book ratio (year-end) (percent) 160.4 183.9 168.4
Price-earnings ratio (year-end) (times) 13.2 14.0 12.7
Dividends paid (in millions) $766 $726 $695
Dividend yield (year-end) (percent) 5.9 5.2 5.7
Dividend payout ratio (percent) 77.5 72.4 72.9
Cash coverage of dividends (year-end) (times) 2.7 2.9 2.8
Proceeds from sales of stock (in millions) $279 $204 $30
Shares outstanding (in thousands):
Average 649,927 637,319 631,844
Year-end 656,528 642,662 632,917
Stockholders of record (year-end) 234,927 237,105 247,378
- -------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $185 $2,185 $1,815
Retired 241 2,178 2,575
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $100 $426 $410
Retired 1 516 326
- -------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 3,046 2,996 2,950
Commercial 439 427 414
Industrial 17 18 18
Other 5 4 4
- -------------------------------------------------------------------------------------------------------------------------
Total 3,507 3,445 3,386
=========================================================================================================================
Employees (year-end):
Traditional core business 27,480 28,516 28,872
Southern Energy 1,400 745 213
- -------------------------------------------------------------------------------------------------------------------------
Total 28,880 29,261 29,085
=========================================================================================================================
37A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
===================================================================================================================================
1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $8,050 $8,053 $7,620
Consolidated Net Income (in millions) $876 $604 $846
Basic and Diluted Earnings Per Share of Common Stock $1.39 $0.96 $1.34
Cash Dividends Paid Per Share of Common Stock $1.07 $1.07 $1.07
Return on Average Common Equity (percent) 12.74 8.85 12.49
Total Assets (in millions) $19,863 $19,955 $20,092
Gross Property Additions (in millions) $1,123 $1,185 $1,346
- -----------------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $6,976 $6,783 $6,861
Preferred stock and securities 1,333 1,358 1,400
Long-term debt 7,992 8,458 8,575
- -----------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $16,301 $16,599 $16,836
===================================================================================================================================
Capitalization Ratios (percent):
Common stock equity 42.8 40.9 40.8
Preferred stock and securities 8.2 8.2 8.3
Long-term debt 49.0 50.9 50.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0
===================================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $11.05 $10.74 $10.87
Market price per share:
High 17 3/8 14 5/8 14 7/8
Low 12 7/8 11 1/2 11
Close 17 1/8 13 7/8 14 1/2
Market-to-book ratio (year-end) (percent) 155.5 129.7 134.0
Price-earnings ratio (year-end) (times) 12.4 14.6 10.9
Dividends paid (in millions) $676 $676 $675
Dividend yield (year-end) (percent) 6.2 7.7 7.3
Dividend payout ratio (percent) 77.1 111.8 79.8
Cash coverage of dividends (year-end)(times) 2.5 2.8 2.6
Proceeds from sales of stock (in millions) $-- $-- $4
Shares outstanding (in thousands):
Average 631,307 631,307 631,303
Year-end 631,307 631,307 631,307
Stockholders of record (year-end) 254,568 263,046 273,751
- -----------------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $380 $300 $280
Retired 881 146 201
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $100 $-- $--
Retired 125 96 21
- -----------------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 2,903 2,865 2,824
Commercial 403 396 392
Industrial 18 18 18
Other 4 4 4
- -----------------------------------------------------------------------------------------------------------------------------------
Total 3,328 3,283 3,238
===================================================================================================================================
Employees (year-end):
Traditional core business 30,144 30,087 30,368
Southern Energy 258 176 162
- -----------------------------------------------------------------------------------------------------------------------------------
Total 30,402 30,263 30,530
===================================================================================================================================
</TABLE>
37B
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C>
===================================================================================================================
1988 1987
- -------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $7,287 $7,204
Consolidated Net Income (in millions) $846 $577
Basic and Diluted Earnings Per Share of Common Stock $1.36 $0.96
Cash Dividends Paid Per Share of Common Stock $1.07 $1.07
Return on Average Common Equity (percent) 13.03 9.27
Total Assets (in millions) $19,731 $19,518
Gross Property Additions (in millions) $1,754 $1,853
- -------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $6,686 $6,307
Preferred stock and securities 1,465 1,363
Long-term debt 8,433 8,333
- -------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $16,584 $16,003
===================================================================================================================
Capitalization Ratios (percent):
Common stock equity 40.3 39.4
Preferred stock and securities 8.8 8.5
Long-term debt 50.9 52.1
- -------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0
===================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $10.60 $10.28
Market price per share:
High 12 1/8 14 1/2
Low 10 1/8 8 7/8
Close 11 1/8 11 1/8
Market-to-book ratio (year-end) (percent) 105.5 108.8
Price-earnings ratio (year-end) (times) 8.2 11.7
Dividends paid (in millions) $661 $628
Dividend yield (year-end) (percent) 9.6 9.6
Dividend payout ratio (percent) 78.1 108.9
Cash coverage of dividends (year-end) (times) 2.3 2.0
Proceeds from sales of stock (in millions) $194 $247
Shares outstanding (in thousands):
Average 622,292 601,390
Year-end 630,898 613,565
Stockholders of record (year-end) 290,725 296,079
- -------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $335 $700
Retired 273 369
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $120 $125
Retired 10 160
- -------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 2,781 2,733
Commercial 384 374
Industrial 18 18
Other 4 4
- -------------------------------------------------------------------------------------------------------------------
Total 3,187 3,129
===================================================================================================================
Employees (year-end):
Traditional core business 32,366 32,557
Southern Energy 157 55
- -------------------------------------------------------------------------------------------------------------------
Total 32,523 32,612
===================================================================================================================
</TABLE>
37C
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997 (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
==============================================================================================================================
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,837 $2,894 $2,840
Commercial 2,595 2,559 2,485
Industrial 2,139 2,136 2,206
Other 76 76 72
- ------------------------------------------------------------------------------------------------------------------------------
Total retail 7,647 7,665 7,603
Sales for resale within service area 381 409 399
Sales for resale outside service area 505 429 415
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 8,533 8,503 8,417
Southern Energy 3,837 1,683 643
Other revenues 241 172 120
- ------------------------------------------------------------------------------------------------------------------------------
Total $12,611 $10,358 $9,180
==============================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 39,217 40,117 39,147
Commercial 38,926 37,993 35,938
Industrial 54,196 52,798 51,644
Other 903 911 863
- ------------------------------------------------------------------------------------------------------------------------------
Total retail 133,242 131,819 127,592
Sales for resale within service area 9,884 10,935 9,472
Sales for resale outside service area 13,325 10,777 9,143
- ------------------------------------------------------------------------------------------------------------------------------
Total 156,451 153,531 146,207
==============================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.23 7.21 7.25
Commercial 6.67 6.74 6.91
Industrial 3.95 4.04 4.27
Total retail 5.74 5.81 5.96
Sales for resale 3.82 3.86 4.38
Total sales 5.45 5.54 5.76
Average Annual Kilowatt-Hour Use Per Residential Customer 12,296 12,824 12,722
Average Annual Revenue Per Residential Customer $889.50 $925.12 $922.83
Plant Nameplate Capacity Owned (year-end) (megawatts 31,146 31,076 30,733
Maximum Peak-Hour Demand (megawatts):
Winter 22,969 22,631 21,422
Summer 27,334 27,190 27,420
System Reserve Margin (at peak)(percent) 15.0 14.0 9.4
Annual Load Factor (percent) 59.4 62.3 59.5
Plant Availability (percent):
Fossil-steam 88.2 86.4 86.7
Nuclear 88.8 89.7 88.3
- ------------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 74.8 73.3 72.5
Nuclear 16.6 16.7 16.4
Hydro 4.4 4.1 4.1
Oil and gas 1.7 1.5 1.7
Purchased power 2.5 4.4 5.3
- ------------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0
==============================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,035 10,257 10,099
Cost of fuel per million BTU (cents) 145.81 144.02 151.70
Average cost of fuel per net kilowatt-hour generated (cents) 1.46 1.48 1.53
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997 (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
===============================================================================================================================
1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,560 $2,696 $2,402
Commercial 2,357 2,313 2,181
Industrial 2,162 2,200 2,126
Other 70 68 64
- --------------------------------------------------------------------------------------------------------------------------------
Total retail 7,149 7,277 6,773
Sales for resale within service area 360 447 409
Sales for resale outside service area 505 613 797
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 8,014 8,337 7,979
Southern Energy 185 54 -
Other revenues 98 98 94
- --------------------------------------------------------------------------------------------------------------------------------
Total $8,297 $8,489 $8,073
================================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 35,836 36,807 33,627
Commercial 34,080 32,847 31,025
Industrial 50,311 48,738 47,816
Other 844 814 777
- --------------------------------------------------------------------------------------------------------------------------------
Total retail 121,071 119,206 113,245
Sales for resale within service area 8,151 13,258 12,107
Sales for resale outside service area 10,769 12,445 16,632
- --------------------------------------------------------------------------------------------------------------------------------
Total 139,991 144,909 141,984
================================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.14 7.32 7.14
Commercial 6.92 7.04 7.03
Industrial 4.30 4.51 4.45
Total retail 5.90 6.10 5.98
Sales for resale 4.57 4.12 4.20
Total sales 5.72 5.75 5.62
Average Annual Kilowatt-Hour Use Per Residential Customer 11,851 12,378 11,490
Average Annual Revenue Per Residential Customer $846.48 $906.60 $820.67
Plant Nameplate Capacity Owned (year-end) (megawatts) 29,932 29,513 29,830
Maximum Peak-Hour Demand (megawatts):
Winter 22,254 19,432 19,121
Summer 24,546 25,937 24,146
System Reserve Margin (at peak)(percent) 19.3 13.2 14.3
Annual Load Factor (percent) 63.5 59.4 60.3
Plant Availability (percent):
Fossil-steam 85.2 87.9 88.6
Nuclear 89.8 85.9 85.2
- --------------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 70.8 73.0 71.7
Nuclear 17.9 16.3 16.2
Hydro 4.7 3.9 4.6
Oil and gas 0.9 0.9 0.5
Purchased power 5.7 5.9 7.0
- --------------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0
================================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,010 9,994 9,976
Cost of fuel per million BTU (cents) 155.81 166.85 162.58
Average cost of fuel per net kilowatt-hour generated (cents) 1.56 1.67 1.62
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39A
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997 (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C> <C>
=============================================================================================================================
1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,391 $2,342 $2,194
Commercial 2,122 2,062 1,965
Industrial 2,088 2,085 2,011
Other 65 64 60
- -----------------------------------------------------------------------------------------------------------------------------
Total retail 6,666 6,553 6,230
Sales for resale within service area 417 412 401
Sales for resale outside service area 884 977 928
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 7,967 7,942 7,559
Southern Energy - - -
Other revenues 83 111 61
- -----------------------------------------------------------------------------------------------------------------------------
Total $8,050 $8,053 $7,620
=============================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 33,622 33,118 31,627
Commercial 30,379 29,658 28,454
Industrial 46,050 45,974 45,022
Other 817 806 787
- -----------------------------------------------------------------------------------------------------------------------------
Total retail 110,868 109,556 105,890
Sales for resale within service area 12,320 11,134 11,419
Sales for resale outside service area 19,839 24,402 24,228
- -----------------------------------------------------------------------------------------------------------------------------
Total 143,027 145,092 141,537
=============================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.11 7.07 6.94
Commercial 6.99 6.96 6.91
Industrial 4.53 4.53 4.47
Total retail 6.01 5.98 5.88
Sales for resale 4.05 3.91 3.73
Total sales 5.57 5.47 5.34
Average Annual Kilowatt-Hour Use Per Residential Customer 11,659 11,637 11,287
Average Annual Revenue Per Residential Customer $829.18 $822.93 $782.90
Plant Nameplate Capacity Owned (year-end)(megawatts) 29,915 29,532 29,532
Maximum Peak-Hour Demand (megawatts):
Winter 19,166 17,629 20,772
Summer 25,261 25,981 24,399
System Reserve Margin (at peak) (percent) 16.5 14.0 21.0
Annual Load Factor (percent) 58.3 56.6 58.6
Plant Availability (percent):
Fossil-steam 91.3 91.9 92.2
Nuclear 83.4 83.0 87.0
- -----------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 72.6 72.1 71.5
Nuclear 16.2 15.6 15.7
Hydro 4.4 4.4 5.2
Oil and gas 0.6 1.3 1.1
Purchased power 6.2 6.6 6.5
- -----------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0
=============================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,022 10,065 10,086
Cost of fuel per million BTU (cents) 168.28 172.81 171.00
Average cost of fuel per net kilowatt-hour generated (cents) 1.69 1.74 1.72
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
39B
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1987 - 1997 (continued)
Southern Company and Subsidiary Companies 1997 Annual Report
<S> <C> <C>
======================================================================================================================
1988 1987
- -----------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,103 $2,042
Commercial 1,835 1,692
Industrial 1,945 1,870
Other 56 54
- -----------------------------------------------------------------------------------------------------------------------
Total retail 5,939 5,658
Sales for resale within service area 480 461
Sales for resale outside service area 777 1,028
- -----------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 7,196 7,147
Southern Energy - -
Other revenues 91 57
- -----------------------------------------------------------------------------------------------------------------------
Total $7,287 $7,204
=======================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 31,041 30,583
Commercial 27,005 25,593
Industrial 43,675 42,113
Other 763 737
- -----------------------------------------------------------------------------------------------------------------------
Total retail 102,484 99,026
Sales for resale within service area 14,806 13,282
Sales for resale outside service area 15,860 22,905
- -----------------------------------------------------------------------------------------------------------------------
Total 133,150 135,213
=======================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 6.77 6.68
Commercial 6.79 6.61
Industrial 4.45 4.44
Total retail 5.80 5.71
Sales for resale 4.10 4.11
Total sales 5.40 5.29
Average Annual Kilowatt-Hour Use Per Residential Customer 11,255 11,307
Average Annual Revenue Per Residential Customer $762.42 $754.96
Plant Nameplate Capacity Owned (year-end)(megawatts) 27,552 27,610
Maximum Peak-Hour Demand (megawatts):
Winter 18,685 18,185
Summer 23,641 23,194
System Reserve Margin (at peak) (percent) 15.0 16.2
Annual Load Factor (percent) 59.8 58.7
Plant Availability (percent):
Fossil-steam 91.3 91.2
Nuclear 78.4 84.5
- -----------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 77.7 77.8
Nuclear 14.5 13.1
Hydro 2.3 3.3
Oil and gas 0.7 0.6
Purchased power 4.8 5.2
- ------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0
=======================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,094 10,122
Cost of fuel per million BTU (cents) 170.36 176.64
Average cost of fuel per net kilowatt-hour generated (cents) 1.72 1.78
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
39C
