SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 10, 1999
-----------------------------
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 (404) 506-5000
--------------------------
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, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SOUTHERN COMPANY
By /s/ W. Dean Hudson
W. Dean Hudson
Comptroller
Date: March 2, 1999
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 10, 1999 on the financial statements of 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 333-44261 and 333-64871.
/s/ Arthur Andersen
Atlanta, Georgia
February 26, 1999
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This schedule contains summary financial information extracted from the
financial statements filed as Exhibit 99 and is qualified in its entirity by
reference to such financial statements.
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<NAME> Southern COMPANY
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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</TABLE>
MANAGEMENT'S REPORT
Southern Company and Subsidiary Companies 1998 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 10, 1999
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, retained earnings,
paid-in capital, accumulated other comprehensive income, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements (pages 15-39) referred
to above present fairly, in all material respects, the financial position of
Southern Company and subsidiary companies as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
February 10, 1999
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Southern Company and Subsidiary Companies 1998 Annual Report
RESULTS OF OPERATIONS
Earnings and Dividends
Southern Company's 1998 earnings of $1.2 billion -- excluding non-recurring
items -- established a new record high. Earnings were driven by higher energy
sales and from growth in the non-traditional business. However, reported
earnings in both 1998 and 1997 reflected significant charges. Reported earnings
for 1998 were $977 million or $1.40 per share compared with $972 million or
$1.42 per share in 1997. The traditional core business of selling electricity
in the southeastern United States remained strong, while the non-traditional
business results were adversely affected by a $200 million, after tax, write
down of assets in South America in 1998 and by a $111 million windfall profits
tax assessed in the United Kingdom in 1997. Southern Company's subsidiary that
owns and manages its international and domestic non-traditional electric power
production and delivery facilities is Southern Energy, Inc. (Southern Energy).
After excluding these non-recurring charges, Southern Energy accounted for
approximately 20 percent and 10 percent of Southern Company's reported net
income in 1998 and 1997, respectively.
A reconciliation of reported earnings to earnings excluding non-recurring
items and explanations are as follows:
Consolidated Earnings
Net Income Per Share
--------------- ----------------
1998 1997 1998 1997
---------------- ----------------
(in millions)
Earnings as reported $ 977 $ 972 $1.40 $1.42
- ---------------------------------------------------------------
Write down of assets:
South American
investments 200 - .29 -
Rocky Mountain
plant 21 - .03 -
Windfall profits tax - 111 - .16
Work force reduction
programs 20 31 .03 .05
Other 7 16 .01 .02
- ---------------------------------------------------------------
Total non-recurring 248 158 .36 .23
- ---------------------------------------------------------------
Earnings excluding
non-recurring items $1,225 $1,130 $1.76 $1.65
===============================================================
Amount and
percent change $95 8.4% $0.11 6.7%
- ---------------------------------------------------------------
Southern Energy's 1998 write down is related to its investments in Argentina
and Chile not meeting financial expectations, which resulted in an announced
plan to sell these assets. In 1997, Southern Energy -- as well as other
utilities in the United Kingdom -- was assessed a one-time tax on profits. In
1998, Georgia Power resolved a long-term issue related to its investment in the
Rocky Mountain pumped storage hydroelectric plant. The write down resulted from
a settlement of Georgia Power's 1998 retail rate proceeding. Also, work force
reduction programs in the traditional core business were implemented in 1998 and
1997. These costs are expected to be recovered through future savings within
approximately two years following each program's implementation.
Dividends paid on common stock during 1998 were $1.34 per share or 33 1/2
cents per quarter. During 1997 and 1996, dividends paid per share were $1.30 and
$1.26, respectively. In January 1999, Southern Company maintained the quarterly
dividend at 33 1/2 cents per quarter or $1.34 annually. Southern Company has
modified its dividend policy from a targeted 75 percent payout ratio to a lower
ratio over time. This policy supports Southern Company's strategic goal to
become the best investment in the electric utility industry.
Revenues
Operating revenues changed in 1998 and 1997 as a result of the following
factors:
Increase (Decrease)
From Prior Year
- ---------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------
(in millions)
Retail --
Growth and price
change $ 258 $ 105 $ 124
Weather 178 (110) (64)
Fuel cost recovery and
other 189 (13) 2
- ---------------------------------------------------------------
Total retail 625 (18) 62
- ---------------------------------------------------------------
Sales for resale --
Within service area (2) (33) 10
Outside service area 12 81 14
- ---------------------------------------------------------------
Total sales for resale 10 48 24
Southern Energy (1,934) 2,154 1,040
Other operating revenues 91 69 52
- ---------------------------------------------------------------
Total operating revenues $(1,208) $2,253 $1,178
===============================================================
Percent change (9.6)% 21.8% 12.8%
- ---------------------------------------------------------------
Retail revenues of $8.3 billion increased sharply, up 8.2 percent compared
with last year. Continued growth in the traditional service area and the
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
positive impact of weather on energy sales were the predominant factors causing
the rise in revenues. In 1997, retail revenues decreased by 0.2 percent compared
with the year 1996. Under fuel cost recovery provisions, fuel revenues generally
equal fuel expenses -- including the fuel component of purchased energy -- and
do not affect net income.
Sales for resale revenues within the service area were $374 million in 1998,
down 0.7 percent from the prior year. Revenues from sales for resale within the
service area were $376 million in 1997, down 8.1 percent from the prior year.
This sharp decline resulted primarily from supplying less electricity under
contractual agreements with certain wholesale customers in 1997.
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:
1998 1997 1996
- ----------------------------------------------------------------
(in millions)
Capacity $196 $203 $217
Energy 152 183 176
- ----------------------------------------------------------------
Total $348 $386 $393
================================================================
Capacity revenues in 1998 slightly declined as a result of adjustments and
true-ups related to contractual pricing. In 1997, capacity revenues decreased
because the amount of capacity under contract declined during 1996. Additional
declines in capacity are not scheduled until after 1999.
In 1998, Southern Energy's revenues declined because its energy trading and
marketing operations were deconsolidated on January 1, 1998, when Southern
Energy's joint venture with Vastar Resources, Inc. (Vastar) became effective.
Because of Vastar's significant participation rights in the joint venture, the
equity method of accounting is required. This results in Southern Energy's share
of the joint venture's earnings being reported in other income in 1998. In 1997,
Southern Energy reported energy trading and marketing revenues of $2.0 billion.
Southern Energy's revenues in 1998 of $1.9 billion increased $48 million
compared with comparable revenues in 1997 that exclude energy trading and
marketing. This increase results primarily from operations of assets obtained in
domestic acquisitions. In 1997, Southern Energy's revenues rose to $3.8 billion.
This increase was primarily attributable to the development and growth of energy
trading and marketing activities. 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.
Energy Sales
Changes in traditional core business revenues are influenced heavily by the
amount of energy sold each year. Kilowatt-hour sales for 1998 and the percent
change by year were as follows:
Amount Percent Change
(billions of --------- ------------------------------
kilowatt-hours) 1998 1998 1997 1996
- ------------------------------- -------------------------------
Residential 43.5 10.9% (2.2)% 2.5%
Commercial 41.7 7.2 2.5 5.7
Industrial 55.3 2.1 2.6 2.2
Other 1.0 3.1 (1.1) 5.7
-----
Total retail 141.5 6.2 1.1 3.3
Sales for resale --
Within service area 9.8 (0.4) (9.6) 15.4
Outside service area 13.0 (5.6) 27.7 17.9
-----
Total 164.3 4.7 2.2 5.0
=================================================================
The rate of growth in 1998 retail energy sales was the highest one-year
increase since 1986. Residential energy sales registered the highest annual
increase in over two decades as a result of hotter-than-normal weather and the
addition of 57,000 new customers. Commercial sales were also affected by the
warm weather. Commercial and industrial sales, both in 1998 and 1997, 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 1999 through 2009.
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 declined by 5.6 percent in
1998 and increased by 27.7 percent in 1997 when compared with the respective
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
prior year. The wide variances in sales were influenced by fluctuations in
prices for oil and natural gas, the primary fuel sources for utilities with
which the company has long-term contracts. When oil and gas prices fall below a
certain level, these customers can generate electricity to meet their
requirements more economically. However, these fluctuations in energy sales
under long-term contracts have minimal effects 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 $9.4 billion -- before write downs -- for 1998
decreased $1.2 billion compared with the prior year. Traditional core business
expenses increased $679 million. Southern Energy's expenses decreased $2.0
billion. The decline for Southern Energy corresponds to the decrease in revenues
resulting primarily from the deconsolidation of the energy trading and marketing
operations as discussed earlier. Approximately $2.0 billion of these expenses
were recorded in 1997 purchased power expenses. The costs to produce and deliver
electricity for the traditional core business in 1998 increased by $359 million
to meet higher energy demands. Non-production operation and maintenance expenses
increased $192 million in 1998. Traditional core business depreciation expenses
and taxes other than income taxes increased by $142 million as a result of
additional utility plant being placed into service and increased accelerated
depreciation of certain assets.
In 1997, operating expenses of $10.7 billion increased $2.2 billion compared
with 1996. Traditional core business expenses increased $69 million. Southern
Energy's expenses increased $2.1 billion. The large increase for Southern Energy
resulted primarily from two factors. First, the acquisition of CEPA was first
reflected in 1997 expenses. Second, $2.0 billion of energy trading and marketing
expenses were 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 $136
million as a result of additional utility plant being placed into service and
increased accelerated depreciation of certain assets.
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:
1998 1997 1996
- -----------------------------------------------------------------
Total generation
(billions of kilowatt-hours) 164 160 156
Sources of generation
(percent) --
Coal 77 77 77
Nuclear 16 17 17
Hydro 4 4 4
Oil and gas 3 2 2
Average cost of fuel per net
kilowatt-hour generated
(cents) -- 1.48 1.46 1.48
- -----------------------------------------------------------------
Total fuel and purchased power costs of $3.6 billion in 1998 decreased $1.7
billion compared with 1997. The traditional core business increased $299 million
and Southern Energy decreased $2.0 billion. Southern Energy's reduction in fuel
and purchased power costs resulted from $2.0 billion associated with energy
trading and marketing expenses recorded in 1997 and from no energy trading costs
recorded in purchased power in 1998 as a result of the joint venture with Vastar
discussed earlier. The traditional core business's total energy sales rose by
7.4 billion kilowatt-hours more than in 1997. 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. Southern Energy's increase in expenses
escalated as a result of energy trading and marketing activities discussed
earlier. The traditional core business's total energy sales went up by 3.4
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.
Total interest charges and other financing costs increased $91 million from
amounts reported in the previous year. These costs for the traditional core
business increased $48 million compared with the reported amounts in 1997.
Southern Energy's costs increased $47 million related primarily to financing of
acquisitions. In 1997, these same costs for traditional core business were flat,
but Southern Energy's interest charges increased $205 million as a result of
acquisitions.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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 utility plant with
long economic life. 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 securities. 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.
Southern Company continues to position its business to meet the challenges of
a new competitive environment. Work force reduction programs have reduced
earnings by $20 million, $31 million, and $53 million for the years 1998, 1997,
and 1996, 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. In December 1998, Georgia Power received a new three-year
retail rate order. As a result of the rate order, Georgia Power recorded in 1998
a write down of $34 million -- $21 million after taxes -- related to its
investment in the Rocky Mountain pumped storage hydroelectric plant. This
long-standing issue is now resolved. See Note 3 to the financial statements for
additional information about these matters and 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.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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)
to allow holding companies to form exempt wholesale generators and foreign
utility companies to sell power largely free of regulation under PUHCA. These
entities are able to sell power to affiliates -- under certain restrictions --
and to own and operate power generating facilities in other domestic and
international markets. To take advantage of existing and evolving opportunities,
Southern Energy -- founded in 1981 -- is 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 continues to
position the company to become a major competitor. At December 31, 1998,
Southern Energy's total assets amounted to $12 billion.
During 1998, Southern Energy further refined its business strategy to focus
on a few geographic regions of the world. In Asia, Southern Energy will focus
primarily on China, the Philippines, and India. In South America, the company
will pursue opportunities in Brazil. In Europe, Southern Energy will concentrate
efforts on the European Union countries. And in North America, the company will
target efforts in the Northeast, the Midwest, Texas, and California. Southern
Energy announced in 1998 plans to acquire, build, or gain access to some 20,000
megawatts of generating capacity in North America over the next several years in
order to be competitive in the country's evolving competitive energy supply
business. These assets will be closely linked with Southern Energy's energy
trading and marketing business. In January 1998, Southern Energy entered into a
joint venture with Vastar. The two companies combined their energy trading and
marketing operations to form a new full-service energy provider, Southern
Company Energy Marketing. The joint venture agreement gives Southern Company
Energy Marketing rights to market virtually all of Vastar's natural gas
production over the next 10 years.
In December 1998, Southern Energy completed its $537 million purchase of
1,267 megawatts of generating capacity from Commonwealth Electric. In addition,
Southern Energy plans to add 685 megawatts of capacity at the plants. In late
1998, Southern Energy announced the $801 million planned acquisition of 3,065
megawatts of generating capacity from Pacific Gas & Electric in northern
California. Additionally, the company announced plans to acquire from Orange and
Rockland Utilities Inc. and Consolidated Edison Inc. in New York 1,776 megawatts
of capacity for $480 million. These transactions are expected to close during
1999. Additionally, Southern Energy has announced plans to build or purchase an
additional 680 megawatts of capacity in Texas and Wisconsin. Through Southern
Company Energy Marketing, the company has also gained access to additional
capacity through marketing agreements. The company has access to almost
2,000 megawatts of capacity through marketing agreements with Sithe Energies in
New York and Brazos Electric Cooperative in Texas.
After refining its international focus and reviewing the financial
performance of existing assets, Southern Energy announced plans to sell its
holdings in EDELNOR in Chile and Alicura in Argentina. As a result, Southern
Energy recorded a write down of $200 million, after tax, in December 1998
related to these holdings. Because of regulatory and market conditions, these
assets did not meet earnings expectations.
Southern Company has filed with the Securities and Exchange Commission (SEC)
a request to invest up to nearly $8 billion in the non-traditional domestic and
international business. The current SEC authority is $3.9 billion, of which
$3.6 billion has been invested as of December 31, 1998.
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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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 staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry --including Southern Company's --
regarding the recognition, measurement, and classification in the financial
statements of decommissioning costs for nuclear generating facilities. In
response to these questions, the Financial Accounting Standards Board (FASB) has
decided to review the accounting for liabilities related to the retirement of
long-lived assets, including nuclear decommissioning. If the FASB issues new
accounting rules, the estimated costs of retiring 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 asset retirement
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.
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 Standards
The FASB has issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which must be adopted by the year 2000. This statement
establishes accounting and reporting standards for derivative instruments --
including certain derivative instruments embedded in other contracts -- and for
hedging activities. Southern Company has not yet quantified the impact of
adopting this statement on its financial statements; however, the adoption could
increase volatility in earnings and other comprehensive income.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued a new Statement of Position, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement requires
capitalization of certain costs of internal-use software. Southern Company
adopted this statement in January 1999, and it is not expected to have a
material impact on the consolidated financial statements.
In April 1998, the AICPA issued a new Statement of Position, Reporting on the
Cost of Start-up Activities. This statement requires that the costs of start-up
activities and organizational costs be expensed as incurred. Any of these costs
previously capitalized by a company must be written off in the year of adoption.
Southern Company adopted this statement in January 1999, and it is not expected
to have a material impact on the consolidated financial statements.
In December 1998, the Emerging Issues Task Force (EITF) of the FASB issued
EITF No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities. The EITF requires that energy trading contracts must be
marked to market through the income statement, with gains and losses reflected
rather than revenues and purchased power. Energy trading contracts are defined
as energy contracts entered into with the objective of generating profits on or
from exposure to shifts or changes in market prices. Southern Company adopted
the required accounting in January 1999, and it is not expected to have a
material impact on the consolidated financial statements.
Year 2000
Year 2000 Challenge
In order to save storage space, computer programmers in the 1960s and 1970s
shortened the year portion of date entries to just two digits. Computers
assumed, in effect, that all years began with "19." This practice was widely
adopted and hard-coded into computer chips and processors found in some
equipment. This approach, intended to save processing time and storage space,
was used until the mid-1990s. Unless corrected before the Year 2000, affected
software systems and devices containing a chip or microprocessor with date and
time functions could incorrectly process dates or the systems may cease to
function.
Southern Company depends on complex computer systems for many aspects of its
operations, which include generation, transmission, and distribution of
electricity, as well as other business support activities. Southern Company's
goal is to have critical devices or software that are required to maintain
operations to be Year 2000 ready by June 1999. Year 2000 ready means that a
system or application is determined suitable for continued use through the Year
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
2000 and beyond. Critical systems include, but are not limited to, reactor
control systems, safe shutdown systems, turbine generator systems, control
center computer systems, customer service systems, energy management systems,
and telephone switches and equipment.
Year 2000 Program and Status
Southern Company's executive management recognizes the seriousness of the Year
2000 challenge and has dedicated what it believes to be adequate resources to
address the issue. The Millennium Project is a team of employees, IBM
consultants, and other contractors whose progress is reviewed on a monthly basis
by a steering committee of Southern Company executives.
Southern Company's traditional business refers to the integrated utility
services within Alabama, Florida, Georgia, and Mississippi. For this traditional
business, the work was divided into two phases. Phase I began in 1996 and
consisted of identifying and assessing corporate assets related to software
systems and devices that contain a computer chip or clock. The first phase was
completed in June 1997. Phase 2 consists of testing and remediating high
priority systems and devices. Also, contingency planning is included in this
phase. Completion of Phase 2 is targeted for June 1999. The Millennium Project
will continue to monitor the affected computer systems, devices, and
applications into the Year 2000.
For the traditional business, Southern Company has completed more than 70
percent of the activities contained in its work plan. The percentage of
completion and projected completion by function are as follows:
Work Plan
- ----------------------------------------------------------------------
Remediation Project
Inventory Assessment Testing Completion
- ----------------------------------------------------------------------
Generation 100% 100% 70% 6/99
Energy
Management 100 100 90 6/99
Transmission and
Distribution 100 100 100 1/99
Telecommunications 100 100 50 6/99
Corporate
Applications 100 100 90 3/99
- ----------------------------------------------------------------------
For the non-traditional business located in the United States and several
countries throughout the world, Year 2000 readiness is generally scheduled to
follow the traditional business. In a number of the business units outside the
United States, Southern Company is neither the majority owner nor the managing
concern. In these circumstances, Southern Company is providing technical
assistance but does not control the schedule or progress.
Year 2000 Costs
For the traditional business, current projected total costs for Year 2000
readiness are approximately $91 million, which includes $6 million of cost
billed to non-affiliated companies. These costs include labor necessary to
identify, test, and renovate affected devices and systems. From its inception
through December 31, 1998, the Year 2000 program costs, recognized primarily as
expense, amounted to $56 million based on Southern Company's ownership interest.
In addition to the traditional business costs, current projections for Year 2000
program costs are approximately $24 million for the non-traditional business --
based on Southern Company's ownership interest -- of which $9 million has been
spent through December 31, 1998
Year 2000 Risks
Southern Company is implementing a detailed process to minimize the possibility
of service interruptions related to the Year 2000. The company believes, based
on current tests, that the system can provide customers with electricity. These
tests increase confidence, but do not guarantee error-free operations. The
company is taking what it believes to be prudent steps to prepare for the Year
2000, and it expects any interruptions in service that may occur within the
traditional business service territory to be isolated and short in duration.
Southern Company expects the risks associated with Year 2000 to be no more
severe than the scenarios that its electric system is routinely prepared to
handle. The most likely worst case scenario consists of the service loss of one
of the largest generating units and/or the service loss of any single bulk
transmission element in its traditional business service territory. The company
has followed a proven methodology for identifying and assessing software and
devices containing potential Year 2000 challenges. Remediation and testing of
those devices are in progress. Following risk assessment, Southern Company is
preparing contingency plans as appropriate and is participating in North
American Electric Reliability Council-coordinated national drills during 1999.
Southern Company is currently reviewing the Year 2000 readiness of material
third parties that provide goods and services crucial to Southern Company's
operations. Among such critical third parties are fuel, transportation,
telecommunications, water, chemical, and other suppliers. Contingency plans
based on the assessment of each third party's ability to continue supplying
critical goods and services to Southern Company are being developed.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
There is a potential for some earnings erosion caused by reduced electrical
demand by customers because of their own Year 2000 issues. The risk associated
with the progress of some operations outside the United States is a function of
the local regulatory environment and the priorities of the entities with
management control. Year 2000 issues are included in the list of due diligence
activities associated with acquisitions; there is some risk associated with the
subsequent validation of any given seller's representations.
Year 2000 Contingency Plans
Because of experience with hurricanes and other storms, the traditional business
is skilled at developing and using contingency plans in unusual circumstances.
As part of Year 2000 business continuity and contingency planning, Southern
Company is drawing on that experience to make risk assessments and is developing
additional plans to deal specifically with situations that could arise relative
to Year 2000 challenges. Southern Company is identifying critical operational
locations, and key employees will be on duty at those locations during the Year
2000 transition. In September 1999, drills are scheduled to be conducted to test
contingency plans. Because of the level of detail of the contingency planning
process, management feels that the contingency plans will keep any service
interruptions that may occur within the traditional business service territory
isolated and short in duration.
Contingency planning efforts for the non-traditional business are generally
in the initial phase.
FINANCIAL CONDITION
Overview
Southern Company's financial condition continues to remain strong. The company's
common stock closed 1998 with the highest year-end closing price in history.
Consolidated net income of $1.2 billion -- excluding non-recurring charges -- in
1998 increased $95 million compared with the prior year. In January 1999,
Southern Company modified its dividend policy to lower, over time, the
previously targeted payout ratio of approximately 75 percent. The quarterly
dividend declared was maintained at 33 1/2 cents per share or $1.34 annually.
This action allows more internally generated funds to be reinvested in the
company, which is expected to increase long-term shareholder value.
Gross property additions to utility plant were $2.0 billion in 1998. The
majority of funds needed for gross property additions since 1995 has been
provided from operating activities. Southern Energy acquired $670 million of
generating assets in 1998 and sold an additional 26 percent interest in its
United Kingdom subsidiary for $170 million. The Consolidated Statements of Cash
Flows provide additional details.
Derivative Financial Instruments
Southern Company is exposed to market risks, including changes in interest
rates, currency exchange rates, and certain commodity prices. To manage the
volatility attributable to these exposures, the company nets the exposures to
take advantage of natural offsets and enters into various derivative
transactions for the remaining exposures pursuant to the company's policies in
areas such as counterparty exposure and hedging practices. Generally, company
policy is that derivatives are to be used only for hedging purposes. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
The company's market risk exposures relative to interest rate changes and
currency exchange fluctuations, as discussed later, have not changed materially
versus the previous reporting period. In addition, the company is not aware of
any facts or circumstances that would significantly impact such exposures in the
near-term.
Interest rate swaps are used to hedge underlying debt obligations. These
swaps hedge specific debt issuances and qualify for hedge accounting. The
interest rate differential is reflected as an adjustment to interest expense
over the life of the instruments. Additionally, the company has interest rate
swaps in foreign currencies. These swaps are designated as hedges of the
company's related debt issuance in the same currency.
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, 1998. Based on the
company's overall interest rate exposure at December 31, 1998, 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 the United Kingdom and Germany. 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 the net
investments in these countries. As a result of these swaps, a 10 percent
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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 has investments in various emerging market countries where
the net investments are not hedged, including Argentina, Brazil, 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.
Based on availability and economics, the company also uses currency swaps and
forward agreements to hedge dollar-denominated debt issued by subsidiaries
with a functional currency other than the U.S. dollar. These swaps offset the
dollar cash flows, thereby effectively converting debt to the respective
company's reporting currency. Gains and losses related to qualified hedges of
foreign currency firm commitments are deferred and included in the basis of the
underlying transactions. To the extent that a qualifying hedge is terminated or
ceases to be effective as a hedge, any deferred gains and losses to that point
continue to be deferred and are included in the basis of the underlying
transaction.
In addition to the non-trading activities, the company is exposed to market
risks through its electricity and natural gas commodity trading business, which
is primarily conducted through the company's joint venture relationship with
Vastar. While this joint venture relationship is accounted for under the equity
method of accounting, Southern Company -- through guarantees it has made jointly
with Vastar -- is exposed to market risk. Southern Company and Vastar have
agreed to indemnify each other against losses under such guarantees in
proportion to their respective ownership shares of the joint venture. At
December 31, 1998, outstanding guarantees related to the estimated fair value
of net contractual commitments were approximately $152 million. Based upon the
joint venture's statistical analysis of its credit risk, Southern Company's
potential exposure under these contractual commitments would not materially
differ from the estimated fair value. The joint venture's gross revenues and
cost of sales for 1998 were $9.2 billion and $9.1 billion, respectively.
To estimate and manage the market risk of its trading and marketing
portfolio, the joint venture 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 employ a
95 percent confidence level based on historical price movement. Based on the
joint venture's VAR analysis of its overall commodity price risk exposure at
December 31, 1998, 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 allow the company to effectively
convert the majority of its anticipated wholesale electricity purchases from
market prices to fixed prices. The gains and losses on these contracts are
deferred and recognized as electricity is purchased. Recently, a market has
developed for trading these contracts in the United Kingdom. However, due to the
immaturity of this market and the complexity of the company's existing
contracts, 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, commodity fuel prices, 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, 1998, 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 Activities."
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
Capital Structure
Southern Company achieved a ratio of common equity to total capitalization --
including short-term debt -- of 37.4 percent in 1998, compared with 38.6 percent
in 1997, and 45.1 percent in 1996.
During 1998, the subsidiary companies sold, through public authorities, $210
million of pollution control revenue bonds. In addition, preferred stock of
$200 million and capital and preferred securities of $435 million were issued in
1998. The companies continued to reduce financing costs by retiring higher-cost
bonds and preferred stock. Retirements, including maturities, of bonds totaled
$1.7 billion during 1998, $507 million during 1997, and $600 million during
1996. As a result, the composite interest rate on long-term debt decreased from
7.1 percent at December 31, 1995 to 6.42 percent at December 31, 1998.
Retirements of preferred stock totaled $239 million during 1998, $660 million
during 1997, and $179 million during 1996.
In 1998, Southern Company raised net proceeds of $109 million from the
issuance of common stock under the company's various stock plans. At the close
of 1998, the company's common stock had a market value of 29 1/16 per share,
compared with a book value of $14.04 per share. The market-to-book value ratio
was 207 percent at the end of 1998, compared with 186 percent at year-end 1997,
and 166 percent at year-end 1996.
Capital Requirements for Construction
The construction program of Southern Company is budgeted at $2.6 billion for
1999, $2.1 billion for 2000, and $2.1 billion for 2001. 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 2,700 megawatts of combined cycle
generation scheduled to be placed in service by 2001. Southern Energy has under
construction some 1,300 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 $2.6
billion will be required by the end of 2001 for present improvement 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.
In late 1998, Southern Energy announced plans to acquire $801 million and
$480 million of generating assets in California and New York, respectively.
These transactions are expected to close in 1999.
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 $16 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
In July 1997, the Environmental Protection Agency (EPA) revised the national
ambient air quality standards for ozone and particulate matter. This revision
makes the standards significantly more stringent. In September 1998, the EPA
issued the final regional nitrogen oxide rules to the states for implementation.
The states have one year to adopt and implement the new rules. The final rules
affect 22 states including Alabama and Georgia. The EPA rules are being
challenged in the courts by several states and industry groups. Implementation
of the final state rules could require substantial further reductions in
nitrogen oxide emissions from fossil-fired generating facilities and other
industry in these states. Implementation of the standards could result in
significant additional compliance costs and capital expenditures that cannot be
determined until the results of legal challenges are known and the states have
adopted their final rules.
The EPA and state environmental regulatory agencies are reviewing and
evaluating various other matters including: nitrogen oxide emission control
strategies for ozone non-attainment areas; additional controls for hazardous air
pollutant emissions; control strategies to reduce regional haze; 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 $6 million in 1998 and $4 million in 1997. In 1996, the company was
reimbursed $6 million for amounts previously expensed. Additional sites may
require environmental remediation for which the subsidiaries may be liable for a
portion or all required cleanup costs. See Note 3 to the financial statements
for information regarding Georgia Power's potentially responsible party status
at a site in Brunswick, Georgia.
Several major pieces of environmental legislation are being considered for
reauthorization or amendment by Congress. These include: the Clean Air Act; the
Clean Water Act; the Comprehensive Environmental Response, Compensation, and
Liability Act; the Resource Conservation and Recovery Act; the Toxic Substances
Control Act; and the Endangered Species Act. Changes to these laws could affect
many areas of Southern Company's operations. The full impact of any such changes
cannot be determined at this time.
Compliance with possible additional legislation related to global climate
change, electromagnetic fields, and other environmental and health concerns
could significantly affect Southern Company. The impact of new legislation -- if
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 1999 -- 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 1999 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 sought and obtained stockholder approval in 1997 or 1998
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 $872 million of cash and cash equivalents and $4.6 billion of
unused credit arrangements with banks at the beginning of 1999.
Cautionary Statement Regarding Forward-Looking
Information
Southern Company's 1998 Annual Report contains forward-looking and historical
information. The company cautions that there are various important factors that
could cause actual results to differ materially from those indicated in the
forward-looking information; accordingly, there can be no assurance that such
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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; Year 2000 issues; 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.
14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997, and 1996
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
============================================================================================================================
(in millions)
Operating Revenues $11,403 $12,611 $10,358
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 2,371 2,281 2,245
Purchased power 1,243 3,033 1,103
Other 2,112 1,930 1,860
Maintenance 887 763 782
Depreciation and amortization 1,539 1,367 1,133
Taxes other than income taxes 599 572 634
Income taxes 678 725 747
Write down of South American assets (Note 5) 308 - -
Write down of Rocky Mountain plant (Note 3) 34 - -
Income tax benefit for write down of assets (121) - -
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 9,650 10,671 8,504
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 1,753 1,940 1,854
Other Income:
Interest income 243 152 54
Equity in earnings of unconsolidated subsidiaries 123 35 6
Other, net 57 24 40
Income tax benefits (expenses) applicable to other income 8 34 (10)
Windfall profits tax assessed in United Kingdom (Note 8) - (148) -
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Interest Charges 2,184 2,037 1,944
- -----------------------------------------------------------------------------------------------------------------------------
Interest Charges and Other:
Interest on long-term debt 712 678 530
Interest on notes payable 108 112 107
Amortization of debt discount, premium, and expense, net 65 34 33
Other interest charges 68 49 27
Minority interests in subsidiaries 80 29 13
Distributions on capital and preferred securities of subsidiary companies 149 120 22
Preferred dividends of subsidiary companies 25 43 85
- -----------------------------------------------------------------------------------------------------------------------------
Interest charges and other, net 1,207 1,065 817
- -----------------------------------------------------------------------------------------------------------------------------
Consolidated Net Income $ 977 $ 972 $ 1,127
=============================================================================================================================
Common Stock Data: (Note 9)
Average number of shares of common stock outstanding (in millions) 697 685 673
Basic and diluted earnings per share of common stock $1.40 $1.42 $1.68
Cash dividends paid per share of common stock $1.34 $1.30 $1.26
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
15
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
=============================================================================================================================
(in millions)
Operating Activities:
Consolidated net income $ 977 $ 972 $ 1,127
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Depreciation and amortization 1,773 1,592 1,338
Deferred income taxes and investment tax credits (22) (5) 57
Gain on asset sales (61) (25) (59)
Write down of South American assets 308 - -
Write down of Rocky Mountain plant 34 - -
Other, net (199) (64) 50
Changes in certain current assets and liabilities
excluding effects from acquisitions --
Receivables, net 151 (229) (25)
Fossil fuel stock (35) 53 57
Materials and supplies (10) 21 47
Accounts payable (17) 138 19
Other (151) 172 (210)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 2,748 2,625 2,401
- -----------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (2,005) (1,859) (1,229)
Southern Energy business acquisitions, net of cash acquired (998) (2,925) -
Sales of property 281 32 211
Other 86 (13) (275)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,636) (4,765) (1,293)
- -----------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Proceeds --
Common stock 234 360 171
Preferred stock 200 - -
Capital and preferred securities 435 1,321 322
First mortgage bonds - - 85
Other long-term debt 2,973 2,499 1,570
Redemptions --
Common stock repurchased (125) - -
Preferred stock (239) (660) (179)
First mortgage bonds (1,487) (168) (426)
Other long-term debt (599) (802) (1,754)
Increase (decrease) in notes payable, net (353) 509 (268)
Payment of common stock dividends (933) (889) (846)
Miscellaneous 53 126 (110)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities 159 2,296 (1,435)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 271 156 (327)
Cash and Cash Equivalents at Beginning of Year 601 445 772
- -----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 872 $ 601 $ 445
=============================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the year for --
Interest (net of amount capitalized) $998 $876 $677
Income taxes $839 $823 $706
Southern Energy business acquisitions --
Fair value of assets acquired $1,072 $4,768 $-
Less cash paid for common stock 998 2,925 -
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 74 $1,843 $-
=============================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
At December 31, 1998 and 1997
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C>
==============================================================================================================================
Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(in millions)
Utility Plant:
Plant in service (Note 1) $35,364 $34,044
Less accumulated provision for depreciation 13,239 11,934
- -----------------------------------------------------------------------------------------------------------------------------
22,125 22,110
Nuclear fuel, at amortized cost 217 230
Construction work in progress (Note 4) 1,782 1,312
- -----------------------------------------------------------------------------------------------------------------------------
Total 24,124 23,652
- -----------------------------------------------------------------------------------------------------------------------------
Other Property and Investments:
Goodwill, net of accumulated amortization of
$106 million in 1998 and $55 million in 1997 (Note 13) 2,067 1,888
Property rights, net of accumulated amortization of
$169 million in 1998 and $108 million in 1997 1,185 1,389
Equity investments in unconsolidated subsidiaries 1,560 1,168
Nuclear decommissioning trusts 516 387
Miscellaneous 644 742
- -----------------------------------------------------------------------------------------------------------------------------
Total 5,972 5,574
- -----------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 872 601
Special deposits 87 103
Receivables, less accumulated provisions for uncollectible accounts
of $113 million in 1998 and $77 million in 1997 1,797 2,007
Fossil fuel stock, at average cost 252 218
Materials and supplies, at average cost 515 493
Prepayments 102 98
Vacation pay deferred 81 79
- -----------------------------------------------------------------------------------------------------------------------------
Total 3,706 3,599
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes (Note 8) 1,036 1,142
Prepaid pension costs 491 383
Debt expense, being amortized 129 101
Premium on reacquired debt, being amortized 294 285
Miscellaneous 440 519
- -----------------------------------------------------------------------------------------------------------------------------
Total 2,390 2,430
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $36,192 $35,255
=============================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
17
<PAGE>
CONSOLIDATED BALANCE SHEETS (continued)
At December 31, 1998 and 1997
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C>
=============================================================================================================================
Capitalization and Liabilities 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(in millions)
Capitalization (See accompanying statements):
Common stock equity $ 9,797 $ 9,647
Preferred stock of subsidiaries 369 493
Company or subsidiary obligated mandatorily redeemable
capital and preferred securities 2,179 1,744
Long-term debt 10,472 10,274
- -----------------------------------------------------------------------------------------------------------------------------
Total 22,817 22,158
- -----------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Amount of securities due within one year 1,526 784
Notes payable 1,828 2,064
Accounts payable 1,027 1,049
Customer deposits 125 133
Taxes accrued --
Federal and state income 50 120
Other 299 259
Interest accrued 233 262
Vacation pay accrued 112 108
Miscellaneous 542 608
- -----------------------------------------------------------------------------------------------------------------------------
Total 5,742 5,387
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes (Note 8) 4,481 4,650
Deferred credits related to income taxes (Note 8) 715 746
Accumulated deferred investment tax credits 723 754
Employee benefits provisions 474 431
Minority interests in subsidiaries 535 435
Prepaid capacity revenues 96 110
Department of Energy assessments 64 72
Disallowed Plant Vogtle capacity buyback costs 54 56
Storm damage reserves 24 38
Miscellaneous 467 418
- -----------------------------------------------------------------------------------------------------------------------------
Total 7,633 7,710
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingent Matters (Notes 1, 2, 3, 4, 5, 7, 12, and 13)
Total Capitalization and Liabilities $36,192 $35,255
=============================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1998 and 1997
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
=================================================================================================================================
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Common Stock Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- 1998: 700 million shares
-- 1997: 693 million shares
Par value $ 3,499 $ 3,467
Paid-in capital 2,463 2,331
Treasury, at cost (Note 9) (58) -
Retained earnings (Note 9) 3,878 3,842
Accumulated other comprehensive income 15 7
- ------------------------------------------------------------------------------------------------------------------------------------
Total common stock equity 9,797 9,647 42.9% 43.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock of Subsidiaries:
$100 par or stated value --
4.20% to 7.00% 135 136
$25 par or stated value --
5.20% to 6.80% 200 131
Adjustable and auction rates -- at 1/1/99:
4.00% to 4.30% 120 226
- ------------------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $23 million) 455 493
Less amount due within one year 86 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total excluding amount due within one year 369 493 1.6 2.2
- ------------------------------------------------------------------------------------------------------------------------------------
Company or Subsidiary Obligated Mandatorily
Redeemable Capital and Preferred Securities (Note 10):
$25 liquidation value --
6.85% to 7.00% 235 -
7.13% to 7.38% 297 97
7.60% to 7.63% 415 415
7.75% 649 649
8.14% to 9.00% 583 583
- ------------------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $168 million) 2,179 1,744 9.6 7.9
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt of Subsidiaries:
First mortgage bonds --
Maturity Interest Rates
-------- --------------
1998 5.00% to 8.67% - 238
1999 6.13% to 8.67% 373 373
2000 6.00% to 8.67% 209 349
2001 8.67% 9 9
2002 6.85% to 8.67% 10 260
2003 6.13% to 8.67% 635 635
2004 through 2008 6.07% to 8.67% 197 372
2009 through 2013 8.67% 75 75
2014 through 2018 8.67% 56 56
2019 through 2023 7.30% to 8.75% 614 1,298
2024 through 2028 6.88% to 9.00% 287 287
</TABLE>
19
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At December 31, 1998 and 1997
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
===========================================================================================================================
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Other long-term debt --
Pollution control revenue bonds --
Collateralized:
4.38% to 6.75% due 2000-2026 954 1,154
Variable rates (3.10% to 5.25% at 1/1/99)
due 2011-2025 639 639
Non-collateralized:
6.75% to 7.25% due 2003-2020 110 110
5.80% due 2022 - 10
Variable rates (3.15% to 5.33% at 1/1/99)
due 2021-2037 880 670
Long-term notes payable --
5.21% to 11.00% due 1998-2002 - 481
6.13% to 11.00% due 1999-2002 437 -
5.35% to 10.00% due 2003-2004 361 47
5.49% to 10.50% due 2005 551 73
6.80% to 8.14% due 2006 582 578
7.16% to 10.25% due 2007 447 475
3.66% to 10.56% due 2008-2015 959 362
6.38% to 8.12% due 2018-2038 803 20
6.88% to 7.13% due 2047-2048 729 194
Adjustable rates (5.23% to 7.10% at 1/1/99)
due 1998-2001 397 710
Adjustable rates (6.58% at 1/1/99)
due 2002 793 847
Adjustable rates (3.96% at 1/1/99)
due 2004 516 478
Adjustable rates (6.93% to 7.57% at 1/1/99)
due 2005-2007 252 201
Capitalized lease obligations 135 142
Unamortized debt premium (discount), net (98) (85)
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $771 million) 11,912 11,058
Less amount due within one year (Note 11) 1,440 784
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding amount due within one year 10,472 10,274 45.9 46.4
- ---------------------------------------------------------------------------------------------------------------------------
Total Capitalization $22,817 $22,158 100.0% 100.0%
===========================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
20
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997, and 1996
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
=================================================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Consolidated Net Income $977 $972 $1,127
Other comprehensive income:
Foreign currency translation adjustments 12 (10) 31
Gain on investments realized in net income - - (42)
Less applicable income taxes (benefits) 4 (3) (4)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Comprehensive Income $985 $965 $1,120
==================================================================================================================================
CONSOLIDATED STATEMENTS OF PAID-IN CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996
=================================================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $2,331 $2,053 $1,920
Proceeds from sales of common stock over the par value -- 6.3 million,
16.4 million, and 7.5 million shares in 1998, 1997, and 1996, respectively 132 278 133
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $2,463 $2,331 $2,053
==================================================================================================================================
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1998, 1997, and 1996
==================================================================================================================================
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $3,842 $3,764 $3,483
Consolidated net income 977 972 1,127
- ----------------------------------------------------------------------------------------------------------------------------------
4,819 4,736 4,610
Cash dividends on common stock 933 889 846
Capital and preferred stock transactions, net 8 5 -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year (Note 9) $3,878 $3,842 $3,764
==================================================================================================================================
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997, and 1996
===================================================================================================================================
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
Balance at Beginning of Year $ 7 $14 $21
Change during the year 8 (7) (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $15 $ 7 $14
====================================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Southern Company and Subsidiary Companies 1998 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 LINC), 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 LINC 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 public service
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.
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:
1998 1997
- ---------------------------------------------------------------
(in millions)
Deferred income taxes $1,036 $1,142
Deferred Plant Vogtle costs - 50
Premium on reacquired debt 294 285
Demand-side programs - 11
Department of Energy assessments 57 63
Vacation pay 81 79
Deferred fuel charges - 4
Postretirement benefits 36 38
Work force reduction costs 17 37
Deferred income tax credits (715) (746)
Storm damage reserves (24) (36)
Other, net 145 152
- ---------------------------------------------------------------
Total $ 927 $1,079
===============================================================
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.
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 costs, the energy component of purchased power costs, and
22
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
certain other costs. Revenues are adjusted for differences between recoverable
fuel costs and amounts actually recovered in current rates.
Southern Company has a diversified base of customers. No single customer or
industry comprises 10 percent or more of revenues. For all periods presented,
uncollectible accounts continued to average less than 1 percent of revenues.
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 $133
million in 1998, $144 million in 1997, and $142 million in 1996. 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. The DOE failed to begin disposing of spent fuel in January 1998, as
required by the contracts, and the companies are pursuing legal remedies against
the government for breach of contract. Sufficient storage capacity currently is
available to permit operation into 2003 at Plant Hatch, into 2017 at Plant
Vogtle, and into 2009 and 2013 at Plant Farley units 1 and 2, respectively.
Plant Vogtle's spent fuel storage capacity includes the installation in 1998 of
additional rack capacity. 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, 1998, under this law to be approximately $31 million
and $24 million. 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 1998, 3.4 percent in 1997, and 3.3 percent in 1996. When property
subject to depreciation is retired or otherwise disposed of in the normal course
of business, its cost -- together with the cost of removal, less salvage -- is
charged to the accumulated provision for depreciation. Minor items of property
included in the original cost of the plant are retired when the related property
unit is retired. Depreciation expense includes an amount for the expected costs
of decommissioning nuclear facilities and removal of other facilities.
Georgia Power recorded additional depreciation of electric plant amounting to
$316 million in 1998, $159 million in 1997, and $24 million in 1996. The
accumulated depreciation related to these charges is $505 million at December
31, 1998. See Note 3 under "Georgia Power 1998 Retail Rate 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 specific
facility as of its retirement date. The estimated costs of decommissioning --
both site study costs and ultimate costs -- based on the most current study as
23
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
of December 31, 1998, 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) 1998 1997 1997
Decommissioning periods:
Beginning year 2017 2014 2027
Completion year 2031 2027 2038
- ---------------------------------------------------------------
(in millions)
Site study costs:
Radiated structures $629 $372 $317
Non-radiated structures 60 33 44
- ---------------------------------------------------------------
Total $689 $405 $361
===============================================================
(in millions)
Ultimate costs:
Radiated structures $1,868 $722 $ 922
Non-radiated structures 178 65 129
- ----------------------------------------------------------------
Total $2,046 $787 $1,051
================================================================
Significant assumptions:
Inflation rate 4.5% 3.6% 3.6%
Trust earning rate 7.0 6.5 6.5
- ----------------------------------------------------------------
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.
Annual provisions for nuclear decommissioning are based on an annuity method
as approved by the respective state public service commissions. The amount
expensed in 1998 and fund balances were as follows:
Plant Plant Plant
Farley Hatch Vogtle
- ---------------------------------------------------------------
(in millions)
Amount expensed in 1998 $ 18 $ 11 $ 9
Accumulated provisions:
Balance in external trust
funds $232 $172 $112
Balance in internal reserves 42 19 12
- ---------------------------------------------------------------
Total $274 $191 $124
===============================================================
Alabama Power's decommissioning costs for ratemaking are based on the site
study. For Georgia Power effective January 1, 1999, the GPSC increased the
annual provision for decommissioning expenses to $26 million. This amount is
based on the NRC generic estimate to decommission the radioactive portion of the
facilities as of 1997. The estimates are $526 million and $438 million for
plants Hatch and Vogtle, respectively. The ultimate costs associated with the
1997 NRC minimum funding requirements are $1.1 billion and $1.3 billion for
plants Hatch and Vogtle, respectively. Significant assumptions include an
estimated inflation rate of 3.6 percent and an estimated trust earnings rate of
6.5 percent. 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.
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.
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.
Property Rights
Included in property rights are leasehold interests in 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. Also included in property rights is a concession agreement
assigned in 1993 by the Argentine government to Southern Energy for the
operation of a hydroelectric plant.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, temporary cash
investments are considered cash equivalents. Temporary cash investments are
securities with original maturities of 90 days or less.
24
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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.
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 other comprehensive income. The financial
statements of international operations, where the U.S. dollar is the functional
currency, reflect certain transactions denominated in the local currency that
have been remeasured in U.S. dollars. The remeasurement of local currencies into
U.S. dollars creates gains and losses from foreign currency transactions that
are included in consolidated net income. Foreign exchange gains and losses are
not material for all periods presented.
Comprehensive Income
In 1998, Southern Company adopted FASB Statement No. 130, Reporting
Comprehensive Income. This statement establishes rules for the reporting and
display of comprehensive income and its components. Comprehensive income
consists of net income and foreign currency translation adjustments and is
presented in the consolidated financial statements. The objective of the
statement is to report a measure of all changes in common stock equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners.
Financial Instruments for Non-Trading Activities
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 currency 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 investments, are offset against the
translation effects reflected in other comprehensive income, net of tax.
Non-trading financial derivative instruments held at December 31, 1998, were
as follows:
Year of Unrecognized
Maturity or Notional Gain
Type Termination Amount (Loss)
- ------------------------------- ----------------------------
(in millions)
Interest rate
swaps: 2002-2016 $928 $(69)
2001-2012 (pound)600 $(130)
2002-2007 DM691 $(30)
Cross currency
swaps 2001-2007 (pound)429 $11
Cross currency
swaption 2003 DM555 $(18)
- ----------------------------------------------------------------
(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 is
unaware of any counterparties that will 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 allow the company to effectively
convert the majority of its anticipated wholesale electricity purchases from
market prices to fixed prices. The gains and losses on these contracts are
deferred and recognized as electricity is purchased. Recently, a market has
developed for trading these contracts in the United Kingdom. However, due to the
immaturity of this market and the complexity of the company's existing
contracts, it is not practicable to estimate the fair value of these contracts.
25
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 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, 1998 $11,777 $11,626
At December 31, 1997 10,916 11,160
Capital and preferred securities:
At December 31, 1998 2,179 2,288
At December 31, 1997 1,744 1,826
- ----------------------------------------------------------------
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 Activities
Effective in January 1998, Southern Energy and Vastar Resources, Inc. (Vastar)
combined their energy trading and marketing activities to form a joint venture.
Southern Energy's investment in the joint venture is accounted for under the
equity method of accounting. See Note 5 under "Energy Trading and Marketing
Commitments" for additional information. Financial statement disclosure related
to Southern Energy's energy trading and marketing activities for 1997 -- prior
to the formation of the joint venture was presented as follows:
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 were 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 were 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 were recognized for
consolidated balance sheet and income statement purposes.
In 1997, the company provided 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 had widely varying terms and durations that ranged from a few hours
to a number of years depending on the instrument. The majority of the company's
transactions at December 31, 1997, were short-term in duration, with a weighted
average maturity of approximately 1.3 years.
All contractual commitments used for trading purposes were recorded at fair
value. Contracts in a net receivable position, as well as options held, were
reported as assets. Similarly, contractual commitments in a net payable
position, as well as options written, were reported as liabilities. The net
unrealized gain from risk management services amounted to $8 million at December
31, 1997. Contractual commitments reflected in the Consolidated Balance Sheets
at December 31, 1997 were as follows:
Net
Notional Fair Value
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
===============================================================
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.
26
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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
- -----------------------------------------------------------------
2. RETIREMENT BENEFITS
Southern Company has defined benefit, trusteed, pension plans that cover
substantially all employees. 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. In 1998, Southern Company adopted FASB Statement No.
132 Employers' Disclosure about Pensions and Other Postretirement Benefits. The
measurement date is September 30 for each year.
Pension Plans
Changes during the year in the projected benefit obligations and in the fair
value of plan assets were as follows:
Projected
Benefit Obligations
---------------------
1998 1997
- ----------------------------------------------------------------
(in millions)
Balance at beginning of year $3,701 $3,624
Service cost 99 94
Interest cost 273 271
Benefits paid (201) (163)
Actuarial (gain) loss 298 (125)
- ----------------------------------------------------------------
Balance at end of year $4,170 $3,701
================================================================
Plan Assets
--------------------
1998 1997
- ---------------------------------------------------------------
(in millions)
Balance at beginning of year $5,931 $5,212
Actual return on plan assets 223 911
Employer contributions 4 9
Benefits paid (180) (201)
- ---------------------------------------------------------------
Balance at end of year $5,978 $5,931
===============================================================
The accrued pension costs recognized in the Consolidated Balance Sheet were
as follows:
1998 1997
- ----------------------------------------------------------------
(in millions)
Funded status $ 1,808 $ 2,230
Unrecognized transition obligation (89) (101)
Unrecognized prior service cost 119 126
Unrecognized net gain (1,347) (1,874)
Fourth quarter contributions - 2
- ----------------------------------------------------------------
Prepaid asset recognized in the
Consolidated Balance Sheets $ 491 $ 383
================================================================
Components of the plans' net periodic cost were as follows:
1998 1997 1996
- ----------------------------------------------------------------
(in millions)
Service cost $ 99 $ 94 $ 99
Interest cost 273 271 267
Expected return on
plan assets (425) (394) (378)
Recognized net gain (47) (42) (29)
Net amortization (9) (9) (12)
- ----------------------------------------------------------------
Net pension cost (income) $(109) $ (80) $ (53)
================================================================
The weighted average rates assumed in the actuarial calculations for both
the pension plans and postretirement benefits were:
1998 1997
- -----------------------------------------------------------------
Discount 6.75% 7.50%
Annual salary increase 4.25 5.00
Long-term return on plan assets 8.50 8.50
- -----------------------------------------------------------------
Postretirement Benefits
Changes during the year in the projected benefit obligations and in the fair
value of plan assets were as follows:
Projected
Benefit Obligations
------------------
1998 1997
- ----------------------------------------------------------------
(in millions)
Balance at beginning of year $ 935 $870
Service cost 18 18
Interest cost 69 67
Benefits paid (35) (27)
Actuarial (gain) loss 50 7
- ----------------------------------------------------------------
Balance at end of year $1,037 $935
================================================================
27
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
Plan Assets
---------------------
1998 1997
- ----------------------------------------------------------------
(in millions)
Balance at beginning of year $294 $260
Actual return on plan assets 8 32
Employer contributions 69 29
Benefits paid (35) (27)
- ----------------------------------------------------------------
Balance at end of year $336 $294
=================================================================
The accrued postretirement costs recognized in the Consolidated
Balance Sheet were as follows:
1998 1997
- -----------------------------------------------------------------
(in millions)
Funded status $(701) $(641)
Unrecognized transition obligation 219 233
Unrecognized prior service cost - (4)
Unrecognized net loss (gain) 117 68
Fourth quarter contributions 30 41
- -----------------------------------------------------------------
Accrued liability recognized in the
Consolidated Balance Sheets $(335) $(303)
=================================================================
Components of the plans' net periodic cost were as follows:
1998 1997 1996
- -----------------------------------------------------------------
(in millions)
Service cost $ 18 $ 18 $ 20
Interest cost 69 66 60
Expected return on
plan assets (21) (18) (14)
Recognized net gain 2 3 3
Net amortization 14 17 15
- --------------------------------------------------------------
Net postretirement cost $ 82 $ 86 $ 84
==============================================================
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of
8.30 percent for 1998, decreasing gradually to 4.75 percent through the year
2005, and remaining at that level thereafter. An annual increase or decrease
in the assumed medical care cost trend rate of 1 percent would affect the
accumulated benefit obligation and the service and interest cost components at
December 31, 1998 as follows:
1 Percent 1 Percent
Increase Decrease
- ----------------------------------------------------------------
(in millions)
Benefit obligation $75 $(63)
Service and interest costs 7 (6)
- ----------------------------------------------------------------
Work Force Reduction Programs
Southern Company has incurred additional costs for work force reduction
programs. The costs related to these programs were $32 million, $50 million, and
$85 million, for the years 1998, 1997, and 1996, respectively. In addition,
certain costs of these programs were deferred and are being amortized in
accordance with regulatory treatment. The unamortized balance of these costs was
$17 million at December 31, 1998.
3. LITIGATION AND REGULATORY MATTERS
Alabama Power Appliance Warranty Litigation
In 1996, a class action against Alabama Power was filed 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. The plaintiffs seek damages in 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 trial court has granted partial summary
judgment in favor of the plaintiffs. Alabama Power has appealed this decision to
the Supreme Court of Alabama. The final outcome of this case cannot now be
determined.
Alabama Power Environmental Litigation
On November 30, 1998, total judgments of nearly $53 million were entered in
favor of five plaintiffs against Alabama Power and two large textile
manufacturers. The plaintiffs alleged that the manufacturers had discharged
certain polluting substances into a stream that empties into Lake Martin, a
hydroelectric reservoir owned by Alabama Power, and that such discharges had
reduced the value of the plaintiffs' residential lots on Lake Martin. Of the
total amount of the judgments, $155 thousand was compensatory damages and the
remainder was punitive damages. The damages were assessed against all three
defendants jointly. Post-trial motions have been filed, and, if relief is not
granted at the trial court level, Alabama Power will appeal these judgments to
the Supreme Court of Alabama. While Alabama Power believes that these judgments
should be reversed or set aside, the final outcome of this matter cannot now be
determined.
28
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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, 1998, Georgia Power had recorded approximately $5 million in
cumulative expenses associated with the site. This represents Georgia Power's
agreed-upon share of the 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.
FERC Review of Equity Returns
On September 21, 1998, the FERC entered separate orders affirming the outcome
of the administrative law judge's opinions in two proceedings in which the
return on common equity component of formula rates contained in substantially
all of the operating companies' wholesale power contracts was being challenged
as unreasonably high. These orders resulted in no change in the wholesale power
contracts that were the subject of such proceedings. The FERC also dismissed a
complaint filed by three customers under long-term power sales agreements
seeking to lower the equity return component in such agreements. These customers
have filed applications for rehearing regarding each FERC order. In response to
a requirement of the September 1998 FERC orders, Southern Company filed a new
equity return component on the long-term power sales contracts, to be effective
January 5, 1999. The proposed equity return was lowered from 13.75 percent to
12.50 percent. If the filed equity return is approved, the estimated impact on
Southern Company's revenues will be approximately $7 million annually. The FERC
placed the new rates into effect subject to refund. Also, this filing was
consolidated with the new proceeding discussed below.
On December 28, 1998, the FERC staff filed a motion asking the FERC to
initiate a new proceeding regarding the equity return and other issues involving
the operating companies' formula rate contracts. The motion was submitted
pursuant to review procedures applicable to these contracts, and would be
applicable to billings under such contracts on and after January 1, 1999.
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 received final approval by the Joint Congressional Committee
on Taxation in June 1998 and as a result, Alabama Power and Georgia Power
recognized interest income in 1998 of $14 million and $69 million, respectively.
The refund by the IRS has been received and this matter is now concluded.
Mobile Energy Services Petition for Bankruptcy
On January 14, 1999, Mobile Energy Services Company, LLC (MESC) -- an indirect
subsidiary of Southern Company -- filed a petition for Chapter 11 bankruptcy
relief in the U.S. Bankruptcy Court for the Southern District of Alabama. MESC
is the owner and operator of a facility that generates electricity, produces
steam, and processes black liquor as part of a pulp and paper complex in Mobile,
Alabama. This action is in response to Kimberly-Clark Tissue Company's
announcement in May 1998 of plans to close its pulp mill, effective September 1,
1999. As a part of the filing, MESC also is seeking payment for damages from
Kimberly-Clark Tissue Company. MESC will continue to operate the facility as
debtors-in possession, subject to the supervision and orders of the bankruptcy
court. A reorganization plan has not yet been filed by MESC.
Southern Company's equity investment in MESC was $20 million and MESC's total
assets were $392 million at December 31, 1998. MESC contributed $4 million and
$6 million to consolidated net income in 1998 and 1997, respectively. At
December 31, 1998, MESC had senior debt outstanding of $234 million of first
mortgage bonds and $85 million related to tax-exempt bonds. MESC paid in
January 1999 its regular semi-annual payment of $17 million to its bondholders.
The final outcome of this matter cannot now be determined.
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 percent to 14.5 percent and limit increases or decreases in rates to 4
percent in any calendar year.
29
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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. In 1998,
Alabama Power -- in accordance with the 1995 rate order -- recorded $33 million
of additional amortization of premium on reacquired debt.
The ratemaking procedures will remain in effect until the APSC votes to
modify or discontinue them.
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 $142 million investment in rate base as of December 31, 1998. In
December 1998, Georgia Power recorded a write down of $34 million -- $21 million
after taxes -- on its investment in Rocky Mountain as a result of the GPSC's
1998 retail rate order discussed later. This matter is now concluded.
Georgia Power 1998 Retail Rate Order
As required by the GPSC, Georgia Power filed a general rate case in 1998. On
December 18, 1998, the GPSC approved a new three-year rate order for Georgia
Power. Under the terms of the order, Georgia Power's earnings will continue to
be evaluated against a retail return on common equity range of 10 percent to
12.5 percent. Georgia Power's annual retail rates will be decreased by
$262 million effective January 1, 1999, and by an additional $24 million
effective January 1, 2000. The order further provides for $85 million each year,
and up to an additional $50 million annually in 2000 and 2001 of any earnings in
excess of the 12.5 percent return, to be applied to accelerated amortization or
depreciation of assets. Two-thirds of any additional earnings in excess of the
12.5 percent return in any year will be applied to rate reductions and the
remaining one-third retained by Georgia Power. During the term of the order,
Georgia Power will not file for a general base rate increase unless its
projected retail return on common equity falls below 10 percent. Georgia Power
is required to file a general rate case on July 1, 2001. At that time, the GPSC
would be expected to determine whether the rate order should be continued,
modified, or discontinued.
4. CONSTRUCTION PROGRAM
Southern Company is engaged in continuous construction programs, currently
estimated to total some $2.6 billion in 1999, $2.1 billion in 2000, and
$2.1 billion in 2001. 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; acquisition of additional generating assets; 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, 1998, significant
purchase commitments were outstanding in connection with the construction
program. The operating companies have approximately 2,700 megawatts of combined
cycle generation scheduled to be placed in service by 2001. Southern Energy has
under construction some 1,300 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. INVESTMENTS, FINANCING, AND
COMMITMENTS
Investments
In December 1998, Southern Energy designed and implemented a plan to dispose of
its Argentinean and Chilean investments by December 31, 1999. As a result,
30
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
Southern Energy recorded an after-tax write down of approximately $200 million
in 1998 to reflect the difference between the carrying value of these assets
and the estimated fair value of the businesses. Southern Energy estimated the
fair value of the businesses held for sale based upon bids received from
prospective buyers, if available, or the discounted expected future cash flows
to be generated by the assets. The adjusted carrying value of these assets held
for disposal at December 31, 1998 was $90 million. These assets impacted the
Consolidated Statements of Income as follows:
Operating Operating Consolidated
Year Revenues Income Net Income
- ---- ---------------------------------------------
1998 $180 $39 $ 5
1997 180 38 5
1996 157 20 (5)
Depreciation expense was suspended beginning January 1999, and the after-tax
amount of depreciation recorded in 1998 was $16 million. Southern Energy is
actively pursuing and/or negotiating with potential buyers. However at this
time, a definitive agreement has not been entered into.
Southern Energy acquired $670 million of generating assets in 1998 and sold
an additional 26 percent interest in its United Kingdom subsidiary for $170
million. In late 1998, Southern Energy announced plans to acquire $801 million
and $480 million of generating assets in California and New York, respectively.
These transactions are expected to close in 1999. At December 31, 1998, Southern
Energy's total assets amounted to $12 billion.
Financing
The amount and timing of additional equity capital to be raised in 1999 -- 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 1999, unused credit arrangements with banks totaled $4.6
billion, of which $2.7 billion expires during 1999, $304 million during 2000 to
2001, $1.0 billion during 2002, and $593 million during 2003 and 2004. The
following table outlines the credit arrangements by company:
Amount of Credit
-----------------------------------------
Expires
--------------------
2000 &
Company Total Unused 1999 beyond
- -------- -----------------------------------------
(in millions)
Alabama Power $ 758 $ 758 $ 678 $ 80
Georgia Power 1,252 1,252 722 530
Gulf Power 103 97 97 -
Mississippi Power 96 76 56 20
Savannah Electric 61 61 41 20
Southern Company 2,000 2,000 1,000 1,000
Southern Energy 907 340 71 269
Other 70 54 54 -
- -----------------------------------------------------------------
Total $5,247 $4,638 $2,719 $1,919
=================================================================
Approximately $2.0 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 the total $4.6 billion in unused credit, $1.7 billion and $1.0
billion are syndicated credit arrangements of Southern Company and Georgia
Power, respectively. These facilities also require the payment of agent fees.
A portion of the $4.6 billion unused credit with banks is allocated to
provide liquidity support to the companies' variable rate pollution control
bonds. At December 31, 1998, the amount of the credit lines allocated for this
purpose was $1.4 billion.
In addition, the companies from time to time borrow under uncommitted lines
of credit with banks. Also, Southern Company, Alabama Power, Georgia Power, and
Southern Energy borrow through commercial paper programs that have the liquidity
support of committed bank credit arrangements.
31
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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.
Also, Southern Company has entered into various long-term commitments for the
purchase of electricity. Total estimated long-term obligations at December 31,
1998, were as follows:
Purchased
Year Fuel Power
- ----- ----------------------------
(in millions)
1999 $1,674 $ 161
2000 1,248 168
2001 1,048 170
2002 860 173
2003 824 177
2004 and thereafter 3,464 1,522
- ----------------------------------------------------------------
Total commitments $9,118 $2,371
================================================================
Operating Leases
Southern Company has operating lease agreements with various terms and
expiration dates. These expenses totaled $50 million, $33 million, and $25
million for 1998, 1997, and 1996, respectively. At December 31, 1998, estimated
minimum rental commitments for noncancelable operating leases were as follows:
Year Amounts
- ----- ---------
(in millions)
1999 $ 46
2000 39
2001 31
2002 30
2003 29
2004 and thereafter 304
- ---------------------------------------------------------------
Total minimum payments $479
===============================================================
Energy Trading and Marketing Commitments
In January 1998, Southern Energy and Vastar combined their energy trading and
marketing activities to form a joint venture, Southern Company Energy Marketing
(SCEM). Southern Company and Vastar have separately made guarantees to certain
counterparties regarding performance of contractual commitments by the joint
venture. Southern Company and Vastar have agreed to indemnify each other against
losses under such guarantees in proportion to their respective ownership shares
of SCEM. Southern Company's ownership interest is 60 percent. At December 31,
1998, outstanding guarantees related to the estimated fair value of net
contractual commitments were approximately $152 million. Based upon the SCEM's
statistical analysis of its credit risk, Southern Company's potential exposure
under these contractual commitments would not materially differ from the
estimated fair value. SCEM's gross revenues and cost of sales for 1998 were $9.2
billion and $9.1 billion, respectively.
Southern Energy has guaranteed certain minimum annual cash distributions,
subject to exclusions, payable by SCEM to Vastar. These distributions before
adjustments total $105 million for the period 1999-2002.
Vastar has the right -- exercisable in the period from December 1, 2002
through the first business day of 2003 -- to sell its remaining interest in SCEM
to Southern Energy. The price will range from $130 million to $210 million
depending on the interest owned by Vastar at that time, plus certain other
contractual considerations.
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 other subsidiaries.
6. FACILITY SALES AND JOINT OWNERSHIP
AGREEMENTS
Alabama Power owns an undivided interest in units 1 and 2 of Plant Miller and
related facilities jointly with Alabama Electric Cooperative, Inc.
Georgia Power owns undivided interests in plants Vogtle, Hatch, Scherer, and
Wansley in varying amounts, together with transmission facilities, jointly with
OPC, the Municipal Electric Authority of Georgia, and the city of Dalton,
Georgia. In addition, Georgia Power has joint ownership agreements with OPC for
32
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
the Rocky Mountain project and with Florida Power Corporation (FPC) for a
combustion turbine unit at Intercession City, Florida.
At December 31, 1998, 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
--------- ------------ ----------------
(in millions)
Plant Vogtle
(nuclear) 45.7% $3,296 $1,514
Plant Hatch
(nuclear) 50.1 840 538
Plant Miller
(coal)
Units 1 and 2 91.8 717 330
Plant Scherer
(coal)
Units 1 and 2 8.4 112 48
Plant Wansley
(coal) 53.5 298 141
Rocky Mountain
(pumped storage) 25.4 169 61
Intercession City
(combustion turbine) 33.3 12 *
- -----------------------------------------------------------------
*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 $196 million in 1998, $203 million in 1997, and
$217 million in 1996.
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 in 1999. Thereafter, these sales
will decline to some 1,500 megawatts and remain at that approximate level --
unless reduced by FP&L, FPC, and JEA for the periods after 1999 with a minimum
of three years notice -- until the expiration of the contracts in 2010.
8. INCOME TAXES
At December 31, 1998, the tax-related regulatory assets and liabilities were
$1.0 billion and $715 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:
1998 1997 1996
- ---------------------------------------------------------------
(in millions)
Total provision for income taxes:
Federal --
Currently payable $ 451 $ 547 $569
Deferred -- current year 195 188 116
-- reversal of
prior years (208) (160) (74)
- ---------------------------------------------------------------
438 575 611
- ---------------------------------------------------------------
State --
Currently payable 106 104 82
Deferred -- current year 28 15 23
-- reversal of
prior years (31) (19) (9)
- ---------------------------------------------------------------
103 100 96
- ---------------------------------------------------------------
International --
Windfall profits tax
assessed in United Kingdom - 148 -
Other 8 16 50
- ---------------------------------------------------------------
Total 549 839 757
Less income taxes charged
(credited) to other income (8) 114 10
- ---------------------------------------------------------------
Total income taxes charged
to operations $ 557 $ 725 $747
===============================================================
The first half of the windfall profits tax assessed in the United Kingdom was
paid in December 1997, and the remainder in December 1998.
33
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities, are as follows:
1998 1997
- ---------------------------------------------------------------
(in millions)
Deferred tax liabilities:
Accelerated depreciation $3,315 $3,345
Property basis differences 1,667 1,756
Other 403 269
- ---------------------------------------------------------------
Total 5,385 5,370
- ---------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 104 108
Other property basis differences 239 245
Deferred costs 132 116
Pension and other benefits 79 72
Other 293 197
- ---------------------------------------------------------------
Total 847 738
- ---------------------------------------------------------------
Net deferred tax liabilities 4,538 4,632
Portion included in current assets, net (57) 18
- ---------------------------------------------------------------
Accumulated deferred income taxes
in the Consolidated Balance Sheets $4,481 $4,650
===============================================================
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 $38 million in 1998, $30 million in 1997, and $33 million in
1996. At December 31, 1998, all investment tax credits available to reduce
federal income taxes payable had been utilized.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
1998 1997 1996
- ----------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income tax,
net of federal deduction 4.1 3.4 3.2
Non-deductible book
depreciation 4.1 2.3 1.8
International tax credits (6.4) - -
Windfall profits tax - 8.0 -
Difference in prior years'
deferred and current tax rate (1.3) (1.5) (1.0)
Other (1.8) (1.9) (0.5)
- ----------------------------------------------------------------
Effective income tax rate 33.7% 45.3% 38.5%
================================================================
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.
The undistributed earnings of certain foreign subsidiaries aggregated $251
million as of December 31, 1998, which, under existing tax law, will not be
subject to U.S. income tax until distributed. Because the earnings have been or
are intended to be indefinitely reinvested, no provision has been made for any
taxes that may be applicable. It is not practicable to estimate the amount of
unrecognized deferred U.S. income taxes on undistributed earnings.
9. COMMON STOCK
Treasury Stock
In July 1998, Southern Company's Board of Directors authorized the company to
make open market purchases of its common stock in an aggregate amount not to
exceed $300 million through March 31, 1999. The purpose of the program is to
provide shares of common stock for the purchase requirements of Southern
Company's various stockholder, employee, and outside director stock purchase
plans. Under the program, 4.4 million shares have been repurchased and 2.4
million shares were reissued through December 31, 1998.
Shares Reserved
At December 31, 1998, a total of 45 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
As of December 31, 1998, 302 current and former employees participated in the
Performance Stock 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. 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
34
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
Company Board of Directors in accordance with the plan. Stock option activity in
1997 and 1998 for the plan is summarized below:
Shares Average
Subject Option Price
To Option Per Share
- --------------------------------------------------------------
Balance at December 31, 1996 3,825,164 $21.11
Options granted 1,776,094 21.25
Options canceled (64,326) 22.10
Options exercised (137,426) 19.72
- --------------------------------------------------------------
Balance at December 31, 1997 5,399,506 21.15
Options granted 1,659,519 27.03
Options canceled (23,495) 23.18
Options exercised (603,195) 20.92
- --------------------------------------------------------------
Balance at December 31, 1998 6,432,335 $23.92
==============================================================
Shares reserved for future grants:
At December 31, 1996 668,062
At December 31, 1997 38,241,376
At December 31, 1998 36,598,001
- --------------------------------------------------------------
Options exercisable:
At December 31, 1997 2,006,511
At December 31, 1998 2,653,591
- --------------------------------------------------------------
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
FASB Statement No. 128, Earnings per Share 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
--------------------------------
1998 1997 1996
- ---------------------------------------------------------------
(in thousands)
As reported shares 696,944 685,033 672,590
Effect of options 739 201 200
- ---------------------------------------------------------------
Diluted shares 697,683 685,234 672,790
===============================================================
Common Stock Dividend Restrictions
The income of Southern Company is derived primarily from equity in earnings of
its subsidiaries. At December 31, 1998, consolidated retained earnings included
$3.4 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
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, 1998, capital securities of
$950 million and preferred securities of $1.2 billion were outstanding. Southern
Company guarantees the notes related to $950 million of capital securities
issued on its behalf.
11. 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:
1998 1997
- ---------------------------------------------------------------
(in millions)
Bond improvement fund requirements $ 23 $ 38
Less:
Portion to be satisfied by certifying
property additions 14 3
- ---------------------------------------------------------------
Cash requirements 9 35
First mortgage bond maturities
and redemptions 868 349
Other long-term debt maturities 563 400
- ---------------------------------------------------------------
Total $1,440 $784
===============================================================
The first mortgage bond improvement fund requirements amount to 1 percent of
each outstanding series of bonds authenticated under the indentures prior to
35
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
January 1 of each year, other than those issued to collateralize pollution
control revenue bonds 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.
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.
Improvement fund requirements and/or serial maturities through 2003
applicable to other long-term debt are as follows: $563 million in 1999; $385
million in 2000; $433 million in 2001; $1,035 million in 2002; and $387 million
in 2003.
12. 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
$9.7 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 $88 million per incident for each licensed reactor it operates, but not more
than an aggregate of $10 million per incident to be paid in a calendar year for
each reactor. Such maximum assessment, excluding any applicable state premium
taxes, for Alabama Power and Georgia Power -- based on its ownership and buyback
interests -- is $176 million and $178 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.
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 current maximum annual assessments for Alabama Power and Georgia
Power under the three NEIL policies would be $21 million and $25 million,
respectively.
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.
13. PURCHASE METHOD ACQUISITION
Southern Energy 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 CEPA
36
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
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 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.
These unaudited pro forma results are not necessarily indicative of the
actual results that would have been realized had the acquisition 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:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
----------------------------------------------------------
As Pro As Pro
Reported Forma Reported Forma
- -----------------------------------------------------------------------------------------------------
Operating revenues (in millions) $12,611 $12,632 $10,358 $10,506
Consolidated net income (in millions) $972 $977 $1,127 $1,109
Earnings per share $1.42 $1.43 $1.68 $1.65
</TABLE>
14. 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 to retail and wholesale customers 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 for 1997 and 1996. Intersegment revenues are not material.
Financial data for business segments, products and services, and geographic
areas are as follows:
Business Segments
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Regulated Southern Energy
Domestic Non-Traditional Services All
Electric ------------------------------------------ Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- ---- ------------- -----------------------------------------------------------------------------------
(in millions)
1998
- -----
Operating revenues $ 9,363 $1,766 $ 137 $ 1,903 $ 166 $ (29) $11,403
Depreciation and amortization 1,289 216 18 234 16 - 1,539
Interest income 150 86 61 147 57 (111) 243
Net interest charges 654 318 91 409 97 (58) 1,102
Income taxes from operations 721 (123) (4) (127) (18) (19) 557
Writedown of generating assets 34 308 - 308 - - 342
Net income from equity
method subsidiaries 2 126 (5) 121 - - 123
Segment net income (loss) 1,083 23 16 39 (110) (35) 977
Total assets 24,476 9,578 2,869 12,447 1,428 (2,159) 36,192
Investments in equity
method subsidiaries 10 1,363 176 1,539 - 11 1,560
Gross property additions 1,298 586 63 649 58 - 2,005
Increase in goodwill - 30 200 230 - - 230
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Regulated Southern Energy
Domestic Non-Traditional Services All
Electric ---------------------------------------- Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- ----- ---------------------------------------------------------------------------------------------------
(in millions)
1997
- ----
Operating revenues $ 8,688 $1,748 $2,089 $ 3,837 $ 98 $ (12) $12,611
Depreciation and amortization 1,156 179 15 194 17 - 1,367
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 1 41 7 48 - (14) 35
Segment net income (loss) 1,105 (4) 5 1 (123) (11) 972
Total assets 24,555 9,225 1,832 11,057 1,224 (1,581) 35,255
Investments in equity
method subsidiaries 10 1,023 135 1,158 - - 1,168
Gross property additions 1,080 720 1 721 58 - 1,859
Increase in goodwill - 1,649 - 1,649 - - 1,649
- ------------------------------------------------------------------------------------------------------------------------------------
Regulated Southern Energy
Domestic Non-Traditional Services All
Electric ---------------------------------------- Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- ----- ---------------------------------------------------------------------------------------------------
(in millions)
1996
- ----
Operating revenues $ 8,639 $1,506 $177 $1,683 $ 50 $(14) $10,358
Depreciation and amortization 1,019 95 13 108 6 - 1,133
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 1 11 - 11 - (6) 6
Segment net income (loss) 1,086 88 4 92 (40) (11) 1,127
Total assets 24,899 4,320 604 4,924 450 (87) 30,186
Investments in equity
method subsidiaries 8 227 - 227 - (8) 227
Gross property additions 1,033 157 8 165 31 - 1,229
Increase in goodwill - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
(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>
38
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
Products and Services
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Revenues
-------------------------------------------------------------------------------------------------------------
Regulated Domestic Southern Energy
Electric Utilities Non-Traditional Energy Services
----------------------------------- ----------------------------------------------------------------------
Energy
Trading
Year Retail Wholesale Other Total Generation Distribution Marketing Other Total
- ---- -------------------------------------------------------------------------------------------------------------------------
(in millions)
1998 $8,272 $896 $195 $9,363 $578 $1,273 $ - $52 $1,903
1997 7,647 886 155 8,688 513 1,282 1,982 60 3,837
1996 7,665 838 136 8,639 242 1,309 77 55 1,683
- -----------------------------------------------------------------------------------------------------------------------------------
Geographic Areas
Revenues
-----------------------------------------------------------------------------------------------------
International
-------------------------------------------------------------
United Southeast All
Year Domestic Kingdom Asia Other Total Consolidated
- ---- -----------------------------------------------------------------------------------------------------
(in millions)
1998 $9,637 $1,273 $273 $220 $1,766 $11,403
1997 10,863 1,282 247 219 1,748 12,611
1996 8,852 1,309 - 197 1,506 10,358
- -----------------------------------------------------------------------------------------------------------------------------------
Long-Lived Assets
------------------------------------------------------------------------------------
International
-------------------------------------------------------------
United Southeast All
Year Domestic Kingdom Asia Other Total Consolidated
- ---- -----------------------------------------------------------------------------------------------------
(in millions)
1998 $22,005 $2,463 $3,772 $1,856 $8,091 $30,096
1997 21,282 2,428 3,628 1,888 7,944 29,226
1996 21,190 2,473 108 999 3,580 24,770
- -----------------------------------------------------------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 are as follows:
Per Common Share
---------------------------------------------------
Price Range
Operating Operating Consolidated --------------------
Quarter Ended Revenues Income Net Income Earnings Dividends High Low
- -------------- ------------------------------------ -----------------------------------------------------
(in millions)
March 1998 $2,495 $437 $242 $0.35 $0.335 28 11/16 23 15/16
June 1998 2,913 490 270 0.39 0.335 29 25 1/16
September 1998 3,457 752 517 0.74 0.335 29 13/16 25 1/4
December 1998 2,538 74 (52) (0.08) 0.335 31 9/16 27 3/16
March 1997 $2,585 $397 $187 $0.28 $0.325 23 3/8 20 3/4
June 1997 2,717 429 215 0.31 0.325 22 1/4 19 7/8
September 1997 4,071 720 375 0.55 0.325 23 20 13/16
December 1997 3,238 394 195 0.28 0.325 26 1/4 22
- -----------------------------------------------------------------------------------------------------------------------------------
Southern Company's business is influenced by seasonal weather conditions.
Earnings for the fourth quarter 1998 declined by $221 million, or 32 cents per share, as a result of write downs in certain
generating assets as discussed in Notes 3 and 5.
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>
39
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1988-1998
Southern Company and Subsidiary 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $11,403 $12,611 $10,358
Consolidated Net Income (in millions) $977 $972 $1,127
Basic and Diluted Earnings Per Share of Common Stock $1.40 $1.42 $1.68
Cash Dividends Paid Per Share of Common Stock $1.34 $1.30 $1.26
Return on Average Common Equity (percent) 10.04 10.30 12.53
Total Assets (in millions) $36,192 $35,255 $30,230
Gross Property Additions (in millions) $2,005 $1,859 $1,229
- -----------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $ 9,797 $ 9,647 $ 9,216
Preferred stock and securities 2,548 2,237 1,402
Long-term debt 10,472 10,274 7,938
- -----------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $22,817 $22,158 $18,556
=================================================================================================================
Capitalization Ratios (percent):
Common stock equity 42.9 43.5 49.7
Preferred stock and securities 11.2 10.1 7.6
Long-term debt 45.9 46.4 42.7
- -----------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0
=================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $14.04 $13.91 $13.61
Market price per share:
High 31 9/16 26 1/4 25 7/8
Low 23 15/16 19 7/8 21 1/8
Close 29 1/16 25 7/8 22 5/8
Market-to-book ratio (year-end) (percent) 207.0 186.0 166.2
Price-earnings ratio (year-end) (times) 20.8 18.2 13.5
Dividends paid (in millions) $933 $889 $846
Dividend yield (year-end) (percent) 4.6 5.0 5.6
Dividend payout ratio (percent) 95.6 91.5 75.1
Cash coverage of dividends (year-end) (times) 3.2 2.8 2.9
Proceeds from sales of stock (in millions) $234 $360 $171
Shares outstanding (in thousands):
Average 696,944 685,033 672,590
Year-end 697,805 693,423 677,036
Stockholders of record (year-end) 187,053 200,508 215,246
- -----------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $ - $- $85
Retired 1,487 168 426
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $635 $1,321 $322
Retired 239 660 179
- -----------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 3,277 3,220 3,157
Commercial 497 479 464
Industrial 15 16 17
Other 5 5 5
- -----------------------------------------------------------------------------------------------------------------
Total 3,794 3,720 3,643
=================================================================================================================
Employees (year-end):
Traditional core business 25,206 24,682 25,034
Southern Energy 6,642 5,620 3,743
- -----------------------------------------------------------------------------------------------------------------
Total 31,848 30,302 28,777
=================================================================================================================
</TABLE>
40
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1988-1998 (continued)
Southern Company and Subsidiary Companies 1998 Annual Report
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $9,180 $8,297 $8,489 $8,073
Consolidated Net Income (in millions) $1,103 $989 $1,002 $953
Basic and Diluted Earnings Per Share of Common Stock $1.66 $1.52 $1.57 $1.51
Cash Dividends Paid Per Share of Common Stock $1.22 $1.18 $1.14 $1.10
Return on Average Common Equity (percent) 13.01 12.47 13.43 13.42
Total Assets (in millions) $30,522 $27,042 $25,911 $20,038
Gross Property Additions (in millions) $1,401 $1,536 $1,441 $1,105
- ------------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $ 8,772 $ 8,186 $ 7,684 $ 7,234
Preferred stock and securities 1,432 1,432 1,333 1,359
Long-term debt 8,274 7,593 7,412 7,241
- ------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $18,478 $17,211 $16,429 $15,834
==============================================================================================================================
Capitalization Ratios (percent):
Common stock equity 47.5 47.6 46.8 45.7
Preferred stock and securities 7.7 8.3 8.1 8.6
Long-term debt 44.8 44.1 45.1 45.7
- ------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0 100.0
==============================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $13.10 $12.47 $11.96 $11.43
Market price per share:
High 25 22 23 5/8 19 1/2
Low 19 3/8 17 18 3/8 15 1/8
Close 24 5/8 20 22 19 1/4
Market-to-book ratio (year-end) (percent) 188.0 160.4 183.9 168.4
Price-earnings ratio (year-end) (times) 14.8 13.2 14.0 12.7
Dividends paid (in millions) $811 $766 $726 $695
Dividend yield (year-end) (percent) 5.0 5.9 5.2 5.7
Dividend payout ratio (percent) 73.5 77.5 72.4 72.9
Cash coverage of dividends (year-end) (times) 2.9 2.7 2.9 2.8
Proceeds from sales of stock (in millions) $277 $279 $204 $30
Shares outstanding (in thousands):
Average 665,064 649,927 637,319 631,844
Year-end 669,543 656,528 642,662 632,917
Stockholders of record (year-end) 225,739 234,927 237,105 247,378
- --------------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $375 $185 $2,185 $1,815
Retired 538 241 2,178 2,575
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $- $100 $426 $410
Retired 1 1 516 326
- --------------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 3,100 3,046 2,996 2,950
Commercial 450 439 427 414
Industrial 17 17 18 18
Other 5 5 4 4
- -------------------------------------------------------------------------------------------------------------------------------
Total 3,572 3,507 3,445 3,386
===============================================================================================================================
Employees (year-end):
Traditional core business 26,452 27,480 28,516 28,872
Southern Energy 5,430 1,400 745 213
- ------------------------------------------------------------------------------------------------------------------------------
31,882 28,880 29,261 29,085
==============================================================================================================================
</TABLE>
41A
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1988-1998
Southern Company and Subsidiary Companies 1998 Annual Report
<S> <C> <C> <C> <C>
1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions) $8,050 $8,053 $7,620 $7,287
Consolidated Net Income (in millions) $876 $604 $846 $846
Basic and Diluted Earnings Per Share of Common Stock $1.39 $0.96 $1.34 $1.36
Cash Dividends Paid Per Share of Common Stock $1.07 $1.07 $1.07 $1.07
Return on Average Common Equity (percent) 12.74 8.85 12.49 13.03
Total Assets (in millions) $19,863 $19,955 $20,092 $19,731
Gross Property Additions (in millions) $1,123 $1,185 $1,346 $1,754
- ----------------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $ 6,976 $ 6,783 $ 6,861 $ 6,686
Preferred stock and securities 1,333 1,358 1,400 1,465
Long-term debt 7,992 8,458 8,575 8,433
- ----------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $16,301 $16,599 $16,836 $16,584
==================================================================================================================================
Capitalization Ratios (percent):
Common stock equity 42.8 40.9 40.8 40.3
Preferred stock and securities 8.2 8.2 8.3 8.8
Long-term debt 49.0 50.9 50.9 50.9
- --------------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0 100.0
==================================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $11.05 $10.74 $10.87 $10.60
Market price per share:
High 17 3/8 14 5/8 14 7/8 12 1/8
Low 12 7/8 11 1/2 11 10 1/8
Close 17 1/8 13 7/8 14 1/2 11 1/8
Market-to-book ratio (year-end) (percent) 155.5 129.7 134.0 105.5
Price-earnings ratio (year-end) (times) 12.4 14.6 10.9 8.2
Dividends paid (in millions) $676 $676 $675 $661
Dividend yield (year-end) (percent) 6.2 7.7 7.3 9.6
Dividend payout ratio (percent) 77.1 111.8 79.8 78.1
Cash coverage of dividends (year-end) (times) 2.5 2.8 2.6 2.3
Proceeds from sales of stock (in millions) $- $- $4 $194
Shares outstanding (in thousands):
Average 631,307 631,307 631,303 622,292
Year-end 631,307 631,307 631,307 630,898
Stockholders of record (year-end) 254,568 263,046 273,751 290,725
- ----------------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds (in millions):
Issued $380 $300 $280 $335
Retired 881 146 201 273
Preferred Stock and Capital and Preferred Securities (in millions):
Issued $100 $- $- $120
Retired 125 96 21 10
- ----------------------------------------------------------------------------------------------------------------------------------
Traditional Core Business Customers (year-end) (in thousands):
Residential 2,903 2,865 2,824 2,781
Commercial 403 396 392 384
Industrial 18 18 18 18
Other 4 4 4 4
- ----------------------------------------------------------------------------------------------------------------------------------
Total 3,328 3,283 3,238 3,187
==================================================================================================================================
Employees (year-end):
Traditional core business 30,144 30,087 30,368 32,366
Southern Energy 258 176 162 157
- ----------------------------------------------------------------------------------------------------------------------------------
Total 30,402 30,263 30,530 32,523
==================================================================================================================================
</TABLE>
41B
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1988-1998
Southern Company and Subsidiary Companies 1998 Annual Report
<S> <C> <C> <C>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $ 3,163 $ 2,837 $ 2,894
Commercial 2,763 2,595 2,559
Industrial 2,267 2,139 2,136
Other 79 76 76
- --------------------------------------------------------------------------------------------------------
Total retail 8,272 7,647 7,665
Sales for resale within service area 374 376 409
Sales for resale outside service area 522 510 429
- --------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 9,168 8,533 8,503
Southern Energy 1,903 3,837 1,683
Other revenues 332 241 172
- --------------------------------------------------------------------------------------------------------
Total $11,403 $12,611 $10,358
========================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 43,503 39,217 40,117
Commercial 41,737 38,926 37,993
Industrial 55,331 54,196 52,798
Other 929 903 911
- --------------------------------------------------------------------------------------------------------
Total retail 141,500 133,242 131,819
Sales for resale within service area 9,847 9,884 10,935
Sales for resale outside service area 12,988 13,761 10,777
- --------------------------------------------------------------------------------------------------------
Total 164,335 156,887 153,531
========================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.27 7.23 7.21
Commercial 6.62 6.67 6.74
Industrial 4.10 3.95 4.04
Total retail 5.85 5.74 5.81
Sales for resale 3.92 3.75 3.86
Total sales 5.58 5.44 5.54
Average Annual Kilowatt-Hour Use Per Residential Customer 13,379 12,296 12,824
Average Annual Revenue Per Residential Customer $972.89 $889.50 $925.12
Plant Nameplate Capacity Owned (year-end) (megawatts) 31,161 31,146 31,076
Maximum Peak-Hour Demand (megawatts):
Winter 21,108 22,969 22,631
Summer 28,934 27,334 27,190
System Reserve Margin (at peak) (percent) 12.8 15.0 14.0
Annual Load Factor (percent) 60.0 59.4 62.3
Plant Availability (percent):
Fossil-steam 85.2 88.2 86.4
Nuclear 87.8 88.8 89.7
- --------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 72.8 74.7 73.3
Nuclear 15.4 16.5 16.7
Hydro 3.9 4.3 4.1
Oil and gas 3.3 1.7 1.5
Purchased power 4.6 2.8 4.4
- --------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0
========================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 9,690 10,035 10,257
Cost of fuel per million BTU(cents) 152.89 145.81 144.02
Average cost of fuel per net kilowatt-hour generated (cents) 1.48 1.46 1.48
- --------------------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1988-1998
Southern Company and Subsidiary Companies 1998 Annual Report
<S> <C> <C> <C> <C>
1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,840 $2,560 $2,696 $2,402
Commercial 2,485 2,357 2,313 2,181
Industrial 2,206 2,162 2,200 2,126
Other 72 70 68 64
- ---------------------------------------------------------------------------------------------------------------------
Total retail 7,603 7,149 7,277 6,773
Sales for resale within service area 399 360 447 409
Sales for resale outside service area 415 505 613 797
- ---------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 8,417 8,014 8,337 7,979
Southern Energy 643 185 54 -
Other revenues 120 98 98 94
- ---------------------------------------------------------------------------------------------------------------------
Total $9,180 $8,297 $8,489 $8,073
=====================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 39,147 35,836 36,807 33,627
Commercial 35,938 34,080 32,847 31,025
Industrial 51,644 50,311 48,738 47,816
Other 863 844 814 777
- ---------------------------------------------------------------------------------------------------------------------
Total retail 127,592 121,071 119,206 113,245
Sales for resale within service area 9,472 8,151 13,258 12,107
Sales for resale outside service area 9,143 10,769 12,445 16,632
- ---------------------------------------------------------------------------------------------------------------------
Total 146,207 139,991 144,909 141,984
=====================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.25 7.14 7.32 7.14
Commercial 6.91 6.92 7.04 7.03
Industrial 4.27 4.30 4.51 4.45
Total retail 5.96 5.90 6.10 5.98
Sales for resale 4.38 4.57 4.12 4.20
Total sales 5.76 5.72 5.75 5.62
Average Annual Kilowatt-Hour Use Per Residential Customer 12,722 11,851 12,378 11,490
Average Annual Revenue Per Residential Customer $922.83 $846.48 $906.60 $820.67
Plant Nameplate Capacity Owned (year-end) (megawatts) 30,733 29,932 29,513 29,830
Maximum Peak-Hour Demand (megawatts):
Winter 21,422 22,254 19,432 19,121
Summer 27,420 24,546 25,937 24,146
System Reserve Margin (at peak) (percent) 9.4 19.3 13.2 14.3
Annual Load Factor (percent) 59.5 63.5 59.4 60.3
Plant Availability (percent):
Fossil-steam 86.7 85.2 87.9 88.6
Nuclear 88.3 89.8 85.9 85.2
- ---------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 72.5 70.8 73.0 71.7
Nuclear 16.4 17.9 16.3 16.2
Hydro 4.1 4.7 3.9 4.6
Oil and gas 1.7 0.9 0.9 0.5
Purchased power 5.3 5.7 5.9 7.0
- ---------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0
=====================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,099 10,010 9,994 9,976
Cost of fuel per million BTU(cents) 151.70 155.81 166.85 162.58
Average cost of fuel per net kilowatt-hour generated (cents) 1.53 1.56 1.67 1.62
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
43A
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1988-1998
Southern Company and Subsidiary Companies 1998 Annual Report
<S> <C> <C> <C> <C>
1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in millions):
Residential $2,391 $2,342 $2,194 $2,103
Commercial 2,122 2,062 1,965 1,835
Industrial 2,088 2,085 2,011 1,945
Other 65 64 60 56
- ------------------------------------------------------------------------------------------------------------------------
Total retail 6,666 6,553 6,230 5,939
Sales for resale within service area 417 412 401 480
Sales for resale outside service area 884 977 928 777
- -------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 7,967 7,942 7,559 7,196
Southern Energy - - - -
Other revenues 83 111 61 91
- -------------------------------------------------------------------------------------------------------------------------
Total $8,050 $8,053 $7,620 $7,287
=========================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 33,622 33,118 31,627 31,041
Commercial 30,379 29,658 28,454 27,005
Industrial 46,050 45,974 45,022 43,675
Other 817 806 787 763
- ------------------------------------------------------------------------------------------------------------------------
Total retail 110,868 109,556 105,890 102,484
Sales for resale within service area 12,320 11,134 11,419 14,806
Sales for resale outside service area 19,839 24,402 24,228 15,860
- -------------------------------------------------------------------------------------------------------------------------
Total 143,027 145,092 141,537 133,150
=========================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.11 7.07 6.94 6.77
Commercial 6.99 6.96 6.91 6.79
Industrial 4.53 4.53 4.47 4.45
Total retail 6.01 5.98 5.88 5.80
Sales for resale 4.05 3.91 3.73 4.10
Total sales 5.57 5.47 5.34 5.40
Average Annual Kilowatt-Hour Use Per Residential Customer 11,659 11,637 11,287 11,255
Average Annual Revenue Per Residential Customer $829.18 $822.93 $782.90 $762.42
Plant Nameplate Capacity Owned (year-end) (megawatts) 29,915 29,532 29,532 27,552
Maximum Peak-Hour Demand (megawatts):
Winter 19,166 17,629 20,772 18,685
Summer 25,261 25,981 24,399 23,641
System Reserve Margin (at peak) (percent) 16.5 14.0 21.0 15.0
Annual Load Factor (percent) 58.3 56.6 58.6 59.8
Plant Availability (percent):
Fossil-steam 91.3 91.9 92.2 91.3
Nuclear 83.4 83.0 87.0 78.4
- ------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 72.6 72.1 71.5 77.7
Nuclear 16.2 15.6 15.7 14.5
Hydro 4.4 4.4 5.2 2.3
Oil and gas 0.6 1.3 1.1 0.7
Purchased power 6.2 6.6 6.5 4.8
- -------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0
========================================================================================================================
Total Fuel Economy Data:
BTU per net kilowatt-hour generated 10,022 10,065 10,086 10,094
Cost of fuel per million BTU(cents) 168.28 172.81 171.00 170.36
Average cost of fuel per net kilowatt-hour generated (cents) 1.69 1.74 1.72 1.72
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
43B
