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 16, 2000
-----------------------------
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, 1999.
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, 2000
Exhibit 23
Arthur Andersen LLP
Suite 2500
133 Peachtree Street, NE
Atlanta, GA 30303-1816
404-658-1776
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 16, 2000 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 LLP
Atlanta, Georgia
February 28, 2000
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements filed as Exhibit 99 and is qualified in its entirety by
reference to such financial statements.
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<CIK> 0000092122
<NAME> THE SOUTHERN COMPANY
<MULTIPLIER> 1,000,000
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 24,544
<OTHER-PROPERTY-AND-INVEST> 7,925
<TOTAL-CURRENT-ASSETS> 3,529
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<TOTAL-ASSETS> 38,396
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<CAPITAL-SURPLUS-PAID-IN> 1,561
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2,327
369
<LONG-TERM-DEBT-NET> 3,933
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</TABLE>
MANAGEMENT'S REPORT
Southern Company and Subsidiary Companies 1999 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 and Chief Executive Officer
/s/W. L. Westbrook
W. L. Westbrook
Financial Vice President, Chief Financial Officer,
and Treasurer
February 16, 2000
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, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, common stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 15-40) referred
to above present fairly, in all material respects, the financial position of
Southern Company and subsidiary companies as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 16, 2000
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Southern Company and Subsidiary Companies 1999 Annual Report
Results of Operations
Overview of Consolidated Earnings
Southern Company's 1999 earnings of $1.28 billion or $1.86 per share established
a new record high. Higher earnings were primarily driven by strong growth in the
competitive energy supply business outside the southeastern United States. The
traditional business of selling electricity in the Southeast continued to remain
strong. However, reported earnings in both 1999 and 1998 reflected significant
items not related to the normal day-to-day business activities. After excluding
these items, earnings for 1999 were $1.30 billion or $1.90 per share compared
with $1.23 billion or $1.76 per share in 1998.
Southern Energy, Inc. (Southern Energy) is the Southern Company subsidiary
that owns and manages its international operations and develops and owns its
competitive energy supply business in North America outside the Southeast.
Southern Energy earnings accounted for approximately 26 percent of Southern
Company's reported net income in 1999. Amortization of goodwill related to
Southern Energy investments reduced earnings per share by 5 cents in 1999 and 4
cents in 1998.
A reconciliation of reported earnings to earnings excluding non-day to day
business items and the related explanations are as follows:
Consolidated Earnings
Net Income Per Share
------------- --------------
1999 1998 1999 1998
------------- --------------
(in millions)
Earnings as reported $1,276 $ 977 $1.86 $1.40
- ---------------------------------------------------------------
Gain on asset sale (78) - (.11) -
Write down of assets:
South American
investments - 200 - .29
Rocky Mountain
plant - 21 - .03
Mobile Energy 69 - .10 -
Work force reductions 50 20 .07 .03
Other (14) 7 (.02) .01
- ---------------------------------------------------------------
Total adjustments 27 248 .04 .36
- ---------------------------------------------------------------
Earnings as adjusted $1,303 $1,225 $1.90 $1.76
===============================================================
Amount and
percent change $78 6.4% $0.14 8.0%
- ---------------------------------------------------------------
Southern Energy sold the supply business of South Western Electricity in
1999, and the remaining distribution business was renamed Western Power
Distribution. In 1999, Southern Energy recorded an asset impairment related to
Mobile Energy Services -- see Note 3 to the financial statements. Southern
Energy's write down of assets in 1998 related to investments in Argentina and
Chile not meeting financial expectations, which resulted in an announced plan to
sell these assets. In 1998, Georgia Power wrote down its investment in the Rocky
Mountain pumped storage hydroelectric plant as a result of a settlement related
to its 1998 retail rate proceeding. Work force reduction programs began in late
1999 for Bewag, a German utility in which Southern Energy has a 26 percent
ownership interest. Also, the traditional business recorded costs related to
workforce reductions in 1998.
Discussion of the results of operations are separated between the traditional
business of the integrated Southeast utilities and Southern Energy.
Integrated Southeast Utilities
The five integrated Southeast utilities provide electric service in four states.
These utilities are Alabama Power, Georgia Power, Gulf Power, Mississippi Power,
and Savannah Electric. They comprise Southern Company's principal business
segment with earnings of $1.1 billion in 1999. A condensed income statement for
this business segment is as follows:
Increase (Decrease)
Amount From Prior Year
------ --------------------
1999 1999 1998
- ---------------------------------------------------------------
(in millions)
Operating revenues $9,125 $(238) $675
- ---------------------------------------------------------------
Fuel 2,328 7 117
Purchased power 409 13 182
Other operation
and maintenance 2,430 4 252
Depreciation
and amortization 961 (328) 134
Taxes other than
income taxes 521 13 7
Write down of assets - (34) 34
- ---------------------------------------------------------------
Total operating expenses 6,649 (325) 726
- ---------------------------------------------------------------
Operating income 2,476 87 (51)
Other income (8) (84) 93
- ---------------------------------------------------------------
Earnings before
interest and taxes 2,468 3 42
Interest charges and other 720 41 48
Income taxes 675 (28) 16
- ---------------------------------------------------------------
Net income $1,073 $ (10) $ (22)
===============================================================
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Revenues
Operating revenues changed in 1999 and 1998 as a result of the following
factors:
Increase (Decrease)
From Prior Year
------------------
1999 1998
- ---------------------------------------------------------------
(in millions)
Retail --
Growth and price changes $ 166 $258
Rate reductions (352) -
Weather (86) 178
Fuel cost recovery and other 86 189
- ---------------------------------------------------------------
Total retail (186) 625
- ---------------------------------------------------------------
Sales for resale --
Within service area (24) (2)
Outside service area (49) 12
- ---------------------------------------------------------------
Total sales for resale (73) 10
Other operating revenues 21 40
- ---------------------------------------------------------------
Operating revenues $(238) $675
===============================================================
Percent change (2.5)% 7.8%
- ---------------------------------------------------------------
Retail revenues of $8.1 billion in 1999 declined as a result of a Georgia
Power rate reduction effective January 1999. For additional information, see
Note 3 to the financial statements under "Georgia Power 1998 Retail Rate Order."
Customer growth in the Southeast somewhat offset the rate decrease. In 1998,
retail revenues increased sharply, up 8.2 percent compared with the prior year.
Continued growth in the traditional service area and the positive impact of
weather on energy sales were the predominant factors causing the rise in
revenues in 1998. 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 $350 million in 1999,
down 6.5 percent from the prior year. This sharp decline resulted primarily from
supplying less electricity under contractual agreements with certain wholesale
customers in 1999, and a slight reduction in these revenues is expected in 2000.
Revenues from sales for resale within the service area were $374 million in
1998, down 0.7 percent from the prior year.
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. Revenue from long-term unit power contracts have both a capacity and
energy component. 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 of the unit power contracts were as
follows:
1999 1998 1997
- ---------------------------------------------------------------
(in millions)
Capacity $174 $196 $203
Energy 157 152 183
- ---------------------------------------------------------------
Total $331 $348 $386
===============================================================
Capacity revenues in 1999 and 1998 declined each year as a result of
adjustments and true-ups related to contractual pricing. No significant declines
in capacity are scheduled until the termination of the contracts in 2010.
Energy Sales
The changes in revenues for the traditional business in the Southeast are
influenced heavily by the amount of energy sold each year. Kilowatt-hour sales
for 1999 and the percent change by year were as follows:
Amount Percent Change
(billions of ------- ----------------------------
kilowatt-hours) 1999 1999 1998 1997
- ----------------------------------------------------------------
Residential 43.4 (0.2)% 10.9% (2.2)%
Commercial 43.4 4.0 7.2 2.5
Industrial 56.2 1.6 2.1 2.6
Other 0.9 1.6 3.1 (1.1)
-----
Total retail 143.9 1.7 6.2 1.1
Sales for resale --
Within service area 9.4 (4.1) (0.4) (9.6)
Outside service area 13.0 (0.4) (5.6) 27.7
-----
Total 166.3 1.2 4.7 2.2
================================================================
The rate of increase in 1999 total retail energy sales was significantly
lower than in 1998. Although the total number of residential customers served
increased by 61,000 during the year, residential energy sales experienced a
decline as a result of milder weather in 1999. The rate of growth in 1998 retail
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
energy sales was the highest one-year increase since 1986. Also, residential
energy sales registered the highest annual increase in over two decades as a
result of hotter-than-normal weather. Commercial and industrial sales, both in
1999 and 1998, 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 in the southeastern United States.
Energy sales to retail customers are projected to increase at an average annual
rate of 2.2 percent during the period 2000 through 2010.
Sales to customers outside the service area declined by 0.4 percent in 1999
and by 5.6 percent in 1998 when compared with the respective prior year. The
declines in sales were influenced by weather and 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
Operating expenses of $6.6 billion for 1999 decreased $325 million. This decline
was primarily attributable to $308 million less accelerated depreciation of
plant being recorded in accordance with the 1998 Georgia Power rate order as
referred to earlier. The costs to produce and deliver electricity for the
traditional business in the Southeast for 1999 increased by $68 million to meet
higher energy demands. All other operating and maintenance expenses declined by
$44 million as a result of continued cost control programs.
In 1998, operating expenses of $7.0 billion increased $726 million compared
with the prior year. The costs to produce and deliver electricity for the
traditional business in 1998 increased by $359 million to meet higher energy
demands. Non-production operation and maintenance expenses increased $192
million in 1998. Accelerated depreciation of certain assets increased $157
million when compared with 1997.
Fuel costs constitute the single largest expense for the integrated Southeast
utilities. 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
traditional business service area -- were as follows:
1999 1998 1997
- ----------------------------------------------------------------
Total generation
(billions of kilowatt-hours) 165 164 160
Sources of generation
(percent) --
Coal 78 77 77
Nuclear 17 16 17
Hydro 2 4 4
Oil and gas 3 3 2
Average cost of fuel per net
kilowatt-hour generated
(cents) -- 1.45 1.48 1.46
- ----------------------------------------------------------------
Total fuel and purchased power costs of $2.7 billion in 1999 increased only
$20 million while total energy sales increased 2.0 billion kilowatt-hours
compared with the amounts recorded in 1998. Continued efforts to control energy
costs helped lower the average cost of fuel per net kilowatt-hour generated in
1999. In 1998, fuel and purchased power costs increased $299 million as a result
of 7.4 billion more kilowatt-hours being sold than in 1997.
Total interest charges and other financing costs in 1999 decreased $41
million from amounts reported in the previous year. The decline reflected
additional refinancing of debt in 1999. Alabama Power and Georgia Power -- in
accordance with their respective rate making procedures -- recorded additional
accelerated amortization of premium on reacquired debt of $85 million in 1999,
$33 million in 1998, and no additional amounts in 1997. Interest charges and
other financing costs increased in 1998 as a result of the additional
amortization being recorded.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Southern Energy
Southern Energy's domestic and international operations provided much of
Southern Company's strong financial growth in 1999. A condensed income statement
for Southern Company's other significant business segment is as follows:
Increase (Decrease)
Amount From Prior Year
------- ---------------------
1999 1999 1998
- ----------------------------------------------------------------
(in millions)
Operating revenues $2,268 $ 365 $(1,934)
- ----------------------------------------------------------------
Fuel and purchased power 937 38 (1,996)
Other operation
and maintenance 477 131 (22)
Depreciation
and amortization 322 88 40
Taxes other than
income taxes 89 2 16
Write down of assets 69 (239) 308
- ----------------------------------------------------------------
Total operating expenses 1,894 20 (1,654)
- ----------------------------------------------------------------
Operating income 374 345 (280)
Gain on asset sales 313 272 17
Other income 433 99 100
- ----------------------------------------------------------------
Earnings before
interest and taxes 1,120 716 (163)
Interest charges and other 666 178 97
Income taxes 126 249 (298)
- ----------------------------------------------------------------
Net income $ 328 $ 289 $ 38
================================================================
Southern Energy recorded several significant items not related to the normal
day-to-day business activities in both 1999 and 1998 as discussed earlier.
Excluding these one time items, earnings were $355 million and $239 million in
1999 and 1998, respectively.
Southern Energy develops and owns competitive energy supply businesses around
the world. Domestic assets include a 60 percent interest in a top ten energy
trading and marketing business. International operations are principally located
in China, Philippines, England, Germany, Netherlands, Brazil, Chile, Argentina,
Bahamas, and Trinidad and Tobago.
Earnings by major geographical area -- excluding the one time items -- are as
follows:
Increase (Decrease)
Amount From Prior Year
------ --------------------
1999 1999 1998
- ----------------------------------------------------------------
(in millions)
Asia $175 $107 $27
Europe 142 9 62
North America 81 78 14
South America 1 (16) 8
Corporate and other (44) (62) 16
- ----------------------------------------------------------------
Revenues in 1999 increased 19 percent primarily as a result of acquisitions
in North America of some 6,100 megawatts of generating facilities in late 1998
and in 1999. Also, approximately 1,100 megawatts of owned generating capacity in
Asia went into commercial operation in late 1999.
In 1998, Southern Energy's revenues declined because its energy trading and
marketing operations -- $2.0 billion in 1997 -- were deconsolidated as of
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 1999 and 1998. Southern Energy's revenues in 1998 of
$1.9 billion increased by $48 million compared with comparable revenues in 1997
that exclude energy trading and marketing. This increase resulted primarily from
operations of assets obtained in domestic acquisitions.
The decline in 1998 operating expenses 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. Operating expenses and
interest charges increased in 1999 as a result of acquisitions and new
facilities being placed into service.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Effects of Inflation
Southern Company's traditional business of the integrated Southeast utilities 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 lives. 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. The two major factors are the growth of
Southern Energy's operations and the ability of the integrated Southeast
utilities to achieve energy sales growth in a less regulated, more competitive
environment.
The traditional business or the five Southeast utilities currently operate as
vertically integrated companies providing electricity to customers within the
traditional service area of the southeastern United States. Prices for
electricity provided to retail customers are set by state public service
commissions under cost-based regulatory principles. Retail rates and earnings
are reviewed and adjusted periodically within certain limitations based on
earned return on equity. See Note 3 to the financial statements for additional
information about these and other regulatory matters.
Future earnings for the traditional business in the near term will depend
upon growth in energy sales, which is subject to a number of factors. These
factors include weather, competition, new short and long-term contracts with
neighboring utilities, energy conservation practiced by customers, the
elasticity of demand, and the rate of economic growth in the traditional 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's integrated
utilities are aggressively working to maintain and expand their 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 continues to
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 a company to recover its investments, including the regulatory
assets described in Note 1 to the financial statements, could have a material
adverse effect on financial condition and results of operations.
Continuing to be a low-cost producer could provide opportunities to increase
market share and profitability in markets that evolve with changing regulation.
Conversely, if Southern Company's integrated Southeast utilities do not remain
low-cost producers and provide quality service, then energy sales growth could
be limited, and this could significantly erode earnings.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
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.
On December 20, 1999, the Federal Energy Regulatory Commission (FERC) issued
its final rule on Regional Transmission Organizations (RTOs). The order
encourages utilities owning transmission systems to form RTOs on a voluntary
basis. To facilitate the development of RTOs, the FERC will convene regional
conferences for utilities, customers, and other members of the public to discuss
the formation of RTOs. In addition to participating in the regional conferences,
utilities owning transmission systems, including Southern Company, are required
to make a filing by October 15, 2000. The filing must contain either a proposal
for RTO participation or a description of the efforts made to participate in an
RTO, the reasons for non-participation, any obstacles to participation, and any
plans for further work toward participation. The RTOs that are proposed in the
filings should be operational by December 15, 2001. Southern Company is
evaluating this issue and formulating its response. The outcome of this matter
cannot now be determined.
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 trading and marketing,
distribution, and stand-alone generation. As the energy marketplace evolves,
Southern Energy continues to position the company as a major competitor. At
December 31, 1999, Southern Energy's total assets were $13.9 billion, and it had
ownership or control of over 14,000 megawatts of generating capacity. It has
another 5,000 megawatts under construction or advanced development.
In 1999, Southern Energy refined its business strategy to focus on a few key
geographic regions of the world. Its Asian subsidiary will focus primarily on
China, India, and the Philippines, while also pursuing opportunities in more
developed countries such as Australia and Singapore. In Europe, Southern Energy
will concentrate efforts in the countries that make up the North-South corridor
of continental Europe -- Scandinavia, Italy, Switzerland, Germany, the
Netherlands, and select countries in Eastern Europe. In South America, the
company is in the process of exiting Argentina and Chile and is reviewing
whether or not it will pursue additional opportunities in Brazil. In North
America, the company will target its efforts on four U.S. regions -- the
Northeast, the Midwest, Texas/Louisiana, and California/Desert Southwest -- and
also will pursue opportunities in Canada.
In the United States, Southern Energy plans to acquire, build, or gain access
to some 20,000 megawatts of generating capacity over the next several years in
order to ensure its success in the evolving competitive wholesale energy supply
business. Currently, Southern Energy owns or controls approximately 8,500
megawatts of capacity in the four targeted regions, with an additional 4,100
megawatts under construction or advanced development. All of these assets will
be closely linked with Southern Energy's energy trading and marketing business,
Southern Company Energy Marketing (SCEM).
In 1998, Southern Energy and Vastar completed the combination of their energy
trading and marketing activities to form a joint venture, SCEM. SCEM has the
rights to market virtually all of Vastar's natural gas production over a period
of 10 years. Southern Energy's current ownership interest in SCEM is 60 percent.
On July 1, 2001, this ownership interest will automatically increase to 75
percent. Southern Energy has the right -- exercisable during fiscal year 2002 --
to acquire an additional 5 percent interest from Vastar for $80 million. Also,
Vastar has the right -- exercisable in the period from December 1, 2002 through
January 2, 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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Southern Company has filed with the Securities and Exchange Commission (SEC)
a request to invest up to nearly $6 billion in Southern Energy's domestic and
international business. The current SEC authority is $4.1 billion, of which $2.7
billion has been invested as of December 31, 1999.
Southern Company is involved in various matters being litigated. See Note 3
to the financial statements for information regarding material issues that could
possibly affect future earnings.
Compliance costs related to current and future environmental laws and
regulations could affect earnings if such costs are not fully recovered. The
Clean Air Act and other important environmental items are discussed later under
"Environmental Matters."
The 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 integrated Southeast utilities are subject to the provisions of FASB
Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In
the event that a portion of a company's operations is no longer subject to these
provisions, the company would be required to write off related regulatory assets
and liabilities that are not specifically recoverable, and determine if any
other assets have been impaired. See Note 1 to the financial statements under
"Regulatory Assets and Liabilities" for additional information.
New Accounting Standard
The FASB has issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which must be adopted by January 2001. 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.
Year 2000 Challenge
The work undertaken by Southern Company subsidiaries to prepare critical
computer systems and other date sensitive devices to function correctly in the
Year 2000 was successful. There were no material incidents reported and no
disruption of electric service within the service area of the traditional
business. There were no reports of significant events regarding third parties
that impacted revenues or expenses.
For the traditional business, original projected total costs for Year 2000
readiness were approximately $91 million. Final projected costs are $94 million
of which $3 million is projected to be spent in 2000 and $6 million was billed
to non-affiliated companies. These costs include labor necessary to identify,
test, and renovate affected devices and systems, and costs for reporting
requirements to state and federal agencies. From its inception through December
31, 1999, the Year 2000 program costs, recognized primarily as expense, amounted
to $85 million based on Southern Company's ownership interest.
Also, Southern Energy experienced no material incidents or disruption of
electric service for its domestic and international operations. In addition to
the traditional business costs, Southern Energy's final costs for Year 2000
readiness were approximately $17 million -- based on their ownership interest.
Southern Energy's original projected costs were $24 million.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
FINANCIAL CONDITION
Overview
Southern Company's financial condition continues to remain strong. In 1999, the
integrated Southeast utilities' earnings were at the high end of their allowed
range of return on equity, and Southern Energy reported strong earnings growth
in 1999. These factors drove the record consolidated net income of $1.3 billion
in 1999. Consolidated net income -- excluding non-recurring charges -- in 1999
increased $78 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 down to 50 percent. The
quarterly dividend declared in January 2000 continued to be 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. This policy supports Southern Company's
strategic goal to become the best investment in the electric utility business.
Gross property additions to utility plant were $2.6 billion in 1999. The
majority of funds needed for gross property additions since 1996 has been
provided from operating activities. Southern Energy acquired $1.3 billion of
generating assets in 1999 and sold the supply system of South Western
Electricity -- Southern Energy owned 49 percent -- for $256 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 valuation 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 $27 million at December 31, 1999. Based on the
company's overall interest rate exposure at December 31, 1999, 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. To hedge its
net investment in these countries, 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. As a result of these swaps,
a 10 percent sustained decline of the British pound sterling and German
Deutschemark versus the U.S. dollar would not materially affect the consolidated
financial statements.
The company also has investments in various emerging market countries where
the net investments are not hedged, including Argentina, Chile, Trinidad and
Tobago, 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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Also, the company has currency exposure related to its investment in
Companhia Energetica de Minas Gerais (CEMIG) which has not been hedged. Revenues
at CEMIG and dividends from CEMIG are denominated in Brazilian reals; however, a
significant portion of debt incurred to finance CEMIG is required to be repaid
in other currencies. The devaluation of the real in January 1999 resulted in a
net reduction in other comprehensive income of $83 million.
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, natural gas, and energy trading business in North
America and Europe. The North American trading business 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, 1999,
outstanding guarantees related to the estimated fair value of net contractual
commitments were approximately $146 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 were
$12.0 billion and $11.9 billion for 1999, respectively; and $9.2 billion and
$9.1 billion for 1998, respectively.
In 1999, Southern Energy created a European trading operation in Amsterdam.
The business provides risk management services associated with the energy
industry to its customers in the European market.
To estimate and manage the market risk of its trading and marketing
portfolios, the trading businesses employ 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 5 days to 3 months, 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 VAR analysis of the overall commodity price
risk exposure of the trading businesses at December 31, 1999, management does
not anticipate a materially adverse effect on the company's consolidated
financial statements as a result of market fluctuations.
Due to cost-based rate regulations, the integrated Southeast utilities 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 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, 1999, 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."
Capital Structure
Southern Company's ratio of common equity to total capitalization -- including
short-term debt -- was 32.7 percent in 1999, compared with 37.4 percent in 1998,
and 38.6 percent in 1997.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
During 1999, the integrated Southeast utilities sold, through public
authorities, $349 million of pollution control revenue bonds. In addition,
capital and preferred securities of $250 million were issued in 1999. The
companies continued to reduce financing costs by retiring higher-cost bonds and
preferred stock. Retirements of bonds, including maturities, totaled $1.2
billion during 1999, $1.7 billion during 1998, and $507 million during 1997. As
a result, the composite interest rate on long-term debt decreased from 6.9
percent at December 31, 1996 to 6.5 percent at December 31, 1999. Retirements of
preferred stock totaled $86 million during 1999, $239 million during 1998, and
$660 million during 1997.
In April 1999, Southern Company announced the repurchase of up to 50 million
shares of its common stock over a two-year period through open market or
privately negotiated transactions. The program did not establish a target stock
price or timetable for specific repurchases. Under this program, 32.8 million
shares were repurchased through December 31, 1999. Funding for the program was
provided from Southern Company's commercial paper program. At the close of 1999,
the company's common stock market value was 23 1/2 per share, compared with book
value of $13.82 per share. The market-to-book value ratio was 170 percent at the
end of 1999, compared with 207 percent at year-end 1998, and 186 percent at
year-end 1997.
Capital Requirements for Construction
The construction program of Southern Company is budgeted at $3.0 billion for
2000, $3.8 billion for 2001, and $3.9 billion for 2002. 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 integrated Southeast utilities have approximately 5,200 megawatts of
combustion turbine generating capacity scheduled to be placed in service by
2002. Approximately 1,400 megawatts of this new capacity will be dedicated to
the wholesale market. Southern Energy has approximately 1,000 megawatts of owned
capacity under construction. Significant construction of transmission and
distribution facilities and upgrading of generating plants will be continuing
for the traditional business in the Southeast.
Other Capital Requirements
In addition to the funds needed for the construction program, approximately $2.1
billion will be required by the end of 2002 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.
Environmental Matters
On November 3, 1999, the Environmental Protection Agency (EPA) brought a civil
action in the U.S. District Court against Alabama Power, Georgia Power, and the
system service company. The complaint alleges violations of the prevention of
significant deterioration and new source review provisions of the Clean Air Act
with respect to five coal-fired generating facilities in Alabama and Georgia.
The civil action requests penalties and injunctive relief, including an order
requiring the installation of the best available control technology at the
affected units. The EPA concurrently issued to the integrated Southeast
utilities a notice of violation related to 10 generating facilities, which
includes the five facilities mentioned previously. In early 2000, the EPA filed
a motion to amend its complaint to add the violations alleged in its notice of
violation, and to add Gulf Power, Mississippi Power, and Savannah Electric as
defendants. The complaint and notice of violation are similar to those
brought against and issued to several other electric utilities. These complaints
and notices of violation allege that the utilities had failed to secure
necessary permits or install additional pollution equipment when performing
maintenance and construction at coal burning plants constructed or under
construction prior to 1978. Southern Company believes that its integrated
utilities complied with applicable laws and the EPA's regulations and
interpretations in effect at the time the work in question took place. The Clean
Air Act authorizes civil penalties of up to $27,500 per day per violation at
each generating unit. Prior to January 30, 1997, the penalty was $25,000 per
day. An adverse outcome of this matter could require substantial capital
expenditures that cannot be determined at this time and possibly require payment
of substantial penalties. This could affect future results of operations, cash
flows, and possibly financial condition if such costs are not recovered through
regulated rates.
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
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 nitrogen oxide and sulfur dioxide
emissions compliance totaled approximately $300 million.
For Phase II sulfur dioxide compliance, Southern Company currently uses
emission allowances and increased fuel switching. Also, equipment to control
nitrogen oxide emissions was installed on additional system fossil-fired units
as necessary to meet Phase II limits and ozone non-attainment requirements for
metropolitan Atlanta through 2000. Compliance for Phase II and initial ozone
non-attainment requirements increased total estimated construction expenditures
by approximately $105 million.
The States of Georgia and Alabama have proposed or drafted rules to address
one-hour ozone non-attainment in the Atlanta and Birmingham areas. Additional
nitrogen oxide emission controls will be required on certain generating plants
by May 1, 2003. It is expected that seven generating plants will be affected in
the Atlanta area and two plants in the Birmingham area. Additional construction
expenditures for compliance with these new rules are currently estimated at
approximately $850 million.
A significant portion of costs related to the acid rain and ozone
nonattainment provision of the Clean Air Act is expected to be recovered through
existing ratemaking provisions. However, there can be no assurance that all
Clean Air Act costs will be recovered.
In July 1997, the 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 reduction rule to the states for implementation. The final rule affects 22
states, including Alabama and Georgia. The EPA's July 1997 standards and the
September 1998 rule are being challenged in the courts by several states and
industry groups. Implementation of the final state rules for these three
initiatives could require substantial further reductions in nitrogen oxide and
sulfur dioxide emissions from fossil-fired generating facilities and other
industries in these states. Additional compliance costs and capital expenditures
resulting from the implementation of these rules and standards 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: additional controls for hazardous
air pollutant emissions; control strategies to reduce regional haze; and
hazardous waste disposal requirements. The impact of any new standards will
depend on the development and implementation of applicable regulations.
Southern Company must comply with other environmental laws and regulations
that cover the handling and disposal of hazardous waste. Under these various
laws and regulations, the subsidiaries could incur substantial costs to clean up
properties. The subsidiaries conduct studies to determine the extent of any
required cleanup costs and have recognized in their respective financial
statements costs to clean up known sites. These costs for Southern Company
amounted to $4 million in 1999, $6 million in 1998, and $4 million in 1997.
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
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
any -- will depend on the subsequent development and implementation of
applicable regulations. In addition, the potential exists for liability as the
result of lawsuits alleging damages caused by electromagnetic fields.
Sources of Capital
The amount and timing of additional equity capital to be raised in 2000 -- 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 integrated Southeast utilities 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. In recent years, financings primarily have utilized unsecured debt and
trust preferred securities.
To meet short-term cash needs and contingencies, Southern Company had at the
beginning of 2000 approximately $466 million of cash and cash equivalents and
$5.7 billion of unused credit arrangements with banks.
Cautionary Statement Regarding Forward-Looking
Information
Southern Company's 1999 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
indicated results will be realized. These factors include legislative and
regulatory initiatives regarding deregulation and restructuring of the electric
utility industry; the extent and timing of the entry of additional competition
in the markets of the subsidiary companies; potential business strategies --
including acquisitions or dispositions of assets or internal restructuring --
that may be pursued by the company; state and federal rate regulation in the
United States; changes in or application of environmental and other laws and
regulations to which the company and its subsidiaries are subject; political,
legal and economic conditions and developments in the United States and in
foreign countries in which the subsidiaries operate; financial market conditions
and the results of financing efforts; changes in commodity prices and interest
rates; weather and other natural phenomena; the performance of projects
undertaken by Southern Energy 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>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998, and 1997
Southern Company and Subsidiary Companies 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Operating Revenues:
Retail sales $ 8,086 $ 8,272 $ 7,647
Sales for resale 823 896 886
Southern Energy revenues 2,268 1,903 3,837
Other revenues 408 332 241
- -----------------------------------------------------------------------------------------------------------------------------
Total operating revenues 11,585 11,403 12,611
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 2,720 2,371 2,281
Purchased power 954 1,243 3,033
Other 2,199 2,112 1,930
Maintenance 945 887 763
Depreciation and amortization 1,307 1,539 1,367
Taxes other than income taxes 612 599 572
Write down of assets 69 342 -
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 8,806 9,093 9,946
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 2,779 2,310 2,665
Other Income:
Interest income 164 243 152
Gain on asset sales 315 59 24
Equity in earnings of unconsolidated subsidiaries 94 123 35
Other, net 94 (2) -
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Interest, Minority Interests, and Income Taxes 3,446 2,733 2,876
- -----------------------------------------------------------------------------------------------------------------------------
Interest Charges and Other:
Interest on long-term debt 698 712 678
Interest on notes payable 183 108 112
Amortization of debt discount, premium, and expense, net 125 65 34
Other interest charges 53 68 49
Minority interests in subsidiaries 183 80 29
Distributions on capital and preferred securities of subsidiaries 182 149 120
Preferred dividends of subsidiaries 20 25 43
- -----------------------------------------------------------------------------------------------------------------------------
Total interest charges and other, net 1,444 1,207 1,065
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 2,002 1,526 1,811
Income taxes 726 549 839
- -----------------------------------------------------------------------------------------------------------------------------
Consolidated Net Income $ 1,276 $ 977 $ 972
=============================================================================================================================
Common Stock Data:
Average number of shares of common stock outstanding (in millions) 685 697 685
Basic and diluted earnings per share of common stock $1.86 $1.40 $1.42
Cash dividends paid per share of common stock $1.34 $1.34 $1.30
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998, and 1997
Southern Company and Subsidiary Companies 1999 Annual Report
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C>
Operating Activities:
Consolidated net income $ 1,276 $ 977 $ 972
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Depreciation and amortization 1,522 1,773 1,592
Deferred income taxes and investment tax credits 137 (22) (5)
Gain on asset sales (315) (61) (25)
Write down of assets 69 342 -
Equity in earnings of unconsolidated subsidiaries (94) (123) (35)
Other, net 172 (76) (29)
Changes in certain current assets and liabilities
excluding effects from acquisitions --
Receivables, net (213) 151 (229)
Fossil fuel stock (26) (35) 53
Materials and supplies (50) (10) 21
Accounts payable (147) (17) 138
Other 392 (151) 172
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 2,723 2,748 2,625
- ---------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (2,560) (2,005) (1,859)
Southern Energy business and asset acquisitions, net of cash acquired (1,800) (998) (2,925)
Sales of property 285 281 32
Other (139) 86 (13)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (4,214) (2,636) (4,765)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (decrease) in notes payable, net 2,131 (353) 509
Proceeds --
Other long-term debt 2,646 2,973 2,499
Capital and preferred securities 250 435 1,321
Preferred stock - 200 -
Common stock 24 234 360
Redemptions --
First mortgage bonds (890) (1,487) (168)
Other long-term debt (957) (599) (802)
Capital and preferred securities (100) - -
Preferred stock (86) (239) (660)
Common stock repurchased (862) (125) -
Payment of common stock dividends (921) (933) (889)
Other (150) 53 126
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities 1,085 159 2,296
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (406) 271 156
Cash and Cash Equivalents at Beginning of Year 872 601 445
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 466 $ 872 $ 601
===========================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the year for --
Interest (net of amount capitalized) $1,011 $998 $876
Income taxes $642 $839 $823
Southern Energy business and asset acquisitions --
Fair value of assets acquired $1,832 $1,072 $4,768
Less cash paid 1,800 998 2,925
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 32 $ 74 $1,843
===========================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
At December 31, 1999 and 1998
Southern Company and Subsidiary Companies 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------
Assets 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 466 $ 872
Special deposits 72 87
Receivables, less accumulated provisions for uncollectible accounts
of $59 million in 1999 and $113 million in 1998 1,652 1,692
Unrecovered retail fuel clause revenue 244 105
Fossil fuel stock, at average cost 311 252
Materials and supplies, at average cost 585 515
Other 199 183
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 3,529 3,706
- -----------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment:
In service 36,763 35,169
Less accumulated provision for depreciation 14,076 13,239
- -----------------------------------------------------------------------------------------------------------------------
22,687 21,930
Nuclear fuel, at amortized cost 227 217
Construction work in progress 1,630 1,782
- -----------------------------------------------------------------------------------------------------------------------
Total property, plant, and equipment 24,544 23,929
- -----------------------------------------------------------------------------------------------------------------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 1,376 1,549
Property rights, net of accumulated amortization of
$227 million in 1999 and $169 million in 1998 2,202 1,185
Goodwill, net of accumulated amortization of
$164 million in 1999 and $106 million in 1998 2,106 2,125
Other intangibles, net of accumulated amortization of
$13 million in 1999 and $1 million in 1998 447 154
Nuclear decommissioning trusts, at fair value 658 516
Leveraged leases 556 264
Other 580 374
- -----------------------------------------------------------------------------------------------------------------------
Total other property and investments 7,925 6,167
- -----------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 987 1,036
Prepaid pension costs 590 491
Debt expense, being amortized 145 129
Premium on reacquired debt, being amortized 217 294
Other 459 439
- -----------------------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 2,398 2,389
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $38,396 $36,191
=======================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (continued)
At December 31, 1999 and 1998
Southern Company and Subsidiary Companies 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C>
Current Liabilities:
Securities due within one year $ 576 $ 1,526
Notes payable 3,915 1,828
Accounts payable 895 1,027
Customer deposits 133 125
Taxes accrued --
Income taxes 155 49
Other 264 299
Interest accrued 281 233
Vacation pay accrued 120 112
Other 794 542
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 7,133 5,741
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt (See accompanying statements) 11,747 10,472
- -----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,505 4,481
Deferred credits related to income taxes 640 715
Accumulated deferred investment tax credits 693 723
Employee benefits provisions 513 474
Prepaid capacity revenues 80 96
Other 460 609
- -----------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 6,891 7,098
- -----------------------------------------------------------------------------------------------------------------------
Minority interests in subsidiaries 725 535
- -----------------------------------------------------------------------------------------------------------------------
Company or subsidiary obligated mandatorily redeemable
capital and preferred securities (See accompanying statements) 2,327 2,179
- -----------------------------------------------------------------------------------------------------------------------
Cumulative preferred stock of subsidiaries (See accompanying statements) 369 369
- -----------------------------------------------------------------------------------------------------------------------
Common stockholders' equity (See accompanying statements) 9,204 9,797
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $38,396 $36,191
=======================================================================================================================
Commitments and Contingent Matters (Notes 1, 2, 3, 4, 5, 7, 12, and 13)
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these balance sheets.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1999 and 1998
Southern Company and Subsidiary Companies 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
Long-Term Debt of Subsidiaries:
First mortgage bonds --
Maturity Interest Rates
------- -------------
<S> <C> <C> <C> <C> <C>
1999 6.13% to 8.67% $ - $ 373
2000 6.00% to 8.67% 200 209
2001 8.67% - 9
2002 8.67% - 10
2003 6.13% to 8.67% 325 635
2004 6.60% to 8.67% 35 45
2005 through 2009 6.07% to 8.67% 105 165
2010 through 2014 8.67% - 80
2015 through 2019 8.67% - 38
2020 through 2024 7.30% to 9.00% 559 764
2025 through 2026 6.88% to 7.88% 117 137
- -----------------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 1,341 2,465
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term notes payable --
6.13% to 11.00% due 1999-2002 - 437
6.38% to 11.00% due 2000-2002 279 -
5.35% to 9.75% due 2003-2004 901 361
5.49% to 10.50% due 2005 760 551
6.80% to 9.70% due 2006 593 582
5.76% to 10.25% due 2007 583 447
3.07% to 10.56% due 2008-2015 1,605 959
6.38% to 8.12% due 2018-2038 801 803
6.63% to 7.13% due 2039-2048 1,029 729
Adjustable rates (3.81% to 8.63% at 1/1/00)
due 1999-2007 1,887 1,958
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term notes payable 8,438 6,827
- -----------------------------------------------------------------------------------------------------------------------------------
Other long-term debt --
Pollution control revenue bonds --
Collateralized:
4.38% to 6.75% due 2000-2026 617 954
Variable rates (3.70% to 4.85% at 1/1/00)
due 2011-2025 120 639
Non-collateralized:
5.25% to 7.25% due 2003-2034 263 110
Variable rates (3.50% to 6.03% at 1/1/00)
due 2011-2037 1,510 880
- -----------------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 2,510 2,583
- -----------------------------------------------------------------------------------------------------------------------------------
Capitalized lease obligations 97 135
- -----------------------------------------------------------------------------------------------------------------------------------
Unamortized debt premium (discount), net (63) (98)
- -----------------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $800 million) 12,323 11,912
Less amount due within one year 576 1,440
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding amount due within one year 11,747 10,472 49.7% 45.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At December 31, 1999 and 1998
Southern Company and Subsidiary Companies 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(in millions) (percent of total)
<S> <C> <C> <C> <C>
Company or Subsidiary Obligated Mandatorily
Redeemable Capital and Preferred Securities:
$25 liquidation value --
6.85% to 7.00% 435 235
7.13% to 7.38% 297 297
7.60% to 7.63% 415 415
7.75% 649 649
8.14% to 9.00% 481 583
Auction rate (6.42% at 1/1/00) 50 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total company or subsidiary obligated mandatorily
redeemable capital and preferred securities (annual
distribution requirement -- $176 million) 2,327 2,179 9.8 9.6
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock of Subsidiaries:
$100 par or stated value --
4.20% to 7.00% 99 135
$25 par or stated value --
5.20% to 5.83% 200 200
Adjustable and auction rates -- at 1/1/00:
4.22% to 4.50% 70 120
- -----------------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $19 million) 369 455
Less amount due within one year - 86
- -----------------------------------------------------------------------------------------------------------------------------------
Total cumulative preferred stock of subsidiaries
excluding amount due within one year 369 369 1.6 1.6
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stockholders' Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- 1999: 701 million shares
-- 1998: 700 million shares
Treasury -- 1999: 35 million shares
-- 1998: 2 million shares
Par value 3,503 3,499
Paid-in capital 2,480 2,463
Treasury, at cost (919) (58)
Retained earnings 4,232 3,878
Accumulated other comprehensive income (92) 15
- -----------------------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity 9,204 9,797 38.9 42.9
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $23,647 $22,817 100.0% 100.0%
===================================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998, and 1997
Southern Company and Subsidiary Companies 1999 Annual Report
Common Stock Accumulated
--------------------------------------- Other
Par Paid In Retained Comprehensive
Value Capital Treasury Earnings Income Total
- -------------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $3,385 $2,053 $ - $3,764 $ 14 $9,216
Net income - - - 972 - 972
Other comprehensive income - - - - (7) (7)
Stock issued 82 278 - - - 360
Cash dividends - - - (889) - (889)
Other - - - (5) - (5)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,467 2,331 - 3,842 7 9,647
Net income - - - 977 - 977
Other comprehensive income - - - - 8 8
Stock issued 32 132 70 - - 234
Stock repurchased, at cost - - (125) - - (125)
Cash dividends - - - (933) - (933)
Other - - (3) (8) - (11)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 3,499 2,463 (58) 3,878 15 9,797
Net income - - - 1,276 - 1,276
Other comprehensive income - - - - (107) (107)
Stock issued 4 17 1 - - 22
Stock repurchased, at cost - - (861) - - (861)
Cash dividends - - - (921) - (921)
Other - - (1) (1) - (2)
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $3,503 $2,480 $(919) $4,232 $ (92) $9,204
=========================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 1999, 1998, and 1997
Southern Company and Subsidiary Companies 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(in millions)
Consolidated Net Income $1,276 $977 $972
Other comprehensive income:
Foreign currency translation adjustments (165) 12 (10)
Less applicable income taxes (benefits) (58) 4 (3)
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Comprehensive Income $1,169 $985 $965
==========================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Southern Company and Subsidiary Companies 1999 Annual Report
1. Summary of Significant Accounting
Policies
General
Southern Company is the parent company of five integrated Southeast utilities, 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 integrated Southeast utilities -- Alabama Power,
Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric -- provide
electric service in four states. Contracts among the integrated Southeast
utilities -- related to 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 integrated Southeast utilities
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. Southern Nuclear provides services to Southern Company's
nuclear power plants. Southern Energy acquires, develops, builds, owns, and
operates power production and delivery facilities and provides a broad range of
energy-related services to utilities and industrial companies in selected
countries around the world. Southern Energy businesses include independent power
projects, integrated utilities, a distribution company, and energy trading and
marketing businesses outside the southeastern United States.
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 integrated Southeast
utilities 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. The equity method is used for subsidiaries
in which the company has significant influence but does not control. 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 integrated Southeast utilities 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 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:
1999 1998
- ---------------------------------------------------------------
(in millions)
Deferred income tax charges $ 987 $1,036
Premium on reacquired debt 217 294
Department of Energy assessments 52 57
Vacation pay 87 81
Postretirement benefits 33 36
Deferred income tax credits (640) (715)
Storm damage reserves (29) (24)
Other, net 144 162
- ---------------------------------------------------------------
Total $ 851 $ 927
===============================================================
In the event that a portion of a company's operations is no longer subject to
the provisions of FASB Statement No. 71, the company would be required to write
off related 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.
22
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Revenues and Fuel Costs
Revenues are accrued for service rendered but unbilled at the end of each fiscal
period. Fuel costs are expensed as the fuel is used. Electric rates for the
integrated Southeast utilities include provisions to adjust billings for
fluctuations in fuel costs, the energy component of purchased power costs, and
certain other costs. Revenues are adjusted for differences between recoverable
fuel costs and amounts actually recovered in current regulated 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 $137
million in 1999, $133 million in 1998, and $144 million in 1997. 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. 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. Activities for adding dry cask storage
capacity and for potentially increasing spent fuel pool rack capacity at Plant
Hatch during 2000 are in progress. Planning for additional on-site spent fuel
storage capacity at Plant Farley is also in progress, with the intent to place
additional on-site spent fuel storage capacity in operation as early as 2005. In
addition, through Southern Nuclear, Alabama Power and Georgia Power are members
of Private Fuel Storage, LLC, a joint utility effort to develop a private spent
fuel storage facility for temporary storage of spent nuclear fuel. This facility
is planned to begin operation as early as the year 2003.
Also, the Energy Policy Act of 1992 required the establishment 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, 1999, under this law to be approximately $28 million and $21
million. These obligations are recorded in the Consolidated Balance Sheets.
Depreciation and Nuclear Decommissioning
Depreciation of the original cost of plant in service is provided primarily by
using composite straight-line rates, which approximated 3.5 percent in 1999 and
3.4 percent in 1998 and 1997. 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
$314 million in 1998 and $159 million in 1997. Georgia Power did not record any
additional depreciation in 1999. 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
23
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
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
of December 31, 1999, 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. Rates used in the assumptions were approved by the
respective public service commissions.
Annual provisions for nuclear decommissioning are based on an annuity method
as approved by the respective state public service commissions. The amount
expensed in 1999 and fund balances were as follows:
Plant Plant Plant
Farley Hatch Vogtle
- ---------------------------------------------------------------
(in millions)
Amount expensed in 1999 $18 $17 $9
Accumulated provisions:
External trust funds,
at fair value $287 $222 $149
Internal reserves 40 22 12
- ---------------------------------------------------------------
Total $327 $244 $161
===============================================================
Alabama Power's decommissioning costs for ratemaking are based on the site
study. Effective January 1, 1999, the Georgia Public Service Commission
(GPSC)increased Georgia Power's 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. 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.
Property, Plant, and Equipment
Property, plant, and equipment is stated at original cost less regulatory
disallowances and impairments. 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
24
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
replacement of minor items of property is charged to maintenance expense. The
cost of replacements of property -- exclusive of minor items of property -- is
capitalized.
Property Rights
Property rights primarily consist of leasehold interests in Southern Energy's
Asian power generation facilities that are developed under build, operate, and
transfer agreements with the government-owned utility. These construction costs
for Southern Energy are initially recorded as construction work in progress, and
- -- after completion -- they are recorded as leasehold interests. These costs are
amortized over the period -- ranging from 12 to 29 years -- that the facility is
operated before transfer to the government-owned utility.
Goodwill and Other Intangible Assets
Goodwill, which represents the excess of cost over the fair value of assets of
businesses acquired, is amortized on a straight-line basis over periods from 30
to 40 years. Other intangible assets are amortized on a straight-line basis over
periods from 15 to 30 years.
Leveraged Leases
Southern Energy has several leveraged lease agreements -- ranging from 21 to 30
years -- that primarily relate to international energy generation, distribution,
and transportation assets. The investment income earned from these leveraged
leases is immaterial for all periods presented.
Impairment of Long-Lived Assets and Intangibles
Southern Company evaluates long-lived assets -- including goodwill and
identifiable intangibles -- when events or changes in circumstances indicate
that the carrying value of such assets may not be recoverable. The determination
of whether an impairment has occurred is based on an estimate of undiscounted
future cash flows attributable to the assets, as compared to the carrying value
of the assets. If an impairment has occurred, the amount of the impairment
recognized is determined by estimating the fair value of the assets and
recording a provision for loss if the carrying value is greater than the fair
value. For assets identified as held for sale, the carrying value is compared to
their estimated fair value less the cost to sell in order to determine if an
impairment provision is required. Until the assets are disposed of, their
estimated fair value is reevaluated when circumstances or events change.
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.
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 Energy'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. Gains and losses on foreign currency
transactions are not material for all periods presented.
Comprehensive Income
Comprehensive income -- consisting of net income and foreign currency
translation adjustments net of taxes -- 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.
25
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
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 of the
hedged item when the 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 Energy's international operations are exposed to the effects of
foreign currency exchange rate fluctuations. To protect against this exposure,
currency swaps are used to hedge the 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. Non-trading hedging
activities are classified in the same category as the item hedged in the
company's cash flow statement.
Non-trading financial derivative instruments held at December 31, 1999, were
as follows:
Year of Unrecognized
Maturity or Notional Gain
Type Termination Amount (Loss)
- ------------------------------- --------------------------
(in millions)
Interest rate
swaps: 2000-2012 $1,910 $(3)
2001-2012 (pound)600 $(49)
2002-2007 DM691 $(5)
Cross currency
swaps 2001-2007 (pound)414 $(11)
Cross currency
swaption 2003 DM435 $11
- -----------------------------------------------------------------
(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.
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, 1999 $12,226 $11,557
At December 31, 1998 11,777 11,626
Capital and preferred securities:
At December 31, 1999 2,327 2,015
At December 31, 1998 2,179 2,288
- --------------------------------------------------------------
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
During 1999, Southern Energy created an energy trading company in Amsterdam,
which provides risk management services associated with the energy industry to
its customers in the European market. These services are provided primarily
through a variety of exchange-traded energy contracts including forward
contracts, futures contracts, option contracts, and financial swap agreements.
These contractual commitments, which represent risk management assets and
liabilities, are accounted for using the mark-to-market method of accounting.
Accordingly, they are reflected at fair value, net of future delivery costs, in
the Consolidated Balance Sheets.
Net unrealized gains from risk management services are immaterial at December
31, 1999. The volumetric weighted average maturity of the contractual
commitments was 1.35 years. The net notional amount of the risk management
assets and liabilities at December 31, 1999 was 5.3 billion kilowatt-hours. The
notional amount is indicative only of the volume of activity and not of the
amount exchanged by the parties to the financial instruments. Consequently,
26
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
these amounts are not a measure of market risk. The averages for 1999 were based
on month-end balances. The fair value of these assets and liabilities at
December 31, 1999 was $1 million and $5 million, respectively.
The Amsterdam trading operations involve elements of credit risk. The trading
operation has attempted to mitigate this risk by establishing controls to
determine and monitor the creditworthiness of counterparties. The company
monitors credit risk on both an individual and group counterparty basis.
Accordingly, the company does not anticipate any material impact to its
financial position or results of operations as a result of counterparty
nonperformance.
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 integrated Southeast utilities fund trusts to the extent
required by their respective regulatory commissions. The measurement date for
plan assets and obligations 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
-------------------
1999 1998
- --------------------------------------------------------------
(in millions)
Balance at beginning of year $4,170 $3,701
Service cost 111 99
Interest cost 265 273
Benefits paid (213) (201)
Actuarial (gain) loss (251) 298
- --------------------------------------------------------------
Balance at end of year $4,082 $4,170
==============================================================
Plan Assets
-----------------
1999 1998
- --------------------------------------------------------------
(in millions)
Balance at beginning of year $5,978 $5,931
Actual return on plan assets 1,008 223
Employer contributions - 4
Benefits paid (308) (180)
- --------------------------------------------------------------
Balance at end of year $6,678 $5,978
==============================================================
The accrued pension costs recognized in the Consolidated Balance Sheets were
as follows:
1999 1998
- ---------------------------------------------------------------
(in millions)
Funded status $ 2,596 $ 1,808
Unrecognized transition obligation (76) (89)
Unrecognized prior service cost 149 119
Unrecognized net gain (2,079) (1,347)
- ---------------------------------------------------------------
Prepaid asset recognized in the
Consolidated Balance Sheets $ 590 $ 491
===============================================================
Components of the pension plans' net periodic cost were as follows:
1999 1998 1997
- ---------------------------------------------------------------
(in millions)
Service cost $ 111 $ 99 $ 94
Interest cost 265 273 271
Expected return on
plan assets (451) (425) (394)
Recognized net gain (42) (47) (42)
Net amortization 2 (9) (9)
- ---------------------------------------------------------------
Net pension cost (income) $(115) $(109) $ (80)
===============================================================
Postretirement Benefits
Changes during the year in the accumulated benefit obligations and in the fair
value of plan assets were as follows:
Accumulated
Benefit Obligations
--------------------
1999 1998
- ---------------------------------------------------------------
(in millions)
Balance at beginning of year $1,037 $ 935
Service cost 21 18
Interest cost 69 69
Benefits paid (36) (35)
Actuarial (gain) loss (95) 50
- ----------------------------------------------------------------
Balance at end of year $ 996 $1,037
================================================================
27
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Plan Assets
------------------
1999 1998
- ---------------------------------------------------------------
(in millions)
Balance at beginning of year $336 $294
Actual return on plan assets 36 8
Employer contributions 60 69
Benefits paid (37) (35)
- ---------------------------------------------------------------
Balance at end of year $395 $336
===============================================================
The accrued postretirement costs recognized in the Consolidated Balance
Sheets were as follows:
1999 1998
- ---------------------------------------------------------------
(in millions)
Funded status $(601) $(701)
Unrecognized transition obligation 203 219
Unrecognized prior service cost 1 -
Unrecognized net loss (gain) 11 117
Fourth quarter contributions 25 30
- ---------------------------------------------------------------
Accrued liability recognized in the
Consolidated Balance Sheets $(361) $(335)
===============================================================
Components of the postretirement plans' net periodic cost were as follows:
1999 1998 1997
- --------------------------------------------------------------
(in millions)
Service cost $ 21 $ 18 $ 18
Interest cost 69 69 66
Expected return on
plan assets (26) (21) (18)
Recognized net gain 2 2 3
Net amortization 15 14 17
- --------------------------------------------------------------
Net postretirement cost $ 81 $ 82 $ 86
==============================================================
The weighted average rates assumed in the actuarial calculations for both
the pension plans and postretirement benefits were:
1999 1998
- ---------------------------------------------------------------
Discount 7.50% 6.75%
Annual salary increase 5.00 4.25
Long-term return on plan assets 8.50 8.50
- ---------------------------------------------------------------
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of 7.74
percent for 1999, decreasing gradually to 5.50 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,
1999 as follows:
1 Percent 1 Percent
Increase Decrease
- ----------------------------------------------------------------
(in millions)
Benefit obligation $73 $(62)
Service and interest costs 6 (5)
- ----------------------------------------------------------------
Work Force Reduction Programs
Southern Company has incurred additional costs for work force reduction
programs. The costs related to these programs were $30 million, $32 million, and
$50 million for the years 1999, 1998, and 1997, respectively. In addition,
certain costs of these programs were deferred and are being amortized in
accordance with regulatory treatment.
3. CONTINGENCIES AND REGULATORY
MATTERS
Alabama Power Lake Martin 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. Alabama Power has appealed 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.
Additional actions have been filed by other land owners in the same
subdivision on Lake Martin against the same defendants, including Alabama Power.
The plaintiffs assert substantially the same allegations as in the current
proceeding being appealed. The final outcome of these actions cannot now be
determined.
28
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 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, 1999, 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.
Environmental Litigation
On November 3, 1999, the EPA brought a civil action in the U.S. District Court
against Alabama Power, Georgia Power, and the system service company. The
complaint alleges violations of the prevention of significant deterioration and
new source review provisions of the Clean Air Act with respect to five
coal-fired generating facilities in Alabama and Georgia. The civil action
requests penalties and injunctive relief, including an order requiring the
installation of the best available control technology at the affected units. The
Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation
at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per
day.
The EPA concurrently issued to the integrated Southeast utilities a notice of
violation related to 10 generating facilities, which includes the five
facilities mentioned previously. In early 2000, the EPA filed a motion to amend
its complaint to add the violations alleged in its notice of violation, and to
add Gulf Power, Mississippi Power, and Savannah Electric as defendants. The
complaint and notice of violations are similar to those brought against and
issued to several other electric utilities. These complaints and notices of
violation allege that the utilities had failed to secure necessary permits or
install additional pollution equipment when performing maintenance and
construction at coal burning plants constructed or under construction prior to
1978. Southern Company believes that its integrated utilities complied with
applicable laws and the EPA's regulations and interpretations in effect at the
time the work in question took place.
An adverse outcome of this matter could require substantial capital
expenditures that cannot be determined at this time and possibly require payment
of substantial penalties. This could affect future results of operations, cash
flows, and possibly financial condition if such costs are not recovered through
regulated rates.
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. As a result of the bankruptcy filing, the
investment in MESC was deconsolidated. 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 was in
response to Kimberly-Clark Tissue Company's (Kimberly-Clark) announcement in May
1998 of plans to close its pulp mill, effective September 1, 1999. The pulp mill
had historically provided 50 percent of MESC's revenues.
As a result of settlement discussions with Kimberly-Clark and MESC's
bondholders, Southern Company recorded in September 1999 an after-tax write down
of $69 million, primarily representing Southern Company's investment in MESC. At
December 31, 1999, MESC had total assets of $395 million and senior debt
outstanding of $193 million of first mortgage bonds and $73 million related to
tax-exempt bonds. In connection with MESC's bond financings, Southern Company
provided certain limited guarantees, in lieu of funding debt service and
maintenance reserve accounts with cash. As of December 31, 1999, Southern
Company had paid $38 million pursuant to the guarantees. Southern Company
continues to have guarantees outstanding of certain potential environmental and
other obligations of MESC that represent a maximum contingent liability of $21
million at December 31, 1999.
MESC, an unofficial committee of its bondholders, and Kimberly-Clark have
reached a tentative agreement to settle disputes arising from the shutdown of
Kimberly-Clark's pulp mill in Mobile, Alabama, and to reconfigure energy
services at the site. MESC has reached a separate agreement with Southern Energy
to develop and operate a 165-megawatt cogeneration facility at the site,
including providing a combustion turbine for such facility. The bankruptcy court
approved both agreements.
29
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
The finalization of the proposed settlement between MESC and Kimberly-Clark
requires further agreements to be negotiated between the parties and certain
other conditions to be met, including having a plan of reorganization for MESC
be approved by the bankruptcy court and become effective by no later than
October 30, 2000. If these conditions, as well as others set out in the
settlement agreement filed with the bankruptcy court, are not met, then the
proposed settlement would no longer be effective. The final outcome of this
matter cannot now be determined.
Southern Energy Brazilian Investment
In September 1999, a Brazilian appellate court granted a temporary injunction
that suspended the effectiveness of a shareholders' agreement for Companhia
Energetica de Minas Gerais (CEMIG). This ruling suspends the shareholders'
agreement -- including Southern Energy's super majority voting rights -- while
the action to determine the validity of the agreement is litigated in the lower
court. Southern Energy intends to pursue its legal rights in this matter and to
have all of its rights restored regarding CEMIG. Southern Energy does not
anticipate that this temporary suspension of the shareholders' agreement will
have a significant effect on its financial condition or results of operation.
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.
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. Alabama Power did not
record any additional amounts in 1999 or 1997.
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 the 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 were decreased by $262 million
effective January 1, 1999, and by an additional $24 million effective January 1,
2000. In addition, the order provided for $85 million annually to be applied to
accelerated amortization or depreciation of assets, and up to an additional $50
million annually in 2000 and 2001 of any earnings above the 12.5 percent return.
In 1999, Georgia Power -- in accordance with the rate order -- recorded $85
million of additional amortization of premium on reacquired debt.
30
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Two-thirds of any additional earnings above the 12.5 percent return in any
year will be applied to rate reductions and the remaining one-third retained by
Georgia Power. In 1999, Georgia Power's return was above 12.5 percent, and
accordingly, it recorded $79 million as an estimate of revenues to be refunded
to customers in 2000. 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 $3.0 billion in 2000, $3.8 billion in 2001, and $3.9
billion in 2002. 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, 1999, significant
purchase commitments were outstanding in connection with the construction
program. The integrated Southeast utilities have approximately 5,200 megawatts
of combustion turbine generating capacity scheduled to be placed in service by
2002. Southern Energy has under construction approximately 1,000 megawatts of
owned capacity. In addition, significant construction will continue related to
transmission and distribution facilities and the upgrading of generating plants.
See Management's Discussion and Analysis under "Environmental Matters" for
information on the impact of the Clean Air Act Amendments of 1990 and other
environmental matters.
5. FINANCING AND COMMITMENTS
Financing
The amount and timing of additional equity capital to be raised in 2000 -- as
well as in subsequent years -- will be contingent on Southern Company's
investment opportunities. Equity capital may be provided from any combination of
public offerings, private placements, or the company's stock plans.
The integrated Southeast utilities' 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 2000, unused credit arrangements with banks totaled $5.7
billion, of which $3.1 billion expires during 2000, $1.1 billion during 2001 and
2002, and $1.5 billion during 2003 and 2004. The following table outlines the
credit arrangements by company:
Amount of Credit
-------------------------------------
Expires
--------------------
2001 &
Company Total Unused 2000 beyond
- -------- ---------------------------------------
(in millions)
Alabama Power $ 907 $ 907 $ 517 $ 390
Georgia Power 1,252 1,252 752 500
Gulf Power 103 103 103 -
Mississippi Power 104 104 104 -
Savannah Electric 61 26 26 -
Southern Company 2,000 2,000 1,000 1,000
Southern Energy 3,021 1,256 574 682
Other 60 51 51 -
- --------------------------------------------------------------
Total $7,508 $5,699 $3,127 $2,572
==============================================================
Approximately $2.5 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 $5.7 billion in unused credit, $1.85 billion, $1.0
billion, $800 million, and $780 million are syndicated credit arrangements of
Southern Company, Georgia Power, Southern Energy, and Alabama Power,
respectively. These facilities also require the payment of agent fees.
31
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
A portion of the $5.7 billion unused credit with banks is allocated to
provide liquidity support to the companies' variable rate pollution control
bonds. The amount of variable rate pollution control bonds requiring liquidity
support as of December 31, 1999, was $674 million.
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.
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,
1999, were as follows:
Purchased
Year Fuel Power
- ----- ------------------------
(in millions)
2000 $1,629 $ 81
2001 1,351 81
2002 1,153 97
2003 1,012 99
2004 872 95
2005 and thereafter 3,429 1,006
- ---------------------------------------------------------------
Total commitments $9,446 $1,459
===============================================================
Operating Leases
Southern Company has operating lease agreements with various terms and
expiration dates. These expenses totaled $67 million, $56 million, and $36
million for 1999, 1998, and 1997, respectively. At December 31, 1999, estimated
minimum rental commitments for noncancelable operating leases were as follows:
Year Amounts
- ---- ------------
(in millions)
2000 $ 64
2001 83
2002 89
2003 82
2004 82
2005 and thereafter 526
- ------------------------------------------------------------------
Total minimum payments $926
==================================================================
Long-Term Service Agreements
Southern Energy has entered into several long-term service agreements for the
maintenance and repair of its combustion turbine or combined cycle generating
plants. These agreements may be terminated in the event a planned construction
project is canceled. At December 31, 1999, the annual amounts committed are as
follows:
Year Amounts
- ---- ---------------
(in millions)
2000 $ 3
2001 8
2002 28
2003 51
2004 62
2005 and thereafter 591
- ----------------------------------------------------------------
Total minimum payments $743
================================================================
Energy Trading and Marketing Commitments
In 1998, Southern Energy and Vastar Resources (Vastar) completed the combination
of their energy trading and marketing activities to form a joint venture,
Southern Company Energy Marketing (SCEM). SCEM buys and sells physical and
financial energy commodities and financial instruments and provides
energy-related products and services. SCEM's gross revenues and cost of sales
for 1999 were $12.0 billion and $11.9 billion, respectively.
Southern Energy's current ownership interest in SCEM is 60 percent. The
equity method of accounting is used because of Vastar's significant
32
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
participation rights. On July 1, 2001, this ownership interest will
automatically increase to 75 percent. Southern Energy has the right --
exercisable during fiscal year 2002 -- to acquire an additional 5 percent
interest from Vastar for $80 million. Also, Vastar has the right -- exercisable
in the period from December 1, 2002 through January 2, 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.
Southern Company and Vastar have separately made guarantees to certain
counterparties regarding performance of contractual commitments by SCEM.
Southern Company and Vastar have agreed to indemnify each other against losses
under such guarantees in proportion to their respective ownership shares of
SCEM. At December 31, 1999, outstanding guarantees related to the estimated fair
value of net contractual commitments were approximately $146 million. Based upon
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.
Southern Energy has guaranteed certain minimum annual cash distributions,
subject to exclusions, payable by SCEM to Vastar. For 1999, this distribution,
after adjustments, was $17 million. These distributions before any adjustments
total $85 million for the period 2000-2002.
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. 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 jointly with OPC, the Municipal Electric Authority of
Georgia, the city of Dalton, Georgia, Florida Power &Light Company (FP&L), and
Jacksonville Electric Authority (JEA). In addition, Georgia Power has joint
ownership agreements with OPC for the Rocky Mountain project and with Florida
Power Corporation (FPC) for a combustion turbine unit at Intercession City,
Florida.
At December 31, 1999, 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% $3,297 $1,630
Plant Hatch
(nuclear) 50.1 857 604
Plant Miller
(coal)
Units 1 and 2 91.8 740 297
Plant Scherer
(coal)
Units 1 and 2 8.4 112 51
Plant Wansley
(coal) 53.5 299 145
Rocky Mountain
(pumped storage) 25.4 169 66
Intercession City
(combustion turbine) 33.3 11 *
- ---------------------------------------------------------------
*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 integrated Southeast utilities 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
33
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
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 $174 million in 1999, $196 million in 1998,
and $203 million in 1997.
Unit power from specific generating plants is currently being sold to FP&L,
FPC, JEA, and the city of Tallahassee, Florida. Under these agreements,
approximately 1,600 megawatts of capacity is scheduled to be sold in 2000.
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
2000 with a minimum of three years notice -- until the expiration of the
contracts in 2010.
8. INCOME TAXES
At December 31, 1999, the tax-related regulatory assets and liabilities were
$987 million and $640 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:
1999 1998 1997
- --------------------------------------------------------------
(in millions)
Total provision for income taxes:
Federal --
Current $ 486 $ 451 $ 547
Deferred -- current year 186 195 188
-- reversal of
prior years (145) (208) (160)
- --------------------------------------------------------------
527 438 575
- --------------------------------------------------------------
State --
Current 85 106 104
Deferred -- current year 16 28 15
-- reversal of
prior years (10) (31) (19)
- --------------------------------------------------------------
91 103 100
- --------------------------------------------------------------
International 108 8 164
- --------------------------------------------------------------
Total $ 726 $ 549 $ 839
==============================================================
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:
1999 1998
- --------------------------------------------------------------
(in millions)
Deferred tax liabilities:
Accelerated depreciation $3,439 $3,315
Property basis differences 1,516 1,667
Other 585 403
- --------------------------------------------------------------
Total 5,540 5,385
- --------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 102 104
Other property basis differences 221 239
Deferred costs 134 132
Pension and other benefits 90 79
Other 420 293
- ---------------------------------------------------------------
Total 967 847
- ---------------------------------------------------------------
Net deferred tax liabilities 4,573 4,538
Portion included in current assets, net (68) (57)
- ---------------------------------------------------------------
Accumulated deferred income taxes
in the Consolidated Balance Sheets $4,505 $4,481
===============================================================
Deferred investment tax credits are amortized over the lives 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 $35 million in 1999, $38 million in 1998, and $30 million in
1997. At December 31, 1999, all investment tax credits available to reduce
federal income taxes payable had been utilized.
A reconciliation of the federal statutory income tax rate -- which excludes
the effect of minority interests and preferred dividends -- to the effective
income tax rate is as follows:
1999 1998 1997
- ---------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income tax,
net of federal deduction 2.8 4.1 3.4
Non-deductible book
depreciation 1.3 4.1 2.3
Differences in foreign tax rates (5.1) (6.4) -
Windfall profits tax - - 8.0
Difference in prior years'
deferred and current tax rate (0.9) (1.3) (1.5)
Other (0.2) (1.8) (1.9)
- ---------------------------------------------------------------
Effective income tax rate 32.9% 33.7% 45.3%
===============================================================
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.
34
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
The undistributed earnings of foreign subsidiaries aggregated $435
million as of December 31, 1999, and these subsidiaries' earnings are not
subject to U.S. income tax until distributed. Of the total undistributed
earnings, provisions for U.S. taxes have not been made on $210 million related
to earnings that are intended to be reinvested indefinitely.
9. COMMON STOCK
Stock Repurchase Programs
In April 1999, Southern Company's Board of Directors approved the repurchase of
up to 50 million shares of Southern Company's common stock over a two-year
period through open market or privately negotiated transactions. The program did
not establish a target stock price or timetable for specific repurchases. Under
this program, 32.8 million shares have been repurchased through December 31,
1999. Funding for the program was provided from Southern Company's commercial
paper program.
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 was 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 were repurchased and 2.4 million
shares were reissued.
Shares Reserved
At December 31, 1999, a total of 47 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, 1999, 355 current and former employees participated in the
Performance Stock Plan. The maximum number of shares of common stock that may be
issued under the 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
three years from the date of grant. Options outstanding will expire no later
than 10 years after the date of grant, unless terminated earlier by the Southern
Company Board of Directors in accordance with the plan. Stock option activity in
1998 and 1999 for the plan is summarized below:
Shares Average
Subject Option Price
To Option Per Share
- --------------------------------------------------------------
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 (604,238) 20.21
- --------------------------------------------------------------
Balance at December 31, 1998 6,431,292 22.77
Options granted 2,108,818 26.56
Options canceled (27,995) 25.54
Options exercised (56,708) 19.51
- --------------------------------------------------------------
Balance at December 31, 1999 8,455,407 $23.73
==============================================================
Shares reserved for future grants:
At December 31, 1997 38,241,376
At December 31, 1998 36,598,001
At December 31, 1999 34,515,156
- --------------------------------------------------------------
Options exercisable:
At December 31, 1998 2,653,591
At December 31, 1999 4,525,349
- --------------------------------------------------------------
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
------------------------------
1999 1998 1997
- --------------------------------------------------------------
(in thousands)
As reported shares 685,163 696,944 685,033
Effect of options 580 739 201
- --------------------------------------------------------------
Diluted shares 685,743 697,683 685,234
==============================================================
35
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
Common Stock Dividend Restrictions
The income of Southern Company is derived primarily from equity in earnings of
its subsidiaries. At December 31, 1999, consolidated retained earnings included
$3.5 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, 1999, capital securities of
$950 million and preferred securities of $1.4 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:
1999 1998
- --------------------------------------------------------------
(in millions)
Bond improvement fund requirements $ 14 $ 23
Less:
Portion to be satisfied by certifying
property additions 9 14
- --------------------------------------------------------------
Cash requirements 5 9
First mortgage bond maturities
and redemptions 200 868
Other long-term debt maturities 371 563
- --------------------------------------------------------------
Total $576 $1,440
==============================================================
The first mortgage bond improvement fund requirements amount to 1 percent of
each outstanding series of bonds authenticated under the indentures prior to
January 1 of each year, other than those issued to collateralize pollution
control 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
integrated Southeast utilities 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 2004
applicable to other long-term debt are as follows: $371 million in 2000; $501
million in 2001; $1.0 billion in 2002; $435 million in 2003; and $1.46 billion
in 2004.
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
$9.5 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.
36
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
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 12 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 $19 million and $21 million,
respectively.
For all on-site property damage insurance policies for commercial nuclear
power plants, the NRC requires that the proceeds of such policies 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. ACQUISITIONS AND ASSET SALES
Acquisitions
Southern Energy completed several acquisitions in both 1999 and 1998. In 1999, a
$801 million acquisition of 3,065 megawatts of generating capacity from Pacific
Gas &Electric in northern California was completed. Additionally, Southern
Energy acquired 1,794 megawatts of generating capacity from Orange and Rockland
Utilities Inc. and Consolidated Edison Inc. for $476 million. A 9.9 percent
interest in Shandong International Power Development Company was purchased in
1999 for $107 million.
Southern Energy paid $537 million in 1998 to Commonwealth Electric for 1,245
megawatts of generating capacity. Also in 1998, Southern Energy acquired a 3.6
percent economic interest in CEMIG -- a Brazilian utility -- for $274 million.
Assets Sold
Southern Energy's significant asset sales in 1999 and 1998 related to its United
Kingdom subsidiary South Western Electricity (SWEB). The supply system of SWEB
was sold in 1999 for $256 million of which Southern Energy owned 49 percent. The
remaining distribution business was renamed Western Power Distribution. In 1998,
Southern Energy sold a 26 percent interest in SWEB for $170 million.
Assets for Sale
In December 1998, Southern Energy designed and implemented a plan to dispose of
its Argentinean and Chilean investments. As a result, 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, 1999 was $92 million. These assets impacted the Consolidated
Statements of Income as follows:
Operating Operating Consolidated
Year Revenues Income Net Income
- ---- -----------------------------------------
(in millions)
1999 $171 $23 $2
1998 180 37 5
1997 180 37 5
Depreciation expense was suspended beginning January 1999, and the after-tax
amount of depreciation recorded in 1998 was $16 million. Southern Energy has
been actively pursuing and/or negotiating with potential buyers for its assets
in Argentina and Chile. In early 2000, Southern Energy announced an agreement to
sell its Argentinean assets substantially at the adjusted carrying value with no
material gain or loss expected to be recognized in 2000.
37
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
14. SEGMENT AND RELATED INFORMATION
Southern Company's principal business segment is the five integrated Southeast
utilities that provide electric service in four states. The other reportable
business segment is Southern Energy, which includes international operations and
the competitive energy supply businesses in North America outside the Southeast.
Intersegment revenues are not material. Financial data for business segments,
products and services, and geographic areas are as follows:
<TABLE>
<CAPTION>
Business Segments
Integrated Southern Energy All
Southeast ------------------------------------------ Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- ---- -------------------------------------------------------------------------------------------------
(in millions)
1999
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $ 9,125 $1,532 $ 736 $ 2,268 $ 222 $ (30) $11,585
Depreciation and amortization 961 261 61 322 24 - 1,307
Interest income 64 88 86 174 42 (116) 164
Net interest charges 700 264 219 483 136 (78) 1,241
Income taxes 675 85 41 126 (62) (13) 726
Write down of generating assets - - 69 69 - - 69
Net income from equity
method subsidiaries - 100 (6) 94 - - 94
Segment net income (loss) 1,073 346 (18) 328 (101) (24) 1,276
Total assets 25,251 9,370 4,502 13,872 461 (1,188) 38,396
Investments in equity
method subsidiaries 11 1,195 171 1,366 - (1) 1,376
Gross property additions 1,854 447 232 679 27 - 2,560
Increase in goodwill - - 48 48 - - 48
- -----------------------------------------------------------------------------------------------------------------------------------
Integrated Southern Energy All
Southeast -------------------------------------------- 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 703 (101) (22) (123) (12) (19) 549
Write down 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 24,420 9,578 2,869 12,447 1,438 (2,114) 36,191
Investments in equity
method subsidiaries 10 1,363 176 1,539 - - 1,549
Gross property additions 1,298 586 63 649 58 - 2,005
Increase in goodwill - 30 261 291 - - 291
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
<TABLE>
<CAPTION>
Integrated Southern Energy All
Southeast -------------------------------------------- Other Reconciling
Year Utilities International Domestic Total (Note) Eliminations Consolidated
- ---- --------------------------------------------------------------------------------------------------
(in millions)
1997
- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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 687 181 (6) 175 (17) (154) 691
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 24,796 9,225 1,832 11,057 1,225 (1,823) 35,255
Investments in equity
method subsidiaries 10 1,024 134 1,158 - - 1,168
Gross property additions 1,080 720 1 721 58 - 1,859
Increase in goodwill - 1,649 - 1,649 - - 1,649
- -----------------------------------------------------------------------------------------------------------------------------------
(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. Amounts for Southern Energy exclude interest
expense to parent Southern Company.
</TABLE>
<TABLE>
<CAPTION>
Products and Services
Revenues
------------------------------------------------------------------------------------------------------------------
Integrated
Southeast Utilities Southern Energy
--------------------------------------------- ----------------------------------------------------------------
Energy
Trading And
Year Retail Wholesale Other Total Generation Distribution Marketing Other Total
- ---- ------------------------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $8,086 $823 $216 $9,125 $1,222 $ 976 $ - $70 $2,268
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
- -----------------------------------------------------------------------------------------------------------------------------------
Geographic Areas
Revenues
----------------------------------------------------------------------------------------------------
International
-------------------------------------------------------------
All
Year Domestic Europe Asia Other Total Consolidated
- ---- ----------------------------------------------------------------------------------------------------
(in millions)
1999 $10,053 $ 976 $342 $214 $1,532 $11,585
1998 9,637 1,273 273 220 1,766 11,403
1997 10,863 1,282 247 219 1,748 12,611
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
NOTES (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
<TABLE>
<CAPTION>
Long-Lived Assets
--------------------------------------------------------------------------------------------------
International
-----------------------------------------------------------------------------
All
Year Domestic Europe Asia Other Total Consolidated
- ---- --------------------------------------------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
1999 $24,266 $2,449 $4,029 $1,725 $8,203 $32,469
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1999 and 1998 are as follows:
Per Common Share
-------------------------------------------------------
Operating Operating Consolidated Price Range
Quarter Ended Revenues Income Net Income Earnings Dividends High Low
- -------------- ------------------------------------ --------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
March 1999 $2,442 $ 485 $224 $0.32 $0.335 29 5/8 23 1/4
June 1999 2,791 668 314 0.45 0.335 29 3/16 22 3/4
September 1999 3,736 1,109 615 0.90 0.335 28 25
December 1999 2,616 517 123 0.19 0.335 27 1/8 22 1/16
March 1998 $2,495 $ 573 $242 $0.35 $0.335 28 11/16 23 15/16
June 1998 2,913 648 270 0.39 0.335 29 25 1/16
September 1998 3,457 1,068 517 0.74 0.335 29 13/16 25 1/4
December 1998 2,538 21 (52) (0.08) 0.335 31 9/16 27 3/16
- ---------------------------------------------------------------------------------------------------------------------------
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 13.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1995-1999
Southern Company and Subsidiary Companies 1999 Annual Report
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues (in millions) $11,595 $11,403 $12,611 $10,358 $9,180
Consolidated Net Income (in millions) $1,276 $977 $972 $1,127 $1,103
Basic and Diluted Earnings Per Share of Common Stock $1.86 $1.40 $1.42 $1.68 $1.66
Cash Dividends Paid Per Share of Common Stock $1.34 $1.34 $1.30 $1.26 $1.22
Return on Average Common Equity (percent) 13.43 10.04 10.30 12.53 13.01
Total Assets (in millions) $38,396 $36,191 $35,255 $30,230 $30,522
Gross Property Additions (in millions) $2,560 $2,005 $1,859 $1,229 $1,401
Southern Energy Business and Asset Acquisitions $1,800 $998 $2,925 $- $1,416
- ----------------------------------------------------------------------------------------------------------------------------
Capitalization (in millions):
Common stock equity $ 9,204 $ 9,797 $ 9,647 $ 9,216 $ 8,772
Preferred stock and securities 2,696 2,548 2,237 1,402 1,432
Long-term debt 11,747 10,472 10,274 7,938 8,274
- ----------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year $23,647 $22,817 $22,158 $18,556 $18,478
============================================================================================================================
Capitalization Ratios (percent):
Common stock equity 38.9 42.9 43.5 49.7 47.5
Preferred stock and securities 11.4 11.2 10.1 7.6 7.7
Long-term debt 49.7 45.9 46.4 42.7 44.8
- ----------------------------------------------------------------------------------------------------------------------------
Total excluding amounts due within one year 100.0 100.0 100.0 100.0 100.0
============================================================================================================================
Other Common Stock Data:
Book value per share (year-end) $13.82 $14.04 $13.91 $13.61 $13.10
Market price per share:
High 29 5/8 31 9/16 26 1/4 25 7/8 25
Low 22 1/16 23 15/16 19 7/8 21 1/8 19 3/8
Close 23 1/2 29 1/16 25 7/8 22 5/8 24 5/8
Market-to-book ratio (year-end) (percent) 170.0 207.0 186.0 166.2 188.0
Price-earnings ratio (year-end) (times) 12.6 20.8 18.2 13.5 14.8
Dividends paid (in millions) $921 $933 $889 $846 $811
Dividend yield (year-end) (percent) 5.7 4.6 5.0 5.6 5.0
Dividend payout ratio (percent) 72.2 95.6 91.5 75.1 73.5
Shares outstanding (in thousands):
Average 685,163 696,944 685,033 672,590 665,064
Year-end 665,796 697,747 693,423 677,036 669,543
Stockholders of record (year-end) 174,179 187,053 200,508 215,246 225,739
- -----------------------------------------------------------------------------------------------------------------------------
Customers for Integrated Southeast Utilities
(year-end) (in thousands):
Residential 3,339 3,277 3,220 3,157 3,100
Commercial 513 497 479 464 450
Industrial 15 15 16 17 17
Other 4 5 5 5 5
- -----------------------------------------------------------------------------------------------------------------------------
Total 3,871 3,794 3,720 3,643 3,572
=============================================================================================================================
Employees (year-end):
Traditional business 26,269 25,206 24,682 25,034 26,452
Southern Energy 6,680 6,642 5,620 3,743 5,430
- -----------------------------------------------------------------------------------------------------------------------------
Total 32,949 31,848 30,302 28,777 31,882
=============================================================================================================================
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA 1995-1999 (continued)
Southern Company and Subsidiary Companies 1999 Annual Report
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues (in millions):
Residential $ 3,105 $ 3,163 $ 2,837 $ 2,894 $2,840
Commercial 2,743 2,763 2,595 2,559 2,485
Industrial 2,237 2,267 2,139 2,136 2,206
Other 1 79 76 76 72
- ----------------------------------------------------------------------------------------------------------------------------
Total retail 8,086 8,272 7,647 7,665 7,603
Sales for resale within service area 350 374 376 409 399
Sales for resale outside service area 473 522 510 429 415
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 8,909 9,168 8,533 8,503 8,417
Southern Energy 2,268 1,903 3,837 1,683 643
Other revenues 408 332 241 172 120
- ----------------------------------------------------------------------------------------------------------------------------
Total $11,585 $11,403 $12,611 $10,358 $9,180
============================================================================================================================
Kilowatt-Hour Sales (in millions):
Residential 43,402 43,503 39,217 40,117 39,147
Commercial 43,387 41,737 38,926 37,993 35,938
Industrial 56,210 55,331 54,196 52,798 51,644
Other 945 929 903 911 863
- ----------------------------------------------------------------------------------------------------------------------------
Total retail 143,944 141,500 133,242 131,819 127,592
Sales for resale within service area 9,440 9,847 9,884 10,935 9,472
Sales for resale outside service area 12,929 12,988 13,761 10,777 9,143
- ----------------------------------------------------------------------------------------------------------------------------
Total 166,313 164,335 156,887 153,531 146,207
============================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 7.15 7.27 7.23 7.21 7.25
Commercial 6.32 6.62 6.67 6.74 6.91
Industrial 3.98 4.10 3.95 4.04 4.27
Total retail 5.62 5.85 5.74 5.81 5.96
Sales for resale 3.68 3.92 3.75 3.86 4.38
Total sales 5.36 5.58 5.44 5.54 5.76
Average Annual Kilowatt-Hour
Use Per Residential Customer 13,107 13,379 12,296 12,824 12,722
Average Annual Revenue Per Residential Customer $937.81 $972.89 $889.50 $925.12 $922.83
Plant Nameplate Capacity Owned (year-end) (megawatts) 31,161 31,161 31,146 31,076 30,733
Maximum Peak-Hour Demand (megawatts):
Winter 25,203 21,108 22,969 22,631 21,422
Summer 30,578 28,934 27,334 27,190 27,420
System Reserve Margin (at peak) (percent) 8.5 12.8 15.0 14.0 9.4
Annual Load Factor (percent) 59.2 60.0 59.4 62.3 59.5
Plant Availability (percent):
Fossil-steam 83.3 85.2 88.2 86.4 86.7
Nuclear 89.9 87.8 88.8 89.7 88.3
- ----------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 73.1 72.8 74.7 73.3 72.5
Nuclear 15.7 15.4 16.5 16.7 16.4
Hydro 2.3 3.9 4.3 4.1 4.1
Oil and gas 2.8 3.3 1.7 1.5 1.7
Purchased power 6.1 4.6 2.8 4.4 5.3
- ----------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0 100.0
============================================================================================================================
</TABLE>
42
