Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2004 | ||
OR | ||
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ___to___ |
Commission | Registrant, State of Incorporation, | I.R.S. Employer | ||
File Number | Address and Telephone Number | Identification No. | ||
1-3526 | The Southern Company | 58-0690070 | ||
(A Delaware Corporation) | ||||
270 Peachtree Street, N.W. | ||||
Atlanta, Georgia 30303 | ||||
(404) 506-5000 | ||||
1-3164 | Alabama Power Company | 63-0004250 | ||
(An Alabama Corporation) | ||||
600 North 18th Street | ||||
Birmingham, Alabama 35291 | ||||
(205) 257-1000 | ||||
1-6468 | Georgia Power Company | 58-0257110 | ||
(A Georgia Corporation) | ||||
241 Ralph McGill Boulevard, N.E. | ||||
Atlanta, Georgia 30308 | ||||
(404) 506-6526 | ||||
0-2429 | Gulf Power Company | 59-0276810 | ||
(A Maine Corporation) | ||||
One Energy Place | ||||
Pensacola, Florida 32520 | ||||
(850) 444-6111 | ||||
001-11229 | Mississippi Power Company | 64-0205820 | ||
(A Mississippi Corporation) | ||||
2992 West Beach | ||||
Gulfport, Mississippi 39501 | ||||
(228) 864-1211 | ||||
1-5072 | Savannah Electric and Power Company | 58-0418070 | ||
(A Georgia Corporation) | ||||
600 East Bay Street | ||||
Savannah, Georgia 31401 | ||||
(912) 644-7171 | ||||
333-98553 | Southern Power Company | 58-2598670 | ||
(A Delaware Corporation) | ||||
270 Peachtree Street, N.W. | ||||
Atlanta, Georgia 30303 | ||||
(404) 506-5000 |
Table of Contents
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No___
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).
Registrant | Yes | No | ||||||
The Southern Company | x | |||||||
Alabama Power Company | x | |||||||
Georgia Power Company | x | |||||||
Gulf Power Company | x | |||||||
Mississippi Power Company | x | |||||||
Savannah Electric and Power Company | x | |||||||
Southern Power Company | x |
Description of | Shares Outstanding | |||||
Registrant | Common Stock | at March 31, 2004 | ||||
The Southern Company | Par Value $5 Per Share | 737,463,215 | ||||
Alabama Power Company | Par Value $40 Per Share | 7,750,000 | ||||
Georgia Power Company | Without Par Value | 7,761,500 | ||||
Gulf Power Company | Without Par Value | 992,717 | ||||
Mississippi Power Company | Without Par Value | 1,121,000 | ||||
Savannah Electric and Power Company | Par Value $5 Per Share | 10,844,635 | ||||
Southern Power Company | Par Value $0.01 Per Share | 1,000 |
This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, Savannah Electric and Power Company and Southern Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2004
Page | ||||||||
Number | ||||||||
DEFINITIONS | 5 | |||||||
PART I — FINANCIAL INFORMATION | ||||||||
Item 1. | Financial Statements (Unaudited) | |||||||
Item 2. | Management’s Discussion and Analysis of Results of Operations and Financial Condition | |||||||
The Southern Company and Subsidiary Companies | ||||||||
8 | ||||||||
9 | ||||||||
10 | ||||||||
12 | ||||||||
13 | ||||||||
Alabama Power Company | ||||||||
25 | ||||||||
26 | ||||||||
27 | ||||||||
29 | ||||||||
30 | ||||||||
Georgia Power Company | ||||||||
38 | ||||||||
39 | ||||||||
40 | ||||||||
42 | ||||||||
43 | ||||||||
Gulf Power Company | ||||||||
52 | ||||||||
53 | ||||||||
54 | ||||||||
56 | ||||||||
57 | ||||||||
Mississippi Power Company | ||||||||
64 | ||||||||
65 | ||||||||
66 | ||||||||
68 | ||||||||
69 | ||||||||
Savannah Electric and Power Company | ||||||||
77 | ||||||||
78 | ||||||||
79 | ||||||||
81 | ||||||||
82 | ||||||||
Southern Power Company | ||||||||
89 | ||||||||
90 | ||||||||
91 | ||||||||
93 | ||||||||
94 | ||||||||
100 | ||||||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 22 | ||||||
Item 4. | Controls and Procedures | 23 |
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2004
Page | ||||||||
Number | ||||||||
PART II — OTHER INFORMATION | ||||||||
Item 1. | Legal Proceedings | 109 | ||||||
Item 2. | Changes in Securities, Unregistered Sales of Equity Securities and Use of Proceeds | 109 | ||||||
Item 3. | Defaults Upon Senior Securities | Inapplicable | ||||||
Item 4. | Submission of Matters to a Vote of Security Holders | Inapplicable | ||||||
Item 5. | Other Information | Inapplicable | ||||||
Item 6. | Exhibits and Reports on Form 8-K | 109 | ||||||
113 |
4
Table of Contents
DEFINITIONS
TERM | MEANING | |
Alabama Power | Alabama Power Company | |
Clean Air Act | Clean Air Act Amendments of 1990 | |
Dynegy | Dynegy, Inc. | |
ECO Plan | Environmental Compliance Overview Plan | |
EITF | Emerging Issues Task Force | |
Energy Act | Energy Policy Act of 1992 | |
EPA | U. S. Environmental Protection Agency | |
FASB | Financial Accounting Standards Board | |
FERC | Federal Energy Regulatory Commission | |
Form 10-K | Combined Annual Report on Form 10-K of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power for the year ended December 31, 2003 | |
Georgia Power | Georgia Power Company | |
Gulf Power | Gulf Power Company | |
IRC | Internal Revenue Code | |
IRS | Internal Revenue Service | |
LIBOR | London Interbank Offered Rate | |
Mirant | Mirant Corporation | |
Mississippi Power | Mississippi Power Company | |
Mobile Energy | Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. | |
Moody’s | Moody’s Investors Service, Inc. | |
NRC | Nuclear Regulatory Commission | |
PEP | Performance Evaluation Plan | |
PPA | Purchase Power Agreement | |
PSC | Public Service Commission | |
PUHCA | Public Utility Holding Company Act of 1935, as amended | |
retail operating companies | Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric | |
RTO | Regional Transmission Organization | |
S&P | Standard and Poor’s, a division of The McGraw-Hill Companies, Inc. | |
Savannah Electric | Savannah Electric and Power Company | |
SCS | Southern Company Services, Inc. | |
SEC | Securities and Exchange Commission | |
SMA | Supply Margin Assessment | |
Southern Company | The Southern Company | |
Southern Company GAS | Southern Company Gas LLC | |
Southern Company system | Southern Company, the retail operating companies, Southern Power and other subsidiaries | |
Southern LINC | Southern Communications Services, Inc. | |
Southern Power | Southern Power Company | |
Super Southeast | Southern Company’s traditional service territory, Alabama, Florida, Georgia and Mississippi, plus the surrounding states of Kentucky, Louisiana, North Carolina, South Carolina, Tennessee and Virginia | |
TVA | Tennessee Valley Authority |
5
Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements in addition to historical information. Forward-looking information includes, among other things, statements concerning the strategic goals for Southern Company’s wholesale business, estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:
• | the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental, tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations; |
• | current and future litigation, regulatory investigations, proceedings or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries and current IRS audits; |
• | the effects, extent and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate; |
• | the impact of fluctuations in commodity prices, interest rates and customer demand; |
• | available sources and costs of fuels; |
• | ability to control costs; |
• | investment performance of Southern Company’s employee benefit plans; |
• | advances in technology; |
• | state and federal rate regulations and pending and future rate cases and negotiations; |
• | effects of and changes in political, legal and economic conditions and developments in the United States, including the current state of the economy; |
• | the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; |
• | internal restructuring or other restructuring options that may be pursued; |
• | potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries; |
• | the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due; |
• | the ability to obtain new short- and long-term contracts with neighboring utilities; |
• | the direct or indirect effect on Southern Company’s business resulting from the terrorist incidents on September 11, 2001, or any similar incidents or responses to such incidents; |
• | financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings; |
• | the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices; |
• | weather and other natural phenomena; |
• | the direct or indirect effects on Southern Company’s business resulting from the August 2003 power outage in the Northeast, or any similar incidents; |
• | the effect of accounting pronouncements issued periodically by standard-setting bodies; and |
• | other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC. |
6
Table of Contents
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
7
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Retail sales | $ | 2,144,089 | $ | 1,973,844 | ||||
Sales for resale | 350,798 | 334,613 | ||||||
Other electric revenues | 93,420 | 91,877 | ||||||
Other revenues | 165,743 | 148,020 | ||||||
Total operating revenues | 2,754,050 | 2,548,354 | ||||||
Operating Expenses: | ||||||||
Fuel | 807,619 | 692,758 | ||||||
Purchased power | 119,758 | 132,554 | ||||||
Other operations | 535,772 | 493,866 | ||||||
Maintenance | 237,497 | 229,710 | ||||||
Depreciation and amortization | 240,654 | 244,988 | ||||||
Taxes other than income taxes | 158,484 | 148,826 | ||||||
Total operating expenses | 2,099,784 | 1,942,702 | ||||||
Operating Income | 654,266 | 605,652 | ||||||
Other Income and (Expense): | ||||||||
Allowance for equity funds used during construction | 8,184 | 7,851 | ||||||
Interest income | 7,654 | 4,498 | ||||||
Equity in losses of unconsolidated subsidiaries | (56,447 | ) | (44,736 | ) | ||||
Leveraged lease income | 15,927 | 17,715 | ||||||
Interest expense, net of amounts capitalized | (130,585 | ) | (123,761 | ) | ||||
Distributions on mandatorily redeemable preferred securities | (31,168 | ) | (39,586 | ) | ||||
Preferred dividends of subsidiaries | (5,472 | ) | (4,750 | ) | ||||
Other income (expense), net | (8,162 | ) | (4,283 | ) | ||||
�� | ||||||||
Total other income and (expense) | (200,069 | ) | (187,052 | ) | ||||
Earnings Before Income Taxes | 454,197 | 418,600 | ||||||
Income taxes | 123,055 | 121,168 | ||||||
Earnings Before Cumulative Effect of Accounting Change | 331,142 | 297,432 | ||||||
Cumulative effect of accounting change — less income taxes of $231 | — | 367 | ||||||
Consolidated Net Income | $ | 331,142 | $ | 297,799 | ||||
Common Stock Data: | ||||||||
Consolidated basic earnings per share | $ | 0.45 | $ | 0.41 | ||||
Consolidated diluted earnings per share | $ | 0.45 | $ | 0.41 | ||||
Average number of basic shares of common stock outstanding (in thousands) | 736,638 | 718,943 | ||||||
Average number of diluted shares of common stock outstanding (in thousands) | 741,603 | 724,891 | ||||||
Cash dividends paid per share of common stock | $ | 0.35 | $ | 0.3425 |
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
8
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Consolidated net income | $ | 331,142 | $ | 297,799 | ||||
Adjustments to reconcile consolidated net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 293,828 | 294,146 | ||||||
Deferred income taxes and investment tax credits | 135,801 | 78,032 | ||||||
Equity in losses of unconsolidated subsidiaries | 25,316 | 27,167 | ||||||
Leveraged lease income | (15,927 | ) | (17,715 | ) | ||||
Pension, postretirement, and other employee benefits | 10,208 | 1,040 | ||||||
Tax benefit of stock options | 11,731 | 10,758 | ||||||
Other, net | (44,543 | ) | (3,790 | ) | ||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | 101,118 | 200,043 | ||||||
Fossil fuel stock | 23,978 | 6,831 | ||||||
Materials and supplies | (2,932 | ) | (9,542 | ) | ||||
Other current assets | (70,044 | ) | (125,293 | ) | ||||
Accounts payable | (26,804 | ) | (76,526 | ) | ||||
Accrued taxes | (159,123 | ) | (8,259 | ) | ||||
Accrued compensation | (240,163 | ) | (263,560 | ) | ||||
Other current liabilities | (65,595 | ) | (43,736 | ) | ||||
Net cash provided from operating activities | 307,991 | 367,395 | ||||||
Investing Activities: | ||||||||
Gross property additions | (512,667 | ) | (530,642 | ) | ||||
Cost of removal net of salvage | (9,767 | ) | (20,656 | ) | ||||
Other | (32,395 | ) | (52,443 | ) | ||||
Net cash used for investing activities | (554,829 | ) | (603,741 | ) | ||||
Financing Activities: | ||||||||
Increase in notes payable, net | 107,398 | 533,363 | ||||||
Proceeds — | ||||||||
Long-term debt | 597,717 | 1,104,870 | ||||||
Mandatorily redeemable preferred securities | 200,000 | — | ||||||
Preferred stock | 100,000 | 125,000 | ||||||
Common stock | 48,702 | 110,903 | ||||||
Redemptions — | ||||||||
Long-term debt | (280,732 | ) | (1,299,768 | ) | ||||
Mandatorily redeemable preferred securities | (240,000 | ) | (40,000 | ) | ||||
Payment of common stock dividends | (257,506 | ) | (245,745 | ) | ||||
Other | (14,524 | ) | (15,892 | ) | ||||
Net cash provided from financing activities | 261,055 | 272,731 | ||||||
Net Change in Cash and Cash Equivalents | 14,217 | 36,385 | ||||||
Cash and Cash Equivalents at Beginning of Period | 311,274 | 273,010 | ||||||
Cash and Cash Equivalents at End of Period | $ | 325,491 | $ | 309,395 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest (net of $11,962 and $18,066 capitalized for 2004 and 2003, respectively) | $ | 139,478 | $ | 117,458 | ||||
Income taxes (net of refunds) | $ | 25,884 | ($117 | ) |
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
9
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 325,491 | $ | 311,274 | ||||
Receivables — | ||||||||
Customer accounts receivable | 629,415 | 695,042 | ||||||
Unbilled revenues | 256,938 | 275,395 | ||||||
Under recovered regulatory clause revenues | 247,055 | 187,866 | ||||||
Other accounts and notes receivable | 255,328 | 338,557 | ||||||
Accumulated provision for uncollectible accounts | (33,817 | ) | (30,155 | ) | ||||
Fossil fuel stock, at average cost | 292,148 | 316,126 | ||||||
Vacation pay | 101,361 | 96,700 | ||||||
Materials and supplies, at average cost | 573,274 | 570,787 | ||||||
Prepaid expenses | 177,886 | 125,477 | ||||||
Other | 69,782 | 30,380 | ||||||
Total current assets | 2,894,861 | 2,917,449 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 40,532,540 | 40,339,785 | ||||||
Less accumulated depreciation | 14,495,666 | 14,303,516 | ||||||
26,036,874 | 26,036,269 | |||||||
Nuclear fuel, at amortized cost | 210,041 | 222,667 | ||||||
Construction work in progress | 1,496,049 | 1,274,888 | ||||||
Total property, plant, and equipment | 27,742,964 | 27,533,824 | ||||||
Other Property and Investments: | ||||||||
Nuclear decommissioning trusts, at fair value | 830,817 | 807,893 | ||||||
Leveraged leases | 853,770 | 837,843 | ||||||
Other | 317,691 | 238,193 | ||||||
Total other property and investments | 2,002,278 | 1,883,929 | ||||||
Deferred Charges and Other Assets: | ||||||||
Deferred charges related to income taxes | 870,348 | 874,443 | ||||||
Prepaid pension costs | 928,624 | 911,442 | ||||||
Unamortized debt issuance expense | 150,173 | 151,558 | ||||||
Unamortized loss on reacquired debt | 331,974 | 326,389 | ||||||
Other | 446,075 | 446,149 | ||||||
Total deferred charges and other assets | 2,727,194 | 2,709,981 | ||||||
Total Assets | $ | 35,367,297 | $ | 35,045,183 | ||||
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
10
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||||||
Liabilities and Stockholders' Equity | 2004 | 2003 | ||||||||||
(in thousands) | ||||||||||||
Current Liabilities: | ||||||||||||
Securities due within one year | $ | 1,070,362 | $ | 741,073 | ||||||||
Notes payable | 674,992 | 567,771 | ||||||||||
Accounts payable | 658,576 | 699,524 | ||||||||||
Customer deposits | 189,934 | 189,000 | ||||||||||
Accrued taxes — | ||||||||||||
Income taxes | 126,048 | 153,757 | ||||||||||
Other | 135,731 | 248,937 | ||||||||||
Accrued interest | 170,373 | 186,935 | ||||||||||
Accrued vacation pay | 131,758 | 128,505 | ||||||||||
Accrued compensation | 137,480 | 436,854 | ||||||||||
Other | 283,855 | 264,688 | ||||||||||
Total current liabilities | 3,579,109 | 3,617,044 | ||||||||||
Long-term Debt | 10,111,378 | 10,164,018 | ||||||||||
Long-term Debt Payable to Affiliated Trusts | 1,960,644 | — | ||||||||||
Mandatorily Redeemable Preferred Securities | — | 1,900,486 | ||||||||||
Deferred Credits and Other Liabilities: | ||||||||||||
Accumulated deferred income taxes | 4,706,611 | 4,586,377 | ||||||||||
Deferred credits related to income taxes | 400,496 | 409,339 | ||||||||||
Accumulated deferred investment tax credits | 572,638 | 579,490 | ||||||||||
Employee benefit obligations | 803,275 | 764,624 | ||||||||||
Asset retirement obligations | 859,251 | 845,392 | ||||||||||
Other cost of removal obligations | 1,268,682 | 1,268,729 | ||||||||||
Miscellaneous regulatory liabilities | 541,232 | 576,393 | ||||||||||
Other | 262,573 | 262,579 | ||||||||||
Total deferred credits and other liabilities | 9,414,758 | 9,292,923 | ||||||||||
Total Liabilities | 25,065,889 | 24,974,471 | ||||||||||
Cumulative Preferred Stock of Subsidiaries | 523,126 | 423,126 | ||||||||||
Common Stockholders’ Equity: | ||||||||||||
Common stock, par value $5 per share — | ||||||||||||
Authorized — 1 billion shares | ||||||||||||
Issued — March 31, 2004: 737,666,597 Shares; | ||||||||||||
— December 31, 2003: 735,021,270 Shares | ||||||||||||
Treasury — March 31, 2004: 203,382 Shares; | ||||||||||||
— December 31, 2003: 192,691 Shares | ||||||||||||
Par value | 3,688,333 | 3,675,106 | ||||||||||
Paid-in capital | 793,458 | 746,080 | ||||||||||
Treasury, at cost | (4,378 | ) | (4,066 | ) | ||||||||
Retained earnings | 5,415,465 | 5,343,471 | ||||||||||
Accumulated other comprehensive loss | (114,596 | ) | (113,005 | ) | ||||||||
Total Common Stockholders’ Equity | 9,778,282 | 9,647,586 | ||||||||||
Total Liabilities and Stockholders’ Equity | $ | 35,367,297 | $ | 35,045,183 | ||||||||
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
11
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 331,142 | $ | 297,799 | ||||
Other comprehensive loss: | ||||||||
Change in fair value of marketable securities, net of tax of $4,061 and $-, respectively | 7,623 | 112 | ||||||
Changes in fair value of qualifying hedges, net of tax of $(7,711) and $(641), respectively | (12,704 | ) | (717 | ) | ||||
Less: Reclassification adjustment for amounts included in net income, net of tax of $2,171 and $(4,698), respectively | 3,490 | (7,367 | ) | |||||
COMPREHENSIVE INCOME | $ | 329,551 | $ | 289,827 | ||||
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
12
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
OVERVIEW
Discussion of the results of operations is focused on Southern Company’s primary business of electricity sales in the Southeast by the retail operating companies – Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric – and Southern Power. Southern Power is an electric wholesale generation subsidiary with market-based rate authority. Southern Company’s other business activities include investments in synthetic fuels and leveraged lease projects, telecommunications, energy-related services and natural gas marketing. For additional information on these businesses, see Item 1 – Business — The SOUTHERN System — “Retail Operating Companies,” “Southern Power” and “Other Business” in the Form 10-K.
Earnings
Southern Company’s first quarter 2004 earnings were $331 million ($0.45 per share) compared with $298 million ($0.41 per share) in the first quarter 2003. Earnings in the first quarter 2004 increased due to a number of positive factors including growth in the number of customers in the Southern Company service area, successful efforts to control costs and strong results from Southern Company’s competitive generation business. Southern Company’s regulated retail business results were positively impacted by customer growth, increased residential consumption per customer and increased demand by industrial customers, as well as favorable weather conditions. Earnings from the competitive generation business continued to favorably affect Southern Company’s net income due to new generating capacity available for sale in wholesale markets. This new capacity led to increases in capacity revenues from new contracts and sales of uncontracted capacity in those wholesale markets.
RESULTS OF OPERATIONS
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Retail sales | $ | 170,245 | 8.6 | |||||
Sales for resale | 16,185 | 4.8 | ||||||
Other revenues | 17,723 | 12.0 | ||||||
Fuel expense | 114,861 | 16.6 | ||||||
Purchased power | (12,796 | ) | (9.7 | ) | ||||
Other operation and maintenance expenses | 49,693 | 6.9 | ||||||
Taxes other than income taxes | 9,658 | 6.5 | ||||||
Equity in losses of unconsolidated subsidiaries | 11,711 | 26.2 | ||||||
Interest expense, net of amounts capitalized | 6,824 | 5.5 | ||||||
Distributions on mandatorily redeemable preferred securities | (8,418 | ) | (21.3 | ) |
Retail sales.Excluding fuel revenues, which generally do not affect net income, retail base revenues increased by $72 million, or 5.2%, in the first quarter 2004 when compared to the same period in 2003. In the first quarter, retail kilowatt-hour energy sales increased by 4.5% over the same period a year ago, primarily due
13
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
to customer and demand growth and the improving economy evidenced by increases in residential and industrial kilowatt-hour energy sales of 5.3% and 5.0%, respectively, when compared to the same period in 2003. The number of retail customers increased by 1.7% and weather-adjusted average consumption by residential customers increased by 4.4% in the first quarter 2004 when compared with the first quarter 2003.
Sales for resale.During the first quarter 2004, sales for resale kilowatt-hours decreased by 2.6% when compared to the same period in the prior year. Sales for resale revenues increased $16.2 million, or 4.8%, when compared to the same period in the prior year. The increase in revenues reflected new wholesale contracts and increases in fuel revenues. An additional 2,407 megawatts of generating capacity were added in June and October 2003 by Southern Power. A portion of this new capacity contributed to the increase in sales for resale revenues for the first quarter 2004 as a result of capacity revenues from PPAs with neighboring utilities. In addition, sales from uncontracted capacity provided increased energy revenues. These increases in sales for resale revenues more than offset the reduction in revenues resulting from the termination of contracts with subsidiaries of Dynegy, Inc. in May 2003. See Note 3 to the financial statements of Southern Company under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information on these contract terminations.
Other revenues.In the first quarter 2004, other revenues increased $17.7 million, or 12.0%. Revenues from Southern Company’s investments in synthetic fuels increased $18 million, primarily as a result of shifting 2004 production schedules to accelerate production earlier in the year, and retail gas marketing revenues increased $5 million, primarily as a result of colder than normal weather. These increases were partially offset by a decrease in revenues from energy-related services of $3 million.
Fuel expense. During the first quarter 2004, fuel expense was higher due to an increase in the average unit cost of fuel, as well as increased generating capacity at Southern Power. Total generation increased 3.1% for the first quarter 2004, when compared to the same period in the prior year. For the first quarter 2004, the average unit cost of fuel per net kilowatt-hour generated increased 3.0% when compared to the same period in the prior year. Increases in fuel expense at the retail operating companies are generally offset by fuel revenues and do not affect net income.
Purchased power.The decrease in the first quarter 2004 for purchased power compared with the same period last year is primarily a result of lower demand for energy. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues.
Other operations and maintenance expenses.The increase in other operations and maintenance expenses in the first quarter 2004 is mainly attributable to increases in administrative and general, transmission and distribution maintenance and other production expenses. Administrative and general expenses increased $33.3 million, or 15.6%, primarily as a result of payroll and employee benefits costs as well as an increase of $12.2 million in freight costs related to the production of synthetic fuel. Transmission and distribution maintenance expenses increased $8.8 million as a result of completing work delayed from 2003. Other production expenses were up $7.0 million, or 5.4%, due to increased expenses primarily resulting from the operation of Southern Power’s new generating facilities.
Taxes other than income taxes.The first quarter 2004 increase in taxes other than income taxes over the comparable period last year is primarily a result of increases in payroll taxes and property taxes on new facilities.
14
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Equity in losses of unconsolidated subsidiaries.Losses from unconsolidated subsidiaries increased in the first quarter 2004 when compared to the corresponding period in 2003. These losses relate primarily to Southern Company’s investments in entities that produce synthetic fuel. Changes between periods are a result of fluctuations in production levels and are generally offset by income tax credits generated by such entities.
Interest expense, net of amounts capitalized.The increase in interest expense, net of amounts capitalized in the first quarter 2004 when compared to the same period in 2003 is mainly attributable to an increase in the amount of senior notes outstanding and lower amounts of interest capitalized as projects have reached completion, partially offset by refinancing long-term debt with lower interest-rate debt. See Financial Condition and Liquidity – “Financing Activities” herein for additional information. Capitalized interest decreased by $6.1 million, or 33.8%, during the first quarter 2004 when compared to the corresponding period in 2003.
Distributions on mandatorily redeemable preferred securities.The decrease in distributions on mandatorily redeemable preferred securities is a result of refinancing a portion of those securities with proceeds from long-term senior notes issuances or equity funds. See Accounting Policies – “New Accounting Standards” herein for related information regarding Southern Company’s adoption of FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities.”
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors. These factors include the retail operating companies’ ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs and to recover costs related to growing demand and increasingly stricter environmental standards. Another major factor is the profitability of the competitive market-based wholesale generating business and federal regulatory policy, which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors, including weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand and the rate of economic growth in the service area. For additional information relating to these issues, see Item 1 — Business — The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis — “Future Earnings Potential” of Southern Company in the
Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” of Southern Company and Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K under “New Source Review Actions” and “Plant Wansley Environmental Litigation.” As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under either the New Source Review Litigation or Plant Wansley Environmental Litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New
15
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source Review action against the TVA. The cases against Alabama Power, Georgia Power and Savannah Electric have been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could 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.
On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from nonattainment to attainment under the one-hour ozone national ambient air quality standard. On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. Areas within the Southern Company’s service area that have been designated as nonattainment under the eight-hour ozone standard include Birmingham, Macon (Georgia), and a 20-county area within metropolitan Atlanta. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. Areas classified as “severe” nonattainment areas under the one-hour standard will not be required to impose emissions fees as a result of nonattainment. Georgia Power, therefore, will no longer be subject to imposition of emissions fees if the Atlanta area does not come into attainment with the one-hour standard. The impact of the eight-hour designations and the new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.
On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to Georgia. These rules specify that Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. The impact of these regulations will depend on the development and approval of Georgia’s state implementation plan and cannot be determined at this time.
Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.
FERC Matters
See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Southern Company under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company anticipates filing a request for rehearing of the order. The final outcome of this matter cannot be determined at this time.
16
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Plant McIntosh Units 10 and 11 are currently under construction by Southern Power and are scheduled to be completed in June 2005. See Note 3 to Southern Company’s financial statements under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11.
See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential — FERC Matters” of Southern Company in the Form 10-K for information on the FERC’s order related to RTOs and the FERC’s notice of proposed rulemaking regarding open access transmission service and standard electricity market design.
Mirant Related Matters
See Note 3 to the financial statements of Southern Company under “Mirant Related Matters” in Item 8 and Management’s Discussion and Analysis — “Future Earnings Potential – Other Matters” in Item 7 of the Form 10-K and Note (B) to the Condensed Financial Statements herein under “Mirant Related Matters”. In July 2003, Mirant filed for voluntary reorganization under Chapter 11 of the Federal Bankruptcy Code. Southern Company has various contingent liabilities associated with Mirant, including guarantees of contractual commitments, litigation and joint and several liabilities in connection with the consolidated federal income tax return. The ultimate outcome of such contingent liabilities cannot now be determined.
Income Tax Matters
See Item 7— Management’s Discussion and Analysis — “Future Earnings Potential — Income Tax Matters” of Southern Company and Note 3 to the financial statements of Southern Company under “Income Tax Issues” in Item 8 of the Form 10-K for information regarding IRS and other challenges to Southern Company’s transactions related to synthetic fuel tax credits and international leveraged leases. See Note (B) to the Condensed Financial Statements herein for information on potential additional challenges related to the international leveraged leases. The ultimate outcome of these matters cannot now be determined.
Other Matters
In January 2002, Georgia Power began operating under a three-year retail rate order. Under the terms of the order, earnings are evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds, with the remaining one-third retained by Georgia Power. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the Georgia PSC would be expected to determine whether the rate order should be continued, modified, or discontinued. See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential – Other Matters” and Note 3 to the financial statements of Southern Company under “Georgia Power Retail Rate Orders” in Item 8 of the Form 10-K for additional information.
See Note 3 to Southern Company’s financial statements under “Mississippi Power Regulatory Filing” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein for information on Mississippi Power’s request to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity in jurisdictional cost of service. The final outcome of this matter cannot now be determined.
17
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Southern Power is completing limited construction activities on Plant Franklin Unit 3 to preserve the long-term viability of the project but has deferred final completion until the 2008-2011 period. See Note 3 to Southern Company’s financial statements under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information. The final outcome of these matters cannot now be determined.
See Management’s Discussion and Analysis — “Future Earnings Potential — Other Matters” in Item 7 of the Form 10-K for information on nuclear security measures. Implementation plans for the measures ordered by the NRC to be in effect by October 29, 2004 have been finalized based on current interpretations of the requirements. Alabama Power and Georgia Power — based on its ownership interest – currently estimate their respective expenditures related to these security measures to total $9.6 million and $9.3 million, of which $9.3 million and $1.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.
Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 - Management’s Discussion and Analysis – “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Southern Company in the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Plant Daniel Capacity. Also see Note (I) to the Condensed Financial Statements herein for additional information related to Mississippi Power’s request to include the Plant Daniel capacity in jurisdictional cost of service.
New Accounting Standards
On March 31, 2004, Southern Company prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of Interpretation No. 46R had no impact on Southern Company’s net income. However, as a result of the adoption, Southern Company and the retail operating companies
18
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
deconsolidated certain wholly-owned trusts established to issue preferred securities since Southern Company and the retail operating companies do not meet the definition of primary beneficiary established by Interpretation No. 46R. In addition, Southern Company consolidated its 85% limited partnership investment in an energy/telecom venture capital fund that was previously accounted for under the equity method. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Southern Company’s financial condition during the first three months of 2004 included $513 million used for gross property additions to utility plant. The funds for these additions and other capital requirements were primarily obtained from operating activities and net proceeds from security issuances of approximately $533 million. See Southern Company’s Condensed Consolidated Statements of Cash Flows and “Financing Activities” herein for further details.
Capital Requirements and Contractual Obligations
See Item 7 — Management’s Discussion and Analysis — “Capital Requirements and Contractual Obligations” of Southern Company in the Form 10-K for a description of Southern Company’s capital requirements for its construction program, and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred stock dividends, leases, trust funding requirements and other purchase commitments. Approximately $1.1 billion will be required by March 31, 2005 for redemptions and maturities of long-term debt.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. The amounts and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities. The retail operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances and term loan and short-term borrowings. However, the amount, type and timing of any financings, if needed, will depend upon market conditions and regulatory approval. See Item 1 — Business — “Financing Programs” and Item 7 — Management’s Discussion and Analysis — “Financial Condition And Liquidity – Sources of Capital” of Southern Company in the Form 10-K for additional information.
Southern Company’s current liabilities exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs, as well as scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, the Southern Company system had at March 31, 2004 approximately $325 million of cash and cash equivalents and approximately $3.5 billion of unused credit arrangements with banks, of which $2.8 billion expire in 2004, $10 million expire in 2005 and $660 million expire in 2006 and beyond. Of the facilities maturing in 2004 and 2005, $2.2 billion contain provisions allowing two-year term loans executable at the expiration date and $225 million contain provisions allowing one-year term loans executable at the expiration date. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. Southern Company expects to renew its credit facilities, as
19
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
needed, prior to expiration. The retail operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the retail operating companies. At March 31, 2004, the Southern Company system had outstanding extendible commercial notes of $4 million and outstanding commercial paper of $671 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity – Off-Balance Sheet Financing Arrangements” of Southern Company and Note 7 to the financial statements of Southern Company in Item 8 of the Form 10-K under “Operating Leases” for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Southern Company and its subsidiaries do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases and agreements covering interest rate swaps. At March 31, 2004, the maximum potential collateral requirements were approximately $426 million. Generally, collateral may be provided for by a Southern Company guaranty, letter of credit or cash.
Market Price Risk
Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, the retail operating companies have limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, the retail operating companies and Southern Power enter into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Also, the retail operating companies have each implemented fuel-hedging programs at the instruction of their respective PSCs. The fair value of derivative energy contracts at March 31, 2004 was as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 15,825 | ||
Contracts realized or settled | (5,647 | ) | ||
New contracts at inception | — | |||
Changes in valuation techniques | — | |||
Current period changes | 33,334 | |||
Contracts at March 31, 2004 | $ | 43,512 | ||
20
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of March 31, 2004 | ||||||||||||
Valuation Prices | ||||||||||||
Maturity | ||||||||||||
Total | ||||||||||||
Fair Value | Year 1 | 1-3 Years | ||||||||||
(in thousands) | ||||||||||||
Actively quoted | $ | 43,512 | $ | 39,093 | 4,419 | |||||||
External sources | — | — | — | |||||||||
Models and other methods | — | — | — | |||||||||
Contracts at March 31, 2004 | $ | 43,512 | $ | 39,093 | $ | 4,419 | ||||||
For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Southern Company in the Form 10-K and Notes 1 and 6 to the financial statements of Southern Company under “Financial Instruments” in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.
Financing Activities
During the first quarter of 2004, Southern Company subsidiaries issued $590 million of senior notes, $208 million of other long-term debt, $100 million of preferred stock and $49 million of common stock through employee and directors stock plans. The issuances were primarily used to refund senior notes and other long-term debt. The remainder was used to repay short-term debt and fund ongoing construction programs. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2004.
In January 2004, Georgia Power issued $100 million of Series S 4.00% Senior Notes due January 15, 2011 and $100 million of Series T 5.75% Senior Public Income Notes due January 15, 2044. The proceeds from these sales were used in March 2004 to redeem all of its outstanding Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011 and Series D 6 5/8% Senior Notes due March 31, 2039.
Further in January 2004, Georgia Power Capital Trust VII, a statutory trust, sold $200 million of its 5 7/8% Trust Preferred Securities, which are guaranteed by Georgia Power. The net proceeds from this issuance were used to redeem 6.85% Trust Preferred Securities of Georgia Power Capital Trust IV. In connection with this transaction, Georgia Power issued $206 million of its junior subordinated debentures to Georgia Power Capital Trust VII.
In February 2004, Alabama Power issued 4,000,000 shares ($100 million aggregate stated capital) of 5.30% Class A Preferred Stock, Cumulative, Par Value $1 Per Share (Stated Capital $25 Per Share) and $200 million of Series Z 5.125% Senior Notes due February 15, 2019. The proceeds from these sales were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuous construction program.
21
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Also in February 2004, Georgia Power issued $150 million of Series U Floating Rate Senior Notes due February 17, 2009. The proceeds of this sale were used for general corporate purposes.
In March 2004, Mississippi Power issued $40 million of Series F Floating Rate Senior Notes due March 9, 2009. The proceeds from this sale, along with other monies of Mississippi Power were used to repay $80 million aggregate principal amount of Mississippi Power’s Series D Floating Rate Senior Notes due March 12, 2004.
Additionally, in April 2004, Alabama Power issued $150 million of Series AA 5.625% Senior Notes due April 15, 2034. The proceeds from the sale will be used together with other funds to redeem, in May 2004, $200 million in aggregate principal amount of Alabama Power’s Series J 6.75% Senior Notes due June 30, 2039.
Also in April 2004, Gulf Power issued $35 million of Series J 5.875% Senior Notes due April 1, 2044. The proceeds from this issue were used for general corporate purposes, including Gulf Power’s continuous construction program.
Further, in April 2004, Mississippi Power issued 1,200,000 Depositary Shares ($30 million aggregate stated capital) each representing one-fourth of a share of 5.25% Series Preferred Stock cumulative, par value $100 per share. The proceeds from this sale were primarily used to redeem various issues of preferred stock and the remainder was used for general corporate purposes.
Southern Company and its subsidiaries plan to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital.
The market price of Southern Company’s common stock at March 31, 2004 was $30.50 per share and the book value was $13.26 per share, representing a market-to-book ratio of 230%, compared to $30.25, $13.13 and 230%, respectively, at the end of 2003. The dividend for the first quarter 2004 was $0.35 per share compared to $0.3425 per share in the first quarter 2003.
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
See Management’s Discussion and Analysis — “Financial Condition and Liquidity - Market Price Risk” herein for each registrant and Notes 1 and 6 to the financial statements of each registrant under “Financial Instruments” in Item 8 of the Form 10-K. Also, see Note (G) to the Condensed Financial Statements herein for information relating to derivative instruments.
22
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company, the retail operating companies and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon those evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to each company (including its consolidated subsidiaries) required to be included in periodic filings with the SEC.
(b) Changes in internal controls.
There have been no changes in Southern Company’s, the retail operating companies’ or Southern Power’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter of 2004 that have materially affected or are reasonably likely to materially affect, Southern Company’s, the retail operating companies’ or Southern Power’s internal controls over financial reporting.
23
Table of Contents
ALABAMA POWER COMPANY
24
Table of Contents
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Retail sales | $ | 744,633 | $ | 670,829 | ||||
Sales for resale — | ||||||||
Non-affiliates | 111,945 | 119,281 | ||||||
Affiliates | 65,788 | 61,987 | ||||||
Other revenues | 37,328 | 38,024 | ||||||
Total operating revenues | 959,694 | 890,121 | ||||||
Operating Expenses: | ||||||||
Fuel | 271,979 | 239,744 | ||||||
Purchased power — | ||||||||
Non-affiliates | 28,642 | 28,830 | ||||||
Affiliates | 59,932 | 41,496 | ||||||
Other operations | 146,386 | 134,543 | ||||||
Maintenance | 80,387 | 74,575 | ||||||
Depreciation and amortization | 105,353 | 100,211 | ||||||
Taxes other than income taxes | 64,447 | 60,085 | ||||||
Total operating expenses | 757,126 | 679,484 | ||||||
Operating Income | 202,568 | 210,637 | ||||||
Other Income and (Expense): | ||||||||
Allowance for equity funds used during construction | 4,110 | 4,737 | ||||||
Interest income | 4,439 | 3,276 | ||||||
Interest expense, net of amounts capitalized | (50,079 | ) | (54,573 | ) | ||||
Distributions on mandatorily redeemable preferred securities | (3,938 | ) | (3,441 | ) | ||||
Other income (expense), net | (4,338 | ) | (5,719 | ) | ||||
Total other income and (expense) | (49,806 | ) | (55,720 | ) | ||||
Earnings Before Income Taxes | 152,762 | 154,917 | ||||||
Income taxes | 57,268 | 59,073 | ||||||
Net Income | 95,494 | 95,844 | ||||||
Dividends on Preferred Stock | 4,747 | 4,025 | ||||||
Net Income After Dividends on Preferred Stock | $ | 90,747 | $ | 91,819 | ||||
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
25
Table of Contents
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 95,494 | $ | 95,844 | ||||
Adjustments to reconcile net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 124,220 | 121,910 | ||||||
Deferred income taxes and investment tax credits, net | 35,416 | 14,105 | ||||||
Deferred revenues | (3,080 | ) | (14,577 | ) | ||||
Pension, postretirement, and other employee benefits | (12,907 | ) | (10,633 | ) | ||||
Tax benefit of stock options | 4,091 | 4,195 | ||||||
Other, net | (7,712 | ) | 15,062 | |||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | 29,613 | 80,795 | ||||||
Fossil fuel stock | 9,043 | (3,949 | ) | |||||
Materials and supplies | (3,448 | ) | (2,920 | ) | ||||
Other current assets | (46,030 | ) | (58,344 | ) | ||||
Accounts payable | (89,966 | ) | (112,134 | ) | ||||
Accrued taxes | 29,758 | 60,108 | ||||||
Accrued compensation | (47,924 | ) | (58,677 | ) | ||||
Other current liabilities | 6,368 | 35,666 | ||||||
Net cash provided from operating activities | 122,936 | 166,451 | ||||||
Investing Activities: | ||||||||
Gross property additions | (204,249 | ) | (185,102 | ) | ||||
Cost of removal net of salvage | (9,272 | ) | (10,865 | ) | ||||
Other | 14,048 | 2,160 | ||||||
Net cash used for investing activities | (199,473 | ) | (193,807 | ) | ||||
Financing Activities: | ||||||||
Increase (decrease) in notes payable, net | — | (36,991 | ) | |||||
Proceeds — | ||||||||
Senior notes | 200,000 | 620,000 | ||||||
Preferred stock | 100,000 | 125,000 | ||||||
Common stock | 20,000 | — | ||||||
Redemptions — | ||||||||
Senior notes | — | (560,800 | ) | |||||
Other long-term debt | (1,438 | ) | (236 | ) | ||||
Payment of preferred stock dividends | (4,636 | ) | (3,200 | ) | ||||
Payment of common stock dividends | (109,325 | ) | (107,550 | ) | ||||
Other | (4,807 | ) | (2,949 | ) | ||||
Net cash provided from financing activities | 199,794 | 33,274 | ||||||
Net Change in Cash and Cash Equivalents | 123,257 | 5,918 | ||||||
Cash and Cash Equivalents at Beginning of Period | 42,752 | 22,685 | ||||||
Cash and Cash Equivalents at End of Period | $ | 166,009 | $ | 28,603 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest (net of $1,648 and $2,507 capitalized for 2004 and 2003, respectively) | $ | 36,445 | $ | 31,313 | ||||
Income taxes (net of refunds) | $ | 2,140 | $ | — |
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
26
Table of Contents
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 166,009 | $ | 42,752 | ||||
Receivables — | ||||||||
Customer accounts receivable | 212,369 | 240,562 | ||||||
Unbilled revenues | 83,130 | 95,953 | ||||||
Under recovered regulatory clause revenues | 38,403 | — | ||||||
Other accounts and notes receivable | 39,994 | 53,547 | ||||||
Affiliated companies | 34,413 | 48,876 | ||||||
Accumulated provision for uncollectible accounts | (5,868 | ) | (4,756 | ) | ||||
Fossil fuel stock, at average cost | 77,950 | 86,993 | ||||||
Vacation pay | 35,530 | 35,530 | ||||||
Materials and supplies, at average cost | 215,138 | 211,690 | ||||||
Prepaid expenses | 82,297 | 44,608 | ||||||
Other | 27,797 | 19,454 | ||||||
Total current assets | 1,007,162 | 875,209 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 14,289,720 | 14,224,117 | ||||||
Less accumulated provision for depreciation | 4,956,474 | 4,905,920 | ||||||
9,333,246 | 9,318,197 | |||||||
Nuclear fuel, at amortized cost | 86,907 | 93,611 | ||||||
Construction work in progress | 410,615 | 321,316 | ||||||
Total property, plant, and equipment | 9,830,768 | 9,733,124 | ||||||
Other Property and Investments: | ||||||||
Equity investments in unconsolidated subsidiaries | 47,279 | 47,811 | ||||||
Nuclear decommissioning trusts, at fair value | 395,607 | 384,574 | ||||||
Other | 25,495 | 16,992 | ||||||
Total other property and investments | 468,381 | 449,377 | ||||||
Deferred Charges and Other Assets: | ||||||||
Deferred charges related to income taxes | 320,166 | 321,077 | ||||||
Prepaid pension costs | 456,669 | 446,256 | ||||||
Unamortized loss on reacquired debt | 108,886 | 110,946 | ||||||
Other | 130,315 | 134,635 | ||||||
Total deferred charges and other assets | 1,016,036 | 1,012,914 | ||||||
Total Assets | $ | 12,322,347 | $ | 12,070,624 | ||||
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
27
Table of Contents
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Liabilities and Stockholder's Equity | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Liabilities: | ||||||||
Securities due within one year | $ | 725,011 | $ | 526,019 | ||||
Accounts payable — | ||||||||
Affiliated | 120,047 | 135,017 | ||||||
Other | 92,781 | 162,314 | ||||||
Customer deposits | 48,513 | 47,507 | ||||||
Accrued taxes — | ||||||||
Income taxes | 68,524 | 83,544 | ||||||
Other | 44,169 | 22,273 | ||||||
Accrued interest | 56,710 | 46,489 | ||||||
Accrued vacation pay | 35,530 | 35,530 | ||||||
Accrued compensation | 27,697 | 75,620 | ||||||
Other | 43,945 | 34,513 | ||||||
Total current liabilities | 1,262,927 | 1,168,826 | ||||||
Long-term Debt | 3,376,165 | 3,377,148 | ||||||
Long-term Debt Payable to Affiliated Trusts | 309,279 | — | ||||||
Mandatorily Redeemable Preferred Securities | — | 300,000 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Accumulated deferred income taxes | 1,626,767 | 1,571,076 | ||||||
Deferred credits related to income taxes | 158,555 | 162,168 | ||||||
Accumulated deferred investment tax credits | 213,570 | 216,309 | ||||||
Employee benefit obligations | 178,466 | 180,960 | ||||||
Deferred capacity revenues | 33,486 | 36,567 | ||||||
Asset retirement obligations | 364,775 | 358,759 | ||||||
Asset retirement obligation regulatory liability | 136,356 | 127,346 | ||||||
Other cost of removal obligations | 580,389 | 574,445 | ||||||
Miscellaneous regulatory liabilities | 78,556 | 86,323 | ||||||
Other | 34,873 | 37,525 | ||||||
Total deferred credits and other liabilities | 3,405,793 | 3,351,478 | ||||||
Total Liabilities | 8,354,164 | 8,197,452 | ||||||
Cumulative Preferred Stock | 472,512 | 372,512 | ||||||
Common Stockholder’s Equity: | ||||||||
Common stock, par value $40 per share — | ||||||||
Authorized - 15,000,000 shares | ||||||||
Outstanding - March 31, 2004: 7,750,000 Shares | ||||||||
- December 31, 2003: 7,250,000 Shares | 310,000 | 290,000 | ||||||
Paid-in capital | 1,931,060 | 1,926,970 | ||||||
Premium on preferred stock | 99 | 99 | ||||||
Retained earnings | 1,271,210 | 1,291,558 | ||||||
Accumulated other comprehensive loss | (16,698 | ) | (7,967 | ) | ||||
Total common stockholder’s equity | 3,495,671 | 3,500,660 | ||||||
Total Liabilities and Stockholder’s Equity | $ | 12,322,347 | $ | 12,070,624 | ||||
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
28
Table of Contents
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 90,747 | $ | 91,819 | ||||
Other comprehensive loss: | ||||||||
Changes in fair value of qualifying hedges, net of tax of $(6,162) and $(796), respectively | (10,136 | ) | (1,308 | ) | ||||
Less: Reclassification adjustment for amounts included in net income, net of tax of $854 and $752, respectively | 1,405 | 1,236 | ||||||
COMPREHENSIVE INCOME | $ | 82,016 | $ | 91,747 | ||||
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
29
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
RESULTS OF OPERATIONS
Earnings
Alabama Power’s net income after dividends on preferred stock for the first quarter 2004 was $90.7 million compared to $91.8 million for the corresponding period of 2003. Earnings in the first quarter of 2004 decreased by $1.1 million, or 1.2%, primarily due to higher operation and maintenance expenses, depreciation expense and taxes other than income taxes. These increases were partially offset by an increase in retail base-rate revenues and a decrease in interest expense.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Retail sales | $ | 73,804 | 11.0 | |||||
Sales for resale — non-affiliates | (7,336 | ) | (6.2 | ) | ||||
Sales for resale — affiliates | 3,801 | 6.1 | ||||||
Fuel expense | 32,235 | 13.4 | ||||||
Purchased power — affiliates | 18,436 | 44.3 | ||||||
Other operation expense | 11,843 | 8.8 | ||||||
Maintenance expense | 5,812 | 7.8 | ||||||
Depreciation and amortization | 5,142 | 5.1 | ||||||
Taxes other than income taxes | 4,362 | 7.3 | ||||||
Interest expense, net of amounts capitalized | (4,494 | ) | (8.2 | ) |
Retail sales. Excluding energy cost recovery revenues and revenues associated with PPAs certificated by the Alabama PSC, which generally do not affect net income, retail sales revenues increased by $21.6 million, or 4.3%, for the first quarter 2004 when compared to the corresponding period in 2003. See Note 3 to Alabama Power’s financial statements under “Retail Rate Adjustment Procedures” in Item 8 of the Form 10-K for additional information. Kilowatt-hour energy sales to residential, commercial, and industrial customers increased 4.4%, 2.6%, and 8.9%, respectively, for the first quarter 2004 when compared to the corresponding period of 2003 primarily due to favorable weather conditions and improved industrial sales mainly in the primary metal and automotive sectors.
Sales for resale — non-affiliates.During the first quarter 2004, the revenues associated with sales for resale to non-affiliates decreased due to a 5.7% reduction in kilowatt-hour sales of energy while market based prices remained flat when compared to the first quarter of 2003. Kilowatt-hour sales of energy will vary depending on demand, market based prices and the availability of Southern Company system generation. These transactions did not have a significant impact on earnings since the energy is usually sold at variable cost.
30
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale — affiliates and Purchased power — affiliates. Sales for resale to affiliates increased in the first quarter 2004 when compared to the corresponding period in 2003 due to a $1.0 million increase in capacity payments received in accordance with the affiliated company interchange agreement as a result of Alabama Power’s increased share of the total interchange capacity. Purchases of energy will vary depending on demand and the availability and cost of generating resources at each company. Purchased power from affiliates increased in the first quarter 2004 principally due to a PPA between Alabama Power and Southern Power that began in June 2003. The capacity component of these transactions was $9.4 million in the first quarter 2004. Excluding the capacity revenue received under the interchange agreement, these transactions did not have a significant impact on earnings since the related energy is sold at marginal cost, and energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clause.
Fuel expense.Fuel expense was higher in the first quarter 2004 when compared to the corresponding period in 2003 mainly due to a 26.7% increase in natural gas prices and a 36.3% increase in generation from natural gas-fired generating facilities. The increase in generation from gas-fired facilities in the first quarter 2004 when compared to the first quarter 2003 is mainly due to a 27.1% decrease in generation from Alabama Power’s hydroelectric facilities. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings.
Other operation expense.The increase in other operation expense in the first quarter 2004 is a result of an $11.1 million increase in administrative and general expenses. This increase primarily relates to a $4.9 million increase in employee payroll and benefits, and legal expenses, a $1.9 million increase in property insurance, a $1.9 million increase in accrued expense for liability insurance, litigation and workers compensation and a $1.8 million increase in pension expense.
Maintenance expense.The increase in maintenance expense for the first quarter 2004 when compared to the same period in 2003 is attributed to a $3.3 million increase in distribution expense and a $1.7 million increase in transmission expense. These increases are mainly related to scheduled work performed on overhead lines.
Depreciation and amortization expense.The increase in depreciation and amortization expense during the first quarter 2004 is attributed to an increase in utility plant-in-service when compared to the same period in 2003. See Note 7 to Alabama Power’s financial statements under “Construction Program” in Item 8 of the Form 10-K for additional information.
Taxes other than income taxes.The first quarter 2004 increase in taxes other than income taxes is due to a $2.3 million increase in payroll taxes and a $1.3 million increase in property taxes when compared to the corresponding period in 2003.
Interest expense, net of amounts capitalized.The decrease in interest expense, net of amounts capitalized during the first quarter 2004 when compared to the same period in 2003 is the result of refinancing higher cost debt. For additional information, see “Financial Condition and Liquidity — Financing Activities” herein.
31
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including Alabama Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs and to recover costs related to growing demand and increasingly strict environmental standards. Growth in energy sales is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand and the rate of economic growth in Alabama Power’s service area. For additional information relating to these issues, see Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Alabama Power in the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information about these issues, including the EPA litigation, see Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential - Environmental Matters” and Note 3 to the financial statements of Alabama Power under “New Source Review Actions” in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under the New Source Review Litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review action against the TVA. The case against Alabama Power has been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome in this case could require substantial capital expenditures that cannot be determined at this time and could 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.
On March 12, 2004, the EPA redesignated the Birmingham, Alabama area from nonattainment to attainment under the one-hour ozone national ambient air quality standard. On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. Within Alabama Power’s service area, Birmingham has been designated as nonattainment under the eight-hour ozone standard. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. The impact of the eight-hour designations and the new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time. Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.
FERC Matters
See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Alabama Power under “FERC
32
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.
See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters” of Alabama Power in the Form 10-K for information on the FERC’s order related to RTOs and the FERC’s notice of proposed rulemaking regarding open access transmission service.
Other Matters
See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Other Matters” of Alabama Power in Item 7 of the Form 10-K for information on nuclear security measures. Implementation plans for the measures ordered by the NRC to be in effect by October 29, 2004 have been finalized based on current interpretations of the requirements. Alabama Power currently estimates its expenditures related to these security measures to total $9.6 million of which $9.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.
Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Alabama Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Alabama Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 — Management’s Discussion and Analysis - “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Alabama Power in the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation and Contingent Obligations.
33
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
On March 31, 2004, Alabama Power prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of Interpretation No. 46R had no impact on Alabama Power’s net income. However, as a result of the adoption, Alabama Power deconsolidated certain wholly-owned trusts established to issue preferred securities since Alabama Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Alabama Power’s financial condition during the first three months of 2004 included the addition of approximately $204 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and net proceeds from security issuances of $319 million. See Alabama Power’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
See Item 7 — Management’s Discussion and Analysis — Financial Condition And Liquidity — “Capital Requirements and Contractual Obligations” of Alabama Power in of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements. Approximately $725 million will be required by March 31, 2005 for redemptions and maturities of long-term debt.
Sources of Capital
In addition to the financing activities described below, Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.
Alabama Power’s current liabilities exceed current assets primarily because of scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, at March 31, 2004 Alabama Power had $166 million of cash and cash equivalents, unused committed lines of credit of approximately $865 million (including $504 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. These lines of credit will expire at various times during 2004. Alabama Power expects to renew its credit facilities, as needed, prior to expiration. Alabama Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory authority for up to $1 billion of short-term borrowings. At March 31, 2004, Alabama Power had no commercial paper or notes payable outstanding. Management believes that the need for working capital can be adequately met by issuing commercial paper or utilizing lines of credit without maintaining large cash balances.
34
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Credit Rating Risk
Alabama Power does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral – but not accelerated payment – in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed price physical gas purchases and agreements covering interest rate swaps. At March 31, 2004, the maximum potential collateral requirements were approximately $27 million.
Market Price Risk
Alabama Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Alabama Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Alabama Power has 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, Alabama Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama PSC. The fair value of derivative energy contracts at March 31, 2004 was as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 6,413 | ||
Contracts realized or settled | (3,189 | ) | ||
New contracts at inception | — | |||
Changes in valuation techniques | — | |||
Current period changes | 14,634 | |||
Contracts at March 31, 2004 | $ | 17,858 | ||
Source of March 31, 2004 | ||||||||||||
Valuation Prices | ||||||||||||
Total | Maturity | |||||||||||
Fair Value | Year 1 | 1-3 Years | ||||||||||
(in thousands) | ||||||||||||
Actively quoted | $ | 17,858 | $ | 16,432 | $ | 1,426 | ||||||
External sources | — | — | — | |||||||||
Models and other methods | — | — | — | |||||||||
Contracts at March 31, 2004 | $ | 17,858 | $ | 16,432 | $ | 1,426 | ||||||
35
Table of Contents
ALABAMA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition And Liquidity — Market Price Risk” of Alabama Power in the Form 10-K and Notes 1 and 6 to the financial statements of Alabama Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.
Financing Activities
In February 2004, Alabama Power issued 500,000 shares of common stock to Southern Company at $40.00 a share ($20 million aggregate purchase price). The proceeds from the sale were used by Alabama Power for general corporate purposes.
Also in February 2004, Alabama Power issued 4,000,000 shares ($100 million aggregate stated capital) of 5.30% Class A Preferred Stock, Cumulative, Par Value $1 per share (Stated Capital $25 Per Share) and $200 million of Series Z 5.125% Senior Notes due February 15, 2019. The proceeds from the sale were used to repay a portion of Alabama Power’s outstanding short-term indebtedness and for other general corporate purposes, including Alabama Power’s continuous construction program.
In April 2004, Alabama Power issued $150 million of Series AA 5.625% Senior Notes due April 15, 2034. The proceeds from the sale will be used together with other funds to redeem in May 2004 $200 million in aggregate principal amount of the Series J 6.75% Senior Notes due June 30, 2039.
Alabama Power plans to continue, when economically feasible, a program to retire higher-cost debt and replace these obligations with lower-cost capital if market conditions permit.
36
Table of Contents
GEORGIA POWER COMPANY
37
Table of Contents
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Retail sales | $ | 1,037,795 | $ | 965,707 | ||||
Sales for resale — | ||||||||
Non-affiliates | 65,456 | 73,986 | ||||||
Affiliates | 54,142 | 47,486 | ||||||
Other revenues | 41,996 | 39,259 | ||||||
Total operating revenues | 1,199,389 | 1,126,438 | ||||||
Operating Expenses: | ||||||||
Fuel | 285,214 | 242,503 | ||||||
Purchased power — | ||||||||
Non-affiliates | 62,689 | 72,036 | ||||||
Affiliates | 135,142 | 113,843 | ||||||
Other operations | 198,393 | 185,990 | ||||||
Maintenance | 108,468 | 110,944 | ||||||
Depreciation and amortization | 67,737 | 85,742 | ||||||
Taxes other than income taxes | 56,432 | 53,175 | ||||||
Total operating expenses | 914,075 | 864,233 | ||||||
Operating Income | 285,314 | 262,205 | ||||||
Other Income and (Expense): | ||||||||
Allowance for equity funds used during construction | 3,347 | 2,956 | ||||||
Interest income | 2,352 | 115 | ||||||
Interest expense, net of amounts capitalized | (45,650 | ) | (44,363 | ) | ||||
Distributions on mandatorily redeemable preferred securities | (15,839 | ) | (14,919 | ) | ||||
Other income (expense), net | (4,395 | ) | 2,912 | |||||
Total other income and (expense) | (60,185 | ) | (53,299 | ) | ||||
Earnings Before Income Taxes | 225,129 | 208,906 | ||||||
Income taxes | 81,120 | 75,468 | ||||||
Net Income | 144,009 | 133,438 | ||||||
Dividends on Preferred Stock | 168 | 168 | ||||||
Net Income After Dividends on Preferred Stock | $ | 143,841 | $ | 133,270 | ||||
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
38
Table of Contents
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 144,009 | $ | 133,438 | ||||
Adjustments to reconcile net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 91,462 | 102,770 | ||||||
Deferred income taxes and investment tax credits, net | 56,823 | 29,956 | ||||||
Pension, postretirement, and other employee benefits | (7,342 | ) | (7,633 | ) | ||||
Tax benefit of stock options | 4,523 | 2,750 | ||||||
Other, net | (15,288 | ) | (8,924 | ) | ||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | 42,798 | 114,048 | ||||||
Fossil fuel stock | (3,808 | ) | (11,235 | ) | ||||
Materials and supplies | 773 | (2,166 | ) | |||||
Other current assets | 24,430 | 24,309 | ||||||
Accounts payable | 5,576 | (97,095 | ) | |||||
Accrued taxes | (131,794 | ) | (56,058 | ) | ||||
Accrued compensation | (93,468 | ) | (92,624 | ) | ||||
Other current liabilities | (262 | ) | 413 | |||||
Net cash provided from operating activities | 118,432 | 131,949 | ||||||
Investing Activities: | ||||||||
Gross property additions | (158,743 | ) | (190,895 | ) | ||||
Cost of removal net of salvage | 2,059 | (4,950 | ) | |||||
Change in construction payables, net of joint owner portion | (20,809 | ) | (53,462 | ) | ||||
Other | 5,210 | 6,865 | ||||||
Net cash used for investing activities | (172,283 | ) | (242,442 | ) | ||||
Financing Activities: | ||||||||
Increase in notes payable, net | 55,044 | 171,742 | ||||||
Proceeds — | ||||||||
Senior notes | 350,000 | 400,000 | ||||||
Mandatorily redeemable preferred securities | 200,000 | — | ||||||
Redemptions — | ||||||||
Senior notes | (200,000 | ) | (315,000 | ) | ||||
Mandatorily redeemable preferred securities | (200,000 | ) | — | |||||
Payment of common stock dividends | (141,375 | ) | (141,450 | ) | ||||
Other | (11,567 | ) | (8,371 | ) | ||||
Net cash provided from financing activities | 52,102 | 106,921 | ||||||
Net Change in Cash and Cash Equivalents | (1,749 | ) | (3,572 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 8,699 | 16,873 | ||||||
Cash and Cash Equivalents at End of Period | $ | 6,950 | $ | 13,301 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest (net of $1,180 and $1,846 capitalized for 2004 and 2003, respectively) | $ | 62,923 | $ | 54,160 | ||||
Income taxes (net of refunds) | $ | 16,494 | $ | (3,896 | ) |
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
39
Table of Contents
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 6,950 | $ | 8,699 | ||||
Receivables — | ||||||||
Customer accounts receivable | 235,414 | 261,771 | ||||||
Unbilled revenues | 118,218 | 117,327 | ||||||
Under recovered regulatory clause revenues | 177,935 | 151,447 | ||||||
Other accounts and notes receivable | 66,067 | 101,783 | ||||||
Affiliated companies | 38,004 | 52,413 | ||||||
Accumulated provision for uncollectible accounts | (5,350 | ) | (5,350 | ) | ||||
Fossil fuel stock, at average cost | 141,345 | 137,537 | ||||||
Vacation pay | 54,811 | 50,150 | ||||||
Materials and supplies, at average cost | 270,267 | 271,040 | ||||||
Prepaid expenses | 16,787 | 46,157 | ||||||
Other | 9,867 | 83 | ||||||
Total current assets | 1,130,315 | 1,193,057 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 18,272,064 | 18,171,862 | ||||||
Less accumulated provision for depreciation | 6,978,797 | 6,898,725 | ||||||
11,293,267 | 11,273,137 | |||||||
Nuclear fuel, at amortized cost | 123,133 | 129,056 | ||||||
Construction work in progress | 354,607 | 341,783 | ||||||
Total property, plant, and equipment | 11,771,007 | 11,743,976 | ||||||
Other Property and Investments: | ||||||||
Equity investments in unconsolidated subsidiaries | 67,965 | 38,714 | ||||||
Nuclear decommissioning trusts, at fair value | 435,210 | 423,319 | ||||||
Other | 37,253 | 37,142 | ||||||
Total other property and investments | 540,428 | 499,175 | ||||||
Deferred Charges and Other Assets: | ||||||||
Deferred charges related to income taxes | 506,916 | 509,887 | ||||||
Prepaid pension costs | 416,031 | 405,164 | ||||||
Unamortized debt issuance expense | 75,625 | 75,245 | ||||||
Unamortized loss on reacquired debt | 185,024 | 177,707 | ||||||
Other | 166,029 | 177,817 | ||||||
Total deferred charges and other assets | 1,349,625 | 1,345,820 | ||||||
Total Assets | $ | 14,791,375 | $ | 14,782,028 | ||||
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
40
Table of Contents
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Liabilities and Stockholder’s Equity | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Liabilities: | ||||||||
Securities due within one year | $ | 252,352 | $ | 2,304 | ||||
Notes payable | 192,322 | 137,277 | ||||||
Accounts payable — | ||||||||
Affiliated | 118,025 | 121,928 | ||||||
Other | 220,435 | 238,069 | ||||||
Customer deposits | 106,604 | 103,756 | ||||||
Accrued taxes — | ||||||||
Income taxes | 116,667 | 107,532 | ||||||
Other | 56,628 | 166,892 | ||||||
Accrued interest | 70,102 | 70,844 | ||||||
Accrued vacation pay | 42,749 | 38,206 | ||||||
Accrued compensation | 40,536 | 134,004 | ||||||
Other | 97,671 | 105,234 | ||||||
Total current liabilities | 1,314,091 | 1,226,046 | ||||||
Long-term Debt | 3,661,712 | 3,762,333 | ||||||
Long-term Debt Payable to Affiliated Trusts | 969,073 | — | ||||||
Mandatorily Redeemable Preferred Securities | — | 940,000 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Accumulated deferred income taxes | 2,322,259 | 2,303,085 | ||||||
Deferred credits related to income taxes | 182,806 | 186,625 | ||||||
Accumulated deferred investment tax credits | 309,384 | 312,506 | ||||||
Employee benefit obligations | 299,314 | 295,788 | ||||||
Asset retirement obligations | 482,593 | 475,585 | ||||||
Other cost of removal obligations | 413,875 | 412,161 | ||||||
Miscellaneous regulatory liabilities | 208,084 | 249,687 | ||||||
Other | 66,732 | 63,432 | ||||||
Total deferred credits and other liabilities | 4,285,047 | 4,298,869 | ||||||
Total Liabilities | 10,229,923 | 10,227,248 | ||||||
Cumulative Preferred Stock | 14,569 | 14,569 | ||||||
Common Stockholder’s Equity: | ||||||||
Common stock, without par value — Authorized — 15,000,000 shares Outstanding — 7,761,500 shares | 344,250 | 344,250 | ||||||
Paid-in capital | 2,213,021 | 2,208,498 | ||||||
Premium on preferred stock | 40 | 40 | ||||||
Retained earnings | 2,012,764 | 2,010,297 | ||||||
Accumulated other comprehensive loss | (23,192 | ) | (22,874 | ) | ||||
Total common stockholder’s equity | 4,546,883 | 4,540,211 | ||||||
Total Liabilities and Stockholder’s Equity | $ | 14,791,375 | $ | 14,782,028 | ||||
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
41
Table of Contents
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 143,841 | $ | 133,270 | ||||
Other comprehensive loss: | ||||||||
Changes in fair value of qualifying hedges, net of tax of $(880) and $(966), respectively | (1,395 | ) | (1,532 | ) | ||||
Less: Reclassification adjustment for amounts included in net income, net of tax of $679 and $-, respectively | 1,077 | (7 | ) | |||||
COMPREHENSIVE INCOME | $ | 143,523 | $ | 131,731 | ||||
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
42
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
RESULTS OF OPERATIONS
Earnings
Georgia Power’s net income after dividends on preferred stock for the first quarter 2004 was $143.9 million compared to $133.3 million for the corresponding period in 2003. Earnings in the first quarter 2004 increased by $10.6 million, or 7.9%, primarily due to higher retail revenues that were partially offset by higher non-fuel operating expenses when compared to the same period in 2003.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Retail sales | $ | 72,088 | 7.5 | |||||
Sales for resale — non-affiliates | (8,530 | ) | (11.5 | ) | ||||
Sales for resale — affiliates | 6,656 | 14.0 | ||||||
Other revenues | 2,737 | 7.0 | ||||||
Fuel expense | 42,711 | 17.6 | ||||||
Purchased power — non-affiliates | (9,347 | ) | (13.0 | ) | ||||
Purchased power — affiliates | 21,299 | 18.7 | ||||||
Other operation expense | 12,403 | 6.7 | ||||||
Depreciation and amortization | (18,005 | ) | (21.0 | ) | ||||
Interest income | 2,237 | N/M | ||||||
Other income (expense), net | (7,307 | ) | (250.9 | ) |
N/M Not meaningful |
Retail sales.Excluding fuel revenues, which generally do not affect net income, retail sales revenue increased by $31.8 million, or 4.7%, in the first quarter 2004 compared to the corresponding period in 2003. In the first quarter 2004, kilowatt-hour energy sales to residential, commercial and industrial customers increased by 5.3%, 3.9% and 2.1%, respectively, when compared to the same period in 2003. These increases in the retail sectors during the first quarter 2004 are mainly due to customer growth of 2% and an improving economy.
Sales for resale — non-affiliates. The decrease in revenues from sales for resale to non-affiliates in the first quarter 2004 is mainly attributed to lower demand for energy by these customers when compared to the same period in 2003. These transactions did not have a significant impact on earnings since the energy is usually sold at variable cost.
43
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale — affiliates. Revenues from sales for resale to affiliates increased in the first quarter 2004 when compared to the same period in 2003 despite lower demand for energy due to higher fuel costs associated with generating electricity. These transactions did not have a significant impact on earnings since this energy is generally sold at marginal cost.
Other revenues.The increase in other revenues during the first quarter 2004 when compared to the corresponding period of 2003 is primarily attributed to a $1.4 million increase in outdoor lighting revenues and a $0.7 million increase in electric property rental revenues.
Fuel expense. During the first quarter 2004, fuel expenses increased as a result of a 15.1% increase in the unit cost of fuel when compared to the corresponding period in 2003 and an increase of 2.5% in generation due to increased retail sales. These expenses do not have a significant impact on earnings since fuel expenses are generally offset by fuel revenues through Georgia Power’s fuel cost recovery clause.
Purchased power — non-affiliates.The first quarter 2004 decrease in purchased power from non-affiliates is primarily due to fluctuations in off-system energy purchases used to meet off-system sales commitments. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.
Purchased power — affiliates. Purchased power from affiliates increased in the first quarter 2004 when compared to the first quarter 2003 due to a PPA between Georgia Power and Southern Power that began in June 2003. The capacity component of these transactions totaled $10.7 million in the first quarter 2004. The energy component of power purchased from affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company and will have no significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery clause.
Other operation expense.Other operation expense in the first quarter 2004 was higher when compared to the same period in 2003 due to increased administrative and general expenses of $10.8 million related to employee payroll and benefits and $3.2 million in workers compensation benefits.
Depreciation and amortization.In the first quarter 2004, depreciation and amortization expense was lower compared to the first quarter of 2003. This decrease was caused primarily by lower regulatory charges needed to levelize purchased power capacity costs under the terms of the retail rate order effective January 1, 2002. This decrease was offset by an increase in affiliated purchased power costs discussed above. See Note 1 to the financial statements under “Depreciation and Amortization” of Georgia Power in Item 8 of the Form 10-K for additional information.
Interest income.During the first quarter 2004, interest income increased when compared to the corresponding period in 2003 due mainly to interest received from the State of Georgia for a favorable sales and use tax settlement.
Other income (expense), net.The change in this item in the first quarter 2004 when compared to the first quarter 2003 reflects decreased income from a new electricity pricing program.
44
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including Georgia Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Georgia Power in the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. For additional information, including information on certain environmental litigation, see Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” of Georgia Power and Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K under “New Source Review Actions” and “Plant Wansley Environmental Litigation.” As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under either the New Source Review litigation or Plant Wansley Environmental litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review action against the TVA. The case against Georgia Power has been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome in either of these cases could require substantial capital expenditures that cannot be determined at this time and could 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.
On April 30, 2004, the EPA published its eight-hour ozone nonattainment designations and a portion of the rules implementing the new eight-hour standard. Areas within Georgia Power’s service area that have been designated as nonattainment under the eight-hour ozone standard include Macon and a 20-county area within metropolitan Atlanta. Under the implementation provisions of the new rule, the EPA announced that the one-hour ozone standard will be revoked on June 15, 2005. Areas classified as “severe” nonattainment areas under the one-hour standard will not be required to impose emissions fees as a result of nonattainment. Georgia Power, therefore, will no longer be subject to imposition of emissions fees if the Atlanta area does not come into attainment with the one-hour standard. The impact of the eight-hour designations and the new standards will depend on the development and implementation of applicable state regulations and therefore cannot be determined at this time.
On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to the State of Georgia. These rules specify that Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. The impact of these regulations will depend on the development and approval of Georgia’s state implementation plan and cannot be determined at this time.
45
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.
FERC Matters
See Management’s Discussion And Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing the FERC’s order. The final outcome of this matter cannot be determined at this time.
See Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11.
See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” and Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K for information on the FERC’s order related to RTOs and the FERC’s notice of proposed rulemaking regarding open access transmission service.
Other Matters
In January 2002, Georgia Power began operating under a three-year retail rate order. Under the terms of the order, earnings will be evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds, with the remaining one-third retained by Georgia Power. Retail rates were decreased by $118 million effective January 1, 2002. Purchases under PPAs are required by the order to be reflected in rates evenly over the three year period ending December 31, 2004. Georgia Power is required to file a general rate case on July 1, 2004, in response to which the Georgia PSC would be expected to determine whether the rate order should be continued, modified, or discontinued. See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential – Other Matters” and Note 3 to the financial statements of Georgia Power under “Retail Rate Orders” in Item 8 of the Form 10-K for additional information.
In August 2003, the Georgia PSC issued an order allowing Georgia Power to increase customer fuel rates to recover existing under-recovered deferred fuel costs over the period October 1, 2003 through March 31, 2005. See Note 3 to the financial statements of Georgia Power under “Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.
46
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
See Management’s Discussion and Analysis — “Future Earnings Potential — Other Matters” in Item 7 of the Form 10-K for information on nuclear security measures. Implementation plans for the measures ordered by the NRC to be in effect by October 29, 2004 have been finalized based on current interpretations of the requirements. Georgia Power, based on its ownership interest, currently estimates its expenditures related to these security measures will total $9.3 million, of which $1.3 million will be capitalized. These estimates are subject to change in the event additional NRC guidance is provided.
In June 2002, Georgia Power entered into a fifteen-year PPA beginning in June 2005 with Southern Power to purchase 1,040 megawatts of capacity from Southern Power’s Plant McIntosh. See Management’s Discussion and Analysis – “Future Earnings Potential — FERC Matters – Market-Based Rate Authority” in Item 7 of the Form 10-K and Note 3 to the financial statements of Georgia Power under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for this PPA.
Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Georgia Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Georgia Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Georgia Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 — Management’s Discussion and Analysis – “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Georgia Power in the Form 10-K for a complete discussion of Georgia Power’s critical accounting policies and estimates related to Electric Utility Regulation and Contingent Obligations.
New Accounting Standards
On March 31, 2004, Georgia Power prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of Interpretation No. 46R had no impact on Georgia Power’s net income. However, as a result of the adoption, Georgia Power deconsolidated certain wholly-owned trusts
47
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
established to issue preferred securities since Georgia Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.
FINANCIAL CONDITION AND LIQUIDITY
Overview
The major change in Georgia Power’s financial condition during the first three months of 2004 was the addition of approximately $159 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See Georgia Power’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Capital Requirements and Contractual Obligations” of Georgia Power in the Form 10-K for a description of Georgia Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements. Approximately $252 million will be required by March 31, 2005 for redemptions and maturities of long-term debt.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, including funds from operations and new security issuances. The amount, type and timing of additional security issuances — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.
Georgia Power’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs, which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Georgia Power had at March 31, 2004 approximately $7.0 million of cash and cash equivalents and $725 million of unused credit arrangements with banks. These credit arrangements expire in June 2004 and contain provisions allowing two-year term loans executable at the expiration. Georgia Power expects to renew its credit facilities, as needed, prior to expiration. The credit arrangements provide liquidity support to Georgia Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Georgia Power and other Southern Company subsidiaries. At March 31, 2004, Georgia Power had outstanding $192 million in notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.
48
Table of Contents
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Credit Rating Risk
Georgia Power does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases, and agreements covering interest rate swaps. At March 31, 2004, the maximum potential collateral requirements were approximately $227 million.
Market Price Risk
Georgia Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Georgia Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Georgia Power has 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, Georgia Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Georgia Power has also implemented a retail fuel hedging program at the instruction of the Georgia PSC. The fair value of derivative energy contracts at March 31, 2004 was as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 3,155 | ||
Contracts realized or settled | (98 | ) | ||
New contracts at inception | — | |||
Changes in valuation techniques | — | |||
Current period changes | 7,476 | |||
Contracts at March 31, 2004 | $ | 10,533 | ||
Source of March 31, 2004 | ||||||||||||
Valuation Prices | ||||||||||||
Maturity | ||||||||||||
Total | ||||||||||||
Fair Value | Year 1 | 1-3 Years | ||||||||||
(in thousands) | ||||||||||||
Actively quoted | $ | 10,533 | $ | 9,238 | $ | 1,295 | ||||||
External sources | — | — | — | |||||||||
Models and other methods | — | — | — | |||||||||
Contracts at March 31, 2004 | $ | 10,533 | $ | 9,238 | $ | 1,295 | ||||||
49
Table of Contents
`
GEORGIA POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Georgia Power in the Form 10-K and Notes 1 and 6 to the financial statements of Georgia Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.
Financing Activities
In January 2004, Georgia Power issued $100 million of Series S 4.00% Senior Notes due January 15, 2011 and $100 million of Series T 5.75% Senior Public Income Notes due January 15, 2044. The proceeds from these sales were used in March 2004 to redeem all of its outstanding Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011 and Series D 6 5/8% Senior Notes due March 31, 2039.
Further in January 2004, Georgia Power Capital Trust VII, a statutory trust, sold $200 million of its 5 7/8% Trust Preferred Securities, which are guaranteed by Georgia Power. The net proceeds from this issuance were used to redeem the 6.85% Trust Preferred Securities of Georgia Power Capital Trust IV. In connection with this transaction, Georgia Power issued $206 million of its junior subordinated debentures to Georgia Power Capital Trust VII.
In February 2004, Georgia Power issued $150 million of Series U Floating Rate Senior Notes due February 17, 2009. The proceeds of this sale were used for general corporate purposes.
Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
50
Table of Contents
GULF POWER COMPANY
51
Table of Contents
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Retail sales | $ | 165,084 | $ | 159,793 | ||||
Sales for resale — | ||||||||
Non-affiliates | 19,488 | 18,725 | ||||||
Affiliates | 20,695 | 10,217 | ||||||
Other revenues | 9,652 | 9,103 | ||||||
Total operating revenues | 214,919 | 197,838 | ||||||
Operating Expenses: | ||||||||
Fuel | 78,416 | 63,267 | ||||||
Purchased power — | ||||||||
Non-affiliates | 6,433 | 5,956 | ||||||
Affiliates | 7,428 | 12,587 | ||||||
Other operations | 33,018 | 30,011 | ||||||
Maintenance | 16,206 | 16,580 | ||||||
Depreciation and amortization | 20,552 | 20,252 | ||||||
Taxes other than income taxes | 17,063 | 16,388 | ||||||
Total operating expenses | 179,116 | 165,041 | ||||||
Operating Income | 35,803 | 32,797 | ||||||
Other Income and (Expense): | ||||||||
Interest expense, net of amounts capitalized | (7,894 | ) | (8,055 | ) | ||||
Distributions on mandatorily redeemable preferred securities | (1,113 | ) | (2,028 | ) | ||||
Other income (expense), net | 18 | (423 | ) | |||||
Total other income and (expense) | (8,989 | ) | (10,506 | ) | ||||
Earnings Before Income Taxes | 26,814 | 22,291 | ||||||
Income taxes | 9,921 | 8,265 | ||||||
Net Income | 16,893 | 14,026 | ||||||
Dividends on Preferred Stock | 54 | 54 | ||||||
Net Income After Dividends on Preferred Stock | $ | 16,839 | $ | 13,972 | ||||
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
52
Table of Contents
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 16,893 | $ | 14,026 | ||||
Adjustments to reconcile net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 22,084 | 21,656 | ||||||
Deferred income taxes | 5 | 1,621 | ||||||
Pension, postretirement, and other employee benefits | 1,427 | 1,981 | ||||||
Tax benefit of stock options | 932 | 943 | ||||||
Other, net | 1,939 | 5,081 | ||||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | 16,812 | 16,220 | ||||||
Fossil fuel stock | 2,303 | (3,127 | ) | |||||
Materials and supplies | 624 | (1,451 | ) | |||||
Other current assets | (2,248 | ) | 7,798 | |||||
Accounts payable | (4,899 | ) | (7,211 | ) | ||||
Accrued taxes | 7,199 | (6,544 | ) | |||||
Accrued compensation | (8,591 | ) | (7,854 | ) | ||||
Other current liabilities | 1,999 | 5,819 | ||||||
Net cash provided from operating activities | 56,479 | 48,958 | ||||||
Investing Activities: | ||||||||
Gross property additions | (33,145 | ) | (22,070 | ) | ||||
Cost of removal net of salvage | (3,067 | ) | (3,559 | ) | ||||
Investment in property damage fund | (6,700 | ) | (1,100 | ) | ||||
Other | (1,327 | ) | (4,463 | ) | ||||
Net cash used for investing activities | (44,239 | ) | (31,192 | ) | ||||
Financing Activities: | ||||||||
Decrease in notes payable, net | (19,682 | ) | (489 | ) | ||||
Proceeds — | ||||||||
Senior notes | — | 65,000 | ||||||
Capital contributions from parent company | 25,000 | 10,000 | ||||||
Redemptions — | ||||||||
Senior notes | — | (32 | ) | |||||
Mandatorily redeemable preferred securities | — | (40,000 | ) | |||||
Payment of preferred stock dividends | (54 | ) | (54 | ) | ||||
Payment of common stock dividends | (17,500 | ) | (17,550 | ) | ||||
Other | (203 | ) | (3,729 | ) | ||||
Net cash provided from (used for) financing activities | (12,439 | ) | 13,146 | |||||
Net Change in Cash and Cash Equivalents | (199 | ) | 30,912 | |||||
Cash and Cash Equivalents at Beginning of Period | 2,548 | 13,278 | ||||||
Cash and Cash Equivalents at End of Period | $ | 2,349 | $ | 44,190 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest (net of $233 and $20 capitalized for 2004 and 2003, respectively) | $ | 8,915 | $ | 9,957 | ||||
Income taxes (net of refunds) | $ | 1,849 | ($21 | ) |
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
53
Table of Contents
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 2,349 | $ | 2,548 | ||||
Receivables — | ||||||||
Customer accounts receivable | 39,313 | 44,001 | ||||||
Unbilled revenues | 28,284 | 31,548 | ||||||
Under recovered regulatory clause revenues | 17,136 | 21,812 | ||||||
Other accounts and notes receivable | 2,918 | 6,179 | ||||||
Affiliated companies | 9,104 | 9,826 | ||||||
Accumulated provision for uncollectible accounts | (1,147 | ) | (947 | ) | ||||
Fossil fuel stock, at average cost | 33,052 | 35,354 | ||||||
Vacation pay | 5,254 | 5,254 | ||||||
Materials and supplies, at average cost | 35,306 | 35,930 | ||||||
Prepaid expenses | 5,937 | 6,310 | ||||||
Other | 7,571 | 4,985 | ||||||
Total current assets | 185,077 | 202,800 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 2,311,976 | 2,306,959 | ||||||
Less accumulated provision for depreciation | 860,541 | 847,519 | ||||||
1,451,435 | 1,459,440 | |||||||
Construction work in progress | 72,876 | 49,438 | ||||||
Total property, plant, and equipment | 1,524,311 | 1,508,878 | ||||||
Other Property and Investments | 21,530 | 12,597 | ||||||
Deferred Charges and Other Assets: | ||||||||
Deferred charges related to income taxes | 18,366 | 18,263 | ||||||
Prepaid pension costs | 42,809 | 42,014 | ||||||
Unamortized debt issuance expense | 6,853 | 6,877 | ||||||
Unamortized premium on reacquired debt | 18,942 | 19,389 | ||||||
Other | 28,857 | 28,235 | ||||||
Total deferred charges and other assets | 115,827 | 114,778 | ||||||
Total Assets | $ | 1,846,745 | $ | 1,839,053 | ||||
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
54
Table of Contents
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Liabilities and Stockholder's Equity | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Liabilities: | ||||||||
Securities due within one year | $ | 50,000 | $ | 50,000 | ||||
Notes payable | 17,985 | 37,666 | ||||||
Accounts payable — | ||||||||
Affiliated | 24,166 | 26,945 | ||||||
Other | 18,134 | 21,952 | ||||||
Customer deposits | 18,790 | 18,271 | ||||||
Accrued taxes — | ||||||||
Income taxes | 10,681 | 6,405 | ||||||
Other | 8,688 | 8,621 | ||||||
Accrued interest | 7,534 | 8,077 | ||||||
Accrued vacation pay | 5,254 | 5,254 | ||||||
Accrued compensation | 4,865 | 13,456 | ||||||
Other | 13,905 | 9,694 | ||||||
Total current liabilities | 180,002 | 206,341 | ||||||
Long-term Debt | 515,946 | 515,827 | ||||||
Long-term Debt Payable to Affiliated Trusts | 72,166 | — | ||||||
Mandatorily Redeemable Preferred Securities | — | 70,000 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Accumulated deferred income taxes | 179,409 | 175,685 | ||||||
Deferred credits related to income taxes | 25,815 | 26,545 | ||||||
Accumulated deferred investment tax credits | 19,960 | 20,451 | ||||||
Employee benefit obligations | 54,616 | 52,395 | ||||||
Other cost of removal obligations | 153,220 | 151,229 | ||||||
Miscellaneous regulatory liabilities | 28,455 | 27,903 | ||||||
Other | 26,241 | 27,083 | ||||||
Total deferred credits and other liabilities | 487,716 | 481,291 | ||||||
Total Liabilities | 1,255,830 | 1,273,459 | ||||||
Cumulative Preferred Stock | 4,236 | 4,236 | ||||||
Common Stockholder’s Equity: | ||||||||
Common stock, without par value — Authorized — 992,717 shares Outstanding — 992,717 shares | 38,060 | 38,060 | ||||||
Paid-in capital | 390,784 | 364,852 | ||||||
Premium on preferred stock | 12 | 12 | ||||||
Retained earnings | 160,547 | 161,208 | ||||||
Accumulated other comprehensive loss | (2,724 | ) | (2,774 | ) | ||||
Total common stockholder’s equity | 586,679 | 561,358 | ||||||
Total Liabilities and Stockholder’s Equity | $ | 1,846,745 | $ | 1,839,053 | ||||
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
55
Table of Contents
GULF POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 16,839 | $ | 13,972 | ||||
Other comprehensive income (loss): | ||||||||
Less: Reclassification adjustment for amounts included in net income, net of tax of $31 | 50 | — | ||||||
COMPREHENSIVE INCOME | $ | 16,889 | $ | 13,972 | ||||
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
56
Table of Contents
GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
RESULTS OF OPERATIONS
Earnings
Gulf Power’s net income after dividends on preferred stock for the first quarter 2004 was $16.8 million compared to $14.0 million for the corresponding period in 2003. First quarter 2004 net income increased by $2.8 million, or 21.0%, primarily due to higher operating revenues when compared to the same period in 2003.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Retail sales | $ | 5,291 | 3.3 | |||||
Sales for resale — affiliates | 10,478 | 102.5 | ||||||
Fuel expense | 15,149 | 23.9 | ||||||
Purchased power — affiliates | (5,159 | ) | (41.0 | ) | ||||
Other operations expense | 3,008 | 10.0 | ||||||
Distributions on mandatorily redeemable preferred securities | (915 | ) | (45.1 | ) |
Retail sales.Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales increased by $4.1 million, or 4.3%, for the first quarter 2004 when compared to the corresponding period in 2003. Energy sales to residential, commercial and industrial customers were higher by 5.2%, 3.6%, and 2.9%, respectively, in the first quarter 2004 as compared to the same period in 2003. The increase in retail sales revenue during the first quarter 2004 is primarily due to a 2.5% increase in customer growth and favorable weather conditions when compared to the same period in 2003.
Sales for resale – affiliates and Purchased power — affiliates. Revenues from sales for resale to affiliates and purchases of energy by affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism. The increase in sales for resale to affiliates is due to available generation being sold to affiliate companies. The decrease in purchased power from affiliates is the result of a decrease in the demand for purchased power due to increased self-generation.
Fuel expense.In the first quarter 2004, fuel expense was higher than the same period in 2003 due primarily to a 23.3% increase in generation to meet additional demand for energy as well as a 4.8% increase in coal prices and a 1.3% increase in natural gas prices. Since energy expenses are generally offset by energy revenues through Gulf Power’s fuel cost recovery mechanism, these expenses do not have a material impact on net income.
57
Table of Contents
GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other operation expense. The increase in other operations expense during the first quarter 2004 is due to a $1.0 million increase in marketing expenses and a $1.3 million increase in employee benefit expenses when compared to the same period in 2003.
Distributions on mandatorily redeemable preferred securities.The decrease in distributions on mandatorily redeemable preferred securities is due to the redemption of $40 million of 7.625% trust preferred securities during the first quarter 2003 and the redemption of $45 million of 7.000% trust preferred securities during the fourth quarter 2003.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors, including Gulf Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Gulf Power in the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs are not fully recovered through Gulf Power’s Environmental Cost Recovery Clause. See Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” in Item 7 of the Form 10-K and Note 3 to the financial statements of Gulf Power under “New Source Review Actions” in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under the New Source Review litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review action against the TVA. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome of this matter could require substantial capital expenditures that cannot be determined at this time and could 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.
Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.
58
Table of Contents
GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FERC Matters
See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Gulf Power under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.
See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential — FERC Matters” of Gulf Power in the Form 10-K for information on the FERC’s order related to RTOs and notice of proposed rulemaking regarding open access transmission service.
Other Matters
Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Gulf Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Gulf Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Gulf Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Gulf Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 — Management’s Discussion and Analysis — “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Gulf Power in the Form 10-K for a complete discussion of Gulf Power’s critical accounting policies and estimates related to Electric Utility Regulation and Contingent Obligations.
59
Table of Contents
GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
On March 31, 2004, Gulf Power prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of Interpretation No. 46R had no impact on Gulf Power’s net income. However, as a result of the adoption, Gulf Power deconsolidated certain wholly-owned trusts established to issue preferred securities since Gulf Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Gulf Power’s financial condition during the first three months of 2004 included the addition of approximately $33.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See Gulf Power’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
Reference is made to Item 7 — Management’s Discussion and Analysis – “Financial Condition and Liquidity — Capital Requirements and Contractual Obligations” of Gulf Power in the Form 10-K for a description of Gulf Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.
Sources of Capital
In addition to the financing activities described herein, Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. These sources include cash flows from operating activities, issuances of unsecured debt and pollution control bonds issued for Gulf Power’s benefit by public authorities. The amount, type and timing of any future financings — if needed — will depend upon market conditions and regulatory approval. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, Gulf Power has various internal and external sources of liquidity. At March 31, 2004, Gulf Power had approximately $2.3 million of cash and cash equivalents and $56 million of unused committed lines of credit with banks that expire in 2004. Gulf Power expects to renew its credit facilities, as needed, prior to expiration. In addition, Gulf Power has substantial cash flow from operating activities. The credit arrangements provide liquidity support to Gulf Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Gulf Power and other Southern Company subsidiaries. At March 31, 2004, Gulf Power had $18 million of commercial paper outstanding. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.
60
Table of Contents
GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Credit Rating Risk
Gulf Power does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
Market Price Risk
Gulf Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Gulf Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Gulf Power has 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, Gulf Power enters into fixed price contracts for purchase of coal supplies, the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Gulf Power has received approval from the Florida PSC to recover prudently incurred costs related to its fuel hedging program through the fuel cost recovery mechanism. The fair value of derivative energy contracts at March 31, 2004 was as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 2,504 | ||
Contracts realized or settled | (1,079 | ) | ||
New contracts at inception | — | |||
Changes in valuation techniques | — | |||
Current period changes | 4,249 | |||
Contracts at March 31, 2004 | $ | 5,674 | ||
Source of March 31, 2004 | ||||||||||||
Valuation Prices | ||||||||||||
Maturity | ||||||||||||
Total | ||||||||||||
Fair Value | Year 1 | 1-3 Years | ||||||||||
(in thousands) | ||||||||||||
Actively quoted | $ | 5,674 | $ | 5,154 | $ | 520 | ||||||
External sources | — | — | — | |||||||||
Models and other methods | — | — | — | |||||||||
Contracts at March 31, 2004 | $ | 5,674 | $ | 5,154 | $ | 520 | ||||||
See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Gulf Power in the Form 10-K and Notes 1 and 6 to the financial statements of Gulf Power under “Financial Instruments” in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein for further information.
61
Table of Contents
GULF POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
In April 2004, Gulf Power issued $35 million of Series J 5.875% Senior Notes due April 1, 2044. The proceeds from this issue were used for general corporate purposes, including Gulf Power’s continuous construction program.
Gulf Power plans to evaluate, and to the extent possible, retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
62
Table of Contents
MISSISSIPPI POWER COMPANY
63
Table of Contents
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Retail sales | $ | 128,555 | $ | 113,970 | ||||
Sales for resale — | ||||||||
Non-affiliates | 65,800 | 70,425 | ||||||
Affiliates | 11,809 | 6,223 | ||||||
Other revenues | 3,564 | 3,268 | ||||||
Total operating revenues | 209,728 | 193,886 | ||||||
Operating Expenses: | ||||||||
Fuel | 76,525 | 51,124 | ||||||
Purchased power — | ||||||||
Non-affiliates | 6,955 | 6,817 | ||||||
Affiliates | 17,316 | 20,332 | ||||||
Other operations | 34,978 | 35,163 | ||||||
Maintenance | 15,072 | 14,260 | ||||||
Depreciation and amortization | 14,143 | 13,073 | ||||||
Taxes other than income taxes | 13,139 | 13,367 | ||||||
Total operating expenses | 178,128 | 154,136 | ||||||
Operating Income | 31,600 | 39,750 | ||||||
Other Income and (Expense): | ||||||||
Interest expense | (2,803 | ) | (3,770 | ) | ||||
Distributions on mandatorily redeemable preferred securities | (630 | ) | (630 | ) | ||||
Other income (expense), net | 571 | 12 | ||||||
Total other income and (expense) | (2,862 | ) | (4,388 | ) | ||||
Earnings Before Income Taxes | 28,738 | 35,362 | ||||||
Income taxes | 10,916 | 13,463 | ||||||
Net Income | 17,822 | 21,899 | ||||||
Dividends on Preferred Stock | 503 | 503 | ||||||
Net Income After Dividends on Preferred Stock | $ | 17,319 | $ | 21,396 | ||||
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
64
Table of Contents
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 17,822 | $ | 21,899 | ||||
Adjustments to reconcile net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 15,247 | 15,910 | ||||||
Deferred income taxes and investment tax credits, net | 5,872 | (1,267 | ) | |||||
Pension, postretirement, and other employee benefits | (272 | ) | 250 | |||||
Tax benefit of stock options | 293 | 606 | ||||||
Other, net | 869 | (1,351 | ) | |||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | 6,776 | 26,326 | ||||||
Fossil fuel stock | 4,732 | 2,204 | ||||||
Materials and supplies | 571 | (529 | ) | |||||
Other current assets | (244 | ) | (4,940 | ) | ||||
Accounts payable | (7,781 | ) | (21,039 | ) | ||||
Accrued taxes | (28,379 | ) | (18,080 | ) | ||||
Accrued compensation | (14,552 | ) | (17,686 | ) | ||||
Other current liabilities | (11,883 | ) | (7,884 | ) | ||||
Net cash used for operating activities | (10,929 | ) | (5,581 | ) | ||||
Investing Activities: | ||||||||
Gross property additions | (15,611 | ) | (11,806 | ) | ||||
Cost of removal net of salvage | 2,463 | (1,236 | ) | |||||
Other | (1,651 | ) | 1,532 | |||||
Net cash used for investing activities | (14,799 | ) | (11,510 | ) | ||||
Financing Activities: | ||||||||
Increase in notes payable, net | 34,939 | 19,975 | ||||||
Proceeds — Senior notes | 40,000 | — | ||||||
Redemptions — | ||||||||
First mortgage bonds | — | (33,350 | ) | |||||
Pollution control bonds | — | (850 | ) | |||||
Senior notes | (80,000 | ) | (73 | ) | ||||
Payment of preferred stock dividends | (503 | ) | (503 | ) | ||||
Payment of common stock dividends | (16,550 | ) | (16,500 | ) | ||||
Other | — | (1,178 | ) | |||||
Net cash used for financing activities | (22,114 | ) | (32,479 | ) | ||||
Net Change in Cash and Cash Equivalents | (47,842 | ) | (49,570 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 69,120 | 62,695 | ||||||
Cash and Cash Equivalents at End of Period | $ | 21,278 | $ | 13,125 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest | $ | 2,468 | $ | 2,612 | ||||
Income taxes (net of refunds) | $ | 1,615 | $ | (226 | ) |
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
65
Table of Contents
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 21,278 | $ | 69,120 | ||||
Receivables — | ||||||||
Customer accounts receivable | 27,103 | 30,514 | ||||||
Unbilled revenues | 16,853 | 19,278 | ||||||
Under recovered regulatory clause revenues | 13,581 | 14,607 | ||||||
Other accounts and notes receivable | 7,194 | 8,088 | ||||||
Affiliated companies | 12,693 | 12,160 | ||||||
Accumulated provision for uncollectible accounts | (451 | ) | (897 | ) | ||||
Fossil fuel stock, at average cost | 20,501 | 25,233 | ||||||
Vacation pay | 5,766 | 5,766 | ||||||
Materials and supplies, at average cost | 23,099 | 23,670 | ||||||
Prepaid income taxes | 20,887 | 27,415 | ||||||
Prepaid expenses | 5,775 | 4,517 | ||||||
Other | 7,480 | 2,857 | ||||||
Total current assets | 181,759 | 242,328 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 1,844,475 | 1,841,668 | ||||||
Less accumulated provision for depreciation | 676,236 | 672,730 | ||||||
1,168,239 | 1,168,938 | |||||||
Construction work in progress | 40,427 | 25,844 | ||||||
Total property, plant, and equipment | 1,208,666 | 1,194,782 | ||||||
Other Property and Investments | 3,847 | 2,750 | ||||||
Deferred Charges and Other Assets: | ||||||||
Deferred charges related to income taxes | 11,941 | 12,125 | ||||||
Prepaid pension costs | 18,375 | 18,167 | ||||||
Unamortized debt issuance expense | 6,912 | 6,993 | ||||||
Unamortized loss on reacquired debt | 10,000 | 10,201 | ||||||
Prepaid rent | 14,287 | 14,758 | ||||||
Other | 8,854 | 16,280 | ||||||
Total deferred charges and other assets | 70,369 | 78,524 | ||||||
Total Assets | $ | 1,464,641 | $ | 1,518,384 | ||||
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
66
Table of Contents
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Liabilities and Stockholder’s Equity | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Liabilities: | ||||||||
Securities due within one year | $ | — | $ | 80,000 | ||||
Notes payable | 34,939 | — | ||||||
Accounts payable — | ||||||||
Affiliated | 26,113 | 21,259 | ||||||
Other | 44,302 | 55,309 | ||||||
Customer deposits | 8,215 | 11,863 | ||||||
Accrued taxes — | ||||||||
Income taxes | 945 | 1,696 | ||||||
Other | 13,241 | 42,834 | ||||||
Accrued interest | 3,466 | 3,223 | ||||||
Accrued vacation pay | 5,766 | 5,766 | ||||||
Accrued compensation | 9,287 | 23,832 | ||||||
Regulatory clauses over recovery | 26,439 | 31,118 | ||||||
Other | 6,874 | 4,867 | ||||||
Total current liabilities | 179,587 | 281,767 | ||||||
Long-term Debt | 242,491 | 202,488 | ||||||
Long-term Debt Payable to Affiliated Trusts | 36,082 | — | ||||||
Mandatorily Redeemable Preferred Securities | — | 35,000 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Accumulated deferred income taxes | 145,043 | 142,088 | ||||||
Deferred credits related to income taxes | 22,894 | 23,279 | ||||||
Accumulated deferred investment tax credits | 19,538 | 19,841 | ||||||
Employee benefit obligations | 53,704 | 54,830 | ||||||
Plant Daniel lease guarantee obligation, at fair value | 14,287 | 14,758 | ||||||
Plant Daniel capacity | 60,300 | 60,300 | ||||||
Other cost of removal obligations | 83,291 | 80,588 | ||||||
Miscellaneous regulatory liabilities | 15,511 | 11,899 | ||||||
Other | 27,319 | 27,248 | ||||||
Total deferred credits and other liabilities | 441,887 | 434,831 | ||||||
Total Liabilities | 900,047 | 954,086 | ||||||
Cumulative Preferred Stock | 31,809 | 31,809 | ||||||
Common Stockholder’s Equity: | ||||||||
Common stock, without par value — | ||||||||
Authorized - 1,130,000 shares | ||||||||
Outstanding - 1,121,000 shares | 37,691 | 37,691 | ||||||
Paid-in capital | 292,807 | 292,515 | ||||||
Premium on preferred stock | 326 | 326 | ||||||
Retained earnings | 204,188 | 203,419 | ||||||
Accumulated other comprehensive loss | (2,227 | ) | (1,462 | ) | ||||
Total common stockholder’s equity | 532,785 | 532,489 | ||||||
Total Liabilities and Stockholder’s Equity | $ | 1,464,641 | $ | 1,518,384 | ||||
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
67
Table of Contents
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 17,319 | $ | 21,396 | ||||
Other comprehensive income (loss): | ||||||||
Changes in fair value of qualifying hedges, net of tax of $(474) | (765 | ) | — | |||||
COMPREHENSIVE INCOME | $ | 16,554 | $ | 21,396 | ||||
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
68
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
RESULTS OF OPERATIONS
Earnings
Mississippi Power’s net income after dividends on preferred stock for the first quarter 2004 was $17.3 million compared to $21.4 million for the corresponding period of 2003. Earnings in the first quarter 2004 decreased by $4.1 million, or 19%, primarily due to lower wholesale revenues as a result of the termination of a contract with a subsidiary of Dynegy, Inc. in October 2003. See Note 3 to the financial statements of Mississippi Power under “Contract Termination” in Item 8 of the Form 10-K for additional information.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Retail sales | 14,585 | 12.8 | ||||||
Sales for resale — non-affiliates | (4,625 | ) | (6.6 | ) | ||||
Sales for resale — affiliates | 5,586 | 89.8 | ||||||
Fuel expense | 25,401 | 49.7 | ||||||
Purchased power — affiliates | (3,016 | ) | (14.8 | ) | ||||
Maintenance expense | 812 | 5.7 | ||||||
Depreciation and amortization | 1,070 | 8.2 | ||||||
Interest expense | (967 | ) | (25.6 | ) | ||||
Income taxes | (2,547 | ) | (18.9 | ) |
Retail sales.Retail sales revenue for the first quarter 2004 increased when compared to the same period in 2003 primarily as a result of a $13.6 million increase in fuel revenues, which generally do not have an effect on income. Retail sales revenues, excluding fuel revenues, for the first quarter 2004 to residential, commercial and industrial customers increased 2.7%, 2.5% and 2.3%, respectively, primarily as a result of economic growth in the service area when compared to the same period in 2003.
Sales for resale — non-affiliates.The decrease in sales for resale to non-affiliates in the first quarter 2004 as compared to the same period in 2003 is primarily due to the termination of a contract with a subsidiary of Dynegy, Inc. in October 2003. See Note 3 to the financial statements of Mississippi Power under “Contract Termination” in Item 8 of the Form 10-K for additional information.
69
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale — affiliates and Purchased power — affiliates. Revenues from sales for resale to affiliates, as well as purchases of energy from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses. The increase in sales for resale to affiliates and the decrease in purchased power from affiliates is a result of Mississippi Power’s more economical generating costs when compared to others.
Fuel expense.In the first quarter 2004, fuel expense increased when compared to the same period in 2003 as a result of a 16.5% increase in generation and a 57.6% increase in cost of oil and gas. Since energy expenses are generally offset by energy revenues through Mississippi Power’s retail and wholesale fuel cost recovery clauses, these expenses do not have a significant impact on earnings.
Maintenance expense.The first quarter 2004 increase in maintenance expense when compared to the same period in 2003 is a result of increased generation by the combined cycle units at Plant Daniel. Maintenance expense for the combined cycle units is based on fired operating hours which were 36.8% higher in the first quarter 2004 when compared to the same period in 2003.
Depreciation and amortization.The first quarter 2004 increase in depreciation and amortization expense when compared to the same period in 2003 is primarily the result of a true-up in 2003 related to the Environmental Compliance Overview (ECO) Plan. See Note 3 to Mississippi Power’s financial statements under “Environmental Compliance Overview Plan” in Item 8 of the Form 10-K for additional information.
Interest expense.The decreased interest expense for the first quarter 2004 as compared to the same period in 2003 is a result of lower interest rates on securities outstanding and a reduction in accrued interest expense related to prior years’ income tax adjustments. See Item 7 — Management’s Discussion and Analysis – Financial Condition and Liquidity – “Financing Activities” of Mississippi Power in the Form 10-K and Financial Condition and Liquidity – “Financing Activities” herein for further information on efforts to reduce interest rates.
Income taxes.The decrease in income taxes of $2.5 million, or 18.9%, is a result of the $6.7 million reduction in pretax net income when compared to the same period in 2003.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including Mississippi Power’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see Item 1 — Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Mississippi Power in the Form 10-K.
70
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Environmental Matters
Mississippi Power’s 2004 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 15, 2004 and resulted in a slight decrease in rates effective April 2004. Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot continue to be recovered. See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” and Note 3 to the financial statements of Mississippi Power under “New Source Review Actions” in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under the New Source Review litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review action against the TVA. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome of this matter could require substantial capital expenditures and could possibly require substantial penalties. This could affect future results of operations, cash flows, and possibly financial condition if such costs are not recovered through regulated rates.
Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.
FERC Matters
See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” and Note 3 to the financial statements of Mississippi Power under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.
See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Mississippi Power in the Form 10-K for information on the FERC’s order related to RTOs and the notice of proposed rulemaking regarding open access transmission service.
Other Matters
See Note 3 to Mississippi Power’s financial statements under “Retail Regulatory Filing” in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements herein for information on Mississippi Power’s request to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity in jurisdictional cost of service. The final outcome of this matter cannot now be determined.
Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Mississippi Power’s business activities are subject to extensive governmental regulation related to
71
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Mississippi Power cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from any such current proceedings would have a material adverse effect on Mississippi Power’s financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Mississippi Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 — Management’s Discussion and Analysis — “Accounting Policies — Application of Critical Accounting Policies and Estimates” of the Form 10-K for a complete discussion of Mississippi Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Plant Daniel Capacity and Plant Daniel Operating Lease. Also see Note (I) to the condensed financial statements herein for additional information related to Mississippi Power’s request to include the additional Plant Daniel capacity in jurisdictional cost of service.
New Accounting Standards
On March 31, 2004, Mississippi Power prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of Interpretation No. 46R had no impact on Mississippi Power’s net income. However, as a result of the adoption, Mississippi Power deconsolidated certain wholly-owned trusts established to issue preferred securities since Mississippi Power does not meet the definition of primary beneficiary established by Interpretation No. 46R. See Note (E) to the Condensed Financial Statements herein for additional information related to the adoption of Interpretation No. 46R.
Financial Condition and Liquidity
Overview
Major changes in Mississippi Power’s financial condition during the first three months of 2004 included the addition of approximately $15.6 million to utility plant financed primarily from operating activities, a reduction in current liabilities of $102.5 million and a $40.1 million increase in long-term debt as a result of re-financing activities. See Mississippi Power’s Condensed Statements of Cash Flows and “Financing Activities” herein for further details.
72
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Capital Requirements and Contractual Obligations
See Item 7 — Management’s Discussion and Analysis — Financial Condition and Liquidity — “Capital Requirements and Contractual Obligations” of Mississippi Power in the Form 10-K for a description of Mississippi Power’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.
Sources of Capital
In addition to the financing activities described herein, Mississippi Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings — if needed — will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, Mississippi Power had at March 31, 2004, approximately $21.3 million of cash and cash equivalents and $100 million of unused committed credit arrangements with banks that expire in 2004. Approximately $37.5 million of these credit arrangements contain provisions allowing two-year term loans executable at the expiration date. Mississippi Power expects to renew its credit facilities, as needed, prior to expiration. The credit arrangements provide liquidity support to Mississippi Power’s obligations with respect to variable rate pollution control bonds and commercial paper. Mississippi Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Mississippi Power and other Southern Company subsidiaries. At March 31, 2004, Mississippi Power had $34.9 million in outstanding notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Off-Balance Sheet Financing Arrangements” and Note 7 to the financial statements of Mississippi Power under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Mississippi Power does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
Market Price Risk
Mississippi Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Mississippi Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
73
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Due to cost-based rate regulation, Mississippi Power has 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, Mississippi Power enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market. Mississippi Power has also implemented retail fuel hedging programs at the instruction of its PSC and wholesale fuel hedging programs under agreements with wholesale customers. The fair values of derivative, fuel and energy contracts at March 31, 2004 were as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 2,470 | ||
Contracts realized or settled | (733 | ) | ||
New contracts at inception | — | |||
Changes in valuation techniques | — | |||
Current period changes | 3,884 | |||
Contracts at March 31, 2004 | $ | 5,621 | ||
Source of March 31, 2004 | ||||||||||||
Valuation Prices | ||||||||||||
Total | Maturity | |||||||||||
Fair Value | Year 1 | 1-3 Years | ||||||||||
(in thousands) | ||||||||||||
Actively quoted | $ | 5,621 | $ | 4,645 | $ | 976 | ||||||
External sources | — | — | — | |||||||||
Models and other methods | — | — | — | |||||||||
Contracts at March 31, 2004 | $ | 5,621 | $ | 4,645 | $ | 976 | ||||||
For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Mississippi Power in the Form 10-K and Notes 1 and 6 to the financial statements under “ Financial Instruments” of Mississippi Power in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.
Financing Activities
In March 2004, Mississippi Power issued $40 million of Series F Floating Rate Senior Notes due March 9, 2009. The proceeds from this sale, along with other monies of Mississippi Power were used to repay at maturity $80 million aggregate principal amount of Mississippi Power’s Series D Floating Rate Senior Notes due March 12, 2004.
74
Table of Contents
MISSISSIPPI POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In April 2004, Mississippi Power issued 1,200,000 Depositary Shares ($30 million aggregate stated capital) each representing one-fourth of a share of 5.25% Series Preferred Stock cumulative, par value $100 per share. The proceeds from this sale were primarily used to redeem various issues of higher cost preferred stock and the remainder was used for general corporate purposes.
Mississippi Power plans to continue, to the extent possible, a program to retire higher-cost securities and replace these securities with lower-cost capital.
75
Table of Contents
SAVANNAH ELECTRIC
AND
POWER COMPANY
76
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Retail sales | $ | 68,023 | $ | 63,546 | ||||
Sales for resale — | ||||||||
Non-affiliates | 1,410 | 1,926 | ||||||
Affiliates | 2,437 | 2,324 | ||||||
Other revenues | 965 | 1,078 | ||||||
Total operating revenues | 72,835 | 68,874 | ||||||
Operating Expenses: | ||||||||
Fuel | 10,484 | 11,425 | ||||||
Purchased power — | ||||||||
Non-affiliates | 2,342 | 1,904 | ||||||
Affiliates | 22,130 | 19,013 | ||||||
Other operations | 14,101 | 13,099 | ||||||
Maintenance | 6,431 | 5,910 | ||||||
Depreciation and amortization | 5,204 | 5,061 | ||||||
Taxes other than income taxes | 3,597 | 3,447 | ||||||
Total operating expenses | 64,289 | 59,859 | ||||||
Operating Income | 8,546 | 9,015 | ||||||
Other Income and (Expense): | ||||||||
Interest expense, net of amounts capitalized | (3,144 | ) | (2,621 | ) | ||||
Distributions on mandatorily redeemable preferred securities | (109 | ) | (685 | ) | ||||
Other income (expense), net | (347 | ) | (209 | ) | ||||
Total other income and (expense) | (3,600 | ) | (3,515 | ) | ||||
Earnings Before Income Taxes | 4,946 | 5,500 | ||||||
Income taxes | 1,798 | 1,991 | ||||||
Net Income | $ | 3,148 | $ | 3,509 | ||||
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
77
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 3,148 | $ | 3,509 | ||||
Adjustments to reconcile net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 5,739 | 5,582 | ||||||
Deferred income taxes and investment tax credits, net | 1,516 | (439 | ) | |||||
Pension, postretirement, and other employee benefits | 1,713 | 1,670 | ||||||
Tax benefit of stock options | 263 | 101 | ||||||
Other, net | 2,479 | 2,143 | ||||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | 5,420 | 5,284 | ||||||
Fossil fuel stock | 122 | (1,620 | ) | |||||
Materials and supplies | (967 | ) | 16 | |||||
Other current assets | (2,193 | ) | (65 | ) | ||||
Accounts payable | (2,275 | ) | (5,911 | ) | ||||
Accrued taxes | 790 | (46 | ) | |||||
Accrued compensation | (3,129 | ) | (4,107 | ) | ||||
Other current liabilities | 1,017 | 3,112 | ||||||
Net cash provided from operating activities | 13,643 | 9,229 | ||||||
Investing Activities: | ||||||||
Gross property additions | (11,743 | ) | (10,798 | ) | ||||
Other | (796 | ) | 3,342 | |||||
Net cash used for investing activities | (12,539 | ) | (7,456 | ) | ||||
Financing Activities: | ||||||||
Increase (decrease) in notes payable, net | 6,695 | (2,897 | ) | |||||
Proceeds — | ||||||||
Pollution control bonds | — | 13,870 | ||||||
Capital contributions from parent company | — | 5,000 | ||||||
Redemptions — | ||||||||
Pollution control bonds | — | (13,870 | ) | |||||
Other long-term debt | 281 | (225 | ) | |||||
Mandatorily redeemable preferred securities | (40,000 | ) | — | |||||
Payment of common stock dividends | (5,800 | ) | (5,750 | ) | ||||
Other | 1,105 | (71 | ) | |||||
Net cash used for financing activities | (37,719 | ) | (3,943 | ) | ||||
Net Change in Cash and Cash Equivalents | (36,615 | ) | (2,170 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 37,943 | 3,978 | ||||||
Cash and Cash Equivalents at End of Period | $ | 1,328 | $ | 1,808 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest (net of $95 and $27 capitalized for 2004 and 2003, respectively) | $ | 1,392 | $ | 1,724 | ||||
Income taxes (net of refunds) | $ | 774 | $ | — |
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
78
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 1,328 | $ | 37,943 | ||||
Receivables — | ||||||||
Customer accounts receivable | 17,687 | 19,674 | ||||||
Unbilled revenues | 10,452 | 11,288 | ||||||
Other accounts and notes receivable | 1,073 | 1,138 | ||||||
Affiliated companies | 2,464 | 4,872 | ||||||
Accumulated provision for uncollectible accounts | (765 | ) | (641 | ) | ||||
Fossil fuel stock, at average cost | 8,530 | 8,652 | ||||||
Materials and supplies, at average cost | 10,038 | 9,070 | ||||||
Prepaid income taxes | 24,982 | 24,419 | ||||||
Prepaid expenses | 2,061 | 1,377 | ||||||
Other | 2,131 | 623 | ||||||
Total current assets | 79,981 | 118,415 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 916,068 | 912,504 | ||||||
Less accumulated provision for depreciation | 407,060 | 402,394 | ||||||
509,008 | 510,110 | |||||||
Construction work in progress | 22,517 | 14,121 | ||||||
Total property, plant, and equipment | 531,525 | 524,231 | ||||||
Other Property and Investments | 2,265 | 2,248 | ||||||
Deferred Charges and Other Assets: | ||||||||
Deferred charges related to income taxes | 9,462 | 9,611 | ||||||
Cash surrender value of life insurance for deferred compensation plans | 23,969 | 23,866 | ||||||
Unamortized debt issuance expense | 4,481 | 5,652 | ||||||
Unamortized loss on reacquired debt | 8,479 | 7,488 | ||||||
Other | 17,499 | 18,410 | ||||||
Total deferred charges and other assets | 63,890 | 65,027 | ||||||
Total Assets | $ | 677,661 | $ | 709,921 | ||||
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
79
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Liabilities and Stockholder's Equity | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Liabilities: | ||||||||
Securities due within one year | $ | 958 | $ | 40,910 | ||||
Notes payable | 6,695 | — | ||||||
Accounts payable — | ||||||||
Affiliated | 10,751 | 13,797 | ||||||
Other | 14,015 | 13,147 | ||||||
Customer deposits | 7,012 | 6,922 | ||||||
Accrued taxes — | ||||||||
Income taxes | 521 | 1,172 | ||||||
Other | 2,913 | 1,473 | ||||||
Accrued interest | 4,222 | 2,802 | ||||||
Accrued vacation pay | 2,547 | 2,530 | ||||||
Accrued compensation | 2,523 | 5,652 | ||||||
Other | 4,609 | 5,107 | ||||||
Total current liabilities | 56,766 | 93,512 | ||||||
Long-term Debt | 222,725 | 222,493 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Accumulated deferred income taxes | 85,911 | 83,852 | ||||||
Deferred credits related to income taxes | 9,550 | 9,804 | ||||||
Accumulated deferred investment tax credits | 8,459 | 8,625 | ||||||
Employee benefit obligations | 41,546 | 39,833 | ||||||
Other cost of removal obligations | 37,907 | 36,843 | ||||||
Miscellaneous regulatory liabilities | 13,968 | 12,932 | ||||||
Other | 16,935 | 15,735 | ||||||
Total deferred credits and other liabilities | 214,276 | 207,624 | ||||||
Total Liabilities | 493,767 | 523,629 | ||||||
Common Stockholder’s Equity: | ||||||||
Common stock, par value $5 per share — Authorized - 16,000,000 shares Outstanding - 10,844,635 shares | 54,223 | 54,223 | ||||||
Paid-in capital | 24,680 | 24,417 | ||||||
Retained earnings | 107,204 | 109,856 | ||||||
Accumulated other comprehensive loss | (2,213 | ) | (2,204 | ) | ||||
Total common stockholder’s equity | 183,894 | 186,292 | ||||||
Total Liabilities and Stockholder’s Equity | $ | 677,661 | $ | 709,921 | ||||
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
80
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 3,148 | $ | 3,509 | ||||
Other comprehensive income (loss): | ||||||||
Changes in fair value of qualifying hedges, net of tax of $(20) | (33 | ) | — | |||||
Less: Reclassification adjustment for amounts included in net income, net of tax of $15 | 24 | — | ||||||
COMPREHENSIVE INCOME | $ | 3,139 | $ | 3,509 | ||||
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
81
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
RESULTS OF OPERATIONS
Earnings
Savannah Electric’s net income for the first quarter 2004 was $3.1 million compared to $3.5 million for the corresponding period of 2003. Earnings decreased by $0.4 million, or 10.3%, in the first quarter 2004, primarily due to higher operating expenses, partially offset by higher operating revenues.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Retail sales | 4,477 | 7.0 | ||||||
Sales for resale — non-affiliates | (516 | ) | (26.8 | ) | ||||
Fuel expense | (941 | ) | (8.2 | ) | ||||
Purchased power — non-affiliates | 438 | 23.0 | ||||||
Purchased power — affiliates | 3,117 | 16.4 | ||||||
Other operation expense | 1,002 | 7.6 | ||||||
Maintenance expense | 521 | 8.8 |
Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue increased by $2.0 million, or 5.2%, in the first quarter 2004 when compared to the corresponding period in 2003. The first quarter 2004 increase in retail sales revenue is mainly attributed to a 3.4% increase in retail kilowatt-hour energy sales. Energy sales to residential and commercial customers were higher by 16.4% and 1.9%, respectively, mainly due to colder weather and growth in the number of customers when compared to the same period in 2003. Energy sales to industrial customers were lower by 16.6% in the first quarter 2004 compared to the first quarter 2003 primarily due to the installation of a cogeneration facility by one customer.
Sales for resale — non-affiliates.In the first quarter 2004, revenues from sales for resale to non-affiliates is lower primarily due to fluctuations in off-system sale transactions that were generally offset by corresponding purchase transactions. These transactions had no significant effect on net income.
Fuel expense.Fuel expense decreased in the first quarter 2004 primarily as a result of certain billing credits relating to the Plant McIntosh combustion turbines. Since fuel expenses are generally offset by fuel revenues through Savannah Electric’s fuel cost recovery clause, these expenses do not have a significant impact on net income.
Purchased power — non-affiliates.In the first quarter 2004, the increase in purchased power from non-affiliates resulted from purchases used to meet a 103.1% increase in demand for energy from non-affiliates offset somewhat by a lower cost per kilowatt-hour. These transactions do not have a significant impact on earnings, as energy costs are generally recovered through Savannah Electric’s fuel cost recovery clause.
82
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased power — affiliates. Purchased power from affiliates increased in the first quarter 2004 as compared to the same period in the prior year partially as the result of an accounting order approved by the Georgia PSC in December 2002 which allows Savannah Electric to write-down a portion of the approximately $3.8 million annual deferral in Plant Wansley purchased power costs, which the Georgia PSC had ruled to be outside the test period in Savannah Electric’s base rate order. See Note 3 to the financial statements of Savannah Electric under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information. The net impact of these transactions compared to the prior year was a $0.3 million increase to expense. Purchased power from affiliates also includes energy purchases which will vary depending on demand and cost of generation resources at each company and higher energy costs. These energy costs are recovered through the fuel cost recovery clause and have no significant impact on earnings.
Other operation expense. The increase for the first quarter 2004 as compared to the same period in the prior year in other operation expense is attributed to an increase in administrative and general expenses primarily relating to accounting and auditing services, employee benefits expenses and regulatory expenses.
Maintenance expense.The increase in the first quarter 2004 as compared to the same period in the prior year is mainly due to scheduled generating plant maintenance and an increase in maintenance on distribution facilities.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including Savannah Electric’s ability to maintain a stable regulatory environment, to achieve energy sales growth while containing costs, and to recover costs related to growing demand and increasingly stricter environmental standards. Growth in energy sales is subject to a number of factors, which include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. For additional information relating to these issues, see Item 1 — Business — The SOUTHERN System — “Risk Factors” and Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential” of Savannah Electric in the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect earnings if such costs cannot be recovered. See Management’s Discussion and Analysis — “Future Earnings Potential — Environmental Matters” in Item 7 of the Form 10-K and Note 3 to the financial statements of Savannah Electric under “New Source Review Actions” in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under the New Source Review litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review action against the TVA. The case against Savannah Electric has been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome
83
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
in this case could require substantial capital expenditures that cannot be determined at this time and could 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.
On April 21, 2004, the EPA published the final regional nitrogen oxide reduction rules applicable to the State of Georgia. These rules specify that Georgia must submit a revised state implementation plan by April 2005, and affected sources must comply with the reduction requirements by May 1, 2007. The impact of these regulations will depend on the development and approval of Georgia’s state implementation plan and cannot be determined at this time. Additionally, on April 15, 2004, the EPA announced proposed amendments to its Regional Haze rules with respect to Best Available Retrofit Technology (BART) guidelines and requirements. The impact of these regulations will depend on the development and implementation of the final rules and implementation by the states, and therefore cannot be determined at this time.
FERC Matters
See Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters — Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Savannah Electric under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.
See to Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Savannah Electric in the Form 10-K for information on plans to retire a 102 megawatt peaking facility in May 2005 and a fifteen-year PPA with Southern Power to purchase 200 megawatts of capacity beginning in June 2005 from the planned combined-cycle plant at Plant McIntosh to be built and owned by Southern Power. The annual capacity cost is expected to be approximately $15 million. See Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for this PPA.
See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Savannah Electric in the Form 10-K for information on the FERC’s order related to RTOs and the FERC’s notice of proposed rulemaking regarding open access transmission service.
Other Matters
Savannah Electric is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Savannah Electric’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such litigation against Savannah Electric cannot be predicted at this time; however, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Savannah Electric’s financial statements.
84
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Savannah Electric anticipates filing a base rate case in late 2004. See the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Savannah Electric prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Savannah Electric in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Savannah Electric’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 — Management’s Discussion and Analysis — “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Savannah Electric in the Form 10-K for a complete discussion of Savannah Electric’s critical accounting policies and estimates related to Electric Utility Regulation and Contingent Obligations.
New Accounting Standards
On March 31, 2004, Savannah Electric prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. See Note 6 to the financial statements of Savannah Electric under “Mandatorily Redeemable Preferred Securities” in Item 8 of the Form 10-K regarding Savannah Electric’s redemption of all outstanding preferred securities in January 2004 and the dissolution of the issuing trust. Therefore, the adoption of Interpretation No. 46R had no impact on Savannah Electric’s financial statements.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Savannah Electric’s financial condition during the first three months of 2004 included the addition of approximately $11.7 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and short-term debt. See Savannah Electric’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
Reference is made to Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity” of Savannah Electric under “Capital Requirements and Contractual Obligations,” in the Form 10-K for a description of Savannah Electric’s capital requirements for its construction program, lease obligations, purchase commitments and trust funding requirements.
85
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sources of Capital
Savannah Electric plans to obtain the funds required for construction and other purposes from sources similar to those used in the past including both internal and external funds. The amount, type and timing of any future financings — if needed — will depend upon market conditions and regulatory approval. See Item 1 — Business — “Financing Programs” in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, Savannah Electric had at March 31, 2004 approximately $1.3 million of cash and cash equivalents and $60 million of unused committed credit arrangements with banks, of which $40 million expires in 2004, $10 million expires in 2005 and $10 million expires in 2006 and beyond. Of the unused credit arrangements expiring in 2004 and 2005, $40 million include two year term loan options executable at the expiration date. The credit arrangements provide liquidity support to some of Savannah Electric’s obligations with respect to its variable rate debt and its commercial paper. Savannah Electric expects to renew its credit facilities, as needed, prior to expiration. Savannah Electric may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of Savannah Electric and other Southern Company subsidiaries. At March 31, 2004, Savannah Electric had $6.7 million of outstanding commercial paper. Since Savannah Electric has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit.
Credit Rating Risk
Savannah Electric does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
Market Price Risk
Savannah Electric’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Savannah Electric is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Savannah Electric has 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, Savannah Electric enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas and oil purchases. Savannah Electric has also implemented a retail fuel hedging program at the instruction of the Georgia PSC.
86
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fair value of derivative energy contracts at March 31, 2004 was as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 463 | ||
Contracts realized or settled | (1 | ) | ||
New contracts at inception | — | |||
Changes in valuation techniques | — | |||
Current period changes | 1,497 | |||
Contracts at March 31, 2004 | $ | 1,959 | ||
Source of March 31, 2004 | ||||||||||||
Valuation Prices | ||||||||||||
Total | Maturity | |||||||||||
Fair Value | Year 1 | 1-3 Years | ||||||||||
(in thousands) | ||||||||||||
Actively quoted | $ | 1,959 | $ | 1,757 | $ | 202 | ||||||
External sources | — | — | — | |||||||||
Models and other methods | — | — | — | |||||||||
Contracts at March 31, 2004 | $ | 1,959 | $ | 1,757 | $ | 202 | ||||||
For additional information, see Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Market Price Risk” of Savannah Electric and Notes 1 and 6 to the financial statements of Savannah Electric under “Financial Instruments” in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.
Financing Activities
Savannah Electric plans to evaluate, and to the extent possible, retire higher-cost debt and replace these securities with lower-cost capital.
87
Table of Contents
SOUTHERN POWER COMPANY
88
Table of Contents
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Revenues: | ||||||||
Sales for resale — | ||||||||
Non-affiliates | $ | 86,699 | $ | 50,269 | ||||
Affiliates | 86,795 | 55,290 | ||||||
Other revenues | 2,111 | 1,880 | ||||||
Total Operating Revenues | 175,605 | 107,439 | ||||||
Operating Expenses: | ||||||||
Fuel | 30,335 | 20,038 | ||||||
Purchased power — | ||||||||
Non-affiliates | 13,605 | 15,323 | ||||||
Affiliates | 42,056 | 17,932 | ||||||
Other operations | 14,725 | 5,908 | ||||||
Maintenance | 3,012 | 2,177 | ||||||
Depreciation and amortization | 12,778 | 6,544 | ||||||
Taxes other than income taxes | 2,679 | 1,300 | ||||||
Total operating expenses | 119,190 | 69,222 | ||||||
Operating Income | 56,415 | 38,217 | ||||||
Other Income and (Expense): | ||||||||
Interest expense, net of amounts capitalized | (12,586 | ) | (1,399 | ) | ||||
Other income (expense), net | 493 | 303 | ||||||
Total other income and (expense) | (12,093 | ) | (1,096 | ) | ||||
Earnings Before Income Taxes | 44,322 | 37,121 | ||||||
Income taxes | 17,137 | 14,363 | ||||||
Earnings Before Cumulative Effect of Accounting Change | 27,185 | 22,758 | ||||||
Cumulative effect of accounting change — less income taxes of $231 thousand | — | 367 | ||||||
Net Income | $ | 27,185 | $ | 23,125 | ||||
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
89
Table of Contents
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Operating Activities: | ||||||||
Net income | $ | 27,185 | $ | 23,125 | ||||
Adjustments to reconcile net income to net cash provided from operating activities — | ||||||||
Depreciation and amortization | 15,267 | 6,544 | ||||||
Deferred income taxes and investment tax credits, net | 16,525 | 9,062 | ||||||
Deferred capacity revenues | (19,235 | ) | (12,392 | ) | ||||
Tax benefit of stock options | 109 | 41 | ||||||
Other, net | (4,957 | ) | 844 | |||||
Changes in certain current assets and liabilities — | ||||||||
Receivables, net | (9,435 | ) | (1,857 | ) | ||||
Fossil fuel stock | 2,867 | 7,917 | ||||||
Materials and supplies | (508 | ) | (79 | ) | ||||
Other current assets | (161 | ) | (1,544 | ) | ||||
Accounts payable | (9,961 | ) | (10,629 | ) | ||||
Accrued taxes | 2,884 | 1,764 | ||||||
Accrued interest | (16,166 | ) | (12,618 | ) | ||||
Net cash provided from operating activities | 4,414 | 10,178 | ||||||
Investing Activities: | ||||||||
Gross property additions | (68,779 | ) | (103,974 | ) | ||||
Change in construction payables, net | (6,589 | ) | (8,042 | ) | ||||
Other | 185 | 239 | ||||||
Net cash used for investing activities | (75,183 | ) | (111,777 | ) | ||||
Financing Activities: | ||||||||
Increase (decrease) in notes payable, net — affiliated | 67,411 | 11,950 | ||||||
Increase (decrease) in notes payable, net | 94 | 446,485 | ||||||
Proceeds — Capital contributions from parent company | — | 113 | ||||||
Redemptions — Other long-term debt | — | (373,979 | ) | |||||
Other | 933 | 234 | ||||||
Net cash provided from financing activities | 68,438 | 84,803 | ||||||
Net Change in Cash and Cash Equivalents | (2,331 | ) | (16,796 | ) | ||||
Cash and Cash Equivalents at Beginning of Period | 2,798 | 19,474 | ||||||
Cash and Cash Equivalents at End of Period | $ | 467 | $ | 2,678 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid during the period for — | ||||||||
Interest (net of $8,739 and $13,526 capitalized for 2004 and 2003, respectively) | $ | 25,114 | $ | 12,767 | ||||
Income taxes (net of refunds) | $ | 1,684 | $ | 4,018 |
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
90
Table of Contents
SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Assets | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 467 | $ | 2,798 | ||||
Receivables — | ||||||||
Customer accounts receivable | 10,501 | 10,772 | ||||||
Affiliated companies | 23,506 | 14,130 | ||||||
Accumulated provision for uncollectible accounts | (350 | ) | (350 | ) | ||||
Other accounts receivable | 600 | 270 | ||||||
Fossil fuel stock, at average cost | 2,931 | 5,798 | ||||||
Materials and supplies, at average cost | 8,632 | 8,123 | ||||||
Prepaid income taxes | 12,432 | 11,222 | ||||||
Prepaid expenses | 1,478 | 2,528 | ||||||
Other | 534 | 1,174 | ||||||
Total current assets | 60,731 | 56,465 | ||||||
Property, Plant, and Equipment: | ||||||||
In service | 1,830,846 | 1,831,139 | ||||||
Less accumulated provision for depreciation | 72,810 | 60,005 | ||||||
1,758,036 | 1,771,134 | |||||||
Construction work in progress | 573,169 | 504,097 | ||||||
Total property, plant, and equipment | 2,331,205 | 2,275,231 | ||||||
Deferred Charges and Other Assets: | ||||||||
Unamortized debt issuance expense | 17,433 | 18,315 | ||||||
Accumulated deferred income taxes | 4,921 | 21,911 | ||||||
Prepaid maintenance expenses | 24,224 | 21,728 | ||||||
Prepaid transmission expenses — affiliated | 13,690 | 12,790 | ||||||
Other | 2,885 | 2,845 | ||||||
Total deferred charges and other assets | 63,153 | 77,589 | ||||||
Total Assets | $ | 2,455,089 | $ | 2,409,285 | ||||
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
91
Table of Contents
SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At March 31, | At December 31, | |||||||
Liabilities and Stockholder’s Equity | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Current Liabilities: | ||||||||
Securities due within one year | $ | 200 | $ | 200 | ||||
Notes payable | 114,339 | 114,347 | ||||||
Notes payable to parent | 67,411 | — | ||||||
Accounts payable — | ||||||||
Affiliated | 35,335 | 51,442 | ||||||
Other | 6,149 | 6,591 | ||||||
Accrued taxes other than income taxes | 4,173 | 1,289 | ||||||
Accrued interest | 13,846 | 30,012 | ||||||
Other | 717 | 489 | ||||||
Total current liabilities | 242,170 | 204,370 | ||||||
Long-term Debt | 1,149,266 | 1,149,112 | ||||||
Deferred Credits and Other Liabilities: | ||||||||
Deferred capacity revenues— | ||||||||
Affiliated | 9,727 | 28,799 | ||||||
Other | 91 | 256 | ||||||
Other— | ||||||||
Affiliated | 14,281 | 15,061 | ||||||
Other | 143 | 211 | ||||||
Total deferred credits and other liabilities | 24,242 | 44,327 | ||||||
Total Liabilities | 1,415,678 | 1,397,809 | ||||||
Common Stockholder’s Equity: | ||||||||
Common stock, par value $.01 per share — Authorized - 1,000,000 shares Outstanding - 1,000 shares Paid-in capital | 850,421 | 850,312 | ||||||
Retained earnings | 244,811 | 217,626 | ||||||
Accumulated other comprehensive loss | (55,821 | ) | (56,462 | ) | ||||
Total common stockholder’s equity | 1,039,411 | 1,011,476 | ||||||
Total Liabilities and Stockholder’s Equity | $ | 2,455,089 | $ | 2,409,285 | ||||
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
92
Table of Contents
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Net Income After Dividends on Preferred Stock | $ | 27,185 | $ | 23,125 | ||||
Other comprehensive income (loss): | ||||||||
Changes in fair value of qualifying hedges, net of tax of $(522) and $(2,400), respectively | (928 | ) | (3,833 | ) | ||||
Less: Reclassification adjustment for amounts included in net income, net of tax of $987 and $166, respectively | 1,569 | 264 | ||||||
COMPREHENSIVE INCOME | $ | 27,826 | $ | 19,556 | ||||
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
93
Table of Contents
SOUTHERN POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2004 vs. FIRST QUARTER 2003
RESULTS OF OPERATIONS
Earnings
Southern Power’s net income for first quarter 2004 was $27.2 million compared to $23.1 million for the corresponding period of 2003. The increase in first quarter 2004 earnings of $4.1 million, or 17.6%, was due primarily to increased wholesale capacity and energy revenues from units placed in service during 2003 (Plant Franklin Unit 2, Plant Harris Units 1 and 2 and Plant Stanton A). The increased revenues came from new PPAs with Alabama Power and Georgia Power for Plants Harris Unit 1 and Franklin Unit 2 that began in June 2003 and with the Stanton joint owners for Stanton A that began in October 2003. Additional sales of uncontracted capacity from Plant Harris Unit 2 also contributed to the increase.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease) | ||||||||
First Quarter | ||||||||
(in thousands) | % | |||||||
Sales for resale — non-affiliates | $ | 36,430 | 72.5 | |||||
Sales for resale – affiliates | 31,505 | 57.0 | ||||||
Fuel expense | 10,297 | 51.4 | ||||||
Purchased power — non-affiliates | (1,718 | ) | (11.2 | ) | ||||
Purchased power – affiliates | 24,124 | 134.5 | ||||||
Other operation expense | 8,817 | 149.2 | ||||||
Depreciation and amortization | 6,234 | 95.3 | ||||||
Interest expense, net of amounts capitalized | 11,187 | 799.6 |
Sales for resale — non-affiliates. In the first quarter 2004, revenues from sales for resale to non-affiliates were higher when compared to the corresponding period in 2003. This increase was due primarily to additional wholesale capacity and energy sales to non-affiliates as a result of commercial operation of Plant Harris Unit 2, which was placed into commercial operation in June 2003 and Plant Stanton A, which was placed into commercial operation in October 2003.
Sales for resale — affiliates.During the first quarter 2004, sales for resale to affiliates increased primarily due to energy and capacity sales through PPAs with Alabama Power and Georgia Power that commenced in June 2003. Revenues from sales to affiliated companies through the Southern Company system power pool and energy sales under PPAs will vary depending on demand and the availability and cost of generating resources accessible throughout the Southern Company system.
94
Table of Contents
SOUTHERN POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. Fuel expense in the first quarter 2004 increased significantly when compared to the same period in 2003. The first quarter 2004 increase resulted primarily from commercial operation of Plant Harris Unit 2, and higher natural gas prices.
Purchased power — non-affiliates. The decrease in purchased power from non-affiliates during the first quarter 2004 when compared to the first quarter 2003 is primarily due to the availability of lower cost energy from affiliates.
Purchased power — affiliates. The availability of power at prices lower than Southern Power’s self-generation, which is primarily natural gas-fired, accounted for the first quarter 2004 increase in purchased power from affiliates when compared to the same period in the prior year. Expenses from purchased power transactions will vary depending on demand, availability and the cost of generating resources accessible throughout the Southern Company system.
Other operation expense.During the first quarter 2004, other operation expense increased when compared to the same period in the prior year due mainly to administrative and general expenses associated with the commercial operation of Plant Franklin Unit 2 and Plant Harris Units 1 and 2, which were all placed into commercial operation in June 2003, and Plant Stanton A which was placed into commercial operation in October 2003.
Depreciation and amortization.New generating units placed into service in June and October 2003, are the main drivers for the increases in depreciation and amortization in the first quarter 2004 as compared to the corresponding period in the prior year.
Interest expense, net of amounts capitalized.In the first quarter 2004, interest expense, net of amounts capitalized increased when compared to the same period in 2003 due to an increase in the amount of senior notes outstanding and a lower percentage of interest costs being capitalized as projects have reached completion.
Future Earnings Potential
The results of operations are not necessarily indicative of future earnings. The level of future earnings depends on numerous factors including completion of construction on new generating facilities, regulatory matters including those related to affiliate contracts, energy sales, creditworthiness of customers, total generating capacity available in the Super Southeast and the remarketing of capacity. Another major factor is federal regulatory policy, which may impact Southern Power’s level of participation in the wholesale energy market. For additional information relating to these issues, see Item 1 - - Business – The SOUTHERN System — “Risk Factors” and Item 7 – Management’s Discussion and Analysis – “Future Earnings Potential” of Southern Power in the Form 10-K.
See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential – General” and “Power Sales Agreements” of Southern Power in the Form 10-K for additional information on long-term power sales agreements and PPAs. Southern Power’s PPAs with non-affiliated counterparties have provisions that require the posting of collateral or an acceptable substitute guarantee in the event that S&P or Moody’s downgrades the credit ratings of such counterparty to below-investment grade, or, if the counterparty is not rated, fails to maintain a minimum coverage ratio. The PPAs are expected to provide Southern Power with a stable source of revenue during their respective terms.
95
Table of Contents
SOUTHERN POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 2003, Southern Power placed Plant Franklin Unit 2 and Plant Harris Units 1 and 2 into commercial operation. In October 2003, Southern Power placed Plant Stanton A into commercial operation. In June 2004, the PPA with Georgia Power for the remaining 200 MW of uncontracted capacity at Plant Franklin Unit 2 will begin. Also, in June 2004, the PPA with Georgia Power for Plant Harris Unit 2 will begin. PPAs for the other units became effective upon commercial operation. As these PPAs become effective, the opportunity for external sales out of uncontracted capacity will decline significantly. Plant McIntosh Units 10 and 11 are under construction and are scheduled to be completed in June 2005. See Note 3 to Southern Power’s financial statements under “FERC Matters” in Item 8 of the Form 10-K and Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11. Southern Power is also completing limited construction activities on Plant Franklin Unit 3 to preserve the long-term viability of the project but has deferred final completion until the 2008-2011 period. See Note 3 to Southern Power’s financial statements under “Uncontracted Generating Capacity” in Item 8 of the Form 10-K for additional information. The final outcome of these matters cannot now be determined.
See Item 7 — Management’s Discussion and Analysis — “Future Earnings Potential — FERC Matters” of Southern Power in the Form 10-K for information on the FERC’s order related to RTOs and the FERC’s notice of proposed rulemaking regarding open access transmission service.
See Management’s Discussion and Analysis – “Future Earnings Potential – FERC Matters – Market-Based Rate Authority” in Item 7 and Note 3 to the financial statements of Southern Power under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. See Note (B) to the Condensed Financial Statements under “FERC Matters” herein for additional information. Southern Company is filing a request for rehearing of the FERC’s order. The final outcome of this matter cannot be determined at this time.
See Item 7 — Management’s Discussion and Analysis – “Future Earnings Potential — Environmental Matters” of Southern Power in the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emission of air pollution from industrial sources, including electric generating facilities. Compliance costs related to current and future environmental laws and regulations could affect earnings if such costs are not fully recovered.
Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. In addition, Southern Power’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury and citizen enforcement of environmental requirements, has increased generally throughout the United States; in particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. No such litigation is currently pending against Southern Power.
See also the Notes to the Condensed Financial Statements herein for discussion of various contingencies and other matters which may affect future earnings potential.
96
Table of Contents
SOUTHERN POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power prepares its financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See Item 7 –Management’s Discussion and Analysis – “Accounting Policies — Application of Critical Accounting Policies and Estimates” of Southern Power in the Form 10-K for a complete discussion of Southern Power’s critical accounting policies and estimates related to Revenue Recognition and Asset Impairments.
FINANCIAL CONDITION AND LIQUIDITY
Overview
The major change in Southern Power’s financial condition during the first three months of 2004 was the addition of approximately $69 million to utility plant related to on-going construction of Southern Power’s combined-cycle units. The funds for these additions were provided by subordinated loans from Southern Company and ongoing operations. See Southern Power’s Condensed Statements of Cash Flows herein for further details.
Capital Requirements and Contractual Obligations
Reference is made to Item 7 — Management’s Discussion and Analysis — “Financial Condition and Liquidity — Capital Requirements and Contractual Obligations” of Southern Power in the Form 10-K for a description of Southern Power’s capital requirements for its construction program, maturing debt, purchase commitments and long-term service agreements.
Sources of Capital
Southern Power’s current liabilities exceed current assets because of the continued use of short-term debt as an interim funding source for Southern Power’s ongoing construction program and the seasonality of the electricity business. In February 2003, Southern Power initiated a commercial paper program to fund a portion of the construction costs of new generating facilities. The amount of commercial paper initially represented approximately 45% of total debt, but is forecasted to be less than 20% at year-end 2005. Southern Power’s strategy is to refinance most of such short-term borrowings with long-term securities following commercial operation of the generating facilities. At March 31, 2004, Southern Power had outstanding $114.3 million in commercial paper. See Note 6 to the financial statements of Southern Power under “Commercial Paper” in Item 8 of the Form 10-K for additional information.
97
Table of Contents
SOUTHERN POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet liquidity and capital resource requirements, Southern Power had at March 31, 2004 approximately $650 million of an unused committed credit arrangement with banks expiring in 2006. This arrangement also provides liquidity support for Southern Power’s commercial paper program (as discussed above). Amounts drawn under the arrangements may be used to finance acquisition and construction costs related to gas-fired electric generating facilities and for general corporate purposes, subject to borrowing limitations for each generating facility. The arrangements permit Southern Power to fund construction of future generating facilities upon meeting certain requirements. Southern Power expects to renew its credit facility, as needed, prior to expiration. Financing of construction at the McIntosh facility is subject to FERC approval of the related PPAs. Reference is made to Note (C) to the Condensed Financial Statements herein for information regarding the FERC approval process for Southern Power’s PPAs with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11. Southern Power also has access to loans from Southern Company to meet any additional Plant McIntosh funding needs should other funding sources not be adequate.
Credit Rating Risk
Southern Power does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are contracts that could require collateral — but not accelerated payment — in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity purchases and sales, fixed-price physical gas purchases and agreements covering interest rate swaps. Generally, collateral may be provided by a Southern Company guaranty, letter of credit or cash. At March 31, 2004, the maximum potential collateral requirements were approximately $172 million.
Market Price Risk
Southern Power’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2003 reporting period. In addition, Southern Power is not aware of any facts or circumstances that would significantly affect such exposures in the near term.
Because energy from Southern Power’s generating facilities is primarily sold under long-term PPAs with tolling agreements and provisions shifting substantially all of the responsibility for fuel cost to the purchasers, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited. To mitigate residual risks in those areas, Southern Power enters into fixed-price contracts for the sale of electricity. Unrealized gains and losses on electric and gas contracts qualifying as cash flow hedges of anticipated purchases and sales are deferred in Other Comprehensive Income.
98
Table of Contents
SOUTHERN POWER COMPANY
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The fair values of derivative energy contracts at March 31, 2004 were as follows:
First Quarter | ||||
2004 | ||||
Changes | ||||
Fair Value | ||||
(in thousands) | ||||
Contracts beginning of period | $ | 665 | ||
Contracts realized or settled | (665 | ) | ||
New contracts at inception | — | |||
Current period changes | (203 | ) | ||
Contracts at March 31, 2004 | $ | (203 | ) | |
At March 31, 2004, all of these contracts mature within one year and are based on actively quoted market prices. For additional information, see Item 7 - - Management’s Discussion and Analysis – “Financial Condition and Liquidity— Market Price Risk” and Notes 1 and 6 to the financial statements under “Financial Instruments” of Southern Power in Item 8 of the Form 10-K and Note (G) to the Condensed Financial Statements herein.
99
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
Registrant | Applicable Notes | |
| ||
Southern Company | A, B, C, D, E, F, G, H, I, J, L | |
Alabama Power | A, B, D, E, G, H | |
Georgia Power | A, B, C, D, E, G, H | |
Gulf Power | A, B, D, E, G, H | |
Mississippi Power | A, B, D, E, G, H, I | |
Savannah Electric | A, B, C, D, G, H, K | |
Southern Power | A, B, C, G |
100
Table of Contents
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) | The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant’s management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended March 31, 2004 and 2003. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosure which would substantially duplicate the disclosure in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are omitted from this Form 10-Q. Therefore, these condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year. | |||
(B) | See Note 3 to the financial statements of each of the registrants in Item 8 and “Legal Proceedings” in Item 3 of the Form 10-K for information relating to various lawsuits and other contingencies. | |||
NEW SOURCE REVIEW ACTIONS | ||||
See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric under “New Source Review Actions” and of Southern Company and Georgia Power under “Plant Wansley Environmental Litigation” in Item 8 of the Form 10-K. As of March 15, 2004, civil penalties under the Clean Air Act were increased prospectively to a maximum of $32,500 per day, per violation. To the extent alleged violations under either the New Source Review Litigation or Plant Wansley Environmental Litigation are deemed to be continuing, this increased civil penalty amount could apply to such violations found to continue after that date. On May 3, 2004, the U.S. Supreme Court denied the EPA’s petition to review the Eleventh Circuit Court of Appeals’ decision in the EPA’s similar New Source Review action against the TVA. The cases against Alabama Power, Georgia Power and Savannah Electric have been effectively stayed pending final resolution of the TVA appeal. With the denial of the EPA’s petition for review, the Court of Appeals’ decision is now final. An adverse outcome in any one of these cases could require substantial capital expenditures that cannot be determined at this time and could 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. |
101
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
MIRANT RELATED MATTERS | ||||
See Note 3 to the financial statements of Southern Company under “Mirant Related Matters — Mirant Bankruptcy” in Item 8 and Management’s Discussion and Analysis – “Future Earnings Potential — Other Matters” of Southern Company in Item 7 of the Form 10-K. On April 7, 2004, the U.S. Bankruptcy Court judge presiding over Mirant’s proceedings ordered that an examiner be appointed and identified a number of duties for the examiner, including preliminary investigation of potential causes of action against insiders, past or present, of Mirant. On April 13, 2004, the judge approved the appointment of William K. Snyder as examiner. In an April 29, 2004 Order, the judge further defined the duties of the examiner, including the investigation of any potential causes of action or any basis for objecting to or subordinating any claim that may be available to Mirant against any past or present insider or any member of a committee appointed in Mirant’s bankruptcy proceeding. As a former shareholder of Mirant, Southern Company could be considered a past insider. The final outcome of these matters cannot now be determined. | ||||
See Note 3 to Southern Company’s financial statements in Item 8 of the Form 10-K under “Mirant Bankruptcy” and Note 5 to Southern Company’s financial statements in Item 8 of the Form 10-K for information related to potential contingent liabilities as a result of Mirant’s inclusion in the consolidated federal income tax return prior to the spin-off. In connection with the audit of tax years 2000 and 2001, the IRS has preliminarily indicated that they may challenge certain tax deductions arising from Mirant’s operations prior to the spin-off. The ultimate outcome of this matter cannot now be determined. | ||||
See Note 3 to the financial statements of Southern Company under “Mobile Energy Services’ Petition for Bankruptcy” in Item 8 of the Form 10-K. On April 29, 2004, Mobile Energy Services Holdings (MESH) sold the electric generating facility. In connection with the sale, the pulp and paper complex owners released Southern Company from its contingent obligations associated with the guarantee of certain potential environmental obligations and with the potential obligation to fund a maintenance reserve account. Southern Company simultaneously released MESH from its indemnification obligations. | ||||
FERC MATTERS | ||||
See Note 3 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power under “FERC Matters” in Item 8 of the Form 10-K. On April 14, 2004, the FERC issued an order that abandoned the SMA test and adopted a new interim analysis for measuring generation market power. This new interim approach includes a pivotal supplier analysis and a wholesale market share analysis, the results of which provide a rebuttable presumption regarding generation market power. The FERC’s order also sets forth procedures for rebutting these presumptions and addresses mitigation measures for those entities that are found to have market power. In the absence of specific mitigation measures, the order includes several cost-based mitigation measures that would apply by default. The FERC also initiated a new rulemaking proceeding that, among other things, will adopt a final methodology for assessing generation market power. Southern Company, the retail operating companies, and Southern Power believe that it may be difficult for a traditional utility company, or affiliate thereof, with a significant load service obligation and generation to satisfy that obligation to pass all aspects of the market power screens as currently designed; however, each of the companies believes that it has appropriate basis to rebut the generation market power presumption. In the event that FERC’s default mitigation measures are ultimately applied, Southern Power and the retail operating companies may be required to charge cost-based rates, which may be lower than negotiated market-based rates. Southern Company is filing a request for |
102
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
rehearing of the FERC’s order. The final outcome of this matter will depend on the form in which the final methodology for assessing generation market power and mitigation rules may be ultimately adopted and cannot be determined at this time. | ||||
INCOME TAX MATTERS | ||||
See Note 3 to Southern Company’s financial statements under “Income Tax Issues — Leveraged Lease Transactions” in Item 8 of the Form 10-K. In connection with their current audits of Southern Company’s consolidated federal income tax returns for the 2000 and 2001 tax years, the IRS has indicated that they intend to propose a similar adjustment of $18 million to disallow the tax losses associated with the international leveraged lease transaction originally challenged in their 1996-1999 audits. The IRS has also preliminarily indicated that they may challenge Southern Company’s other three international leveraged lease transactions (so-called SILO or sale-in-lease-out transactions). See Note 1 to Southern Company’s financial statements under “Leveraged Leases” in Item 8 of the Form 10-K for additional details of the deferred taxes related to these transactions. The ultimate outcome of these matters cannot now be determined | ||||
(C) | See Note 3 under “FERC Matters” to the financial statements of Georgia Power, Savannah Electric and Southern Power, in Item 8 of the Form 10-K for information regarding PPAs between Southern Power and Georgia Power and Savannah Electric for Plant McIntosh capacity. | |||
In April 2003, Southern Power applied for FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs to become effective June 1, 2005, subject to refund, and ordered that hearings be held. The hearings previously scheduled to commence on March 1, 2004 were postponed pending the outcome of settlement negotiations. Settlement negotiations have been terminated and hearings have been rescheduled to begin on May 25, 2004. Management believes that the PPAs should be approved by the FERC; however, the ultimate outcome of this matter cannot now be determined. | ||||
(D) | See Note 1 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric under “Asset Retirement Obligations and Other Costs of Removal” in Item 8 of the Form 10-K. The following table reflects the details of the Asset Retirement Obligations included in the Condensed Balance Sheets. |
Balance at | Liabilities | Liabilities | Cash Flow | Balance at | ||||||||||||||||||||||||||||
12/31/03 | Incurred | Settled | Accretion | Revisions | 03/31/04 | |||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Alabama Power | $ | 359 | $ | — | $ | — | $ | 6 | $ | — | $ | 365 | ||||||||||||||||||||
Georgia Power | 476 | — | (1 | ) | 8 | — | 483 | |||||||||||||||||||||||||
Gulf Power | 4 | — | — | — | — | 4 | ||||||||||||||||||||||||||
Mississippi Power | 2 | — | — | — | 1 | 3 | ||||||||||||||||||||||||||
Savannah Electric | 4 | — | — | — | — | 4 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Southern Company | $ | 845 | $ | — | $ | (1 | ) | $ | 14 | $ | 1 | $ | 859 |
(E) | On March 31, 2004, Southern Company prospectively adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities,” which requires the primary beneficiary of a variable interest entity to consolidate the related assets and liabilities. The adoption of Interpretation No. 46R had no impact on Southern Company’s net income. However, as a result of the adoption, Southern Company and the retail operating companies deconsolidated certain wholly-owned trusts established to issue preferred securities since Southern Company and the retail operating companies do not meet the |
103
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
definition of primary beneficiary established by Interpretation No. 46R. Therefore, the investments in these trusts are reflected as Equity Investments in Unconsolidated Subsidiaries for Alabama Power and Georgia Power and as Other Investments for Southern Company, Gulf Power and Mississippi Power. The related loans from the trusts to Southern Company and the retail operating companies are reflected as Notes Payable to Affiliated Trusts on the accompanying Balance Sheets. This treatment resulted in the following increases in both total assets and total liabilities as of March 31, 2004 (in millions): |
Alabama Power | $ | 9 | ||
Georgia Power | 29 | |||
Gulf Power | 2 | |||
Mississippi Power | 1 | |||
Southern Company | $ | 60 |
In addition, Southern Company consolidated its 85% limited partnership investment in an energy/telecom venture capital fund that was previously accounted for under the equity method. At March 31, 2004, Southern Company’s investment totaled $25 million; Southern Company has committed to a maximum investment of $75 million. The assets of the venture capital fund are included in Cash and Other Investments on the accompanying Condensed Balance Sheets. | ||||
(F) | See Note 1 under “Stock Options” and Note 8 under “Stock Option Plan” to the financial statements of Southern Company in Item 8 of the Form 10-K for information regarding non-qualified employee stock options provided by Southern Company. Southern Company accounts for options granted in accordance with Accounting Principles Board Opinion No. 25; thus, no compensation expense is recognized because the exercise price of all options granted equaled the fair market value on the date of the grant. The estimated fair values of stock options granted during the three-month periods ending March 31, 2004 and 2003 have been derived using the Black-Scholes stock option pricing model. The following table shows the assumptions and the weighted average fair values of these stock options: |
Three Months Ended | Three Months Ended | |||||||
March 31, 2004 | March 31, 2003 | |||||||
Interest Rate | 3.1 | % | 2.7 | % | ||||
Average expected life of stock options (in years) | 5.0 | 4.3 | ||||||
Expected volatility of common stock | 19.7 | % | 23.6 | % | ||||
Expected annual dividends on common stock | $ | 1.40 | $ | 1.37 | ||||
Weighted average fair value of stock options granted | $ | 3.29 | $ | 3.59 |
The pro forma impact of fair-value accounting for options granted on net income is as follows:
As Reported | Pro Forma | |||||||
Three Months Ended March 31, 2004 | ||||||||
Net income (in millions) | $ | 331 | $ | 326 | ||||
Earnings per share (dollars): | ||||||||
Basic | $ | 0.45 | $ | 0.44 | ||||
Diluted | $ | 0.45 | $ | 0.44 | ||||
Three Months Ended March 31, 2003 | ||||||||
Net income (in millions) | $ | 298 | $ | 294 | ||||
Earnings per share (dollars): | ||||||||
Basic | $ | 0.41 | $ | 0.41 | ||||
Diluted | $ | 0.41 | $ | 0.41 |
104
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Diluted Earnings Per Share |
Three Months Ended | Three Months Ended | |||||||
March 31, 2004 | March 31, 2003 | |||||||
(in thousands) | ||||||||
As Reported Shares | 736,638 | 718,943 | ||||||
Effect of options | 4,965 | 5,948 | ||||||
Diluted Shares | 741,603 | 724,891 |
(G) | See Note 6 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power under “Financial Instruments” in Item 8 of the Form 10-K. At March 31, 2004, the fair value of derivative energy contracts was reflected in the financial statements as follows: |
Southern | Alabama | Georgia | Gulf | Mississippi | Savannah | Southern | ||||||||||||||||||||||||||
Company | Power | Power | Power | Power | Electric | Power | ||||||||||||||||||||||||||
Amounts | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Regulatory liabilities, net | $ | 43,110 | $ | 18,078 | $ | 10,526 | $ | 5,673 | $ | 6,859 | $ | 1,974 | $ | — | ||||||||||||||||||
Other comprehensive income (loss) | 606 | (226 | ) | — | — | (1,239 | ) | (15 | ) | (216 | ) | |||||||||||||||||||||
Net income | (204 | ) | 6 | 7 | 1 | 1 | — | 13 | ||||||||||||||||||||||||
Total fair value | $ | 43,512 | $ | 17,858 | $ | 10,533 | $ | 5,674 | $ | 5,621 | $ | 1,959 | $ | (203 | ) | |||||||||||||||||
For the three months ended March 31, 2004 and 2003, the amounts recognized in income for Southern Company, Alabama Power, Georgia, Power, Gulf Power, Mississippi Power, Savannah Electric and Southern Power were immaterial. | ||||
In addition, approximately $2.7 million in pre-tax gains will be reclassified from Other Comprehensive Income to Fuel Expense by Southern Company for the twelve month period ended March 31, 2005. | ||||
At March 31, 2004, Southern Company had $3.4 billion notional amount of interest rate swaps outstanding with net fair value gains of $21.1 million as follows: | ||||
Fair Value Hedges |
Notional | Fixed Rate | Variable Rate | Maturity | Fair Value Gain (Loss) | ||||||||||||||||
Amount | Received | Paid | Date | March 31, 2004 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Southern Company | $400 million | 5.3 | % | 6-month LIBOR (in arrears) less 0.103% | February 2007 | $ | 31.3 | |||||||||||||
Southern Company | $40 million | 7.625 | % | 6-month LIBOR (in arrears) plus 2.9225% | December 2009 | $ | 2.2 | |||||||||||||
105
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Cash Flow Hedges |
Weighted | ||||||||||||||
Variable | Average | Fair Value | ||||||||||||
Notional | Rate | Fixed Rate | Maturity | Gain (Loss) | ||||||||||
Amount | Received | Paid | Date | March 31, 2004 | ||||||||||
(in millions) | ||||||||||||||
Variable Rate Securities | ||||||||||||||
Southern Company | $200 million | 1-month LIBOR | 3.1975 | % | June 2004 | $ | (1.0 | ) | ||||||
Alabama Power | $536 million | BMA Index | 2.007 | % | January 2007 | $ | (1.6 | ) | ||||||
Alabama Power | $195 million | 3-month LIBOR | 1.89 | % | April 2006 | $ | (0.3 | ) | ||||||
Alabama Power | $250 million | 3-month LIBOR | 3.9198 | % | September 2009 | $ | (5.0 | ) | ||||||
Alabama Power | $220 million | 3-month LIBOR | 3.4145 | % | November 2007 | $ | (3.0 | ) | ||||||
Alabama Power | $150 million | 3-month LIBOR | 5.051 | % | April 2034 | $ | 1.0 | |||||||
Georgia Power | $250 million | 3-month LIBOR plus 0.125% | 1.96 | % | February 2005 | $ | (1.4 | ) | ||||||
Georgia Power | $50 million | 3-month LIBOR plus 0.10% | 1.5625 | % | January 2005 | $ | (0.1 | ) | ||||||
Georgia Power | $873 million | BMA Index | 1.3878 | % | December 2004 | $ | (1.5 | ) | ||||||
Georgia Power | $250 million | 3-month LIBOR | 4.6629 | % | February 2015 | $ | 0.6 | |||||||
Savannah Electric | $20 million | 3-month LIBOR plus 0.375% | 2.055 | % | December 2004 | $ | (0.1 | ) |
For the twelve month period ended March 31, 2005, the following table reflects the estimated pre-tax losses that will be reclassified from Other Comprehensive Income to Interest Expense. |
(in Millions) | ||||
Alabama Power | $ | (11.6 | ) | |
Georgia Power | (4.1 | ) | ||
Gulf Power | (0.3 | ) | ||
Mississippi Power | — | |||
Savannah Electric | (0.1 | ) | ||
Southern Power | (10.6 | ) | ||
| ||||
Southern Company | $ | (27.8 | ) |
106
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(H) | See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric in Item 8 of the Form 10-K. Components of the pension plans’ and postretirement plans’ net periodic costs for the three-month periods ending March 31, 2004 and 2003 are as follows: |
Southern | Alabama | Georgia | Gulf | Mississippi | Savannah | |||||||||||||||||||||||
Company | Power | Power | Power | Power | Electric | |||||||||||||||||||||||
PENSION PLANS (in millions) | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Three Months Ended March 31, 2004 | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Service cost | $ | 32 | $ | 8 | $ | 10 | $ | 1 | $ | 2 | $ | 1 | ||||||||||||||||
Interest cost | 68 | 18 | 26 | 3 | 3 | 1 | ||||||||||||||||||||||
Expected return on plan assets | (113 | ) | (35 | ) | (45 | ) | (5 | ) | (5 | ) | (1 | ) | ||||||||||||||||
Recognized net gain | (1 | ) | (1 | ) | (1 | ) | — | — | — | |||||||||||||||||||
Net amortization | 4 | 1 | 2 | — | — | — | ||||||||||||||||||||||
Net cost (income) | $ | (10 | ) | $ | (9 | ) | $ | (8 | ) | $ | (1 | ) | $ | — | $ | 1 | ||||||||||||
| ||||||||||||||||||||||||||||
Three Months Ended March 31, 2003 | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Service cost | $ | 29 | $ | 7 | $ | 10 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||
Interest cost | 65 | 17 | 25 | 3 | 3 | 1 | ||||||||||||||||||||||
Expected return on plan assets | (112 | ) | (35 | ) | (45 | ) | (5 | ) | (4 | ) | (1 | ) | ||||||||||||||||
Recognized net gain | (11 | ) | (3 | ) | (5 | ) | — | — | — | |||||||||||||||||||
Net amortization | 4 | 1 | 2 | — | — | — | ||||||||||||||||||||||
Net cost (income) | $ | (25 | ) | $ | (13 | ) | $ | (13 | ) | $ | (1 | ) | $ | — | $ | 1 | ||||||||||||
| ||||||||||||||||||||||||||||
POSTRETIREMENT PLANS (in millions) | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Three Months Ended March 31, 2004 | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Service cost | $ | 7 | $ | 2 | $ | 2 | $ | — | $ | — | $ | — | ||||||||||||||||
Interest cost | 24 | 6 | 11 | 1 | 1 | 1 | ||||||||||||||||||||||
Expected return on plan assets | (12 | ) | (4 | ) | (6 | ) | — | — | — | |||||||||||||||||||
Net amortization | 9 | 2 | 5 | — | — | — | ||||||||||||||||||||||
Net cost (income) | $ | 28 | $ | 6 | $ | 12 | $ | 1 | $ | 1 | $ | 1 | ||||||||||||||||
| ||||||||||||||||||||||||||||
Three Months Ended March 31, 2003 | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Service cost | $ | 6 | $ | 2 | $ | 2 | $ | — | $ | — | $ | — | ||||||||||||||||
Interest cost | 23 | 6 | 10 | 1 | 1 | 1 | ||||||||||||||||||||||
Expected return on plan assets | (12 | ) | (4 | ) | (6 | ) | — | — | — | |||||||||||||||||||
Net amortization | 8 | 2 | 4 | — | — | — | ||||||||||||||||||||||
Net cost (income) | $ | 25 | $ | 6 | $ | 10 | $ | 1 | $ | 1 | $ | 1 |
107
Table of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(I) | See Note 3 to the financial statements in Item 8 of the Form 10-K for Southern Company under “Mississippi Power Regulatory Filing” and Mississippi Power under “Retail Regulatory Filing” in Item 8 of the Form 10-K regarding Mississippi Power’s request with the Mississippi PSC to include 266 megawatts of Plant Daniel Units 3 and 4 generating capacity not currently included in jurisdictional cost of service. The Mississippi PSC held hearings in April 2004 and a final decision in this matter is pending. The ultimate outcome of this matter cannot now be determined. | |||
(J) | See Note 1 to Southern Company’s financial statements under “Leveraged Leases” in Item 8 of the Form 10-K. In April 2004, Southern Company entered into a commitment with KeySpan Corporation for the purchase and subsequent leaseback of the Ravenswood Expansion Facility, a 250 megawatt combined cycle gas turbine facility in New York, New York. The cost of the facility is estimated at $375 million. Southern Company’s net investment in the leveraged lease is currently anticipated to be approximately $70 million. The transaction is projected to close in the second quarter of 2004. | |||
(K) | On March 23, 2004, Savannah Electric submitted a request to the Georgia PSC for an accounting order which, if approved by the Georgia PSC, would allow for the cost of a coal transloader currently under construction to be amortized over twenty-four months through fuel expense and recovered through Savannah Electric’s fuel cost recovery clause. This transloader will allow foreign coal to be off-loaded from ships at Savannah Electric’s Plant Kraft dock, and then transferred by rail to Savannah Electric’s Plant McIntosh. The total cost of the transloader, including carrying costs, is expected to be approximately $4.0 million. | |||
(L) | Southern Company’s reportable business segment is the sale of electricity in the Southeast by the five retail operating companies and Southern Power. The All Other column 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 investments in synthetic fuels and leveraged lease projects, telecommunications, energy-related services and natural gas marketing. Intersegment revenues are not material. Financial data for business segments and products and services for the periods covered in the Form 10-Q are as follows: |
Electric Utilities | ||||||||||||||||||||||||||||||||
Retail | ||||||||||||||||||||||||||||||||
Operating | Southern | All | Reconciling | |||||||||||||||||||||||||||||
Companies | Power | Eliminations | Total | Other | Eliminations | Consolidated | ||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2004: | ||||||||||||||||||||||||||||||||
Operating revenues | $ | 2,542 | $ | 176 | $ | (130 | ) | $ | 2,588 | $ | 173 | $ | (7 | ) | $ | 2,754 | ||||||||||||||||
Segment net income (loss) | 272 | 27 | — | 299 | 33 | (1 | ) | 331 | ||||||||||||||||||||||||
Total assets at March 31, 2004 | $ | 31,602 | $ | 2,455 | $ | (96 | ) | $ | 33,961 | $ | 1,825 | $ | (419 | ) | $ | 35,367 | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2003: | ||||||||||||||||||||||||||||||||
Operating revenues | $ | 2,366 | $ | 107 | $ | (73 | ) | $ | 2,400 | $ | 153 | $ | (5 | ) | $ | 2,548 | ||||||||||||||||
Segment net income (loss) | 264 | 23 | — | 287 | 11 | — | 298 | |||||||||||||||||||||||||
Total assets at December 31, 2003 | $ | 31,412 | $ | 2,409 | $ | (122 | ) | $ | 33,699 | $ | 1,671 | $ | (325 | ) | $ | 35,045 |
Products and Services |
Electric Utilities Revenues | ||||||||||||||||
Period | Retail | Wholesale | Other | Total | ||||||||||||
(in millions) | ||||||||||||||||
Three Months Ended March 31, 2004 | $ | 2,144 | $ | 351 | $ | 93 | $ | 2,588 | ||||||||
Three Months Ended March 31, 2003 | 1,974 | 334 | 92 | 2,400 |
108
Table of Contents
PART II- OTHER INFORMATION
Item 1. | Legal Proceedings. |
See the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which Southern Company and its reporting subsidiaries are involved. |
Item 2. | Changes in Securities, Unregistered Sales of Equity Securities and Use of Proceeds. |
On February 17, 2004, Alabama Power issued to Southern Company, in a private placement, 500,000 shares of Alabama Power’s common stock, $40.00 par value per share, for a price of $40.00 per share ($20,000,000 aggregate purchase price). There were no underwriting discounts or commissions. The issuance to Southern Company was exempt from registration under the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) of the Act because it was a transaction by an issuer that did not involve a public offering. The proceeds from the sale were used by Alabama Power for general corporate purposes. |
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits. | |||
(3) | Articles of Incorporation and By-Laws | |||
Georgia Power |
(c) 1 | - | By-laws of Georgia Power as amended effective August 20, 2003, and as presently in effect. |
(24) | Power of Attorney and Resolutions | |||
Southern Company |
(a) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 1-3526 as Exhibit 24(a) and incorporated herein by reference.) |
Alabama Power |
(b) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 1-3164 as Exhibit 24(b) and incorporated herein by reference.) |
Georgia Power |
(c) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 1-6468 as Exhibit 24(c) and incorporated herein by reference.) |
109
Table of Contents
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits. (Continued) | |||
Gulf Power |
(d) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 0-2429 as Exhibit 24(d) and incorporated herein by reference.) |
Mississippi Power |
(e) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 001-11229 as Exhibit 24(e) and incorporated herein by reference.) |
Savannah Electric |
(f) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 1-5072 as Exhibit 24(f) and incorporated herein by reference.) |
Southern Power |
(g) 1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2003, File No. 333-98553 as Exhibit 24(g) and incorporated herein by reference.) |
(31) | Section 302 Certifications | |||
Southern Company |
(a) 1 | - | Certificate of Southern Company’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| ||||
(a) 2 | - | Certificate of Southern Company’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
Alabama Power |
(b) 1 | - | Certificate of Alabama Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| ||||
(b) 2 | - | Certificate of Alabama Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
Georgia Power |
(c) 1 | - | Certificate of Georgia Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
110
Table of Contents
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits. (Continued) |
(c) 2 | - | Certificate of Georgia Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
Gulf Power |
(d) 1 | - | Certificate of Gulf Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| ||||
(d) 2 | - | Certificate of Gulf Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
Mississippi Power |
(e) 1 | - | Certificate of Mississippi Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| ||||
(e) 2 | - | Certificate of Mississippi Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
Savannah Electric |
(f) 1 | - | Certificate of Savannah Electric’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| ||||
(f) 2 | - | Certificate of Savannah Electric’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
Southern Power |
(g) 1 | - | Certificate of Southern Power’s Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| ||||
(g) 2 | - | Certificate of Southern Power’s Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
(32) | Section 906 Certifications |
Southern Company |
(a) | - | Certificate of Southern Company’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
Alabama Power |
(b) | - | Certificate of Alabama Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
111
Table of Contents
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits. (Continued) | |||
Georgia Power |
(c) | - | Certificate of Georgia Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
Gulf Power |
(d) | - | Certificate of Gulf Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
Mississippi Power |
(e) | - | Certificate of Mississippi Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
Savannah Electric |
(f) | - | Certificate of Savannah Electric’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
Southern Power |
(g) | - | Certificate of Southern Power’s Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) | Reports on Form 8-K. |
The registrants collectively and separately furnished Current Reports on Form 8-K dated January 29, 2004: |
Item reported: Financial statements filed: | Item 12 None |
Alabama Power filed Current Reports on Form 8-K dated February 5, 2004 and February 10, 2004: |
Items reported: Financial statements filed: | Items 5 and 7 None |
Georgia Power filed Current Reports on Form 8-K dated January 12, 2004, January 15, 2004 and February 12, 2004: |
Item reported: Financial statements filed: | Items 5 and 7 None |
Mississippi Power filed Current Reports on Form 8-K both dated March 3, 2004: |
Items reported: Financial statements filed: | Items 5 and 7 None |
112
Table of Contents
THE SOUTHERN COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
THE SOUTHERN COMPANY | |||
By | Allen Franklin | ||
Chairman and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | Thomas A. Fanning | ||
Executive Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
113
Table of Contents
ALABAMA POWER COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
ALABAMA POWER COMPANY | |||
By | Charles D. McCrary | ||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | William B. Hutchins, III | ||
Executive Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
114
Table of Contents
GEORGIA POWER COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
GEORGIA POWER COMPANY | |||
By | Michael D. Garrett | ||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | C. B. Harreld | ||
Executive Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
115
Table of Contents
GULF POWER COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
GULF POWER COMPANY | |||
By | Susan N. Story | ||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | Ronnie R. Labrato | ||
Vice President, Chief Financial Officer and Comptroller | |||
(Principal Financial and Accounting Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
116
Table of Contents
MISSISSIPPI POWER COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
MISSISSIPPI POWER COMPANY | |||
By | Anthony J. Topazi | ||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | Michael W. Southern | ||
Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial and Accounting Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
117
Table of Contents
SAVANNAH ELECTRIC AND POWER COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
SAVANNAH ELECTRIC AND POWER COMPANY | |||
By | A. R. James | ||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | Kirby R. Willis | ||
Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial and Accounting Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
118
Table of Contents
SOUTHERN POWER COMPANY
SIGNATURES
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 signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
SOUTHERN POWER COMPANY | |||
By | William P. Bowers | ||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
By | Cliff S. Thrasher | ||
Senior Vice President, Comptroller and Chief Financial Officer | |||
(Principal Financial and Accounting Officer) | |||
By | /s/ Wayne Boston | ||
(Wayne Boston, Attorney-in-fact) |
Date: May 6, 2004
119