EXHIBIT 99
MANAGEMENT'S REPORT
Mississippi Power Company 2001 Annual Report
The management of Mississippi Power Company has prepared -- and is responsible
for -- the financial statements and related information included in this report.
These statements were prepared in accordance with accounting principles
generally accepted in the United States and necessarily include amounts that are
based on the best estimates and judgments of management. Financial information
throughout this annual report is consistent with the financial statements.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that the accounting records
reflect only authorized transactions of the Company. Limitations exist in any
system of internal controls, however, based on a recognition that the cost of
the system should not exceed its benefits. The Company believes its system of
internal accounting controls maintains an appropriate cost/benefit relationship.
The Company's system of internal accounting controls is evaluated on an
ongoing basis by the Company's internal audit staff. The Company's independent
public accountants also consider certain elements of the internal control system
in order to determine their auditing procedures for the purpose of expressing an
opinion on the financial statements.
The audit committee of the board of directors, composed of four independent
directors, provides a broad overview of management's financial reporting and
control functions. Periodically, this committee meets with management, the
internal auditors, and the independent public accountants to ensure that these
groups are fulfilling their obligations and to discuss auditing, internal
controls, and financial reporting matters. The internal auditors and independent
public accountants have access to the members of the audit committee at any
time.
Management believes that its policies and procedures provide reasonable
assurance that the Company's operations are conducted according to a high
standard of business ethics.
In management's opinion, the financial statements present fairly, in all
material respects, the financial position, results of operations, and cash flows
of Mississippi Power Company in conformity with accounting principles generally
accepted in the United States.
/s/Michael D. Garrett
Michael D. Garrett
President and Chief Executive Officer
/s/Michael W. Southern
Michael W. Southern
Vice President, Treasurer and
Chief Financial Officer
February 13, 2002
1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To Mississippi Power Company:
We have audited the accompanying balance sheets and statements of capitalization
of Mississippi Power Company (a Mississippi corporation and a wholly owned
subsidiary of Southern Company) as of December 31, 2001 and 2000, and the
related statements of income, common stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements (pages 13-29) referred to above
present fairly, in all material respects, the financial position of Mississippi
Power Company as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 1 to the financial statements, effective January 1,
2001, Mississippi Power Company changed its method of accounting for derivative
instruments and hedging activities.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 13, 2002
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Mississippi Power Company 2001 Annual Report
RESULTS OF OPERATIONS
Earnings
Mississippi Power Company's 2001 net income after dividends on preferred stock
of $63.9 million increased $8.9 million over 2000 earnings of $55.0 million,
which were $0.2 million more than 1999 earnings of $54.8 million. Net income for
2001 was higher due to additional sales for resale primarily attributable to the
commercial operation of the new Plant Daniel Combined Cycle Units 3 and 4 and
lower interest expense.
Revenues
Operating revenues for the Company in 2001 and the changes from the prior year
are as follows:
Increase (Decrease)
Amount From Prior Year
------ ----------------
2001 2001 2000
---------------------------------------
(in thousands)
Retail --
Base Revenues $284,255 $ (3,000) $ (4,343)
Fuel cost recovery
and other 204,898 (6,398) 33,460
-----------------------------------------------------------------
Total retail 489,153 (9,398) 29,117
-----------------------------------------------------------------
Sales for resale --
Non-affiliates 204,623 58,692 14,927
Affiliates 85,652 57,737 8,469
-----------------------------------------------------------------
Total sales for resale 290,275 116,429 23,396
Other operating
revenues 16,637 1,432 2,085
-----------------------------------------------------------------
Operating revenues $796,065 $108,463 $ 54,598
=================================================================
Percent change 15.8% 8.6%
-----------------------------------------------------------------
Total retail revenues for 2001 decreased approximately 1.9 percent when
compared to 2000. The decrease resulted primarily from lower energy sales to
residential, commercial, and industrial customers as a result of mild weather
and a slowdown in manufacturing activity in the Company's service territory.
Retail revenues for 2000 reflected a 6.2 percent increase over the prior year
due to the continued growth in the service area, increased fuel revenues, and a
positive weather impact.
Fuel revenues generally represent the direct recovery of fuel expense
including purchased power. Therefore, changes in recoverable fuel expenses are
offset with corresponding changes in fuel revenues and have no effect on net
income.
Sales for resale to non-affiliates are influenced by those utilities' own
customer demand, plant availability, and the cost of their predominant fuels.
Included in sales for resale to non-affiliates are revenues from rural electric
cooperative associations and municipalities located in southeastern Mississippi.
Energy sales to these customers decreased 3.7 percent in 2001 and increased 10.9
percent in 2000, with the related revenues decreasing 2.4 percent and rising
10.8 percent, respectively. The customer demand experienced by these utilities
is determined by factors very similar to those of the Company. Revenues from
other sales outside the service area increased in 2001 when compared to 2000 as
a result of a new long term contract made possible by the commercial operation
of Plant Daniel Units 3 and 4.
Energy sales to affiliated companies within the Southern Company electric
system, as well as purchases, will vary from year to year depending on demand
and the availability and cost of generating resources at each company. These
sales do not have a significant impact on earnings.
Below is a breakdown of kilowatt-hour sales for 2001 and the percent change
for the last two years:
2001 Percent Change
------------- ---------------------------
KWH 2001 2000
(in millions) ---------------------------
Residential 2,163 (5.4)% 1.7%
Commercial 2,841 (1.5) 1.3
Industrial 4,276 (2.3) (0.7)
Other 40 (0.3) 2.5
-------------
Total retail 9,320 (2.8) 0.5
Sales for
Resale --
Non-affiliates 5,011 36.4 12.9
Affiliates 2,953 552.3 (16.2)
-------------
Total 17,284 26.0 2.8
==================================================================
Residential sales decreased 5.4 percent due to unusually mild weather in the
Company's service area. Commercial sales decreased 1.5 percent and industrial
sales fell 2.3 percent due to an economic slowdown. Total retail kilowatt-hour
sales increased slightly in 2000. This increase primarily resulted from the
continued growth in the service area, increased tourism, and the positive impact
of weather. Kilowatt-hour sales from outside the service area increased in 2001
when compared to 2000 as a result of a new contract made possible by the
3
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
commercial operation of Plant Daniel Combined Cycle Units 3 and 4. Again, sales
to affiliates will vary year to year depending on demand and cost of generating
resources at each company.
Expenses
Total operating expenses were $663 million in 2001, reflecting an increase of
$98 million or 17.4 percent over the prior year. The increase was due primarily
to the commercial operation of Plant Daniel Combined Cycle Units 3 and 4. In
2000, total operating expenses increased by 10.1 percent over the prior year due
primarily to higher fuel and purchased power expenses.
Fuel costs are the single largest expense for the Company. Fuel expenses for
2001 and 2000 increased 45.4 percent and 10.7 percent, respectively. The
increase for 2001 was due to increased generation especially from Plant Daniel
Combined Cycle Units 3 and 4 and a higher average cost of fuel. The 2000
increase was due to increased generation and a higher average cost of fuel.
In 2001, expenses related to purchased power from non-affiliates decreased
26.4 percent, while expenses related to purchased power from affiliates
increased 5.7 percent which, in total, resulted in a 11.1 percent decrease when
compared to 2000. This decrease in purchased power is primarily due to the
commercial operation of Plant Daniel Combined Cycle Units 3 and 4 and the
expiration of non-affiliated purchase power contracts in 2000. Sales and
purchases among the Company and its affiliates will vary from period to period
depending on demand and the availability and variable production cost of each
generating unit in the Southern Company electric system.
The amount and sources of generation and the average cost of fuel per net
kilowatt-hour generated were as follows:
2001 2000 1999
----------------------------
Total generation
(millions of kilowatt hours) 15,770 11,688 11,599
Sources of generation
(percent) --
Coal 59 83 81
Gas 41 17 19
Average cost of fuel per net
kilowatt-hour generated
(cents) -- 1.89 1.80 1.65
- ----------------------------------------------------------------
Other operation expenses increased 17.2 percent in 2001 primarily due to an
increase in other production expenses due to the commercial operation of Plant
Daniel Combined Cycle Units 3 and 4. In 2000, other operation expense decreased
8.2 percent primarily due to a decrease in administrative and general expenses.
Maintenance expense in 2001 increased primarily due to the commercial operation
of Plant Daniel Combined Cycle Units 3 and 4, while maintenance expense in 2000
increased primarily due to additional scheduled maintenance. Depreciation and
amortization expense increased 7.6 percent in 2001 due to a growth in plant
investment and the amortization of the Company's regulatory asset related to its
Environmental Compliance Overview Plan (ECO Plan). In 2000, depreciation expense
increased slightly due to growth in plant investment and new depreciation rates,
which became effective January 2000.
Taxes other than income taxes decreased 7.6 percent in 2001 due to reduced
ad valorem taxes related to a change in the tax rate. These taxes increased 1.7
percent in 2000 due to higher municipal franchise taxes resulting from higher
retail revenues. Interest on long-term debt decreased in 2001 as a result of
lower interest rates on debt outstanding.
Effects of Inflation
The Company is subject to rate regulation and income tax laws that are based on
the recovery of historical costs. Therefore, inflation creates an economic loss
because the Company is recovering its costs of investments in dollars that have
less purchasing power. While the inflation rate has been relatively low in
recent years, it continues to have an adverse effect on the Company because of
the large investment in utility plant with long economic lives. Conventional
accounting for historical costs does not recognize this economic loss nor the
partially offsetting gain that arises through financing facilities with
fixed-money obligations, such as long-term debt and preferred securities. Any
recognition of inflation by regulatory authorities is reflected in the rate of
return allowed.
Future Earnings Potential
General
The results of continuing operations for the past three years are not
necessarily indicative of future earnings potential. The level of the Company's
4
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
future earnings depends on numerous factors ranging from weather to energy sales
growth to a less regulated and more competitive environment. Expenses are
subject to constant review and cost control programs. The Company is also
maximizing the utility of invested capital and minimizing the need for
additional capital by refinancing outstanding obligations, managing the size of
its fuel stockpile, raising generating plant availability and efficiency, and
aggressively controlling its construction budget.
The Company currently operates as a vertically integrated utility providing
electricity to customers within its traditional service area located in
southeastern Mississippi. Prices for electricity provided by the Company to
retail customers are set by the Mississippi Public Service Commission (MPSC)
under cost-based regulatory principles. The Federal Energy Regulatory Commission
(FERC) regulates the Company's wholesale rate schedules, power sales contracts,
and transmission facilities.
Operating revenues will be affected by any changes in rates under the
Performance Evaluation Plan (PEP) -- the Company's performance based ratemaking
plan -- and the ECO Plan. PEP has proven to be a stabilizing force on electric
rates, with only moderate changes in rates taking place. The ECO Plan provides
for recovery of costs (including costs of capital) associated with environmental
projects approved by the MPSC, most of which are required to comply with Clean
Air Act Amendments of 1990 (Clean Air Act) and the regulations thereunder. The
ECO Plan is operated independently of PEP. Compliance costs related to the Clean
Air Act could affect earnings if such costs cannot be recovered. The Company
filed its 2001 ECO Plan in January 2001 which was approved, as filed, by the
Mississippi PSC on March 7, 2001, and resulted in a slight increase in customer
prices. The Company filed its 2002 ECO Plan in January 2002, which, if approved
as filed, will result in a slight increase in rates. See Note 3 to the financial
statements under "Litigation and Regulatory Matters" for additional information.
The Clean Air Act and other important environmental items are discussed later
under "Environmental Matters."
In August 2001, the Company filed a request with the MPSC for a retail rate
increase of approximately $46 million. In order to consider the Company's
request, the MPSC suspended the semi-annual evaluations under PEP. In December
2001, after a full investigation and hearing on the Company's request, the MPSC
approved an increase of approximately $39 million, which took effect in January
2002. Additionally, the MPSC ordered the Company to reactivate the semi-annual
evaluations under PEP, beginning in February 2003 for the year 2002. PEP will
remain in effect until the MPSC modifies, suspends, or terminates the plan. The
MPSC also set for hearing in 2002 a review of the return on equity models used
in PEP in setting the Company's authorized return on equity. This proceeding
will conclude in 2002, so that changes to the PEP return on equity models, if
any, may be incorporated into the February 2003 PEP evaluation filing for the
period ending December 31, 2002. The outcome of this matter and any future
impact to the Company cannot now be determined.
In February 2002, the Company reached an agreement with certain of its
wholesale customers to increase its wholesale tariff rates effective June 2002.
The agreement results in an annual increase of approximately $10.5 million and
the adoption of an Energy Cost Management clause similar to the one approved by
the Company's retail jurisdiction (see Note 1 to the financials). In addition,
the Company and its customers agreed that neither party would seek a unilateral
change to the new rates prior to December 31, 2003, except for changes due to
the operation of the fuel adjustment and energy cost management clauses. The
Company and its customers will file the agreement with the FERC for its
approval. Though the FERC has accepted settlement agreements as filed in the
past, the ultimate outcome of this matter before the FERC cannot now be
determined.
In accordance with Financial Accounting Standards Board (FASB) Statement No.
87, Employers' Accounting for Pensions, the Company recorded non-cash pension
income of approximately $3.2 million in 2001. Future pension income is dependent
on several factors including trust earnings and changes to the plan. For the
Company, pension income is a component of the regulated rates and does not have
a significant effect on net income. For more information, see Note 2 to the
financial statements.
The Company is involved in various matters being litigated. See Note 3 to
the financial statements for information regarding material issues that could
possibly affect future earnings.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
Compliance costs related to current and future environmental laws,
regulations, and litigation could affect earnings if such costs are not fully
recovered. The Clean Air Act and other important environmental items are
discussed later under "Environmental Matters."
Future earnings in the near term will depend upon growth in energy sales,
which is subject to a number of factors. These factors include weather,
competition, changes in contracts with neighboring utilities, energy
conservation practiced by customers, the elasticity of demand, and the rate of
economic growth in the Company's service area. The Company anticipates somewhat
slower growth in energy sales as the tourism industry stabilizes within its
service area. In addition to tourism, the healthcare and retail trade sectors
will provide most of the anticipated energy growth for the commercial class of
customers, while shipbuilding, chemicals, and the U.S. government will provide
much of the basis for anticipated growth in the industrial sector.
Industry Restructuring
The electric utility industry in the United States is continuing to evolve as a
result of regulatory and competitive factors. Among the primary agents of change
has been the Energy Policy Act of 1992 (Energy Act). The Energy Act allows
independent power producers (IPPs) to access a utility's transmission network in
order to sell electricity to other utilities. This enhances the incentive for
IPPs to build cogeneration plants for a utility's large industrial and
commercial customers and sell energy generation to other utilities. Also,
electricity sales for resale rates are affected by wholesale transmission access
and numerous potential new energy suppliers, including power marketers and
brokers.
Although the Energy Act does not permit retail customer access, it was a
major catalyst for the current restructuring and consolidation taking place
within the utility industry. Numerous federal and state initiatives are in
various stages to promote wholesale and retail competition. Among other things,
these initiatives allow customers to choose their electricity provider. As these
initiatives materialize, the structure of the utility industry could radically
change. In May 2000, the MPSC ordered that its docket reviewing restructuring of
the electric industry in the State of Mississippi be suspended. The MPSC found
that retail competition may not be in the public interest at this time, and
ordered that no further formal hearings would be held on this subject. It found
that the current regulatory structure produced reliable low cost power and
"should not be changed without clear and convincing demonstration that change
would be in the public interest." The MPSC will continue to monitor retail and
wholesale restructuring activities throughout the United States and reserves its
right to order further formal hearings on the matter should new evidence
demonstrate that retail competition would be in the public interest and all
customers could receive a reduction in the total cost of their electric service.
If the MPSC decides to hold future restructuring hearings on this matter,
enactment would require numerous issues to be resolved, including significant
ones relating to recovery of any stranded investments, full cost recovery of
energy produced, and other issues related to the energy crisis that occurred in
California. As a result of that crisis, many states have either discontinued or
delayed implementation of initiatives involving retail deregulation.
Continuing to be a low-cost producer could provide significant opportunities
to increase market share and profitability in markets that evolve with changing
regulation. Conversely, unless the Company remains a low-cost producer and
provides quality service, the Company's energy sales growth could be limited,
and this could significantly erode earnings.
In December 1999, the FERC issued its final ruling on Regional Transmission
Organizations (RTOs). The order encourages utilities owning transmission systems
to form RTOs on a voluntary basis. Southern Company and its operating companies,
including the Company, have submitted a series of status reports informing the
FERC of progress toward the development of a Southeastern RTO. In these status
reports, Southern Company explained that it is developing a for-profit RTO known
as SeTrans with a number of non-jurisdictional cooperative and public power
entities. Recently, Entergy Corporation and Cleco Power joined the SeTrans
development process. In January 2002, the sponsors of SeTrans held a public
meeting to form a Stakeholder Advisory Committee, which will participate in the
development of the RTO. Southern Company continues to work with the other
sponsors to develop the SeTrans RTO. While the creation of SeTrans is not
expected to have a material impact on the Company's financial statements, the
outcome of this matter cannot now be determined.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
Accounting Policies
Critical Policies
The Company's significant accounting policies are described in Note 1 to the
financial statements. The Company's most critical accounting policy involves
rate regulation. The Company is subject to the provisions of FASB Statement No.
71, Accounting for the Effects of Certain Types of Regulation. In the event that
a portion of the Company's operation is no longer subject to these provisions,
the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable and determine if any other
assets have been impaired. See Note 1 to the financial statements under
"Regulatory Assets and Liabilities" for additional information.
Additionally, the Company accounts for its lease agreement with Escatawpa
Funding, Limited Partnership (Escatawpa) as an operating lease. Under this
agreement, Escatawpa, a special purpose entity, is owner-lessor of the
combined-cycle generating units at the Company's Plant Daniel. The Company does
not consolidate this entity since parties unrelated to the Company have made
substantive residual equity capital investments in excess of 3 percent. The FASB
has recently issued a draft interpretation that addresses issues related to
identifying and accounting for certain special purpose entities. One proposed
change would increase the 3 percent outside equity requirement to 10 percent.
This interpretation is in draft form; therefore, final conclusions may differ
from the draft. However, a change to a ten percent equity requirement could
result in the Company having to change its accounting for this lease agreement,
including having to consolidate the leased asset and related debt. See Note 4 to
the financial statements where the lease agreement and the Company's related
obligations are discussed.
New Accounting Standards
Effective January 2001, the Company adopted FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. Statement No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This statement requires that certain derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at fair value, and that changes in the fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. See
Note 1 to the financial statements under "Financial Instruments" for additional
information. The impact on the Company's net income in 2001 was not material. An
additional interpretation of Statement No. 133 will result in a change -
effective April 1, 2002 - in accounting for certain contracts related to fuel
supplies that contain quantity options. These contracts will be accounted for as
derivatives and marked to market. However, due to the existence of the Company's
cost-based fuel recovery clause, this change is not expected to have a material
impact on net income.
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets, which establishes new accounting and reporting standards for
acquired goodwill and other intangible assets and supersedes Accounting
Principles Board Opinion No. 17. Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets -- but not
those acquired in a business combination -- should be accounted for upon
acquisition and on an ongoing basis. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives, which are no longer limited to
40 years. The Company adopted Statement No.142 in January 2002 with no material
impact on the financial statements.
Also in June 2001, the FASB issued Statement No. 143, Asset Retirement
Obligations, which establishes new accounting and reporting standards for legal
obligations associated with retiring assets, including decommissioning of
nuclear plants. The liability for an asset's future retirement must be recorded
in the period in which the liability is incurred. The cost must be capitalized
as part of the related long-lived asset and depreciated over the asset's useful
life. Changes in the liability resulting from the passage of time will be
recognized as operating expenses. Statement No. 143 must be adopted by January
1, 2003. The Company has not yet quantified the impact of adopting Statement No.
143 on its financial statements.
FINANCIAL CONDITION
Overview
The principal change in the Company's financial condition during 2001 was the
addition of approximately $61 million to utility plant. Funding for these
7
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
additions and other capital requirements were derived primarily from operations.
The Statements of Cash Flows provide additional details.
Credit Rating Risk
The Company 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 certain fixed-price physical gas purchase contracts that
could require collateral - but not accelerated payment - in the event of a
credit rating change to below investment grade; however, at December 31, 2001,
this exposure was immaterial.
Exposure to Market Risks
Due to cost-based rate regulations, the Company 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, the
Company enters into fixed price contracts for the purchase and sale of
electricity through the wholesale electricity market. Realized gains and losses
are recognized in the income statements as incurred. At December 31, 2001,
exposure from these activities was not material to the Company's financial
statements. Also, based on the Company's overall variable rate long-term debt
exposure at December 31, 2001, a near-term 100 basis point change in interest
rates would not materially affect the Company's financial statements. Fair value
of changes in energy trading contracts and year-end valuations are as follows:
Changes
During the Year
----------------------
Fair Value
----------------------------------------------------------------
(in thousands)
Contracts beginning of year $ 112
Contracts realized or settled (101)
New contracts at inception -
Changes in valuation techniques -
Current period changes (3,841)
- -----------------------------------------------------------------
Contracts end of year $ (3,830)
=================================================================
Source of Year-End
Valuation Prices
-----------------------------------
Maturity
Total --------------------
Fair Value Year 1 1-3 Years
- -----------------------------------------------------------------
(in thousands)
- -----------------------------------------------------------------
Actively quoted $(3,830) $(3,517) $ (313)
External sources - - -
Models and other methods
- - -
- -----------------------------------------------------------------
Contracts end of year $(3,830) $(3,517) $ (313)
=================================================================
For additional information, see Note 1 to the financial statements under
"Financial Instruments."
In June 2001, the MPSC approved the Company's request to implement an Energy
Cost Management Clause (ECM). ECM, among other things, allows the Company to
utilize financial instruments to hedge its fuel commitments. Amounts paid or
received as a result of the use of these instruments are recognized as fuel
related expense and are recovered or credited through the ECM factor calculated
annually and applied to customer billings. The Company records the fair value of
these financial instruments (cash flow hedges) in its financial statements in
accordance with FASB Statement No. 133 with a related regulatory asset or
liability recorded under the provisions of FASB Statement No. 71.
As of December 31, 2001, the Company had financial instruments related to
natural gas commodity contracts that had a contract value of approximately $31
million and $30 million expiring in 2002 and 2003, respectively. The market
values as of December 31, 2001 for these contracts were approximately $27
million and $30 million, respectively. The amounts settled and recognized in the
financial statements for 2001 were not material. Currently, the Company does not
have any fixed price natural gas commitments, either physical or financial,
beyond 2003.
Sources of Capital
To meet short-term cash needs and contingencies, the Company had at December 31,
2001 approximately $18.9 million of cash and cash equivalents and approximately
$114.5 million of unused committed credit agreements.
The Company may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper at the request and for
the benefit of the Company and the other Southern Company operating companies.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
At December 31, 2001, the Company had outstanding $16 million of commercial
paper.
It is anticipated that the funds required for construction and other
purposes, including compliance with environmental regulations, will be derived
from sources similar to those used in the past. These sources were primarily the
issuance of first mortgage bonds and preferred securities, in addition to
pollution control revenue bonds issued for the Company's benefit by public
authorities. The Company also utilized unsecured debt and lease arrangements in
the past as well.
The Company has no restrictions on the amounts of unsecured indebtedness it
may incur. However, the Company is required to meet certain coverage
requirements specified in its mortgage indenture and corporate charter to issue
new first mortgage bonds and preferred stock. The Company's coverage ratios are
high enough to permit, at present interest rate levels, any foreseeable security
sales. The amount of securities which the Company will be permitted to issue in
the future will depend upon market conditions and other factors prevailing at
that time.
Financing Activity
In May 2001, the Company received a $70 million capital contribution which was
used to retire $35 million of 6.60 percent first mortgage bonds, $20 million of
series C variable-rate senior notes, and $15 million in short term debt. The
Company plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these securities with lower-cost capital. See the
Statements of Cash Flows for further details.
Composite financing rates decreased for the year 2001 when compared to 2000
and 1999. As of year-end, the composite rates were as follows:
2001 2000 1999
-------------------------------
Composite interest rate on
long-term debt 4.60% 6.41% 6.19%
Composite preferred stock
dividend rate 6.33% 6.33% 6.33%
Composite interest rate on
preferred securities 7.75% 7.75% 7.75%
--------------------------------------------------------------
Off-Balance Sheet Financing Arrangements
In 1999, the Company signed an Agreement for Lease and a Lease Agreement with
Escatawpa. These agreements called for the Company to design and construct, as
agent for Escatawpa, a 1,064 megawatt natural gas combined cycle facility at the
Company's Plant Victor J. Daniel Facility (Facility). In May 2001, the Facility
was completed and placed into commercial operation. Effective with commercial
operation of the Facility, the initial 10-year lease term under its lease
arrangement for the Facility with Escatawpa began. The completion cost was
approximately $370 million. The lease provides for a residual value guarantee
(approximately 71% of the completion cost) by the Company that is due upon
termination of the lease in certain circumstances. The lease also includes
purchase and renewal options. Upon termination of the lease, at the Company's
option, the Company may either exercise its purchase option or the Facility can
be sold to a third party. The Company expects that the fair market value of the
leased Facility would substantially reduce or eliminate the Company's payment
under the residual value guarantee. In 2001, the Company recognized
approximately $18 million in lease expense. See Note 4 to the financial
statements for additional information.
Capital Structure
At year-end 2001, the Company's ratio of common equity to total capitalization,
excluding long-term debt due within one year, increased from 48.1 percent in
2000 to 62.1 percent. The Company plans to replace the long-term debt due within
one year with new issues.
Capital Requirements for Construction
The Company's projected construction expenditures for the next three years total
$241 million ($84 million in 2002, $72 million in 2003, and $85 million in
2004). The major emphasis within the construction program will be on the upgrade
of existing facilities.
Revisions to projected construction expenditures may be necessary because of
factors such as changes in business conditions, revised load projections, the
availability and cost of capital, changes in environmental regulations, and
alternatives such as leasing.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
Other Capital Requirements
In addition to the funds required for the Company's construction program,
approximately $115 million will be required by the end of 2003 for present
sinking fund requirements and maturities of long-term debt. The Company plans to
continue, when economically feasible, to retire higher cost debt and preferred
stock and replace these obligations with lower-cost capital if market conditions
permit.
These capital requirements, lease obligations, and purchase commitments -
discussed in notes 4 and 8 to the financial statements - are as follows:
2002 2003 2004
----------------------------------------------------------
(in thousands)
Bonds -
First mortgage $ - $ - $ -
Pollution control 20 25 25
Notes 80,000 35,000 -
Lease obligations 27,000 27,000 27,000
Purchase commitments
Fuel 225,000 188,000 7,000
Purchased power - - -
- -----------------------------------------------------------
At the beginning of 2002, the Company had not used any of its available
credit arrangements. Credit arrangements are as follows:
Expires
-----------------------------
Total Unused 2002 2003 & Beyond
- ------------------------------------------------------------
(in millions)
$114.5 $114.5 $109.5 5.0
- ------------------------------------------------------------
Environmental Matters
On November 3, 1999, the Environmental Protection Agency (EPA), brought a civil
action in the U.S. District Court against Alabama Power Company, Georgia Power
Company, and the system service company. The complaint alleges violations of the
New Source Review provisions of the Clean Air Act with respect to five
coal-fired generating facilities in Alabama and Georgia. The civil action
requests penalties and injunctive relief, including an order requiring the
installation of the best available control technology at the affected units. The
EPA concurrently issued to the operating companies a notice of violation related
to 10 generating facilities, which includes the five facilities mentioned
previously, and the Company's plants Watson and Greene County. In early 2000,
the EPA filed a motion to amend its complaint to add the violations alleged in
its notice of violation, and to add Gulf Power, Savannah Electric, and the
Company as defendants. The complaint and notice of violation are similar to
those brought against and issued to several other electric utilities. These
complaints and notices of violation allege that the utilities had failed to
secure necessary permits or install additional pollution control equipment when
performing maintenance and construction at coal burning plants constructed or
under construction prior to 1978. The U.S. District Court in Georgia granted
Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and
granted the system service company's motion to dismiss on the grounds that it
neither owned nor operated the generating units involved in the proceedings. The
court granted the EPA's motion to add Savannah Electric as a defendant, but it
denied the motion to add Gulf Power and the Company based on lack of
jurisdiction over those companies. The court directed the EPA to re-file its
amended complaint limiting claims to those brought against Georgia Power and
Savannah Electric. The EPA re-filed those claims as directed by the court. Also,
the EPA re-filed its claims against Alabama Power in U.S. District Court in
Alabama. It has not re-filed against Gulf Power, the system service company, or
the Company.
The Alabama Power, Georgia Power, and Savannah Electric cases have been
stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals
for the Eleventh Circuit in the appeal of a very similar New Source Review
enforcement action against the Tennessee Valley Authority (TVA). The TVA case
involves many of the same legal issues raised by the actions against Alabama
Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA case
could have a significant adverse impact on Alabama Power and Georgia Power, both
companies are parties to that case as well. The U.S. District Court in Alabama
has indicated that it will revisit the issue of a continued stay in April 2002.
The U.S. District Court in Georgia is currently considering a motion by the EPA
to reopen the Georgia case. Georgia Power and Savannah Electric have opposed
that motion.
The Company believes that it complied with applicable laws and the EPA's
regulations and interpretations in effect at the time the work in question took
place. The Clean Air Act authorizes civil penalties of up to $27,500 per day per
violation at each generating unit. Prior to January 30, 1997, the penalty was
10
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
$25,000 per day. An adverse outcome of this matter could require substantial
capital expenditures that cannot be determined at this time and possibly require
payment of substantial penalties. This could affect future results of
operations, cash flows and possibly financial condition unless such costs can be
recovered through regulated rates.
In November 1990, the Clean Air Act Amendments of 1990 (Clean Air Act) were
signed into law. Title IV of the Clean Air Act -- the acid rain compliance
provision of the law -- significantly affected Southern Company. Reductions in
sulfur dioxide and nitrogen oxide emissions from fossil-fired generating plants
were required in two phases. Phase I compliance began in 1995.
Southern Company achieved Phase I compliance at its affected plants by
primarily switching to low-sulfur coal and with some equipment upgrades.
Construction expenditures for Phase I nitrogen oxide and sulfur dioxide
emissions compliance totaled approximately $65 million for the Company.
Phase II sulfur dioxide compliance was required in 2000. Southern Company
used emission allowances and fuel switching to comply with Phase II
requirements. Also, equipment to control nitrogen oxide emissions was installed
on additional system fossil-fired units as necessary to meet Phase II limits and
ozone non-attainment requirements for metropolitan Atlanta through 2000. Phase
II compliance did not have a material impact on the Company.
The Company's ECO Plan is designed to allow recovery of costs of compliance
with the Clean Air Act, as well as other environmental statutes and regulations.
The MPSC reviews environmental projects and the Company's environmental policy
through the ECO Plan. Under the ECO Plan, any increase in the annual revenue
requirement is limited to 2 percent of retail revenues. The Company's management
believes that the ECO Plan provides for recovery of the Clean Air Act costs. See
Note 3 to the financial statements under "Environmental Compliance Overview
Plan" for additional information.
A significant portion of costs related to the acid rain and ozone
non-attainment provisions of the Clean Air Act is expected to be recovered
through existing ratemaking provisions. However, there can be no assurance that
all Clean Air Act costs will be recovered.
In July 1997, the EPA revised the national ambient air quality standards for
ozone and fine particulate matter. This revision made the standards
significantly more stringent. In the subsequent litigation of these standards,
the U.S. Supreme Court found the EPA's implementation program for the new ozone
standard unlawful and remanded it to the EPA. In addition, the Federal District
of Columbia Circuit Court of Appeals is considering other legal challenges to
these standards. A court decision is expected in the spring of 2002. If the
standards are eventually upheld, implementation could be required by 2007 to
2010.
In September 1998, the EPA issued regional nitrogen oxide reduction rules to
the states for implementation. Compliance is required by May 31, 2004 for most
states including Alabama. For Georgia, further rulemaking was required, and
proposed compliance was delayed until May 1, 2005. The final rules affect 21
states that do not include Mississippi. The EPA is presently evaluating whether
or not to bring an additional 15 states including Mississippi, under this
regional nitrogen oxide rule.
In December 2000, having completed its utility studies for mercury and other
hazardous air pollutants (HAPS), the EPA issued a determination that an emission
control program for mercury and, perhaps, other HAPS is warranted. The program
is being developed under the Maximum Achievable Control Technology provisions of
the Clean Air Act, and the regulations are scheduled to be finalized by the end
of 2004 with implementation to take place around 2007. In January 2001, the EPA
proposed guidance for the determination of Best Available Retrofit Technology
(BART) emission controls under the Regional Haze Regulations. Installation of
BART controls is expected to take place in 2010. Litigation of the Regional Haze
Regulations, including the BART provisions, is ongoing in the Federal District
of Columbia Circuit Court of Appeals. A court decision is expected in mid-2002.
Implementation of the final state rules for these initiatives could require
substantial further reductions in nitrogen oxide and sulfur dioxide and
reductions in mercury and other HAPS emissions from fossil-fired generating
facilities and other industries in these states. Additional compliance costs and
capital expenditures resulting from the implementation of these rules and
11
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Mississippi Power Company 2001 Annual Report
standards cannot be determined until the results of legal challenges are known,
and the states have adopted their final rules.
In October 1997, the EPA issued regulations setting forth requirements for
Compliance Assurance Monitoring (CAM) in its state and federal operating permit
programs. These regulations were amended by the EPA in March 2001 in response to
a court order resolving challenges to the rules brought by environmental groups
and industry. Generally, this rule affects the operation and maintenance of
electrostatic precipitators and could involve significant additional ongoing
expense.
The EPA and state environmental regulatory agencies are reviewing and
evaluating various other matters including: control strategies to reduce
regional haze; limits on pollutant discharges to impaired waters; cooling water
intake restrictions; and hazardous waste disposal requirements. The impact of
any new standards will depend on the development and implementation of
applicable regulations.
The Company must comply with other environmental laws and regulations that
cover the handling and disposal of hazardous waste. Under these various laws and
regulations, the Company could incur costs to clean up properties currently or
previously owned. Upon identifying potential sites, the Company conducts
studies, when possible, to determine the extent of any required cleanup. Should
remediation be determined to be probable, reasonable estimates of costs to clean
up such sites are developed and recognized in the financial statements.
Several major pieces of environmental legislation are being considered for
reauthorization or amendment by Congress. These include: the Clean Air Act; the
Clean Water Act; the Comprehensive Environmental Response, Compensation, and
Liability Act; the Resource Conservation and Recovery Act; and the Endangered
Species Act. Changes to these laws could affect many areas of the Company's
operations. The full impact of any such changes cannot be determined at this
time.
Compliance with possible additional legislation related to global climate
change, electromagnetic fields, and other environmental and health concerns
could significantly affect the Company. The impact of new legislation -- if any
- -- will depend on the subsequent development and implementation of applicable
regulations. In addition, the potential exists for liability as the result of
lawsuits alleging damages caused by electromagnetic fields.
Cautionary Statement Regarding Forward-Looking
Information
This Annual Report includes forward-looking statements in addition to historical
information. Forward-looking information includes, among other things,
statements concerning projected sales growth and scheduled completion of new
generation. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "projects," "potential," or
"continue" or the negative of these terms or other comparable terminology. The
Company cautions that there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. These factors include 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 and other laws and regulations to which the
Company is subject, as well as changes in application of existing laws and
regulations; current and future litigation, including the pending EPA civil
action against the Company; the effects, extent and timing of the entry of
additional competition in the markets of the Company; the impact of fluctuations
in commodity prices, interest rates, and customer demand; state and federal rate
regulations; political, legal, and economic conditions and developments in the
United States; 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 the Company; the effects of, and changes in, economic conditions in the areas
in which the Company operates; the direct or indirect effects on the Company's
business resulting from the terrorist incidents on September 11, 2001, or any
similar such incidents or responses to such incidents; financial market
conditions and the results of financing efforts; the timing and acceptance of
the Company's new product and service offerings; the ability of the Company to
obtain additional generating capacity at competitive prices; weather and other
natural phenomena; and other factors discussed elsewhere herein and in other
reports (including Form 10-K) filed from time to time by the Company with the
Securities and Exchange Commission.
12
STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000, and 1999
Mississippi Power Company 2001 Annual Report
- --------------------------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Operating Revenues:
Retail sales $489,153 $498,551 $469,434
Sales for resale --
Non-affiliates 204,623 145,931 131,004
Affiliates 85,652 27,915 19,446
Other revenues 16,637 15,205 13,120
- --------------------------------------------------------------------------------------------------------------
Total operating revenues 796,065 687,602 633,004
- --------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 277,946 191,127 172,686
Purchased power --
Non-affiliates 41,254 56,082 40,080
Affiliates 53,990 51,057 31,007
Other 134,845 115,055 125,291
Maintenance 56,153 52,750 47,085
Depreciation and amortization 54,077 50,275 49,206
Taxes other than income taxes 44,966 48,686 47,893
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 663,231 565,032 513,248
- --------------------------------------------------------------------------------------------------------------
Operating Income 132,834 122,570 119,756
Other Income (Expense):
Interest income 369 347 189
Other, net (532) (647) 1,675
- --------------------------------------------------------------------------------------------------------------
Earnings Before Interest and Income Taxes 132,671 122,270 121,620
- --------------------------------------------------------------------------------------------------------------
Interest Expense and Other:
Interest expense, net 23,568 28,101 27,969
Distributions on preferred securities of subsidiary 2,712 2,712 2,712
- --------------------------------------------------------------------------------------------------------------
Total interest charges and other, net 26,280 30,813 30,681
- --------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 106,391 91,457 90,939
Income taxes 40,533 34,356 34,117
- --------------------------------------------------------------------------------------------------------------
Earnings Before Cumulative Effect of 65,858 57,101 56,822
Accounting Change
Cumulative effect of accounting change--
less income taxes of $43 thousand 70 - -
- --------------------------------------------------------------------------------------------------------------
Net Income 65,928 57,101 56,822
Dividends on Preferred Stock 2,041 2,129 2,013
- --------------------------------------------------------------------------------------------------------------
Net Income After Dividends on Preferred Stock $ 63,887 $ 54,972 $ 54,809
==============================================================================================================
The accompanying notes are an integral part of these statements.
13
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000, and 1999
Mississippi Power Company 2001 Annual Report
- -----------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating Activities:
Net income $ 65,928 $ 57,101 $ 56,822
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 58,105 54,638 53,427
Deferred income taxes and investment tax credits, net (9,718) 752 (4,143)
Other, net 2,441 (1,747) 5,531
Changes in certain current assets and liabilities --
Receivables, net (7,796) (3,231) (39,304)
Fossil fuel stock (20,269) 14,577 (9,379)
Materials and supplies (1,529) (1,056) (1,903)
Accounts payable 53,462 1,309 1,391
Other 11,251 2,952 14,206
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 151,875 125,295 76,648
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (61,193) (81,211) (75,888)
Other (2,988) (9,153) 1,009
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (64,181) (90,364) (74,879)
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (decrease) in notes payable, net (40,027) (1,500) 44,500
Proceeds --
Other long-term debt - 100,000 59,400
Capital contributions from parent company 73,095 12,659 2,028
Retirements --
First mortgage bonds (36,000) - -
Other long-term debt (21,021) (81,405) (50,456)
Preferred stock - - -
Payment of preferred stock dividends (2,041) (2,129) (2,013)
Payment of common stock dividends (50,200) (54,700) (56,100)
Other (81) (498) (282)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (76,275) (27,573) (2,923)
- -----------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 11,419 7,358 (1,154)
Cash and Cash Equivalents at Beginning of Period 7,531 173 1,327
- -----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 18,950 $ 7,531 $173
=======================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $28,126 $30,570 $25,486
Income taxes (net of refunds) 45,761 33,276 39,729
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
14
BALANCE SHEETS
At December 31, 2001 and 2000
Mississippi Power Company 2001 Annual Report
- -------------------------------------------------------------------------------------------------------------------------
Assets 2001 2000
- -------------------------------------------------------------------------------------------------------------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 18,950 $ 7,531
Receivables --
Customer accounts receivable 63,286 72,064
Other accounts and notes receivable 26,068 21,843
Affiliated companies 22,569 10,071
Accumulated provision for uncollectible accounts (856) (571)
Fossil fuel stock, at average cost 31,489 11,220
Materials and supplies, at average cost 23,223 21,694
Other 16,002 8,320
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 200,731 152,172
- -------------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment:
In service 1,741,499 1,665,879
Less accumulated provision for depreciation 698,681 652,891
- -------------------------------------------------------------------------------------------------------------------------
1,042,818 1,012,988
Construction work in progress 38,253 60,951
- -------------------------------------------------------------------------------------------------------------------------
Total property, plant, and equipment 1,081,071 1,073,939
- -------------------------------------------------------------------------------------------------------------------------
Other Property and Investments 1,900 2,268
- -------------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 13,394 13,860
Prepaid pension costs 4,501 434
Debt expense, being amortized 4,396 4,628
Premium on reacquired debt, being amortized 6,719 7,168
Other 20,821 14,312
- -------------------------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 49,831 40,402
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $1,333,533 $1,268,781
=========================================================================================================================
The accompanying notes are an integral part of these balance sheets.
15
BALANCE SHEETS
At December 31, 2001 and 2000
Mississippi Power Company 2001 Annual Report
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 80,020 $ 20
Notes payable 15,973 56,000
Accounts payable --
Affiliated 6,175 10,715
Other 105,834 48,146
Customer deposits 6,540 5,274
Taxes accrued --
Income taxes 14,981 8,769
Other 35,282 36,799
Interest accrued 5,079 4,482
Vacation pay accrued 5,810 5,701
Other 11,483 6,473
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 287,177 182,379
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt (See accompanying statements) 233,753 370,511
- -----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 138,913 139,909
Deferred credits related to income taxes 23,626 25,603
Accumulated deferred investment tax credits 22,268 23,481
Employee benefits provisions 31,041 28,911
Workforce reduction plan 8,263 9,734
Other 30,003 16,546
- -----------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 254,114 244,184
- -----------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding company junior
subordinated notes (See accompanying statements) 35,000 35,000
- -----------------------------------------------------------------------------------------------------------------------
Preferred stock (See accompanying statements) 31,809 31,809
- -----------------------------------------------------------------------------------------------------------------------
Common stockholder's equity (See accompanying statements) 491,680 404,898
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $1,333,533 $1,268,781
=======================================================================================================================
The accompanying notes are an integral part of these balance sheets.
16
STATEMENTS OF CAPITALIZATION
At December 31, 2001 and 2000
Mississippi Power Company 2001 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) (percent of total)
Long-Term Debt:
First mortgage bonds --
Maturity Interest Rates
-------- -------------
June 1, 2023 7.45% $ 34,000 $ 35,000
March 1, 2004 6.60% - 35,000
December 1, 2025 6.875% 30,000 30,000
- -----------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 64,000 100,000
- -----------------------------------------------------------------------------------------------------------------------------
Long-term notes payable --
6.05% due May 1, 2003 35,000 35,000
6.75% due June 30, 2038 52,178 53,179
Adjustable rates (2.0056% at 1/1/02)
due 2000-2002 80,000 100,000
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term notes payable 167,178 188,179
- -----------------------------------------------------------------------------------------------------------------------------
Other long-term debt --
Pollution control revenue bonds --
Collateralized:
5.65% to 5.80% due 2007-2023 26,745 26,765
Non-collateralized:
Variable rates (1.90% to 2.00% at 1/1/02)
due 2020-2028 56,820 56,820
- -----------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 83,565 83,585
- -----------------------------------------------------------------------------------------------------------------------------
Unamortized debt premium (discount), net (970) (1,233)
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $14.5 million) 313,773 370,531
Less amount due within one year 80,020 20
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding amount due within one year $233,753 $370,511 29.5% 43.9%
- -----------------------------------------------------------------------------------------------------------------------------
17
STATEMENTS OF CAPITALIZATION (continued)
At December 31, 2001 and 2000
Mississippi Power Company 2001 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) (percent of total)
Company Obligated Mandatorily
Redeemable Preferred Securities:(Note 8)
$25 liquidation value --
7.75% $ 35,000 $ 35,000
- -----------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $2.7 million) 35,000 35,000 4.4 4.2
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock:
$100 par value
4.40% to 7.00% 31,809 31,809
- -----------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $2.0 million) 31,809 31,809 4.0 3.8
- -----------------------------------------------------------------------------------------------------------------------------
Common Stockholder's Equity:
Common stock, without par value --
Authorized - 1,130,000 shares
Outstanding - 1,121,000 shares in 2001 and 2000 37,691 37,691
Paid-in capital 267,256 194,161
Premium on preferred stock 326 326
Retained earnings 186,407 172,720
- -----------------------------------------------------------------------------------------------------------------------------
Total common stockholder's equity 491,680 404,898 62.1 48.1
- -----------------------------------------------------------------------------------------------------------------------------
Total Capitalization $792,242 $842,218 100.0% 100.0%
=============================================================================================================================
The accompanying notes are an integral part of these statements.
18
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
For the Years Ended December 31, 2001, 2000, and 1999
Mississippi Power Company 2001 Annual Report
- ---------------------------------------------------------------------------------------------------------------------------
Premium on
Common Paid-In Preferred Retained
Stock Capital Stock Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at January 1, 1999 $37,691 $179,474 $326 $173,740 $391,231
Net income after dividends on preferred stock - - - 54,809 54,809
Capital contributions from parent company - 2,028 - - 2,028
Cash dividends on common stock - - - (56,100) (56,100)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 37,691 181,502 326 172,449 391,968
Net income after dividends on preferred stock - - - 54,972 54,972
Capital contributions from parent company - 12,659 - - 12,659
Cash dividends on common stock - - - (54,700) (54,700)
Other - - - (1) (1)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 37,691 194,161 326 172,720 404,898
Net income after dividends on preferred stock - - - 63,887 63,887
Capital contributions from parent company - 73,095 - - 73,095
Cash dividends on common stock - - - (50,200) (50,200)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $37,691 $267,256 $326 $186,407 $491,680
===========================================================================================================================
The accompanying notes are an integral part of these statements.
19
NOTES TO FINANCIAL STATEMENTS
Mississippi Power Company 2001 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Mississippi Power Company is a wholly owned subsidiary of Southern Company,
which is the parent company of five operating companies, a system service
company, Southern Communications Services (Southern LINC), Southern Nuclear
Operating Company (Southern Nuclear), Southern Power Company (Southern Power),
and other direct and indirect subsidiaries. The operating companies -- Alabama
Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power
Company, and Savannah Electric and Power Company -- provide electric service in
four southeastern states. Contracts among the operating companies -- related to
jointly owned generating facilities, interconnecting transmission lines, and the
exchange of electric power -- are regulated by the Federal Energy Regulatory
Commission (FERC) and/or the Securities and Exchange Commission. The system
service company provides, at cost, specialized services to Southern Company and
subsidiary companies. Southern LINC provides digital wireless communications
services to the operating companies and also markets these services to the
public within the Southeast. Southern Nuclear provides services to Southern
Company's nuclear power plants. Southern Power was established in 2001 to
construct, own, and manage Southern Company's competitive generation assets and
sell electricity at market-based rates in the wholesale market.
Southern Company is registered as a holding company under the Public Utility
Holding Company Act of 1935 (PUHCA). Both the Company and its subsidiaries are
subject to the regulatory provisions of the PUHCA. The Company is also subject
to regulation by the FERC and the Mississippi Public Service Commission (MPSC).
The Company follows accounting principles generally accepted in the United
States and complies with the accounting policies and practices prescribed by the
respective commissions. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of estimates, and the actual results may differ from those estimates.
Prior years' data presented in the financial statements have been
reclassified to conform with the current year presentation.
Affiliate Transactions
The Company has an agreement with the system service company under which the
following services are rendered to the Company at cost: general and design
engineering, purchasing, accounting and statistical, finance and treasury, tax,
information resources, marketing, auditing, insurance and pension
administration, human resources, systems and procedures, and other services with
respect to business and operations and power pool operations. Costs for these
services amounted to $44.1 million, $46.2 million, and $45.5 million during
2001, 2000, and 1999, respectively.
Regulatory Assets and Liabilities
The Company is subject to the provisions of Financial Accounting Standards Board
(FASB) Statement No. 71, Accounting for the Effects of Certain Types of
Regulation. Regulatory assets represent probable future revenues to the Company
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are expected to be credited
to customers through the ratemaking process. Regulatory assets and (liabilities)
reflected in the Balance Sheets at December 31 relate to the following:
2001 2000
-------------------------
(in thousands)
Deferred income tax charges $ 13,394 $ 13,860
Vacation pay 5,810 5,701
Premium on reacquired debt 6,719 7,168
Fuel commitments 4,328 -
Property damage reserve (4,044) (3,519)
Deferred income tax credits (23,626) (25,603)
Other, net (1,066) (505)
- ----------------------------------------------------------------
Total $ 1,515 $ (2,898)
================================================================
20
NOTES (continued)
Mississippi Power Company 2001 Annual Report
In the event that a portion of the Company's operations is no longer subject
to the provisions of FASB Statement No. 71, the Company would be required to
write off related regulatory assets and liabilities that are not specifically
recoverable through regulated rates. In addition, the Company would be required
to determine if any impairment to other assets exists, including plant, and
write down the assets, if impaired, to their fair value.
Revenues and Fuel Costs
The Company currently operates as a vertically integrated utility providing
electricity to retail customers within its traditional service area located
within the state of Mississippi and to wholesale customers in the Southeast.
Revenues are recognized as services are rendered. Unbilled revenues are
accrued at the end of each fiscal period. The Company's retail and wholesale
rates include provisions to adjust billings for fluctuations in fuel costs, the
energy component of purchased power costs, and certain other costs. Retail rates
also include provisions to adjust billings for fluctuations in costs for ad
valorem taxes, certain qualifying environmental costs, and energy cost
management activities. Revenues are adjusted for differences between actual
allowable amounts and the amounts included in rates.
The Company has a diversified base of customers. No single customer or
industry comprises 10 percent or more of revenues. For all periods presented,
uncollectible accounts continued to average less than 1 percent of revenues.
Depreciation
Depreciation of the original cost of plant in service is provided primarily by
using composite straight-line rates, which approximated 3.5 percent in 2001, 3.5
percent in 2000, and 3.3 percent in 1999. When property subject to depreciation
is retired or otherwise disposed of in the normal course of business, its
original cost -- together with the cost of removal, less salvage -- is charged
to accumulated depreciation. Minor items of property included in the original
cost of the plant are retired when the related property unit is retired.
Depreciation expense includes an amount for the expected cost of removal of
facilities.
Income Taxes
The Company uses the liability method of accounting for deferred income taxes
and provides deferred income taxes for all significant income tax temporary
differences. Investment tax credits utilized are deferred and amortized to
income over the average lives of the related property.
Property, Plant, and Equipment
Property, plant, and equipment is stated at original cost. Original cost
includes: materials; labor; minor items of property; appropriate administrative
and general costs; payroll-related costs such as taxes, pensions, and other
benefits; and the estimated cost of funds used during construction, if
applicable. The cost of maintenance, repairs, and replacement of minor items of
property is charged to maintenance expense except for the maintenance of coal
cars and a portion of the railway track maintenance, which are charged to fuel
stock. The cost of replacements of property -- exclusive of minor items of
property -- is capitalized.
Cash and Cash Equivalents
For purposes of the Statements of Cash Flows, temporary cash investments are
considered cash equivalents. Temporary cash investments are securities with
original maturities of 90 days or less.
Financial Instruments
Effective January 2001, the Company adopted FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. The 2001 impact
on net income was immaterial. The Company uses derivative financial instruments
to hedge exposure to fluctuations in interest rates and certain commodity
prices. Gains and losses on qualifying hedges are deferred and recognized either
as income or as an adjustment to the carrying amount of the hedged item when the
transaction occurs. The Company is exposed to losses related to financial
instruments in the event of counterparties' nonperformance. The Company has
established controls to determine and monitor the creditworthiness of
counterparties in order to mitigate the Company's exposure to counterparty
credit risk.
The Company and its affiliates, through the system service company acting as
their agent, enters into commodity related forward and option contracts to limit
21
NOTES (continued)
Mississippi Power Company 2001 Annual Report
exposure to changing prices on certain fuel purchases and electricity purchases
and sales. Substantially all of these bulk energy purchases and sales contracts
meet the definition of a derivative under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. In many cases, these fuel and
electricity contracts qualify for normal purchase and sale exceptions under
Statement No. 133 and are accounted for under the accrual method. Other
contracts qualify as cash flow hedges of anticipated transactions, resulting in
the deferral of related gains and losses, and are recorded in other
comprehensive income until the hedged transactions occur. Any ineffectiveness is
recognized currently in net income. Contracts that do not qualify for the normal
purchase and sale exception and that do not meet the hedge requirements are
marked to market through current period income.
In June 2001, the MPSC approved the Company's request to implement an Energy
Cost Management Clause (ECM). ECM, among other things, allows the Company to
utilize financial instruments that are used to hedge its fuel commitments.
Amounts paid or received as a result of financial settlement of these
instruments are classified as fuel expense and are included in the ECM factor
applied to customer billings. The Company records the fair value of these
financial instruments (cash flow hedges) in its financial statements in
accordance with FASB Statement No. 133 with a related regulatory asset or
liability recorded under the provisions of FASB Statement No. 71.
As of December 31, 2001, the Company had financial instruments related to
natural gas commodity contracts that had a contract value of approximately $31
million and $30 million expiring in 2002 and 2003, respectively. The market
values as of December 31, 2001 for these contracts were approximately $27
million and $30 million, respectively. The amounts settled and recognized in the
financial statements for 2001 were not material. Currently, the Company does not
have any fixed price natural gas commitments, either physical or financial,
beyond 2003.
The Company's other financial instruments for which the carrying amount did
not equal fair value at December 31 were as follows:
Carrying Fair
Amount Value
---------------------------
(in millions)
Long-term debt:
At December 31, 2001 $314 $309
At December 31, 2000 $371 $362
Capital trust preferred
securities:
At December 31, 2001 $ 35 $ 35
At December 31, 2000 $ 35 $ 34
- --------------------------------------------------------------
The fair values for long-term debt and preferred securities were based on
either closing market price or closing price of comparable instruments.
Materials and Supplies
Generally, materials and supplies include the cost of transmission,
distribution, and generating plant materials. Materials are charged to inventory
when purchased and then expensed or capitalized to plant, as appropriate, when
used or installed.
Provision for Property Damage
The Company is self-insured for the cost of storm, fire, and other uninsured
casualty damage to its property, including transmission and distribution
facilities. As permitted by regulatory authorities, the Company accrues for the
cost of such damage by charging expense and crediting an accumulated provision.
The cost of repairing damage resulting from such events that individually exceed
$50 thousand is charged to the accumulated provision. In 1999, an order from the
MPSC increased the maximum Property Damage Reserve from $18 million to $23
million and allows an annual accrual of up to $4.6 million. In 2001, the Company
provided for such costs by charges to income of $2.5 million. In 2000 and 1999,
the Company provided for such costs by charges to income of $3.5 million and
$4.4 million, respectively. As of December 31, 2001, the accumulated provision
amounted to $4.0 million.
2. RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, pension plan that covers
substantially all employees. The Company provides certain medical care and life
insurance benefits for retired employees. Substantially all these employees may
become eligible for such benefits when they retire. The Company funds trusts to
22
NOTES (continued)
Mississippi Power Company 2001 Annual Report
the extent deductible under federal income tax regulations or the extent
required by regulatory authorities. In late 2000, the Company adopted several
pension and postretirement benefits plan changes that had the effect of
increasing benefits to both current and future retirees. The measurement date
for plan assets and obligations is September 30 for each year.
Pension Plan
Changes during the year in the projected benefit obligations and in the fair
value of plan assets were as follows:
Projected
Benefit Obligations
--------------------------
2001 2000
- ---------------------------------------------------------------------
(in thousands)
Balance at beginning of year $154,411 $148,657
Service cost 4,797 4,357
Interest cost 11,817 10,912
Benefits paid (8,456) (8,169)
Actuarial gain and employee
transfers 1,268 (1,646)
Amendments 8,406 300
Other (76) -
- ---------------------------------------------------------------------
Balance at end of year $172,167 $154,411
=====================================================================
Plan Assets
--------------------------
2001 2000
- ---------------------------------------------------------------------
(in thousands)
Balance at beginning of year $256,648 $221,487
Actual return on plan assets (37,214) 39,737
Benefits paid (7,850) (7,593)
Employee transfers (38) 3,017
- ---------------------------------------------------------------------
Balance at end of year $211,546 $256,648
=====================================================================
The accrued pension costs recognized in the Balance Sheets were as follows:
2001 2000
- ---------------------------------------------------------------------
(in thousands)
Funded status $ 39,379 $ 102,238
Unrecognized transition obligation (2,716) (3,253)
Unrecognized prior service cost 13,656 6,298
Unrecognized net gain (45,818) (104,849)
- ---------------------------------------------------------------------
Prepaid asset recognized in the
Balance Sheets $ 4,501 $ 434
=====================================================================
Components of the pension plans' net periodic cost were as follows:
2001 2000 1999
- ---------------------------------------------------------------
(in thousands)
Service Cost $ 4,797 $ 4,357 $ 4,501
Interest cost 11,818 10,912 10,025
Expected return on
plan assets (17,328) (15,910) (14,681)
Recognized net gain (3,012) (2,577) (1,670)
Net amortization 511 76 76
- ---------------------------------------------------------------
Net pension income $ (3,214) $ (3,142) $ (1,749)
===============================================================
Postretirement Benefits
Changes during the year in the accumulated benefit obligations and in the fair
value of plan assets were as follows:
Accumulated
Benefit Obligations
---------------------------
2001 2000
- ----------------------------------------------------------------
(in thousands)
Balance at beginning of year $44,952 $45,390
Service cost 922 830
Interest cost 3,411 3,309
Benefits paid (2,918) (2,628)
Actuarial gain and
employee transfers 3,256 (1,949)
Amendments 1,900 -
----------------------------------------------------------------
Balance at end of year $51,523 $44,952
================================================================
Plan Assets
---------------------------
2001 2000
- ----------------------------------------------------------------
(in thousands)
Balance at beginning of year $17,843 $14,998
Actual return on plan assets (1,888) 2,511
Employer contributions 3,232 2,961
Benefits paid (2,918) (2,627)
- ----------------------------------------------------------------
Balance at end of year $16,269 $17,843
================================================================
23
NOTES (continued)
Mississippi Power Company 2001 Annual Report
The accrued postretirement costs recognized in the Balance Sheets were as
follows:
2001 2000
- ------------------------------------------------------------------
(in thousands)
Funded status $(35,254) $(27,109)
Unrecognized transition obligation 3,928 4,275
Unrecognized prior service cost 1,821 -
Unrecognized net gain (40) (6,632)
Fourth quarter contributions 1,268 1,065
- ------------------------------------------------------------------
Accrued liability recognized in the
Balance Sheets $(28,277) $(28,401)
==================================================================
Components of the postretirement plans' net periodic cost
were as follows:
2001 2000 1999
- ------------------------------------------------------------------
(in thousands)
Service cost $ 922 $ 830 $ 981
Interest cost 3,411 3,309 3,105
Expected return on
plan assets (1,409) (1,235) $(1,100)
Transition obligation 346 346 346
Prior service cost 80 - -
Recognized net loss (38) - -
- ------------------------------------------------------------------
Net postretirement cost $ 3,312 $ 3,250 $ 3,332
==================================================================
The weighted average rates assumed in the actuarial calculations
for both the pension plans and postretirement benefits plan were:
2001 2000
---------------------------------------------------------------
Discount 7.50% 7.50%
Annual salary increase 5.00 5.00
Long-term return on plan assets 8.50 8.50
---------------------------------------------------------------
An additional assumption used in measuring the accumulated postretirement
benefit obligation was a weighted average medical care cost trend rate of 9.25
percent for 2001, decreasing gradually to 5.25 percent through the year 2010 and
remaining at that level thereafter. An annual increase or decrease in the
assumed medical care cost trend rate of 1 percent would affect the accumulated
benefit obligation and the service and interest cost components at December 31,
2001 as follows:
1 Percent 1 Percent
Increase Decrease
- -----------------------------------------------------------------
(in thousands)
Benefit obligation $4,037 $3,551
Service and interest costs 314 273
- -----------------------------------------------------------------
Employee Savings Plan
The Company also sponsors a 401(k) defined contribution plan covering
substantially all employees. The Company provides a 75 percent matching
contribution up to 6 percent of an employee's base salary. Total matching
contributions made to the plan for the years 2001, 2000, and 1999 were $2.5
million, $2.3 million, and $2.2 million, respectively.
3. LITIGATION AND REGULATORY MATTERS
General
The Company is subject to certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the Company's financial condition.
Environmental Litigation
On November 3, 1999, the Environmental Protection Agency (EPA) brought a civil
action in the U.S. District Court in Georgia against Alabama Power, Georgia
Power and the system service company. The complaint alleges violations of the
New Source Review provisions of the Clean Air Act with respect to five
coal-fired generating facilities in Alabama and Georgia. The civil action
requests penalties and injunctive relief, including an order requiring the
installation of the best available control technology at the affected units. The
Clean Air Act authorizes civil penalties of up to $27,500 per day per violation
at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per
day.
The EPA concurrently issued to the operating companies a notice of
violation related to 10 generating facilities, which includes the five
facilities mentioned previously, and the Company's plants Watson and Greene
County. In early 2000, the EPA filed a motion to amend its complaint to add the
violations alleged in its notice of violation and to add Gulf Power, Savannah
24
NOTES (continued)
Mississippi Power Company 2001 Annual Report
Electric and the Company as defendants. The complaint and notice of violation
are similar to those brought against and issued to several other electric
utilities. These complaints and notices of violation allege that the utilities
had failed to secure necessary permits or install additional pollution control
equipment when performing maintenance and construction at coal burning plants
constructed or under construction prior to 1978. The U.S. District Court in
Georgia granted Alabama Power's motion to dismiss for lack of jurisdiction and
granted the system service company's motion to dismiss on the grounds that it
neither owned nor operated the generating units involved in the proceedings. The
court granted the EPA's motion to add Savannah Electric as a defendant, but it
denied the motion to add Gulf Power and the Company based on lack of
jurisdiction over those companies. The court directed the EPA to re-file its
amended complaint limiting claims to those brought against Georgia Power and
Savannah Electric. The EPA re-filed those claims as directed by the court. Also,
the EPA re-filed its claims against Alabama Power in U.S. District Court in
Alabama. It has not re-filed against Gulf Power, the system service company, or
the Company.
The Alabama Power, Georgia Power, and Savannah Electric cases have been
stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals
for the Eleventh Circuit in the appeal of a very similar New Source Review
enforcement action against the Tennessee Valley Authority (TVA). The TVA case
involves many of the same legal issues raised by the actions against Alabama
Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA case
could have a significant adverse impact on Alabama Power and Georgia Power, both
companies are parties to that case as well. The U.S. District Court in Alabama
has indicated that it will revisit the issue of a continued stay in April 2002.
The U.S. District Court in Georgia is currently considering a motion by the EPA
to reopen the Georgia case. Georgia Power and Savannah Electric have opposed
that motion.
The Company believes that it complied with applicable laws and the EPA's
regulations and interpretations in effect at the time the work in question took
place. An adverse outcome of this matter could require substantial capital
expenditures that cannot be determined at this time and could possibly require
payment of substantial penalties. This could affect future results of
operations, cash flows and possibly financial condition unless such costs can be
recovered through regulated rates.
Retail Rate Adjustment Plans
The Company's retail base rates are set under a Performance Evaluation Plan
(PEP) approved by the MPSC in 1994. PEP was designed with the objective that the
plan would reduce the impact of rate changes on the customer and provide
incentives for the Company to keep customer prices low. PEP includes a mechanism
for rate adjustments based on the Company's ability to maintain low rates for
customers and on the Company's performance as measured by three indicators that
emphasize price and service to the customer. PEP provides for semiannual
evaluations of the Company's performance-based return on investment. Any change
in rates is limited to 2 percent of retail revenues per evaluation period.
In August 2001, the Company filed a request with the MPSC for a retail rate
increase of approximately $46 million. In order to consider the Company's
request, the MPSC suspended the semi-annual evaluations under PEP. In December
2001, after a full investigation and hearing on the Company's request, the MPSC
approved an increase of approximately $39 million, which took effect in January
2002. Additionally, the MPSC ordered the Company to reactivate the semi-annual
evaluations under PEP, beginning in February 2003 for the year 2002. PEP will
remain in effect until the MPSC modifies, suspends, or terminates the plan. The
MPSC also set for hearing in 2002 a review of the return on equity models used
in PEP in setting the Company's authorized return on equity. This proceeding
will conclude in 2002, so that changes to the PEP return on equity models, if
any, may be incorporated into the February 2003 PEP evaluation filing for the
period ending December 31, 2002. The outcome of this matter and any future
impact to the Company cannot now be determined.
Environmental Compliance Overview Plan
The MPSC approved the Company's Environmental Compliance Overview Plan (ECO
Plan) in 1992. The ECO Plan establishes procedures to facilitate the MPSC's
overview of the Company's environmental strategy and provides for recovery of
costs (including costs of capital) associated with environmental projects
approved by the MPSC. Under the ECO Plan, any increase in the annual revenue
25
NOTES (continued)
Mississippi Power Company 2001 Annual Report
requirement is limited to 2 percent of retail revenues. However, the ECO Plan
also provides for carryover of any amount over the 2 percent limit into the next
year's revenue requirement. The Company conducts studies, when possible, to
determine the extent of any required environmental remediation. Should such
remediation be determined to be probable, reasonable estimates of costs to clean
up such sites are developed and recognized in the financial statements. The
Company recovers such costs under the ECO Plan as they are incurred, as provided
for in the Company's 1995 ECO Plan Order. The Company filed its 2002 ECO Plan in
January, which, if approved as filed, will result in a slight increase in
customer prices.
Approval for New Capacity
In January 1998, the Company was granted a Certificate of Public Convenience and
Necessity by the MPSC to build approximately 1,064 megawatts of combined cycle
generation at the Company's Plant Daniel site, to be placed in service by June
2001. In December 1998, the Company requested approval to transfer the ownership
rights under the certificate to Escatawpa Funding, Limited Partnership
(Escatawpa), which will lease the facility to the Company (see Note 4,
Commitments). In September 2000, the Company and the Mississippi Public
Utilities Staff entered, and the MPSC in October 2000 approved, a new
stipulation that modifies a January 1999 stipulation and order covering cost
allocation. The 1999 stipulation and MPSC order would have excluded the new
capacity from retail rate base and would have assigned the Company's existing
generating facilities entirely to the retail jurisdiction. The new stipulation
and MPSC order allocates a pro-rata share of the new capacity along with the
Company's existing generating capacity to the retail jurisdiction. The Company's
2001 retail rate case reflected this methodology and the MPSC's December 2001
order on the retail rate case filing approved the Company's cost allocations.
4. COMMITMENTS
Construction Program
The Company is engaged in continuous construction programs, the costs of which
are currently estimated to total $84 million in 2002, $72 million in 2003, and
$85 million in 2004. The construction program is subject to periodic review and
revision, and actual construction costs may vary from the above estimates
because of numerous factors. These factors include changes in business
conditions; revised load growth estimates; changes in environmental regulations;
increasing costs of labor, equipment and materials; and cost of capital.
Significant construction will continue related to transmission and distribution
facilities, and the upgrading of generating plants.
Lease Agreements
In 1989, the Company entered into a twenty-two year operating lease agreement
for the use of 495 aluminum railcars. In 1994, a second lease agreement for the
use of 250 additional aluminum railcars was also entered into for twenty-two
years. The Company has the option to purchase the 745 railcars at the greater of
lease termination value or fair market value, or to renew the leases at the end
of the lease term. Both of these leases were for the transport of coal to Plant
Daniel.
Gulf Power, as joint owner of Plant Daniel Units 1 and 2, is responsible for
one half of the lease cost. The Company's share (50%) of the leases, charged to
fuel stock, was $1.9 million in 2001, $2.1 million in 2000, and $2.8 million in
1999. The Company's annual lease payments for 2002 through 2006 will average
approximately $2.0 million and after 2006, lease payments total in aggregate
approximately $12 million.
In 1999, the Company signed an Agreement for Lease and a Lease Agreement
with Escatawpa Funding, Limited Partnership (Escatawpa). These agreements called
for the Company to design and construct, as agent for Escatawpa, a 1,064
megawatt natural gas combined cycle facility at the Company's Plant Victor J.
Daniel Facility (Facility). In May 2001, the Facility was completed and placed
into commercial operation. Effective with commercial operation of the Facility
at Plant Daniel, the initial 10-year lease term under its lease arrangement for
the Facility with Escatawpa began. The completion cost was approximately $370
million. The lease provides for a residual value guarantee (approximately 71% of
the completion cost) by the Company that is due upon termination of the lease in
certain circumstances. The lease also includes a purchase and renewal option.
Upon termination of the lease, at the Company's option, the Company may either
exercise its purchase option or the Facility can be sold to a third party. The
Company expects that the fair market value of the leased Facility would
26
NOTES (continued)
Mississippi Power Company 2001 Annual Report
substantially reduce or eliminate the Company's payment under the residual value
guarantee. In 2001, the Company recognized approximately $18 million in lease
expense. The Company estimates that its annual amount of future minimum
operating lease payments, exclusive of any payment related to the residual value
guarantee, as of December 31, 2001, were as follows:
Year Lease Payments
- ---- --------------
(in millions)
2002 $26.4
2003 25.5
2004 25.2
2005 25.0
2006 24.7
2007 and thereafter 143.0
- ----------------------------------------------------------
Total commitments $269.8
==========================================================
Fuel
To supply a portion of the fuel requirements of its generating plants, the
Company has entered into various long-term commitments for the procurement of
fuel. In most cases, these contracts contain provisions for price escalations,
minimum production levels, and other financial commitments. In addition, the
Company utilizes financial instruments to eliminated price volatility. Total
estimated fixed-price obligations at December 31, 2001, were as follows:
Year Fuel
- ---- ----
(in millions)
2002 $225
2003 188
2004 7
2005 7
2006 7
2007 and thereafter 86
- ----------------------------------------------------------
Total commitments $520
==========================================================
In addition, the system service company acts as agent for the five operating
companies and Southern Power with regard to natural gas purchases. Natural gas
purchases (in dollars) are based on various indices at the actual time of
delivery; therefore, only the volume commitments are firm. The Company's
committed volumes allocated based on usage projections, as of December 31, 2001
are as follows:
Year Natural Gas
- ---- -----------
(MMBtu)
2002 40,345,416
2003 39,723,953
2004 22,521,216
2005 11,161,628
2006 8,044,570
2007 and thereafter 2,981,474
- ------------------------------------------------------------
Total commitments 124,778,257
============================================================
Additional commitments for fuel will be required in the future to supply the
Company's fuel needs.
5. JOINT OWNERSHIP AGREEMENTS
The Company and Alabama Power own as tenants in common Units 1 and 2 at Plant
Greene County located in Alabama. Additionally, the Company and Gulf Power own
as tenants in common Units 1 and 2 at Plant Daniel located in Mississippi.
At December 31, 2001, the Company's percentage ownership and investment in
these jointly owned facilities were as follows:
Company's
Generating Total Percent Gross Accumulated
Plant Capacity Ownership Investment Depreciation
----- -------- --------- ---------- ------------
(Megawatts) (in thousands)
Greene County
Units 1 and 2 500 40% $ 65,486 $ 35,116
Daniel
Units 1 and 2 1,000 50% $236,979 $116,766
--------------------------------------------------------------
The Company's share of plant operating expenses is included in the
corresponding operating expenses in the Statements of Income.
6. LONG-TERM CAPACITY SALES AND LEASE
AGREEMENTS
The Company and the other operating companies of Southern Company have long-term
contractual agreements for the sale of capacity and energy to certain
non-affiliated utilities located outside the system's service area. Because the
energy is generally sold at cost under these agreements, profitability is
primarily affected by revenues from capacity sales. The Company's capacity
revenues under these agreements were not material during the periods reported.
27
NOTES (continued)
Mississippi Power Company 2001 Annual Report
In 1984, the Company and Entergy Corp. (formerly Gulf States Utilities)
entered into a 40-year transmission facilities agreement whereby Entergy began
paying a use fee to the Company covering all expenses relative to ownership and
operation and maintenance of a 500 kV line, including amortization of its
original $57 million cost. For the three years ended 2001, use fees collected
under this agreement, net of related expenses, amounted to approximately $2.7
million each year and are included within Other Income in the Statements of
Income.
During 2000, the Company entered into a 10-year capacity lease that began in
mid 2001. The minimum capacity lease revenue that the Company will receive will
average approximately $21 million per year over the 10-year period. Capacity
revenues for 2001 were approximately $12.3 million and were classified as sales
for resale in the financial statements.
7. INCOME TAXES
At December 31, 2001, the tax-related regulatory assets and liabilities were $13
million and $24 million, respectively. These assets are attributable to tax
benefits flowed through to customers in prior years and to taxes applicable to
capitalized interest. These liabilities are attributable to deferred taxes
previously recognized at rates higher than current enacted tax law and to
unamortized investment tax credits.
Details of the federal and state income tax provisions are shown below:
2001 2000 1999
----------------------------------
(in thousands)
Total provision for
income taxes
Federal --
Current $43,596 $28,934 $33,379
Deferred (8,661) 622 (3,973)
-----------------------------------------------------------------
34,935 29,556 29,406
-----------------------------------------------------------------
State --
Current 6,698 4,670 4,881
Deferred (1,057) 130 (170)
-----------------------------------------------------------------
5,641 4,800 4,711
-----------------------------------------------------------------
Total $40,576 $34,356 $34,117
=================================================================
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities are as follows:
2001 2000
-------------------------------
(in thousands)
Deferred tax liabilities:
Accelerated depreciation $147,147 $151,278
Basis differences 8,271 8,559
Other 34,544 24,136
---------------------------------------------------------------
Total 189,962 183,973
---------------------------------------------------------------
Deferred tax assets:
Other property
basis differences 15,983 17,147
Pension and
other benefits 9,474 9,528
Property insurance 1,547 3,558
Unbilled fuel 5,596 5,727
Other 27,269 9,669
---------------------------------------------------------------
Total 59,869 45,629
---------------------------------------------------------------
Total deferred tax
liabilities, net 130,093 138,344
Portion included in current
assets, net 8,820 1,565
---------------------------------------------------------------
Accumulated deferred
income taxes in the
Balance Sheets $138,913 $139,909
===============================================================
Deferred investment tax credits are amortized over the lives of the related
property with such amortization normally applied as a credit to reduce
depreciation in the Statements of Income. Credits amortized in this manner
amounted to $1.2 million in 2001, 2000, and 1999. At December 31, 2001, all
investment tax credits available to reduce federal income taxes payable had been
utilized.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
2001 2000 1999
--------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income tax, net of
federal deduction 3.4 3.4 3.4
Non-deductible book
depreciation 0.5 0.6 0.7
Other (0.8) (1.5) (1.6)
----------------------------------------------------------------
Effective income tax rate 38.1% 37.5% 37.5%
================================================================
Southern Company files a consolidated federal income tax return. Under a
joint consolidated income tax agreement, each subsidiary's current and deferred
tax expense is computed on a stand-alone basis. In accordance with Internal
Revenue Service regulations, each company is jointly and severally liable for
the tax liability.
28
NOTES (continued)
Mississippi Power Company 2001 Annual Report
8. CAPITALIZATION
Preferred Securities
In February 1997, Mississippi Power Capital Trust I (Trust I), of which the
Company owns all the common securities, issued $35 million of 7.75 percent
mandatorily redeemable preferred securities. Substantially all of the assets of
Trust I are $36 million aggregate principal amount of the Company's 7.75 percent
junior subordinated notes due February 15, 2037.
The Company considers that the mechanisms and obligations relating to the
preferred securities, taken together, constitute a full and unconditional
guarantee by the Company of the Trust's payment obligations with respect to the
preferred securities.
Trust I is a subsidiary of the Company, and accordingly is consolidated in
the Company's financial statements.
Long-Term Debt Due Within One Year
A summary of the improvement fund requirements and scheduled maturities and
redemptions of long-term debt due within one year is as follows:
2001 2000
---------------------
(in thousands)
Bond improvement fund requirement $ 650 $1,000
Less: Portion to be satisfied by
certifying property additions 650 1,000
--------------------------------------------------------------
Cash sinking fund requirement - -
Current portion of other long-term debt 80,000 -
Pollution control bond cash
sinking fund requirements 20 20
--------------------------------------------------------------
Total $80,020 $ 20
==============================================================
The first mortgage bond improvement fund requirement is one percent of each
outstanding series authenticated under the indenture of the Company prior to
January 1 of each year, other than first mortgage bonds issued as collateral
security for certain pollution control obligations. The requirement must be
satisfied by June 1 of each year by depositing cash or reacquiring bonds, or by
pledging additional property equal to 166-2/3 percent of such requirement.
Bank Credit Arrangements
At December 31, 2001, the Company had total committed credit agreements with
banks for approximately $114.5 million. At year-end 2001, the unused portion of
these committed credit agreements was approximately $114.5 million. These credit
agreements expire at various dates in 2002 and 2003. Some of these agreements
allow short-term borrowings to be converted into term loans, payable in 12 equal
quarterly installments, with the first installment due at the end of the first
calendar quarter after the applicable termination date or at an earlier date at
the Company's option. In connection with these credit arrangements, the Company
agrees to pay commitment fees based on the unused portions of the commitments or
to maintain compensating balances with the banks. The amount of commercial paper
outstanding at December 31, 2001 was $16 million.
Assets Subject to Lien
The Company's mortgage indenture dated as of September 1, 1941, as amended and
supplemented, which secures the first mortgage bonds issued by the Company,
constitutes a direct first lien on substantially all of the Company's fixed
property and franchises.
Dividend Restrictions
The Company's first mortgage bond indenture and the corporate charter contain
various common stock dividend restrictions. At December 31, 2001, approximately
$118 million of retained earnings was restricted against the payment of cash
dividends on common stock under the most restrictive terms of the mortgage
indenture or corporate charter.
29
NOTES (continued)
Mississippi Power Company 2001 Annual Report
9. QUARTERLY FINANCIAL DATA
(UNAUDITED)
Summarized quarterly financial data for 2001 and 2000 are as follows:
Net Income
After Dividends
Operating Operating On Preferred
Quarter Ended Revenues Income Stock
- -------------------------------------------------------------------
(in thousands)
March 2001 $171,312 $23,615 $ 9,757
June 2001 203,949 32,640 16,571
September 2001 235,916 53,263 30,379
December 2001 184,888 23,315 7,180
March 2000 $134,705 $18,593 $ 6,722
June 2000 176,028 28,130 12,232
September 2000 220,119 53,943 28,762
December 2000 156,750 21,904 7,256
- -------------------------------------------------------------------
The Company's business is influenced by seasonal weather conditions and the
timing of rate changes.
30
SELECTED FINANCIAL AND OPERATING DATA 1997-2001
Mississippi Power Company 2001 Annual Report
- --------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)* $796,065 $687,602 $633,004 $595,131 $543,588
Net Income after Dividends
on Preferred Stock (in thousands) $63,887 $54,972 $54,809 $55,105 $54,010
Cash Dividends
on Common Stock (in thousands) $50,200 $54,700 $56,100 $51,700 $49,400
Return on Average Common Equity (percent) 14.25 13.80 14.00 14.15 14.00
Total Assets (in thousands) $1,333,533 $1,268,781 $1,251,136 $1,189,605 $1,166,829
Gross Property Additions (in thousands) $61,193 $81,211 $75,888 $68,231 $55,375
- --------------------------------------------------------------------------------------------------------------------------------
Capitalization (in thousands):
Common stock equity $491,680 $404,898 $391,968 $391,231 $387,824
Preferred stock 31,809 31,809 31,809 31,809 31,896
Company obligated mandatorily
redeemable preferred securities 35,000 35,000 35,000 35,000 35,000
Long-term debt 233,753 370,511 321,802 292,744 291,665
- --------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) $792,242 $842,218 $780,579 $750,784 $746,385
================================================================================================================================
Capitalization Ratios (percent):
Common stock equity 62.1 48.1 50.2 52.1 52.0
Preferred stock 4.0 3.8 4.1 4.2 4.3
Company obligated mandatorily
redeemable preferred securities 4.4 4.2 4.5 4.7 4.7
Long-term debt 29.5 43.9 41.2 39.0 39.0
- --------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0
================================================================================================================================
Security Ratings:
First Mortgage Bonds -
Moody's Aa3 Aa3 Aa3 Aa3 Aa3
Standard and Poor's A+ A+ AA- AA- AA-
Fitch AA- AA- AA- AA- AA-
Preferred Stock -
Moody's A3 a1 a1 a1 a1
Standard and Poor's BBB+ BBB+ A- A A
Fitch A A A A+ A+
Unsecured Long-Term Debt -
Moody's A1 - - - -
Standard and Poor's A - - - -
Fitch A+ - - - -
================================================================================================================================
Customers (year-end):
Residential 158,852 158,253 157,592 156,530 156,650
Commercial 32,538 32,372 31,837 31,319 31,667
Industrial 498 517 546 587 642
Other 173 206 202 200 200
- --------------------------------------------------------------------------------------------------------------------------------
Total 192,061 191,348 190,177 188,636 189,159
================================================================================================================================
Employees (year-end): 1,316 1,319 1,328 1,230 1,245
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* 1999 data includes the true-up of the unbilled revenue estimates.
31
SELECTED FINANCIAL AND OPERATING DATA 1997-2001 (continued)
Mississippi Power Company 2001 Annual Report
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2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands)*:
Residential $ 164,716 $170,729 $159,945 $157,642 $138,608
Commercial 163,253 163,552 153,936 145,677 134,208
Industrial 156,525 159,705 151,244 135,039 140,233
Other 4,659 4,565 4,309 4,209 4,193
- ------------------------------------------------------------------------------------------------------------------------------------
Total retail 489,153 498,551 469,434 442,567 417,242
Sales for resale - non-affiliates 204,623 145,931 131,004 121,225 105,141
Sales for resale - affiliates 85,652 27,915 19,446 18,285 10,143
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 779,428 672,397 619,884 582,077 532,526
Other revenues 16,637 15,205 13,120 13,054 11,062
- ------------------------------------------------------------------------------------------------------------------------------------
Total $796,065 $687,602 $633,004 $595,131 $543,588
====================================================================================================================================
Kilowatt-Hour Sales (in thousands)*:
Residential 2,162,623 2,286,143 2,248,255 2,248,915 2,039,042
Commercial 2,840,840 2,883,197 2,847,342 2,623,276 2,407,520
Industrial 4,275,781 4,376,171 4,407,445 3,729,166 3,981,875
Other 41,009 41,153 40,091 39,772 40,508
- ------------------------------------------------------------------------------------------------------------------------------------
Total retail 9,320,253 9,586,664 9,543,133 8,641,129 8,468,945
Sales for resale - non-affiliates 5,011,212 3,674,621 3,256,175 3,157,837 2,895,182
Sales for resale - affiliates 2,952,455 452,611 539,939 552,142 478,884
- ------------------------------------------------------------------------------------------------------------------------------------
Total 17,283,920 13,713,896 13,339,247 12,351,108 11,843,011
====================================================================================================================================
Average Revenue Per Kilowatt-Hour (cents)*:
Residential 7.62 7.47 7.11 7.01 6.80
Commercial 5.75 5.67 5.41 5.55 5.57
Industrial 3.66 3.65 3.43 3.62 3.52
Total retail 5.25 5.20 4.92 5.12 4.93
Sales for resale 3.64 4.21 3.96 3.76 3.42
Total sales 4.51 4.90 4.65 4.71 4.50
Residential Average Annual
Kilowatt-Hour Use Per Customer * 13,634 14,445 14,301 14,376 13,132
Residential Average Annual
Revenue Per Customer * $1,038.41 $1,078.76 $1,017.42 $1,007.68 $892.68
Plant Nameplate Capacity
Ratings (year-end) (megawatts) 3,156 2,086 2,086 2,086 2,086
Maximum Peak-Hour Demand (megawatts):
Winter 2,249 2,305 2,125 1,740 1,922
Summer 2,466 2,593 2,439 2,339 2,209
Annual Load Factor (percent) 60.7 59.3 59.6 58.0 59.1
Plant Availability Fossil-Steam (percent): 92.8 92.6 91.0 90.0 92.4
- ------------------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 52.0 67.8 69.4 66.5 70.5
Oil and gas 35.9 13.5 15.9 14.5 12.5
Purchased power -
From non-affiliates 3.1 7.7 6.2 8.0 3.0
From affiliates 9.0 11.0 8.5 11.0 14.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0 100.0
====================================================================================================================================
* 1999 data includes the true-up of the unbilled revenue estimates.
32