==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
1-3526 The Southern Company 58-0690070
(A Delaware Corporation)
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(404) 506-5000
1-3164 Alabama Power Company 63-0004250
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35291
(205) 257-1000
1-6468 Georgia Power Company 58-0257110
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
0-2429 Gulf Power Company 59-0276810
(A Maine Corporation)
One Energy Place
Pensacola, Florida 32520
(850) 444-6111
0-6849 Mississippi Power Company 64-0205820
(A Mississippi Corporation)
2992 West Beach
Gulfport, Mississippi 39501
(228) 864-1211
1-5072 Savannah Electric and Power Company 58-0418070
(A Georgia Corporation)
600 East Bay Street
Savannah, Georgia 31401
(912) 644-7171
================= =========================================== =================
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No____
Description of Shares Outstanding
Registrant Common Stock at July 31, 2001
The Southern Company Par Value $5 Per Share 689,744,563
Alabama Power Company Par Value $40 Per Share 6,000,000
Georgia Power Company No Par Value 7,761,500
Gulf Power Company No Par Value 992,717
Mississippi Power Company Without Par Value 1,121,000
Savannah Electric and Power Company Par Value $5 Per Share 10,844,635
This combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company and Savannah Electric and Power Company. Information contained
herein relating to any individual company is filed by such company on its own
behalf. Each company makes no representation as to information relating to the
other companies.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2001
Page
Number
DEFINITIONS............................................................................................................... 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
Condensed Consolidated Statements of Income........................................................ 7
Condensed Consolidated Statements of Cash Flows.................................................... 8
Condensed Consolidated Balance Sheets.............................................................. 9
Condensed Consolidated Statements of Comprehensive Income and
Accumulated Other Comprehensive Income.......................................................... 11
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 12
Alabama Power Company
Condensed Statements of Income..................................................................... 20
Condensed Statements of Cash Flows................................................................. 21
Condensed Balance Sheets........................................................................... 22
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 24
Georgia Power Company
Condensed Statements of Income..................................................................... 29
Condensed Statements of Cash Flows................................................................. 30
Condensed Balance Sheets........................................................................... 31
Condensed Statements of Comprehensive Income and Accumulated
Other Comprehensive Income..................................................................... 33
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 34
Gulf Power Company
Condensed Statements of Income..................................................................... 40
Condensed Statements of Cash Flows................................................................. 41
Condensed Balance Sheets........................................................................... 42
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 44
Mississippi Power Company
Condensed Statements of Income..................................................................... 49
Condensed Statements of Cash Flows................................................................. 50
Condensed Balance Sheets........................................................................... 51
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 53
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 58
Condensed Statements of Cash Flows................................................................. 59
Condensed Balance Sheets........................................................................... 60
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 62
Notes to the Condensed Financial Statements........................................................... 66
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 72
Item 2. Changes in Securities and Use of Proceeds................................................................. Inapplicable
Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 72
Item 5. Other Information......................................................................................... 74
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 74
Signatures ............................................................................................... 75
3
DEFINITIONS
TERM MEANING
ALABAMA..................................... Alabama Power Company
Clean Air Act .............................. Clean Air Act Amendments of 1990
ECO Plan.................................... Environmental Compliance Overview Plan
Energy Act.................................. Energy Policy Act of 1992
EPA......................................... U. S. Environmental Protection Agency
FASB........................................ Financial Accounting Standards Board
FERC........................................ Federal Energy Regulatory Commission
Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA,
GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended
December 31, 2000
GEORGIA..................................... Georgia Power Company
GULF........................................ Gulf Power Company
integrated Southeast utilities.............. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH
Mirant...................................... Mirant Corporation (formerly Southern Energy, Inc.)
MISSISSIPPI................................. Mississippi Power Company
Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services
Holdings, Inc.
PEP......................................... Performance Evaluation Plan
PSC......................................... Public Service Commission
RTO......................................... Regional Transmission Organization
SAVANNAH.................................... Savannah Electric and Power Company
SCS......................................... Southern Company Services, Inc.
SEC......................................... Securities and Exchange Commission
SOUTHERN.................................... The Southern Company
SOUTHERN system............................. SOUTHERN, the integrated Southeast utilities and other subsidiaries
TVA......................................... Tennessee Valley Authority
4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking and historical
information. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. The registrants caution that
there are various important factors that could cause actual results to differ
materially from those indicated in the forward-looking statements; accordingly,
there can be no assurance that such indicated results will be realized. These
factors include the impact of recent and future federal and state regulatory
change, including legislative and regulatory initiatives regarding deregulation
and restructuring of the electric utility industry and also changes in
environmental and other laws and regulations to which SOUTHERN and its
subsidiaries are subject, as well as changes in application of existing laws and
regulations; current and future litigation, including the pending EPA civil
action against certain of the integrated Southeast utilities and the race
discrimination litigation against certain of SOUTHERN's subsidiaries; the
effects, extent and timing of additional competition in the markets of
SOUTHERN's subsidiaries; potential business strategies, including acquisitions
or dispositions of assets or businesses, which cannot be assured to be completed
or beneficial; internal restructuring or other restructuring options that may be
pursued by SOUTHERN; state and federal rate regulation in the United States;
political, legal and economic conditions and developments in the United States;
financial market conditions and the results of financing efforts; the impact of
fluctuations in commodity prices, interest rates and customer demand; weather
and other natural phenomena; the performance of projects undertaken by the
non-traditional business and the success of efforts to invest in and develop new
opportunities; the timing and acceptance of SOUTHERN's new product and service
offerings; the ability of SOUTHERN to obtain additional generating capacity at
competitive prices; and other factors discussed elsewhere herein and in other
reports (including Form 10-K) filed from time to time with the SEC.
5
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
-------------- ----------------- ------------------ -----------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $2,145,856 $2,188,285 $4,028,334 $3,970,993
Sales for resale 286,994 229,188 547,040 407,117
Other revenues 128,954 105,269 255,948 196,235
-------------- ----------------- ------------------ -----------------
Total operating revenues 2,561,804 2,522,742 4,831,322 4,574,345
-------------- ----------------- ------------------ -----------------
Operating Expenses:
Operation --
Fuel 654,906 644,380 1,262,387 1,168,453
Purchased power 197,331 156,405 311,357 230,834
Other operations 476,821 465,782 882,712 853,145
Maintenance 229,641 214,772 455,498 425,714
Depreciation and amortization 283,387 311,401 587,053 603,075
Taxes other than income taxes 134,904 131,837 272,213 267,016
-------------- ----------------- ------------------ -----------------
Total operating expenses 1,976,990 1,924,577 3,771,220 3,548,237
-------------- ----------------- ------------------ -----------------
Operating Income 584,814 598,165 1,060,102 1,026,108
Other Income:
Interest income 7,506 11,791 12,962 20,758
Equity in earnings of unconsolidated subsidiaries (16,039) (5,677) (18,736) (11,455)
Other, net 25,228 15,443 27,802 26,873
-------------- ----------------- ------------------ -----------------
Earnings From Continuing Operations
Before Interest and Income Taxes 601,509 619,722 1,082,130 1,062,284
-------------- ----------------- ------------------ -----------------
Interest and Other:
Interest expense, net 145,650 169,286 290,538 322,233
Distributions on capital and preferred
securities of subsidiaries 42,099 42,278 84,340 84,520
Preferred dividends of subsidiaries 4,614 4,763 9,419 9,458
-------------- ----------------- ------------------ -----------------
Total interest and other 192,363 216,327 384,297 416,211
-------------- ----------------- ------------------ -----------------
Earnings From Continuing Operations Before
Income Taxes 409,146 403,395 697,833 646,073
Income taxes 138,758 147,825 248,703 239,572
-------------- ----------------- ------------------ -----------------
Earnings From Continuing Operations Before
Cumulative Effect of Accounting Change 270,388 255,570 449,130 406,501
Cumulative effect of accounting change --
less income taxes of $477 - - 771 -
-------------- ----------------- ------------------ -----------------
Earnings From Continuing Operations 270,388 255,570 449,901 406,501
Earnings from discontinued operations, net of income
taxes of $961 and $819 for the three months and
$92,713 and ($29,418) for the six months ended
2001 and 2000, respectively 2,185 86,334 142,217 180,847
-------------- ----------------- ------------------ -----------------
Consolidated Net Income $272,573 $341,904 $592,118 $587,348
============== ================= ================== =================
Common Stock Data:
Basic and diluted earnings per share of common stock --
Earnings per share from continuing operations $0.40 $0.39 $0.66 $0.62
Earnings per share from discontinued operations ($0.01) $0.13 $0.20 $0.28
-------------- ----------------- ------------------ -----------------
Consolidated Basic and Diluted Earnings Per Share $0.39 $0.52 $0.86 $0.90
============== ================= ================== =================
Average number of shares of common stock
outstanding (in thousands) 686,702 648,696 684,638 650,915
Cash dividends paid per share of common stock $0.335 $0.335 $0.67 $0.67
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
7
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
----------------- -----------------
(in thousands)
Operating Activities:
Consolidated net income $592,118 $587,348
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Less income from discontinued operations 142,217 180,847
Depreciation and amortization 663,396 701,721
Deferred income taxes and investment tax credits (40,739) 19,858
Equity in earnings of unconsolidated subsidiaries 3,101 11,294
Other, net (414,045) (181,173)
Changes in certain current assets and liabilities --
Receivables, net 93,448 (88,582)
Fossil fuel stock (193,386) (1,704)
Materials and supplies (84) (4,096)
Accounts payable (158,122) (23,557)
Other 112,761 (82,412)
----------------- -----------------
Net cash provided from operating activities of continuing operations 516,231 757,850
----------------- -----------------
Investing Activities:
Gross property additions (1,411,839) (977,908)
Other (124,786) (122,114)
----------------- -----------------
Net cash used for investing activities of continuing operations (1,536,625) (1,100,022)
----------------- -----------------
Financing Activities:
Increase (decrease) in notes payable, net 822,266 197,145
Proceeds --
Other long-term debt 689,877 668,331
Common stock 195,329 299
Redemptions --
First mortgage bonds (396,166) (200,000)
Other long-term debt (111,828) (77,844)
Preferred stock - (383)
Common stock repurchased - (414,475)
Payment of common stock dividends (457,931) (437,846)
Other (24,969) (8,228)
----------------- -----------------
Net cash provided from (used for) financing activities of continuing operations 716,578 (273,001)
----------------- -----------------
Cash provided by discontinued operations 304,853 587,970
----------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,037 (27,203)
Cash and Cash Equivalents at Beginning of Year 199,191 153,955
----------------- -----------------
Cash and Cash Equivalents at End of Year $200,228 $126,752
================= =================
Supplemental Cash Flow Information From Continuing Operations:
Cash paid during the period for --
Interest (net of amount capitalized) $313,843 $404,470
Income taxes (net of refunds) $227,632 $103,963
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30,
2001 At December 31,
Assets (Unaudited) 2000
- ------
------------------- -------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 200,228 $ 199,191
Special deposits 45,488 5,895
Receivables, less accumulated provisions for uncollectible accounts
of $24,506 at June 30, 2001 and $21,799
at December 31, 2000 1,245,045 1,311,457
Under recovered retail fuel clause revenue 367,857 418,077
Fossil fuel stock, at average cost 388,591 195,206
Materials and supplies, at average cost 507,509 507,425
Other 284,859 187,948
------------------- -------------------
Total current assets 3,039,577 2,825,199
------------------- -------------------
Property, Plant, and Equipment:
In service 34,968,164 34,187,808
Less accumulated depreciation 14,721,062 14,348,763
------------------- -------------------
20,247,102 19,839,045
Nuclear fuel, at amortized cost 196,272 214,620
Construction work in progress 2,007,786 1,568,737
------------------- -------------------
Total property, plant, and equipment 22,451,160 21,622,402
------------------- -------------------
Other Property and Investments:
Nuclear decommissioning trusts, at fair value 693,621 689,561
Net assets of discontinued operations - 3,320,497
Leveraged leases 626,154 595,952
Other 244,655 165,332
------------------- -------------------
Total other property and investments 1,564,430 4,771,342
------------------- -------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 945,709 956,673
Prepaid pension costs 562,213 498,279
Debt expense, being amortized 75,875 99,442
Premium on reacquired debt, being amortized 272,794 280,239
Other 355,423 308,082
------------------- -------------------
Total deferred charges and other assets 2,212,014 2,142,715
------------------- -------------------
Total Assets $29,267,181 $31,361,658
=================== ===================
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
At June 30,
2001 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 2000
- ------------------------------------
------------------- -------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 562,095 $ 67,324
Notes payable 2,501,909 1,679,643
Accounts payable 705,203 870,032
Customer deposits 146,519 139,798
Taxes accrued --
Income taxes 175,411 87,731
Other 194,658 208,143
Interest accrued 144,828 120,770
Vacation pay accrued 119,247 118,710
Other 460,975 444,600
------------------- -------------------
Total current liabilities 5,010,845 3,736,751
------------------- -------------------
Long-term debt 7,531,212 7,842,491
------------------- -------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,108,393 4,074,265
Deferred credits related to income taxes 525,930 551,259
Accumulated deferred investment tax credits 648,887 663,579
Employee benefits provisions 502,145 478,414
Prepaid capacity revenues 46,743 58,377
Other 743,594 651,805
------------------- -------------------
Total deferred credits and other liabilities 6,575,692 6,477,699
------------------- -------------------
Company or subsidiary obligated mandatorily redeemable
capital and preferred securities 2,246,250 2,246,250
------------------- -------------------
Cumulative preferred stock of subsidiaries 368,126 368,126
------------------- -------------------
Common Stockholders' Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- June 30, 2001: 700,622,308 shares;
-- December 31, 2000: 700,622,308 shares 3,503,112 3,503,112
Paid-in capital 9,558 3,153,461
Treasury, at cost -- June 30, 2001: 11,791,284 shares;
-- December 31, 2000: 19,464,122 shares (331,278) (544,515)
Retained earnings 4,352,900 4,671,881
Accumulated other comprehensive income 764 (93,598)
------------------- -------------------
Total common stockholders' equity 7,535,056 10,690,341
------------------- -------------------
Total Liabilities and Stockholders' Equity $29,267,181 $31,361,658
=================== ===================
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ --------------------------------
2001 2000 2001 2000
------------- --------------- -------------- --------------
(in thousands) (in thousands)
Consolidated net income $272,573 $341,904 $ 592,118 $587,348
Other comprehensive income - continuing operations:
Cumulative effect of accounting change - - 466 -
Current period changes in fair value (960) - 364 -
Related income tax benefits 368 - (315) -
-------------- --------------- -------------- --------------
Total other comprehensive income - Continuing operations (592) - 515 -
-------------- --------------- -------------- --------------
Other comprehensive income - discontinued operations:
Cumulative effect of accounting change, net of income tax - - (249,246) -
Current period changes in fair value, net of income tax - - (103,962) -
Current period reclassifications to net income, net of income tax - - 59,857 -
Foreign currency translation adjustments and other, - -
net of income tax - - (21,199) (18,585)
------------- --------------- -------------- --------------
Total other comprehensive income - discontinued operations - - (314,550) (18,585)
------------- --------------- -------------- --------------
CONSOLIDATED COMPREHENSIVE INCOME $271,981 $341,904 $ 278,083 $568,763
============= =============== ============== ==============
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
At June 30, At
2001 December 31,
(Unaudited) 2000
--------------------------------
(in thousands)
Balance at beginning of period - continuing operations $ 249 $ -
Change in current period - continuing operations 515 249
-------------- --------------
BALANCE AT END OF PERIOD - Continuing Operations 764 249
-------------- --------------
Balance at beginning of period - discontinued operations (93,598) (92,395)
Change in current period - discontinued operations - (1,452)
Impact of spin-off 93,598 -
-------------- --------------
BALANCE AT END OF PERIOD - Discontinued Operations - (93,847)
-------------- --------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME $ 764 ($93,598)
============== ==============
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
11
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
Effective April 2, 2001, SOUTHERN completed a spin off of
its remaining ownership of 272 million Mirant shares to SOUTHERN's shareholders
in a tax free distribution. Shares from the spin off were distributed at a rate
of approximately 0.4 share of Mirant common stock for every share of SOUTHERN
common stock held at the record date. As a result of the spin off, SOUTHERN's
financial statements reflect Mirant as discontinued operations.
SOUTHERN is now focusing on three main businesses in the Southeast: its
traditional business, represented by its five integrated Southeast utilities
providing electric service in four states; a growing competitive generation
business in the eight state "Super Southeast" region; and energy-related
products and services for its retail customers.
Earnings
SOUTHERN's second quarter and year-to-date 2001 earnings from continuing
operations were $270 million ($0.40 per share) and $450 million ($0.66 per
share), respectively, compared with $256 million ($0.39 per share) and $407
million ($0.62 per share) in the second quarter and year-to-date 2000. The
increases in earnings for the second quarter and year-to-date 2001 are primarily
due to several factors, including growth in the competitive wholesale generation
business, higher other operating revenues and lower interest expense, partially
offset by the impact of unusually mild weather in the Southeast.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ (42,429) (1.9) $ 57,341 1.4
Sales for resale................................. 57,806 25.2 139,923 34.4
Other revenues................................... 23,685 22.5 59,713 30.4
Fuel expense..................................... 10,526 1.6 93,934 8.0
Purchased power expense.......................... 40,926 26.2 80,523 34.9
Maintenance expense.............................. 14,869 6.9 29,784 7.0
Depreciation and amortization.................... (28,014) (9.0) (16,022) (2.7)
Equity in earnings of unconsolidated subsidiaries
(10,362) 182.5 (7,281) 63.6
Interest expense, net............................ (23,636) (14.0) (31,695) (9.8)
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue was down by $44 million or 2.9% in the second
quarter of 2001 and up by approximately $4 million or 0.1% year-to-date 2001
compared to the same periods in the prior year. The second quarter 2001 decrease
is primarily due to milder weather in this period as compared to the second
quarter 2000. Total retail energy sales were down by 3.1% in the second quarter
of 2001. The year-to-date 2001 increase is primarily due to increased energy
sales to residential and commercial customers due to a 1.7% growth in the
average number of customers served when compared to the same period in the prior
year.
Sales for resale. The second quarter and year-to-date 2001 increases are
mostly due to increased demand for energy by non-affiliated companies. Also
reflected in these revenues are sales from Plant Dahlberg which went into
service in the second quarter of 2000.
Other revenues. During the second quarter and year-to-date 2001, other
revenues increased due to several factors including increased revenues from
gas-fueled cogeneration steam facilities, transmission of electricity for
others, pole attachments and distribution systems equipment rentals, as well as
fuel clause adjustments. However, cogeneration revenues and fuel clause
adjustments generally have no material effect on net income since they are
generally equal to related fuel expenses.
Fuel expense. For the second quarter 2001, fuel expense increased when
compared to the same period in 2000 primarily due to higher natural gas prices.
The increase in the second quarter 2001 was partially offset by decreased
generation resulting from lower demand for energy in some of the areas served by
the integrated Southeast utilities due in part to the unusually mild weather.
The year-to-date 2001 increase in fuel expense is mainly attributed to increased
generation resulting from higher demand for energy and higher natural gas
prices. Since energy expenses are usually offset by energy revenues, these
expenses do not have a significant impact on earnings.
Purchased power expense. In the second quarter and year-to-date 2001, this
expense increased above amounts recorded in the corresponding periods of 2000
due in large part to increased demand for energy by wholesale customers and
increased prices for natural gas. Since energy expenses are usually offset by
energy revenues, these expenses do not have a significant impact on earnings.
Maintenance expense. These expenses were higher in the second quarter and
year-to-date 2001 when compared to the same periods in 2000 due mostly to
scheduled work performed on power generating facilities and transmission and
distribution facilities.
Depreciation and amortization. This item was lower in the second quarter
and year-to-date 2001 as compared to the same periods in 2000 in accordance with
GEORGIA's 1998 rate plan, as authorized by the Georgia PSC. Reference is made to
Note (G) in the "Notes to the Condensed Financial Statements" herein and Item 7
- - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA
in the Form 10-K for additional information.
Equity in earnings of unconsolidated subsidiaries. The second quarter and
year-to-date 2001 decreases in this item primarily relate to the investment by
SOUTHERN, in April 2001, in a partnership producing alternative fuel products.
Interest expense, net. During the second quarter and year-to-date 2001,
interest on long-term debt and interest on notes payable decreased when compared
to the same periods in 2000. Reasons for these decreases include the redemption
of first mortgage bonds and the repayment of other long-term debt in the first
half of 2001 and declining short-term debt and lower interest rates on
outstanding notes payable.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors. The two major factors are the ability of the integrated Southeast
utilities to achieve energy sales growth while containing cost in a more
competitive environment; and the profitability of the new competitive
market-based wholesale generating facilities being added. For additional
information relating to the other businesses, see Item 1 - BUSINESS - "Other
Business" in the Form 10-K. Also, reference is made to Note (B) in the "Notes to
the Condensed Financial Statements" herein for information relating to the spin
off of Mirant.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, SOUTHERN is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" of SOUTHERN in the Form 10-K.
On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO
proposal. For additional information on the FERC's response to SOUTHERN's
proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast
Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN
submitted a series of status reports informing the FERC of progress toward the
development of a Southeastern RTO. In these status reports, SOUTHERN explained
that it has entered into memoranda of understanding to develop an RTO with eight
non-jurisdictional cooperative and public power entities. In addition, SOUTHERN
has entered into a memorandum of understanding with TVA to address coordination
issues between their transmission systems. On July 12, 2001, the FERC issued an
order on the status reports of SOUTHERN, as well as GridSouth and
Entergy/Southwest Power Pool. In those orders, the FERC indicated that it
favored a single RTO for the Southeast. The FERC initiated a mediation process,
directed the parties to participate in the mediation for 45 days and ordered the
mediator to file a report within 10 days following the end of the mediation.
These discussions are ongoing and it is expected that the mediator will make a
report by mid-September 2001.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of SOUTHERN in
the Form 10-K for information on EPA litigation.
Reference is made to Notes (B) through (K), (N) and (O) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
Reference is also made to Part II - Item 1 - "Legal Proceedings" herein.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
Effective January 1, 2001, SOUTHERN and its subsidiaries adopted FASB Statement
No. 133, as amended, and changed the method of accounting for derivative
instruments. All derivatives are now reflected on the Condensed Consolidated
Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes
to the Condensed Financial Statements" herein for additional information on the
adoption of Statement No. 133.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
which establishes new accounting and reporting standards for business
combinations and supersedes Accounting Principles Board (APB) Opinion No. 16.
All business combinations initiated after June 30, 2001 must now be accounted
for using the purchase method of accounting.
Also 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 APB Opinion No. 17.
It 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 provisions of Statement No. 142
must be adopted in 2002. SOUTHERN has not yet quantified the impact of adopting
Statement No. 142 on its financial statements; however, the impact is not
expected to be material.
Additionally 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 nuclear plants. The fair value of a liability for an asset
retirement obligation must be recorded in the period in which it is incurred,
with the cost 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 2003. SOUTHERN has not yet quantified the impact of
adopting Statement No. 143 on its financial statements. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN,
ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of
SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning"
in Item 8 of the Form 10-K.
FINANCIAL CONDITION
Overview
Major changes in SOUTHERN's financial condition during the first six months of
2001 included $1.4 billion used for gross property additions to utility plant.
The funds for these additions and other capital requirements were from
operations and other long-term debt. See SOUTHERN's Condensed Consolidated
Statements of Cash Flows for further details.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
In February 2001, GEORGIA issued $350 million aggregate principal amount of
senior notes consisting of $200 million of Series F 5.75% Senior Notes due
January 31, 2003 and $150 million Series G 6.20% Senior Notes due February 1,
2006. The proceeds of the sale were applied to redeem $200 million of GEORGIA's
First Mortgage Bonds, 6 5/8% Series due April 2003 and to repay a portion of
GEORGIA's outstanding short-term indebtedness. Also in February 2001, GEORGIA
issued $100 million of Series H 6.70% Senior Insured Quarterly Notes due March
1, 2011. The proceeds of this sale were used to repay an additional portion of
GEORGIA's outstanding short-term indebtedness.
In April 2001, ALABAMA sold, through a public authority, $10 million of
variable rate demand revenue bonds due April 1, 2031. In May 2001, GEORGIA
issued $150 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds
of this sale were used in May 2001 to repurchase $47 million aggregate principal
amount of GEORGIA's First Mortgage Bonds, 7.70% Series due May 1, 2025, $1.9
million aggregate principal amount of GEORGIA's First Mortgage Bonds, 6 7/8%
Series due April 1, 2008 and $8.1 million aggregate principal amount of
GEORGIA's First Mortgage Bonds, 6.07% Series due December 1, 2005, and to redeem
in June 2001 $75 million outstanding principal amount of GEORGIA's First
Mortgage Bonds, 6.35% Series due August 1, 2003. The remainder was used to repay
a portion of GEORGIA's outstanding short-term indebtedness. Also in May 2001,
SAVANNAH issued $65 million aggregate principal amount of senior notes
consisting of $20 million of Series B 5.12% Senior Notes due May 15, 2003 and
$45 million of Series C 6.55% Senior Notes due May 15, 2008. The proceeds of the
sale were used to redeem in June 2001 the $20 million outstanding principal
amount of SAVANNAH's First Mortgage Bonds, 6 3/8% Series due July 1, 2003 and to
repay $30 million in bank loans and a portion of SAVANNAH's outstanding
short-term indebtedness.
In July 2001, GEORGIA sold, through public authorities, an aggregate
principal amount of $58,845,000 of pollution control revenue bonds due July 1,
2031. Also in July 2001, GEORGIA sold, through public authorities, $67 million
of pollution control revenue bonds due July 1, 2016. The proceeds of these sales
will be used to redeem various series of outstanding pollution control revenue
bonds. On August 3, 2001, GULF issued $60 million of Series C 4.69% Senior Notes
due August 1, 2003. The proceeds of the sale will be used to redeem $30 million
outstanding principal amount of GULF's First Mortgage Bonds, 6 1/8% Series due
July 1, 2003 and to repay a portion of GULF's short-term indebtedness.
The market price of SOUTHERN's common stock at June 30, 2001 was $23.25 per
share and the book value was $10.94 per share, representing a market-to-book
ratio of 213%, compared to $33.25, $15.69 and 212%, respectively, at the end of
2000. The decreases in market price and book value per share reflect the impact
of the Mirant spin off. The dividend for the second quarter of 2001 was $0.335
per share.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital
Requirements", "Other Capital Requirements" and "Environmental Matters" of
SOUTHERN in the Form 10-K for a description of the SOUTHERN system's capital
requirements for its construction program, sinking fund requirements, maturing
debt and environmental compliance efforts. Approximately $562 million will be
required by June 30, 2002 for redemptions and maturities of long-term debt.
Also, the integrated Southeast utilities plan to continue, to the extent
possible, a program to retire higher-cost debt and replace these securities with
lower-cost capital.
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sources of Capital
In addition to the financing activities previously described, SOUTHERN may
require additional equity capital during the remainder of the year. The amounts
and timing of additional equity capital to be raised in 2001, as well as in
subsequent years, will be contingent on SOUTHERN's investment opportunities. The
integrated Southeast utilities plan to obtain the funds required for
construction and other purposes from sources similar to those used in the past.
The amount, type and timing of any financings--if needed--will depend upon
market conditions and regulatory approval. See Item 1 - BUSINESS - "Financing
Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, the SOUTHERN system had at
June 30, 2001 approximately $200 million of cash and cash equivalents and
approximately $5.1 billion of unused credit arrangements with banks. These
unused credit arrangements also provide liquidity support to variable rate
pollution control bonds and commercial paper programs. SOUTHERN's integrated
Southeast utilities may also meet short-term cash needs through a SOUTHERN
subsidiary organized to issue and sell commercial paper at the request and for
the benefit of each of the integrated Southeast utilities. At June 30, 2001, the
SOUTHERN system had short-term notes payable outstanding of $324 million and
commercial paper outstanding of $2.2 billion. Management believes that the need
for working capital can be adequately met by utilizing lines of credit without
maintaining large cash balances.
17
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price
Risk" and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form
10-K. Additional reference is made to Notes (C), (D) and (I) in the "Notes to
the Condensed Financial Statements" contained herein for additional information
regarding commodity-related marketing and price risk management activities.
18
ALABAMA POWER COMPANY
19
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $712,507 $747,570 $1,347,279 $1,353,696
Sales for resale --
Non-affiliates 122,484 113,685 232,946 209,816
Affiliates 44,990 18,423 120,123 47,092
Other revenues 23,886 20,780 53,521 36,031
---------------- ---------------- ---------------- ----------------
Total operating revenues 903,867 900,458 1,753,869 1,646,635
---------------- ---------------- ---------------- ----------------
Operating Expenses:
Operation --
Fuel 233,308 218,321 492,763 413,395
Purchased power --
Non-affiliates 41,691 37,001 76,000 55,873
Affiliates 51,023 53,922 87,009 80,787
Other 144,000 135,363 255,002 247,609
Maintenance 88,209 83,762 164,569 160,596
Depreciation and amortization 97,087 91,226 192,604 181,698
Taxes other than income taxes 54,335 52,088 111,681 106,240
---------------- ---------------- ---------------- ----------------
Total operating expenses 709,653 671,683 1,379,628 1,246,198
---------------- ---------------- ---------------- ----------------
Operating Income 194,214 228,775 374,241 400,437
Other Income (Expense):
Interest income 3,957 8,551 7,443 14,477
Equity in earnings of unconsolidated subsidiaries 944 638 1,999 1,497
Other, net (1,961) (107) (5,091) (1,189)
---------------- ---------------- ---------------- ----------------
Earnings Before Interest and Income Taxes 197,154 237,857 378,592 415,222
---------------- ---------------- ---------------- ----------------
Interest and Other:
Interest expense, net 62,317 63,997 120,138 122,905
Distributions on preferred securities of subsidiary 6,214 6,371 12,570 12,707
---------------- ---------------- ---------------- ----------------
Total interest and other, net 68,531 70,368 132,708 135,612
---------------- ---------------- ---------------- ----------------
Earnings Before Income Taxes 128,623 167,489 245,884 279,610
Income taxes 49,305 60,278 92,915 100,919
---------------- ---------------- ---------------- ----------------
Net Income Before Cumulative Effect of
Accounting Change 79,318 107,211 152,969 178,691
Cumulative effect of accounting change --
less income taxes of $215 thousand - - 353 -
---------------- ---------------- ---------------- ----------------
Net Income 79,318 107,211 153,322 178,691
Dividends on Preferred Stock 3,890 4,036 7,942 8,004
---------------- ---------------- ---------------- ----------------
Net Income After Dividends on Preferred Stock $75,428 $103,175 $145,380 $170,687
================ ================ ================ ================
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
20
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
----------------- -----------------
(in thousands)
Operating Activities:
Net income $153,322 $178,691
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 215,388 202,909
Deferred income taxes and investment tax credits, net 25,070 14,557
Other, net (59,034) (37,992)
Changes in certain current assets and liabilities --
Receivables, net 56,338 (66,654)
Fossil fuel stock (33,496) (10,377)
Materials and supplies 2,391 (5,790)
Accounts payable (145,497) (6,326)
Energy cost recovery, retail 39,611 (7,502)
Other (7,927) 24,476
----------------- -----------------
Net cash provided from operating activities 246,166 285,992
----------------- -----------------
Investing Activities:
Gross property additions (341,226) (391,398)
Other (22,296) (26,371)
----------------- -----------------
Net cash used for investing activities (363,522) (417,769)
----------------- -----------------
Financing Activities:
Increase in notes payable, net 224,351 123,418
Proceeds --
Common stock 15,642 -
Other long-term debt 10,000 250,000
Capital contributions from parent company 84,366 84,000
Redemptions --
First mortgage bonds (7,484) (100,000)
Other long-term debt (2,232) (3,078)
Payment of preferred stock dividends (7,590) (7,984)
Payment of common stock dividends (198,800) (208,800)
Other (11) (894)
----------------- -----------------
Net cash provided from financing activities 118,242 136,662
----------------- -----------------
Net Change in Cash and Cash Equivalents 886 4,885
Cash and Cash Equivalents at Beginning of Period 14,247 19,475
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 15,133 $ 24,360
================= =================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $121,607 $114,885
Income taxes (net of refunds) $69,526 $42,604
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
21
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Assets (Unaudited) 2000
- ------
------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 15,133 $ 14,247
Receivables --
Customer accounts receivable 327,337 337,870
Under recovered retail fuel clause revenue 198,206 237,817
Other accounts and notes receivable 44,722 60,315
Affiliated companies 64,590 95,704
Accumulated provision for uncollectible accounts (5,335) (6,237)
Fossil fuel stock, at average cost 94,111 60,615
Materials and supplies, at average cost 175,908 178,299
Other 104,562 52,624
------------------- --------------------
Total current assets 1,019,234 1,031,254
------------------- --------------------
Property, Plant, and Equipment:
In service 12,864,156 12,431,575
Less accumulated provision for depreciation 5,227,302 5,107,822
------------------- --------------------
7,636,854 7,323,753
Nuclear fuel, at amortized cost 93,345 94,050
Construction work in progress 532,386 744,974
------------------- --------------------
Total property, plant, and equipment 8,262,585 8,162,777
------------------- --------------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 40,926 38,623
Nuclear decommissioning trusts 321,276 313,895
Other 12,989 13,612
------------------- --------------------
Total other property and investments 375,191 366,130
------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 344,101 345,550
Prepaid pension costs 296,344 268,259
Debt expense, being amortized 8,568 8,758
Premium on reacquired debt, being amortized 72,107 76,020
Department of Energy assessments 24,588 24,588
Other 113,432 95,772
------------------- --------------------
Total deferred charges and other assets 859,140 818,947
------------------- --------------------
Total Assets $10,516,150 $10,379,108
=================== ====================
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
22
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 2000
- ------------------------------------
------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 132,353 $ 844
Notes payable 505,694 281,343
Accounts payable --
Affiliated 103,306 124,534
Other 83,999 209,205
Customer deposits 39,657 36,814
Taxes accrued --
Income taxes 65,353 65,505
Other 55,746 19,471
Interest accrued 34,615 33,186
Vacation pay accrued 31,711 31,711
Other 84,388 97,743
------------------- --------------------
Total current liabilities 1,136,822 900,356
------------------- --------------------
Long-term debt 3,295,744 3,425,527
------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,433,412 1,401,424
Deferred credits related to income taxes 213,304 222,485
Accumulated deferred investment tax credits 243,753 249,280
Employee benefits provisions 88,656 84,816
Prepaid capacity revenues 46,743 58,377
Other 150,575 176,559
------------------- --------------------
Total deferred credits and other liabilities 2,176,443 2,192,941
------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 347,000 347,000
------------------- --------------------
Cumulative preferred stock 317,512 317,512
------------------- --------------------
Common Stockholder's Equity:
Common stock, par value $40 per share --
Authorized - 6,000,000 shares
Outstanding - 6,000,000 shares (5,608,955 at December 31, 2000)
Par value 240,000 224,358
Paid-in capital 1,827,729 1,743,363
Premium on preferred stock 99 99
Retained earnings 1,174,801 1,227,952
------------------- --------------------
Total common stockholder's equity 3,242,629 3,195,772
------------------- --------------------
Total Liabilities and Stockholder's Equity $10,516,150 $10,379,108
=================== ====================
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
23
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
Earnings
ALABAMA's net income after dividends on preferred stock for the second quarter
and year-to-date 2001 was $75.4 million and $145.4 million, respectively,
compared to $103.2 million and $170.7 million for the corresponding periods of
2000. The decreases in the second quarter and year-to-date 2001 of $27.8 million
or 26.9% and $25.3 million or 14.8%, respectively, were primarily due to lower
retail sales revenue and higher operating expenses.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $(35,063) (4.7) $(6,417) (0.5)
Sales for resale - non-affiliates................ 8,799 7.7 23,130 11.0
Sales for resale - affiliates.................... 26,567 144.2 73,031 155.1
Other revenues................................... 3,106 15.0 17,490 48.5
Fuel expense..................................... 14,987 6.9 79,368 19.2
Purchased power - non-affiliates................. 4,690 12.7 20,127 36.0
Purchased power - affiliates..................... (2,899) (5.4) 6,222 7.7
Maintenance expense.............................. 4,447 5.3 3,973 2.5
Depreciation and amortization.................... 5,861 6.4 10,906 6.0
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue was lower by $19.8 million or 3.7% for the second
quarter 2001 and $15.5 million or 1.6% year-to-date 2001 when compared to the
corresponding periods in 2000 due mainly to decreased energy sales to retail
customers. As a result of milder weather, energy sales to residential customers
decreased 4.2% during the second quarter of 2001. Energy sales to industrial
customers were down for the second quarter and year-to-date 2001 by 4.2% and
8.0%, respectively, due to a slower economy.
Sales for resale - non-affiliates. Increased demand for energy by
non-affiliates during the second quarter and year-to-date 2001 translated to
higher revenues from sales for resale to non-affiliates. These transactions did
not have a significant impact on earnings since the energy is usually sold at
variable cost.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies within the SOUTHERN system, as
well as purchases of energy, will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions did not have a significant impact on earnings.
Other revenues. Increased steam sales in conjunction with the operation of
cogeneration facilities was the primary reason for the increase in other
revenues for the second quarter and year-to-date 2001 when compared to the same
periods in 2000. Since cogeneration steam revenues are generally offset by fuel
expenses, these revenues did not have a significant impact on earnings.
24
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. Increased generation by gas-fueled plants resulted in higher
fuel expense for the second quarter and year-to-date 2001 when compared to the
corresponding periods in 2000. Since energy expenses are generally offset by
energy revenues, these expenses did not have a significant impact on earnings.
Purchased power - non-affiliates. Increases in purchased power from
non-affiliates in the second quarter and year-to-date 2001 when compared to the
same periods in 2000 are primarily due to higher costs associated with these
energy purchases. These expenses do not have a significant impact on earnings
since energy expenses are generally offset by energy revenues.
Maintenance expense. These increases during the second quarter and
year-to-date 2001 as compared to the corresponding periods in 2000 are a result
of higher expenses related to the maintenance of transmission and distribution
lines.
Depreciation and amortization. The increases for the second quarter and
year-to-date 2001 as compared to the same periods in 2000 are primarily due to
increased depreciation expenses associated with recent generating capacity
additions.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, ALABAMA is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" of ALABAMA in the Form 10-K.
On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO
proposal. For additional information on the FERC's response to SOUTHERN's
proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast
Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN
submitted a series of status reports informing the FERC of progress toward the
development of a Southeastern RTO. In these status reports, SOUTHERN explained
that it has entered into memoranda of understanding to develop an RTO with eight
non-jurisdictional cooperative and public power entities. In addition, SOUTHERN
has entered into a memorandum of understanding with TVA to address coordination
issues between their transmission systems. On July 12, 2001, the FERC issued an
order on the status reports of SOUTHERN, as well as GridSouth and
Entergy/Southwest Power Pool. In those orders, the FERC indicated that it
favored a single RTO for the Southeast. The FERC initiated a mediation process,
directed the parties to participate in the mediation for 45 days and ordered the
mediator to file a report within 10 days following the end of the mediation.
These discussions are ongoing and it is expected that the mediator will make a
report by mid-September 2001.
25
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of ALABAMA in the
Form 10-K for information on EPA litigation.
Reference is made to Notes (C) through (F), (K) and (N) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
New Accounting Standards
Effective January 1, 2001, ALABAMA adopted FASB Statement No. 133, as amended,
and changed the method of accounting for derivative instruments. All derivatives
are now reflected on the Condensed Consolidated Balance Sheet at fair market
value. Reference is made to Note (C) in the "Notes to the Condensed Financial
Statements" herein for additional information on the adoption of Statement No.
133.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
which establishes new accounting and reporting standards for business
combinations and supersedes Accounting Principles Board (APB) Opinion No. 16.
All business combinations initiated after June 30, 2001 must now be accounted
for using the purchase method of accounting.
Also 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 APB Opinion No. 17.
It 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 provisions of Statement No. 142
must be adopted in 2002. ALABAMA has not yet quantified the impact of adopting
Statement No. 142 on its financial statements; however, the impact is not
expected to be material.
Additionally 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 nuclear plants. The fair value of a liability for an asset
retirement obligation must be recorded in the period in which it is incurred,
with the cost 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 2003. ALABAMA has not yet quantified the impact of
adopting Statement No. 143 on its financial statements. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN,
ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of
SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning"
in Item 8 of the Form 10-K.
FINANCIAL CONDITION
Overview
Major changes in ALABAMA's financial condition during the first six months of
2001 included the addition of approximately $341 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operating activities and the sale of additional common stock to and capital
contributions from SOUTHERN. See ALABAMA's Condensed Statements of Cash Flows
for further details.
26
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
In April 2001, ALABAMA sold, through a public authority, $10 million of variable
rate demand revenue bonds due April 1, 2031. The proceeds of the sale were used
to pay certain costs incurred in connection with the acquisition, construction,
installation and equipping of certain local district heating and cooling
facilities and sewage and solid waste facilities at ALABAMA's Theodore
Congeneration Plant. ALABAMA has called for redemption in August 2001 the $131.5
million outstanding principal amount of its First Mortgage Bonds, 9% Series due
February 1, 2024. ALABAMA plans to continue, to the extent possible, a program
to retire higher-cost debt and replace these obligations with lower-cost
capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA
under "Capital Requirements," "Other Capital Requirements" and "Environmental
Matters" in the Form 10-K for a description of ALABAMA's capital requirements
for its construction program, maturing debt and environmental compliance
efforts.
Sources of Capital
In addition to the financing activities previously described herein, ALABAMA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, ALABAMA had at June 30,
2001 approximately $15 million of cash and cash equivalents, unused committed
lines of credit of approximately $962 million (including $429 million of such
lines under which borrowings may be made only to fund purchase obligations
relating to variable rate pollution control bonds) and an extendible commercial
note program. ALABAMA may also meet short-term cash needs through a SOUTHERN
subsidiary organized to issue and sell commercial paper at the request and for
the benefit of ALABAMA and other SOUTHERN subsidiaries. ALABAMA has regulatory
authority for up to $750 million of short-term borrowings. At June 30, 2001,
ALABAMA had outstanding $136 million in notes payable, $309 million of
commercial paper and $61 million of extendible commercial notes.
27
GEORGIA POWER COMPANY
28
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
--------------- ---------------- ----------------- ----------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $1,093,733 $1,095,283 $2,042,878 $2,004,311
Sales for resale --
Non-affiliates 92,760 62,110 180,351 105,799
Affiliates 35,281 31,220 71,058 43,153
Other revenues 37,509 32,064 73,025 59,053
--------------- ---------------- ----------------- ----------------
Total operating revenues 1,259,283 1,220,677 2,367,312 2,212,316
--------------- ---------------- ----------------- ----------------
Operating Expenses:
Operation --
Fuel 252,438 269,396 481,130 480,303
Purchased power --
Non-affiliates 118,991 85,430 173,096 128,540
Affiliates 73,285 41,728 152,580 89,468
Other 196,528 201,529 372,102 360,512
Maintenance 104,941 88,408 211,606 186,541
Depreciation and amortization 139,679 173,803 303,928 331,570
Taxes other than income taxes 51,747 49,896 101,848 101,509
--------------- ---------------- ----------------- ----------------
Total operating expenses 937,609 910,190 1,796,290 1,678,443
--------------- ---------------- ----------------- ----------------
Operating Income 321,674 310,487 571,022 533,873
Other Income (Expense):
Interest income 1,206 778 1,808 1,186
Equity in earnings of unconsolidated subsidiaries 947 676 1,956 1,529
Other, net 8,210 1,955 (156) (4,270)
--------------- ---------------- ----------------- ----------------
Earnings Before Interest and Income Taxes 332,037 313,896 574,630 532,318
--------------- ---------------- ----------------- ----------------
Interest Charges and Other:
Interest expense, net 50,290 53,134 101,189 100,111
Distributions on preferred securities of subsidiaries 14,776 14,776 29,552 29,552
--------------- ---------------- ----------------- ----------------
Total interest charges and other, net 65,066 67,910 130,741 129,663
--------------- ---------------- ----------------- ----------------
Earnings Before Income Taxes 266,971 245,986 443,889 402,655
Income taxes 103,698 97,284 173,031 160,084
-------------- ---------------- ----------------- ----------------
Net Income Before Cumulative Effect of
Accounting Change 163,273 148,702 270,858 242,571
Cumulative effect of accounting change --
less income taxes of $162 thousand - - 257 -
--------------- ---------------- ----------------- ----------------
Net Income 163,273 148,702 271,115 242,571
Dividends on Preferred Stock 167 169 335 339
--------------- ---------------- ----------------- ----------------
Net Income After Dividends on Preferred Stock $ 163,106 $ 148,533 $ 270,780 $ 242,232
=============== ================ ================= ================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
29
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
--------------- ----------------
(in thousands)
Operating Activities:
Net income $271,115 $242,571
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 341,607 392,426
Deferred income taxes and investment tax credits, net (68,186) (15,964)
Other, net (492) (3,429)
Changes in certain current assets and liabilities --
Receivables, net 43,215 (10,306)
Fossil fuel stock (101,637) 3,870
Materials and supplies 385 (3,836)
Accounts payable (110,312) (21,728)
Energy cost recovery, retail 12,386 (62,437)
Other 92,336 27,948
--------------- ----------------
Net cash provided from operating activities 480,417 549,115
--------------- ----------------
Investing Activities:
Gross property additions (740,218) (456,786)
Other (43,712) (66,152)
--------------- ----------------
Net cash used for investing activities (783,930) (522,938)
--------------- ----------------
Financing Activities:
Increase (decrease) in notes payable, net 93,568 (238,082)
Proceeds --
Other long-term debt 600,000 300,000
Capital contributions from parent company 200,433 269,000
Retirements --
First mortgage bonds (332,040) (100,000)
Preferred stock - (383)
Payment of preferred stock dividends (240) (318)
Payment of common stock dividends (265,400) (275,100)
Other (7,111) (183)
--------------- ----------------
Net cash provided from (used for) financing activities 289,210 (45,066)
--------------- ----------------
Net Change in Cash and Cash Equivalents (14,303) (18,889)
Cash and Cash Equivalents at Beginning of Period 29,370 34,660
--------------- ----------------
Cash and Cash Equivalents at End of Period $ 15,067 $ 15,771
=============== ================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $100,945 $133,263
Income taxes (net of refunds) $140,690 $54,164
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
30
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Assets (Unaudited) 2000
- ------
------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 15,067 $ 29,370
Receivables --
Customer accounts receivable 442,546 465,249
Under recovered retail fuel clause revenue 119,237 131,623
Other accounts and notes receivable 129,640 156,143
Affiliated companies 13,550 13,312
Accumulated provision for uncollectible accounts (9,250) (5,100)
Fossil fuel stock, at average cost 201,100 99,463
Materials and supplies, at average cost 263,224 263,609
Other 163,276 97,515
------------------- --------------------
Total current assets 1,338,390 1,251,184
------------------- --------------------
Property, Plant, and Equipment:
In service 16,711,457 16,469,706
Less accumulated provision for depreciation 7,085,416 6,914,512
------------------- --------------------
9,626,041 9,555,194
Nuclear fuel, at amortized cost 102,927 120,570
Construction work in progress 1,079,992 652,264
------------------- --------------------
Total property, plant, and equipment 10,808,960 10,328,028
------------------- --------------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 27,309 25,485
Nuclear decommissioning trusts 372,345 375,666
Other 41,719 33,829
------------------- --------------------
Total other property and investments 441,373 434,980
------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 555,529 565,982
Prepaid pension costs 236,058 205,113
Debt expense, being amortized 56,709 53,748
Premium on reacquired debt, being amortized 171,263 173,610
Other 114,823 120,964
------------------- --------------------
Total deferred charges and other assets 1,134,382 1,119,417
------------------- --------------------
Total Assets $13,723,105 $13,133,609
=================== ====================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
31
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Liabilities and Stockholder's Equity (Unaudited) 2000
- ------------------------------------
------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 315,661 $ 1,808
Notes payable and commercial paper 797,407 703,839
Accounts payable --
Affiliated 97,588 117,168
Other 280,227 397,550
Customer deposits 81,019 78,540
Taxes accrued --
Income taxes 105,840 5,151
Other 98,060 137,511
Interest accrued 72,907 47,244
Vacation pay accrued 39,501 38,865
Other 177,214 153,400
------------------- --------------------
Total current liabilities 2,065,424 1,681,076
------------------- --------------------
Long-term debt 2,995,914 3,041,939
------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,156,778 2,182,783
Deferred credits related to income taxes 237,973 247,067
Accumulated deferred investment tax credits 344,882 352,282
Employee benefits provisions 185,612 177,444
Other 477,033 397,655
------------------- --------------------
Total deferred credits and other liabilities 3,402,278 3,357,231
------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 789,250 789,250
------------------- --------------------
Preferred stock 14,569 14,569
------------------- --------------------
Common Stockholder's Equity:
Common stock, without par value--
Authorized - 15,000,000 shares
Outstanding - 7,761,500 shares 344,250 344,250
Paid-in capital 2,317,931 2,117,497
Premium on preferred stock 40 40
Retained earnings 1,793,136 1,787,757
Accumulated other comprehensive income 313 -
------------------- --------------------
Total common stockholder's equity 4,455,670 4,249,544
------------------- --------------------
Total Liabilities and Stockholder's Equity $13,723,105 $13,133,609
=================== ====================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
32
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------- -----------------------------------
2001 2000 2001 2000
-------------- ------------------ -------------- --------------
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $163,106 $148,533 $270,780 $242,232
Other comprehensive income:
Cumulative effect of accounting change - - 466 -
Current period changes in fair value (776) - (34) -
Related income tax benefit (expense) 297 - (119) -
-------------- ------------------ -------------- --------------
COMPREHENSIVE INCOME $162,627 $148,533 $271,093 $242,232
============== ================== ============== ==============
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED)
At June 30, At December 31,
2001 2000
-----------------------------------
(in thousands)
Balance at beginning of period $ - $ -
Change in current period 313 -
-------------- --------------
BALANCE AT END OF PERIOD $ 313 $ -
============== ==============
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
33
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
Earnings
GEORGIA's net income after dividends on preferred stock for the second quarter
and year-to-date 2001 was $163.1 million and $270.8 million, respectively,
compared to $148.5 million and $242.2 million for the corresponding periods in
2000. Earnings increased by $14.6 million or 9.8% for the second quarter 2001
and $28.5 million or 11.8% year-to-date 2001 when compared to the same periods
in 2000 due primarily to increased operating revenues that were partially offset
by increased operating expenses.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $(1,550) (0.1) $38,567 1.9
Sales for resale - non-affiliates................ 30,650 49.3 74,552 70.5
Sales for resale - affiliates.................... 4,061 13.0 27,905 64.7
Other revenues................................... 5,445 17.0 13,972 23.7
Fuel expense..................................... (16,958) (6.3) 827 0.2
Purchased power - non-affiliates................. 33,561 39.3 44,556 34.7
Purchased power - affiliates..................... 31,557 75.6 63,112 70.5
Maintenance expense.............................. 16,533 18.7 25,065 13.4
Depreciation and amortization.................... (34,124) (19.6) (27,642) (8.3)
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue decreased in the second quarter of 2001 by $22.1
million or 2.8% and increased year-to-date 2001 by $12.1 million or 0.8% when
compared to the respective periods in 2000. The decrease for the second quarter
2001 is primarily due to a 5% decrease in energy sales to residential customers
as a result of milder weather in this quarter compared to the same period in the
prior year and an 8.8% decrease in energy sales to industrial customers due to a
continued slowdown in manufacturing activity that is occurring in the State of
Georgia, partially offset by a 2.4% increase in commercial energy sales due to
increased number of commercial customers. The year-to-date 2001 retail sales
revenue was higher due primarily to a 4.9% increase in energy sales to
commercial customers partially offset by the milder weather in the second
quarter.
Sales for resale - non-affiliates. During the second quarter and
year-to-date 2001, sales for resale to non-affiliates was higher when compared
to the corresponding periods in 2000 primarily due to increased demand for
energy which was in large part offset by energy expenses. Also, reflected in
these revenues are sales from Plant Dahlberg which went into service in the
second quarter of 2000.
34
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions did not have a significant impact on earnings.
Other revenues. For the second quarter and year-to-date 2001, other
revenues increased when compared to the same periods in 2000 due mainly to
higher revenues from transmission of electricity for others and distribution
systems equipment rentals.
Fuel expense. During the second quarter of 2001, fuel expense went down
when compared to the same period in 2000 due primarily to decreased generation
due to reduced demand for energy by retail customers. Fuel costs year-to-date
2001 remained relatively flat when compared to the corresponding period in 2000.
Since energy expenses are generally offset by energy revenues, these expenses do
not have a significant impact on earnings.
Purchased power - non-affiliates. For the second quarter and year-to-date
2001, the costs associated with purchased power from non-affiliates were higher
due to increased demand for energy by wholesale customers and increased prices
for natural gas and oil. These expenses do not have a significant impact on
earnings since energy expenses are generally offset by energy revenues.
Maintenance expense. The primary reason for the second quarter and
year-to-date 2001 increases when compared to the corresponding periods in 2000
is work performed on power generating facilities and transmission and
distribution facilities.
Depreciation and amortization. The second quarter and year-to-date 2001
decreases result from lower depreciation charges under the 1998 rate plan.
Reference is made to Note (G) in the "Notes to the Condensed Financial
Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of GEORGIA in the Form 10-K for additional information.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, GEORGIA is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form
10-K.
Pursuant to GEORGIA's existing rate order approved by the Georgia PSC,
GEORGIA was required to file a general rate case with the Georgia PSC by July 1,
2001. Accordingly, on June 29, 2001, GEORGIA filed a rate plan with the Georgia
PSC. Reference is made to Note (G) in the "Notes to the Condensed Financial
Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of GEORGIA in the Form 10-K for additional information.
35
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On July 31, 2001, GEORGIA transferred ownership of the Plant Dahlberg
generating units at net book value to Southern Power Company, an affiliated
company.
On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO
proposal. For additional information on the FERC's response to SOUTHERN's
proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast
Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN
submitted a series of status reports informing the FERC of progress toward the
development of a Southeastern RTO. In these status reports, SOUTHERN explained
that it has entered into memoranda of understanding to develop an RTO with eight
non-jurisdictional cooperative and public power entities. In addition, SOUTHERN
has entered into a memorandum of understanding with TVA to address coordination
issues between their transmission systems. On July 12, 2001, the FERC issued an
order on the status reports of SOUTHERN, as well as GridSouth and
Entergy/Southwest Power Pool. In those orders, the FERC indicated that it
favored a single RTO for the Southeast. The FERC initiated a mediation process,
directed the parties to participate in the mediation for 45 days and ordered the
mediator to file a report within 10 days following the end of the mediation.
These discussions are ongoing and it is expected that the mediator will make a
report by mid-September 2001.
Compliance costs related to the Clean Air Act and other environmental
issues could affect earnings. For additional information, see Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Issues" of GEORGIA in the
Form 10-K.
Reference is made to Notes (C) through (H), (K) and (M) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
New Accounting Standards
Effective January 1, 2001, GEORGIA adopted FASB Statement No. 133, as amended,
and changed the method of accounting for derivative instruments. All derivatives
are now reflected on the Condensed Consolidated Balance Sheet at fair market
value. Reference is made to Note (C) in the "Notes to the Condensed Financial
Statements" herein for additional information on the adoption of Statement No.
133.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
which establishes new accounting and reporting standards for business
combinations and supersedes Accounting Principles Board (APB) Opinion No. 16.
All business combinations initiated after June 30, 2001 must now be accounted
for using the purchase method of accounting.
Also 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 APB Opinion No. 17.
It 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 provisions of Statement No. 142
must be adopted in 2002. GEORGIA has not yet quantified the impact of adopting
Statement No. 142 on its financial statements; however, the impact is not
expected to be material.
36
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Additionally 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 nuclear plants. The fair value of a liability for an asset
retirement obligation must be recorded in the period in which it is incurred,
with the cost 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 2003. GEORGIA has not yet quantified the impact of
adopting Statement No. 143 on its financial statements. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN,
ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of
SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning"
in Item 8 of the Form 10-K.
FINANCIAL CONDITION
Overview
The major change in GEORGIA's financial condition during the first six months of
2001 was the addition of approximately $740.2 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations and capital contributions from SOUTHERN. See GEORGIA's Condensed
Statements of Cash Flows for further details.
Financing Activities
In February 2001, GEORGIA issued $350 million aggregate principal amount of
senior notes consisting of $200 million of Series F 5.75% Senior Notes due
January 31, 2003 and $150 million of Series G 6.20% Senior Notes due February 1,
2006. The proceeds of the sale were applied to redeem $200 million outstanding
principal amount of First Mortgage Bonds, 6 5/8% Series due April 2003 and to
repay a portion of GEORGIA's outstanding short-term indebtedness. Also in
February 2001, GEORGIA issued $100 million of Series H 6.70% Senior Insured
Quarterly Notes due March 1, 2011. The proceeds of this sale were used to repay
an additional portion of GEORGIA's outstanding short-term indebtedness.
In May 2001, GEORGIA issued $150 million of Series I 5.25% Senior Notes due
May 8, 2003. The proceeds of this sale were used in May 2001 to repurchase $47
million aggregate principal amount of First Mortgage Bonds, 7.70% Series due May
1, 2025, $1.9 million aggregate principal amount of First Mortgage Bonds, 6 7/8%
Series due April 1, 2008 and $8.1 million aggregate principal amount of First
Mortgage Bonds, 6.07% Series due December 1, 2005, and to redeem in June 2001
$75 million outstanding principal amount of GEORGIA's First Mortgage Bonds,
6.35% Series due August 1, 2003. The remainder was used to repay a portion of
GEORGIA's outstanding short-term indebtedness.
In July 2001, GEORGIA sold, through public authorities, an aggregate
principal amount of $58.8 million of pollution control revenue bonds due July 1,
2031. Also in July 2001, GEORGIA sold, through public authorities, $67 million
of pollution control revenue bonds due July 1, 2016. The proceeds of these sales
are being used to redeem various series of outstanding pollution control revenue
bonds.
37
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA
under "Liquidity and Capital Requirements" and "Environmental Issues" in the
Form 10-K for a description of GEORGIA's capital requirements for its
construction program and environmental compliance efforts.
Sources of Capital
In addition to the financing activities previously described herein, GEORGIA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GEORGIA had at June 30,
2001 approximately $15.1 million of cash and cash equivalents and approximately
$1.765 billion of unused credit arrangements with banks. The credit arrangements
provide liquidity support to GEORGIA's obligations with respect to variable rate
pollution control bonds and its commercial paper program. GEORGIA may also meet
short-term cash needs through a SOUTHERN subsidiary organized to issue and sell
commercial paper at the request and for the benefit of GEORGIA and other
SOUTHERN subsidiaries. At June 30, 2001, GEORGIA had outstanding $86.2 million
of notes payable and $711.2 million of commercial paper. Management believes
that the need for working capital can be adequately met by utilizing lines of
credit without maintaining large cash balances.
38
GULF POWER COMPANY
39
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---------------- ---------------- --------------- --------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $141,098 $142,360 $266,661 $259,167
Sales for resale --
Non-affiliates 20,297 16,609 40,444 27,587
Affiliates 9,056 20,566 17,666 29,233
Other revenues 9,979 2,585 20,688 4,631
---------------- ---------------- --------------- --------------
Total operating revenues 180,430 182,120 345,459 320,618
---------------- ---------------- --------------- --------------
Operating Expenses:
Operation --
Fuel 53,138 57,020 102,470 98,663
Purchased power --
Non-affiliates 16,537 15,781 25,038 22,395
Affiliates 6,014 3,578 17,580 6,736
Other 29,009 29,979 56,235 57,167
Maintenance 14,376 15,346 27,835 29,522
Depreciation and amortization 16,932 16,443 33,607 32,810
Taxes other than income taxes 13,722 13,468 27,207 26,813
---------------- ---------------- --------------- --------------
Total operating expenses 149,728 151,615 289,972 274,106
---------------- ---------------- --------------- --------------
Operating Income 30,702 30,505 55,487 46,512
Other Income (Expense):
Interest income 337 289 507 727
Other, net 222 (934) (577) (1,438)
---------------- ---------------- --------------- --------------
Earnings Before Interest and Income Taxes 31,261 29,860 55,417 45,801
---------------- ---------------- --------------- --------------
Interest and Other:
Interest expenses, net 6,423 7,496 12,696 14,564
Distributions on preferred securities of subsidiary 1,550 1,550 3,100 3,100
---------------- ---------------- --------------- --------------
Total interest charges and other, net 7,973 9,046 15,796 17,664
---------------- ---------------- --------------- --------------
Earnings Before Income Taxes 23,288 20,814 39,621 28,137
Income taxes 8,464 7,833 14,615 10,449
---------------- ---------------- --------------- --------------
Net Income Before Cumulative Effect of
Accounting Change 14,824 12,981 25,006 17,688
Cumulative effect of accounting change --
less income taxes of $42 thousand - - 68 -
---------------- ---------------- --------------- --------------
Net Income 14,824 12,981 25,074 17,688
Dividends on Preferred Stock 54 54 108 108
---------------- ---------------- --------------- --------------
Net Income After Dividends on Preferred Stock $14,770 $12,927 $24,966 $17,580
================ ================ =============== ==============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
40
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
--------------- ---------------
(in thousands)
Operating Activities:
Net income $25,074 $17,688
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 35,554 34,793
Deferred income taxes and investment tax credits, net (1,737) (8,245)
Other, net 547 5,202
Changes in certain current assets and liabilities --
Receivables, net 5,791 (11,728)
Fossil fuel stock (24,143) (1,914)
Materials and supplies (279) 1,335
Accounts payable (36,430) 5,789
Other 17,730 27,476
--------------- ---------------
Net cash provided from operating activities 22,107 70,396
--------------- ---------------
Investing Activities:
Gross property additions (163,048) (48,452)
Other 22,471 (9,289)
--------------- ---------------
Net cash used for investing activities (140,577) (57,741)
--------------- ---------------
Financing Activities:
Increase (decrease) in notes payable, net 73,225 3,000
Proceeds --
Capital contributions from parent company 70,000 -
Retirements --
Other long-term debt (71) (924)
Payment of preferred stock dividends (108) (108)
Payment of common stock dividends (26,800) (29,500)
Other - (22)
--------------- ---------------
Net cash provided from (used for) financing activities 116,246 (27,554)
--------------- ---------------
Net Change in Cash and Cash Equivalents (2,224) (14,899)
Cash and Cash Equivalents at Beginning of Period 4,381 15,753
--------------- ---------------
Cash and Cash Equivalents at End of Period $ 2,157 $854
=============== ===============
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $14,734 $16,335
Income taxes (net of refunds) 7,748 5,207
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
41
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Assets (Unaudited) 2000
- ------
------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 2,157 $ 4,381
Receivables --
Customer accounts receivable 69,799 69,820
Other accounts and notes receivable 6,914 2,179
Affiliated companies 4,137 15,026
Accumulated provision for uncollectible accounts (1,226) (1,302)
Fossil fuel stock, at average cost 40,911 16,768
Materials and supplies, at average cost 29,312 29,033
Regulatory clauses under recovery 7,694 2,112
Other 10,356 6,543
------------------- --------------------
Total current assets 170,054 144,560
------------------- --------------------
Property, Plant, and Equipment:
In service 1,908,958 1,892,023
Less accumulated provision for depreciation 889,298 867,260
------------------- --------------------
1,019,660 1,024,763
Construction work in progress 205,428 71,008
------------------- --------------------
Total property, plant, and equipment 1,225,088 1,095,771
------------------- --------------------
Other Property and Investments 6,770 4,510
------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 16,365 15,963
Prepaid pension costs 26,356 23,491
Debt expense, being amortized 2,315 2,392
Premium on reacquired debt, being amortized 15,130 15,866
Other 15,164 12,943
------------------- --------------------
Total deferred charges and other assets 75,330 70,655
------------------- --------------------
Total Assets $1,477,242 $1,315,496
=================== ====================
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
42
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Liabilities and Stockholder's Equity (Unaudited) 2000
- ------------------------------------
------------------- --------------------
(in thousands)
Current Liabilities:
Notes payable $ 116,225 $ 43,000
Accounts payable --
Affiliated 16,240 17,558
Other 32,872 38,153
Customer deposits 13,980 13,474
Taxes accrued --
Income taxes 12,552 3,864
Other 12,667 8,749
Interest accrued 7,895 8,324
Provision for rate refund 4,039 7,203
Vacation pay accrued 4,512 4,512
Regulatory clauses over recovery 7,123 6,848
Other 15,964 1,584
------------------- --------------------
Total current liabilities 244,069 153,269
------------------- --------------------
Long-term debt 366,094 365,993
------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 158,463 155,074
Deferred credits related to income taxes 33,274 38,255
Accumulated deferred investment tax credits 25,016 25,792
Employee benefits provisions 36,487 34,507
Other 29,059 25,992
------------------- --------------------
Total deferred credits and other liabilities 282,299 279,620
------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 85,000 85,000
------------------- --------------------
Preferred stock 4,236 4,236
------------------- --------------------
Common Stockholder's Equity:
Common stock, without par value--
Authorized - 992,717 shares
Outstanding - 992,717 shares 38,060 38,060
Paid-in capital 303,476 233,476
Premium on preferred stock 12 12
Retained earnings 153,996 155,830
------------------- --------------------
Total common stockholder's equity 495,544 427,378
------------------- --------------------
Total Liabilities and Stockholder's Equity $1,477,242 $1,315,496
=================== ====================
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
43
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
Earnings
GULF's net income after dividends on preferred stock for the second quarter and
year-to-date 2001 was $14.8 million and $25.0 million, respectively, compared to
$12.9 million and $17.6 million for the same periods in 2000. The second quarter
2001 earnings were higher by $1.8 million or 14.3% due primarily to a reduction
in interest expense, an increase in allowance for equity funds used during
construction and the discontinuance of the appliance sales division.
Year-to-date 2001 earnings increased by $7.4 million or 42% due primarily to
higher operating revenues.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $(1,262) (0.9) $7,494 2.9
Sales for resale - non-affiliates................ 3,688 22.2 12,857 46.6
Sales for resale - affiliates.................... (11,510) (56.0) (11,567) (39.6)
Other revenues................................... 7,394 286.0 16,057 346.7
Fuel expense..................................... (3,882) (6.8) 3,807 3.9
Purchased power - non-affiliates................. 756 4.8 2,643 11.8
Purchased power - affiliates..................... 2,436 68.1 10,844 161.0
Maintenance expense.............................. (970) (6.3) (1,687) (5.7)
Other, net....................................... 1,156 123.8 861 59.9
Retail sales. Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales decreased slightly $0.2
million or 0.2% for the second quarter 2001 and increased $6.3 million or 4.1%
year-to-date 2001. The year-to-date 2001 increase in retail sales revenue was
primarily due to a 6.2% increase in retail energy sales which is attributed to
favorable weather conditions and growth in the number of customers served by
GULF.
Sales for resale - non-affiliates. In the second quarter and year-to-date
2001, sales for resale to non-affiliates increased primarily as a result of
increased unit power energy sales. These transactions do not have a significant
impact on earnings since the energy is usually sold at variable cost.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
44
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other revenues. The second quarter and year-to-date 2001 increases resulted
from fuel clause adjustments made to other operating revenues to reflect the
difference between recoverable costs and the amounts actually reflected in
current rates. The recovery provisions generally equal the related expenses and
have no material effect on net income.
Fuel expense. Fuel expense in the second quarter of 2001 was down due to
less generation related to reduced demand for energy by retail customers when
compared to the same period in 2000. The year-to-date 2001 fuel expense increase
is a result of increased fuel prices for the first half of 2001 compared to 2000
and increased generation during the first quarter 2001 that was partially offset
in the second quarter 2001 by reduced generation. Since energy expenses are
generally offset by energy revenues, these expenses do not have a significant
impact on net income.
Purchased power - non-affiliates. The increases for the second quarter and
year-to-date 2001 when compared to the corresponding periods in 2000 are
primarily attributed to an increase in energy purchases to meet the demand for
energy by wholesale customers. Since energy expenses are generally offset by
energy revenues, these expenses do not have a significant impact on net income.
Maintenance expense. For the second quarter and year-to-date 2001,
maintenance expense was down when compared to the same periods in 2000 due
primarily to higher turbine outage expenses and special projects performed in
the first half of 2000.
Other, net. The second quarter and year-to-date 2001 increases when
compared to the corresponding periods in 2000 are mainly due to higher allowance
for equity funds used during construction for the current year related to the
construction of GULF's new combined cycle unit, partially offset by higher
expenses related to the discontinuance of GULF's appliance sales division for
the same periods in 2000.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, GULF is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs are not fully recovered through GULF's Environmental Cost Recovery Clause.
For additional information about the Clean Air Act and other environmental
issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" of GULF in the Form 10-K.
In 1999, the Florida PSC approved GULF's plan to reduce its authorized rate
of return, reduce retail base rates and share revenues with its customers. For
additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of GULF in the Form 10-K.
45
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO
proposal. For additional information on the FERC's response to SOUTHERN's
proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast
Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN
submitted a series of status reports informing the FERC of progress toward the
development of a Southeastern RTO. In these status reports, SOUTHERN explained
that it has entered into memoranda of understanding to develop an RTO with eight
non-jurisdictional cooperative and public power entities. In addition, SOUTHERN
has entered into a memorandum of understanding with TVA to address coordination
issues between their transmission systems. On July 12, 2001, the FERC issued an
order on the status reports of SOUTHERN, as well as GridSouth and
Entergy/Southwest Power Pool. In those orders, the FERC indicated that it
favored a single RTO for the Southeast. The FERC initiated a mediation process,
directed the parties to participate in the mediation for 45 days and ordered the
mediator to file a report within 10 days following the end of the mediation.
These discussions are ongoing and it is expected that the mediator will make a
report by mid-September 2001.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of GULF in the
Form 10-K for information on EPA litigation.
Reference is made to Notes (C) through (F) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
New Accounting Standards
Effective January 1, 2001, GULF adopted FASB Statement No. 133, as amended, and
changed the method of accounting for derivative instruments. All derivatives are
now reflected on the Condensed Consolidated Balance Sheet at fair market value.
Reference is made to Note (C) in the "Notes to the Condensed Financial
Statements" herein for additional information on the adoption of Statement No.
133.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
which establishes new accounting and reporting standards for business
combinations and supersedes Accounting Principles Board (APB) Opinion No. 16.
All business combinations initiated after June 30, 2001 must now be accounted
for using the purchase method of accounting.
Also 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 APB Opinion No. 17.
It 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 provisions of Statement No. 142
must be adopted in 2002. GULF has not yet quantified the impact of adopting
Statement No. 142 on its financial statements; however, the impact is not
expected to be material.
Additionally 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 nuclear plants. The fair value of a liability for an asset
retirement obligation must be recorded in the period in which it is incurred,
with the cost 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
46
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
recognized as operating expenses. Statement No. 143 must be adopted by 2003.
GULF has not yet quantified the impact of adopting Statement No. 143 on its
financial statements.
FINANCIAL CONDITION
Overview
Major changes in GULF's financial condition during the first six months of 2001
included the addition of approximately $163 million to utility plant. The funds
for these additions and other capital requirements were derived primarily from
operations, capital contributions from SOUTHERN and short-term indebtedness. See
GULF's Condensed Statements of Cash Flows for further details.
Financing Activities
On August 3, 2001, GULF issued $60 million of Series C 4.69% Senior Notes due
August 1, 2003. The proceeds of the sale will be used to redeem $30 million
outstanding principal amount of GULF's First Mortgage Bonds, 6 1/8% Series due
July 1, 2003 and to repay a portion of GULF's short-term indebtedness. GULF
plans to continue, to the extent possible, a program to retire higher-cost debt
and replace these securities with lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under
"Capital Requirements for Construction" and "Environmental Matters" in the Form
10-K for a description of GULF's capital requirements for its construction
program and environmental compliance efforts.
Sources of Capital
In addition to the financing activities previously described herein, GULF plans
to obtain the funds required for construction and other purposes from sources
similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GULF had at June 30, 2001
approximately $2.2 million of cash and cash equivalents and $123 million of
unused committed lines of credit with banks. The credit arrangements provide
liquidity support to GULF's obligations with respect to variable rate pollution
control bonds and commercial paper. GULF may also meet short-term cash needs
through a SOUTHERN subsidiary organized to issue and sell commercial paper at
the request and for the benefit of GULF and other SOUTHERN subsidiaries. At June
30, 2001, GULF had $58 million of notes payable to banks and $58.2 million of
commercial paper. Management believes that the need for working capital can be
adequately met by utilizing lines of credit without maintaining large cash
balances.
47
MISSISSIPPI POWER COMPANY
48
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- --------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $127,802 $132,749 $242,381 $233,711
Sales for resale --
Non-affiliates 49,437 35,787 89,725 62,349
Affiliates 23,604 4,303 35,592 8,884
Other revenues 3,106 3,189 7,563 5,789
---------------- ---------------- ---------------- --------------
Total operating revenues 203,949 176,028 375,261 310,733
---------------- ---------------- ---------------- --------------
Operating Expenses:
Operation --
Fuel 73,064 52,513 110,548 89,573
Purchased power --
Non-affiliates 14,183 13,152 28,806 17,160
Affiliates 13,167 11,433 44,703 23,055
Other 32,764 27,954 59,133 54,685
Maintenance 13,441 17,247 27,289 30,184
Depreciation and amortization 13,962 13,508 25,878 25,221
Taxes other than income taxes 10,728 12,091 22,649 24,132
---------------- ---------------- ---------------- --------------
Total operating expenses 171,309 147,898 319,006 264,010
---------------- ---------------- ---------------- --------------
Operating Income 32,640 28,130 56,255 46,723
Other Income:
Interest income 79 41 223 140
Other, net 1,856 437 2,063 791
---------------- ---------------- ---------------- --------------
Earnings Before Interest and Income Taxes 34,575 28,608 58,541 47,654
---------------- ---------------- ---------------- --------------
Interest Expense and Other:
Interest expense, net 6,218 7,489 13,164 14,443
Distributions on preferred securities of subsidiary 678 699 1,356 1,398
---------------- ---------------- ---------------- --------------
Total interest charges and other, net 6,896 8,188 14,520 15,841
---------------- ---------------- ---------------- --------------
Earnings Before Income Taxes 27,679 20,420 44,021 31,813
Income taxes 10,605 7,684 16,729 11,852
---------------- ---------------- ---------------- --------------
Net Income Before Cumulative Effect of
Accounting Change 17,074 12,736 27,292 19,961
Cumulative effect of accounting change --
less income taxes of $43 thousand - - 70 -
---------------- ---------------- ---------------- --------------
Net Income 17,074 12,736 27,362 19,961
Dividends on Preferred Stock 503 504 1,034 1,007
---------------- ---------------- ---------------- --------------
Net Income After Dividends on Preferred Stock $16,571 $ 12,232 $26,328 $ 18,954
================ ================ ================ ==============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
49
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
-------------- ---------------
(in thousands)
Operating Activities:
Net income $27,362 $19,961
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 27,836 27,444
Deferred income taxes and investment tax credits, net (239) (2,669)
Other, net 2,086 6,407
Changes in certain current assets and liabilities --
Receivables, net (10,692) 245
Fossil fuel stock (30,500) 6,623
Materials and supplies (1,153) (391)
Accounts payable 6,861 (8,686)
Other 231 (4,035)
-------------- ---------------
Net cash provided from operating activities 21,792 44,899
-------------- ---------------
Investing Activities:
Gross property additions (23,032) (44,921)
Other (5,358) (9,297)
-------------- ---------------
Net cash used for investing activities (28,390) (54,218)
-------------- ---------------
Financing Activities:
Increase (decrease) in notes payable, net 22,724 (10,500)
Proceeds --
Other long-term debt - 100,000
Capital contributions from parent company 70,000 10,000
Retirements --
First mortgage bonds (36,000) -
Other long-term debt (20,547) (50,681)
Payment of preferred stock dividends (1,034) (1,007)
Payment of common stock dividends (25,300) (27,400)
Other (78) (253)
-------------- ---------------
Net cash provided from financing activities 9,765 20,159
-------------- ---------------
Net Change in Cash and Cash Equivalents 3,167 10,840
Cash and Cash Equivalents at Beginning of Period 7,531 173
-------------- ---------------
Cash and Cash Equivalents at End of Period $10,698 $11,013
============== ===============
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $14,616 $13,776
Income taxes (net of refunds) $1,472 $104
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
50
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Assets (Unaudited) 2000
- ------
-------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 10,698 $ 7,531
Receivables --
Customer accounts receivable 53,676 48,001
Under recovered regulatory clauses 23,181 24,063
Other accounts and notes receivable 25,580 21,843
Affiliated companies 12,214 10,071
Accumulated provision for uncollectible accounts (691) (571)
Fossil fuel stock, at average cost 41,720 11,220
Materials and supplies, at average cost 22,847 21,694
Other 14,909 8,320
-------------------- --------------------
Total current assets 204,134 152,172
-------------------- --------------------
Property, Plant, and Equipment:
In service 1,704,302 1,665,879
Less accumulated provision for depreciation 675,198 652,891
-------------------- --------------------
1,029,104 1,012,988
Construction work in progress 43,010 60,951
-------------------- --------------------
Total property, plant, and equipment 1,072,114 1,073,939
-------------------- --------------------
Other Property and Investments 2,292 2,268
-------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 13,543 13,860
Prepaid pension costs 8,579 6,724
Debt expense, being amortized 4,492 4,628
Premium on reacquired debt, being amortized 7,061 7,168
Other 17,818 14,312
-------------------- --------------------
Total deferred charges and other assets 51,493 46,692
-------------------- --------------------
Total Assets $1,330,033 $1,275,071
==================== ====================
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
51
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Liabilities and Stockholders' Equity (Unaudited) 2000
- ------------------------------------
-------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 80,020 $ 20
Notes payable 78,724 56,000
Accounts payable --
Affiliated 4,653 10,715
Other 57,920 48,146
Customer deposits 5,869 5,274
Taxes accrued --
Income taxes 25,943 8,769
Other 21,400 36,799
Interest accrued 3,721 4,482
Vacation pay accrued 5,701 5,701
Other 11,236 7,003
-------------------- --------------------
Total current liabilities 295,187 182,909
-------------------- --------------------
Long-term debt 234,205 370,511
-------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 141,567 139,909
Deferred credits related to income taxes 24,408 25,603
Accumulated deferred investment tax credits 22,875 23,481
Employee benefits provisions 35,126 34,671
Workforce reduction plan 8,992 9,734
Other 24,938 16,546
-------------------- --------------------
Total deferred credits and other liabilities 257,906 249,944
-------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding company junior
subordinated notes 35,000 35,000
-------------------- --------------------
Preferred stock 31,809 31,809
-------------------- --------------------
Common Stockholder's Equity:
Common stock equity --
Authorized - 1,130,000 shares
Outstanding - 1,121,000 shares
Par value 37,691 37,691
Paid-in capital 264,160 194,161
Premium on preferred stock 326 326
Retained earnings 173,749 172,720
-------------------- --------------------
Total common stockholder's equity 475,926 404,898
-------------------- --------------------
Total Liabilities and Stockholder's Equity $1,330,033 $1,275,071
==================== ====================
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
52
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
Earnings
MISSISSIPPI's net income after dividends on preferred stock for the second
quarter and year-to-date 2001 was $16.6 million and $26.3 million, respectively,
compared to $12.2 million and $18.9 million for the corresponding periods of
2000. The increases in earnings of $4.3 million or 35.5% and $7.4 million or
38.9% for the second quarter and year-to-date 2001, respectively, are attributed
primarily to higher operating revenues.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ (4,947) (3.7) $ 8,670 3.7
Sales for resale - non-affiliates................ 13,650 38.1 27,376 43.9
Sales for resale - affiliates.................... 19,301 448.5 26,708 300.6
Fuel expense..................................... 20,551 39.1 20,975 23.4
Purchased power - non-affiliates................. 1,031 7.8 11,646 67.9
Purchased power - affiliates..................... 1,734 15.2 21,648 93.9
Other operation expense.......................... 4,810 17.2 4,448 8.1
Maintenance expense.............................. (3,806) (22.1) (2,895) (9.6)
Taxes other than income taxes.................... (1,363) (11.3) (1,483) (6.1)
Other income..................................... 1,457 304.8 1,355 145.5
Interest expense, net............................ (1,271) (16.9) (1,279) (8.9)
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue was down by $1.2 million or 1.6% in the second
quarter 2001 and $0.3 million or 0.3% year-to-date 2001 when compared to the
corresponding periods in 2000 due to lower retail energy sales. Decreases in
retail energy sales of 2.7% in the second quarter of 2001 and 1.9% year-to-date
2001 are largely due to mild weather.
Sales for resale - non-affiliates. This item increased during the second
quarter and year-to-date 2001 when compared to the same periods in 2000 as a
result of increased demand for energy by non-affiliates and additional power
sales as a result of the commercial operation of Plant Daniel Units 3 and 4.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
Fuel expense. For the second quarter and year-to-date 2001, fuel expense
was higher when compared to the same periods in 2000 due mostly to increased
generation to meet energy demands and higher cost of fuel.
53
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased power - non-affiliates. This expense increased during the second
quarter and year-to-date 2001 primarily as a result of the need to meet higher
demand for energy. These transactions do not have a significant impact on net
income since energy expenses are generally offset by energy revenues.
Other operation expense. The second quarter and year-to-date 2001 increases
are related to the commercial operation of Plant Daniel Units 3 and 4.
Maintenance expense. This expense decreased in the second quarter and
year-to-date 2001 due primarily to the timing of maintenance work to be
performed during 2001.
Taxes other than income taxes. For the second quarter and year-to-date
2001, taxes other than income taxes decreased when compared to the same periods
in 2000 due primarily to lower ad valorem taxes.
Other income. For the second quarter and year-to-date 2001, other, net
increased when compared to the same periods in 2000 as a result of project work
completed in the second quarter 2001.
Interest expense, net. Interest expenses are lower for the second quarter
and year-to-date as a result of lower interest rates on debt outstanding.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters, the effect of weather, and the economy on
energy sales. On August 3, 2001, MISSISSIPPI filed a request with the
Mississippi PSC to increase annual retail rate revenues by approximately $46.4
million. The requested increase would take effect in January 2002. As a result
of the filing, the Mississippi PSC suspended the operation of MISSISSIPPI's
formula rate plan until an order is issued on MISSISSIPPI's request. The
Mississippi PSC is required to rule on MISSISSIPPI'S request in December 2001.
For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of MISSISSIPPI in the Form 10-K.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, MISSISSIPPI is positioning
the business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form
10-K.
MISSISSIPPI's 2001 ECO Plan filing was approved, as filed, by the
Mississippi PSC on March 7, 2001 and resulted in a slight increase in customer
prices. Compliance costs related to the Clean Air Act could affect earnings if
such costs cannot be recovered. For additional information about the Clean Air
Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K.
On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO
proposal. For additional information on the FERC's response to SOUTHERN's
proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast
Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN
submitted a series of status reports informing the FERC of progress toward the
development of a Southeastern RTO. In these status reports, SOUTHERN explained
that it has entered into memoranda of understanding to develop an RTO with eight
non-jurisdictional cooperative and public power entities. In addition, SOUTHERN
54
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
has entered into a memorandum of understanding with TVA to address coordination
issues between their transmission systems. On July 12, 2001, the FERC issued an
order on the status reports of SOUTHERN, as well as GridSouth and
Entergy/Southwest Power Pool. In those orders, the FERC indicated that it
favored a single RTO for the Southeast. The FERC initiated a mediation process,
directed the parties to participate in the mediation for 45 days and ordered the
mediator to file a report within 10 days following the end of the mediation.
These discussions are ongoing and it is expected that the mediator will make a
report by mid-September 2001.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of MISSISSIPPI in
the Form 10-K for information on EPA litigation.
Reference is made to Notes (C) through (F) and (L) in the "Notes to the
Condensed Financial Statements" herein for discussion of various contingencies
and other matters which may affect future earnings potential.
New Accounting Standards
Effective January 1, 2001, MISSISSIPPI adopted FASB Statement No. 133, as
amended, and changed the method of accounting for derivative instruments. All
derivatives are now reflected on the Condensed Consolidated Balance Sheet at
fair market value. Reference is made to Note (C) in the "Notes to the Condensed
Financial Statements" herein for additional information on the adoption of
Statement No. 133.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
which establishes new accounting and reporting standards for business
combinations and supersedes Accounting Principles Board (APB) Opinion No. 16.
All business combinations initiated after June 30, 2001 must now be accounted
for using the purchase method of accounting.
Also 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 APB Opinion No. 17.
It 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 provisions of Statement No. 142
must be adopted in 2002. MISSISSIPPI has not yet quantified the impact of
adopting Statement No. 142 on its financial statements; however, the impact is
not expected to be material.
Additionally 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 nuclear plants. The fair value of a liability for an asset
retirement obligation must be recorded in the period in which it is incurred,
with the cost 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 2003. MISSISSIPPI has not yet quantified the impact of
adopting Statement No. 143 on its financial statements.
55
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in MISSISSIPPI's financial condition during the first six months
of 2001 included the addition of approximately $23 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations and financing activities. See MISSISSIPPI's Condensed Statements
of Cash Flows for further details.
Financing Activities
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing
Activity" and Note 4 to the financial statements of MISSISSIPPI in the Form
10-K. Effective May 4, 2001, in connection with commercial operation of a
1,064-megawatt natural gas combined cycle facility, MISSISSIPPI entered into the
initial 10-year lease term with Escatawpa Funding, Limited Partnership. The
final completion cost will be approximately $370 million. Reference is made to
Note (L) in the "Notes to the Condensed Financial Statements" herein for
additional information.
MISSISSIPPI plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these securities with lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of
MISSISSIPPI under "Capital Requirements for Construction," "Environmental
Matters" and "Other Capital Requirements" and Note 3 to the financial statements
in the Form 10-K for a description of MISSISSIPPI's capital requirements for its
construction program, environmental compliance efforts, sinking fund
requirements and maturities of long-term debt.
Sources of Capital
In addition to the financing activities previously described herein, MISSISSIPPI
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, MISSISSIPPI had at June
30, 2001 approximately $10.7 million of cash and cash equivalents and
approximately $124.3 million of unused committed credit arrangements with banks.
The credit arrangements provide liquidity support to MISSISSIPPI's obligation
with respect to variable rate pollution control bonds and commercial paper.
MISSISSIPPI may also meet short-term cash needs through a SOUTHERN subsidiary
organized to issue and sell commercial paper at the request and for the benefit
of MISSISSIPPI and other SOUTHERN subsidiaries. At June 30, 2001, MISSISSIPPI
had outstanding $23.0 million of notes payable to banks and $55.7 million of
commercial paper. Management believes that the need for working capital can be
adequately met by utilizing lines of credit without maintaining large cash
balances.
56
SAVANNAH ELECTRIC
AND
POWER COMPANY
57
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---------------- ---------------- --------------- --------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $70,716 $70,323 $129,135 $120,108
Sales for resale --
Non-affiliates 2,016 997 3,574 1,566
Affiliates 651 1,033 1,878 2,754
Other revenues 587 427 1,074 742
---------------- ---------------- --------------- --------------
Total operating revenues 73,970 72,780 135,661 125,170
---------------- ---------------- --------------- --------------
Operating Expenses:
Operation --
Fuel 13,119 16,763 22,513 26,510
Purchased power --
Non-affiliates 5,756 5,405 8,082 7,593
Affiliates 12,957 8,570 28,705 16,620
Other 13,035 12,601 25,151 24,648
Maintenance 4,949 5,478 10,997 10,144
Depreciation and amortization 6,460 6,309 12,920 12,618
Taxes other than income taxes 3,510 3,310 6,745 6,354
---------------- ---------------- --------------- --------------
Total operating expenses 59,786 58,436 115,113 104,487
---------------- ---------------- --------------- --------------
Operating Income 14,184 14,344 20,548 20,683
Other Income (Expense):
Interest income 84 38 117 79
Other, net (138) (262) (314) (404)
---------------- ---------------- --------------- --------------
Earnings Before Interest and Income Taxes 14,130 14,120 20,351 20,358
---------------- ---------------- --------------- --------------
Interest Charges and Other:
Interest expense, net 3,264 3,179 6,540 6,200
Distributions on preferred securities of subsidiary 685 685 1,370 1,370
---------------- ---------------- --------------- --------------
Total interest charges and other, net 3,949 3,864 7,910 7,570
---------------- ---------------- --------------- --------------
Earnings Before Income Taxes 10,181 10,256 12,441 12,788
Income taxes 3,935 3,969 4,741 4,858
---------------- ---------------- --------------- --------------
Net Income Before Cumulative Effect of
Accounting Change 6,246 6,287 7,700 7,930
Cumulative effect of accounting change --
less income taxes of $14 thousand - - 22 -
---------------- ---------------- --------------- --------------
Net Income $ 6,246 $ 6,287 $ 7,722 $ 7,930
================ ================ =============== ==============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
58
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2001 2000
--------------- ---------------
(in thousands)
Operating Activities:
Net income $7,722 $7,930
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 13,945 13,495
Deferred income taxes and investment tax credits, net (5,097) (1,563)
Other, net 1,955 3,326
Changes in certain current assets and liabilities --
Receivables, net (5,096) (13,588)
Fossil fuel stock (3,610) 94
Materials and supplies (261) (706)
Accounts payable (8,431) 8,627
Other 13,559 2,468
--------------- ---------------
Net cash provided from operating activities 14,686 20,083
--------------- ---------------
Investing Activities:
Gross property additions (18,546) (13,325)
Other, net 229 (3,279)
--------------- ---------------
Net cash used for investing activities (18,317) (16,604)
--------------- ---------------
Financing Activities:
Increase (decrease) in notes payable, net 5,540 7,400
Proceeds --
Other long-term debt 65,000 -
Retirements --
First mortgage bonds (20,642) -
Other long-term debt (30,441) (304)
Payment of common stock dividends (10,900) (12,300)
Other (355) -
--------------- ---------------
Net cash provided from (used for) financing activities 8,202 (5,204)
--------------- ---------------
Net Change in Cash and Cash Equivalents 4,571 (1,725)
Cash and Cash Equivalents at Beginning of Period - 6,553
--------------- ---------------
Cash and Cash Equivalents at End of Period $4,571 $4,828
=============== ===============
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $7,354 $5,774
Income taxes (net of refunds) (2,915) 2,867
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
59
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Assets (Unaudited) 2000
- ------
------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 4,571 $ -
Receivables --
Customer accounts receivable 37,327 28,189
Under recovered retail fuel clause revenue 36,022 39,632
Other accounts and notes receivable 901 1,412
Affiliated companies 837 738
Accumulated provision for uncollectible accounts (429) (407)
Fossil fuel stock, at average cost 10,749 7,140
Materials and supplies, at average cost 9,205 8,944
Prepaid Taxes - 8,651
Other 3,141 377
------------------- --------------------
Total current assets 102,324 94,676
------------------- --------------------
Property, Plant, and Equipment:
In service 842,903 829,270
Less accumulated provision for depreciation 393,608 382,030
------------------- --------------------
449,295 447,240
Construction work in progress 10,847 6,782
------------------- --------------------
Total property, plant, and equipment 460,142 454,022
------------------- --------------------
Other Property and Investments 2,192 2,066
------------------- --------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 13,097 12,404
Cash surrender value of life insurance for deferred compensation plans 17,632 17,954
Debt expense, being amortized 3,268 3,003
Premium on reacquired debt, being amortized 7,233 7,575
Other 2,129 2,527
------------------- --------------------
Total deferred charges and other assets 43,359 43,463
------------------- --------------------
Total Assets $608,017 $594,227
=================== ====================
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
60
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
At June 30,
2001 At December 31,
Liabilities and Stockholder's Equity (Unaudited) 2000
- ------------------------------------
------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 754 $ 30,698
Notes payable 50,940 45,400
Accounts payable --
Affiliated 7,621 16,153
Other 8,284 7,738
Customer deposits 5,994 5,696
Taxes accrued --
Income taxes 3,336 3,450
Other 2,542 1,435
Interest accrued 4,602 4,541
Vacation pay accrued 2,340 2,276
Other 7,990 7,973
------------------- --------------------
Total current liabilities 94,403 125,360
------------------- --------------------
Long-term debt 160,763 116,902
------------------- --------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 79,154 79,756
Deferred credits related to income taxes 15,282 16,038
Accumulated deferred investment tax credits 10,284 10,616
Deferred compensation plans 12,909 11,968
Employee benefits provisions 11,629 9,236
Other 11,776 9,357
------------------- --------------------
Total deferred credits and other liabilities 141,034 136,971
------------------- --------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 40,000 40,000
------------------- --------------------
Common Stockholder's Equity:
Common stock, par value $5 per share --
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares
Par value 54,223 54,223
Paid-in capital 11,266 11,265
Retained earnings 106,328 109,506
------------------- --------------------
Total common stockholder's equity 171,817 174,994
------------------- --------------------
Total Liabilities and Stockholder's Equity $608,017 $594,227
=================== ====================
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
61
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2001 vs. SECOND QUARTER 2000
AND
YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000
RESULTS OF OPERATIONS
Earnings
SAVANNAH's net income for the second quarter and year-to-date 2001 was $6.2
million and $7.7 million, respectively, as compared to $6.3 million and $7.9
million for the corresponding periods of 2000. Earnings were flat in the second
quarter 2001 and down slightly year-to-date 2001, reflecting higher operating
revenues that were fully offset by higher operating expenses.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ 393 0.6 $ 9,027 7.5
Sales for resale - non-affiliates................ 1,019 102.2 2,008 128.2
Sales for resale - affiliates.................... (382) (37.0) (876) (31.8)
Fuel expense..................................... (3,644) (21.7) (3,997) (15.1)
Purchased power - non-affiliates................. 351 6.5 489 6.4
Purchased power - affiliates..................... 4,387 51.2 12,085 72.7
Maintenance expense.............................. (529) (9.7) 853 8.4
Retail sales. Excluding fuel revenues, which do not affect net income,
retail sales revenue decreased by $0.3 million or 0.8% for the second quarter of
2001 and increased by $1.1 million or 1.5% year-to-date 2001 when compared to
the same periods in 2000. For the second quarter 2001, retail sales revenue
decreased primarily due to a 6.6% decrease in energy sales in the industrial
sector. Industrial energy sales were affected by reduced demand from one
industrial customer in the second quarter of 2001. The year-to-date 2001
increase in retail sales revenue is attributed to a 2.9% increase in energy
sales to retail customers spurred by growth in the number of customers served by
SAVANNAH, offset somewhat by the decrease in industrial sales.
Sales for resale - non-affiliates. The second quarter and year-to-date 2001
increases are primarily due to more energy sales to non-affiliated wholesale
customers than were recorded in the same periods in 2000. These transactions do
not have a significant impact on earnings since the energy is usually sold at
variable cost.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary from period to period depending on demand
and the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
Fuel expense. Fuel expense was lower in the second quarter and year-to-date
2001 when compared to the corresponding periods in 2000 as a result of reduced
generation and lower average cost of fuel consumed.
62
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased power - non-affiliates. The second quarter and year-to-date 2001
increases are due primarily to higher costs associated with these energy
purchases. These transactions do not have a significant impact on net income
since energy expenses are generally offset by energy revenues.
Maintenance expense. During the second quarter of 2001, this expense was
lower due mainly to an unscheduled maintenance outage and a boiler outage during
the same period in 2000. The year-to-date 2001 increase is attributed to a
scheduled major maintenance outage at one of SAVANNAH's plants.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, SAVANNAH is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" of SAVANNAH in the Form 10-K.
On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO
proposal. For additional information on the FERC's response to SOUTHERN's
proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast
Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN
submitted a series of status reports informing the FERC of progress toward the
development of a Southeastern RTO. In these status reports, SOUTHERN explained
that it has entered into memoranda of understanding to develop an RTO with eight
non-jurisdictional cooperative and public power entities. In addition, SOUTHERN
has entered into a memorandum of understanding with TVA to address coordination
issues between their transmission systems. On July 12, 2001, the FERC issued an
order on the status reports of SOUTHERN, as well as GridSouth and
Entergy/Southwest Power Pool. In those orders, the FERC indicated that it
favored a single RTO for the Southeast. The FERC initiated a mediation process,
directed the parties to participate in the mediation for 45 days and ordered the
mediator to file a report within 10 days following the end of the mediation.
These discussions are ongoing and it is expected that the mediator will make a
report by mid-September 2001.
Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of SAVANNAH in
the Form 10-K for information on EPA litigation.
Reference is made to Notes (C) through (F), (K) and (M) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
63
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
Effective January 1, 2001, SAVANNAH adopted FASB Statement No. 133, as amended,
and changed the method of accounting for derivative instruments. All derivatives
are now reflected on the Condensed Consolidated Balance Sheet at fair market
value. Reference is made to Note (C) in the "Notes to the Condensed Financial
Statements" herein for additional information on the adoption of Statement No.
133.
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
which establishes new accounting and reporting standards for business
combinations and supersedes Accounting Principles Board (APB) Opinion No. 16.
All business combinations initiated after June 30, 2001 must now be accounted
for using the purchase method of accounting.
Also 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 APB Opinion No. 17.
It 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 provisions of Statement No. 142
must be adopted in 2002. SAVANNAH has not yet quantified the impact of adopting
Statement No. 142 on its financial statements; however, the impact is not
expected to be material.
Additionally 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 nuclear plants. The fair value of a liability for an asset
retirement obligation must be recorded in the period in which it is incurred,
with the cost 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 2003. SAVANNAH has not yet quantified the impact of
adopting Statement No. 143 on its financial statements.
FINANCIAL CONDITION
Overview
Major changes in SAVANNAH's financial condition during the first six months of
2001 included the addition of approximately $18 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations, credit arrangements with banks and financings. See SAVANNAH's
Condensed Statements of Cash Flows for further details.
64
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
In May 2001, SAVANNAH issued $65 million aggregate principal amount of senior
notes consisting of $20 million of Series B 5.12% Senior Notes due May 15, 2003
and $45 million of Series C 6.55% Senior Notes due May 15, 2008. The proceeds of
the sale were used to redeem in June 2001 the $20 million outstanding principal
amount of SAVANNAH's First Mortgage Bonds, 6 3/8% Series due July 1, 2003 and to
repay $30 million in bank loans and a portion of SAVANNAH's outstanding
short-term indebtedness.
SAVANNAH plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these securities with lower-cost capital.
Sources of Capital
SAVANNAH plans to obtain the funds required for construction and other purposes
from sources similar to those used in the past. The amount, type and timing of
any financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, SAVANNAH had at June 30,
2001 approximately $4.6 million of cash and cash equivalents and approximately
$65.5 million of unused committed credit arrangements with banks. The credit
arrangements provide liquidity support to SAVANNAH's obligation with respect to
variable rate pollution control bonds and commercial paper. SAVANNAH may also
meet short-term cash needs through a SOUTHERN subsidiary organized to issue and
sell commercial paper at the request and for the benefit of SAVANNAH and other
SOUTHERN subsidiaries. At June 30, 2001, SAVANNAH had outstanding $20.8 million
of notes payable to banks and $30.1 million of commercial paper. Since SAVANNAH
has no major generating plants under construction, management believes that the
need for working capital can be adequately met by utilizing lines of credit.
65
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes
SOUTHERN A, B, C, D, E, F, G, H, I, J, K, N, O
ALABAMA A, C, D, E, F, K, N
GEORGIA A, C, D, E, F, G, H, K, M
GULF A, C, D, E, F
MISSISSIPPI A, C, D, E, F, L
SAVANNAH A, C, D, E, F, K, M
66
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) The condensed financial statements of the registrants included herein
have been prepared by each registrant, without audit,
pursuant to the rules and regulations of the SEC. In the opinion of
each registrant's management, the information regarding
such registrant furnished herein reflects all adjustments necessary to
present fairly the results of operations for the periods
ended June 30, 2001 and 2000. Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such
rules and regulations, although each registrant believes that the
disclosures regarding such registrant are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements of each registrant be read in
conjunction with the financial statements of such registrant and the
notes thereto included in the Form 10-K. Certain prior
period amounts have been reclassified to conform with current period
presentation. Due to seasonal variations in the demand for
energy, operating results for the periods presented do not necessarily
indicate operating results for the entire year.
(B) Reference is made to Note 11 to the financial statements of SOUTHERN in
Item 8 and MANAGEMENT'S DISCUSSION AND ANALYSIS - "Overview of
Consolidated Earnings" and "Discontinued Operations" of SOUTHERN in Item 7
of the Form 10-K for information on the spin off of Mirant.
On April 2, 2001, SOUTHERN completed the spin off of Mirant with a tax
free distribution to SOUTHERN's shareholders of its remaining ownership of
272 million Mirant shares. Shares from the spin off were distributed at a
ratio of approximately 0.4 share of Mirant common stock for every share of
SOUTHERN common stock held at the record date. The distribution resulted
in charges of approximately $3,323 million and $260 million to SOUTHERN's
paid-in capital and retained earnings, respectively.
As a result of the spin off, SOUTHERN's financial statements reflect
Mirant as discontinued operations. All historical financial statements
presented and footnotes have been reclassified to conform to this
presentation, with the historical assets and liabilities of Mirant
presented on the Condensed Consolidated Balance Sheet as net assets of
discontinued operations.
(C) On January 1, 2001, SOUTHERN and its subsidiaries adopted FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended. Statement No. 133 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.
SOUTHERN utilizes financial instruments to reduce its exposure to changes
in interest rates and foreign currency exchange rates. Such financial
instruments are generally structured so that their terms are substantially
identical to (and their changes in market value are highly correlated to)
those of SOUTHERN's recorded liabilities or unrecorded firm commitments.
Thus, these instruments generally qualify as hedges under Statement No.
133.
67
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The integrated Southeast utilities also enter into commodity related
forward and option contracts to limit exposure to changing prices on
certain fuel purchases and electricity purchases and sales. Substantially
all of the integrated Southeast utilities' bulk energy purchases and sales
meet the definition of a derivative under Statement No. 133. In many
cases, these transactions meet Statement No. 133's normal purchase and
sale exception and the related contracts are accounted for under the
accrual method. Certain of these contracts qualify as cash flow hedges of
anticipated transactions, resulting in the deferral of related gains and
losses in other comprehensive income until the hedged transactions occur.
Any ineffectiveness is recognized currently in net income. Certain other
contracts do not meet the hedge requirements and are marked to market
through current period income.
The cumulative effect of adoption was a reduction of approximately $300
million in comprehensive income, which was all related to discontinued
operations. The impact on net income was immaterial and less than $0.01
per share to each of the integrated Southeast utilities individually, as
well as to SOUTHERN on a consolidated basis. The mark to market
adjustments recorded during the second quarter of 2001 were also
immaterial. However, the application and interpretation of Statement No.
133's requirements are still evolving and further guidance from the FASB
is expected, which could further impact the financial statements of
SOUTHERN and the integrated Southeast utilities. Also, as wholesale energy
markets mature, the accounting for future transactions could be
significantly impacted by Statement No. 133, resulting in more volatility
in net income and comprehensive income.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price
Risk" of SOUTHERN and the integrated Southeast utilities in Item 7 for
each of the registrants in the Form 10-K, and Note 1 to the financial
statements of SOUTHERN under the caption "Financial Instruments for
Non-Trading Activities" in Item 8 of the Form 10-K.
(D) SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH engage in price
risk management activities. Reference is made to MANAGEMENT'S DISCUSSION
AND ANALYSIS - "Market Price Risk" in SOUTHERN; and "Exposure to Market
Risks," in ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH. Reference is
also made to Note 1 to the financial statements of SOUTHERN, ALABAMA and
GEORGIA in Item 8 of the Form 10-K for a discussion of these activities.
In May 2001, the Georgia PSC ordered that SAVANNAH implement a natural
gas/oil hedging program to become effective June 1, 2001. In June 2001,
the Mississippi PSC approved MISSISSIPPI's Energy Cost Management Clause
to become effective June 1, 2001. These programs have been designed as a
means to mitigate the effects of volatile fuel prices and to better match
the cost recovery of fuel and energy related transactions.
(E) The integrated Southeast utilities are subject to the provisions of FASB
Statement No. 71, Accounting for the Effects of Certain Types of
Regulation. In the event that a portion of a company's operations is no
longer subject to these provisions, the company would be required to write
off related regulatory assets and liabilities that are not specifically
recoverable, and determine if any other assets have been impaired. For
additional information, see Note 1 to the financial statements of each
registrant in Item 8 of the Form 10-K.
(F) Reference is made to Note 3 to the financial statements of SOUTHERN,
ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH in Item 8 of the Form
10-K for information on EPA litigation.
68
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(G) Reference is made to Note 3 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information concerning a
three-year rate order approved by the Georgia PSC effective
January 1, 1999. The order decreased annual retail rates by $262 million
effective January 1, 1999 and by an additional $24 million effective
January 1, 2000. The order further provides for $85 million each year,
plus up to $50 million annually of any earnings above a 12.5% retail
return on common equity during the second and third years, to be applied
to accelerated amortization or depreciation of assets. In May 2000, the
Georgia PSC ordered that these funds be maintained in a regulatory
liability account and that interest be accrued on the account
at the prime rate. These amounts are reflected on the balance sheets in
deferred credits and other liabilities, other. Two-thirds of any
additional earnings above the 12.5% return will be applied to rate
reductions and the remaining one-third retained by GEORGIA. Pursuant to
this provision, GEORGIA recognized accelerated amortization of $11.6
million in the second quarter of 2001 and $51.3 million in the second
quarter of 2000 and $49.2 million year-to-date 2001 and $87.9 million
year-to-date 2000.
Pursuant to GEORGIA's existing rate order, GEORGIA was required to file a
general rate case with the Georgia PSC by July 1, 2001. Accordingly, on
June 29, 2001, GEORGIA filed a rate plan with the Georgia PSC. GEORGIA's
filing showed a base rate revenue deficiency of $103 million for the test
period. GEORGIA's rate plan proposal waives the base rate increase in
favor of a five-year plan that includes several modifications to the
existing rate order. GEORGIA requested to continue operating within an
earnings band, but requested that the mid-point of the band be increased
by 100 basis points, to a range of between 11% and 13.5 % return on
equity. As part of the proposal, GEORGIA also requested a continuation of
the sharing mechanism that was approved in 1998. The new proposal would
allow customers to keep two-thirds of any amount above the earnings range
that can be attributed to weather, while GEORGIA would keep one-third.
GEORGIA and its customers would each keep half of all other earnings above
the range. GEORGIA also proposed a certified capacity cost recovery clause
that would become effective on June 1, 2002. The Georgia PSC is expected
to issue its decision by December 20, 2001 to be effective January 1,
2002. There can be no assurance that the plan, as submitted by GEORGIA,
will be approved by the Georgia PSC.
(H) Reference is made to Note 3 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's
designation as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act and other
environmental contingencies.
(I) SOUTHERN has made separate guarantees to certain counterparties regarding
performance of contractual commitments by Mirant's trading and marketing
subsidiaries. At June 30, 2001, the total notional amount of guarantees
was $96 million and the estimated fair value of net contractual
commitments outstanding was approximately $17.3 million. Based upon a
statistical analysis of credit risk, SOUTHERN's potential exposure under
these contractual commitments would not materially differ from the
estimated fair value. Subsequent to the spin off, Mirant began paying
SOUTHERN a monthly fee of 1 percent on the average aggregate maximum
principal amount of all guarantees outstanding until they are replaced or
expire. Mirant must use reasonable efforts to release SOUTHERN from all
such support arrangements and will indemnify SOUTHERN for any obligations
incurred.
Reference is made to Note 9 to the financial statements of SOUTHERN under
the caption "Guarantees" in Item 8 of the Form 10-K.
69
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(J) With respect to Mobile Energy, reference is made to Note 3 to the
financial statements of SOUTHERN in Item 8 and to Legal Proceedings in
Item 3 of the Form 10-K for information relating to (i) petitions for
Chapter 11 bankruptcy relief which were filed in the U. S. Bankruptcy
Court for the Southern District of Alabama and (ii) proposed settlement
discussions among the affected parties.
(K) Reference is made to Note 3 to the financial statements of SOUTHERN in
Item 8 and to Legal Proceedings in Item 3 of the Form 10-K for
information relating to various lawsuits.
(L) Effective May 4, 2001, in connection with commercial operation of the
1,064-megawatt natural gas combined cycle facility at MISSISSIPPI's Plant
Daniel (the "Facility"), MISSISSIPPI entered into the initial 10-year lease
term under its lease arrangement for the Facility with Escatawpa Funding,
Limited Partnership. The final completion cost will be approximately $370
million. The lease provides for a residual value guarantee (approximately
71% of the acquisition cost) by MISSISSIPPI 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 MISSISSIPPI's option,
MISSISSIPPI may either exercise its purchase option or the facility can be
sold to a third party. MISSISSIPPI expects the fair market value of the
leased facility to substantially reduce or eliminate MISSISSIPPI's payment
under the residual value guarantee. The annual amount of future minimum
operating lease payments exclusive of any payment related to this guarantee
will approximate $30 million during the initial term.
(M) In April 2001, SAVANNAH received an order from the Georgia PSC allowing
SAVANNAH to set the fuel cost recovery rate to recover its approximately
$40 million deferred fuel balance over three years and to recover
approximately $137 million in projected annual fuel and purchased power
costs, for a total recovery of about $150 million per year. The order
"capped" energy strip purchases at $100 per megawatt. Any purchase
agreement for summer energy strips priced in excess of the "cap" requires
that the amount above $100 per megawatt be "imputed" as capacity and
recovered through non-fuel rates. In a reconsideration of the SAVANNAH
order, decided in a June 11, 2001 Administrative Session, the Georgia PSC
ordered that all costs for energy purchases contracted for prior to April
30, 2001 may be recovered through the fuel clause. In May 2001, the Georgia
PSC approved an increase to the retail fuel rate allowing GEORGIA to
recover $87 million of unrecovered fuel costs over the next 24 months.
(N) Reference is made to Note 3 to the financial statements of SOUTHERN and
ALABAMA in Item 8 of the Form 10-K for information relating to retail rate
adjustment procedures. Effective July 2001, retail rates were adjusted
under Rate CNP, Certificated New Plant, which allows ALABAMA to begin to
recover costs for a new generating plant after it goes into commercial
operation. ALABAMA placed Plant Barry, Unit 7 into commercial operation on
May 1, 2001.
70
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(O) SOUTHERN's reportable business segment is the five integrated Southeast
utilities that provide electric service in four states.
Net income and total assets for discontinued operations are included in
the Reconciling Eliminations columns. The All Other category includes
parent SOUTHERN, which does not allocate operating expenses to business
segments, and segments below the quantitative threshold for separate
disclosure. These segments include telecommunications, energy products and
services, and leasing and financing services. Intersegment revenues are
not material. Financial data for business segments for the periods covered
in the Form 10-Q are as follows:
Integrated
Southeast All Reconciling
Utilities Other Eliminations Consolidated
----------------- -------------- --------------- ------------------
(in millions)
Three Months Ended June 30, 2001:
Operating revenues $ 2,503 $ 70 $ (12) $ 2,561
Segment net income (loss) 276 (4) - 272
Six Months Ended June 30, 2001:
Operating revenues $ 4,724 $ 119 $ (12) $ 4,831
Segment net income (loss) 475 (23) 140 592
Total assets at June 30, 2001 $28,032 $ 3,307 $(2,053) $29,286
------------------------------------------------ ----------------- -------------- --------------- ------------------
Three Months Ended June 30, 2000:
Operating revenues $ 2,472 $ 62 $ (12) $ 2,522
Segment net income (loss) 281 (28) 89 342
Six Months Ended June 30, 2000:
Operating revenues $ 4,477 $ 119 $ (22) $ 4,574
Segment net income (loss) 457 (51) 181 587
Total assets at December 31, 2000 $26,917 $ 2,200 $ 2,245 $31,362
------------------------------------------------ ----------------- -------------- --------------- ------------------
71
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(1) Reference is made to the Notes to the Condensed Financial
Statements herein for information regarding certain legal
and administrative proceedings in which SOUTHERN and its
reporting subsidiaries are involved.
Item 4. Submission of Matters to a Vote of Security Holders.
SOUTHERN
SOUTHERN held its annual meeting of shareholders on May 23,
2001. Each nominee for director of SOUTHERN received the
requisite plurality of votes. The vote tabulation was as
follows:
Nominees Shares For Shares Withhold Vote
Daniel P. Amos 514,915,234 6,937,409
Dorrit J. Bern 514,640,987 7,211,656
Thomas J. Chapman 514,671,296 7,181,347
H. Allen Franklin 514,928,372 6,924,271
Bruce S. Gordon 514,734,568 7,118,075
L. G. Hardman III 514,775,095 7,077,548
Elmer B. Harris 514,806,224 7,046,419
Donald M. James 514,894,669 6,957,974
Zack T. Pate 515,004,974 6,847,669
Gerald J. St. Pe 514,782,135 7,070,508
ALABAMA
ALABAMA held its annual meeting of common shareholders and
preferred shareholders on April 27, 2001, and the following
persons were elected to serve as directors of ALABAMA:
Whit Armstrong Thomas C. Meredith
David J. Cooper Mayer Mitchell
H. Allen Franklin William V. Muse
Elmer B. Harris Robert D. Powers
R. Kent Henslee Andreas Renschler
Carl E. Jones, Jr. C. Dowd Ritter
Patricia M. King James H. Sanford
James K. Lowder John Cox Webb, IV
Wallace D. Malone, Jr. James W. Wright
All 5,608,955 of the then outstanding shares of ALABAMA's
common stock are owned by SOUTHERN and were voted in favor of
the nominees for directors. None of the shares of preferred
stock or Class A preferred stock were voted.
72
Item 4. Submission of Matters to a Vote of Security Holders.(Continued)
GEORGIA
GEORGIA held its annual meeting of common shareholders and
preferred shareholders on May 16, 2001, and the following
persons were elected to serve as directors of GEORGIA:
Daniel P. Amos G. Joseph Prendergast
Juanita P. Baranco David M. Ratcliffe
William A. Fickling, Jr. William Jerry Vereen
H. Allen Franklin Carl Ware
L. G. Hardman III E. Jenner Wood, III
James R. Lientz, Jr.
All of the 7,761,500 outstanding shares of GEORGIA's common
stock are owned by SOUTHERN and were voted in favor of the
nominees for directors. None of the shares of preferred stock
were voted.
GULF
GULF held its annual meeting of common shareholders and
preferred shareholders on May 22, 2001, and the following
persons were elected to serve as directors of GULF:
Travis J. Bowden W. Deck Hull, Jr.
C. LeDon Anchors Joseph K. Tannehill
Fred C. Donovan Barbara H. Thames
H. Allen Franklin
In addition, at the annual meeting, shareholders were entitled
to vote on an amendment of GULF's by-laws to allow GULF's board
of directors to fill vacancies on the board under any
circumstance.
All of the 992,717 outstanding shares of GULF's common stock
are owned by SOUTHERN and were voted in favor of the nominees
for directors and the by-laws amendment. None of the shares of
preferred stock were voted.
MISSISSIPPI
MISSISSIPPI held its annual meeting of common shareholders and
preferred shareholders on May 21, 2001, and the following
persons were elected to serve as directors of MISSISSIPPI:
Michael D. Garrett Malcolm Portera
Tommy E. Dulaney George A. Schloegel
Robert S. Gaddis Philip J. Terrell
Linda T. Howard N. Eugene Warr
Aubrey K. Lucas
All of the 1,121,000 outstanding shares of MISSISSIPPI's common
stock are owned by SOUTHERN and were voted in favor of the
nominees for directors. A total of 30 shares of preferred stock
were voted in favor of the nominees for directors and no other
shares of preferred stock were voted.
73
Item 4. Submission of Matters to a Vote of Security Holders.(Continued)
SAVANNAH
By written consent, in lieu of the annual meeting of
stockholders of SAVANNAH, effective May 3, 2001, the following
persons were elected to serve as directors of SAVANNAH:
Gus H. Bell, III Anthony R. James
Archie H. Davis Robert B. Miller, III
Walter D. Gnann Arnold M. Tenenbaum
All of the 10,844,635 outstanding shares of SAVANNAH's common
stock are owned by SOUTHERN and were voted in favor of the
nominees for directors.
Item 5. Other Information.
Historically, the price for shares purchased from SOUTHERN
under the Southern Investment Plan was calculated as the
average of the high and low sale prices as reported on the NYSE
Composite Transactions as published by The Wall Street Journal.
On April 30, 2001, The Wall Street Journal ceased reporting
such high and low sales prices. Accordingly, effective April
30, 2001, the price for shares purchased under the Southern
Investment Plan is calculated as the average of the high and
low sales prices on the NYSE Composite Transactions as reported
to SOUTHERN by the NYSENET or, if the NYSENET is unavailable to
SOUTHERN for any reason, as reported to SOUTHERN by the New
York Stock Exchange or by such other sources as SOUTHERN deems
accurate.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
Exhibit 24 - (a) Powers of Attorney and resolutions.
(Designated in the Form 10-K for the
year ended December 31, 2000, File
Nos. 1-3526, 1-3164, 1-6468, 0-2429,
0-6849 and 1-5072 as Exhibits 24(a),
24(b), 24(c), 24(d), 24(e) and 24(f),
respectively, and
incorporated herein by reference.)
Exhibit 99 Important U.S. Federal Income Tax
Information for Mirant spin off.
(b) Reports on Form 8-K.
-------------------
SOUTHERN filed a Current Report on Form 8-K dated
April 2, 2001:
Items reported: Items 2, 7 and 9
Financial statements filed: Pro Forma
Financial
Information.
GEORGIA filed Current Reports on Form 8-K dated May 1,
2001 and May 14, 2001:
Items reported: Items 5 and 7
Financial statements filed: None
SAVANNAH filed a Current Report on Form 8-K dated May 8,
2001:
Items reported: Items 5 and 7
Financial statements filed: None
74
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
THE SOUTHERN COMPANY
By H. Allen Franklin
Chairman and Chief Executive Officer
(Principal Executive Officer)
By Gale E. Klappa
Financial Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 14, 2001
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
ALABAMA POWER COMPANY
By Elmer B. Harris
Chairman and Chief Executive Officer
(Principal Executive Officer)
By William B. Hutchins, III
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 14, 2001
75
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GEORGIA POWER COMPANY
By David M. Ratcliffe
President and Chief Executive Officer
(Principal Executive Officer)
By Thomas A. Fanning
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 14, 2001
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GULF POWER COMPANY
By Travis J. Bowden
President and Chief Executive Officer
(Principal Executive Officer)
By Ronnie Labrato
Vice President, Chief Financial Officer and Comptroller
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 14, 2001
76
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MISSISSIPPI POWER COMPANY
By Michael D. Garrett
President and Chief Executive Officer
(Principal Executive Officer)
By Michael W. Southern
Vice President, Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 14, 2001
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
SAVANNAH ELECTRIC AND POWER COMPANY
By Anthony R. James
President and Chief Executive Officer
(Principal Executive Officer)
By Kirby R. Willis
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 14, 2001
77