==============================================================================
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, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ------------- ------------------------------------- ------------------
1-3526 The Southern Company 58-0690070
(A Delaware Corporation)
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(404) 506-5000
1-3164 Alabama Power Company 63-0004250
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35291
(205) 257-1000
1-6468 Georgia Power Company 58-0257110
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
0-2429 Gulf Power Company 59-0276810
(A Maine Corporation)
One Energy Place
Pensacola, Florida 32520
(850) 444-6111
001-11229 Mississippi Power Company 64-0205820
(A Mississippi Corporation)
2992 West Beach
Gulfport, Mississippi 39501
(228) 864-1211
1-5072 Savannah Electric and Power Company 58-0418070
(A Georgia Corporation)
600 East Bay Street
Savannah, Georgia 31401
(912) 644-7171
333-98553 Southern Power Company 58-2598670
(A Delaware Corporation)
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(404) 506-5000
=============== =========================================== ==================
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____
Indicate by check mark whether the registrants are accelerated filers as
defined by Rule 12b-2 of the Securities Exchange Act of 1934.
Yes X (except for Southern Power Company) No ___
Description of Shares Outstanding
Registrant Common Stock at July 31, 2003
- ---------- --------------- -----------------
The Southern Company Par Value $5 Per Share 728,512,169
Alabama Power Company Par Value $40 Per Share 6,625,000
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
Southern Power Company Par Value $0.01 Per Share 1,000
This combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company and Southern Power Company.
Information contained herein relating to any individual company is filed by such
company on its own behalf. Each company makes no representation as to
information relating to the other companies.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2003
Page
Number
DEFINITIONS........................................................................................................ 5
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
Condensed Consolidated Statements of Income........................................................ 8
Condensed Consolidated Statements of Cash Flows.................................................... 9
Condensed Consolidated Balance Sheets.............................................................. 10
Condensed Consolidated Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 12
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 13
Alabama Power Company
Condensed Statements of Income..................................................................... 24
Condensed Statements of Cash Flows................................................................. 25
Condensed Balance Sheets........................................................................... 26
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 28
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 29
Georgia Power Company
Condensed Statements of Income..................................................................... 38
Condensed Statements of Cash Flows................................................................. 39
Condensed Balance Sheets........................................................................... 40
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 42
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 43
Gulf Power Company
Condensed Statements of Income..................................................................... 52
Condensed Statements of Cash Flows................................................................. 53
Condensed Balance Sheets........................................................................... 54
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 56
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 57
Mississippi Power Company
Condensed Statements of Income..................................................................... 65
Condensed Statements of Cash Flows................................................................. 66
Condensed Balance Sheets........................................................................... 67
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 69
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 77
Condensed Statements of Cash Flows................................................................. 78
Condensed Balance Sheets........................................................................... 79
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 81
Southern Power Company
Condensed Statements of Income..................................................................... 88
Condensed Statements of Cash Flows................................................................. 89
Condensed Balance Sheets........................................................................... 90
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 92
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 93
Notes to the Condensed Financial Statements........................................................... 101
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 22
Item 4. Controls and Procedures............................................................................... 22
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2003
Page
Number
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 116
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....................................................... 116
Item 5. Other Information......................................................................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 119
Signatures ............................................................................................... 124
4
DEFINITIONS
TERM MEANING
Alabama Power............................... Alabama Power Company
Clean Air Act .............................. Clean Air Act Amendments of 1990
Dynegy...................................... Dynegy, Inc.
ECO Plan.................................... Environmental Compliance Overview Plan
Energy Act.................................. Energy Policy Act of 1992
EPA......................................... U. S. Environmental Protection Agency
FASB........................................ Financial Accounting Standards Board
FERC........................................ Federal Energy Regulatory Commission
Form 10-K................................... Combined Annual Report on Form 10-K of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power,
Savannah Electric and Southern Power for the year ended
December 31, 2002
Georgia Power............................... Georgia Power Company
Gulf Power.................................. Gulf Power Company
IRS......................................... Internal Revenue Service
LIBOR....................................... London Interbank Offered Rate
Mirant...................................... Mirant Corporation
Mississippi Power........................... Mississippi Power Company
Mobile Energy............................... Mobile Energy Services Company, L.L.C. and
Mobile Energy Services Holdings, Inc.
Moody's..................................... Moody's Investors Service, Inc.
NRC......................................... Nuclear Regulatory Commission
operating companies......................... Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Savannah Electric
PEP......................................... Performance Evaluation Plan
PPA......................................... Purchase Power Agreement
PSC......................................... Public Service Commission
PUHCA....................................... Public Utility Holding Company Act of 1935, as amended
RTO......................................... Regional Transmission Organization
S&P......................................... Standard and Poor's, a division of The McGraw-Hill Companies
Savannah Electric........................... Savannah Electric and Power Company
SCS......................................... Southern Company Services, Inc.
SEC......................................... Securities and Exchange Commission
SeTrans..................................... A proposed regional transmission organization consisting
of public and private companies, including Southern Company, located
in eight southeastern states
Southern Company............................ The Southern Company
Southern Company GAS........................ Southern Company Gas LLC
Southern Company system..................... Southern Company, the operating companies, Southern Power and other subsidiaries
Southern LINC............................... Southern Communications Services, Inc.
Southern Power.............................. Southern Power Company
Super Southeast............................. Southern Company's traditional service territory, Alabama, Florida, Georgia and
Mississippi plus the surrounding states of Kentucky, Louisiana, North Carolina,
South Carolina, Tennessee and Virginia
TVA......................................... Tennessee Valley Authority
5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking and historical
information. Forward-looking information includes, among other things,
statements concerning capital requirements, expected capacity payments, the
Atlanta one-hour ozone nonattainment classification and Southern Power's
commercial paper balances and scheduled completion of new generating facilities.
In some cases, forward-looking statements can be identified by terminology such
as "may," "will," "could," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" or "continue" or
the negative of these terms or other comparable terminology. The registrants
caution that there are various important factors that could cause actual results
to differ materially from those indicated in the forward-looking statements;
accordingly, there can be no assurance that such indicated results will be
realized. These factors include the impact of recent and future federal and
state regulatory change, including legislative and regulatory initiatives
regarding deregulation and restructuring of the electric utility industry and
also changes in environmental and other laws and regulations to which Southern
Company and its subsidiaries are subject, as well as changes in application of
existing laws and regulations; current and future litigation, including the
pending EPA civil actions against certain Southern Company subsidiaries; the
effects, extent and timing of the entry of additional competition in the markets
in which Southern Company's subsidiaries operate; the impact of fluctuations in
commodity prices, interest rates and customer demand; state and federal rate
regulations; political, legal and economic conditions and developments in the
United States; the performance of projects undertaken by the non-traditional
business and the success of efforts to invest in and develop new opportunities;
internal restructuring or other restructuring options that may be pursued;
potential business strategies, including acquisitions or dispositions of assets
or businesses, which cannot be assured to be completed or beneficial to Southern
Company or its subsidiaries; the ability of counterparties of Southern Company
and its subsidiaries to make payments as and when due; the effects of, and
changes in, economic conditions in the areas in which Southern Company's
subsidiaries operate, including the current soft economy; the direct or indirect
effects on Southern Company's business resulting from the terrorist incidents on
September 11, 2001, or any similar such incidents or responses to such
incidents; financial market conditions and the results of financing efforts; the
timing and acceptance of Southern Company's new product and service offerings;
the ability of Southern Company and its subsidiaries to obtain additional
generating capacity at competitive prices; weather and other natural phenomena;
and other factors discussed elsewhere herein and in other reports (including the
Form 10-K) filed from time to time with the SEC.
6
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
7
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,
--------------------- ---------------------
2003 2002 2003 2002
------ ------ ------ ------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $2,175,706 $2,185,048 $4,149,550 $4,028,767
Sales for resale 338,071 293,475 677,232 526,154
Other electric revenues 227,921 84,447 319,798 149,258
Other revenues 117,525 67,802 265,545 140,181
---------- ---------- ---------- ----------
Total operating revenues 2,859,223 2,630,772 5,412,125 4,844,360
---------- ---------- ---------- ----------
Operating Expenses:
Fuel 732,245 686,544 1,442,572 1,260,737
Purchased power 135,575 123,644 272,677 191,261
Other operations 570,193 522,704 1,064,059 967,956
Maintenance 238,954 247,019 468,664 475,809
Depreciation and amortization 258,297 254,271 503,285 499,906
Taxes other than income taxes 142,737 137,877 291,563 277,724
---------- ---------- ---------- ----------
Total operating expenses 2,078,001 1,972,059 4,042,820 3,673,393
---------- ---------- ---------- ----------
Operating Income 781,222 658,713 1,369,305 1,170,967
Other Income and (Expense):
Allowance for equity funds used during construction 4,173 3,505 12,024 10,592
Interest income 20,589 4,141 25,087 8,944
Equity in losses of unconsolidated subsidiaries (26,276) (25,751) (53,443) (41,655)
Leveraged lease income 15,698 14,753 33,413 29,454
Interest expense, net of amounts capitalized (134,188) (123,219) (257,949) (243,772)
Distributions on capital and preferred securities of subsidiaries (39,951) (43,649) (79,537) (86,176)
Preferred dividends of subsidiaries (5,472) (4,396) (10,222) (8,777)
Other income (expense), net 1,855 2,176 (2,428) (17,880)
---------- ---------- ---------- ----------
Total other income and (expense) (163,572) (172,440) (333,055) (349,270)
---------- ---------- ---------- ----------
Earnings Before Income Taxes 617,650 486,273 1,036,250 821,697
Income taxes 185,763 154,881 306,931 266,019
---------- ---------- ---------- ----------
Earnings Before Cumulative Effect of Accounting Change 431,887 331,392 729,319 555,678
Cumulative effect of accounting change --
less income taxes of $231 - - 367 -
---------- ---------- ---------- ----------
Consolidated Net Income $ 431,887 $ 331,392 $ 729,686 $ 555,678
========== ========== ========== ==========
Common Stock Data:
Consolidated basic earnings per share $0.60 $0.47 $1.01 $0.79
Consolidated diluted earnings per share $0.59 $0.46 $1.00 $0.78
Average number of basic shares of common
stock outstanding (in thousands) 724,627 706,181 721,785 703,596
Average number of diluted shares of common
stock outstanding (in thousands) 730,286 712,165 727,139 709,137
Cash dividends paid per share of common stock $0.343 $0.335 $0.685 $0.670
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
------ -----
(in thousands)
Operating Activities:
Consolidated net income $729,686 $555,678
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Depreciation and amortization 585,381 551,663
Deferred income taxes and investment tax credits 199,776 22,729
Equity in losses of unconsolidated subsidiaries 53,443 41,655
Leveraged lease income (33,413) (29,454)
Pension, postretirement, and other employee benefits (13,540) (29,632)
Other, net 21,791 15,952
Changes in certain current assets and liabilities --
Receivables, net (30,305) (38,478)
Fossil fuel stock (28,952) 20,027
Materials and supplies (13,401) 12,806
Other current assets (117,251) (70,190)
Accounts payable (251,300) (78,416)
Taxes accrued 160,320 92,725
Other current liabilities (110,334) (25,671)
---------- ----------
Net cash provided from operating activities 1,151,901 1,041,394
---------- ----------
Investing Activities:
Gross property additions (1,071,142) (1,409,984)
Cost of removal net of salvage (35,941) (56,779)
Change in construction payables (66,025) (65,109)
Other (21,309) (49,871)
---------- ----------
Net cash used for investing activities (1,194,417) (1,581,743)
---------- ----------
Financing Activities:
Increase (decrease) in notes payable, net 477,254 (247,899)
Proceeds --
Senior notes 1,970,000 1,473,992
Other long-term debt 75,495 3,299
Capital and preferred securities - 475,000
Preferred stock 125,000 -
Common stock 291,076 247,830
Redemptions --
First mortgage bonds (33,350) (7,444)
Long-term senior notes (1,617,465) (381,030)
Other long-term debt (526,605) (160,662)
Capital and preferred securities (240,000) (35,000)
Payment of common stock dividends (493,069) (470,426)
Other (48,213) (36,618)
---------- ----------
Net cash provided from (used for) financing activities (19,877) 861,042
----------- ----------
Net Change in Cash and Cash Equivalents (62,393) 320,693
Cash and Cash Equivalents at Beginning of Period 273,032 354,015
---------- ----------
Cash and Cash Equivalents at End of Period $ 210,639 $ 674,708
========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $31,176 and $28,108 capitalized for 2003 and 2002, respectively) $247,444 $213,496
Income taxes (net of refunds) ($1,680) $241,385
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- ------ ------------- ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 210,639 $ 273,032
Receivables
Customer accounts receivable 745,372 709,878
Unbilled revenues 294,924 277,105
Under recovered regulatory clause revenues 167,717 174,362
Other accounts and notes receivable 365,861 370,021
Accumulated provision for uncollectible accounts (35,941) (25,546)
Fossil fuel stock, at average cost 327,906 298,955
Materials and supplies, at average cost 552,860 539,459
Other 328,957 299,743
----------- -----------
Total current assets 2,958,295 2,917,009
----------- -----------
Property, Plant, and Equipment:
In service 39,617,006 37,485,853
Less accumulated depreciation 15,254,464 15,448,850
----------- -----------
24,362,542 22,037,003
Nuclear fuel, at amortized cost 196,637 222,676
Construction work in progress 1,403,638 2,382,287
----------- -----------
Total property, plant, and equipment 25,962,817 24,641,966
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at fair value 725,987 639,167
Leveraged leases 806,908 790,767
Other 225,199 243,353
----------- -----------
Total other property and investments 1,758,094 1,673,287
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 889,272 897,777
Prepaid pension costs 841,318 786,115
Unamortized debt issuance expense 127,705 121,008
Unamortized premium on reacquired debt 329,189 313,057
Other 426,604 398,581
----------- -----------
Total deferred charges and other assets 2,614,088 2,516,538
----------- -----------
Total Assets $33,293,294 $31,748,800
=========== ===========
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholders' Equity 2003 2002
- ------------------------------------ ------------ ----------------
(in thousands)
Current Liabilities:
Securities due within one year $ 698,846 $ 1,679,489
Notes payable 1,443,369 972,459
Accounts payable 657,820 985,660
Customer deposits 177,036 168,952
Taxes accrued --
Income taxes 202,149 62,571
Other 207,230 218,967
Interest accrued 174,085 158,196
Vacation pay accrued 128,463 130,015
Other 456,410 592,531
------------ -----------
Total current liabilities 4,145,408 4,968,840
------------ -----------
Long-term debt 9,525,874 8,692,962
------------ -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,398,899 4,214,471
Deferred credits related to income taxes 431,602 449,816
Accumulated deferred investment tax credits 593,072 606,779
Employee benefits provisions 645,229 614,239
Asset retirement obligations 839,643 -
Other 892,831 813,464
------------ -----------
Total deferred credits and other liabilities 7,801,276 6,698,769
------------ -----------
Company or subsidiary obligated mandatorily redeemable
capital and preferred securities 2,180,000 2,380,000
------------ -----------
Cumulative preferred stock of subsidiaries 423,126 298,126
------------ -----------
Common Stockholders' Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- June 30, 2003: 727,821,192 shares;
-- December 31, 2002: 716,548,526 shares 3,639,106 3,582,743
Paid-in capital 572,734 337,670
Treasury, at cost -- June 30, 2003: 160,935 shares;
-- December 31, 2002: 147,021 shares (3,409) (2,815)
Retained earnings 5,110,814 4,874,375
Accumulated other comprehensive loss (101,635) (81,870)
------------ -----------
Total common stockholders' equity 9,217,610 8,710,103
------------ -----------
Total Liabilities and Stockholders' Equity $ 33,293,294 $31,748,800
============ ===========
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
11
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,
-------------------------- --------------------------
2003 2002 2003 2002
-------- ------- --------------------------
(in thousands) (in thousands)
Consolidated Net Income $ 431,887 $ 331,392 $ 729,686 $ 555,678
Other comprehensive loss:
Changes in fair value of marketable securities (16) 431 96 291
Changes in fair value of qualifying hedges, net of tax
of $(9,458), $(22,990), ($14,962), $(18,945),
respectively (12,351) (35,941) (20,692) (29,692)
Less: Reclassification adjustment for amounts
included in net income, net of tax of $29, $24, $195,
$24, respectively 574 38 831 38
------------ ---------- --------- ---------
Total other comprehensive loss $ (11,793) $ (35,472) $ (19,765) $ (29,363)
------------ ---------- ---------- ---------
CONSOLIDATED COMPREHENSIVE INCOME $ 420,094 $ 295,920 $ 709,921 $ 526,315
============ ========== ========= =========
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At June 30, At December 31,
2003 2002
------------ ---------------
(in thousands)
Balance at beginning of period $ (81,870) $ 7,148
Change in current period (19,765) (89,018)
---------- ---------
BALANCE AT END OF PERIOD $ (101,635) $ (81,870)
---------- ---------
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Southern Company is focusing on three main businesses in the Southeast: its
traditional business, represented by its five operating companies providing
regulated retail electric service in four states; a growing competitive
generation business in the Super Southeast; and energy-related products and
services for its retail customers. For additional information on these
businesses, see Item 1 - BUSINESS - "Operating Companies," "Southern Power" and
"Other Business" in the Form 10-K.
Earnings
Southern Company's second quarter and year-to-date 2003 earnings were
$432 million ($0.60 per share) and $730 million ($1.01 per share), respectively,
compared with $331 million ($0.47 per share) and $556 million ($0.79 per share)
in the second quarter and year-to-date 2002. The second quarter and year-to-date
2003 earnings include a one-time after-tax gain of $88 million associated with
the termination in May 2003 of all PPAs between Southern Company subsidiaries,
Mississippi Power and Southern Power, and subsidiaries of Dynegy. Reference is
made to Note (M) to the Condensed Financial Statements herein for additional
information. Earnings in the second quarter 2003 increased despite mild weather.
As a result of the mild weather, second quarter demand for electricity in the
retail service territory declined; however, the availability of low-cost
generation for the wholesale market resulted in increased sales to other
utilities and strong performance by Southern Company's competitive generation
business. Year-to-date 2003 earnings were also positively impacted by increased
demand for electricity in the first quarter 2003 and the overall impact of
regulatory rate proceedings in Alabama and Florida.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease)
------------------------------- -------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ (9,342) (0.4) $ 120,783 3.0
Sales for resale................................. 44,596 15.2 151,078 28.7
Other electric revenues.......................... 143,474 169.9 170,540 114.3
Other revenues................................... 49,723 73.3 125,364 89.4
Fuel expense..................................... 45,701 6.7 181,835 14.4
Purchased power expense.......................... 11,931 9.6 81,416 42.6
Other operations expense......................... 47,489 9.1 96,103 9.9
Equity in losses of unconsolidated
subsidiaries.................................. 525 2.0 11,788 28.3
Interest income.................................. 16,448 N/M 16,143 180.5
Interest expense, net of amounts
capitalized................................... 10,969 8.9 14,177 5.8
N/M Not meaningful
13
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 decreased by $17.5 million, or 1.1%, in the
second quarter 2003 and increased by $40 million, or 1.4%, year-to-date 2003
when compared to the same periods in 2002. Kilowatt-hour energy sales to
residential, commercial and industrial customers were down 4.1%, 1.3% and 1.1%,
respectively, for the second quarter 2003 primarily due to milder-than-normal
temperatures and the sluggish economy in the service territory. Year-to-date
2003 earnings increased due to colder weather in the first quarter 2003 and
customer growth when compared to the corresponding periods in the prior year.
Sales for resale. The second quarter and year-to-date 2003 increases are
primarily attributed to increases of 27% and 33.3%, respectively, in wholesale
capacity and energy sales to these customers due to commercial operation of new
plants placed into service in June 2002 and June 2003 when compared to the same
periods in 2002. In addition, milder-than-normal weather in the retail service
territory resulted in additional available capacity for the wholesale markets.
Increased demand for energy as well as higher sales prices also contributed to
the increases in both of these reporting periods in 2003.
Other electric revenues. Other electric revenues were higher in the second
quarter and year-to-date 2003 when compared to the same periods in 2002
primarily due to $144 million in revenues recorded upon the termination of
Dynegy's PPAs. See Note (M) to the Condensed Financial Statements herein for
further information.
Other revenues. The second quarter and year-to-date 2003 increases in other
revenues are primarily attributed to revenues from Southern Company GAS, which
began operations in August 2002, as well as increases in revenues from Southern
LINC and from a subsidiary that provides services related to alternative fuel
products, when compared to the same periods in 2002.
Fuel expense. In the second quarter and year-to-date 2003, fuel expense
increased as a result of an increase in the average cost of fuel; commercial
operation of Southern Power's new units in June 2002 and June 2003 and fuel
expenses associated with Southern Company GAS. Increases in fuel expense at the
operating companies are generally offset by fuel revenues and do not affect net
income.
Purchased power expense. This expense increased in the second quarter and
year-to-date 2003 mainly due to the availability of power at prices lower than
the cost of self-generation and the Southern Company system power pool when
compared to the same periods in 2002. Increases in purchased power expenses at
the operating companies are generally offset by fuel revenues and do not affect
net income.
Other operations expense. The increases in other operation expense for the
second quarter and year-to-date 2003 are primarily attributed to higher
administrative and general expenses related to commercial operation of Southern
Power's new units in June 2002 and June 2003; costs incurred in conjunction with
restructuring Mississippi Power's lease agreement for the combined cycle
generating units at Plant Daniel; property insurance and employee benefits and
operations at Southern Company GAS. Southern Company GAS began operations in
August 2002. Reference is made to Note (R) to the Condensed Financial Statements
herein for additional information on Mississippi Power's restructured lease
agreement.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Equity in losses of unconsolidated subsidiaries. Losses from unconsolidated
subsidiaries remained stable in the second quarter 2003 but increased
year-to-date 2003 when compared to the corresponding period in the prior year
due to higher operating losses from Southern Company's investments in entities
that produce synthetic fuel. These losses are offset by income tax credits
generated by such entities. See Note (D) to the Condensed Financial Statements
herein for further information on Southern Company's investments in these
entities and IRS reviews of the related tax credits.
Interest income. The second quarter and year-to-date 2003 increases when
compared to the same periods in 2002 are primarily a result of a favorable tax
settlement related to IRS audits for the years 1988 through 1999, excluding 1993
through 1995.
Interest expense, net of amounts capitalized. The increases in this expense
in the second quarter and year-to-date 2003 are mainly attributed to issuances,
net of redemptions, of $353 million in senior notes by the operating companies
since the corresponding periods in 2002.
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 operating companies to
maintain a stable regulatory environment and achieve energy sales growth while
containing costs and the profitability of the competitive market-based wholesale
generating business. For additional information relating to these issues, see
Item 1 - BUSINESS - "Risk Factors" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Future Earnings Potential" of Southern Company in the Form 10-K.
Reference is made to Note 11 to the financial statements of Southern
Company in Item 8 and MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings
Potential" in Item 7 of the Form 10-K and to Note (B) to the Condensed Financial
Statements herein for information relating to Mirant. On July 14, 2003, Mirant
filed for voluntary reorganization under Chapter 11 of the Federal Bankruptcy
Code. Southern Company has various contingent liabilities associated with
Mirant, including guarantees, litigation and joint and several liabilities in
connection with the consolidated federal income tax return, as well as related
indemnifications under the separation agreement. The ultimate outcome of such
contingent liabilities cannot now be determined. Furthermore, the impact of
Mirant's bankruptcy filing on its related indemnity obligations, if any, cannot
now be determined.
On April 30, 2003, Mirant filed its Annual Report on Form 10-K for the year
ended December 31, 2002, which included its restated financial statements for
the years ended December 31, 2001 and 2000. The effect of these restatements on
Southern Company's financial statements, if any, cannot be determined until
Mirant's 2001 revised quarterly financial statements are filed. The impact of
the bankruptcy filing on the timing of filing 2001 revised quarterly financial
statements, if any, cannot now be determined. However, Southern Company's
management does not currently anticipate that a reaudit of Southern Company's
2000 or 2001 financial statements will be necessary.
Southern Company's business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation
over environmental issues and claims of various types, including property
damage, personal injury and citizen enforcement of environmental requirements,
has increased generally throughout the United States. In particular, personal
injury claims for damages caused by alleged exposure to hazardous materials have
become more frequent. The ultimate outcome of such litigation currently
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
filed against Southern Company and its subsidiaries cannot be predicted at this
time; however, after consultation with legal counsel, management does not
anticipate that the liabilities, if any, arising from such proceedings would
have a material adverse effect on Southern Company's financial position, results
of operations or cash flows.
Reference is made to Note (D) to the Condensed Financial Statements herein
for information regarding Southern Company's investments in two entities that
produce synthetic fuel and receive tax credits pursuant to Section 29 of the
Internal Revenue Code. On June 30, 2003 the IRS issued an announcement that
suspended the issuance of new private letter rulings upon its initiation of
additional reviews of the significant chemical change requirement for such tax
credits. The IRS has notified both of the entities in which Southern Company
holds investments of related reviews. From the date of Southern Company's
investments in these entities through June 30, 2003, Southern Company has
recognized approximately $219 million of these synthetic fuel tax credits
through income. The ultimate outcome of the IRS reviews cannot be determined at
this time.
Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information about these issues, including the EPA litigation, see
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note
3 to the financial statements of Southern Company in Item 8 of the Form 10-K.
Reference is made to Note (E) to the Condensed Financial Statements herein for
information regarding a recent ruling by the U.S. Court of Appeals for the
Eleventh Circuit.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" in Item 7 of the Form 10-K. The Atlanta area is currently classified as
a "serious" nonattainment area for the one-hour ozone standard under Title I of
the Clean Air Act. All "serious" areas were required to attain the one-hour
ozone standard by November 1999. The EPA provided an extension of the area's
compliance deadline to 2004, but on June 16, 2003, the Eleventh Circuit Court of
Appeals held the EPA's extension policy to be invalid and remanded the matter
back to the EPA. In response, the EPA is expected to re-classify Atlanta as a
"severe" nonattainment area with respect to the one-hour standard. If the
Atlanta area fails to comply with the one-hour standard by November 2005, all
major sources of nitrogen oxides and volatile organic compounds located in the
nonattainment area, including Georgia Power's Plants McDonough and Yates, could
be subject to payment of emissions fees currently estimated at $7,800-$8,000 per
ton, of nitrogen oxides emitted above 80% of the baseline period. Based on
average emissions at these units over the past three years, such fees could
potentially reach $23 million annually. However, Georgia Power does not
anticipate exceeding 80% of the baseline and, therefore, does not anticipate
incurring any such fees. The final outcome of this matter will depend on the
development and implementation of applicable regulations.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Southern Company in the Form 10-K
for information on the formation of an RTO as ordered by the FERC and the notice
of proposed rulemaking regarding open access transmission service and standard
electricity market design. In April 2003, the FERC issued a White Paper related
to its proposed rulemaking regarding open access transmission service and
standard electricity market design in an effort to respond to certain of the
public comments received on the standard market design proposal. Reactions to
the White Paper by Southeastern state regulators reflect significant continuing
differences in opinion between the FERC and various state regulatory commissions
over questions of jurisdiction and protection of retail customers. These
significant differences between state and federal regulators create substantial
uncertainty related to the ultimate approval of SeTrans because state commission
approval of the transfer of operational control of the transmission assets of
Southern Company and its subsidiaries is a prerequisite to the formation of
SeTrans. Pending energy legislation may also impact these issues. Any impact of
the other FERC proposals on Southern Company and its subsidiaries
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
will depend on the form in which final rules may be ultimately adopted;
however, Southern Company's revenues, expenses, assets and
liabilities could be adversely affected by changes in the transmission
regulatory structure in its regional power market.
Reference is made to Note (M) to the Condensed Financial Statements herein
for information regarding a one-time gain of $88 million upon the amendment and
termination of PPAs between Dynegy and Mississippi Power and Southern Power. In
accordance with the amended PPA, Mississippi Power will recognize capacity
revenues totaling approximately $8.8 million for the period from June through
October 2003. Under the original terms of the PPAs, Mississippi Power and
Southern Power would have recognized revenue of approximately $1.8 million and
$5.9 million, respectively, for the remaining period of 2003 following the
terminations. Additionally, Mississippi Power and Southern Power are evaluating
options for their existing capacity. Southern Power has suspended construction
of Plant Franklin Unit 3. The final outcome of these matters cannot now be
determined.
Reference is made to Notes (A) through (I), (L) through (N) and (R) to the
Condensed Financial Statements herein for discussion of various contingencies
and other matters which may affect future earnings potential.
Accounting Policies
Critical Policy
Southern Company's significant accounting policies are described in Note 1 to
the financial statements of Southern Company in Item 8 of the Form 10-K.
Southern Company's critical accounting policy involves rate regulation. The
operating companies are subject to the provisions of FASB Statement No. 71,
"Accounting for the Effects of Certain Types of Regulation." In the event that a
portion of a company's operations is no longer subject to these provisions, the
company would be required to write off related regulatory assets and liabilities
that are not specifically recoverable and determine if any other assets,
including plant, have been impaired.
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial Statements herein for
information regarding the adoption of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" effective January 1, 2003. Statement No. 143
establishes new accounting and reporting standards for legal obligations
associated with the ultimate cost of retiring long-lived assets. The present
value of the ultimate costs for an asset's future retirement must be recorded in
the period in which the liability is incurred. The cost must be capitalized as
part of the related long-lived asset and depreciated over the asset's useful
life. Additionally, Statement No. 143 does not permit non-regulated companies to
continue accruing future retirement costs for long-lived assets that they do not
have a legal obligation to retire. Prior to January 2003, Southern Company
accrued for the ultimate cost of retiring most long-lived assets over the life
of the related asset through depreciation expense.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires classification of certain financial instruments within its scope,
including shares that are mandatorily redeemable, as liabilities. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003 for calendar year companies. In
accordance with Statement No. 150, Southern Company and the operating companies
reclassified $2.2 billion of mandatorily redeemable preferred securities as
liabilities effective July 1, 2003. The implementation of Statement No. 150 did
not have a material effect on Southern Company's Statements of Income and Cash
Flows.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
requires the primary beneficiary of a variable interest entity to consolidate
the related assets and liabilities. On July 1, 2003, Southern Company adopted
Interpretation No. 46 with no financial statement impact following completion of
restructuring Mississippi Power's lease arrangement for the combined cycle
generating units at Plant Daniel. See Financial Condition - "Off-Balance Sheet
Financing Arrangements" below and Note (R) to the Condensed Financial Statements
herein for further information on the lease restructuring.
FINANCIAL CONDITION
Overview
Major changes in Southern Company's financial condition during the first six
months of 2003 included $1.1 billion used for gross property additions to
utility plant. The funds for these additions and other capital requirements were
primarily obtained from operating activities, issuances of senior notes and
other long-term debt. See Southern Company's Condensed Consolidated Statements
of Cash Flows herein for further details.
Off-Balance Sheet Financing Arrangements
In May 2001, Mississippi Power began the initial 10-year term of an operating
lease agreement with Escatawpa Funding, Limited Partnership ("Escatawpa"), a
special purpose entity, to use a combined-cycle generating facility located at
Mississippi Power's Plant Daniel. The facility cost approximately $370 million.
Reference is made to Note 9 to the financial statements of Southern Company in
Item 8 of the Form 10-K for additional information. In June 2003, Escatawpa sold
its ownership interests in the facility to Juniper Capital L.P. ("Juniper").
Simultaneously, Juniper entered into a restructured lease agreement with
Mississippi Power. The terms of the lease with Juniper are substantially the
same as the lease with Escatawpa. In accordance with Interpretation No. 46,
Mississippi Power is not required to consolidate the leased assets and related
liabilities. Furthermore, the restructured lease agreement is an operating lease
under FASB Statement No. 13, "Accounting for Leases." Reference is made to Note
(R) to the Condensed Financial Statements herein for additional information.
Credit Rating Risk
Southern Company and its subsidiaries do not have any credit agreements that
would require material changes in payment schedules or terminations as a result
of a credit rating downgrade. There are certain contracts that could require
collateral -- but not accelerated payment -- in the event of a credit rating
change to below investment grade. These contracts are primarily for physical
electricity purchases and sales, fixed-price physical gas purchases and
agreements covering interest rate swaps. At June 30, 2003, the maximum potential
collateral requirements under the electricity purchase and sale contracts and
financial instrument agreements were approximately $382 million. Generally,
collateral may be provided for by a Southern Company guaranty, letter of credit
or cash. At June 30, 2003, there were no material collateral requirements for
the gas purchase contracts.
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Exposure to Market Risks
Southern Company's market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 2002 reporting period. In
addition, Southern Company is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
Due to cost-based rate regulations, the operating companies have limited
exposure to market volatility in interest rates, commodity fuel prices and
prices of electricity. To mitigate residual risks relative to movements in
electricity prices, the operating companies and Southern Power enter into fixed
price contracts for the purchase and sale of electricity through the wholesale
electricity market and, to a lesser extent, similar contracts for gas purchases.
Also, the operating companies have each implemented fuel-hedging programs at the
instruction of their respective PSCs. The fair value of derivative energy
contracts at June 30, 2003 was as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
---------------------------------- ----------------------------------------
Fair Value
---------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $47,228 $47,335
Contracts realized or settled (23,235) (37,955)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 2,690 17,303
---------------------------------- ------------------------ ---------------
Contracts at June 30, 2003 $26,683 $26,683
================================== ======================== ===============
Source of June 30, 2003
Valuation Prices
-------------------------------- ------------ ---------------------------
Total Maturity
----------------------------
Fair Value Year 1 1-3 Years
-------------------------------- --------------------------------------
(in thousands)
Actively quoted $26,683 $32,620 $(5,937)
External sources - - -
Models and other methods - - -
-------------------------------- ------------ -------------- -------------
Contracts at June 30, 2003 $26,683 $32,620 $(5,937)
================================ ============ ============== =============
Unrealized gains and losses from mark to market adjustments on contracts
related to the PSC-approved fuel hedging programs are recorded as regulatory
assets and liabilities. Realized gains and losses from these programs are
included in fuel expense and are recovered through the operating companies' fuel
cost recovery clauses. In addition, unrealized gains and losses on electric and
gas contracts used to hedge anticipated purchases and sales are deferred in
Other Comprehensive Income. Gains and losses on contracts that do not represent
hedges are recognized in the Statements of Income as incurred. At June 30, 2003,
the fair value of derivative energy contracts reflected in the financial
statements was as follows:
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Amounts
--------------------------------------- -------------------------
(in thousands)
Regulatory liabilities, net $24,110
Other comprehensive income 862
Net income 1,711
--------------------------------------- -------------------------
Total fair value $26,683
======================================= =========================
For the three months and six months ended June 30, 2003, approximately $1
million and $0.5 million, respectively, of gains were recognized in income,
compared to $3.7 million and $(6.1) million, respectively, of gains (losses)
recognized in income during the three months and six months ended June 30, 2002.
Southern Company is exposed to market price risk in the event of
nonperformance by the parties to the derivative energy contracts. Southern
Company's policy is to enter into agreements with counterparties that have
investment grade credit ratings by Moody's and S&P or that provide adequate
collateral; therefore, Southern Company does not anticipate nonperformance by
the counterparties. For additional information, reference is made to Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" of Southern Company
in the Form 10-K, Note 1 to the financial statements of Southern Company in Item
8 of the Form 10-K and Note (L) to the Condensed Financial Statements herein.
Financing Activities
During the first half of 2003, Southern Company subsidiaries issued $1,970
million of senior notes, $125 million of preferred stock and $75 million of
other long-term debt. The issuances were used to refund long-term senior notes
and other long-term debt. The remainder was used to reduce short-term debt and
fund ongoing construction programs. Reference is made to Southern Company's
Condensed Consolidated Statements of Cash Flows herein for further details on
financing activities during the first half of 2003.
In July 2003, Gulf Power issued $60 million of Series G 4.35% Senior Notes
due July 15, 2013 and $60 million of Series H 5.25% Senior Notes due July 15,
2033. The proceeds of the Series G Senior Notes were used to pay at maturity the
$60 million outstanding principal amount of Series C 4.69% Senior Notes due
August 1, 2003. The proceeds of the Series H Senior Notes will be used to redeem
in August 2003 the $46.7 million outstanding principal amount of the Series A
6.70% Senior Insured Quarterly Notes due June 30, 2038. The remainder will be
used to repay a portion of Gulf Power's short-term indebtedness.
In July 2003, Southern Power issued $575 million of 4.875% Senior Notes,
Series C due July 15, 2015. The proceeds from the sale were used to repay a
substantial portion of existing short-term indebtedness; to settle interest rate
hedges associated with this financing; and for general corporate purposes.
In July 2003, Alabama Power entered into swaps to hedge interest payments
associated with an anticipated debt issuance planned in December 2003. The swaps
are for a notional amount of $250 million at a fixed interest rate of 2.35% and
mature in December 2006.
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In July 2003, Georgia Power entered swaps to hedge interest payments
associated with variable rate pollution control bonds. The swaps are for a
notional amount of $873.3 million at an average fixed interest rate of 1.388%
and mature in December 2004. Also in July 2003, Georgia Power entered a swap to
hedge interest payments associated with a variable rate note with a coupon of
LIBOR plus 10 basis points. The swap is for a notional amount of $50 million at
a fixed interest rate of 1.5625% and matures in January 2005. Further in July
2003, Georgia Power entered a U.S. Treasury lock to hedge interest payments
associated with a 10-year debt issuance planned in August 2003. The swap is for
a notional amount of $100 million at a fixed interest rate of 4.465%.
In July 2003, Savannah Electric entered a swap to hedge interest payments
associated with an anticipated debt issuance planned in December 2003. The swap
is for a notional amount of $25 million at a fixed interest rate of 5.025% and
matures in December 2013.
The market price of Southern Company's common stock at June 30, 2003 was
$31.16 per share and the book value was $12.67 per share, representing a
market-to-book ratio of 246%, compared to $28.39, $12.16 and 233%, respectively,
at the end of 2002. The dividend for the second quarter 2003 was $0.343 per
share compared to $0.335 per share in the second quarter 2002. In July 2003,
Southern Company increased the dividend to $0.35 per share for the third quarter
2003.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital
Requirements for Construction," "Other Capital Requirements" and "Environmental
Matters" of Southern Company in the Form 10-K for a description of the Southern
Company system's capital requirements for its construction program, sinking fund
requirements, maturing debt and environmental compliance efforts. Approximately
$699 million will be required by June 30, 2004 for redemptions and maturities of
long-term debt. Also, Southern Company and its subsidiaries plan to continue, to
the extent possible, a program to retire higher-cost debt and replace these
securities with lower-cost capital.
Sources of Capital
In addition to the financing activities previously described, Southern Company
may require additional equity capital over the next several years. The amounts
and timing of additional equity capital to be raised will be contingent on
Southern Company's investment opportunities. The operating companies and
Southern Power plan to obtain the funds required for construction and other
purposes from sources similar to those used in the past, which were primarily
internal sources and the issuances of new debt and preferred equity securities,
term loans and short-term borrowings. However, the amount, type and timing of
any financings -- if needed -- will depend upon market conditions and regulatory
approval. See Item 1 - BUSINESS - "Financing Programs" of Southern Company in
the Form 10-K for additional information.
Southern Company's current liabilities exceed current assets because of the
continued use of short-term debt as a funding source to meet cash needs as well
as scheduled maturities of long-term debt.
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet short-term cash needs and contingencies, the Southern Company
system had at June 30, 2003 approximately $211 million of cash and cash
equivalents and approximately $3.2 billion of unused credit arrangements with
banks, of which $76 million expire in 2003, $2.5 billion expire in 2004 and $665
million expire in 2005 and beyond. Of the facilities maturing in 2003 and 2004,
$2.2 billion contain provisions allowing two-year term loans executable at the
expiration date. These unused credit arrangements also provide liquidity support
to variable rate pollution control bonds and commercial paper programs. Due to a
reduction of commercial paper and variable rate pollution bonds requiring
liquidity support, the Southern Company system reduced its credit arrangements
from $4.3 billion at March 2003 to $3.2 billion by the end of June 2003. The
operating companies may also meet short-term cash needs through a Southern
Company subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of each of the operating
companies. At June 30, 2003, the Southern Company system had extendible
commercial notes outstanding of zero, short-term notes payable outstanding of
$32 million and commercial paper outstanding of $1.4 billion. Management
believes that the need for working capital can be adequately met by utilizing
lines of credit without maintaining large cash balances.
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk"
herein for each registrant and Note 1 to the financial statements of each
registrant in Item 8 of the Form 10-K. Reference is also made to Note (L) to the
Condensed Financial Statements herein for information relating to derivative
instruments.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company,
the operating companies and Southern Power conducted separate evaluations under
the supervision and with the participation of each company's management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the disclosure controls and procedures (as defined in Sections
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon
those evaluations, the Chief Executive Officer and the Chief Financial Officer,
in each case, concluded that the disclosure controls and procedures are
effective in alerting them in a timely manner to material information relating
to each company (including its consolidated subsidiaries) required to be
included in periodic filings with the SEC.
(b) Changes in internal controls.
There have been no significant changes in Southern Company's, the operating
companies' or Southern Power's internal controls or in other factors that could
significantly affect these internal controls subsequent to the date each company
carried out its evaluation.
22
ALABAMA POWER COMPANY
23
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------ ------ ------ ------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $748,906 $736,174 $1,419,735 $1,368,071
Sales for resale --
Non-affiliates 130,621 119,540 254,343 214,163
Affiliates 54,741 42,497 116,728 97,174
Other revenues 30,288 26,132 68,311 47,184
--------- -------- ---------- ---------
Total operating revenues 964,556 924,343 1,859,117 1,726,592
--------- -------- ---------- ---------
Operating Expenses:
Operation --
Fuel 234,988 233,536 474,732 443,833
Purchased power --
Non-affiliates 41,886 20,413 75,156 36,184
Affiliates 58,416 41,913 99,912 74,643
Other 159,642 141,510 294,185 261,572
Maintenance 81,646 77,701 156,221 154,515
Depreciation and amortization 104,505 98,934 204,716 197,209
Taxes other than income taxes 56,482 54,103 116,567 111,603
--------- --------- ---------- ---------
Total operating expenses 737,565 668,110 1,421,489 1,279,559
--------- --------- ---------- ---------
Operating Income 226,991 256,233 437,628 447,033
Other Income and (Expense):
Allowance for equity funds used during construction 3,062 2,869 7,799 5,876
Interest income 4,270 3,190 7,546 6,352
Interest expense, net of amounts capitalized (58,941) (58,568) (113,514) (114,217)
Distributions on preferred securities of subsidiary (3,939) (5,995) (7,380) (12,014)
Other income (expense), net (4,315) (4,461) (10,034) (16,026)
--------- --------- --------- --------
Total other income and (expense) (59,863) (62,965) (115,583) (130,029)
--------- ------- --------- --------
Earnings Before Income Taxes 167,128 193,268 322,045 317,004
Income taxes 55,758 73,884 114,831 121,424
--------- ---------- ---------- ---------
Net Income 111,370 119,384 207,214 195,580
Dividends on Preferred Stock 4,747 3,671 8,772 7,327
---------- ---------- ---------- ---------
Net Income After Dividends on Preferred Stock $ 106,623 $ 115,713 $ 198,442 $ 188,253
========== ========== ========== ==========
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
24
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
------ --------
(in thousands)
Operating Activities:
Net income $ 207,214 $ 195,580
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 236,633 232,518
Deferred income taxes and investment tax credits, net 32,712 (19,574)
Pension, postretirement, and other employee benefits (18,924) (18,521)
Other, net 6,116 29,684
Changes in certain current assets and liabilities --
Receivables, net (24,466) 6,172
Fossil fuel stock (7,857) 13,166
Materials and supplies (2,899) 4,950
Other current assets (50,549) (61,860)
Accounts payable (65,279) (60,648)
Taxes accrued 60,963 57,455
Other current liabilities (13,840) 16,920
----------- ---------
Net cash provided from operating activities 359,824 395,842
----------- ---------
Investing Activities:
Gross property additions (359,735) (345,823)
Cost of removal net of salvage (17,752) (15,287)
Other 16,488 (8,902)
----------- ---------
Net cash used for investing activities (360,999) (370,012)
----------- ---------
Financing Activities:
Increase in notes payable, net 33,940 134,651
Proceeds --
Senior notes 1,065,000 350,000
Preferred stock 125,000 -
Common stock 25,000 -
Capital contributions from parent company 8,162 2,396
Redemptions --
First mortgage bonds - (4,498)
Senior notes (1,000,800) (840)
Other long-term debt (472) (434)
Payment of preferred stock dividends (8,659) (7,219)
Payment of common stock dividends (215,100) (215,500)
Other (24,524) 4,959
----------- ---------
Net cash provided from financing activities 7,547 263,515
----------- ---------
Net Change in Cash and Cash Equivalents 6,372 289,345
Cash and Cash Equivalents at Beginning of Period 22,685 35,756
----------- ---------
Cash and Cash Equivalents at End of Period $ 29,057 $ 325,101
=========== =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $3,953 and $3,531 capitalized for 2003 and 2002, respectively) $85,222 $86,015
Income taxes (net of refunds) $48,385 $121,615
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
25
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- ---- ------------- -----------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 29,057 $ 22,685
Receivables --
Customer accounts receivable 266,581 240,052
Unbilled revenues 95,757 89,336
Other accounts and notes receivable 44,107 47,535
Affiliated companies 69,043 74,099
Accumulated provision for uncollectible accounts (4,142) (4,827)
Fossil fuel stock, at average cost 81,600 73,742
Materials and supplies, at average cost 190,494 187,596
Other 131,245 110,035
------------ -----------
Total current assets 903,742 840,253
------------- -----------
Property, Plant, and Equipment:
In service 14,057,392 13,506,170
Less accumulated provision for depreciation 5,390,833 5,543,416
------------ -----------
8,666,559 7,962,754
Nuclear fuel, at amortized cost 84,130 103,088
Construction work in progress 335,200 478,652
------------ -----------
Total property, plant, and equipment 9,085,889 8,544,494
------------ -----------
Other Property and Investments:
Equity investments in subsidiaries 47,378 45,553
Nuclear decommissioning trusts, at fair value 338,386 292,297
Other 16,717 16,477
------------ -----------
Total other property and investments 402,481 354,327
------------ -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 328,308 327,276
Prepaid pension costs 415,768 389,793
Unamortized debt issuance expense 7,946 4,361
Unamortized premium on reacquired debt 115,137 103,819
Department of Energy assessments 17,144 17,144
Other 111,465 104,539
------------- ------------
Total deferred charges and other assets 995,768 946,932
------------- ------------
Total Assets $ 11,387,880 $ 10,686,006
============= ============
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
26
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ------------- ----------------
(in thousands)
Current Liabilities:
Securities due within one year $ 507,177 $ 1,117,945
Notes payable 70,931 36,991
Accounts payable --
Affiliated 106,946 109,790
Other 86,921 150,195
Customer deposits 46,202 44,410
Taxes accrued --
Income taxes 80,948 80,438
Other 59,698 20,561
Interest accrued 49,915 36,344
Vacation pay accrued 33,901 33,901
Other 80,729 114,870
------------ -------------
Total current liabilities 1,123,368 1,745,445
------------ -------------
Long-term debt 3,536,617 2,851,562
------------ -------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,502,600 1,436,559
Deferred credits related to income taxes 166,446 177,205
Accumulated deferred investment tax credits 221,789 227,270
Employee benefits provisions 148,200 141,149
Deferred capacity revenues 29,165 33,924
Asset retirement obligations 346,809 -
Asset retirement obligation regulatory liability 96,369 -
Other 150,356 147,640
------------ -------------
Total deferred credits and other liabilities 2,661,734 2,163,747
------------ -------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 300,000 300,000
------------ -------------
Cumulative preferred stock 372,512 247,512
------------ -------------
Common stockholder's equity:
Common stock, par value $40 per share --
Authorized - 15,000,000 shares
Outstanding - 6,625,000 shares
Par value 265,000 240,000
Paid-in capital 1,908,626 1,900,464
Premium on preferred stock 99 99
Retained earnings 1,232,291 1,250,594
Accumulated other comprehensive loss (12,367) (13,417)
------------ -------------
Total common stockholder's equity 3,393,649 3,377,740
------------ -------------
Total Liabilities and Stockholder's Equity $ 11,387,880 $ 10,686,006
============ =============
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
27
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------- ---------------------------
2003 2002 2003 2002
---------------- ----------- -------- --------
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 106,623 $ 115,713 $ 198,442 $ 188,253
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax
of $265, $(312), $221, $(312), respectively 1,122 (514) 1,050 (514)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 107,745 $ 115,199 $ 199,492 $ 187,739
========== =========== =========== ===========
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At June 30, At December 31,
2003 2002
------------ -----------------
(in thousands)
Balance at beginning of period $ (13,417) $ -
Change in current period 1,050 (13,417)
----------- -------------
BALANCE AT END OF PERIOD $ (12,367) $ (13,417)
============ =============
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
28
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Alabama Power's net income after dividends on preferred stock for the second
quarter and year-to-date 2003 was $106.6 million and $198.4 million,
respectively, compared to $115.7 million and $188.3 million, respectively, for
the corresponding periods of 2002. Earnings decreased $9.1 million, or 7.9%, in
the second quarter of 2003 primarily due to higher operating expenses that were
partially offset by the favorable settlement of income tax audits. Earnings
year-to-date 2003 increased by $10.1 million, or 5.4%, principally due to the
effect of increased market based prices in sales for resale - non-affiliates and
the favorable effect of the settlement of income tax audits.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ 12,732 1.7 $ 51,664 3.8
Sales for resale - non-affiliates................ 11,081 9.3 40,180 18.8
Sale for resale - affiliates..................... 12,244 28.8 19,554 20.1
Other revenues................................... 4,156 15.9 21,127 44.8
Fuel expense..................................... 1,452 0.6 30,899 7.0
Purchased power - non-affiliates................. 21,473 105.2 38,972 107.7
Purchased power - affiliates..................... 16,503 39.4 25,269 33.9
Other operation expense.......................... 18,132 12.8 32,613 12.5
Depreciation and amortization.................... 5,571 5.6 7,507 3.8
Distributions on preferred securities
of subsidiary.................................. (2,056) (34.3) (4,634) (38.6)
Income taxes..................................... (18,126) (24.5) (6,593) (5.4)
Retail sales. Excluding energy cost recovery revenues and revenues from
Rate CNP, Certificated New Plant, associated with PPAs certificated by the
Alabama PSC which generally do not affect net income, retail sales revenues
decreased by $7.6 million, or 1.4%, for the second quarter 2003, but increased
$12.9 million, or 1.2%, year-to-date 2003, when compared to the same periods in
the prior year. Reference is made to Note (F) to the Condensed Financial
Statements herein for additional information. During the second quarter 2003,
retail energy sales were impacted by milder-than-normal temperatures and as a
result decreased slightly when compared to the corresponding period in 2002. The
year-to-date 2003 increase can primarily be attributed to favorable weather
conditions and slight sales growth in the first three months of this year, as
well as a 2 percent increase in retail base rates that went into effect in April
2002 as a result of Rate RSE, Rate Stabilization and Equalization.
29
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - non-affiliates. During the second quarter 2003, the
revenues associated with sales for resale to non-affiliates increased due to an
11.8% increase in market based prices even though overall sales of energy for
the quarter decreased 2.4% when compared to the corresponding period in 2002.
The year-to-date increase in sales for resale to non-affiliates in 2003 is due
to a 7.6% increase in energy sold and a 10.3% increase in price when compared to
the corresponding period in 2002. Sales of energy will vary depending on demand,
market based prices and the availability of Southern Company system generation.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies within the Southern Company
system, as well as purchases of energy, will vary depending on demand and the
availability and cost of generating resources at each company. These
transactions did not have a significant impact on earnings since the related
energy is sold at marginal cost, and energy purchases are generally offset by
energy revenues through Alabama Power's energy cost recovery clause.
Other revenues. During the second quarter 2003, other revenues increased
primarily due to a $3.8 million increase in revenues from Alabama PSC-approved
fees charged to customers for connection, reconnection and collection when
compared to the same period in 2002. The year-to-date 2003 increase is primarily
due to an $11.7 million increase in revenues from cogeneration steam facilities
due to higher gas prices, a $7.3 million increase in revenues from fees charged
to customers for connection, reconnection and collection and a $5.7 million
increase in revenues from transmission for others when compared to the same
period in 2002. Since cogeneration steam revenues are generally offset by fuel
expenses, these revenues do not have a significant impact on earnings.
Fuel expense. During the second quarter 2003, fuel expense remained flat
because generation decreased 8.5% compared to the corresponding period in 2002
while the price of fuel increased 9.9%. However, year-to-date 2003 fuel expense
increased when compared to the corresponding period in 2002 mainly due to a
10.3% increase in fuel prices while generation remained relatively flat. Since
energy expenses are generally offset by energy revenues, these expenses did not
have a significant impact on earnings.
Purchased power - non-affiliates. In the second quarter and year-to-date
2003, purchased power from non-affiliates increased when compared to the same
periods in the prior year. The second quarter and year-to-date 2003 increases
are primarily attributed to a 103.9% and 119.1% increase in price, respectively.
These expenses do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Alabama Power's energy
cost recovery clause.
Other operation expense. The increase in other operation expense for the
second quarter 2003 is mainly a result of a $10.9 million increase in
administrative and general expenses. The increase in administrative and general
expenses primarily relates to a $5.5 million increase in property insurance and
a $3.4 million increase in employee benefits. The year-to-date 2003 increase in
other operation expense when compared to the same period in 2002 is primarily
due to a $20.3 million increase in administrative and general expenses, a $3.4
million increase in nuclear expense and a $2.9 million increase in steam
expense. The increase in administrative and general expenses mainly relates to a
$7.7 million increase in property insurance, a $7.3 million increase in employee
benefits and a $2.2 million increase in injuries and damages expense.
Depreciation and amortization. The increases for the second quarter and
year-to-date 2003 are attributed to an increase in utility plant-in-service when
compared to the same periods in 2002.
30
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Distributions on preferred securities of subsidiary. Refinancing of higher
distribution rate trust preferred securities in the fourth quarter 2002 led to
decreases in this item in the second quarter and year-to-date 2003.
Income taxes. The second quarter and year-to-date 2003 decreases in income
tax expenses are primarily attributed to the tax settlement related to tax
audits covering the years 1988 through 1999, excluding the years 1993 through
1995, which increased net income by $4.7 million.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including Alabama Power's ability to achieve energy sales growth while
containing costs and maintaining a stable regulatory environment. Growth in
energy sales is subject to a number of factors. These factors include weather,
competition, new short- and long-term contracts with neighboring utilities,
energy conservation practiced by customers, the elasticity of demand and the
rate of economic growth in Alabama Power's service area. For additional
information relating to these issues, see Item 1 - BUSINESS - "Risk Factors" and
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
Alabama Power in the Form 10-K.
Alabama Power's business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage,
personal injury and citizen enforcement of environmental requirements, has
increased generally throughout the United States. In particular, personal injury
claims for damages caused by alleged exposure to hazardous materials have become
more frequent.
Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information about these issues, including the EPA litigation, see
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note
3 to the financial statements of Alabama Power in Item 8 of the Form 10-K.
Reference is made to Note (E) to the Condensed Financial Statements herein for
information regarding a recent ruling by the U.S. Court of Appeals for the
Eleventh Circuit.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "FERC
Matters" of Alabama Power in the Form 10-K for information on the formation of
an RTO as ordered by the FERC and the notice of proposed rulemaking regarding
open access transmission service and standard electricity market design. In
April 2003, the FERC issued a White Paper related to its proposed rulemaking
regarding open access transmission service and standard electricity market
design in an effort to respond to certain of the public comments received on the
standard market design proposal. Reactions to the White Paper by Southeastern
state regulators reflect significant continuing differences in opinion between
the FERC and various state regulatory commissions over questions of jurisdiction
and protection of retail customers. These significant differences between state
and federal regulators create substantial uncertainty related to the ultimate
approval of SeTrans because state commission approval of the transfer of
operational control of the transmission assets of Southern Company and its
subsidiaries is a prerequisite to the formation of SeTrans. Pending energy
legislation may also impact these issues. Any impact of the other FERC proposals
on Southern Company and its subsidiaries will depend on the form in which final
rules may be ultimately adopted; however, Alabama Power's revenues, expenses,
assets and liabilities could be adversely affected by changes in the
transmission regulatory structure in its regional power market.
31
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 2003, during a special session of the State of Alabama Legislature,
a tax reform package was passed subject to approval by the voters of Alabama on
September 9, 2003. If the tax reform package passes, the impact to Alabama
Power's overall tax liability should not be significant.
Reference is also made to Notes (A), (E), (F), (H), (L) and (N) to the
Condensed Financial Statements herein for discussion of various contingencies
and other matters which may affect future earnings potential.
Accounting Policies
Critical Policy
Alabama Power's significant accounting policies are described in Note 1 to the
financial statements of Alabama Power in Item 8 of the Form 10-K. Alabama
Power's critical accounting policy involves rate regulation. Alabama Power is
subject to the provisions of FASB Statement No. 71, "Accounting for the Effects
of Certain Types of Regulation." In the event that a portion of Alabama Power's
operations is no longer subject to these provisions, Alabama Power would be
required to write off related regulatory assets and liabilities that are not
specifically recoverable and determine if any other assets, including plant,
have been impaired.
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial Statements herein for
information regarding the adoption of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" effective January 1, 2003. Statement No. 143
establishes new accounting and reporting standards for legal obligations
associated with the ultimate cost of retiring long-lived assets. The present
value of the ultimate costs for an asset's future retirement must be recorded in
the period in which the liability is incurred. The cost must be capitalized as
part of the related long-lived asset and depreciated over the asset's useful
life. Additionally, Statement No. 143 does not permit non-regulated companies to
continue accruing future retirement costs for long-lived assets that they do not
have a legal obligation to retire. Prior to January 2003, Alabama Power accrued
for the ultimate cost of retiring most long-lived assets over the life of the
related asset through depreciation expense.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires classification of certain financial instruments within its scope,
including shares that are mandatorily redeemable, as liabilities. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003 for calendar year companies. In
accordance with Statement No. 150, Alabama Power reclassified $300 million of
mandatorily redeemable preferred securities as liabilities effective July 1,
2003. The implementation of Statement No. 150 did not have a material effect on
Alabama Power's Statements of Income and Cash Flows.
32
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in Alabama Power's financial condition during the first six months
of 2003 included the addition of approximately $360 million to utility plant.
The funds for these additions and other capital requirements were derived
primarily from operating activities. See Alabama Power's Condensed Statements of
Cash Flows herein for further details.
Credit Rating Risk
Alabama Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade.
Exposure to Market Risks
Alabama Power's market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2002 reporting period. In
addition, Alabama Power is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
Due to cost-based rate regulations, Alabama Power has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Alabama Power enters into fixed price contracts for the purchase and
sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Alabama Power has also implemented
a retail fuel hedging program at the instruction of the Alabama PSC. The fair
value of derivative energy contracts at June 30, 2003 was as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
-------------------------------------------------------------------------
Fair Value
-------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $24,276 $21,402
Contracts realized or settled (11,624) (18,780)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 3,035 13,065
-------------------------------- ------------------------ ---------------
Contracts at June 30, 2003 $15,687 $15,687
========================================================= ===============
33
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of June 30, 2003
Valuation Prices
------------------------------- ------------ ----------------------------
Total Maturity
----------------------------
Fair Value Year 1 1-3 Years
------------------------------- -----------------------------------------
(in thousands)
Actively quoted $15,687 $20,487 $(4,800)
External sources - - -
Models and other methods - - -
------------------------------- ------------ -------------- -------------
Contracts at June 30, 2003 $15,687 $20,487 $(4,800)
=============================== ============ ============== =============
Unrealized gains and losses from mark to market adjustments on contracts
related to the retail fuel hedging programs are recorded as regulatory assets
and liabilities. Realized gains and losses from these programs are included in
fuel expense and are recovered through Alabama Power's fuel cost recovery
clause. Gains and losses on contracts that do not represent hedges are
recognized in the Statements of Income as incurred. At June 30, 2003, the fair
value of derivative energy contracts reflected in the financial statements was
as follows:
Amounts
--------------------------------------- --------------------
(in thousands)
Regulatory liabilities, net $15,892
Other comprehensive income -
Net loss (205)
--------------------------------------- ---------------------
Total fair value $15,687
======================================= =====================
For the three months ended June 30, 2003 and 2002, approximately $(0.1)
million and $1 million, respectively, of (losses) gains were recognized in
income. For the six months ended June 30, 2003 and 2002, approximately $0.3
million and $2.4 million, respectively, of losses were recognized in income.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risk" of Alabama Power in the Form
10-K and Note 1 to the financial statements of Alabama Power in Item 8 of the
Form 10-K and to Note (L) to the Condensed Financial Statements herein.
Financing Activities
Alabama Power issued a total of $620 million of Senior Notes in the first
quarter 2003. The proceeds of these issues were used to redeem $557 million of
Senior Notes and for other general corporate purposes. In addition, Alabama
Power redeemed $194 million of Senior Notes in the first quarter 2003 from
proceeds obtained from a December 2002 issuance of $200 million of Senior Notes.
Also in the first quarter 2003, Alabama Power issued 1,250 shares ($125
million) of Preferred Stock. The proceeds of this issue were used to repay a
portion of Alabama Power's outstanding short-term indebtedness and for other
general corporate purposes.
34
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In April 2003, Alabama Power issued $195 million of Series W Floating Rate
Extendible Senior Notes due April 23, 2006, the initial maturity date, unless
the maturity of all or a portion of the principal amount is extended by
investors to April 23, 2007. The proceeds from the sale were used by Alabama
Power for general corporate purposes, including Alabama Power's continuous
construction program.
In May 2003, Alabama Power issued $250 million of Series X 3.125% Senior
Notes due May 1, 2008. The proceeds from this sale were used to repay at
maturity $250 million in aggregate principal amount of the Series M 7.85% Senior
Notes due May 15, 2003.
In the second quarter 2003, Alabama Power issued a total of 625,000 shares
of common stock to Southern Company at $40.00 a share ($25,000,000 aggregate
purchase price). The proceeds from the sale were used by Alabama Power for
general corporate purposes.
In July 2003, Alabama Power entered into swaps to hedge interest payments
associated with an anticipated debt issuance planned in December 2003. The swaps
are for a notional amount of $250 million at a fixed interest rate of 2.35% and
mature in December 2006.
Alabama Power plans to continue, when economically feasible, a program to
retire higher-cost debt and replace these obligations with lower-cost capital if
market conditions permit.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS of Alabama Power under "Capital Requirements," "Other Capital
Requirements" and "Environmental Matters" in the Form 10-K for a description of
Alabama Power'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 Power plans to obtain the funds required for construction and
other purposes from sources similar to those used in the past. The amount, type
and timing of any financings -- if needed -- will depend upon maintenance of
adequate earnings, regulatory approval, prevailing market conditions and other
factors. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for
additional information.
Alabama Power's current liabilities exceed current assets because of
scheduled maturities of long-term debt.
To meet short-term cash needs and contingencies, Alabama Power had at June
30, 2003 approximately $29.1 million of cash and cash equivalents, unused
committed lines of credit of approximately $619 million (including $454 million
of such lines which are dedicated to funding purchase obligations relating to
variable rate pollution control bonds) and an extendible commercial note
program. These lines of credit, unless extended, will expire at various times
during 2004. Alabama Power may also meet short-term cash needs through a
Southern Company subsidiary organized to issue and sell commercial paper and
extendible commercial notes at the request and for the benefit of Alabama
35
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Power and other Southern Company subsidiaries. Alabama Power has
regulatory authority for up to $1 billion of short-term borrowings. At June 30,
2003, Alabama Power had $59 million outstanding in commercial paper and $12
million outstanding in notes payable to banks. Management believes that the need
for working capital can be adequately met by utilizing lines of credit without
maintaining large cash balances.
36
GEORGIA POWER COMPANY
37
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------ ------ ------ ------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $ 1,041,604 $ 1,062,070 $ 2,007,311 $ 1,966,984
Sales for resale --
Non-affiliates 59,452 72,322 133,438 122,372
Affiliates 46,365 25,282 93,851 41,789
Other revenues 42,672 44,811 81,931 80,103
----------- ----------- ----------- -----------
Total operating revenues 1,190,093 1,204,485 2,316,531 2,211,248
----------- ----------- ----------- -----------
Operating Expenses:
Operation --
Fuel 271,428 255,792 513,931 483,169
Purchased power --
Non-affiliates 62,052 65,280 134,088 103,070
Affiliates 121,605 98,716 235,448 157,496
Other 199,487 204,694 385,477 378,514
Maintenance 107,628 108,461 218,572 212,315
Depreciation and amortization 86,003 101,206 171,745 197,003
Taxes other than income taxes 49,290 49,857 102,465 99,432
----------- ----------- ----------- -----------
Total operating expenses 897,493 884,006 1,761,726 1,630,999
----------- ----------- ----------- -----------
Operating Income 292,600 320,479 554,805 580,249
Other Income and (Expense):
Interest expense, net of amounts capitalized (47,925) (41,453) (92,288) (82,048)
Distributions on preferred securities of subsidiaries (14,919) (15,647) (29,838) (30,423)
Other income (expense), net 25,169 8,519 31,152 6,158
----------- ----------- ----------- -----------
Total other income and (expense) (37,675) (48,581) (90,974) (106,313)
----------- ----------- ----------- -----------
Earnings Before Income Taxes 254,925 271,898 463,831 473,936
Income taxes 96,231 100,933 171,699 176,058
----------- ----------- ----------- -----------
Net Income 158,694 170,965 292,132 297,878
Dividends on Preferred Stock 167 167 335 335
----------- ----------- ----------- -----------
Net Income After Dividends on Preferred Stock $ 158,527 $ 170,798 $ 291,797 $ 297,543
=========== =========== =========== ===========
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
38
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
------ -------
(in thousands)
Operating Activities:
Net income $ 292,132 $ 297,878
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 204,286 195,235
Deferred income taxes and investment tax credits, net 108,809 22,448
Pension, postretirement, and other employee benefits (17,372) (27,239)
Other, net 8,167 15,817
Changes in certain current assets and liabilities --
Receivables, net 33,395 56,317
Fossil fuel stock (22,658) 19,988
Materials and supplies (8,000) 7,625
Other current assets 31,641 9,869
Accounts payable (141,009) (75,937)
Taxes accrued 16,600 26,551
Other current liabilities 2,201 6,829
----------- ----------
Net cash provided from operating activities 508,192 555,381
----------- ----------
Investing Activities:
Gross property additions (370,727) (434,403)
Cost of removal net of salvage (10,786) (32,826)
Sales of property - 387,212
Change in construction payables (63,893) (30,131)
Other 2,104 8,606
----------- ----------
Net cash used for investing activities (443,302) (101,542)
----------- ----------
Financing Activities:
Increase (decrease) in notes payable, net (17,633) 85,407
Proceeds --
Senior notes 700,000 -
Preferred securities - 440,000
Capital contributions from parent company 9,748 5,397
Redemptions --
First mortgage bonds - (1,860)
Pollution control bonds - (7,800)
Senior notes (465,000) (300,000)
Capital distributions to parent company - (200,000)
Payment of preferred stock dividends (393) (344)
Payment of common stock dividends (282,900) (271,450)
Other (14,786) (15,276)
----------- ----------
Net cash used for financing activities (70,964) (265,926)
----------- ----------
Net Change in Cash and Cash Equivalents (6,074) 187,913
Cash and Cash Equivalents at Beginning of Period 16,873 23,260
----------- ----------
Cash and Cash Equivalents at End of Period $ 10,799 $ 211,173
=========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $2,852 and $5,344 capitalized for 2003 and 2002, respectively) $107,940 $79,084
Income taxes (net of refunds) ($21,958) $95,482
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
39
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- ------ -------------- -----------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 10,799 $ 16,873
Receivables --
Customer accounts receivable 279,288 302,995
Unbilled revenues 132,307 104,454
Under recovered regulatory clause revenues 125,052 117,580
Other accounts and notes receivable 74,943 122,585
Affiliated companies 38,691 40,501
Accumulated provision for uncollectible accounts (5,825) (5,825)
Fossil fuel stock, at average cost 142,705 120,048
Materials and supplies, at average cost 271,364 263,364
Other 62,396 96,922
------------ ------------
Total current assets 1,131,720 1,179,497
------------ ------------
Property, Plant, and Equipment:
In service 17,894,675 17,222,661
Less accumulated provision for depreciation 7,183,011 7,333,529
------------ ------------
10,711,664 9,889,132
Nuclear fuel, at amortized cost 112,508 119,588
Construction work in progress 403,677 667,581
------------ ------------
Total property, plant, and equipment 11,227,849 10,676,301
------------ ------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 38,095 36,167
Nuclear decommissioning trusts, at fair value 387,601 346,870
Other 29,480 28,612
------------ ------------
Total other property and investments 455,176 411,649
------------ ------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 516,618 524,510
Prepaid pension costs 370,464 341,944
Unamortized debt issuance expense 75,344 67,362
Unamortized premium on reacquired debt 177,496 178,590
Asset retirement obligation regulatory asset 11,901 -
Other 151,220 162,686
------------ ------------
Total deferred charges and other assets 1,303,043 1,275,092
------------ ------------
Total Assets $ 14,117,788 $ 13,542,539
============ ============
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
40
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ------------- ----------------
(in thousands)
Current Liabilities:
Securities due within one year $ 2,215 $ 322,125
Notes payable 340,044 357,677
Accounts payable --
Affiliated 115,804 135,260
Other 259,774 445,220
Customer deposits 99,418 94,859
Taxes accrued --
Income taxes 104,794 20,245
Other 91,031 134,269
Interest accrued 65,900 59,608
Vacation pay accrued 40,844 42,442
Other 102,134 112,131
------------ ------------
Total current liabilities 1,221,958 1,723,836
------------ ------------
Long-term debt 3,663,476 3,109,619
------------ ------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,238,686 2,176,438
Deferred credits related to income taxes 200,822 208,410
Accumulated deferred investment tax credits 318,750 324,994
Employee benefits provisions 247,634 236,486
Asset retirement obligations 484,323 -
Other 336,897 373,740
------------ ------------
Total deferred credits and other liabilities 3,827,112 3,320,068
------------ ------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 940,000 940,000
------------ ------------
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 2,165,789 2,156,040
Premium on preferred stock 40 40
Retained earnings 1,954,417 1,945,520
Accumulated other comprehensive loss (13,823) (11,403)
------------ ------------
Total common stockholder's equity 4,450,673 4,434,447
------------ ------------
Total Liabilities and Stockholder's Equity $ 14,117,788 $ 13,542,539
============ ============
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
41
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- ----------------------
2003 2002 2003 2002
----------- ----------- --------- --------
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 158,527 $ 170,798 $ 291,797 $ 297,543
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax
of $(380), $(37), $(1,346), $120, respectively (1,015) (58) (2,547) 190
Less: Reclassification adjustment for amounts included in net
income, net of tax of $79, $0, $79, $0, respectively 134 - 127 -
---------- ----------- ---------- ----------
COMPREHENSIVE INCOME $ 157,646 $ 170,740 $ 289,377 $ 297,733
========== =========== ========== ==========
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At June 30, At December 31,
2003 2002
------------ -----------------
(in thousands)
Balance at beginning of period $ (11,403) $ (153)
Change in current period (2,420) (11,250)
---------- ----------
BALANCE AT END OF PERIOD $ (13,823) $ (11,403)
========== =========
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
42
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Georgia Power's net income after dividends on preferred stock for the
second quarter and year-to-date 2003 was $158.5 million and $291.8 million,
respectively, compared to $170.8 million and $297.5 million for the
corresponding periods in 2002. Earnings were down by $12.3 million, or 7.2%, for
the second quarter 2003 primarily due to lower operating revenues. Year-to-date
2003 earnings were down slightly by $5.7 million, or 1.9%, as a result of higher
non-fuel operating expenses and lower retail base revenues.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ (20,466) (1.9) $ 40,327 2.1
Sales for resale - non-affiliates................ (12,870) (17.8) 11,066 9.0
Sale for resale - affiliates..................... 21,083 83.4 52,062 124.6
Fuel expense..................................... 15,636 6.1 30,762 6.4
Purchased power - non-affiliates................. (3,228) (4.9) 31,018 30.1
Purchased power - affiliates..................... 22,889 23.2 77,952 49.5
Depreciation and amortization.................... (15,203) (15.0) (25,258) (12.8)
Interest expense, net of amounts capitalized..... 6,472 15.6 10,240 12.5
Other income (expense), net...................... 16,650 195.4 24,994 N/M
N/M Not meaningful
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue decreased by $30 million, or 4%, in the second
quarter 2003 and $7.3 million, or 0.5%, year-to-date 2003 when compared to the
corresponding periods in 2002. During the second quarter 2003, energy sales to
residential, commercial and industrial customers were down by 6%, 1.5% and 3.5%,
respectively, when compared to the same period in the prior year.
Milder-than-normal temperatures and a sluggish economy during the second quarter
2003 are the primary causes for these reductions in energy sales. Year-to-date
2003, energy sales to residential, commercial and industrial customers remained
relatively flat.
Sales for resale - non-affiliates. The decrease in the second quarter 2003
and the increase year-to-date 2003 in sales for resale to non-affiliates is
related to the demand for energy by these customers. In the second quarter 2003,
the demand for energy by non-affiliates was down by 17.8%. Year-to-date 2003,
the demand for energy by non-affiliates was up by 9.0%. These transactions did
not have a significant impact on earnings since the energy is usually sold at
variable cost.
43
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates. Revenues from sales for resale to affiliated
companies within the Southern Company system will vary depending on demand and
the availability and cost of generating resources at each company. During the
second quarter and year-to-date 2003, energy sales to affiliates increased 83.4%
and 124.6%, respectively, when compared to the corresponding periods in 2002.
These transactions did not have a significant impact on earnings since this
energy is generally sold at marginal cost.
Fuel expense. In the second quarter and year-to-date 2003, fuel expense was
higher primarily due to increases of 9.1% and 7.1%, respectively, in the average
cost of fuel. These expenses do not have a significant impact on earnings since
energy expenses are generally offset by energy revenues through Georgia Power's
fuel cost recovery clause.
Purchased power - non-affiliates. Purchased power from non-affiliates was
down in the second quarter 2003 when compared to the same period in the prior
year principally due to lower demand for energy. Year-to-date 2003, these
purchases were higher due mainly to increased demand for energy and the higher
average unit cost of energy purchased by Georgia Power. These expenses do not
have a significant impact on earnings since energy expenses are generally offset
by energy revenues through Georgia Power's fuel cost recovery clause.
Purchased power - affiliates. During the second quarter and year-to-date
2003, purchased power from affiliates increased as a direct result of PPAs
between Georgia Power and Southern Power that began in June 2002 and June 2003.
The capacity component of these transactions increased $13.2 million in the
second quarter 2003 and $36.8 million year-to-date 2003 as compared to the same
periods in 2002. The energy component of power purchased from affiliated
companies within the Southern Company system will vary depending on demand and
the availability and cost of generating resources at each company and will have
no significant impact on earnings since energy expenses are generally offset by
energy revenues through Georgia Power's fuel cost recovery clause.
Depreciation and amortization. The decreases in the second quarter and
year-to-date 2003 are attributed to lower regulatory charges necessary to
levelize purchased power costs under the terms of the retail rate order
effective January 1, 2002. These decreases are offset by an increase in
purchased power costs discussed above. All purchased power costs will be
reflected in rates evenly from 2002 through 2004 under the retail rate order
effective January 1, 2002.
Interest expense, net of amounts capitalized. This item increased during
the second quarter and year-to-date 2003 mainly as a result of the issuances of
$1.2 billion in senior notes since the same periods in 2002.
Other income (expense), net. The second quarter and year-to-date 2003
increases are primarily attributed to increased income related to a new
electricity pricing program and $14.5 million of interest on a favorable tax
settlement as compared to the same periods in 2002. The new electricity pricing
program contributed $7.2 million and $10.1 million to the increase for the
second quarter and year-to-date 2003, respectively.
44
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales. For additional information relating to these issues, see Item 1
- - BUSINESS - "Risk Factors" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of Georgia Power in the Form 10-K.
In January 2002, Georgia Power began operating under a three-year retail
rate order. Under the terms of the order, earnings will be evaluated annually
against a retail return on common equity range of 10 percent to 12.95 percent.
Two-thirds of any earnings above the 12.95 percent return will be applied to
rate refunds, with the remaining one-third retained by Georgia Power. Retail
rates were decreased by $118 million effective January 1, 2002. Purchases under
PPAs will be reflected in rates evenly over the next three years under the
retail rate order effective January 1, 2002. Reference is made to Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" and Note 3 to
the financial statements of Georgia Power in Item 8 of the Form 10-K for
additional information.
On May 23, 2003, Georgia Power filed for a fuel cost recovery rate
increase. Reference is made to Note (G) to the Condensed Financial Statements
herein for additional information.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Georgia Power in the Form 10-K for
information on the formation of an RTO as ordered by the FERC and the notice of
proposed rulemaking regarding open access transmission service and standard
electricity market design. In April 2003, the FERC issued a White Paper related
to its proposed rulemaking regarding open access transmission service and
standard electricity market design in an effort to respond to certain of the
public comments received on the standard market design proposal. Reactions to
the White Paper by Southeastern state regulators reflect significant continuing
differences in opinion between the FERC and various state regulatory commissions
over questions of jurisdiction and protection of retail customers. These
significant differences between state and federal regulators create substantial
uncertainty related to the ultimate approval of SeTrans because state commission
approval of the transfer of operational control of the transmission assets of
Southern Company and its subsidiaries is a prerequisite to the formation of
SeTrans. Pending energy legislation may also impact these issues. Any impact of
the other FERC proposals on Southern Company and its subsidiaries will depend on
the form in which final rules may be ultimately adopted; however, Georgia
Power's revenues, expenses, assets and liabilities could be adversely affected
by changes in the transmission regulatory structure in its regional power
market.
In June 2002, Georgia Power entered into a fifteen-year PPA beginning in
June 2005 with Southern Power to purchase 1,040 megawatts of capacity from the
planned combined-cycle plant at Plant McIntosh to be built and owned by Southern
Power. The annual capacity cost is expected to be approximately $72 million.
Reference is made to Note (P) to the Condensed Financial Statements herein for
information regarding the FERC approval process for this PPA.
Additionally, Georgia Power has entered into a seven-year PPA beginning in
June 2005 with Duke Energy Trading & Marketing to purchase 620 megawatts with an
average annual capacity cost of approximately $48 million. Reference is made to
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" and
Note 4 under "Purchased Power Commitments" to the financial statements of
Georgia Power in Item 8 of the Form 10-K.
45
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information, including information on the EPA litigation, see Item 7
- - MANAGEMENT'S DISCUSSION AND Analysis - "Environmental Matters" of Georgia
Power and Note 3 to the financial statements of Georgia Power in Item 8 of the
Form 10-K. Reference is made to Note (E) to the Condensed Financial Statements
herein for information regarding a recent ruling by the U.S. Court of Appeals
for the Eleventh Circuit.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" in Item 7 of the Form 10-K. The Atlanta area is currently classified as
a "serious" nonattainment area for the one-hour ozone standard under Title I of
the Clean Air Act. All "serious" areas were required to attain the one-hour
ozone standard by November 1999. The EPA provided an extension of the area's
compliance deadline to 2004, but on June 16, 2003, the Eleventh Circuit Court of
Appeals held the EPA's extension policy to be invalid and remanded the matter
back to the EPA. In response, the EPA is expected to re-classify Atlanta as a
"severe" nonattainment area with respect to the one-hour standard. If the
Atlanta area fails to comply with the one-hour standard by November 2005, all
major sources of nitrogen oxides and volatile organic compounds located in the
nonattainment area, including Georgia Power's Plants McDonough and Yates, could
be subject to payment of emissions fees currently estimated at $7,800-$8,000 per
ton, of nitrogen oxides emitted above 80% of the baseline period. Based on
average emissions at these units over the past three years, such fees could
potentially reach $23 million annually. However, Georgia Power does not
anticipate exceeding 80% of the baseline and, therefore, does not anticipate
incurring any such fees. The final outcome of this matter will depend on the
development and implementation of applicable regulations.
Georgia Power's business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage,
personal injury and citizen enforcement of environmental requirements, has
increased generally throughout the United States. In particular, personal injury
claims for damages caused by alleged exposure to hazardous materials have become
more frequent. The ultimate outcome of such litigation currently filed against
Georgia Power cannot be predicted at this time; however, after consultation with
legal counsel, management does not anticipate that the liabilities, if any,
arising from such proceedings would have a material adverse effect on Georgia
Power's financial statements.
Reference is made to Notes (A), (E), (G) through (I), (L) and (P) to the
Condensed Financial Statements herein for discussion of various contingencies
and other matters which may affect future earnings potential.
Accounting Policies
Critical Policy
Georgia Power's significant accounting policies are described in Note 1 to
the financial statements of Georgia Power in Item 8 of the Form 10-K. Georgia
Power's critical accounting policy involves rate regulation. Georgia Power is
subject to the provisions of FASB Statement No. 71, "Accounting for the Effects
of Certain Types of Regulation." In the event that a portion of Georgia Power's
operations is no longer subject to these provisions, Georgia Power would be
required to write off related regulatory assets and liabilities that are not
specifically recoverable and determine if any other assets, including plant,
have been impaired.
46
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial
Statements herein for information regarding the adoption of FASB Statement No.
143, "Accounting for Asset Retirement Obligations" effective January 1, 2003.
Statement No. 143 establishes new accounting and reporting standards for legal
obligations associated with the ultimate cost of retiring long-lived assets. The
present value of the ultimate costs for an asset's future retirement must be
recorded in the period in which the liability is incurred. The cost must be
capitalized as part of the related long-lived asset and depreciated over the
asset's useful life. Additionally, Statement No. 143 does not permit
non-regulated companies to continue accruing future retirement costs for
long-lived assets that they do not have a legal obligation to retire. Prior to
January 2003, Georgia Power accrued for the ultimate cost of retiring most
long-lived assets over the life of the related asset through depreciation
expense.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires classification of certain financial instruments within its scope,
including shares that are mandatorily redeemable, as liabilities. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003 for calendar year companies. In
accordance with Statement No. 150, Georgia Power reclassified $940 million of
mandatorily redeemable preferred securities as liabilities effective July 1,
2003. The implementation of Statement No. 150 did not have a material effect on
Georgia Power's Statements of Income and Cash Flows.
FINANCIAL CONDITION
Overview
The major change in Georgia Power's financial condition during the first
six months of 2003 was the addition of approximately $371 million to utility
plant. The funds for these additions and other capital requirements were derived
primarily from operations. See Georgia Power's Condensed Statements of Cash
Flows herein for further details.
Credit Rating Risk
Georgia Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are certain physical electricity sales contracts that could
require collateral -- but not termination -- in the event of a credit rating
change to below investment grade. Generally, collateral may be provided for by a
Southern Company guaranty, letter of credit or cash. At June 30, 2003, the
maximum potential collateral requirements were approximately $228 million.
Exposure to Market Risks
Georgia Power's market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2002 reporting period. In
addition, Georgia Power is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
47
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Due to cost-based rate regulations, Georgia Power has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Georgia Power enters into fixed price contracts for the purchase and
sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Georgia Power has also implemented
a retail fuel hedging program at the instruction of the Georgia PSC. The fair
value of derivative energy contracts at June 30, 2003 was as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
--------------------------------- ----------------------------------------
Fair Value
--------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $ (839) $ 89
Contracts realized or settled (4) (4)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes (1,191) (2,119)
--------------------------------- ------------------------ --------------
Contracts at June 30, 2003 $ (2,034) $ (2,034)
================================= ======================== ================
All of these contracts are actively quoted and mature within one year.
At June 30, 2003, the fair value of derivative energy contracts reflected
in the financial statements was as follows:
Amounts
--------------------------------------- -------------------------
(in thousands)
Regulatory assets, net $(1,785)
Other comprehensive income -
Net loss (249)
--------------------------------------- -------------------------
Total fair value $(2,034)
======================================= =========================
Realized gains and losses are recognized in the Statements of Income as
incurred. For the three months ended June 30, 2003 and 2002, approximately
$(0.1) million and $1.3 million of (losses) gains, respectively, were recognized
in income. For the six months ended June 30, 2003 and 2002, approximately $0.3
million and $1.2 million of losses, respectively, were recognized in income.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of Georgia Power in the
Form 10-K and Note 1 to the financial statements of Georgia Power in Item 8 of
the Form 10-K.
Financing Activities
In February 2003, Georgia Power issued $250 million of Series L Floating Rate
Senior Notes due February 18, 2005. The proceeds from this issuance were used to
repay a portion of Georgia Power's outstanding short-term indebtedness. Also in
February 2003, Georgia Power issued $150 million of Series M 5.40% Senior
Insured Quarterly Notes due March 1, 2033. A portion of the proceeds was used to
redeem in March 2003 the $145 million outstanding principal amount of Georgia
48
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Power's Series A 6 7/8% SeniorPublic Income Notes due December 31, 2047 and the
balance of the proceeds was used for general corporate purposes.
During March 2003, Georgia Power elected to change the interest rate mode
on $316 million of variable rate pollution control bonds. Georgia Power changed
$255 million of the bonds from the "daily rate mode," which required backup bank
credit facilities, to the "auction rate mode." In addition, Georgia Power
changed $61 million of the bonds from the "daily rate mode" to the "long-term
interest rate mode."
In April 2003, Georgia Power issued $100 million of Series N 5.750% Senior
Notes due April 15, 2023, $150 million of Series O 5.90% Senior Notes due April
15, 2033 and $50 million of Series P Floating Rate Senior Notes due April 15,
2005. The proceeds from these sales were used to repay a portion of Georgia
Power's outstanding short-term indebtedness and to repay at maturity all of
Georgia Power's Series I 5.25% Senior Notes due May 8, 2003.
In July 2003, Georgia Power entered swaps to hedge interest payments
associated with variable rate pollution control bonds. The swaps are for a
notional amount of $873.3 million at an average fixed interest rate of 1.388%
and mature in December 2004. Also in July 2003, Georgia Power entered a swap to
hedge interest payments associated with a variable rate note with a coupon of
LIBOR plus 10 basis points. The swap is for a notional amount of $50 million at
a fixed interest rate of 1.5625% and matures in January 2005. Further in July
2003, Georgia Power entered a U.S. Treasury lock to hedge interest payments
associated with a 10-year debt issuance planned in August 2003. The swap is for
a notional amount of $100 million at a fixed interest rate of 4.465%.
Georgia Power plans to continue, when economically feasible, a program to
retire higher-cost debt and replace these obligations with lower-cost capital if
market conditions permit.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of Georgia
Power under "Financing Activities," "Liquidity and Capital Requirements" and
"Environmental Matters" in the Form 10-K for a description of Georgia Power's
capital requirements for its construction program, maturing debt and
environmental compliance efforts.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past. 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.
Georgia Power's current liabilities exceed current assets because of the
continued use of short-term debt as a funding source to meet cash needs.
49
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet short-term cash needs and contingencies, Georgia Power had at June
30, 2003 approximately $10.8 million of cash and cash equivalents and
approximately $725 million of unused credit arrangements with banks. These
credit arrangements expire in June 2004 and contain provisions allowing two-year
term loans executable at the expiration date and represent a reduction in the
previous level of credit arrangements due to reduced liquidity support
requirements as outlined in "Financing Activities" above. The credit
arrangements provide liquidity support to Georgia Power's obligations with
respect to variable rate pollution control bonds and commercial paper. Georgia
Power may also meet short-term cash needs through a Southern Company subsidiary
organized to issue and sell commercial paper and extendible commercial notes at
the request and for the benefit of Georgia Power and other Southern Company
subsidiaries. At June 30, 2003, Georgia Power had outstanding $340 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.
50
GULF POWER COMPANY
51
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------- ------ ------ --------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $175,669 $172,781 $335,462 $306,275
Sales for resale --
Non-affiliates 17,908 18,684 36,633 36,118
Affiliates 12,414 7,514 22,631 10,095
Other revenues 9,218 11,008 18,321 18,432
-------- -------- -------- --------
Total operating revenues 215,209 209,987 413,047 370,920
-------- -------- -------- --------
Operation --
Fuel 77,798 70,142 141,065 106,897
Purchased power --
Non-affiliates 3,929 6,848 9,885 12,652
Affiliates 5,079 13,130 17,666 30,191
Other 33,426 30,985 63,437 57,910
Maintenance 17,257 23,749 33,837 41,938
Depreciation and amortization 20,324 19,083 40,576 36,374
Taxes other than income taxes 16,728 14,876 33,116 29,291
-------- -------- -------- --------
Total operating expenses 174,541 178,813 339,582 315,253
-------- -------- -------- --------
Operating Income 40,668 31,174 73,465 55,667
Other Income and (Expense):
Interest expense, net of amounts capitalized (8,252) (8,146) (16,307) (15,132)
Distributions on preferred securities of subsidiary (1,894) (2,103) (3,922) (4,206)
Other income (expense), net (256) 185 (679) 1,961
--------- --------- -------- ---------
Total other income and (expense) (10,402) (10,064) (20,908) (17,377)
-------- -------- -------- --------
Earnings Before Income Taxes 30,266 21,110 52,557 38,290
Income taxes 11,427 7,569 19,692 12,978
-------- -------- -------- --------
Net Income 18,839 13,541 32,865 25,312
Dividends on Preferred Stock 54 54 108 108
-------- -------- -------- --------
Net Income After Dividends on Preferred Stock $ 18,785 $ 13,487 $ 32,757 $25,204
======== ======== ======== ========
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
52
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
------ --------
(in thousands)
Operating Activities:
Net income $ 32,865 $ 25,312
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 43,247 38,700
Deferred income taxes (112) (4,049)
Other, net 917 (25)
Changes in certain current assets and liabilities --
Receivables, net (7,598) (27,336)
Fossil fuel stock (2,822) (12,757)
Materials and supplies (2,797) (465)
Other current assets 12,241 5,281
Accounts payable (19,713) 2,200
Taxes accrued 17,002 13,545
Other current liabilities 14,065 (144)
--------- ---------
Net cash provided from operating activities 87,295 40,262
--------- ---------
Investing Activities:
Gross property additions (40,654) (67,948)
Cost of removal net of salvage (4,842) (1,672)
Other (6,652) (16,305)
--------- ---------
Net cash used for investing activities (52,148) (85,925)
--------- ---------
Financing Activities:
Increase (decrease) in notes payable, net 23,227 (3,187)
Proceeds --
Pollution control bonds 61,625 -
Senior notes 65,000 44,803
Capital contributions from parent company 11,612 37,782
Redemptions --
Pollution control bonds (61,625) -
Senior notes (45,037) -
Other long-term debt (20,000) -
Preferred securities (40,000) -
Payment of preferred stock dividends (108) (108)
Payment of common stock dividends (35,100) (32,750)
Other (4,504) (594)
--------- ---------
Net cash provided from (used for) financing activities (44,910) 45,946
--------- ---------
Net Change in Cash and Cash Equivalents (9,763) 283
Cash and Cash Equivalents at Beginning of Period 13,278 2,244
--------- ---------
Cash and Cash Equivalents at End of Period $ 3,515 $ 2,527
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $66 and $1,391 capitalized for 2003 and 2002, respectively) $18,525 $19,999
Income taxes (net of refunds) ($5,393) $2,503
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
53
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- ------ ----------- -----------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 3,515 $ 13,278
Receivables --
Customer accounts receivable 55,611 48,609
Unbilled revenues 32,171 28,077
Under recovered regulatory clause revenues 27,970 29,549
Other accounts and notes receivable 5,954 6,618
Affiliated companies 7,730 8,678
Accumulated provision for uncollectible accounts (1,197) (889)
Fossil fuel stock, at average cost 40,013 37,191
Materials and supplies, at average cost 37,637 34,840
Prepaid taxes - 12,704
Prepaid service agreement 4,547 4,535
Other 10,051 9,599
----------- ----------
Total current assets 224,002 232,789
----------- ----------
Property, Plant, and Equipment:
In service 2,280,852 2,248,156
Less accumulated provision for depreciation 974,598 946,408
----------- ----------
1,306,254 1,301,748
Construction work in progress 32,426 35,708
----------- ----------
Total property, plant, and equipment 1,338,680 1,337,456
----------- ----------
Other Property and Investments 11,318 10,157
----------- ----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 18,182 18,798
Prepaid pension costs 38,788 36,298
Unamortized debt issuance expense 4,947 3,900
Unamortized premium on reacquired debt 17,418 14,052
Other 24,037 20,379
----------- -----------
Total deferred charges and other assets 103,372 93,427
----------- -----------
Total Assets $ 1,677,372 $ 1,673,829
=========== ===========
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
54
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ------------- ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 60,000 $ 100,000
Notes payable 51,706 28,479
Accounts payable --
Affiliated 23,037 26,395
Other 17,707 39,685
Customer deposits 17,227 16,047
Taxes accrued --
Income taxes 19,671 10,718
Other 15,040 9,170
Interest accrued 7,055 7,875
Vacation pay accrued 5,044 5,044
Other 14,344 3,933
------------ -----------
Total current liabilities 230,831 247,346
------------ -----------
Long-term debt 453,345 452,040
------------ -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 169,347 167,689
Deferred credits related to income taxes 27,808 29,692
Accumulated deferred investment tax credits 21,308 22,289
Employee benefits provisions 42,259 39,656
Other 56,735 46,376
------------ -----------
Total deferred credits and other liabilities 317,457 305,702
------------ -----------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 115,000 115,000
------------ -----------
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 361,380 349,769
Premium on preferred stock 12 12
Retained earnings 160,055 162,398
Accumulated other comprehensive loss (3,004) (734)
------------ -----------
Total common stockholder's equity 556,503 549,505
------------ -----------
Total Liabilities and Stockholder's Equity $ 1,677,372 $ 1,673,829
============ ===========
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
55
GULF POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ------------------------
2003 2002 2003 2002
--------- -------- ---------- -------
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 18,785 $ 13,487 $ 32,757 $ 25,204
Other comprehensive income:
Changes in fair value of qualifying hedges, net of tax
of $(1,426), $0, $(1,426), $0, respectively (2,270) - (2,270) -
---------- --------- ---------- ---------
COMPREHENSIVE INCOME $ 16,515 $ 13,487 $ 30,487 $ 25,204
========== ========= ========== =========
GULF POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At At
June 30, December 31,
2003 2002
----------- ---------------
(in thousands)
Balance at beginning of period $ (734) $ -
Change in current period (2,270) (734)
-------- -------
BALANCE AT END OF PERIOD $ (3,004) $ (734)
======== =======
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
56
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Gulf Power's net income after dividends on preferred stock for the second
quarter and year-to-date 2003 was $18.8 million and $32.8 million, respectively,
compared to $13.5 million and $25.2 million for the corresponding periods in
2002. Earnings in the second quarter and year-to-date 2003 increased by $5.3
million, or 39.3%, and $7.6 million, or 30%, respectively, as a result of higher
operating revenues that were only partially offset year-to-date 2003 with 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........................ $2,888 1.7 $29,187 9.5
Sale for resale - affiliates........ 4,900 65.2 12,536 124.2
Other revenues...................... (1,790) (16.3) (111) (0.6)
Fuel expense........................ 7,656 10.9 34,168 32.0
Purchased power - non-affiliates.... (2,919) (42.6) (2,767) (21.9)
Purchased power - affiliates........ (8,051) (61.3) (12,525) (41.5)
Other operation expense............. 2,441 7.9 5,527 9.5
Maintenance expense................. (6,492) (27.3) (8,101) (19.3)
Depreciation and amortization....... 1,241 6.5 4,202 11.6
Taxes other than income taxes....... 1,852 12.4 3,825 13.1
Other income (expense), net......... (441) (238.4) (2,640) (134.6)
Retail sales. Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales increased by $8.3 million,
or 8.7%, for the second quarter 2003 and by $21.3 million, or 12.2%,
year-to-date 2003 when compared to the corresponding periods in 2002. For both
of the above reporting periods, retail sales revenues were higher than the
corresponding periods in 2002 primarily due to an increase in the number of
customers and the retail rate increase which went into effect in June 2002.
During the second quarter 2003, retail energy sales to residential and
industrial customers increased by 1.2% and 8.1%, respectively, while energy
sales to commercial customers decreased by 1% as compared to the same period in
2002. For year-to-date 2003 as compared to 2002, retail energy sales to
residential, commercial and industrial customers increased by 0.2%, 0.6% and
8.2%, respectively.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies and purchases of energy within the
Southern Company system will vary depending on demand and the availability and
cost of generating resources at each company. Gulf Power increased its
generating resources with commercial operation of Plant Smith in April 2002 and
thus had greater generation resources to sell to affiliates. These
57
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
transactions do not have a significant impact on earnings since this energy is
generally sold at marginal cost and energy purchases are generally offset by
energy revenues through Gulf Power's fuel cost recovery mechanism.
Other revenues. The second quarter 2003 decrease in other revenues when
compared to the same period in 2002 is primarily due to a $1.7 million
settlement, recorded in 2002, related to a PPA.
Fuel expense. During the second quarter 2003, fuel expense increased from
the corresponding period in the prior year mainly due to a 78.5% increase in
natural gas prices and increased generation to meet demand. Year-to-date 2003,
fuel expense was higher because of commercial operation of Plant Smith Unit 3 in
April 2002, a 60.4% increase in natural gas prices and increased generation to
meet additional demand for energy. Since energy expenses are generally offset by
energy revenues through Gulf Power's fuel cost recovery mechanism, these
expenses do not have a significant impact on net income.
Purchased power - non-affiliates. The decreases in the second quarter and
year-to-date 2003 when compared to the corresponding periods in 2002 are
directly related to commercial operation of Plant Smith Unit 3 which began
commercial operation in April 2002.
Other operation expense. A number of factors caused the increases in other
operation expense in the second quarter and year-to-date 2003 as compared to the
same periods in the prior year. Customer accounts expenses increased $0.5
million and $1.3 million; distribution expenses increased $0.5 million and $0.6
million; and administrative and general expenses increased $0.5 million and $2.2
million, respectively, for the second quarter and year-to-date 2003. Increased
relocation expenses and severance costs caused the change in the administrative
and general expenses.
Maintenance expense. The decreases in maintenance expense during the second
quarter and year-to-date 2003 were primarily due to a decrease in planned
turbine and boiler inspections and repairs in 2003 compared to the same periods
in 2002.
Depreciation and amortization. Depreciation and amortization was higher in
the second quarter and year-to-date 2003 and was directly related to an increase
in utility plant-in-service, including Plant Smith Unit 3, when compared to the
corresponding periods in the prior year.
Taxes other than income taxes. The increases in this item for the second
quarter and year-to-date 2003 are primarily attributed to property taxes on
Plant Smith Unit 3 and revenue taxes related to the 2002 base rate increase.
Other income (expense), net. The decreases in this item during the second
quarter and year-to-date 2003 as compared to the same periods in the prior year
were primarily a result of reductions in Allowance for Equity Funds Used During
Construction following the completion of Plant Smith Unit 3.
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 major factors include regulatory matters and the ability to achieve
energy sales growth. For additional information relating to these issues, see
Item 1 - BUSINESS - "Risk Factors" and Item 7 - MANAGEMENT'S DISCUSSION AND
58
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ANALYSIS - "Future Earnings Potential" of Gulf Power in the Form 10-K.
Gulf Power is subject to certain claims and legal actions arising in the
ordinary course of business. Gulf Power's business activities are subject to
extensive governmental regulation related to public health and the environment.
Litigation over environmental issues and claims of various types, including
property damage, personal injury and citizen enforcement of environmental
requirements, has increased generally throughout the United States. In
particular, personal injury claims for damages caused by alleged exposure to
hazardous materials have become more frequent. The ultimate outcome of such
litigation currently filed against Gulf Power cannot be predicted at this time;
however, after consultation with legal counsel, management does not anticipate
that the liabilities, if any, arising from such proceedings would have a
material adverse effect on Gulf Power's financial statements.
Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs are not fully recovered through
Gulf Power's Environmental Cost Recovery Clause. For additional information
about these issues, including the EPA litigation, see Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial
statements of Gulf Power in the Form 10-K. Reference is made to Note (E) to the
Condensed Financial Statements herein for information regarding a recent ruling
by the U.S. Court of Appeals for the Eleventh Circuit.
In 2002, the Florida PSC approved an annual base rate increase for Gulf
Power of $53.2 million which became effective in June 2002. Reference is made to
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
Gulf Power in the Form 10-K for additional information.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Gulf Power in the Form 10-K for
information on the formation of an RTO as ordered by the FERC and the notice of
proposed rulemaking regarding open access transmission service and standard
electricity market design. In April 2003, the FERC issued a White Paper related
to its proposed rulemaking regarding open access transmission service and
standard electricity market design in an effort to respond to certain of the
public comments received on the standard market design proposal. Reactions to
the White Paper by Southeastern state regulators reflect significant continuing
differences in opinion between the FERC and various state regulatory commissions
over questions of jurisdiction and protection of retail customers. These
significant differences between state and federal regulators create substantial
uncertainty related to the ultimate approval of SeTrans because state commission
approval of the transfer of operational control of the transmission assets of
Southern Company and its subsidiaries is a prerequisite to the formation of
SeTrans. Pending energy legislation may also impact these issues. Any impact of
the other FERC proposals on Southern Company and its subsidiaries will depend on
the form in which final rules may be ultimately adopted; however, Gulf Power's
revenues, expenses, assets and liabilities could be adversely affected by
changes in the transmission regulatory structure in its regional power market.
Reference is made to Notes (A), (E), (H), (I) and (L) to the Condensed
Financial Statements herein for discussion of various contingencies and other
matters which may affect future earnings potential.
59
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Accounting Policies
Critical Policy
Gulf Power's significant accounting policies are described in Note 1 to the
financial statements of Gulf Power in Item 8 of the Form 10-K. Gulf Power's
critical accounting policy involves rate regulation. Gulf Power is subject to
the provisions of FASB Statement No. 71, "Accounting for the Effects of Certain
Types of Regulation." In the event that a portion of Gulf Power's operations is
no longer subject to these provisions, Gulf Power would be required to write off
related regulatory assets and liabilities that are not specifically recoverable
and determine if any other assets, including plant, have been impaired.
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial Statements herein for
information regarding the adoption of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" effective January 1, 2003. Statement No. 143
establishes new accounting and reporting standards for legal obligations
associated with the ultimate cost of retiring long-lived assets. The present
value of the ultimate costs for an asset's future retirement must be recorded in
the period in which the liability is incurred. The cost must be capitalized as
part of the related long-lived asset and depreciated over the asset's useful
life. Additionally, Statement No. 143 does not permit non-regulated companies to
continue accruing future retirement costs for long-lived assets that they do not
have a legal obligation to retire. Prior to January 2003, Gulf Power accrued for
the ultimate cost of retiring most long-lived assets over the life of the
related asset through depreciation expense.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires classification of certain financial instruments within its scope,
including shares that are mandatorily redeemable, as liabilities. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003 for calendar year companies. In
accordance with Statement No. 150, Gulf Power reclassified $115 million of
mandatorily redeemable preferred securities as liabilities effective July 1,
2003. The implementation of Statement No. 150 did not have a material effect on
Gulf Power's Statements of Income and Cash Flows.
FINANCIAL CONDITION
Overview
Major changes in Gulf Power's financial condition during the first six months of
2003 included the addition of approximately $40.7 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations. See Gulf Power's Condensed Statements of Cash Flows herein for
further details.
Credit Rating Risk
Gulf Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade.
60
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Exposure to Market Risks
Gulf Power's market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2002 reporting period. In
addition, Gulf Power is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
Due to cost-based rate regulations, Gulf Power has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Gulf Power enters into fixed price contracts for the purchase and sale
of electricity through the wholesale electricity market and, to a lesser extent,
similar contracts for gas purchases. Gulf Power has received approval from the
Florida PSC to recover prudently incurred costs related to its fuel hedging
program through the fuel cost recovery mechanism. The fair value of derivative
energy contracts at June 30, 2003 was as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
--------------------------------- ----------------------------------------
Fair Value
--------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $3,955 $ 2,336
Contracts realized or settled (2,369) (2,860)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes (568) 1,542
--------------------------------- ------------------------ ---------------
Contracts at June 30, 2003 $1,018 $1,018
================================= ======================== ===============
Source of June 30, 2003
Valuation Prices
-------------------------------- --------------- -----------------------
Total Maturity
-----------------------
Fair Value Year 1 1-3 Years
-------------------------------- ---------------------------------------
(in thousands)
Actively quoted $1,018 $1,858 $(840)
External sources - - -
Models and other methods - - -
-------------------------------- --------------- -----------------------
Contracts at June 30, 2003 $1,018 $1,858 $(840)
================================ =============== =======================
Unrealized gains and losses from mark to market adjustments on contracts
related to fuel hedging programs are recorded as regulatory assets and
liabilities. Realized gains and losses from these programs are included in fuel
expense and are recovered through Gulf Power's fuel cost recovery clause. Gains
and losses on contracts that do not represent hedges are recognized in the
income statement as incurred. At June 30, 2003, the fair value of derivative
energy contracts was reflected in the financial statements as follows:
61
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Amounts
- -----------------------------------------------------------------------------
(in thousands)
Regulatory liabilities, net $1,059
Other comprehensive income -
Net income (41)
- -----------------------------------------------------------------------------
Total fair value $1,018
=============================================================================
For the quarter and year-to-date periods ended June 30, 2003 and 2002, the
realized gains and losses recognized in income were immaterial.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Exposure to Market Risks" of Gulf Power in the Form 10-K and Note 1 to the
financial statements of Gulf Power in Item 8 of the Form 10-K for additional
information.
Financing Activities
In January 2003, Gulf Power redeemed $40 million of 7.625% trust preferred
securities using the proceeds of $40 million in trust preferred securities
issued in December 2002 at a five-year initial fixed rate of 5.60%.
In March 2003, Gulf Power issued $65 million of Series F Senior Insured
Quarterly Notes due April 1, 2033. The proceeds from this issue were used to
redeem, in April 2003, the $20 million Series B 7.50% Junior Subordinated Notes
due June 30, 2037 and, in May 2003, the $45 million of Series E Senior Notes due
January 30, 2012.
In April 2003, Gulf Power sold through public authorities $29.075 million
of variable rate pollution control revenue refunding bonds due February 1, 2026
and $32.55 million of variable rate pollution control refunding bonds due June
1, 2023. The proceeds were used to redeem (1) $7.875 million aggregate principal
amount of water pollution control revenue refunding bonds, Series 1993; (2)
$21.2 million of pollution control revenue refunding bonds, Series 1996 and (3)
the outstanding amount of pollution control revenue refunding bonds, Series
1993. Both pollution control bonds issued in April 2003 will bear interest at a
rate to be determined by the auction rate process.
In July 2003, Gulf Power issued $60 million of Series G 4.35% Senior Notes
due July 15, 2013 and $60 million of Series H 5.25% Senior Notes due July 15,
2033. The proceeds of the Series G Senior Notes were used to pay at maturity the
$60 million outstanding principal amount of Series C 4.69% Senior Notes due
August 1, 2003. The proceeds of the Series H Senior Notes will be used to redeem
in August 2003 the $46.7 million outstanding principal amount of the Series A
6.70% Senior Insured Quarterly Notes due June 30, 2038. The remainder will be
used to repay a portion of Gulf Power's short-term indebtedness.
Gulf Power plans to continue, to the extent possible, a program to retire
higher-cost securities and replace these obligations with lower-cost capital if
market conditions permit.
62
GULF 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 Gulf Power
under "Capital Requirements for Construction," "Other Capital Requirements" and
"Environmental Matters" in the Form 10-K for a description of Gulf Power'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, Gulf Power
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings -- if needed -- will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, Gulf Power had at June 30,
2003 approximately $3.5 million of cash and cash equivalents and $66.3 million
of unused committed lines of credit with banks that expire in 2004. The credit
arrangements provide liquidity support to Gulf Power's obligations with respect
to variable rate pollution control bonds and commercial paper. Gulf Power may
also meet short-term cash needs through a Southern Company subsidiary organized
to issue and sell commercial paper and extendible commercial notes at the
request and for the benefit of Gulf Power and other Southern Company
subsidiaries. At June 30, 2003, Gulf Power had outstanding $20 million of notes
payable and $31.7 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.
63
MISSISSIPPI POWER COMPANY
64
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------- ------ ------ ------
(in thousands) (in thousands)
Retail sales $134,058 $138,601 $248,028 $257,068
Sales for resale --
Non-affiliates 59,320 52,182 129,745 104,334
Affiliates 5,665 10,456 11,888 20,069
Contract termination 62,111 - 62,111 -
Other revenues 3,206 4,139 6,474 6,965
-------- -------- -------- --------
Total operating revenues 264,360 205,378 458,246 388,436
-------- -------- -------- --------
Operating Expenses:
Operation --
Fuel 55,596 66,772 106,720 126,974
Purchased power --
Non-affiliates 4,511 4,416 11,328 7,257
Affiliates 17,755 10,387 38,087 17,793
Other 49,743 37,103 84,906 72,464
Maintenance 18,751 20,606 33,011 41,277
Depreciation and amortization 13,902 13,918 26,975 28,430
Taxes other than income taxes 13,716 13,719 27,083 26,911
-------- -------- -------- --------
Total operating expenses 173,974 166,921 328,110 321,106
-------- -------- -------- --------
Operating Income 90,386 38,457 130,136 67,330
Other Income and (Expense):
Interest expense (3,767) (4,279) (7,537) (9,325)
Distributions on preferred securities of subsidiary (630) (1,022) (1,260) (1,770)
Other income (expense), net 753 1,152 765 1,345
-------- -------- -------- --------
Total other income and (expense) (3,644) (4,149) (8,032) (9,750)
-------- -------- -------- --------
Earnings Before Income Taxes 86,742 34,308 122,104 57,580
Income taxes 33,179 13,016 46,642 21,803
-------- -------- -------- --------
Net Income 53,563 21,292 75,462 35,777
Dividends on Preferred Stock 504 504 1,007 1,007
-------- -------- -------- --------
Net Income After Dividends on Preferred Stock $ 53,059 $ 20,788 $ 74,455 $ 34,770
======== ========= ======== =========
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
65
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
----- -----
(in thousands)
Operating Activities:
Net income $ 75,462 $ 35,777
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 31,046 30,486
Deferred income taxes and investment tax credits, net 1,623 (6,021)
Other, net 12,676 5,953
Changes in certain current assets and liabilities --
Receivables, net 12,950 3,463
Fossil fuel stock (6,723) (1,768)
Materials and supplies 143 (1,092)
Other current assets (484) (5,487)
Accounts payable (40,330) (13,723)
Taxes accrued 14,463 7,666
Other current liabilities (16,025) 8,500
--------- ---------
Net cash provided from operating activities 84,801 63,754
--------- ---------
Investing Activities:
Gross property additions (26,566) (36,813)
Other (1,317) (10,713)
--------- ---------
Net cash used for investing activities (27,883) (47,526)
--------- ---------
Financing Activities:
Increase (decrease) in notes payable, net - 9,922
Proceeds --
Senior notes 90,000 80,000
Preferred securities - 35,000
Capital contributions from parent company 1,956 682
Redemptions --
First mortgage bonds (33,350) (650)
Pollution control bonds (850) -
Senior notes (86,628) (80,190)
Preferred securities - (35,000)
Payment of preferred stock dividends (1,007) (1,007)
Payment of common stock dividends (33,000) (31,750)
Other (1,185) 106
--------- ---------
Net cash used for financing activities (64,064) (22,887)
--------- ---------
Net Change in Cash and Cash Equivalents (7,146) (6,659)
Cash and Cash Equivalents at Beginning of Period 62,695 18,950
--------- ---------
Cash and Cash Equivalents at End of Period $ 55,549 $ 12,291
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest $10,413 $7,490
Income taxes (net of refunds) $6,073 $7,231
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
66
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- -------- ------------ ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 55,549 $ 62,695
Receivables --
Customer accounts receivable 38,151 31,136
Unbilled revenues 21,215 18,434
Under recovered regulatory clause revenues 14,695 27,233
Other accounts and notes receivable 6,112 8,056
Affiliated companies 12,596 20,674
Accumulated provision for uncollectible accounts (902) (718)
Fossil fuel stock, at average cost 34,026 27,303
Materials and supplies, at average cost 21,920 22,063
Assets from risk management activities 9,568 13,061
Deferred income tax assets 15,174 18,675
Other 11,445 7,469
----------- -----------
Total current assets 239,549 256,081
----------- -----------
Property, Plant, and Equipment:
In service 1,800,392 1,786,378
Less accumulated provision for depreciation 740,374 722,231
----------- -----------
1,060,018 1,064,147
Construction work in progress 37,246 34,065
----------- -----------
Total property, plant, and equipment 1,097,264 1,098,212
----------- -----------
Other Property and Investments 1,809 1,768
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 12,332 12,617
Prepaid pension costs 16,243 14,993
Unamortized debt issuance expense 2,503 4,304
Unamortized premium on reacquired debt 10,617 7,776
Other 39,063 16,415
----------- -----------
Total deferred charges and other assets 80,758 56,105
----------- -----------
Total Assets $ 1,419,380 $ 1,412,166
=========== ===========
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
67
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ------------- -----------------
(in thousands)
Current Liabilities:
Securities due within one year $ 80,000 $ 69,200
Accounts payable --
Affiliated 17,679 22,396
Other 58,217 91,710
Customer deposits 7,307 6,855
Taxes accrued --
Income taxes 44,938 12,042
Other 23,031 41,464
Interest accrued 3,561 6,562
Vacation pay accrued 5,782 5,782
Regulatory clauses over recovery 24,397 35,680
Deferred revenue 14,052 -
Other 8,607 8,504
----------- -----------
Total current liabilities 287,571 300,195
----------- -----------
Long-term debt 202,483 243,715
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 144,937 146,631
Deferred credits related to income taxes 24,340 20,798
Accumulated deferred investment tax credits 20,448 21,054
Employee benefits provisions 51,076 49,869
Residual value guarantee 15,699 -
Other 44,653 45,142
----------- -----------
Total deferred credits and other liabilities 301,153 283,494
----------- -----------
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, without par value --
Authorized - 1,130,000 shares
Outstanding - 1,121,000 shares 37,691 37,691
Paid-in capital 287,236 285,280
Premium on preferred stock 326 326
Retained earnings 237,375 195,920
Accumulated other comprehensive loss (1,264) (1,264)
----------- -----------
Total common stockholder's equity 561,364 517,953
----------- -----------
Total Liabilities and Stockholder's Equity $ 1,419,380 $ 1,412,166
=========== ===========
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
68
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Mississippi Power's net income after dividends on preferred stock for the second
quarter and year-to-date 2003 was $53.1 million and $74.5 million, respectively,
compared to $20.8 million and $34.8 million for the corresponding periods of
2002. Earnings increased by $32.3 million, or 155.2%, in the second quarter 2003
and $39.7 million, or 114.1%, year-to-date 2003 due primarily to a pre-tax gain
of $62 million related to the termination of a PPA with Dynegy. Reference is
made to Note (M) to the Condensed Financial Statements herein for additional
information regarding the termination of this PPA.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------------ -------------------------------
(in thousands) % (in thousands) %
Retail sales.................................. $ (4,543) (3.3) $ (9,040) (3.5)
Sales for resale - non-affiliates............. 7,138 13.7 25,411 24.4
Sale for resale - affiliates.................. (4,791) (45.8) (8,181) (40.8)
Contract termination.......................... 62,111 N/M 62,111 N/M
Fuel expense.................................. (11,176) (16.7) (20,254) (16.0)
Purchased power - non-affiliates.............. 95 2.2 4,071 56.1
Purchased power - affiliates.................. 7,368 70.9 20,294 114.1
Other operation expense....................... 12,640 34.1 12,442 17.2
Maintenance expense........................... (1,855) (9.0) (8,266) (20.0)
N/M Not meaningful
Retail sales. Retail sales revenue decreased by $4.5 million, or 3.3%, in
the second quarter 2003 and $9 million, or 3.5%, year-to-date 2003 when compared
to the same periods in 2002. During the second quarter and year-to-date 2003,
retail sales revenues were down due mainly to decreased energy sales to
residential and industrial customers. The primary reasons for these decreases in
energy sales were milder weather and the continued economic slowdown in
Mississippi Power's service area.
Sales for resale - non-affiliates. In the second quarter and year-to-date
2003, sales for resale to non-affiliates increased when compared to the same
periods in 2002 mainly due to increased prices associated with non-territorial
energy sales.
69
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the Southern Company system will vary depending on demand and the
availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings since the energy is
generally sold at marginal cost and energy purchases are generally offset by
energy revenues through Mississippi Power's retail and wholesale fuel cost
recovery clauses.
Contract termination. In the second quarter and year-to-date 2003, this
item reflects the $62 million of revenues recorded upon the termination of a PPA
with Dynegy. Reference is made to Note (M) to the Condensed Financial Statements
herein for additional information.
Fuel expense and Purchased power - non-affiliates. During the second
quarter and year-to-date 2003, fuel expense decreased and purchased power from
non-affiliates increased when compared to the same periods in 2002 due to
opportunities to purchase some power more economically than to generate it and
due to a 1.5% reduction in demand for energy on a year-to-date basis. Since
energy expenses are generally offset by energy revenues through Mississippi
Power's retail and wholesale fuel cost recovery clauses, these expenses do not
have a significant impact on earnings.
Other operation expense. The increases in this item during the second
quarter and year-to-date 2003 when compared to the corresponding periods in 2002
were caused primarily by the costs incurred in conjunction with restructuring
the lease agreement for the combined cycle generating units at Plant Daniel.
Reference is made to Note (R) to the Condensed Financial Statements herein for
additional information.
Maintenance expense. In the second quarter and year-to-date 2003,
maintenance expenses were down when compared to the same periods in 2002
primarily due to scheduled maintenance performed at Plant Watson and Plant
Daniel in 2002.
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. For additional information relating to these issues, see Item 1
- - BUSINESS - "Risk Factors" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of Mississippi Power in the Form 10-K.
Mississippi Power's business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation
over environmental issues and claims of various types, including property
damage, personal injury and citizen enforcement of environmental requirements,
has increased generally throughout the United States. In particular, personal
injury claims for damages caused by alleged exposure to hazardous materials have
become more frequent. The ultimate outcome of such litigation currently filed
against Mississippi Power cannot be predicted at this time; however, after
consultation with legal counsel, management does not anticipate that the
liabilities, if any, arising from such proceedings would have a material adverse
effect on Mississippi Power's financial statements.
70
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Mississippi Power's 2003 ECO Plan filing was approved, as filed, by the
Mississippi PSC on March 18, 2003 and resulted in a slight increase in rates
effective April 2003. Compliance costs related to the Clean Air Act and other
environmental regulations could affect earnings if such costs cannot continue to
be recovered. For additional information about these issues, including the EPA
litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" and Note 3 to the financial statements of Mississippi Power in the Form
10-K. Reference is made to Note (E) to the Condensed Financial Statements herein
for information regarding a recent ruling by the U.S. Court of Appeals for the
Eleventh Circuit.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Mississippi Power in the Form 10-K
for information on the formation of an RTO as ordered by the FERC and the notice
of proposed rulemaking regarding open access transmission service and standard
electricity market design. In April 2003, the FERC issued a White Paper related
to its proposed rulemaking regarding open access transmission service and
standard electricity market design in an effort to respond to certain of the
public comments received on the standard market design proposal. Reactions to
the White Paper by Southeastern state regulators reflect significant continuing
differences in opinion between the FERC and various state regulatory commissions
over questions of jurisdiction and protection of retail customers. These
significant differences between state and federal regulators create substantial
uncertainty related to the ultimate approval of SeTrans because state commission
approval of the transfer of operational control of the transmission assets of
Southern Company and its subsidiaries is a prerequisite to the formation of
SeTrans. Pending energy legislation may also impact these issues. Any impact of
the other FERC proposals on Southern Company and its subsidiaries will depend on
the form in which final rules may be ultimately adopted; however, Mississippi
Power's revenues, expenses, assets and liabilities could be adversely affected
by changes in the transmission regulatory structure in its regional power
market.
Reference is made to Note (M) to the Condensed Financial Statements herein
for information regarding a one-time gain of $38 million upon the amendment and
termination of a PPA between Dynegy and Mississippi Power. In accordance with
the amended PPA, Mississippi Power will recognize capacity revenues totaling
approximately $8.8 million for the period from June through October 2003. Under
the original terms of the PPAs, Mississippi Power would have recognized revenue
of approximately $1.8 million for the remaining period of 2003 following the
termination. Also as a result of this PPA termination, Mississippi Power
continues to review alternatives for remarketing this capacity. The final
outcome of this matter cannot now be determined.
Reference is made to Notes (A), (E), (H), (M), (Q) and (R) to the Condensed
Financial Statements herein for discussion of various contingencies and other
matters which may affect future earnings potential.
Accounting Policies
Critical Policies
Mississippi Power's significant accounting policies are described in Note 1 to
the financial statements of Mississippi Power in Item 8 of the Form 10-K.
Mississippi Power's critical accounting policies involve rate regulation and
lease accounting.
71
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Mississippi Power is subject to the provisions of FASB Statement No. 71,
"Accounting for the Effects of Certain Types of Regulation." In the event that a
portion of Mississippi Power's operations is no longer subject to these
provisions, Mississippi Power would be required to write off related regulatory
assets and liabilities that are not specifically recoverable and determine if
any other assets, including plant, have been impaired.
Additionally, Mississippi Power accounts for its lease of two generating
units at Plant Daniel totaling 1,064 megawatts of capacity as an operating
lease. Reference is made to Note (R) of the Condensed Financial Statements
herein for an explanation of the restructuring activity that took place during
the second quarter of 2003 to allow for continued off-balance sheet accounting
treatment. Effective July 1, 2003, FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" would have required Mississippi Power to consolidate
the assets and liabilities of Escatawpa Funding, Limited Partnership
("Escatawpa"), the special purpose entity, from which Mississippi Power leased
the units. Under the restructured lease with Juniper Capital, consolidation is
not required.
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial Statements herein for
information regarding the adoption of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" effective January 1, 2003. Statement No. 143
establishes new accounting and reporting standards for legal obligations
associated with the ultimate cost of retiring long-lived assets. The present
value of the ultimate costs for an asset's future retirement must be recorded in
the period in which the liability is incurred. The cost must be capitalized as
part of the related long-lived asset and depreciated over the asset's useful
life. Additionally, Statement No. 143 does not permit non-regulated companies to
continue accruing future retirement costs for long-lived assets that they do not
have a legal obligation to retire. Prior to January 2003, Mississippi Power
accrued for the ultimate cost of retiring most long-lived assets over the life
of the related asset through depreciation expense.
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation applies to guarantees issued or modified after
December 31, 2002. In accordance with FASB Interpretation No. 45, Mississippi
Power has recorded a $16 million liability for the fair value of its residual
value guarantee associated with the lease of two generating units at Plant
Daniel.
FASB Interpretation No. 46 requires the primary beneficiary of a variable
interest entity to consolidate the related assets and liabilities. On July 1,
2003, Mississippi Power adopted Interpretation No. 46 with no financial
statement impact following the completion of restructuring the lease arrangement
for the combined cycle generating units at Plant Daniel. See Financial Condition
- - "Off-Balance Sheet Financing Arrangements" and Note (R) to the Condensed
Financial Statements herein for further information on the lease restructuring.
72
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires classification of certain financial instruments within its scope,
including shares that are mandatorily redeemable, as liabilities. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003 for calendar year companies. In
accordance with Statement No. 150, Mississippi Power reclassified $35 million of
mandatorily redeemable preferred securities as liabilities effective July 1,
2003. The implementation of Statement No. 150 did not have a material effect on
Mississippi Power's Statements of Income and Cash Flows.
FINANCIAL CONDITION
Overview
Major changes in Mississippi Power's financial condition during the first six
months of 2003 included the addition of approximately $26.6 million to utility
plant. The funds for these additions and other capital requirements were derived
primarily from operating activities. See Mississippi Power's Condensed
Statements of Cash Flows herein for further details.
Off-Balance Sheet Financing Arrangements
In May 2001, Mississippi Power began the initial 10-year term of an operating
lease agreement with Escatawpa, a special purpose entity, to use a
combined-cycle generating facility located at Mississippi Power's Plant Daniel.
The facility cost approximately $370 million. Reference is made to Note 8 to the
financial statements of Mississippi Power in Item 8 of the Form 10-K under
"Lease Agreements", "Critical Policies" above and Note (R) to the Condensed
Financial Statements herein for additional information. In June 2003, Escatawpa
sold its ownership interests in the facility to Juniper Capital L.P.
("Juniper"). Simultaneously, Juniper entered into a restructured lease agreement
with Mississippi Power. The terms of the lease with Juniper are substantially
the same as the lease with Escatawpa. In accordance with FASB Interpretation No.
46, Mississippi Power is not required to consolidate the leased assets and
related liabilities. Furthermore, the restructured lease agreement is an
operating lease under FASB Statement No. 13, "Accounting for Leases."
Accordingly, the lease is not reflected on the condensed balance sheet of
Mississippi Power.
Credit Rating Risk
Mississippi Power does not have any credit agreements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade. There are certain fixed-price physical gas purchase contracts
that could require collateral -- but not accelerated payment -- in the event of
a credit rating change to below investment grade; however, at June 30, 2003,
this exposure was immaterial.
Exposure to Market Risks
Mississippi Power's market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 2002 reporting period. In
addition, Mississippi Power is not aware of any facts or circumstances that
would significantly affect such exposures in the near term.
73
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Due to cost-based rate regulation, Mississippi Power has limited exposure
to market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Mississippi Power enters into fixed price contracts for the purchase and
sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Mississippi Power has also
implemented retail fuel hedging programs at the instruction of its PSC and
wholesale fuel hedging programs under agreements with wholesale customers. The
fair value of derivative, fuel and energy contracts was as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
---------------------------------- ----------------------------------------
Fair Value
---------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $13,306 $12,864
Contracts realized or settled (5,176) (9,327)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 579 5,172
---------------------------------- ------------------------ ---------------
Contracts at June 30, 2003 $8,709 $8,709
================================== ======================== ===============
Source of June 30, 2003
Valuation Prices
--------------------------- --------------- ---------------------------
Total Maturity
---------------------------
Fair Value Year 1 1-3 Years
--------------------------- -------------------------------------------
(in thousands)
Actively quoted $8,709 $8,646 $63
External sources - - -
Models and other methods - - -
--------------------------- --------------- ------------- -------------
Contracts at June 30, 2003 $8,709 $8,646 $63
=========================== =============== ============= =============
Unrealized gains and losses from mark to market adjustments on contracts
related to the retail and wholesale fuel hedging programs are recorded as
regulatory assets and liabilities. Realized gains and losses from these programs
are included in fuel expense and are recovered through Mississippi Power's
energy cost management clauses. Reference is made to Note 1 to the financial
statements of Mississippi Power under "Financial Instruments" in Item 8 of the
Form 10-K regarding the respective approvals of the retail and wholesale energy
cost management clauses. Gains and losses on contracts that do not represent
hedges are recognized in the Statements of Income as incurred. At June 30, 2003,
the fair value of derivative energy contracts reflected in the financial
statements was as follows:
Amounts
--------------------------------------- --------------------
(in thousands)
Regulatory liabilities, net $8,752
Other comprehensive income -
Net loss (43)
--------------------------------------- -------------------------
Total fair value $8,709
======================================= =========================
74
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For the quarter and year-to-date periods ended June 30, 2003 and 2002, the
realized gains and losses recognized in income were immaterial.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Market Price Risk" of Mississippi Power in the Form
10-K and Note 1 to the financial statements of Mississippi Power in Item 8 of
the Form 10-K.
Financing Activities
In April 2003, Mississippi Power issued $90 million of Series E 5-5/8% Senior
Notes due May 1, 2033. The proceeds from this sale were used to repay at
maturity $35 million of Mississippi Power's Series B 6.05% Senior Notes due May
1, 2003, to redeem the $51.6 million outstanding principal amount of Mississippi
Power's Series A 6.75% Senior Insured Quarterly Notes due June 30, 2038 and to
repay a portion of Mississippi Power's outstanding short-term indebtedness.
Mississippi Power 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 Power 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 Power's capital requirements
for its construction program, environmental compliance efforts and maturities of
long-term debt.
Sources of Capital
In addition to the financing activities previously described herein, Mississippi
Power plans to obtain the funds required for construction and other purposes
from sources similar to those used in the past. The amount, type and timing of
any financings -- if needed -- will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions and other factors.
See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional
information.
Mississippi Power's current liabilities exceed current assets due to
scheduled maturities of long-term debt.
To meet short-term cash needs and contingencies, Mississippi Power had at
June 30, 2003 approximately $55.5 million of cash and cash equivalents and $99.5
million of unused committed credit arrangements with banks that expire in 2003
and 2004. Approximately $37 million of these credit arrangements contain
provisions allowing two-year term loans executable at expiration date. The
credit arrangements provide liquidity support to Mississippi Power's obligations
with respect to variable rate pollution control bonds and commercial paper.
Mississippi Power may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of Mississippi Power and
other Southern Company subsidiaries. At June 30, 2003, Mississippi Power had no
outstanding commercial paper. Management believes that the need for working
capital can be adequately met by utilizing lines of credit without maintaining
large cash balances.
75
SAVANNAH ELECTRIC
AND
POWER COMPANY
76
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------- ------ ----- ------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $75,468 $74,293 $139,014 $129,240
Sales for resale --
Non-affiliates 1,773 2,097 3,807 3,030
Affiliates 912 1,264 3,236 2,162
Other revenues 757 706 1,835 1,306
------- ------- -------- --------
Total operating revenues 78,910 78,360 147,892 135,738
------- ------- -------- --------
Operating Expenses:
Operation --
Fuel 12,594 14,148 24,019 23,076
Purchased power --
Non-affiliates 1,390 2,067 3,402 3,134
Affiliates 22,080 17,396 41,093 29,523
Other 13,882 12,926 26,981 25,998
Maintenance 6,689 7,447 12,599 12,772
Depreciation and amortization 5,088 6,079 10,149 12,588
Taxes other than income taxes 3,652 3,703 7,099 7,188
------- ------- -------- --------
Total operating expenses 65,375 63,766 125,342 114,279
------- ------- -------- --------
Operating Income 13,535 14,594 22,550 21,459
Other Income and (Expense):
Interest expense, net of amounts capitalized (2,473) (2,705) (5,094) (5,474)
Distributions on preferred securities of subsidiary (685) (685) (1,370) (1,370)
Other income (expense), net (361) 93 (570) (533)
------- ------- -------- --------
Total other income and (expense) (3,519) (3,297) (7,034) (7,377)
------- ------- -------- --------
Earnings Before Income Taxes 10,016 11,297 15,516 14,082
Income taxes 3,720 4,262 5,711 5,245
------- --------- -------- --------
Net Income $ 6,296 $ 7,035 $ 9,805 $ 8,837
======= ========= ======== ========
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
77
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
-------- --------
(in thousands)
Operating Activities:
Net income $ 9,805 $ 8,837
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 11,197 12,968
Deferred income taxes and investment tax credits, net 521 (6,056)
Pension, postretirement, and other employee benefits 3,203 3,153
Other, net 4,085 (3,188)
Changes in certain current assets and liabilities --
Receivables, net (3,986) 2,207
Fossil fuel stock (1,951) 1,056
Materials and supplies (278) 3,712
Other current assets 2,469 (3,150)
Accounts payable (4,168) 4,120
Taxes accrued 2,044 (561)
Other current liabilities (5,808) 2,067
--------- --------
Net cash provided from operating activities 17,133 25,165
--------- --------
Investing Activities:
Gross property additions (19,557) (20,432)
Other 298 510
--------- --------
Net cash used for investing activities (19,259) (19,922)
--------- --------
Financing Activities:
Increase in notes payable, net 29,054 4,351
Proceeds --
Pollution control bonds 13,870 -
Other long-term debt - 159
Capital contributions from parent company 5,860 1,267
Redemptions --
First mortgage bonds - (436)
Pollution control bonds (13,870) -
Senior notes (20,000) -
Other long-term debt (463) -
Payment of common stock dividends (11,500) (11,350)
Other (149) (25)
--------- --------
Net cash provided from (used for) financing activities 2,802 (6,034)
--------- --------
Net Change in Cash and Cash Equivalents 676 (791)
Cash and Cash Equivalents at Beginning of Period 3,978 2,391
--------- --------
Cash and Cash Equivalents at End of Period $ 4,654 $ 1,600
========= ========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $113 and $148 capitalized for 2003 and 2002, respectively) $5,946 $5,536
Income taxes (net of refunds) $403 $15,148
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
78
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- ------ ---------- ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 4,654 $ 3,978
Receivables --
Customer accounts receivable 24,264 22,631
Unbilled revenues 13,474 11,531
Other accounts and notes receivable 1,711 2,937
Affiliated companies 2,792 1,102
Accumulated provision for uncollectible accounts (735) (682)
Fossil fuel stock, at average cost 10,280 8,328
Materials and supplies, at average cost 9,864 9,586
Prepaid taxes 22,385 24,414
Other 2,522 2,066
--------- ---------
Total current assets 91,211 85,891
--------- ---------
Property, Plant, and Equipment:
In service 894,856 880,604
Less accumulated provision for depreciation 428,014 416,232
--------- ---------
466,842 464,372
Construction work in progress 11,722 6,082
--------- ---------
Total property, plant, and equipment 478,564 470,454
--------- ---------
Other Property and Investments 2,117 3,648
--------- ---------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 10,886 11,692
Cash surrender value of life insurance for deferred compensation plans 22,147 21,943
Unamortized debt issuance expense 3,767 3,757
Unamortized premium on reacquired debt 7,835 8,103
Other 15,117 11,717
--------- ---------
Total deferred charges and other assets 59,752 57,212
--------- ---------
Total Assets $ 631,644 $ 617,205
========= ========-
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
79
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ------------ ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 875 $ 20,892
Notes payable 31,951 2,897
Accounts payable --
Affiliated 11,172 7,889
Other 7,122 15,769
Customer deposits 6,882 6,781
Taxes accrued --
Income taxes 1,311 311
Other 4,361 3,317
Interest accrued 3,039 3,268
Vacation pay accrued 2,481 2,427
Other 9,499 15,233
--------- ---------
Total current liabilities 78,693 78,784
--------- ---------
Long-term debt 167,606 168,052
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 80,933 78,970
Deferred credits related to income taxes 11,093 12,445
Accumulated deferred investment tax credits 8,957 9,289
Employee benefits provisions 36,821 33,619
Other 23,572 16,242
--------- ---------
Total deferred credits and other liabilities 161,376 150,565
--------- ---------
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 22,637 16,776
Retained earnings 108,353 110,049
Accumulated other comprehensive loss (1,244) (1,244)
--------- ---------
Total common stockholder's equity 183,969 179,804
--------- ---------
Total Liabilities and Stockholder's Equity $ 631,644 $ 617,205
========= =========
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
80
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Savannah Electric's net income for the second quarter and year-to-date 2003 was
$6.3 million and $9.8 million, respectively, compared to $7 million and $8.8
million for the corresponding periods of 2002. Earnings in the second quarter
were down $0.7 million, or 10.5%, due primarily to higher operating expenses.
Year-to-date 2003 earnings were up by $1 million, or 11%, as a result of higher
operating revenues and lower interest expenses, which were partially 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.................................. $ 1,175 1.6 $ 9,774 7.6
Sales for resale - non-affiliates............. (324) (15.5) 777 25.6
Sale for resale - affiliates.................. (352) (27.8) 1,074 49.7
Fuel expense.................................. (1,554) (11.0) 943 4.1
Purchased power - non-affiliates.............. (677) (32.8) 268 8.6
Purchased power - affiliates.................. 4,684 26.9 11,570 39.2
Other operation expense....................... 956 7.4 983 3.8
Maintenance expense........................... (758) (10.2) (173) (1.4)
Depreciation and amortization................. (991) (16.3) (2,439) (19.4)
Interest expense, net of amounts
capitalized................................ (232) (8.6) (380) (6.9)
Retail sales. Excluding fuel revenues, which do not affect net income,
retail sales revenue decreased by $0.5 million, or 1.1%, in the second quarter
2003 and increased by $2.2 million, or 2.7%, year-to-date 2003 when compared to
the corresponding periods in 2002. The second quarter 2003 decrease is primarily
due to a 5.8% decrease in energy sales to retail customers. Residential and
commercial energy sales were down by 8.8% and 6.4%, respectively, reflecting
milder-than-normal temperatures and industrial energy sales were up 3.6% when
compared to the same period in 2002. The year-to-date 2003 increase is primarily
a result of the base rate increase that took effect in June 2002. Year-to-date
2003, energy sales to industrial customers were higher by 10.2% in contrast to
energy sales to residential and commercial customers that were down by 0.3% and
2.5%, respectively. The increases in energy sales to the industrial sector are
attributed to increased usage by several industrial customers. Residential and
commercial energy sales were down slightly reflecting milder than normal
weather.
81
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - non-affiliates. The decrease in the second quarter 2003
is mainly due to lower demand for energy by these non-affiliated customers when
compared to the same period in 2002. Year-to-date 2003 sales for resale to
non-affiliates increased when compared to the same period in 2002 primarily due
to increased demand for energy by non-affiliates. These transactions do not have
a significant impact on earnings since the energy is usually sold at marginal
cost.
Sales for resale - affiliates. Revenues from sales for resale to affiliated
companies within the Southern Company system will vary depending on demand and
the availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings since the energy is
generally sold at marginal cost.
Fuel expense. The second quarter 2003 decrease in fuel expense is primarily
due to lower demand as compared to the corresponding period in 2002. Fuel
expense increased year-to-date 2003 due primarily to increased generation
related to the higher demand for energy in the first quarter 2003. Since fuel
expenses are generally offset by fuel revenues through Savannah Electric's fuel
cost recovery clause, these expenses do not have a significant impact on net
income.
Purchased power - non-affiliates. In the second quarter 2003, purchased
power from non-affiliates decreased due to reduced demand for energy from
non-affiliates. Year-to-date 2003 purchased power from non-affiliates increased
because of the opportunity to purchase this energy at a cost lower than
self-generation in the first quarter 2003 as compared to the same period in
2002. These transactions do not have a significant impact on earnings, as energy
costs are generally recovered through Savannah Electric's fuel cost recovery
clause.
Purchased power - affiliates. The increases in purchased power from
affiliates in the second quarter and year-to-date 2003 were directly related to
the new PPA with Southern Power which became effective June 2002. The annual
capacity costs of this PPA are approximately $14.0 million. Capacity costs of
purchased power are generally recovered through base rates and the energy
component is recovered through the fuel cost recovery clause. Purchased power
from affiliates also includes energy purchases which will vary depending on
demand and cost of generation resources at each company. These energy costs are
recovered through the fuel cost recovery clause and have no significant impact
on earnings.
Other operation expense. The increases for the second quarter and
year-to-date 2003 are attributed to an increase in administrative and general
expenses primarily relating to employee benefits and to new marketing programs
when compared to the same periods in the prior year.
Maintenance expense. The decreases in the second quarter and year-to-date
2003 are related to scheduled maintenance outages at one of Savannah Electric's
steam plants.
Depreciation and amortization. During the second quarter and year-to-date
2003, this item decreased mainly due to discontinued accelerated depreciation
and the amortization of the related regulatory liability that began in June
2002, in accordance with the 2002 base rate order.
Interest expense, net of amounts capitalized. This expense decreased in the
second quarter and year-to-date 2003 as a result of a lower amount of debt
outstanding and lower interest rates when compared to the corresponding periods
in 2002.
82
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors which include maintaining a stable regulatory environment and achieving
energy sales growth while containing costs. For additional information relating
to these issues, reference is made to Item 1 - BUSINESS - "Risks Factors" and
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
Savannah Electric in the Form 10-K.
Savannah Electric's business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation
over environmental issues and claims of various types, including property
damage, personal injury and citizen enforcement of environmental requirements,
has increased generally throughout the United States. In particular, personal
injury claims for damages caused by alleged exposure to hazardous materials have
become more frequent. The ultimate outcome of such litigation currently filed
against Savannah Electric cannot be predicted at this time; however, after
consultation with legal counsel, management does not anticipate that the
liabilities, if any, arising from such proceedings would have a material adverse
effect on Savannah Electric's financial position, results of operations or cash
flows.
Compliance costs related to the Clean Air Act and other environmental
regulations could affect earnings if such costs cannot be recovered. For
additional information about these issues, including the EPA litigation, see
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note
3 to the financial statements of Savannah Electric in the Form 10-K. Reference
is made to Note (E) to the Condensed Financial Statements herein for information
regarding a recent ruling by the U.S. Court of Appeals for the Eleventh Circuit.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Savannah Electric in the Form 10-K
for information on the formation of an RTO as ordered by the FERC and the notice
of proposed rulemaking regarding open access transmission service and standard
electricity market design. In April 2003, the FERC issued a White Paper related
to its proposed rulemaking regarding open access transmission service and
standard electricity market design in an effort to respond to certain of the
public comments received on the standard market design proposal. Reactions to
the White Paper by Southeastern state regulators reflect significant continuing
differences in opinion between the FERC and various state regulatory commissions
over questions of jurisdiction and protection of retail customers. These
significant differences between state and federal regulators create substantial
uncertainty related to the ultimate approval of SeTrans because state commission
approval of the transfer of operational control of the transmission assets of
Southern Company and its subsidiaries is a prerequisite to the formation of
SeTrans. Pending energy legislation may also impact these issues. Any impact of
the other FERC proposals on Southern Company and its subsidiaries will depend on
the form in which final rules may be ultimately adopted; however, Savannah
Electric's revenues, expenses, assets, and liabilities could be adversely
affected by changes in the transmission regulatory structure in its regional
power market.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of Savannah Electric in the Form 10-K for
information on plans to retire a 102 megawatt peaking facility in May 2005 and a
fifteen-year PPA with Southern Power to purchase 200 megawatts of capacity
beginning in June 2005 from the planned combined-cycle plant at Plant McIntosh
to be built and owned by Southern Power. The annual capacity cost is expected to
be approximately $14.5 million. Reference is made to Note (P) to the Condensed
Financial Statements herein for information regarding the FERC approval process
for this PPA.
83
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Notes (A), (E), (H) and (P) to the Condensed Financial
Statements herein for discussion of various contingencies and other matters
which may affect future earnings potential.
Accounting Policies
Critical Policy
Savannah Electric's significant accounting policies are described in Note 1 to
the financial statements of Savannah Electric in Item 8 of the Form 10-K.
Savannah Electric's critical accounting policy involves rate regulation.
Savannah Electric is subject to the provisions of FASB Statement No. 71,
"Accounting for the Effects of Certain Types of Regulation." In the event that a
portion of Savannah Electric's operations is no longer subject to these
provisions, Savannah Electric 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.
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial Statements herein for
information regarding the adoption of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" effective January 1, 2003. Statement No. 143
establishes new accounting and reporting standards for legal obligations
associated with the ultimate cost of retiring long-lived assets. The present
value of the ultimate costs for an asset's future retirement must be recorded in
the period in which the liability is incurred. The cost must be capitalized as
part of the related long-lived asset and depreciated over the asset's useful
life. Additionally, Statement No. 143 does not permit non-regulated companies to
continue accruing future retirement costs for long-lived assets that they do not
have a legal obligation to retire. Prior to January 2003, Savannah Electric
accrued for the ultimate cost of retiring most long-lived assets over the life
of the related asset through depreciation expense.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires classification of certain financial instruments within its scope,
including shares that are mandatorily redeemable, as liabilities. Statement No.
150 is effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003 for calendar year companies. In
accordance with Statement No. 150, Savannah Electric reclassified $40 million of
mandatorily redeemable preferred securities as liabilities effective July 1,
2003. The implementation of Statement No. 150 did not have a material effect on
Savannah Electric's Statements of Income and Cash Flows.
FINANCIAL CONDITION
Overview
Major changes in Savannah Electric's financial condition during the first six
months of 2003 included the addition of approximately $19.6 million to utility
plant. The funds for these additions and other capital requirements were derived
primarily from operations and the issuance of securities. See Savannah
Electric's Condensed Statements of Cash Flows herein for further details.
84
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Credit Rating Risk
Savannah Electric does not have any credit agreements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade.
Exposure to Market Risks
Savannah Electric's market risk exposures relative to interest rate changes have
not changed materially compared with the December 31, 2002 reporting period. In
addition, Savannah Electric is not aware of any facts or circumstances that
would significantly affect such exposures in the near term.
Due to cost-based rate regulations, Savannah Electric has limited exposure
to market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Savannah Electric enters into fixed price contracts for the purchase and
sale of electricity through the wholesale electricity market and, to a lesser
extent, similar contracts for gas purchases. Savannah Electric has also
implemented a retail fuel hedging program at the instruction of the Georgia PSC.
The fair value of derivative energy contracts at June 30, 2003 was as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
--------------------------------- ----------------------------------------
Fair Value
--------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $1,270 $ 626
Contracts realized or settled (1,130) (1,130)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 37 681
--------------------------------- ------------------------ ---------------
Contracts at June 30, 2003 $177 $177
================================= ======================== ===============
Source of June 30, 2003
Valuation Prices
------------------------------ ------------- -----------------------------
Total Maturity
-----------------------------
Fair Value Year 1 1-3 Years
------------------------------ -------------------------------------------
(in thousands)
Actively quoted $177 $537 $(360)
External sources - - -
Models and other methods - - -
------------------------------ ------------- -------------- --------------
Contracts at June 30, 2003 $177 $537 $(360)
============================== ============= ============== ==============
Unrealized gains and losses from mark to market adjustments on contracts
related to the retail fuel hedging programs are recorded as regulatory assets
and liabilities. At June 30, 2003, Savannah Electric had approximately $0.2
million in regulatory liabilities related to unrealized gains on mark to market
derivative contracts associated with its fuel hedging programs. Gains and losses
on contracts that do not represent hedges are recognized in the Statements of
Income as incurred. For the three months and six months ended June 30, 2003 and
2002, these amounts were not material.
85
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of Savannah Electric in the
Form 10-K and Note 1 to the financial statements of Savannah Electric in Item 8
of the Form 10-K.
Financing Activities
In February 2003, Savannah Electric sold through a public authority an aggregate
principal amount of $13.87 million of variable rate Pollution Control Revenue
Bonds, Series 2003 due February 1, 2038. The proceeds from this sale, together
with any investment proceeds and other moneys of Savannah Electric, were used to
redeem $13.87 million aggregate principal amount of Pollution Control Revenue
Bonds, Series 1997. The 2003 bonds will bear interest at a rate to be determined
by the auction rate process.
In July 2003, Savannah Electric entered a swap to hedge interest payments
associated with an anticipated debt issuance planned in December 2003. The swap
is for a notional amount of $25 million at a fixed interest rate of 5.025% and
matures in December 2013.
Savannah Electric 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 Savannah
Electric under "Capital Requirements for Construction," "Other Capital
Requirements" and "Environmental Matters" in the Form 10-K for a description of
Savannah Electric's capital requirements for its construction program, maturing
debt and environmental compliance efforts.
Sources of Capital
Savannah Electric plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past. 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 Electric had at
June 30, 2003 approximately $4.7 million of cash and cash equivalents and $55
million of unused committed credit arrangements with banks, of which $31 million
expires in 2003 and $24 million expires in 2004 and beyond. Of the unused credit
arrangements expiring in 2003 and 2004, $30 million includes either one or two
year term loan options executable at the expiration date. The credit
arrangements provide liquidity support to some of Savannah Electric's
obligations with respect to its variable rate debt and its commercial paper.
Savannah Electric may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of Savannah Electric and
other Southern Company subsidiaries. At June 30, 2003, Savannah Electric had $32
million of outstanding commercial paper. Since Savannah Electric has no major
generating plants under construction, management believes that the need for
working capital can be adequately met by utilizing lines of credit.
86
SOUTHERN POWER COMPANY
87
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
----- ------ ----- -------
(in thousands) (in thousands)
Operating Revenues:
Sales for resale --
Non-affiliates $ 68,997 $ 25,355 $119,266 $ 42,842
Affiliates 86,079 32,337 141,369 34,147
Contract termination 80,000 - 80,000 -
Other revenues 3,205 85 5,085 87
--------- --------- -------- ---------
Total Operating Revenues 238,281 57,777 345,720 77,076
Operating Expenses:
Operation --
Fuel 35,198 19,173 55,236 21,165
Purchased power --
Non-affiliates 16,237 7,611 31,560 10,725
Affiliates 31,670 3,421 49,602 4,791
Other 12,327 6,213 18,235 8,402
Maintenance 303 801 2,480 871
Depreciation and amortization 8,062 3,484 14,606 5,485
Taxes other than income taxes 2,063 802 3,363 1,503
--------- --------- -------- ---------
Total operating expenses 105,860 41,505 175,082 52,942
--------- --------- -------- ---------
Operating Income 132,421 16,272 170,638 24,134
Other Income and (Expense):
Interest expense, net of amounts capitalized (2,944) (1,195) (4,343) (1,195)
Other income (expense), net (174) (624) 129 (1,220)
--------- --------- -------- ---------
Total other income and (expense) (3,118) (1,819) (4,214) (2,415)
--------- --------- -------- ---------
Earnings Before Income Taxes 129,303 14,453 166,424 21,719
Income taxes 50,013 5,595 64,376 8,406
--------- --------- -------- ---------
Earnings Before Cumulative Effect of
Accounting Change 79,290 8,858 102,048 13,313
Cumulative effect of accounting change --
less income taxes of $231 thousand - - 367 -
--------- --------- -------- ---------
Net Income $ 79,290 $ 8,858 $102,415 $ 13,313
========= ========= ======== =========
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
88
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2003 2002
----- ------
(in thousands)
Operating Activities:
Net income $ 102,415 $ 13,313
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 13,924 6,871
Deferred income taxes and investment tax credits, net 10,514 (1,888)
Deferred capacity revenues (10,159) 4,309
Other, net 878 2,671
Changes in certain current assets and liabilities --
Receivables, net (34,680) (37,958)
Fossil fuel stock 4,678 342
Materials and supplies (324) 663
Other current assets (7,287) 109
Accounts payable 23,023 17,126
Taxes accrued 46,627 10,780
Interest accrued (3,781) 1,198
Other current liabilities - (631)
----------- ---------
Net cash provided from operating activities 145,828 16,905
----------- ---------
Investing Activities:
Gross property additions (231,396) (853,256)
Change in construction related payables (19,587) (20,390)
Other 1,079 (333)
----------- ---------
Net cash used for investing activities (249,904) (873,979)
----------- ---------
Financing Activities:
Increase in notes payable, net 488,326 185,392
Proceeds --
Senior notes - 574,189
Capital contributions from parent company 385 253,772
Redemptions --
Other long-term debt (380,163) (135,000)
Other (2,540) (19,629)
----------- ---------
Net cash provided from financing activities 106,008 858,724
----------- ---------
Net Change in Cash and Cash Equivalents 1,932 1,650
Cash and Cash Equivalents at Beginning of Period 19,474 3,711
----------- ---------
Cash and Cash Equivalents at End of Period $ 21,406 $ 5,361
----------- ---------
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $23,890 and $13,436 capitalized for 2003 and 2002, respectively) $- $-
Income taxes (net of refunds) $10,831 $724
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
89
SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2003 2002
- ----- ------------ ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 21,406 $ 19,474
Receivables --
Customer accounts receivable 8,350 6,609
Affiliated companies 44,494 11,555
Accumulated provision for uncollectible accounts (350) (350)
Fossil fuel stock, at average cost 6,353 11,031
Materials and supplies, at average cost 6,877 6,553
Prepayments 11,419 8,796
Assets from risk management activities 5,601 8,386
Other 6,232 1,568
---------- ------------
Total current assets 110,382 73,622
---------- ------------
Property, Plant, and Equipment:
In service 1,668,361 896,163
Less accumulated provision for depreciation 35,514 21,590
` ---------- ------------
1,632,847 874,573
Construction work in progress 555,136 1,082,987
---------- ------------
Total property, plant, and equipment 2,187,983 1,957,560
---------- ------------
Deferred Charges and Other Assets:
Accumulated deferred income taxes 36,362 38,591
Unamortized debt issuance expense 15,086 12,177
Other 2,931 4,026
---------- ------------
Total deferred charges and other assets 54,379 54,794
---------- ------------
Total Assets $2,352,744 $ 2,085,976
========== ============
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
90
SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ----------- --------------
(in thousands)
Current Liabilities:
Securities due within one year $ 200 $ 200
Notes payable 492,351 -
Notes payable to parent 16,663 210,488
Accounts payable --
Affiliated 36,881 37,748
Other 8,825 4,522
Taxes accrued --
Income taxes 47,046 3,915
Other 7,809 4,313
Interest accrued 16,932 20,713
Other 6,305 3,484
----------- -----------
Total current liabilities 633,012 285,383
----------- -----------
Long-Term Debt:
Senior notes 575,000 575,000
Other long-term debt 1,685 382,089
Unamortized debt (discount) premium, net (1,170) (1,210)
----------- -----------
Long-term debt 575,515 955,879
----------- -----------
Deferred Credits and Other Liabilities:
Obligations under risk management activities 92,983 63,191
Deferred capacity revenues--
Affiliated 8,290 13,075
Other 607 3,147
Other--
Affiliated 15,451 15,644
Other 765 3,053
----------- -----------
Total deferred credits and other liabilities 118,096 98,110
----------- -----------
Common Stockholder's Equity:
Common stock, par value $.01 per share --
Authorized - 1,000,000 shares
Outstanding - 1,000 shares - -
Paid-in capital 921,615 731,230
Retained earnings 164,892 62,477
Accumulated other comprehensive loss (60,386) (47,103)
----------- -----------
Total common stockholder's equity 1,026,121 746,604
----------- -----------
Total Liabilities and Stockholder's Equity $ 2,352,744 $ 2,085,976
=========== ===========
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
91
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Net Income $ 79,290 $ 8,858 $ 102,415 $ 13,313
Other comprehensive loss:
Changes in fair value of qualifying hedges, net of tax
of $(6,164), $(20,285), $(8,564), $(16,397), respectively (10,154) (32,194) (13,987) (26,192)
Less: Reclassification adjustment for amounts included
in net income, net of tax of $(50), $24, $116, $24, respectively 440 38 704 38
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 69,576 $ (23,298) $ 89,132 $ (12,841)
========= ========= ========= =========
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At At
June 30, December 31,
2003 2002
----------- --------------
Balance at beginning of period $ (47,103) $ 6,689
Change in current period (13,283) (53,792)
---------- ---------
BALANCE AT END OF PERIOD $ (60,386) $ (47,103)
========== =========
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
92
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2003 vs. SECOND QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Southern Power's net income for second quarter and year-to-date 2003 was $79.3
million and $102.4 million, respectively, compared to $8.9 million and $13.3
million for the corresponding periods of 2002. The increases in earnings of
$70.4 million for the second quarter 2003 and $89.1 million year-to-date 2003
can be attributed primarily to an after-tax gain of approximately $50 million
related to the termination of PPAs with Dynegy related to Plant Dahlberg Units 8
through 10 and Plant Franklin Unit 3. Reference is made to Note (M) to the
Condensed Financial Statements herein for additional information regarding the
termination of these PPAs. The other significant factor contributing to
increased earnings is the sale of wholesale capacity and energy to affiliated
and non-affiliated companies from Plant Wansley Units 6 and 7 and Plant Franklin
Unit 1 beginning in June 2002, and Plant Franklin Unit 2 and Plant Harris Units
1 and 2, beginning in June 2003, along with the initiation of PPAs for those
units with Alabama Power, Georgia Power and Savannah Electric.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- ------------------------------
(in thousands) % (in thousands) %
Sales for resale - non-affiliates................ $43,642 172.1 $ 76,424 178.4
Sale for resale - affiliates..................... 53,742 166.2 107,222 N/M
Contract termination............................. 80,000 N/M 80,000 N/M
Other revenues................................... 3,120 N/M 4,998 N/M
Fuel expense..................................... 16,025 83.6 34,071 161.0
Purchased power - non-affiliates................. 8,626 113.3 20,835 194.3
Purchased power - affiliates..................... 28,249 N/M 44,811 N/M
Other operation expense.......................... 6,114 98.4 9,833 117.0
Depreciation and amortization.................... 4,578 131.4 9,121 166.3
Interest expense, net of amounts capitalized..... 1,749 146.4 3,148 263.4
N/M Not meaningful
Sales for resale - non-affiliates. During the second quarter and
year-to-date 2003, sales for resale to non-affiliates increased as a result of
additional wholesale capacity and energy sales to non-affiliates that resulted
from commercial operation of Plant Franklin Unit 1, which was not fully
obligated under a long-term PPA until June 2003, and test period energy
transactions for Plant Franklin Unit 2 and Plant Harris Units 1 and 2 which were
placed into commercial operation in June 2003.
93
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates. Energy and capacity sales through PPAs
with Alabama Power, Georgia Power and Savannah Electric for the full six months
of 2003 caused the majority of the increase in the second quarter and
year-to-date 2003 when compared to the same periods in 2002. Revenues from sales
to affiliated companies through the Southern Company system power pool
("Southern Pool") and energy sales under PPAs will vary depending on demand and
the availability and cost of generating resources at each company within the
Southern Pool.
Contract termination. For the second quarter and year-to-date 2003, this
revenue results from the $80 million received from Dynegy in May 2003 to
terminate PPAs related to Plants Dahlberg and Franklin. Reference is made to
Note (M) to the Condensed Financial Statements herein for further information.
Other revenues. The increases in the second quarter and year-to-date 2003
are primarily due to scheduling and administrative fees on wholesale contracts
that were not in place during the first six months of 2002.
Fuel expense. The second quarter and year-to-date 2003 increases are
primarily attributed to the full period commercial operation of units at Plant
Wansley and Plant Franklin Unit 1 as well as commercial operation of new units
at Plant Franklin and Plant Harris as mentioned above.
Purchased power - non-affiliates. During the second quarter and
year-to-date 2003, purchased power from non-affiliates were higher than in the
same periods in 2002 mainly due to the availability of power at prices lower
than Southern Power's self generation or the Southern Pool and the effects of
purchase power provisions in the contracts with the electric membership
cooperatives, the City of Dalton, Georgia and the North Carolina Municipal Power
Authority 1.
Purchased power - affiliates. In the second quarter and year-to-date 2003,
purchased power from affiliates increased primarily due to the availability of
power at prices lower than Southern Power's self-generation. Expenses from
purchased power transactions will vary depending on demand, availability and the
cost of generating resources accessible throughout the Southern Company system.
Other operation expense. The second quarter and year-to-date 2003 increases
result from higher administrative and general expenses due to commercial
operation of Plant Wansley Units 6 and 7 and Plant Franklin Unit 1, beginning in
June 2002, and Plant Franklin Unit 2 and Plant Harris Units 1 and 2, beginning
in June 2003, when compared to the corresponding periods in 2002.
Depreciation and amortization. During the second quarter and year-to-date
2003, the increases in depreciation and amortization are primarily attributed to
the generating units that were placed into service in June 2002 and 2003 as
compared to the same periods in the prior year.
Interest expense, net of amounts capitalized. The increases in interest
expense, net of amounts capitalized for the second quarter and year-to-date
2003, when compared to the corresponding periods in 2002 are due to the lower
percentage of interest costs subject to capitalization as projects have reached
completion.
94
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Effects of Inflation
Southern Power is subject to long-term contracts and income tax laws that are
based on the recovery of historical costs. While the inflation rate has been
relatively low in recent years, it continues to have an adverse effect on
Southern Power because of the large investment in generating facilities with
long economic lives. Conventional accounting for historical cost does not
recognize this economic loss nor the partially offsetting gain that arises
through financing facilities with fixed-money obligations such as long-term
debt.
Future Earnings Potential
The results of operations are not necessarily indicative of future earnings. The
level of future earnings depends on numerous factors including completion of
construction on new generating facilities, regulatory matters, energy sales,
creditworthiness of customers, total generating capacity available in the Super
Southeast and the remarketing of capacity. For additional information relating
to these issues, see Item 1 - BUSINESS - "Risk Factors" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of Southern
Power in the Form 10-K.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - General" and to Note 5 to the financial statements
of Southern Power in Item 8 of the Form 10-K for additional information on
long-term power sales agreements and PPAs. Southern Power's PPAs with
non-affiliated counterparties have provisions that require the posting of
collateral or an acceptable substitute guarantee in the event that S&P or
Moody's downgrades the credit ratings of such counterparty to below-investment
grade, or, if the counterparty is not rated, fails to maintain a minimum
coverage ratio. The PPAs are expected to provide Southern Power with a stable
source of revenue during their respective terms.
In June 2003, Southern Power placed Plant Franklin Unit 2 and Plant Harris
Units 1 and 2 into commercial operation. Southern Power expects Plant Stanton A
to be completed and placed into commercial operation during the third quarter
2003. In 2004, Southern Power's PPA with Georgia Power will begin for Plant
Harris Unit 2. PPAs for the other units become effective upon commercial
operation. Southern Power also has Plant McIntosh Units 10 and 11 under
construction. Reference is made to Note (M) to the Condensed Financial
Statements herein for information regarding a one-time gain of $50 million upon
the termination of PPAs between Dynegy and Southern Power. Under the original
terms of the PPAs, Southern Power would have recognized revenue of approximately
$5.9 million for the remaining period of 2003 following the terminations.
Because of the termination of these PPAs, Southern Power is exploring
alternatives for remarketing its existing capacity and has suspended
construction of Plant Franklin Unit 3. Southern Power may complete limited
construction activities as needed to preserve the long-term viability of the
project. Reference is also made to Note (P) to the Condensed Financial
Statements herein for information regarding the FERC approval process for
Southern Power's PPAs with Georgia Power and Savannah Electric for Plant
McIntosh Units 10 and 11. The final outcome of these matters cannot now be
determined.
In July 2003, Southern Power entered into a five-year contract with
Piedmont Municipal Power Authority (PMPA) beginning January 1, 2006. PMPA is a
full requirements provider to 10 South Carolina cities. The contract is
projected to yield sales of 135 megawatts in 2006, growing to 181 megawatts in
the fifth year of the contract.
95
SOUTHERN 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" of Southern Power in the Form 10-K for information on
the development by federal and state environmental regulatory agencies of
additional control strategies for emission of air pollution from all major
sources of air pollution, particularly electric generating facilities.
Compliance costs related to current and future environmental laws and
regulations could affect earnings if such costs are not fully recovered.
Southern Power's business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage,
personal injury and citizen enforcement of environmental requirements, has
increased generally throughout the United States; in particular, personal injury
claims for damages caused by alleged exposure to hazardous materials have become
more frequent.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Southern Power in the Form 10-K
for information on the formation of an RTO as ordered by the FERC and the notice
of proposed rulemaking regarding open access transmission service and standard
electricity market design. In April 2003, the FERC issued a White Paper related
to its proposed rulemaking regarding open access transmission service and
standard electricity market design in an effort to respond to certain of the
public comments received on the standard market design proposal. Reactions to
the White Paper by Southeastern state regulators reflect significant continuing
differences in opinion between the FERC and various state regulatory commissions
over questions of jurisdiction and protection of retail customers. These
significant differences between state and federal regulators create substantial
uncertainty related to the ultimate approval of SeTrans because state commission
approval of the transfer of operational control of the transmission assets of
Southern Company and its subsidiaries is a prerequisite to the formation of
SeTrans. Pending energy legislation may also impact these issues. Any impact of
the other FERC proposals on Southern Company and its subsidiaries will depend on
the form in which final rules may be ultimately adopted.
Reference is also made to Notes (A), (E), (L), (M) and (P) to the Condensed
Financial Statements herein for discussion of various contingencies and other
matters which may affect future earnings potential.
Accounting Policies
Critical Policies
Southern Power's significant accounting policies are described in Note 1 to the
financial statements of Southern Power in Item 8 of the Form 10-K. Southern
Power has three critical accounting policies that require a significant amount
of judgment and are considered to be the most important to the presentation of
Southern Power's financial position and results of operations. The first
critical policy is the recognition of capacity revenues from long-term contracts
at the lesser of the levelized basis or the cash collected over the contract
periods. Second, Southern Power designates qualifying derivative instruments as
cash flow or fair value hedges and marks such derivative instruments to market
based primarily on quoted market prices. The unrealized changes in fair value of
qualifying cash flow hedges are deferred in Other Comprehensive Income. Any
ineffectiveness in those hedges and changes in non-qualifying positions are
reported as a component of current period income. Finally, Southern Power uses
flow-through accounting for state manufacturer's tax credits. This means that
Southern Power recognizes the credit as a reduction of tax expense when it is
more likely than not to be allowed by the Georgia Department of Revenue.
96
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
Reference is made to Note (J) to the Condensed Financial Statements herein
for information regarding the adoption of FASB Statement No. 143, "Accounting
for Asset Retirement Obligations" effective January 1, 2003. Southern Power has
no legal liability for asset retirement obligations as defined by FASB Statement
No. 143. Upon adoption, Southern Power recorded a cumulative effect of change in
accounting principle of $0.6 million, representing previously accrued removal
costs.
FINANCIAL CONDITION
Overview
The major change in Southern Power's financial condition during the first six
months of 2003 was the addition of approximately $231.4 million to utility plant
related to on-going construction of Southern Power's combined-cycle units. The
funds for these additions were provided by Southern Power's credit facility,
commercial paper program and subordinated loans from Southern Company. See
Southern Power's Condensed Statements of Cash Flows herein for further details.
Credit Rating Risk
Southern Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are certain physical electricity sale contracts, fixed-price
physical gas purchases and agreements covering interest rate swaps and currency
swaps that could require collateral -- but not accelerated payment -- in the
event of a credit rating change to below investment grade. Generally, collateral
may be provided for by a Southern Company guaranty, letter of credit or cash. At
June 30, 2003, the maximum potential collateral requirements under the
electricity sale contracts and financial instrument agreements were
approximately $154 million. At June 30, 2003, there were no material collateral
requirements for the gas purchase contracts.
Exposure to Market Risks
Southern Power is exposed to market risks, including changes in interest rates,
currency exchange rates and certain commodity prices. To manage the volatility
attributable to these exposures, Southern Power nets the exposure to take
advantage of natural offsets and enters into various derivative transactions for
the remaining exposure pursuant to approved risk management policies in areas
such as counterparty exposure and hedging practices. Southern Power's policy is
that derivatives are to be used primarily for hedging purposes. Derivative
positions are monitored using techniques that include market valuation and
sensitivity analysis.
97
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Southern Power has no outstanding variable rate long-term debt. To mitigate
Southern Power's exposure to interest rates, it entered into interest rate swaps
that were designated as cash flow hedges of interest expenses arising from the
2003 planned debt issuances. Changes in the fair values of these swaps are
deferred in Other Comprehensive Income. Upon the issuance of the debt in July
2003, the swaps were settled at a loss of approximately $93.3 million that will
be amortized to expense over the appropriate periods. Reference is made to Note
(L) to the Condensed Financial Statements herein for additional information.
Based on Southern Power's overall interest rate exposure at June 30, 2003,
including derivative and other interest-rate sensitive instruments, a near-term
100 basis-point change in interest rates would not materially affect Southern
Power's financial statements. In addition, Southern Power is not aware of any
facts or circumstances that would significantly affect such exposures in the
near term.
Because energy from Southern Power's facilities is primarily sold under
long-term contracts with tolling agreements and provisions shifting
substantially all of the responsibility for fuel cost to the PPA counterparties,
Southern Power's exposure to market volatility in commodity fuel prices and
prices of electricity is limited. To mitigate residual risks in those areas,
Southern Power enters into fixed-price contracts for the purchase or sale of
fuel and electricity. In connection with the transfers of Plant Franklin in 2001
and Plant Wansley in 2002 to Southern Power, Georgia Power transferred
approximately $5.6 million and $1.6 million, respectively, in derivative assets
relating to electric and gas forward contracts in effect at the date of the
transfers. These contracts were recorded at fair value on the date of the
transfer, which was equal to Georgia Power's carrying amount. Following the
transfer, these contracts are being marked to market through income until
completely realized and settled in August 2003.
Southern Power had firm purchase commitments that required payment in
Euros. As a hedge against fluctuations in the exchange rate for Euros, Southern
Power entered into forward contracts to purchase Euros and had designated these
contracts as fair value hedges of an unrecognized firm commitment. Since the
terms of these Euro contracts mirrored the purchase commitment terms, there was
no ineffectiveness recognized in income. All Euro payments have been made and
the gains associated with the hedges effectively reduced the purchase price of
the equipment, which is included in construction work in progress. As of June
30, 2003, there were no additional Euro hedges outstanding.
Unrealized gains and losses on electric and gas contracts used to hedge
anticipated purchases and sales are deferred in Other Comprehensive Income.
Gains and losses on contracts that do not represent hedges are recognized in the
Statements of Income as incurred. The fair values of derivative energy contracts
at June 30, 2003 were as follows:
Second Quarter
2003 Year-to-Date
Changes Changes
----------------------------------- ----------------------------------------
Fair Value
----------------------------------- ----------------------------------------
(in thousands)
Contracts beginning of period $1,875 $3,864
Contracts realized or settled (2,825) (3,490)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 246 (1,078)
----------------------------------- ------------------------ ---------------
Contracts at June 30, 2003 $ (704) $ (704)
=================================== ======================== ===============
98
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
At June 30, 2003, all of these contracts are based on actively quoted
market prices. Realized gains and losses on hedged transactions are recognized
in revenues and/or fuel expense in the Statements of Income as incurred. For the
three months ended June 30, 2003 and 2002, approximately $0.2 million and $1.3
million of losses, respectively, were recognized in Other Income in the
Statements of Income. For the six months ended June 30, 2003 and 2002,
approximately $0.1 million of gains and $2.6 million of losses, respectively,
were recognized in Other Income in the Statements of Income.
Financing Activities
During the first six months of 2003, Southern Company made subordinated loans to
Southern Power of approximately $3.8 million, net of repayments. In March 2003,
$190 million of notes payable to Southern Company were converted to a capital
contribution from Southern Company. Equity contributions and subordinated loans
from Southern Company are projected to total approximately $900 million to
Southern Power by the end of 2003. No dividends are projected to be paid in
2003.
In July 2003, Southern Power issued $575 million of 4.875% Senior Notes,
Series C due July 15, 2015. The proceeds from the sale were used to repay a
substantial portion of existing short-term indebtedness, to settle interest rate
hedges associated with this financing and for general corporate purposes.
Reference is made to Note (L) to the Condensed Financial Statements herein for
information regarding these hedges.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital
Requirements for Construction" and "Other Capital Requirements" of Southern
Power in the Form 10-K for a description of Southern Power's capital
requirements for its construction program, maturing debt, purchase commitments
and long-term service agreements.
Sources of Capital
Southern Power's current liabilities exceed current assets because of the
continued use of short-term debt as an interim funding source for Southern
Power's ongoing construction program. Southern Power's strategy is to refinance
most of such short-term borrowings with long-term securities following
commercial operation of the generating facilities.
In February 2003, Southern Power initiated a commercial paper program to
fund a portion of the construction costs of new generating facilities. The
amount of commercial paper will initially represent about 45% of total debt, but
is forecasted to decline to about 7% at year-end 2005 as more construction
projects are completed and refinanced with long-term securities. At June 30,
2003, Southern Power had outstanding $492.4 million in commercial paper.
Reference is made to Note 7 to the financial statements of Southern Power in
Item 8 of the Form 10-K for additional information relating to the commercial
paper program.
To meet short-term cash needs and contingencies, Southern Power had at June
30, 2003 approximately $21.4 million of cash and cash equivalents. To meet
liquidity and capital resource requirements, Southern Power had at June 30, 2003
approximately $650 million of unused committed credit arrangements with banks
99
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
expiring in 2006. This line also provides liquidity support for Southern Power's
commercial paper program (as discussed above). Amounts drawn under the
arrangements are used to finance acquisition and construction costs related to
gas-fired electric generating facilities and for general corporate purposes,
subject to borrowing limitations for each generating facility. The arrangements
permit Southern Power to fund construction of future generating facilities upon
meeting certain requirements. Financing of construction at the McIntosh facility
is subject to FERC approval of the related PPAs. Reference is made to Note (P)
to the Condensed Financial Statements herein for information regarding the FERC
approval process for Southern Power's PPAs with Georgia Power and Savannah
Electric for Plant McIntosh Units 10 and 11. Southern Power also has access to
loans from Southern Company to meet any additional Plant McIntosh funding needs
should other funding sources not be adequate.
100
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes
Southern Company A, B, C, D, E, F, G, H, I, J, K, L, M, N, R, S
Alabama Power A, E, F, H, J, L, N
Georgia Power A, E, G, H, I, J, L, N, O, P
Gulf Power A, E, H, I, J, L
Mississippi Power A, E, H, J, M, Q, R
Savannah Electric A, E, H, J, P
Southern Power A, E, J, L, M, O, P
101
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
SOUTHERN POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) The condensed financial statements of the registrants included herein
have been prepared by each registrant, without audit, pursuant to the
rules and regulations of the SEC. In the opinion of each registrant's
management, the information regarding such registrant furnished
herein reflects all adjustments necessary to present fairly the
results of operations for the periods ended June 30, 2003 and 2002.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations, although each
registrant believes that the disclosures regarding such registrant are
adequate to make the information presented not misleading. Disclosure
which would substantially duplicate the disclosure in the Form 10-K
and details which have not changed significantly in amount or
composition since the filing of the Form 10-K are omitted from this
Form 10-Q. Therefore, these condensed financial statements should be
read in conjunction with the financial statements and the notes
thereto included in the Form 10-K. Certain prior period amounts
have been reclassified to conform to current period presentation.
Due to seasonal variations in the demand for energy, operating results
for the periods presented do not necessarily indicate operating results
for the entire year.
(B) Reference is made to Note 11 to the financial statements of Southern
Company in Item 8 and MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential - General" of Southern Company in Item 7 of the Form
10-K for information on the spin-off of Mirant from Southern Company.
On July 14, 2003, Mirant filed for voluntary reorganization under
Chapter 11 of the Federal Bankruptcy Code. Southern Company has certain
contingent liabilities associated with Mirant. Reference is made to
Note 9 under "Guarantees" to the financial statements of Southern
Company in Item 8 of the Form 10-K for information regarding Southern
Company's guarantees of contractual commitments made by Mirant's
subsidiaries. At July 31, 2003, the total notional amount of guarantees
outstanding was less than $30 million.
Reference is also made to Note (E) herein for information regarding
various lawsuits related to Mirant and guarantees related to Mobile
Energy. Reference is also made to Note 6 to the financial statements of
Southern Company in Item 8 of the Form 10-K for information regarding
joint and several liability with Mirant in connection with the joint
consolidated federal income tax return. As discussed in Note (C) below,
the IRS has completed its audits of the consolidated federal income tax
returns through 1999. Under the terms of the separation agreement,
Mirant agreed to indemnify Southern Company for costs associated with
these lawsuits, Mobile Energy guarantees and additional IRS
assessments. The impact of Mirant's bankruptcy filing on Mirant's
indemnity obligations, if any, cannot now be determined.
102
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
On April 30, 2003, Mirant filed its Annual Report on Form 10-K for the
year ended December 31, 2002. This filing included Mirant's restated
financial statements for the years ended December 31, 2001 and 2000.
Mirant's restated net income for 2001 and 2000 decreased by $159
million and $29 million, respectively. Mirant also announced that it is
preparing revised quarterly financial statements for 2001 and expects
to provide the quarterly results as soon as possible. Southern Company
owned 100% of Mirant through September 2000 and 80% between October
2000 and April 2, 2001. Due to Southern Company's spin-off of Mirant on
April 2, 2001, Southern Company's financial statements reflect its
share of Mirant's net income as discontinued operations. The effect of
these restatements on Southern Company's financial statements, if any,
cannot be determined until Mirant's 2001 revised quarterly financial
statements are filed. The impact of the bankruptcy filing on the timing
of filing 2001 revised quarterly financial statements, if any, cannot
now be determined.
(C) Reference is made to Note 1 under "Leveraged Leases" and Note 6 to the
financial statements of Southern Company in Item 8 and MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential - General" in Item
7 of the Form 10-K.
As a large corporate taxpayer, Southern Company undergoes audits by the
IRS for each of its tax years. The IRS has completed its audits of
Southern Company's consolidated federal income tax returns for all
years through 1999. As part of the audit for the 1996-1999 tax years,
the IRS reviewed Southern Company's four international leveraged lease
transactions. Based on its review, the IRS proposed to disallow the tax
losses associated with one of these transactions, resulting in an
additional tax payment of approximately $30 million, including
interest, to the IRS. To finalize the audit and eliminate any
additional interest charges, Southern Company made this payment to the
IRS in May 2003 and intends to pursue a refund claim for this amount.
Notwithstanding the position taken by the IRS, Southern Company
continues to believe that the transaction remains a valid lease for
U.S. tax purposes and, accordingly, will vigorously contest the
proposed disallowance. Southern Company has accounted for the payment
as a deposit. If Southern Company is not successful in its defense of
the tax treatment for this transaction, it would also affect the timing
of the related revenue recognition for book purposes. A cumulative
effect adjustment would be required to reduce net income based on the
revised cash flows as a result of the changes in the allowed tax
deductions.
The IRS did not disallow any tax losses or make any other adjustments
for the 1996-1999 period with respect to any of Southern Company's
other lease transactions. However, there can be no assurance that
subsequent IRS audits would not raise similar disallowance issues.
The ultimate outcome of these matters cannot now be determined.
103
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(D) On June 30, 2003, the IRS issued an announcement suspending the
issuance of new private letter rulings on tax credits for synthetic
fuels pursuant to Section 29 of the Internal Revenue Code upon its
initiation of a review of the scientific validity of test procedures
and results that have been presented as evidence that a significant
chemical change occurred in such synthetic fuel. In addition, the IRS
indicated that it may revoke existing private letter rulings that
relied on the procedures and results under review if it determines that
those test procedures and results do not demonstrate that a significant
chemical change has occurred.
Southern Company has investments in two entities that produce synthetic
fuel and receive tax credits. In April 2001, Southern Company acquired
a 30% membership interest in Alabama Fuel Products, LLC (AFP). In 1998,
Southern Company acquired a 24.975% limited partnership interest in
Carbontronics Synfuels Investors, L.P. (Carbontronics). At June 30,
2003, Southern Company's investments in AFP and Carbontronics totaled
$25 million and $8 million, respectively.
Carbontronics has informed Southern Company that, on August 5, 2003,
the IRS communicated plans to perform an examination of the partnership
for the years 2000 and 2001. From the inception of Southern Company's
investment in Carbontronics through June 30, 2003, Southern Company has
recognized approximately $90 million in tax credits through income
related to its share of Carbontronics' synthetic fuel production.
The IRS is currently auditing AFP for tax years 1999 and 2000. Based on
a conversation between the IRS field agent and the tax matters partner
for AFP on July 31, 2003, there is an expectation that the IRS may
challenge the existence of significant chemical change at AFP. A
written report is expected, but has not yet been received. From the
inception of Southern Company's investment in AFP through June 30,
2003, Southern Company has recognized approximately $129 million in tax
credits through income related to its share of AFP's synthetic fuel
production.
Both entities have private letter rulings from the IRS that concluded
significant chemical change occurred based on the procedures and
results submitted. In addition, both entities regularly use independent
laboratories and experts to test for chemical change. These tests
replicated significant chemical changes consistent with the procedures
submitted with the private letter rulings. Southern Company has relied
on these private letter rulings and believes that the test results
presented in connection with such private letter rulings are valid, and
that the entities have operated in compliance with their respective
private letter rulings and Section 29 of the Internal Revenue Code. The
ultimate outcome of this matter cannot now be determined.
(E) Reference is made to Note 3 to the financial statements of Southern
Company, the operating companies and Southern Power in Item 8 and to
"Legal Proceedings" in Item 3 of the Form 10-K for information relating
to various lawsuits and other contingencies.
MIRANT ERISA LITIGATION
On April 17, 2003, a retired employee of Mirant filed a complaint in
the United States District Court for the Northern District of Georgia
alleging violations of the Employee Retirement Income Security Act and
naming as defendants Mirant, Southern Company, several current and
former directors and officers of Mirant and/or Southern Company, and
"Unknown Fiduciary Defendants 1-100." The plaintiff seeks to represent
a purported class consisting of individuals who were participants in or
beneficiaries of two Mirant employee benefit plans and their
predecessor plans (the "Plans") at any time between January 1, 2000,
and the filing of the complaint whose plan accounts included
investments in Mirant common stock or the "Mirant Corporation Stock
104
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Fund." The complaint alleges that the defendants misled
participants in the Plans by concealing Mirant's alleged
"participation in the illegal manipulation of energy
prices in California during 2000 and 2001 as well as other irregular
and unlawful accounting manipulations tied to energy trading." On June
3, 2003, a substantially similar complaint was filed in the United
States District Court for the Northern District of Georgia. Neither
complaint contains any specific allegations of wrongdoing with respect
to Southern Company. It is expected that these suits will be
consolidated. Southern Company denies any wrongdoing and intends to
defend this action. The final outcome of this matter cannot now be
determined.
NEW SOURCE REVIEW ENFORCEMENT ACTIONS
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" in Item 7 and Note 3 to the financial
statements of each registrant (except Southern Power) under "New Source
Review Enforcement Actions" in Item 8 of the Form 10-K. On June 24,
2003, the U.S. Court of Appeals for the Eleventh Circuit ("Court of
Appeals") ruled that it did not have jurisdiction to decide the TVA
appeal because the challenged Administrative Compliance Order ("ACO")
did not constitute final agency action. The Court of Appeals held that
the Clean Air Act's statutory scheme for enforcement of the ACO is
unconstitutional and that the EPA must prove any Clean Air Act
violations by TVA in federal district court. Until that time, the Court
of Appeals ruled, TVA is free to ignore the ACO without penalty. On
July 3, 2003, Alabama Power and the EPA jointly notified the Alabama
district court of the ruling of the Court of Appeals and requested that
the stay in that case be continued until expiration of the period in
which the EPA can request a rehearing. The district court granted the
parties' request on July 10, 2003. On August 8, 2003, the EPA filed a
petition for rehearing en banc with the Court of Appeals. At this time,
no party to the case in federal district court in Atlanta against
Georgia Power, which was administratively closed two years ago, has
asked the court to reopen that case. The final outcome of these
matters cannot now be determined.
MOBILE ENERGY BANKRUPTCY PETITION
Reference is made to Note 3 to the Southern Company financial
statements in Item 8 of the Form 10-K. In July 2003, Mobile Energy
received the necessary approval of its plan of reorganization under
PUHCA. Mobile Energy currently anticipates the U.S. Bankruptcy Court
will also approve the plan of reorganization in September 2003. The
reorganization will not impact Southern Company's outstanding
guarantees of certain potential obligations of Mobile Energy that
represent a maximum contingent liability of $19 million at June 30,
2003.
PLANT WANSLEY ENVIRONMENTAL LITIGATION
Reference is made to Item 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" of Georgia Power in the Form 10-K and to Note 3
to the financial statements of Southern Company and Georgia Power under
"Plant Wansley Litigation" in Item 8 of the Form 10-K. On June 19,
2003, the court granted Georgia Power's motion to dismiss the
allegations regarding hazardous air pollutants and denied Georgia
Power's motion to dismiss the allegations regarding emission offsets.
Discovery is ongoing and no trial date has been set. The final outcome
of this matter cannot now be determined.
105
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
MIRANT SECURITIES LITIGATION
Reference is made to Note 3 under "Mirant Securities Litigation" of
Southern Company in Item 8 of the Form 10-K. On July 14, 2003, the U.S.
District Court for the Northern District of Georgia dismissed all
claims based on Mirant's alleged improper trading and marketing
activities in the California energy market; however, the Court did not
dismiss the claims based on alleged false statements and omissions in
Mirant's prospectus for its initial public offering and
accounting-related issues previously disclosed by Mirant. Such claims
seek to impose liability on Southern Company based on allegations that
Southern Company was a "control person" as to Mirant prior to the
spin-off date. Mirant's bankruptcy filing imposes an automatic stay of
this action as to Mirant and may affect the proceedings as to Southern
Company and other parties in this lawsuit. Southern Company's answer to
the consolidated amended complaint is due on September 3, 2003, and
discovery begins on that date. Under certain circumstances, Southern
Company will be obligated under its Bylaws to indemnify the four
current and/or former Southern Company officers who served as directors
of Mirant at the time of its initial public offering through the date
of the spin-off and are also named as defendants in this lawsuit. The
final outcome of this matter cannot now be determined.
RACE DISCRIMINATION LITIGATION
Reference is made to Note 3 under "Race Discrimination Litigation" of
Southern Company and Georgia Power in Item 8 of the Form 10-K. On March
31, 2003, the United States District Court for the Northern District of
Georgia granted summary judgment in favor of the defendants on all
claims raised by all of the seven named plaintiffs. On April 28, 2003,
plaintiffs filed an appeal to the United States Court of Appeals for
the Eleventh Circuit challenging these adverse summary judgment
rulings, as well as the District Court's October 2001 ruling denying
class certification. In addition, plaintiffs appealed some adverse
rulings on discovery issues. Both parties have filed their respective
briefs with the Eleventh Circuit Court of Appeals, and they are
awaiting the determination of the Court of Appeals. The final outcome
of the case cannot now be determined.
(F) Reference is made to Note 3 to the financial statements of Southern
Company and Alabama Power in Item 8 of the Form 10-K for information
relating to Alabama Power's retail rate adjustment procedures. In June
2003, Alabama Power began buying power under a seven-year PPA with
Southern Power for 615 megawatts of capacity annually from Plant
Harris. In addition, Alabama Power also began buying power under a
seven-year PPA with a third party for 630 megawatts; one-half of which
became available in June 2003, with the remainder scheduled to be
available beginning in 2004. Both PPAs have been certificated by the
Alabama PSC. As a result, Alabama Power's retail rates were adjusted by
approximately 2.6% under Rate CNP (Certificated New Plant), which
allows Alabama Power to recover costs associated with certificated
PPAs.
106
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(G) On May 23, 2003, Georgia Power filed for a fuel cost recovery rate
increase. The increase will allow for the recovery of fuel costs based
on an estimate of future fuel costs, as well as the collection of the
existing under recovery of fuel expenses. The Georgia PSC held hearings
on July 31, 2003. A final decision from the Georgia PSC is expected on
August 19, 2003 with an effective date of September 1, 2003. The
outcome of the filing cannot be determined at this time.
(H) Reference is made to Note 1 under "Regulatory Assets and Liabilities"
to the financial statements of Southern Company and each of the
operating companies in Item 8 of the Form 10-K. The operating companies
are subject to the provisions of FASB Statement No. 71, "Accounting for
the Effects of Certain Types of Regulation." In the event that a
portion of a company's operations is no longer subject to these
provisions, the company would be required to write off related
regulatory assets and liabilities that are not specifically recoverable
and determine if any other assets have been impaired.
(I) Reference is made to Note 9, Note 4 and Note 4 under "Guarantees" to
the financial statements of Southern Company, Georgia Power and Gulf
Power, respectively, in Item 8 of the Form 10-K for information
regarding guarantees of loans to residential customers for heat pump
purchases. As of June 30, 2003, the total outstanding loans guaranteed
by all of the operating companies was $14.3 million, of which Georgia
Power is responsible for $11.5 million and Gulf Power is responsible
for $0.8 million. Total loan loss reserves of $4 million ($2.4 million
for Georgia Power and $0.2 million for Gulf Power) have been recorded.
(J) Effective January 1, 2003, Southern Company adopted FASB Statement
No. 143, "Accounting for Asset Retirement Obligations."
Statement No. 143 establishes new accounting and reporting standards
for legal obligations associated with the ultimate cost
of retiring long-lived assets. The ultimate costs for an asset's
future retirement must be recorded in the period in which
the liability is incurred. The cost must be capitalized as part of
the related long-lived asset and depreciated over the
asset's useful life. Additionally, Statement No. 143 does not permit
the continued accrual of future retirement costs for
long-lived assets which the company does not have a legal obligation
to retire. However, the operating companies have
discussed the financial statement impacts of Statement No. 143 with
their respective PSCs and will continue to recognize the
accumulated removal costs for other obligations as part of accumulated
depreciation. As of June 30, 2003, amounts recorded
in Accumulated Depreciation that represent regulatory liabilities
related to such removal costs totaled $1.2 billion,
consisting of $562 million, $416 million, $146 million, $75 million
and $34 million for Alabama Power, Georgia Power, Gulf
Power, Mississippi Power and Savannah Electric, respectively.
The operating companies had no cumulative effect to net income
resulting from the adoption of Statement No. 143. As a result, Alabama
Power, Georgia Power, Gulf Power, Mississippi Power and Savannah
Electric recorded regulatory assets (liabilities) of $(71) million, $21
million, $0.9 million, $0.6 million and $2.4 million, respectively, as
of January 1, 2003. At June 30, 2003, the regulatory liability for
Alabama Power is reflected in the balance sheets under "Asset
retirement obligation regulatory liability." The regulatory assets of
the other operating companies are reflected in the balance sheets under
either "Asset retirement obligation regulatory asset" or in "Other"
under "Deferred Charges and Other Assets." Southern Power recorded a
cumulative effect adjustment to income upon adoption of $0.6 million,
representing removal costs previously accrued.
107
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The liability recognized to retire long-lived assets primarily relates
to Southern Company's nuclear facilities, which include Alabama Power's
Plant Farley and Georgia Power's ownership interests in Plants Hatch
and Vogtle. The fair value of assets legally restricted for settling
retirement obligations related to these assets as of June 30, 2003 is
$338 million, $388 million and $726 million for Alabama Power, Georgia
Power and Southern Company, respectively. In addition, the operating
companies have retirement obligations related to various landfill
sites, ash ponds and underground storage tanks. The operating companies
have also identified retirement obligations related to certain
transmission and distribution facilities. However, liabilities for the
removal of these transmission and distribution assets will not be
recorded because no reasonable estimate can be made regarding the
timing of the obligations. The operating companies will continue to
recognize in the income statement their ultimate removal costs in
accordance with each company's respective regulatory treatment. Any
difference between costs recognized under Statement No. 143 and those
reflected in rates will be recognized as either a regulatory asset or
liability.
Alabama Power has revised the estimated cost to retire Farley Nuclear
Plant as a result of a new site-specific decommissioning study
completed in April 2003. The effect of the revision is an increase of
$34.5 million for the Statement No. 143 liability included in "Asset
retirement obligations" with a corresponding increase in property,
plant and equipment. Based on the new study, the estimated site study
decommissioning costs are $955 million ($892 million for radiated
structures plus $63 million for non-radiated structures) and the
ultimate decommissioning costs are $2,529 million ($2,349 million for
radiated structures plus $180 million for non-radiated structures). For
additional information, see Note 1 to the financial statements of
Alabama Power in Item 8 of the Form 10-K.
The following table reflects the details of the Asset Retirement
Obligations included in the balance sheets.
Balance at Liabilities Liabilities Cash Flow Balance at
12/31/02 Incurred Settled Accretion Revisions 06/30/03
-------- -------- ------- --------- --------- --------
(in millions)
Alabama Power $ - $301.0 $ - $11.3 $34.5 $346.8
Georgia Power - 469.1 - 15.2 - 484.3
Gulf Power - 4.0 - 0.1 - 4.1
Mississippi Power - 1.0 - - - 1.0
Savannah Electric - 3.2 - 0.1 - 3.3
Southern Company $ - $778.3 $ - $26.7 $34.5 $839.5
The following table represents pro-forma asset retirement obligations
as if Statement No. 143 had been adopted on January 1, 2002.
At December 31,
-----------------------------------
2002 2001
---- ----
(in millions)
Alabama Power $301.0 $281.3
Georgia Power 469.1 440.1
Gulf Power 4.0 3.7
Mississippi Power 1.0 0.9
Savannah Electric 3.2 2.7
Southern Company $778.3 $728.7
108
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The adoption of FASB Statement No. 143 has been treated as a non-cash
transaction for purposes of the Statements of Cash Flows.
(K) Reference is made to Note 1 under "Stock Options" and Note 7 under
"Stock Option Plan" to the financial statements of Southern Company in
Item 8 of the Form 10-K for information regarding non-qualified
employee stock options provided by Southern Company. Southern Company
accounts for options granted in accordance with Accounting Principles
Board Opinion No. 25; thus, no compensation expense is recognized
because the exercise price of all options granted equaled the fair
market value on the date of the grant. The estimated fair values of
stock options granted during the three-month and six-month periods
ending June 30, 2003 and 2002 have been derived using the
Black-Scholes stock option pricing model. The following table shows the
assumptions and the weighted average fair values of these stock
options:
Three Months Three Months Six Six
Ended Ended Months Months
June 30, 2003 June 30, 2002 Ended Ended
June 30, 2003 June 30,
2002
-------------- -------------- --------------- --------------
Interest Rate 2.6% 4.2% 2.7% 4.0%
Average expected life of stock options (in years)
4.3 4.3 4.3 4.3
Expected volatility of common stock 22.7% 26.2% 23.6% 26.1%
Expected annual dividends on common stock $1.37 $1.34 $1.37 $1.34
Weighted average fair value of stock options
granted $3.51 $4.08 $3.59 $3.37
The pro forma impact of fair-value accounting for options granted on
net income is as follows:
As Reported Pro Forma
--------------------- -------------------------
Three Months Ended June 30, 2003
Net income (in millions) $432 $427
Earnings per share (dollars):
Basic $0.60 $0.60
Diluted $0.59 $0.59
Three Months Ended June 30, 2002
Net income (in millions) $332 $326
Earnings per share (dollars):
Basic $0.47 $0.47
Diluted $0.46 $0.46
Six Months Ended June 30, 2003
Net income (in millions) $730 $721
Earnings per share (dollars):
Basic $1.01 $1.00
Diluted $1.00 $0.99
Six Months Ended June 30, 2002
Net income (in millions) $556 $546
Earnings per share (dollars):
Basic $0.79 $0.78
Diluted $0.78 $0.77
109
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Diluted Earnings Per Share
Three Months Ended Three Months Ended Six Months Six Months
June 30, 2003 June 30, 2002 Ended Ended
(in thousands) June 30, 2003 June 30, 2002
----------------------------------- ------------------- ------------------- ------------------ -------------------
As Reported Shares 724,627 706,181 721,785 703,596
Effect of options 5,659 5,984 5,354 5,541
Diluted Shares 730,286 712,165 727,139 709,137
(L) In addition to the fixed price electric and gas contracts used to
mitigate exposure to volatile energy prices (see "Exposure to Market
Risks" in MANAGEMENT'S DISCUSSION AND ANALYSIS herein), Southern
Company and certain of its subsidiaries enter into interest rate swaps
to hedge exposure to interest rate changes. Swaps related to fixed rate
securities are accounted for as fair value hedges; swaps related to
variable rate securities or forecasted transactions are accounted for
as cash flow hedges. The swaps are generally structured to mirror the
terms of the hedged debt instruments; therefore, no material
ineffectiveness has been recorded in earnings. As of June 30, 2003, the
following swaps were outstanding:
Fair Value Hedges
--------------- -------------- ------------------ ---------------- --------------------------
Notional Fixed Rate Variable Rate Maturity Fair Value
Amount Received Paid Date June 30, 2003
------------------------ --------------- -------------- ------------------ ---------------- --------------------------
Southern Company $400 million 5.3% 6-month LIBOR February 2007 $46.1 million
(in arrears)
less 0.103%
Cash Flow Hedges
---------------- -------------- ------------------ ----------------- --------------------
Weighted Average
Variable Rate Fixed Rate
Notional Received Paid Maturity Fair Value
Amount Date June 30, 2003
----------------------- ---------------- -------------- ------------------ ----------------- --------------------
Variable Rate
Securities
----------------------- ---------------- -------------- ------------------ ----------------- --------------------
Southern Company $200 million 1-month LIBOR 3.1975% June 2004 $(4.0) million
Alabama Power $350 million 3-month 3.015% December 2003 $(3.2) million
LIBOR plus
0.12%
Alabama Power $486 million BMA Index 1.6254% January 2004 $(1.6) million
Alabama Power $486 million BMA Index 1.9923% January 2007 $2.3 million
Alabama Power $195 million 3-month LIBOR 1.89% April 2006 $0.8 million
Georgia Power $250 million 3-month 1.96% February 2005 $(2.0) million
LIBOR plus
0.125%
----------------------- ---------------- -------------- ------------------ ----------------- --------------------
110
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
----------------------- ---------------- -------------- ------------------ ----------------- --------------------
Forecasted
Transactions
----------------------- ---------------- -------------- ------------------ ----------------- --------------------
Gulf Power $60 million 3-month LIBOR 4.5975% July 2013 $(3.7) million
Southern Power $350 million 1-month LIBOR 6.2348% June 2013 $(73.1) million
Southern Power $150 million 1-month LIBOR 5.4792% June 2008 $(19.8) million
In May 2003, Alabama Power completed the issuance of $250 million of
senior notes due May 1, 2008. In connection with the issuance of these
notes, Alabama Power settled a related interest rate swap and incurred
a loss of $10.2 million. Including the effect of this settlement, for
the twelve month period ended June 30, 2004, a total of $2.8 million
will be reclassified from Other Comprehensive Income to Interest
Expense for Alabama Power.
In July 2003, Southern Power completed the issuance of $575 million of
4.875% senior notes due July 15, 2015. In connection with the issuance
of these notes, Southern Power settled the interest rate swaps above
and incurred a loss of $93.3 million. Including the effect of this
settlement, for the twelve month period ended June 30, 2004, a total of
approximately $9.8 million will be reclassified from Other
Comprehensive Income to Interest Expense for Southern Power.
Also in July 2003, Gulf Power completed the issuance of $60 million of
4.35% senior notes due July 15, 2013. In connection with the issuance
of these notes, Gulf Power settled the interest rate swaps above and
incurred a loss of $3.3 million. For the twelve month period ended June
30, 2004, a total of approximately $0.3 million will be reclassified
from Other Comprehensive Income to Interest Expense for Gulf Power.
(M) Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - General" and to Note 5 to the financial
statements in Item 8 of the Form 10-K for Southern Company, Mississippi
Power and Southern Power for information regarding PPAs between
subsidiaries of Dynegy and Mississippi Power and Southern Power and
related letters of credit.
On May 21, 2003, Mississippi Power and Southern Power entered into
agreements with Dynegy (the "Agreements") to resolve all outstanding
matters related to Dynegy, the PPAs and the related letters of credit.
Under the terms of the Agreements, (1) Dynegy made a cash payment of
$75 million to Mississippi Power and $80 million to Southern Power; (2)
the PPAs between Southern Power and Dynegy were terminated, with no
party having any remaining obligations under such PPAs thereafter; (3)
Dynegy and Mississippi Power amended their PPA so that no capacity
payments are due from Dynegy to Mississippi Power for capacity made
available under the PPA from June 2003 through October 2003 (but other
obligations and payments by Dynegy under such PPA are not affected
during such time) and the PPA will terminate effective October 31,
2003, with neither party having any remaining obligations under the PPA
after October 31, 2003; (4) Dynegy paid all amounts for which it was
obligated under the PPAs up to their time of cancellation or amendment;
(5) Southern Power and Mississippi Power returned the existing letters
of credit in support of Dynegy's obligations under the PPAs; and (6)
Dynegy deposited $7 million with Mississippi Power as collateral for
Dynegy's potential energy purchases under the PPA through October 31,
2003.
111
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The termination payments from Dynegy resulted in a one-time gain to
Southern Company of approximately $88 million after tax ($38 million
for Mississippi Power and $50 million for Southern Power).
Because of the terminations of these PPAs, Southern Power has suspended
construction of Plant Franklin Unit 3. Southern Power may complete
limited construction activities as needed to preserve the long-term
viability of the project. The length of the deferral period will depend
on forecasted capacity needs and other wholesale market opportunities.
Mississippi Power and Southern Power are also continuing to explore
alternatives for their existing capacity. The final outcome of these
matters cannot now be determined.
After giving effect to the termination of these PPAs, total expected
capacity payments from non-affiliates are as follows (in millions):
Southern Mississippi Southern
Year Power Power Company
----------------------- ------------ ----------------- --------------
2003 $43.3 $17.6 $ 60.9
2004 64.1 - 64.1
2005 30.5 - 30.5
2006 30.2 - 30.2
2007 30.1 - 30.1
2008 and thereafter 171.4 - 171.4
----------------------- ------------ ----------------- --------------
Total $369.6 $17.6 $387.2
======================= ============ ================= ==============
(N) Reference is made to Note 10, Note 9, and Note 5 for Southern Company,
Alabama Power and Georgia Power, respectively, in Item 8 of the Form
10-K for information regarding a mandatory program of deferred premiums
which could be assessed after a nuclear incident against all owners of
nuclear reactors to cover third-party liability claims. On or about
August 20, 2003, the NRC will increase the maximum retrospective
premium for each licensed reactor operated from $88 million to $100
million per incident. The maximum assessment, excluding any applicable
state premium taxes, for Alabama Power and Georgia Power - based on its
ownership and buyback interests -- is $200 million and $203 million,
respectively, per incident. The annual retrospective limit of $10
million per incident for each licensed reactor will not change.
(O) Reference is made to Note 3 to the financial statements under
"Construction Program" of Southern Power and to Note 4 to the financial
statements under "Construction Program" of Georgia Power in Item 8 of
the Form 10-K for information regarding Southern Company keep-wells
covering the transfer of specific vendor contracts from Georgia Power
to Southern Power for the operation of Plant Dahlberg and construction
at the Plant Franklin and Plant Stanton sites. As of June 30, 2003,
Southern Power has no remaining purchase obligations to equipment
vendors under these contracts.
(P) Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential - General" in Item 7 and Note 4 under "Purchased
Power Commitments" and "Fuel and Purchased Power Commitments" to the
financial statements of Georgia Power and Savannah Electric,
respectively, and Note 5 to the financial statements of Southern Power
in Item 8 of the Form 10-K for information regarding PPAs between
Southern Power and Georgia Power and Savannah Electric for Plant
McIntosh capacity. Such PPAs were certified by the Georgia PSC in
December 2002 after a competitive bidding process.
112
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The Electric Power Supply Association and Calpine Corporation have made
filings in this proceeding in opposition to the FERC's acceptance of
the PPAs, alleging that the PPAs do not meet the applicable standards
for PPAs between affiliates. In April 2003, Southern Power applied for
FERC approval of these PPAs. In July 2003, the FERC accepted the PPAs
to become effective June 1, 2005, subject to refund, and ordered that
hearings be held to determine: (a) whether, in the design and
implementation of the Georgia PSC competitive bidding process, Georgia
Power and Savannah Electric unduly preferred Southern Power; (b)
whether the analysis of the competitive bids unduly favored Southern
Power, particularly with respect to evaluation of non-price factors;
(c) whether Georgia Power and Savannah Electric selected their
affiliate, Southern Power, based upon a reasonable combination of
price and non-price factors; (d) whether Southern Power received an
undue preference or competitive advantage in the competitive bidding
process as a result of access to its affiliate's transmission system;
(e) whether and to what extent the PPAs impact wholesale competition;
and (f) whether the PPAs are just and reasonable and not unduly
discriminatory. Hearings are scheduled to commence on March 1, 2004.
Management believes that the PPAs should be approved by the FERC;
however, the ultimate outcome of this matter cannot now be determined.
In March 2003, Savannah Electric transferred to Southern Power 58 acres
of land to facilitate construction at Plant McIntosh. The transfer was
made at Savannah Electric's book value of approximately $16,500 in
accordance with PUHCA and the related SEC order (Release No. 35-27322)
dated December 27, 2000, which authorized the formation of Southern
Power and the transfer of assets thereto. On July 17, 2003, the Georgia
PSC issued an order requiring that Savannah Electric record the
transfer of this land at the higher of net book value or fair market
value based on an appraisal by an appraiser selected by the Georgia PSC
staff. Based on an appraisal performed in November 2002, the estimated
fair market value of the land is approximately $200,000. The outcome of
this matter cannot now be determined.
(Q) Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential - FERC Matters" in Item 7 and Note 3 under
"Transmission Facilities Agreement" to the financial statements of
Mississippi Power in Item 8 of the Form 10-K for information regarding
the FERC's investigation related to a transmission facilities agreement
with Entergy Corporation. On July 9, 2003, the FERC approved a
settlement between Mississippi Power and the FERC Staff. The impact of
the settlement provides for no refund of prior revenues collected.
(R) Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Accounting Policies - Critical Policies" and "Financial
Condition - Off-Balance Sheet Financing Arrangements" of Mississippi
Power and "Financial Condition - Off-Balance Sheet Financing
Arrangements" of Southern Company in Item 7 and Note 8 under "Lease
Agreements" and Note 9 under "Operating Leases" to the financial
statements of Mississippi Power and Southern Company, respectively,
in Item 8 of the Form 10-K for information regarding Mississippi
Power's lease of two generating units totaling 1,064 megawatts at
Plant Daniel from Escatawpa Funding, Limited Partnership ("Escatawpa"),
which began in 2001. Escatawpa raised a total of approximately $370
million to finance these generating units. Escatawpa was not
consolidated by Mississippi Power pursuant to accounting
guidance then in effect. On June 27, 2003, the generating units owned
by Escatawpa and the related debt were acquired by Juniper Capital L.P.
("Juniper"), a limited partnership unaffiliated with Mississippi Power.
Simultaneously, Juniper entered into a restructured lease agreement
with Mississippi Power. Juniper has also entered into leases with
third parties unrelated to Mississippi Power. The assets leased by
Mississippi Power comprise less than half of Juniper's assets. In
accordance with FASB Interpretation No. 46, Mississippi Power is not
113
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
required to consolidate the leased assets and related liabilities.
Furthermore, the new lease agreement is an operating lease under
FASB Statement No. 13.
Principal terms of the Juniper lease remain essentially the same as
those in the Escatawpa lease. The initial lease term ends in 2011. Like
the Escatawpa lease, the Juniper lease also includes a purchase and
renewal option based on the cost of the facility, which was $368.7
million at the inception of the Juniper lease. Mississippi Power is
required to amortize approximately 4% of the initial acquisition cost
over the initial lease term, which is less than the 10% provided for
under the Escatawpa lease. Eighteen months prior to the end of the
initial lease, Mississippi Power may elect to renew for 10 years. If
Mississippi Power elects to renew the lease, the agreement calls for
Mississippi Power to amortize an additional 17% of the initial
completion cost over the renewal period. Upon termination of the lease,
at Mississippi Power's option, it may either exercise its purchase
option or the facility can be sold to a third party.
For each of the six month periods ended June 30, 2003 and 2002,
Mississippi Power recognized approximately $13 million in lease
expenses, including approximately $1.6 million related to the
amortization of the initial acquisition cost. In addition, $10.6
million in lease termination costs are included in other operation
expenses for the three months ended June 30, 2003.
The Juniper lease provides for a residual value guarantee
(approximately 73% of the acquisition cost) by Mississippi Power that
is due upon termination of the lease in the event that Mississippi
Power does not renew the lease or purchase the assets and the fair
market value is less than the unamortized cost of the asset. In
accordance with FASB Interpretation No. 45, Mississippi Power has
recognized a liability of approximately $16 million for the fair market
value of this residual value guarantee in its June 30, 2003 balance
sheet.
114
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(S) Southern Company's reportable business segment is the sale of
electricity in the Southeast by the operating companies and
Southern Power. The All Other category includes parent Southern
Company, 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:
Electric All Reconciling
Utilities Other Eliminations Consolidated
--------------------------------------------------- --------------------------------------------------------------
(in millions)
Three Months Ended June 30, 2003:
Operating revenues $ 2,742 $ 123 $ (6) $ 2,859
Segment net income (loss) 423 9 - 432
Six Months Ended June 30, 2003:
Operating revenues 5,147 276 (11) 5,412
Segment net income (loss) 710 20 - 730
Total assets at June 30, 2003 $31,962 $ 1,743 $ (412) $33,293
--------------------------------------------------- ------------- ------------- ---------------- -----------------
Three Months Ended June 30, 2002:
Operating revenues $ 2,563 $ 74 $ (7) $ 2,630
Segment net income (loss) 341 (11) 2 332
Six Months Ended June 30, 2002:
Operating revenues 4,704 150 (10) 4,844
Segment net income (loss) 573 (19) 2 556
Total assets at December 31, 2002 $30,409 $1,881 $ (541) $31,749
--------------------------------------------------- ------------- ------------- ---------------- -----------------
Products and Services
Electric Utilities Revenues
Period Retail Wholesale Other Total
------
---------- --------------- ------------ ------------
Three Months Ended June 30, 2003 $2,176 $338 $228 $2,742
Three Months Ended June 30, 2002 2,185 294 84 2,563
Six Months Ended June 30, 2003 4,150 677 320 5,147
Six Months Ended June 30, 2002 4,029 526 149 4,704
115
PART II -OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Notes to the Condensed Financial
Statements herein for information regarding certain legal and
administrative proceedings in which Southern Company and its
reporting subsidiaries are involved.
Item 4. Submission of Matters to a Vote of Security Holders.
Southern Company
Southern Company held its annual meeting of shareholders on
May 28, 2003. Each nominee for director of Southern Company
received the requisite plurality of votes for election. The
vote tabulation was as follows:
Nominees Shares For Shares Withhold Vote
Daniel P. Amos 536,000,477 10,523,799
Dorrit J. Bern 531,823,380 14,700,896
Thomas F. Chapman 532,249,344 14,274,932
Allen Franklin 533,727,210 12,797,066
Bruce S. Gordon 535,628,816 10,895,460
L. G. Hardman III 532,082,468 14,441,808
Donald M. James 530,981,255 15,543,021
Zack T. Pate 532,098,196 14,426,080
J. Neal Purcell 531,979,230 14,545,046
Gerald J. St. Pe 535,764,375 10,759,901
In addition, at the annual meeting, shareholders were asked to
vote for the ratification of by-laws amendments permitting
book-entry shares. The vote tabulation was 528,295,086 shares
for, 9,409,288 shares against and 8,819,889 shares abstaining.
As a result of this vote the by- laws amendments were adopted.
Shareholders were also entitled to vote on a stockholder
proposal on providing an environmental report. The vote
tabulation was 91,215,426 shares for, 293,556,756 shares
against and 45,455,923 shares abstaining. As a result of this
vote, the stockholder proposal was rejected.
116
Item 4. Submission of Matters to a Vote of Security Holders. (Continued)
Alabama Power
Alabama Power held its annual meeting of common shareholders
and preferred shareholders on April 25, 2003, and the
following persons were elected to serve as directors of
Alabama Power:
Whit Armstrong Charles D. McCrary
David J. Cooper, Sr. Malcolm Portera
Allen Franklin Robert D. Powers
R. Kent Henslee C. Dowd Ritter
Carl E. Jones, Jr. James H. Sanford
Patricia M. King William F. Walker
James K. Lowder John Cox Webb, IV
Wallace D. Malone, Jr. James W. Wright
All 6,000,000 of the then outstanding shares of Alabama
Power's common stock are owned by Southern Company and were
voted in favor of the nominees for directors. In addition, at
the annual meeting, shareholders were asked to vote for an
amendment to Alabama Power's Articles of Incorporation that
would increase Alabama Power's authorized common stock from
6,000,000 shares to 15,000,000 shares. All 6,000,000 of the
then outstanding shares of Alabama Power's common stock are
owned by Southern Company and were voted in favor of this
amendment. None of the shares of preferred stock or Class A
preferred stock were voted.
Georgia Power
Georgia Power held its annual meeting of common shareholders
and preferred shareholders on May 21, 2003, and the following
persons were elected to serve as directors of Georgia Power:
Juanita P. Baranco David M. Ratcliffe
Robert L. Brown, Jr. D. Gary Thompson
Anna R. Cablik Richard W. Ussery
Allen Franklin William Jerry Vereen
L. G. Hardman III Carl Ware
G. Joseph Prendergast E. Jenner Wood, III
All of the 7,761,500 outstanding shares of Georgia Power's
common stock are owned by Southern Company and were voted in
favor of the nominees for directors. None of the shares of
preferred stock were voted.
117
Item 4. Submission of Matters to a Vote of Security Holders. (Continued)
Gulf Power
Gulf Power held its annual meeting of common shareholders and
preferred shareholders on May 21, 2003, and the following
persons were elected to serve as directors of Gulf Power:
C. LeDon Anchors Allen Franklin
William C. Cramer, Jr. William A. Pullum
Fred C. Donovan, Sr. Susan N. Story
All of the 992,717 outstanding shares of Gulf Power's common
stock are owned by Southern Company and were voted in favor of
the nominees for directors. None of the shares of preferred
stock were voted.
Mississippi Power
Mississippi Power held its annual meeting of common
shareholders and preferred shareholders on May 21, 2003, and
the following persons were elected to serve as directors of
Mississippi Power:
Tommy E. Dulaney Aubrey K. Lucas
Michael D. Garrett George A. Schloegel
Linda T. Howard Philip J. Terrell
Robert C. Khayat N. Eugene Warr
All of the 1,121,000 outstanding shares of Mississippi Power's
common stock are owned by Southern Company and were voted in
favor of the nominees for directors. None of the shares of
preferred stock were voted.
Savannah Electric
By written consent, in lieu of the annual meeting of
stockholders of Savannah Electric, effective May 2, 2003, the
following persons were elected to serve as directors of
Savannah Electric:
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
Electric's common stock are owned by Southern Company and were
voted in favor of the nominees for directors.
118
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
(3) Articles of Incorporation and By-Laws
Southern Company
(a) 1 - By-Laws of Southern Company as amended effective
February 17, 2003, and as presently in effect.
(4) Instruments Describing Rights of Security Holders, Including Indentures
Southern Power
(g) 1 - Second Supplemental Indenture dated as of July 8,
2003 between Southern Power and The Bank of New York,
as Trustee.
(10) Material Contracts
Southern Company
(a) 1 - Southern Company Change in Control Severance Plan,
Amended and Restated effective May 1, 2003.
(a) 2 - Southern Company Executive Change in Control
Severance Plan, Amended and Restated effective
May 1, 2003.
(a) 3 - Southern Company Senior Executive Change in Control
Severance Plan effective May 1, 2003.
(a) 4 - First Amendment as adopted July 9, 2003, to The
Southern Company Pension Plan, as amended and
restated effective January 1, 2002.
Alabama Power
(b) 1 - Amended and Restated Supplemental Pension Agreement
among SCS, Southern Nuclear, Alabama Power and
James H. Miller III.
(24) Power of Attorney and Resolutions
Southern Company
(a) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 1-3526 as Exhibit 24(a) and incorporated
herein by reference.)
(a) 2 - Power of Attorney for Thomas A. Fanning.
(Designated in the Form 10-Q for the Quarter ended
March 31, 2003, File No. 1-3526 as Exhibit 24(a)2
and incorporated herein by reference.)
119
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
Alabama Power
(b) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 1-3164 as Exhibit 24(b) and incorporated
herein by reference.)
Georgia Power
(c) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 1-6468 as Exhibit 24(c) and incorporated
herein by reference.)
(c) 2 - Power of Attorney for C. B. Harreld.
Gulf Power
(d) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 0-2429 as Exhibit 24(d) and incorporated
herein by reference.)
(d) 2 - Power of Attorney for Susan N. Story. (Designated
in the Form 10-Q for the Quarter ended March 31,
2003, File No. 0-2429 as Exhibit 24(d)2 and
incorporated herein by reference.)
Mississippi Power
(e) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 001-11229 as Exhibit 24(e) and incorporated
herein by reference.)
Savannah Electric
(f) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 1-5072 as Exhibit 24(f) and incorporated
herein by reference.)
Southern Power
(g) 1 - Power of Attorney and resolution. (Designated in
the Form 10-K for the year ended December 31, 2002,
File No. 333-98553 as Exhibit 24(g) and incorporated
herein by reference.)
(31) Section 302 Certifications
Southern Company
(a) 1 - Certificate of Southern Company's Chief Executive
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
120
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
(a) 2 - Certificate of Southern Company's Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
Alabama Power
(b) 1 - Certificate of Alabama Power's Chief Executive
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
(b) 2 - Certificate of Alabama Power's Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
Georgia Power
(c) 1 - Certificate of Georgia Power's Chief Executive
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
(c) 2 - Certificate of Georgia Power's Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
Gulf Power
(d) 1 - Certificate of Gulf Power's Chief Executive Officer
required by Section 302 of the Sarbanes-Oxley Act
of 2002.
(d) 2 - Certificate of Gulf Power's Chief Financial Officer
required by Section 302 of the Sarbanes-Oxley Act
of 2002.
Mississippi Power
(e) 1 - Certificate of Mississippi Power's Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
(e) 2 - Certificate of Mississippi Power's Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
Savannah Electric
(f) 1 - Certificate of Savannah Electric's Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
(f) 2 - Certificate of Savannah Electric's Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
121
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
Southern Power
(g) 1 - Certificate of Southern Power's Chief Executive
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
(g) 2 - Certificate of Southern Power's Chief Financial
Officer required by Section 302 of the Sarbanes-Oxley
Act of 2002.
(32) Section 906 Certifications
Southern Company
(a) - Certificate of Southern Company's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Alabama Power
(b) - Certificate of Alabama Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Georgia Power
(c) - Certificate of Georgia Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Gulf Power
(d) - Certificate of Gulf Power's Chief Executive Officer
and Chief Financial Officer required by Section 906
of the Sarbanes-Oxley Act of 2002.
Mississippi Power
(e) - Certificate of Mississippi Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Savannah Electric
(f) - Certificate of Savannah Electric's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Southern Power
(g) - Certificate of Southern Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
122
(b) Reports on Form 8-K.
-------------------
The registrants collectively and separately filed Current Reports on Form 8-K
dated April 30, 2003:
Item reported: Items 9 and 12
Financial statements filed: None
Southern Company filed Current Reports on Form 8-K dated April 17, 2003,
April 21, 2003 and May 21, 2003:
Item reported: Item 5
Financial statements filed: None
Alabama Power filed Current Reports on Form 8-K dated April 15, 2003 and
May 1, 2003:
Item reported: Items 5 and 7
Financial statements filed: None
Georgia Power filed a Current Report on Form 8-K dated April 10, 2003:
Item reported: Items 5 and 7
Financial statements filed: None
Mississippi Power filed Current Reports on Form 8-K dated April 21, 2003 and
May 21, 2003:
Item reported: Item 5
Financial statements filed: None
Mississippi Power filed a Current Report on Form 8-K dated April 24, 2003:
Item reported: Items 5 and 7
Financial statements filed: None
Southern Power filed Current Reports on Form 8-K dated
April 21, 2003 and May 21, 2003:
Item reported: Item 5
Financial statements filed: None
123
THE SOUTHERN COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
THE SOUTHERN COMPANY
By Allen Franklin
Chairman and Chief Executive Officer
(Principal Executive Officer)
By Thomas A. Fanning
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
124
ALABAMA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
ALABAMA POWER COMPANY
By Charles D. McCrary
President and Chief Executive Officer
(Principal Executive Officer)
By William B. Hutchins, III
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
125
GEORGIA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GEORGIA POWER COMPANY
By David M. Ratcliffe
President and Chief Executive Officer
(Principal Executive Officer)
By C. B. Harreld
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
126
GULF POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GULF POWER COMPANY
By Susan N. Story
President and Chief Executive Officer
(Principal Executive Officer)
By Ronnie R. Labrato
Vice President, Chief Financial Officer and Comptroller
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
127
MISSISSIPPI POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MISSISSIPPI POWER COMPANY
By Michael D. Garrett
President and Chief Executive Officer
(Principal Executive Officer)
By Michael W. Southern
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
128
SAVANNAH ELECTRIC AND POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
SAVANNAH ELECTRIC AND POWER COMPANY
By A. R. James
President and Chief Executive Officer
(Principal Executive Officer)
By Kirby R. Willis
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
129
SOUTHERN POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
SOUTHERN POWER COMPANY
By William P. Bowers
President and Chief Executive Officer
(Principal Executive Officer)
By Cliff S. Thrasher
Senior Vice President, Comptroller and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 13, 2003
130