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 September 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 No ___
Description of Shares Outstanding
Registrant Common Stock at October 31, 2003
- ---------- -------------- -------------------
The Southern Company Par Value $5 Per Share 732,199,800
Alabama Power Company Par Value $40 Per Share 6,625,000
Georgia Power Company Without Par Value 7,761,500
Gulf Power Company Without Par Value 992,717
Mississippi Power Company Without Par Value 1,121,000
Savannah Electric and Power Company Par Value $5 Per Share 10,844,635
Southern Power Company Par Value $0.01 Per Share 1,000
This combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company, Savannah Electric and Power Company and Southern Power Company.
Information contained herein relating to any individual company is filed by such
company on its own behalf. Each company makes no representation as to
information relating to the other companies.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 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..................................................................... 26
Condensed Statements of Cash Flows................................................................. 27
Condensed Balance Sheets........................................................................... 28
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 30
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 31
Georgia Power Company
Condensed Statements of Income..................................................................... 41
Condensed Statements of Cash Flows................................................................. 42
Condensed Balance Sheets........................................................................... 43
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 45
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 46
Gulf Power Company
Condensed Statements of Income..................................................................... 56
Condensed Statements of Cash Flows................................................................. 57
Condensed Balance Sheets........................................................................... 58
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 60
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 61
Mississippi Power Company
Condensed Statements of Income..................................................................... 70
Condensed Statements of Cash Flows................................................................. 71
Condensed Balance Sheets........................................................................... 72
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 74
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 84
Condensed Statements of Cash Flows................................................................. 85
Condensed Balance Sheets........................................................................... 86
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 88
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 89
Southern Power Company
Condensed Statements of Income..................................................................... 97
Condensed Statements of Cash Flows................................................................. 98
Condensed Balance Sheets........................................................................... 99
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 101
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 102
Notes to the Condensed Financial Statements........................................................... 110
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 24
Item 4. Controls and Procedures............................................................................... 24
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2003
Page
Number
------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 127
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....................................................... Inapplicable
Item 5. Other Information......................................................................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 127
Signatures ............................................................................................... 134
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
EITF........................................ Emerging Issues Task Force
Energy Act.................................. Energy Policy Act of 1992
EPA......................................... U. S. Environmental Protection Agency
FASB........................................ Financial Accounting Standards Board
FERC........................................ Federal Energy Regulatory Commission
Form 10-K................................... Combined Annual Report on Form 10-K of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power,
Savannah Electric and Southern Power for the year ended
December 31, 2002
Georgia Power............................... Georgia Power Company
Gulf Power.................................. Gulf Power Company
IRC......................................... Internal Revenue Code
IRS......................................... Internal Revenue Service
LIBOR....................................... London Interbank Offered Rate
Mirant...................................... Mirant Corporation
Mississippi Power........................... Mississippi Power Company
Mobile Energy............................... Mobile Energy Services Company, L.L.C. and
Mobile Energy Services Holdings, Inc.
Moody's..................................... Moody's Investors Service, Inc.
NRC......................................... Nuclear Regulatory Commission
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 and
Southern Power's commercial paper balances, commercial paper as a percentage of
future debt, dividend payment plans 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, tax and other laws and regulations to which
Southern Company and its subsidiaries are subject, as well as changes in
application of existing laws and regulations; current and future litigation,
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; the direct or indirect effects on Southern Company's business
resulting from the August 2003 power outage in the Northeast, or any similar
such incidents; 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 Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Operating Revenues:
Retail sales $2,757,014 $2,748,787 $6,906,564 $6,777,554
Sales for resale 377,153 344,083 1,035,535 870,237
Other electric revenues 90,556 83,381 410,354 232,639
Other revenues 94,373 71,757 359,918 211,938
---------- ---------- ---------- ----------
Total operating revenues 3,319,096 3,248,008 8,712,371 8,092,368
---------- ---------- ---------- ----------
Operating Expenses:
Fuel 936,982 845,121 2,385,357 2,105,858
Purchased power 139,011 183,594 387,034 374,855
Other operations 536,997 542,550 1,601,057 1,510,506
Maintenance 195,871 194,157 664,535 669,966
Depreciation and amortization 260,623 265,538 763,908 765,444
Taxes other than income taxes 155,263 146,996 446,826 424,720
---------- ---------- ---------- ----------
Total operating expenses 2,224,747 2,177,956 6,248,717 5,851,349
---------- ---------- ---------- ----------
Operating Income 1,094,349 1,070,052 2,463,654 2,241,019
Other Income and (Expense):
Allowance for equity funds used during construction 5,025 3,242 17,049 13,834
Interest income 4,994 6,645 30,081 15,589
Equity in losses of unconsolidated subsidiaries (21,982) (25,249) (75,425) (66,904)
Leveraged lease income 16,168 14,506 49,581 43,960
Interest expense, net of amounts capitalized (129,153) (124,237) (387,102) (368,009)
Distributions on shares subject to mandatory redemption (36,393) (44,675) (115,930) (130,851)
Preferred dividends of subsidiaries (5,473) (4,413) (15,695) (13,190)
Other income (expense), net (29,484) (28,175) (31,912) (46,055)
---------- ---------- ---------- ----------
Total other income and (expense) (196,298) (202,356) (529,353) (551,626)
---------- ---------- ---------- ----------
Earnings Before Income Taxes 898,051 867,696 1,934,301 1,689,393
Income taxes 279,216 272,283 586,147 538,302
---------- ---------- ---------- ----------
Earnings Before Cumulative Effect of Accounting Change 618,835 595,413 1,348,154 1,151,091
Cumulative effect of accounting change --
less income taxes of $231 - - 367 -
---------- ---------- ---------- ----------
Consolidated Net Income $ 618,835 $ 595,413 $1,348,521 $1,151,091
========== ========== ========== ==========
Common Stock Data:
Consolidated basic earnings per share $0.85 $0.84 $1.86 $1.63
Consolidated diluted earnings per share $0.84 $0.83 $1.85 $1.62
Average number of basic shares of common
stock outstanding (in thousands) 729,816 710,647 724,462 705,946
Average number of diluted shares of common
stock outstanding (in thousands) 734,855 716,464 729,671 711,346
Cash dividends paid per share of common stock $0.350 $0.3425 $1.035 $1.0125
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 FLOW (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- ----
(in thousands)
Operating Activities:
Consolidated net income $1,348,521 $1,151,091
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Depreciation and amortization 866,783 841,459
Deferred income taxes and investment tax credits 310,411 55,029
Equity in losses of unconsolidated subsidiaries 75,425 66,904
Leveraged lease income (49,581) (43,960)
Pension, postretirement, and other employee benefits (31,665) (58,881)
Tax benefit of stock options 25,917 19,795
Settlement of interest rate hedges (120,483) (16,437)
Other, net 36,090 19,842
Changes in certain current assets and liabilities --
Receivables, net (81,363) (147,652)
Fossil fuel stock (11,719) 74,472
Materials and supplies (20,202) 10,883
Other current assets 11,572 (103,142)
Accounts payable (225,312) 15,165
Taxes accrued 293,598 330,159
Other current liabilities (40,040) 43,789
---------- ----------
Net cash provided from operating activities 2,387,952 2,258,516
---------- ----------
Investing Activities:
Gross property additions (1,453,325) (1,996,548)
Southern Company Gas acquisition - (58,572)
Cost of removal net of salvage (51,761) (83,818)
Change in construction payables, net of joint owner portion (55,280) (95,075)
Other (30,282) (24,344)
---------- ----------
Net cash used for investing activities (1,590,648) (2,258,357)
---------- ----------
Financing Activities:
Decrease in notes payable, net (539,091) (683,347)
Proceeds --
Senior notes 2,805,000 1,775,000
Other long-term debt 75,495 86,428
Shares subject to mandatory redemption - 675,000
Preferred stock 125,000 -
Common stock 370,305 330,374
Redemptions --
First mortgage bonds (33,350) (352,946)
Long-term senior notes (1,724,185) (382,110)
Other long-term debt (536,769) (106,799)
Shares subject to mandatory redemption (240,000) (649,250)
Payment of common stock dividends (748,111) (713,276)
Other (41,681) (40,223)
---------- ----------
Net cash used for financing activities (487,387) (61,149)
---------- ----------
Net Change in Cash and Cash Equivalents 309,917 (60,990)
Cash and Cash Equivalents at Beginning of Period 273,032 354,015
---------- ----------
Cash and Cash Equivalents at End of Period $ 582,949 $ 293,025
========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $39,673 and $43,558 capitalized for 2003 and 2002, respectively) $471,001 $382,502
Income taxes (net of refunds) $55,282 $202,496
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 September 30, At December 31,
Assets 2003 2002
- ------ ---------------- ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 582,949 $ 273,032
Receivables
Customer accounts receivable 917,603 709,878
Unbilled revenues 260,573 277,105
Under recovered regulatory clause revenues 193,588 174,362
Other accounts and notes receivable 276,609 370,021
Accumulated provision for uncollectible accounts (40,471) (25,546)
Fossil fuel stock, at average cost 310,674 298,955
Materials and supplies, at average cost 559,191 539,459
Other 360,242 299,743
----------- -----------
Total current assets 3,420,958 2,917,009
----------- -----------
Property, Plant, and Equipment:
In service 39,814,570 37,485,853
Less accumulated depreciation 15,408,650 15,448,850
----------- -----------
24,405,920 22,037,003
Nuclear fuel, at amortized cost 191,983 222,676
Construction work in progress 1,430,585 2,382,287
----------- -----------
Total property, plant, and equipment 26,028,488 24,641,966
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at fair value 738,521 639,167
Leveraged leases 821,646 790,767
Other 230,540 243,353
----------- -----------
Total other property and investments 1,790,707 1,673,287
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 885,363 897,777
Prepaid pension costs 879,058 786,115
Unamortized debt issuance expense 133,259 121,008
Unamortized premium on reacquired debt 325,108 313,057
Other 429,581 398,581
----------- -----------
Total deferred charges and other assets 2,652,369 2,516,538
----------- -----------
Total Assets $33,892,522 $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 September 30, At December 31,
Liabilities and Stockholders' Equity 2003 2002
- ------------------------------------ ---------------- ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 1,206,892 $ 1,679,489
Notes payable 460,434 972,459
Accounts payable 694,507 985,660
Customer deposits 187,783 168,952
Taxes accrued --
Income taxes 429,303 62,571
Other 302,915 218,967
Interest accrued 169,886 158,196
Vacation pay accrued 128,787 130,015
Other 505,147 592,531
----------- -----------
Total current liabilities 4,085,654 4,968,840
----------- -----------
Long-term Debt 9,750,117 8,692,962
----------- -----------
Shares Subject to Mandatory Redemption 2,180,000 2,380,000
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,475,702 4,214,471
Deferred credits related to income taxes 420,222 449,816
Accumulated deferred investment tax credits 586,219 606,779
Employee benefits provisions 661,080 614,239
Asset retirement obligations 854,058 -
Other 772,342 813,464
----------- -----------
Total deferred credits and other liabilities 7,769,623 6,698,769
----------- -----------
Total Liabilities 23,785,394 22,740,571
----------- -----------
Cumulative Preferred Stock of Subsidiaries 423,126 298,126
----------- -----------
Common Stockholders' Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- September 30, 2003: 731,526,987 shares;
-- December 31, 2002: 716,548,526 shares 3,657,635 3,582,743
Paid-in capital 659,345 337,670
Treasury, at cost -- September 30, 2003: 173,186 shares;
-- December 31, 2002: 147,021 shares (3,776) (2,815)
Retained earnings 5,474,715 4,874,375
Accumulated other comprehensive loss (103,917) (81,870)
----------- -----------
Total Common Stockholders' Equity 9,684,002 8,710,103
----------- -----------
Total Liabilities and Stockholders' Equity $33,892,522 $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 Nine Months
Ended September 30, Ended September 30,
-------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Consolidated Net Income $ 618,835 $ 595,413 $ 1,348,521 $ 1,151,091
Other comprehensive loss:
Changes in fair value of marketable securities (284) 248 (188) 539
Changes in fair value of qualifying hedges, net of tax
of $5,781, $(13,310), $(4,325),$(32,255),
respectively (6,399) (21,591) (19,903) (51,283)
Less: Reclassification adjustment for amounts
included in net income, net of tax $2,723, $166,
$(1,937) $190, respectively 4,401 260 (1,956) 298
--------- --------- ----------- -----------
Total other comprehensive loss $ (2,282) $ (21,083) $ (22,047) $ (50,446)
--------- --------- ----------- -----------
CONSOLIDATED COMPREHENSIVE INCOME $ 616,553 $ 574,330 $ 1,326,474 $ 1,100,645
========== ========= =========== ===========
___________________________________________________________________________________________________________________________________
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At September 30, At December 31,
2003 2002
---------------- ---------------
(in thousands)
Balance at beginning of period $ (81,870) $ 7,148
Change in current period (22,047) (89,018)
---------- ---------
BALANCE AT END OF PERIOD $ (103,917) $ (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
THIRD QUARTER 2003 vs. THIRD 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 - The SOUTHERN System - "Operating
Companies," "Southern Power" and "Other Business" in the Form 10-K.
Earnings
Southern Company's third quarter and year-to-date 2003 earnings were
$619 million ($0.85 per share) and $1.35 billion ($1.86 per share),
respectively, compared with $595 million ($0.84 per share) and $1.15 billion
($1.63 per share) in the third quarter and year-to-date 2002. Earnings in the
third quarter 2003 increased due to a number of positive factors including
growth in the number of customers in the Southern Company service area,
successful efforts to control costs and strong results from Southern Company's
competitive generation business. Earnings from the competitive generation
business increased due to the combination of (1) hydro and coal-fired generating
capacity available as a result of the mild summer weather in Southern Company's
retail service area and (2) higher prices for natural gas, which made this
capacity more competitive in the wholesale markets. Year-to-date 2003 earnings
include a one-time after-tax gain of $88 million in the second quarter of 2003
from the termination of PPAs between Southern Company subsidiaries, Mississippi
Power and Southern Power, and subsidiaries of Dynegy. Reference is made to Note
(N) to the Condensed Financial Statements herein for additional information.
Year-to-date 2003 earnings were also positively impacted by regulatory rate
proceedings in Alabama and Florida which took effect in April 2002 and June
2002, respectively.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease)
-------------------------------------------------------------
Third Quarter Year-To-Date
---------------------------- --------------------------------
(in thousands) % (in thousands) %
Retail sales......................................... $ 8,227 0.3 $ 129,010 1.9
Sales for resale..................................... 33,070 9.6 165,298 19.0
Other electric revenues.............................. 7,175 8.6 177,715 76.4
Other revenues....................................... 22,616 31.5 147,980 69.8
Fuel expense......................................... 91,861 10.9 279,499 13.3
Purchased power expense.............................. (44,583) (24.3) 12,179 3.2
Other operations expense............................. (5,553) (1.0) 90,551 6.0
Taxes other than income taxes........................ 8,267 5.6 22,106 5.2
Interest income...................................... (1,651) (24.8) 14,492 93.0
Equity in losses of unconsolidated subsidiaries...... 3,267 12.9 (8,521) (12.7)
Interest expense, net of amounts capitalized......... 4,916 4.0 19,093 5.2
Distributions on shares subject to
mandatory redemption.............................. (8,282) (18.5) (14,921) (11.4)
Other income (expense), net.......................... 1,309 4.6 (14,143) (30.7)
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 $8.4 million, or 0.4%, in the third
quarter 2003 and increased by $31.6 million, or 0.7%, year-to-date 2003 when
compared to the same periods in 2002. In the third quarter and year-to-date
2003, retail kilowatt-hour energy sales decreased by 1.4% and 0.3%,
respectively, primarily due to mild weather when compared to the same periods in
2002. The year-to-date 2003 revenue increase is primarily attributed to retail
rate increases at Alabama Power and Gulf Power in April 2002 and June 2002,
respectively.
Sales for resale. During the third quarter 2003, sales for resale was
higher when compared to the same period in the prior year. Revenues from the
competitive generation business increased due to the combination of (1) hydro
and coal-fired generating capacity available as a result of the mild summer
weather in Southern Company's retail service area and (2) higher prices for
natural gas, which made this capacity more competitive in the wholesale markets.
Further contributing to the year-to-date increase were increased sales of
wholesale capacity and energy as a result of new plants placed into service by
Southern Power in June 2002 and June 2003.
Other electric revenues. The increase in other electric revenues
year-to-date 2003 when compared to the same period in 2002 is primarily due to
$144 million in revenues recorded upon the termination of PPAs with Dynegy and,
to a lesser extent, revenues from cogeneration steam facilities. Since
cogeneration steam revenues are generally offset by fuel expenses, these
revenues do not have a significant impact on earnings. See Note (N) to the
Condensed Financial Statements herein for further information on the termination
of the Dynegy PPAs.
Other revenues. In the third quarter and year-to-date 2003, other revenues
increased primarily due to revenues from Southern Company GAS, which began
operations in August 2002. In addition, revenues from alternative fuel product
services and, to a lesser degree, energy services also contributed to the
overall increase between years. The increase in revenues from alternative fuel
product services is due to increased production as a result of relocating one of
the units.
Fuel expense. During the third quarter and year-to-date 2003, fuel expense
was higher due to an increase in the average unit cost of fuel. Year-to-date
2003, the average unit cost of fuel per net kilowatt-hour generated increased
9.6%. Fuel expense year-to-date 2003 also increased due to the commercial
operation of Southern Power's new units in June 2002 and 2003 and the
acquisition of Southern Company GAS in the third quarter of 2002. Increases in
fuel expense at the operating companies are generally offset by fuel revenues
and do not affect net income.
Purchased power expense. Purchased power decreased in the third quarter
2003 primarily due to the mild summer weather and the commercial operation of
Southern Power's new units in June 2003. Year-to-date 2003 purchased power
expense increased due to the availability of power at prices lower than the cost
of self-generation and the effects of purchase power provisions in certain of
Southern Power's contracts. 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 decrease in other operations expense in the
third quarter 2003 is mainly attributed to lower administrative and general
expense resulting from efforts to control costs. The year-to-date 2003 increase
in other operations expense is mainly attributed to the acquisition of Southern
Company GAS, which began operations in August 2002, and the commercial operation
of new generating units at Gulf Power in April 2002 and Southern Power in June
2002 and 2003. In addition, higher administrative and general expenses related
to property insurance, employee benefits and approximately $11 million of costs
incurred in conjunction with restructuring Mississippi Power's lease agreement
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
for the combined cycle generating units at Plant Daniel contributed to the
year-to-date increase. Reference is made to Note (S) to the Condensed
Financial Statements herein for additional information on Mississippi Power's
restructured lease agreement.
Taxes other than income taxes. The third quarter and year-to-date 2003
increases are primarily due to higher property taxes on additional plant placed
in service and municipal gross receipts taxes on increased revenues when
compared to the corresponding periods in 2002.
Interest income. Interest income in the third quarter 2003 decreased when
compared to the same period in 2002 due to interest on an income tax refund
recorded in 2002. The year-to-date 2003 increase when compared to the
corresponding period in 2002 is primarily a result of a favorable tax settlement
related to IRS audits for the years 1988 through 1999, excluding 1993 through
1995, recorded in the second quarter of 2003.
Equity in losses of unconsolidated subsidiaries. Losses from unconsolidated
subsidiaries decreased in the third quarter 2003 and increased year-to-date 2003
when compared to the corresponding periods in 2002. These losses relate to
Southern Company's investments in entities that produce synthetic fuel. Changes
between periods are a result of fluctuations in production levels and 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 expense, net of amounts capitalized. In the third quarter and
year-to-date 2003, the increases in interest expense, net of amounts
capitalized, are mainly attributed to less interest cost being capitalized as
projects have reached completion and an increase in the amount of senior notes
outstanding when compared to the same periods in 2002.
Distributions on shares subject to mandatory redemption. The decreases in
the third quarter and year-to-date 2003 are primarily related to the refinancing
of higher distribution rate trust preferred securities since the corresponding
periods in 2002 and the redemption of $200 million of these securities in the
first half of 2003.
Other income (expense), net. The year-to-date 2003 decrease in this expense
is primarily attributed to unrealized gains on derivative energy contracts when
compared to the same period in the prior year. See "Exposure to Market Risks"
herein for additional information on derivative energy contracts.
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 - The SOUTHERN System - "Risk Factors" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of Southern
Company in the Form 10-K.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Legislative and Regulatory Matters
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Southern Company and its subsidiaries.
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 and
Note (E) to the Condensed Financial Statements herein. On October 27, 2003, the
EPA published a final rule providing that certain equipment replacements be
excluded from New Source Review and Prevention of Significant Deterioration
provisions of the Clean Air Act under the definition of "routine maintenance,
repair and replacement." The final rules must be adopted by the states in
Southern Company's service area in order to apply to facilities in the Southern
Company system. The final outcome of these matters cannot now be determined.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" in Item 7 of the Form 10-K. On September 26, 2003, the EPA published a
final rule in the Federal Register, formally reclassifying the Atlanta area
effective January 1, 2004 as a "severe" nonattainment area for the one-hour
ozone standard under Title I of the Clean Air Act. 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 for nitrogen oxides emitted above 80% of the baseline
period. The baseline period is currently unknown. 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 FERC proposals on Southern Company and its subsidiaries 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.
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Mirant Matters
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.
Other Contingent Matters
Southern Company is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Southern Company's business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Southern Company and its subsidiaries cannot
be predicted at this time; however, management does not anticipate that the
liabilities, if any, arising from such current proceedings would have a material
adverse effect on Southern Company's financial statements.
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
IRC. The IRS is currently auditing both of these entities.
From the date of Southern Company's investments in these entities through
September 30, 2003, Southern Company has recognized approximately $250 million
of these synthetic fuel tax credits through income. The ultimate outcome of the
IRS audits cannot be determined at this time.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Note (M) to the Condensed Financial Statements for
information regarding FERC approval of the Open Access Transmission Tariff. This
settlement is not expected to have a material effect on Southern Company's
future earnings.
Reference is made to Note (N) to the Condensed Financial Statements herein
for information regarding the termination of PPAs between Dynegy and Mississippi
Power and Southern Power. As result of the terminations of these PPAs, Southern
Power has deferred the completion date of Plant Franklin Unit 3 and is
completing limited construction activities to preserve the long-term viability
of the project. Current projections indicate completion in the 2008-2011 period.
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.
Reference is made to the Notes 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 costs 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 costs 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 costs of retiring most long-lived assets over the life
of the related asset through depreciation expense.
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges. This conclusion
is subject to ongoing discussions with the FASB and may change. Southern
Company's forward electricity contracts continue to qualify for the normal sales
exception and are recorded on an accrual basis. The implementation of Statement
No. 149 did not have a material effect on Southern Company's financial
statements.
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Southern Company's financial
statements as it affects only the classification of amounts in the Statements of
Income.
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 was effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003. 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 any impact on
Southern Company's Statements of Income and Cash Flows.
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 (S) to the Condensed Financial Statements
herein for further information on the lease restructuring. On October 9, 2003,
the FASB issued Staff Position No. FIN 46-6, which deferred the effective date
of Interpretation No. 46 until December 31, 2003 for interests held in variable
interest entities or potential variable interest entities created before
February 1, 2003. Current analysis indicates that the trusts established by
Southern Company and the operating companies to issue trust preferred securities
are variable interest entities under Interpretation No. 46 and, further, that
Southern Company and the operating companies are not the primary beneficiaries
of these trusts. If this conclusion is finalized, effective December 31, 2003,
the trust assets and liabilities, including the preferred securities issued by
the trusts, will be deconsolidated, the investments in the trusts will be
reflected under the equity method, and the loans from the trusts to Southern
Company and the operating companies will be reflected as long-term notes payable
to affiliates on the balance sheet. Based on the September 30, 2003 values, such
treatment would result in an increase of approximately $70 million to both total
assets and total liabilities. These reclassifications would not have any impact
on net income or cash flow.
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Southern Company's financial condition during the first nine
months of 2003 included $1.4 billion used for gross property additions to
utility plant. The funds for these additions and other capital requirements were
primarily obtained from operating activities and net security issuances of
approximately $300 million. See Southern Company's Condensed Consolidated
Statements of Cash Flows herein for further details.
Ongoing 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
$1.2 billion will be required by September 30, 2004 for redemptions and
maturities of long-term debt.
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
from operations and the issuances of new debt 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. To meet short-term cash needs and
contingencies, the Southern Company system had at September 30, 2003
approximately $583 million of cash and cash equivalents and approximately $3.4
billion of unused credit arrangements with banks, of which $32 million expire in
2003, $2.72 billion expire in 2004 and $665 million expire in 2005 and beyond.
Of the facilities maturing in 2003 and 2004, $2.24 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. 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 September 30, 2003,
the Southern Company system had no outstanding extendible commercial notes and
outstanding notes payable of $460 million. Management believes that the need for
working capital can be adequately met by utilizing lines of credit without
maintaining large cash balances.
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 ("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
(S) 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 September 30, 2003, the maximum
potential collateral requirements under the electricity purchase and sale
contracts and financial instrument agreements were approximately $387 million.
Generally, collateral may be provided for by a Southern Company guaranty, letter
of credit or cash. At September 30, 2003, there were no material collateral
requirements for the gas purchase contracts.
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 September 30, 2003 was as follows:
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Third Quarter
2003 Year-to-Date
Changes Changes
--------------------------------------------------------------------------
Fair Value
-------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $26,683 $ 47,335
Contracts realized or settled (20,734) (58,689)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 340 17,643
------------------------------------------------------------------------
Contracts at September 30, 2003 $6,289 $ 6,289
========================================================================
Source of September 30, 2003
Valuation Prices
-------------------------------------------------------------------------
Total Maturity
------------------------
Fair Value Year 1 1-3 Years
------------------------------------------------------------------------
(in thousands)
Actively quoted $6,289 $12,810 $(6,521)
External sources - - -
Models and other methods - - -
--------------------------------------------------------------------------
Contracts at September 30, 2003 $6,289 $12,810 $(6,521)
==========================================================================
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 September 30,
2003, the fair value of derivative energy contracts reflected in the financial
statements was as follows:
Amounts
-----------------------------------------------------------
(in thousands)
Regulatory assets, net $(499)
Other comprehensive income 1,458
Net income 5,330
------------------------------------------------------------
Total fair value $6,289
============================================================
For the three months and nine months ended September 30, 2003,
approximately $3.3 million and $3.9 million, respectively, of gains were
recognized in income, compared to $2.2 million and $(3.9) million, respectively,
of gains (losses) recognized in income during the three months and nine months
ended September 30, 2002.
22
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 nine months of 2003, Southern Company subsidiaries issued $2.8
billion of senior notes, $125 million of preferred stock and $75 million of
other long-term debt. The issuances were primarily 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 nine months of 2003.
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 $350 million at a fixed interest rate of 2.35% and
mature in December 2006.
In July 2003, Georgia Power entered into 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 into 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.
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 were 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 was used to
repay a portion of Gulf Power's short-term indebtedness.
In September 2003, Georgia Power issued $100 million of Series Q 4.90%
Senior Notes due September 15, 2013. The proceeds from this sale were used to
repay a portion of Georgia Power's outstanding commercial paper. In connection
with this sale, Georgia Power settled a related treasury lock and incurred a
loss of $2.5 million.
In September 2003, Gulf Power issued $40 million of Series I 5.75% Senior
Notes due September 15, 2033. The proceeds from this issue were used in October
2003 to redeem the $45 million outstanding principal amount of Gulf Power
Capital Trust II 7.00% Cumulative Quarterly Income Preferred Securities.
In October 2003, Georgia Power issued $200 million of Series R 6% Senior
Notes due October 15, 2033. The proceeds from this sale will be used to redeem
in November 2003 all of the Series B 6.6% Senior Notes due December 31, 2038.
23
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In July 2003, Savannah Electric entered into 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. In addition, Savannah Electric entered
into a swap to hedge payments associated with a variable rate bank note. The
swap is for a notional amount of $20 million at a fixed interest rate of 2.06%
and matures in December 2004.
In August 2003, Southern Company entered into an interest rate swap to
hedge the fair value of a $40 million senior note outstanding at SCS.
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.
The market price of Southern Company's common stock at September 30, 2003
was $29.35 per share and the book value was $13.24 per share, representing a
market-to-book ratio of 222%, compared to $28.39, $12.16 and 233%, respectively,
at the end of 2002. The dividend for the third quarter 2003 was $0.35 per share
compared to $0.3425 per share in the third quarter 2002.
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Exposure to Market
Risks" 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 over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) during the third quarter of 2003 that have materially
affected or are reasonably likely to materially affect, Southern Company's, the
operating companies' or Southern Power's internal controls over financial
reporting.
24
ALABAMA POWER COMPANY
25
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Operating Revenues:
Retail sales $951,612 $924,944 $2,371,347 $2,293,015
Sales for resale --
Non-affiliates 134,897 143,968 370,390 358,131
Affiliates 96,840 25,547 213,568 122,721
Other revenues 32,785 24,677 101,096 71,861
--------- --------- ---------- ----------
Total operating revenues 1,216,134 1,119,136 3,056,401 2,845,728
--------- --------- ----------- ----------
Operating Expenses:
Fuel 330,189 274,181 810,724 718,014
Purchased power --
Non-affiliates 33,719 40,319 90,025 76,503
Affiliates 60,190 44,865 154,299 119,508
Other operations 152,434 148,679 446,619 410,251
Maintenance 68,143 62,843 224,364 217,358
Depreciation and amortization 103,526 100,404 308,242 297,613
Taxes other than income taxes 54,012 55,184 170,579 166,787
--------- --------- ---------- ----------
Total operating expenses 802,213 726,475 2,204,852 2,006,034
--------- --------- ---------- ----------
Operating Income 413,921 392,661 851,549 839,694
Other Income and (Expense):
Allowance for equity funds used during construction 2,159 2,152 9,958 8,028
Interest income 3,702 3,546 11,248 9,898
Interest expense, net of amounts capitalized (50,068) (54,835) (163,582) (169,052)
Distributions on shares subject to mandatory redemption (3,937) (6,011) (11,317) (18,025)
Other income (expense), net (9,242) (7,250) (19,276) (23,276)
--------- --------- ---------- ----------
Total other income and (expense) (57,386) (62,398) (172,969) (192,427)
--------- --------- ---------- ----------
Earnings Before Income Taxes 356,535 330,263 678,580 647,267
Income taxes 135,271 125,908 250,102 247,332
---------- --------- ---------- ----------
Net Income 221,264 204,355 428,478 399,935
Dividends on Preferred Stock 4,748 3,688 13,520 11,015
--------- --------- ---------- ----------
Net Income After Dividends on Preferred Stock $216,516 $200,667 $414,958 $388,920
========= ========= ========== ==========
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
26
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- ----
(in thousands)
Operating Activities:
Net income $ 428,478 $ 399,935
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 354,513 349,342
Deferred income taxes and investment tax credits, net 58,913 (1,809)
Pension, postretirement, and other employee benefits (32,395) (30,179)
Tax benefit of stock options 8,029 5,355
Settlement of interest rate hedges (12,668) -
Other, net (995) 20,589
Changes in certain current assets and liabilities --
Receivables, net (95,679) (26,853)
Fossil fuel stock (5,844) 21,668
Materials and supplies (7,708) 5,834
Other current assets (27,237) (42,929)
Accounts payable (32,415) (69,742)
Taxes accrued 169,083 131,493
Other current liabilities 32,187 (13,310)
----------- ----------
Net cash provided from operating activities 836,262 749,394
----------- ----------
Investing Activities:
Gross property additions (473,484) (475,451)
Cost of removal net of salvage (23,701) (21,691)
Other 13,433 17,243
----------- ----------
Net cash used for investing activities (483,752) (479,899)
----------- ----------
Financing Activities:
Increase (decrease) in notes payable, net (36,991) 56,975
Proceeds --
Senior notes 1,065,000 350,000
Preferred stock 125,000 -
Common stock 25,000 -
Capital contributions from parent company 133 -
Redemptions --
First mortgage bonds - (350,000)
Senior notes (1,000,800) (1,349)
Other long-term debt (707) (659)
Payment of preferred stock dividends (11,747) (10,820)
Payment of common stock dividends (322,650) (323,250)
Other (4,328) (4,980)
----------- ----------
Net cash used for financing activities (162,090) (284,083)
----------- ----------
Net Change in Cash and Cash Equivalents 190,420 (14,588)
Cash and Cash Equivalents at Beginning of Period 22,685 35,756
----------- ----------
Cash and Cash Equivalents at End of Period $ 213,105 $ 21,168
=========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $5,037 and $4,976 capitalized for 2003 and 2002, respectively) $123,848 $136,089
Income taxes (net of refunds) $84,569 $188,933
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
27
ALABAMA POWER COMPANY
ONDENSED BALANCE SHEETS (UNAUDITED)
September 30, At December 31,
Assets 2003 2002
- ----- -------------- ----------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 213,105 $ 22,685
Receivables --
Customer accounts receivable 344,188 240,052
Unbilled revenues 89,251 89,336
Other accounts and notes receivable 52,356 47,535
Affiliated companies 59,708 74,099
Accumulated provision for uncollectible accounts (5,115) (4,827)
Fossil fuel stock, at average cost 79,586 73,742
Materials and supplies, at average cost 194,471 187,596
Deferred vacation pay 33,901 33,901
Other 83,198 76,134
------------- ------------
Total current assets 1,144,649 840,253
------------ ------------
Property, Plant, and Equipment:
In service 14,090,068 13,506,170
Less accumulated provision for depreciation 5,421,667 5,543,416
------------- ------------
8,668,401 7,962,754
Nuclear fuel, at amortized cost 80,780 103,088
Construction work in progress 340,939 478,652
------------ ------------
Total property, plant, and equipment 9,090,120 8,544,494
------------ ------------
Other Property and Investments:
Equity investments in subsidiaries 46,950 45,553
Nuclear decommissioning trusts, at fair value 344,516 292,297
Other 16,862 16,477
------------ ------------
Total other property and investments 408,328 354,327
------------ ------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 328,824 327,276
Prepaid pension costs 432,141 389,793
Unamortized premium on reacquired debt 113,029 103,819
Department of Energy assessments 17,144 17,144
Other 126,590 108,900
------------ ------------
Total deferred charges and other assets 1,017,728 946,932
------------ ------------
Total Assets $ 11,660,825 $ 10,686,006
============ ============
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
28
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ---------------- ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 1,032,199 $ 1,117,945
Notes payable - 36,991
Accounts payable --
Affiliated 124,332 109,790
Other 111,237 150,195
Customer deposits 46,686 44,410
Taxes accrued --
Income taxes 181,929 80,438
Other 79,623 20,561
Interest accrued 58,302 36,344
Vacation pay accrued 33,901 33,901
Other 101,995 114,870
------------ ------------
Total current liabilities 1,770,204 1,745,445
------------ ------------
Long-term Debt 3,012,302 2,851,562
------------ ------------
Shares Subject to Mandatory Redemption 300,000 300,000
------------ ------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,524,768 1,436,559
Deferred credits related to income taxes 161,066 177,205
Accumulated deferred investment tax credits 219,049 227,270
Employee benefits provisions 151,101 141,149
Deferred capacity revenues 26,684 33,924
Asset retirement obligations 353,284 -
Asset retirement obligation regulatory liability 90,568 -
Other 172,048 147,640
------------ ------------
Total deferred credits and other liabilities 2,698,568 2,163,747
------------ ------------
Total Liabilities 7,781,074 7,060,754
------------ ------------
Cumulative Preferred Stock 372,512 247,512
------------ ------------
Common Stockholder's Equity:
Common stock, par value $40 per share --
Authorized - 15,000,000 shares
Outstanding - September 30, 2003: 6,625,000 shares
- December 31, 2002: 6,000,000 shares 265,000 240,000
Paid-in capital 1,908,625 1,900,464
Premium on preferred stock 99 99
Retained earnings 1,341,257 1,250,594
Accumulated other comprehensive loss (7,742) (13,417)
------------ ------------
Total common stockholder's equity 3,507,239 3,377,740
------------ ------------
Total Liabilities and Stockholder's Equity $ 11,660,825 $ 10,686,006
============ ============
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
29
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------------
2003 2002 2003 2002
----------- -------- -------- ------
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 216,516 $ 200,667 $ 414,958 $ 388,920
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax
of $1,343, $(1,626), $(80), $(1,938), respectively 2,474 (2,674) 480 (3,188)
Less: Reclassification adjustment for amounts included in net
income, net of tax of $1,514, $0, $3,159, $0, respectively 2,151 - 5,195 -
---------- ----------- ---------- -----------
COMPREHENSIVE INCOME $ 221,141 $ 197,993 $ 420,633 $ 385,732
========== =========== ========== ===========
___________________________________________________________________________________________________________________________________
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At September 30, At December 31,
2003 2002
---------------- --------------
(in thousands)
Balance at beginning of period $ (13,417) $ -
Change in current period 5,675 (13,417)
---------- ------------
BALANCE AT END OF PERIOD $ (7,742) $ (13,417)
========== ============
___________________________________________________________________________________________________________________________________
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
30
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2003 vs. THIRD 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 third
quarter and year-to-date 2003 was $216.5 million and $415 million, respectively,
compared to $200.7 million and $388.9 million, respectively, for the
corresponding periods of 2002. Earnings increased by $15.8 million, or 7.9%, in
the third quarter 2003 and by $26.1 million, or 6.7%, year-to-date 2003 due
primarily to higher sales for resale, increases in other revenues and lower
interest expense, partially offset by higher non-fuel operating expenses.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
---------------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ 26,668 2.9 $ 78,332 3.4
Sales for resale - non-affiliates................ (9,071) (6.3) 12,259 3.4
Sales for resale - affiliates.................... 71,293 279.1 90,847 74.0
Other revenues................................... 8,108 32.9 29,235 40.7
Fuel expense..................................... 56,008 20.4 92,710 12.9
Purchased power - non-affiliates................. (6,600) (16.4) 13,522 17.7
Purchased power - affiliates..................... 15,325 34.2 34,791 29.1
Other operation expense.......................... 3,755 2.5 36,368 8.9
Maintenance expense.............................. 5,300 8.4 7,006 3.2
Interest expense, net of amounts capitalized..... (4,767) (8.7) (5,470) (3.2)
Distributions on shares subject to mandatory
redemption.................................... (2,074) (34.5) (6,708) (37.2)
Retail sales. Excluding energy cost recovery revenues and revenues
associated with PPAs certificated by the Alabama PSC, which generally do not
affect net income, retail sales revenues decreased by $10.7 million, or 1.6%,
for the third quarter 2003, but increased $2.2 million, or 0.1%, year-to-date
2003, when compared to the corresponding periods in 2002. Reference is made to
Note (F) to the Condensed Financial Statements herein for additional information
regarding these PPAs. Retail kilowatt-hour energy sales decreased 1.3% in the
third quarter 2003 and remained stable for the year when compared to the same
periods in 2002. Milder-than-normal temperatures caused the decrease in
kilowatt-hour energy sales in the third quarter of 2003.
Sales for resale - non-affiliates. During the third quarter 2003, the
revenues associated with sales for resale to non-affiliates decreased due to a
7.4% decrease in market based prices even though overall kilowatt-hour sales of
energy for the quarter increased 1.2% 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 5.2% increase in kilowatt-hour energy sold when compared to the
corresponding period in 2002. Kilowatt-hour sales of energy will vary depending
on demand, market based prices and the availability of Southern Company system
generation.
31
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates and Purchased power - affiliates. Sales for
resale to affiliates increased in the third quarter and year-to-date 2003
primarily due to the combination of increased demand by Southern Power to meet
contractual obligations and the availability of power due to milder-than-normal
weather in Alabama Power's service territory. In addition, sales for resale
revenues increased in the third quarter and year-to-date 2003 over the same
periods in 2002 due to increased capacity payments received in accordance with
the affiliated company interchange agreement as a result of increased capacity
from PPAs. Purchases of energy will vary depending on demand and the
availability and cost of generating resources at each company. Purchased power
from affiliates increased in the third quarter and year-to-date 2003 principally
due to a PPA between Alabama Power and Southern Power that began in June 2003.
The capacity component of these transactions was $25.9 million in the third
quarter 2003 and $33.9 million year-to-date 2003. Excluding the capacity
revenue, 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 third quarter 2003, other revenues increased
largely due to a $4.7 million increase in revenues from cogeneration steam
facilities due primarily to higher gas prices and a $4.3 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 a $16.4 million increase in
revenues from cogeneration steam facilities and an $11.6 million increase in
revenues from fees charged to customers 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. Fuel expense was higher in the third quarter 2003 when
compared to the corresponding period in 2002 mainly due to a 52% increase in gas
prices and a 4.6% increase in coal prices. The year-to-date 2003 increase is
primarily due to a 61.2% increase in gas prices and a 2.8% increase in coal
prices when compared to the same period in 2002. Generation for both third
quarter and year-to-date 2003 remained relatively constant when compared to the
same period in 2002. Since energy expenses are generally offset by energy
revenues, these expenses do not have a significant impact on earnings.
Purchased power - non-affiliates. The decrease in purchased
power-non-affiliates in the third quarter 2003 is due to an 11.6% decrease in
energy purchased and a 5.4% decrease in price. The decrease in energy purchased
from non-affiliates is a result of the mild summer weather that lowered overall
demand in Alabama Power's retail service territory, in addition to the effect of
a new PPA with Southern Power that began in June 2003. The year-to-date 2003
increase is due to a 26.5% increase in price even though energy purchased
decreased 7.0% when compared to the corresponding period in 2002. 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 in the
third quarter 2003 is mainly a result of a $3.9 million increase in
administrative and general expenses. This increase primarily relates to a $4.7
million increase in accrued expense for liability insurance, litigation, and
workers compensation offset by a $2.4 million decrease 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 $24.2 million increase in administrative
and general expenses, a $2.8 million increase in steam expense and a $2.8
million increase in customer account expenses. The increase in administrative
and general expenses is primarily due to a $7.9 million increase in property
insurance, a $6.9 million increase in accrued expense for liability insurance,
litigation, and workers compensation and a $4.8 million increase in employee
benefits.
32
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Maintenance expense. The increase in maintenance expense for the third
quarter 2003 is attributed to a $4.3 million increase in transmission expense
and a $2.8 million increase in distribution expense. The year-to-date 2003
increase when compared to the corresponding period in 2002 is primarily due to a
$4.2 million dollar increase in transmission expense and a $3.7 million increase
in distribution expense. The increase in transmission and distribution expense
for the third quarter and year-to-date 2003 is mainly related to work performed
on overhead and underground lines.
Interest expense, net of amounts capitalized. The decreases in interest
expense, net of amounts capitalized, during the third quarter and year-to-date
2003 when compared to the same periods in 2002 are a result of refinancing
higher cost debt.
Distributions on shares subject to mandatory redemption. Refinancing of
trust preferred securities in the fourth quarter 2002 led to decreases in this
item in the third quarter and year-to-date 2003.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including 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 - The SOUTHERN
System - "Risk Factors" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of Alabama Power in the Form 10-K.
Alabama Power is subject to certain claims and legal actions arising in the
ordinary course of business. In addition, Alabama Power's business activities
are subject to extensive governmental regulation related to public health and
the environment. Litigation over environmental issues and claims of various
types, including property damage, personal injury and citizen enforcement of
environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged
exposure to hazardous materials have become more frequent. The ultimate outcome
of such litigation against Alabama Power cannot be predicted at this time;
however, management does not anticipate that the liabilities, if any, arising
from such current proceedings would have a material adverse effect on Alabama
Power's financial statements.
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Alabama Power.
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 and
Note (E) to the Condensed Financial Statements herein. On October 27, 2003, the
EPA published a final rule providing that certain equipment
33
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
replacements be excluded from New Source Review and Prevention of Significant
Deterioration provisions of the Clean Air Act under the definition of "routine
maintenance, repair and replacement." This final rule must be adopted by the
State of Alabama in order to apply to Alabama Power's facilities. If fully
implemented, this final regulation could affect the applicability of these
regulations to activities at Alabama Power's facilities. The final outcome of
these matters cannot now be determined.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential - FERC Matters" of Alabama Power in the Form 10-K for
information on the formation of an RTO 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 proposal. Reactions to the White Paper by certain Southeastern state
regulators reflect significant continuing differences in opinion between the
FERC and those 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 FERC proposals
on Alabama Power 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.
Reference is made to Note (M) to the Condensed Financial Statements for
information regarding FERC approval of the Open Access Transmission Tariff. This
settlement is not expected to have a material effect on Alabama Power's future
earnings.
In July 2003, the Alabama PSC issued an order affirming the past treatment
of amortizing severance expenses over 22 months and provided that future
severance expense be recognized as incurred. Such treatment is in accordance
with FASB No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," and is not expected to have a material impact on Alabama Power's
future earnings.
On September 9, 2003, the voters of Alabama rejected a tax reform package
in a state-wide referendum. Currently, no additional revenue increasing
legislation has been proposed.
Reference is also made to the Notes 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.
34
ALABAMA 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 costs 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 costs 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 costs of retiring most long-lived assets over the life of the
related asset through depreciation expense.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges.
This conclusion is subject to ongoing discussions with the FASB and may change.
Alabama Power's forward electricity contracts continue to qualify for the normal
sales exception and are recorded on an accrual basis. The implementation of
Statement No. 149 did not have a material effect on Alabama Power's financial
statements.
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Alabama Power's financial
statements as it affects only the classification of amounts in the Statements of
Income.
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 was effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003. 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 any impact on Alabama Power's Statements of
Income and Cash Flows.
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 October 9, 2003, the FASB issued Staff
Position No. FIN 46-6, which deferred the effective date of Interpretation No.
46 until December 31, 2003 for interests held in variable interest entities or
potential variable interest entities created before February 1, 2003. Current
analysis indicates that the trusts established by Alabama Power to issue trust
preferred securities are variable interest entities under Interpretation No. 46
and, further, that Alabama Power is not the primary beneficiary of these trusts.
If this conclusion is finalized, effective December 31, 2003, the
35
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
trust assets and liabilities, including the preferred securities issued by the
trusts, will be deconsolidated, the investments in the trusts will be reflected
under the equity method, and the loans from the trusts to Alabama Power will be
reflected as long-term notes payable to affiliates on the accompanying balance
sheet. Based on the September 30, 2003 values, such treatment would result in an
increase of approximately $9.3 million to both total assets and total
liabilities. These reclassifications would not have any impact on net income or
cash flow.
FINANCIAL CONDITION
Overview
Major changes in Alabama Power's financial condition during the first nine
months of 2003 included the addition of approximately $473 million to utility
plant. The funds for these additions and other capital requirements were derived
primarily from operating activities and net security issuances of $178 million.
See Alabama Power's Condensed Statements of Cash Flows herein for further
details.
Ongoing Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of
Alabama Power under "Capital Requirements for Construction," "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. Approximately $1 billion will be required
by September 30, 2004 for redemptions and maturities of long-term debt.
Sources of Capital
In addition to the financing activities described below, Alabama Power
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings -- if needed -- will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
Alabama Power's current liabilities exceed current assets because of
scheduled maturities of long-term debt.
To meet short-term cash needs and contingencies, Alabama Power had at
September 30, 2003 approximately $213 million of cash and cash equivalents,
unused committed lines of credit of approximately $815 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
36
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 Power
and other Southern Company subsidiaries. Alabama Power has regulatory authority
for up to $1 billion of short-term borrowings. At September 30, 2003, Alabama
Power had no commercial paper or notes payable to banks outstanding. Management
believes that the need for working capital can be adequately met by utilizing
lines of credit without maintaining large cash balances.
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 September 30, 2003 was as follows:
Third Quarter
2003 Year-to-Date
Changes Changes
-----------------------------------------------------------------------
Fair Value
-----------------------------------------------------------------------
(in thousands)
Contracts beginning of period $15,687 $21,402
Contracts realized or settled (13,030) (31,810)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes (1,481) 11,584
----------------------------------------------------------------------
Contracts at September 30, 2003 $ 1,176 $ 1,176
======================================================================
37
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of September 30, 2003
Valuation Prices
--------------------------------------------------------------------------
Total Maturity
-------------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $1,176 $6,197 $(5,021)
External sources - - -
Models and other methods - - -
--------------------------------------------------------------------------
Contracts at September 30, 2003 $1,176 $6,197 $(5,021)
==========================================================================
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 September 30, 2003, the
fair value of derivative energy contracts reflected in the financial statements
was as follows:
Amounts
----------------------------------------------------------
(in thousands)
Regulatory assets, net $ (630)
Other comprehensive income -
Net income 1,806
----------------------------------------------------------
Total fair value $1,176
==========================================================
For the three months ended September 30, 2003 and 2002, approximately $2
million and $0.3 million, respectively, of gains were recognized in income. For
the nine months ended September 30, 2003 and 2002, approximately $1.7 million
and $(2) million, respectively, of gains (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 $1,065 million of Senior Notes in the first nine
months of 2003. The proceeds of these issues were used to redeem $807 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.
38
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
Also, in the second quarter 2003, Alabama Power entered into swaps to hedge
interest payments associated with variable rate pollution control bonds. The
swaps are for a notional amount of $486 million at an average fixed rate of
1.99% effective January 2004 and mature in January 2007. Further in the second
quarter 2003, Alabama Power entered into a swap to hedge interest payments
associated with variable rate notes. The swap is for a notional amount of $195
million at a fixed interest rate of 1.89% and matures in April 2006.
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 $350 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.
39
GEORGIA POWER COMPANY
40
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Operating Revenues:
Retail sales $ 1,353,851 $ 1,373,842 $ 3,361,162 $ 3,340,826
Sales for resale --
Non-affiliates 59,783 72,106 193,221 194,478
Affiliates 31,805 26,350 125,656 68,139
Other revenues 41,443 44,233 123,374 124,336
----------- ----------- ----------- ----------
Total operating revenues 1,486,882 1,516,531 3,803,413 3,727,779
----------- ----------- ----------- ----------
Operating Expenses:
Fuel 335,058 291,716 848,989 774,885
Purchased power --
Non-affiliates 72,439 114,355 206,527 217,425
Affiliates 156,292 140,372 391,740 297,868
Other operations 195,010 220,902 580,487 599,416
Maintenance 88,774 95,763 307,346 308,078
Depreciation and amortization 89,033 101,896 260,778 298,899
Taxes other than income taxes 60,095 53,374 162,560 152,806
----------- ----------- ----------- -----------
Total operating expenses 996,701 1,018,378 2,758,427 2,649,377
----------- ----------- ----------- -----------
Operating Income 490,181 498,153 1,044,986 1,078,402
Other Income and (Expense):
Allowance for equity funds used during construction (2,509) (979) (6,311) (2,666)
Interest expense, net of amounts capitalized (44,182) (42,722) (136,470) (124,770)
Distributions on shares subject to mandatory redemption (14,918) (16,282) (44,756) (46,705)
Other income (expense), net (16,849) (8,346) 18,105 (501)
----------- ----------- ----------- -----------
Total other income and (expense) (78,458) (68,329) (169,432) (174,642)
----------- ----------- ----------- -----------
Earnings Before Income Taxes 411,723 429,824 875,554 903,760
Income taxes 146,625 158,090 318,324 334,148
----------- ----------- ----------- -----------
Net Income 265,098 271,734 557,230 569,612
Dividends on Preferred Stock 168 168 503 503
----------- ----------- ----------- -----------
Net Income After Dividends on Preferred Stock $ 264,930 $ 271,566 $ 556,727 $ 569,109
=========== =========== =========== ===========
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 CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- ----
(in thousands)
Operating Activities:
Net income $ 557,230 $ 569,612
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 288,405 293,882
Deferred income taxes and investment tax credits, net 174,765 26,956
Pension, postretirement, and other employee benefits (28,270) (47,365)
Tax benefit of stock options 9,590 7,197
Settlement of interest rate hedges (11,250) 447
Other, net 6,975 19,980
Changes in certain current assets and liabilities --
Receivables, net (50,082) (13,546)
Fossil fuel stock (15,799) 56,913
Materials and supplies (10,559) 9,135
Other current assets 25,555 13,414
Accounts payable (80,396) 19,986
Taxes accrued 100,903 146,497
Other current liabilities 8,886 10,319
---------- ---------
Net cash provided from operating activities 975,953 1,113,427
---------- ---------
Investing Activities:
Gross property additions (537,274) (620,301)
Cost of removal net of salvage (16,475) (53,050)
Sales of property - 387,212
Change in construction payables, net of joint owner portion (52,841) (39,251)
Other 21,319 29,372
---------- ---------
Net cash used for investing activities (585,271) (296,018)
---------- ---------
Financing Activities:
Decrease in notes payable, net (287,222) (185,994)
Proceeds --
Senior notes 800,000 300,000
Shares subject to mandatory redemption - 440,000
Capital contributions from parent company 158 -
Redemptions --
First mortgage bonds - (1,860)
Pollution control bonds - (7,800)
Senior notes (465,000) (300,000)
Shares subject to mandatory redemption - (414,250)
Capital distributions to parent company - (200,000)
Payment of preferred stock dividends (546) (507)
Payment of common stock dividends (424,350) (407,175)
Other (16,056) (17,708)
---------- ---------
Net cash used for financing activities (393,016) (795,294)
---------- ---------
Net Change in Cash and Cash Equivalents (2,334) 22,115
Cash and Cash Equivalents at Beginning of Period 16,873 23,260
---------- ---------
Cash and Cash Equivalents at End of Period $ 14,539 $ 45,375
========== =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $3,973 and $7,366 capitalized for 2003 and 2002, respectively) $160,344 $156,478
Income taxes (net of refunds) $58,812 $191,447
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
42
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Assets 2003 2002
- ------ ---------------- ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 14,539 $ 16,873
Receivables --
Customer accounts receivable 368,306 302,995
Unbilled revenues 115,365 104,454
Under recovered regulatory clause revenues 150,646 117,580
Other accounts and notes receivable 67,964 122,585
Affiliated companies 25,471 40,501
Accumulated provision for uncollectible accounts (6,950) (5,825)
Fossil fuel stock, at average cost 135,846 120,048
Materials and supplies, at average cost 273,923 263,364
Deferred vacation pay 52,539 53,677
Other 15,942 43,245
------------ ------------
Total current assets 1,213,591 1,179,497
------------ ------------
Property, Plant, and Equipment:
In service 18,019,810 17,222,661
Less accumulated provision for depreciation 7,256,597 7,333,529
------------ ------------
10,763,213 9,889,132
Nuclear fuel, at amortized cost 111,203 119,588
Construction work in progress 391,185 667,581
------------ ------------
Total property, plant, and equipment 11,265,601 10,676,301
------------ ------------
Other Property and Investments:
Equity investments in unconsolidated subsidiaries 37,652 36,167
Nuclear decommissioning trusts, at fair value 394,004 346,870
Other 29,443 28,612
------------ ------------
Total other property and investments 461,099 411,649
------------ ------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 513,056 524,510
Prepaid pension costs 389,367 341,944
Unamortized debt issuance expense 75,391 67,362
Unamortized premium on reacquired debt 174,894 178,590
Asset retirement obligation regulatory asset 6,760 -
Other 169,250 162,686
------------ ------------
Total deferred charges and other assets 1,328,718 1,275,092
------------ ------------
Total Assets $ 14,269,009 $ 13,542,539
============ ============
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
43
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ---------------- ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 2,259 $ 322,125
Notes payable 70,455 357,677
Accounts payable --
Affiliated 133,681 135,260
Other 301,991 445,220
Customer deposits 101,426 94,859
Taxes accrued --
Income taxes 169,140 20,245
Other 144,019 134,269
Interest accrued 68,772 59,608
Vacation pay accrued 40,844 42,442
Other 104,253 112,131
------------ ------------
Total current liabilities 1,136,840 1,723,836
------------ ------------
Long-term Debt 3,762,904 3,109,619
------------ ------------
Shares Subject to Mandatory Redemption 940,000 940,000
------------ ------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,262,544 2,176,438
Deferred credits related to income taxes 197,029 208,410
Accumulated deferred investment tax credits 315,628 324,994
Employee benefits provisions 255,639 236,486
Asset retirement obligations 492,124 -
Other 319,653 373,740
------------ ------------
Total deferred credits and other liabilities 3,842,617 3,320,068
------------ ------------
Total Liabilities 9,682,361 9,093,523
------------ ------------
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 2,165,788 2,156,040
Premium on preferred stock 40 40
Retained earnings 2,077,897 1,945,520
Accumulated other comprehensive loss (15,896) (11,403)
------------ ------------
Total common stockholder's equity 4,572,079 4,434,447
------------ ------------
Total Liabilities and Stockholder's Equity $ 14,269,009 $ 13,542,539
============ ============
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
44
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- ---------------------
2003 2002 2003 2002
------- ------- ----- ----
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 264,930 $ 271,566 $ 556,727 $ 569,109
Other comprehensive income (loss):
Changes in fair value of qualifying hedges, net of tax
of $(1,941), $(23), $(3,287), $97, respectively (3,078) (37) (5,625) 153
Less: Reclassification adjustment for amounts included in net
income, net of tax of $444, $0, $523, $0, respectively 1,005 - 1,132 -
---------- ----------- ---------- -----------
COMPREHENSIVE INCOME $ 262,857 $ 271,529 $ 552,234 $ 569,262
========== =========== ========== ===========
__________________________________________________________________________________________________________________________________
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At September 30, At December 31,
2003 2002
---------------- ---------------
(in thousands)
Balance at beginning of period $ (11,403) $ (153)
Change in current period (4,493) (11,250)
---------- ----------
BALANCE AT END OF PERIOD $ (15,896) $ (11,403)
========== ==========
___________________________________________________________________________________________________________________________________
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
45
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2003 vs. THIRD 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
third quarter and year-to-date 2003 was $264.9 million and $556.7 million,
respectively, compared to $271.6 million and $569.1 million for the
corresponding periods in 2002. Earnings in the third quarter 2003 were $6.6
million, or 2.4%, lower when compared to the same period in 2002 primarily due
to lower retail base revenues. Year-to-date 2003 earnings decreased by $12.4
million, or 2.2%, when compared to the corresponding period in 2002. The
year-to-date 2003 decrease is mainly attributed to lower retail base revenues
and higher non-fuel operating expenses.
Significant income statement items appropriate for discussion include the following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Retail sales..................................... $ (19,991) (1.5) $ 20,336 0.6
Sales for resale - non-affiliates................ (12,323) (17.1) (1,257) (0.6)
Sales for resale - affiliates..................... 5,455 20.7 57,517 84.4
Fuel expense..................................... 43,342 14.9 74,104 9.6
Purchased power - non-affiliates................. (41,916) (36.7) (10,898) (5.0)
Purchased power - affiliates..................... 15,920 11.3 93,872 31.5
Other operation expense.......................... (25,892) (11.7) (18,929) (3.2)
Maintenance expense.............................. (6,989) (7.3) (732) (0.2)
Depreciation and amortization.................... (12,863) (12.6) (38,121) (12.8)
Taxes other than income taxes.................... 6,721 12.6 9,754 6.4
Interest expense, net of amounts capitalized..... 1,460 3.4 11,700 9.4
Other income (expense), net...................... (10,033) (107.6) 14,961 N/M
N/M Not meaningful
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue decreased by $32.4 million, or 3.3%, in the third
quarter 2003 and $39.7 million, or 1.6%, year-to-date 2003 when compared to the
same periods in 2002. In the third quarter and year-to-date 2003, kilowatt-hour
energy sales to retail customers decreased by 1.5% and 0.6%, respectively. A
relatively mild summer and the sluggish economy were the main factors affecting
the demand for energy which more than offset increases in the number of
customers served by Georgia Power of 0.5% and 1.6% in the third quarter and
year-to-date 2003, respectively.
Sales for resale - non-affiliates. The third quarter and year-to-date 2003
decreases in these sales to non-affiliates are attributed to fluctuations in
off-system sales transactions that were generally offset by corresponding
purchase transactions. These transactions did not have a significant impact on
earnings since the energy is usually sold at variable cost.
46
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates. Sales for resale to affiliates increased in
the third quarter and year-to-date 2003 primarily due to the combination of
increased demand by Southern Power to meet contractual obligations and the
availability of power due to milder-than-normal weather in Georgia Power's
service territory. During the third quarter and year-to-date 2003, energy sales
to affiliates increased 4.2% and 62.2%, respectively, when compared to the same
periods in the prior year. These transactions did not have a significant impact
on earnings since this energy is generally sold at marginal cost.
Fuel expense. Fuel expense was higher in the third quarter and year-to-date
2003 mainly due to increased generation and higher unit cost of fuel when
compared to the corresponding periods in 2002. 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. During the third quarter and year-to-date
2003, purchased power from non-affiliates decreased primarily due to a decrease
in off-system purchases to meet lower off-system sales commitments. These
expenses do not have a significant impact on earnings since energy expenses are
generally offset by energy revenues through Georgia Power's fuel cost recovery
clause.
Purchased power - affiliates. Purchased power from affiliates increased
in the third quarter and year-to-date 2003 principally due to PPAs between
Georgia Power and Southern Power that began in June 2002 and June 2003. The
capacity component of these transactions remained constant in the third quarter
2003 and increased $33.5 million year-to-date 2003 when compared to the
corresponding 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.
Other operation expense. The third quarter and year-to-date 2003 decreases
are primarily attributed to lower administrative and general expenses in these
periods compared to the same periods in 2002 due to decreased employee
compensation in 2003.
Maintenance expense. These expenses were lower in the third quarter and
year-to-date 2003 due mainly to lower power production maintenance expense when
compared to the corresponding periods in 2002 as a result of efforts to control
costs.
Depreciation and amortization. In the third quarter and year-to-date 2003,
depreciation and amortization expense decreased when compared to the same
periods in 2002. These decreases are a result of lower regulatory charges
necessary to levelize purchased power capacity costs under the terms of the
retail rate order effective January 1, 2002. These decreases are offset by an
increase in purchased power-affiliates 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.
47
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Taxes other than income taxes. During the third quarter and year-to-date
2003, taxes other than income taxes increased due mainly to a favorable true-up
of state property tax evaluations in 2002.
Interest expense, net of amounts capitalized. These increases in interest
expense, net of amounts capitalized for the third quarter and year-to-date 2003
are primarily related to an increase in senior notes outstanding from the same
periods in 2002, partially offset by a reduction in interest on short-term debt.
Other income (expense), net. During the third quarter 2003, this item
reflects decreased revenues associated with a new electricity pricing program
when compared to the same period in the prior year. Year-to-date 2003, the
increase in income for this line item is attributed primarily to the new
electricity pricing program and $14.5 million in interest on a favorable income
tax settlement completed in the second quarter of 2003. The electricity pricing
program revenues decreased $5.8 million in the third quarter 2003 and increased
$4.4 million year-to-date 2003.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales. For additional information relating to these issues, see Item 1
- - BUSINESS - The SOUTHERN System - "Risk Factors" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of Georgia Power in the
Form 10-K.
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 August 19, 2003, the Georgia PSC issued an order approving a stipulation
reached by Georgia Power, the Consumers' Utility Counsel Division, Georgia
Textile Manufacturers Association, Georgia Industrial Group and the Staff of the
Georgia PSC allowing Georgia Power to increase customer fuel rates to recover
existing under-recovered deferred fuel costs. 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
48
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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.
Reference is made to Note (M) to the Condensed Financial Statements for
information regarding FERC approval of the Open Access Transmission Tariff. This
settlement is not expected to have a material effect on Georgia Power's future
earnings.
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 (Q) 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.
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Georgia Power.
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 and Note (E) to the Condensed Financial Statements herein. On October
27, 2003, the EPA published a final rule providing that certain equipment
replacements be excluded from New Source Review and Prevention of Significant
Deterioration provisions of the Clean Air Act under the definition of "routine
maintenance, repair and replacement." This final rule must be adopted by the
State of Georgia in order to apply to Georgia Power's facilities. If fully
implemented, this final regulation could affect the applicability of these
regulations to activities at Georgia Power's facilities. The final outcome of
these matters cannot now be determined.
49
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" of Georgia Power in Item 7 of the Form 10-K. On September 26, 2003, the
EPA published a final rule in the Federal Register, formally reclassifying the
Atlanta area as a "severe" nonattainment area for the one-hour ozone standard
under Title I of the Clean Air Act, effective January 1, 2004. 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 for nitrogen oxides emitted above 80% of
the baseline period. The baseline period is currently unknown. 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 is subject to certain claims and legal actions arising in the
ordinary course of business. In addition, Georgia Power's business activities
are subject to extensive governmental regulation related to public health and
the environment. Litigation over environmental issues and claims of various
types, including property damage, personal injury and citizen enforcement of
environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged
exposure to hazardous materials have become more frequent. The ultimate outcome
of such litigation against Georgia Power cannot be predicted at this time;
however, management does not anticipate that the liabilities, if any, arising
from such current proceedings would have a material adverse effect on Georgia
Power's financial statements.
Reference is made to the Notes 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.
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 costs 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 costs must be
capitalized as
50
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 costs of retiring most long-lived assets over the life of the
related asset through depreciation expense.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges. This conclusion
is subject to ongoing discussions with the FASB and may change. Georgia Power's
forward electricity contracts continue to qualify for the normal sales exception
and are recorded on an accrual basis. The implementation of Statement No. 149
did not have a material effect on Georgia Power's financial statements.
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Georgia Power's financial
statements as it affects only the classification of amounts in the Statements of
Income.
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 was effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003. 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 any impact on Georgia Power's Statements of
Income and Cash Flows.
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 October 9, 2003, the FASB issued Staff
Position No. FIN 46-6, which deferred the effective date of Interpretation No.
46 until December 31, 2003 for interests held in variable interest entities or
potential variable interest entities created before February 1, 2003. Current
analysis indicates that the trusts established by Georgia Power to issue trust
preferred securities are variable interest entities under Interpretation No. 46
and, further, that Georgia Power is not the primary beneficiary of these trusts.
If this conclusion is finalized, effective December 31, 2003, the trust assets
and liabilities, including the preferred securities issued by the trusts, will
be deconsolidated, the investments in the trusts will be reflected under the
equity method, and the loans from the trusts to Georgia Power will be reflected
as long-term notes payable to affiliates on the balance sheet. Based on the
September 30, 2003 values, such treatment would result in an increase of
approximately $29 million to both total assets and total liabilities. These
reclassifications would not have any impact on net income or cash flow.
51
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION AND LIQUIDITY
Overview
The major change in Georgia Power's financial condition during the first nine
months of 2003 was the addition of approximately $537 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.
Ongoing 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. Approximately $2.3 million will be required by
September 30, 2004 for redemptions and maturities of long-term debt.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past, including funds from
operations and new security issuances. The amount, type and timing of additional
security issuances -- if needed -- will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions and other factors.
See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional
information.
Georgia Power's current liabilities frequently exceed current assets
because of the continued use of short-term debt as a funding source to meet cash
needs, which can fluctuate significantly due to the seasonality of the business.
To meet short-term cash needs and contingencies, Georgia Power had at September
30, 2003 approximately $14.5 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. 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
September 30, 2003, Georgia Power had outstanding $70 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.
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 September 30, 2003, the
maximum potential collateral requirements were approximately $228 million.
52
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
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 September 30, 2003 was as follows:
Third Quarter
2003 Year-to-Date
Changes Changes
---------------------------------------------------------------------------
Fair Value
---------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $ (2,034) $ 89
Contracts realized or settled 1,815 1,811
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 2,064 (55)
---------------------------------------------------------------------------
Contracts at September 30, 2003 $ 1,845 $ 1,845
===========================================================================
Source of September 30, 2003
Valuation Prices
-------------------------------------------------------------------------
Total Maturity
------------------------
Fair Value Year 1 1-3 Years
-------------------------------------------------------------------------
(in thousands)
Actively quoted $1,845 $1,954 $(109)
External sources - - -
Models and other methods - - -
------------------------------------------------------------------------
Contracts at September 30, 2003 $1,845 $1,954 $(109)
========================================================================
At September 30, 2003, the fair value of derivative energy contracts
reflected in the financial statements was as follows:
Amounts
----------------------------------------------------------------
(in thousands)
Regulatory assets, net $(353)
Other comprehensive income -
Net income 2,198
----------------------------------------------------------------
Total fair value $1,845
================================================================
53
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Realized gains and losses are recognized in the Statements of Income as
incurred. For the three months ended September 30, 2003 and 2002, approximately
$2.4 million and $0.3 million of gains, respectively, were recognized in income.
For the nine months ended September 30, 2003 and 2002, approximately $2.1
million and $1.7 million of gains, 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 the first half of 2003, Georgia Power issued a total of $700 million of
Senior Notes. The proceeds of these issues were used to redeem
$465 million of Senior Notes and to repay a portion of Georgia Power's
short-term indebtedness. Further in the first half of 2003, Georgia Power
entered into a swap to hedge interest payments associated with a variable rate
note with a coupon of LIBOR plus 12.5 basis points. The swap is for a notional
amount of $250 million at a fixed interest rate of 1.960% and matures in
February 2005.
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 July 2003, Georgia Power entered into 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 into 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.
In September 2003, Georgia Power issued $100 million of Series Q 4.90%
Senior Notes due September 15, 2013. The proceeds from this sale were used to
repay a portion of Georgia Power's outstanding commercial paper. In connection
with this sale, Georgia Power settled a related treasury lock and incurred a
loss of $2.5 million.
In October 2003, Georgia Power issued $200 million of Series R 6% Senior
Notes due October 15, 2033. The proceeds from this sale will be used to redeem
in November 2003 all of the Series B 6.6% Senior Notes due December 31, 2038.
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.
54
GULF POWER COMPANY
55
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Operating Revenues:
Retail sales $205,327 $198,503 $540,789 $504,778
Sales for resale --
Non-affiliates 19,608 21,697 56,241 57,815
Affiliates 17,313 14,139 39,944 24,234
Other revenues 10,641 11,262 28,962 29,694
-------- -------- -------- --------
Total operating revenues 252,889 245,601 665,936 616,521
-------- -------- -------- --------
Operating Expenses:
Fuel 96,531 87,663 237,596 194,560
Purchased power --
Non-affiliates 3,166 8,033 13,051 20,685
Affiliates 10,194 5,312 27,860 35,503
Other operations 30,737 29,416 94,174 87,326
Maintenance 11,447 11,679 45,284 53,617
Depreciation and amortization 20,373 19,929 60,949 56,303
Taxes other than income taxes 18,896 17,908 52,012 47,199
-------- -------- -------- --------
Total operating expenses 191,344 179,940 530,926 495,193
-------- -------- -------- --------
Operating Income 61,545 65,661 135,010 121,328
Other Income and (Expense):
Interest expense, net of amounts capitalized (7,191) (8,680) (23,498) (23,812)
Distributions on shares subject to mandatory redemption (1,901) (2,103) (5,823) (6,309)
Other income (expense), net 500 (57) (179) 1,904
-------- -------- -------- --------
Total other income and (expense) (8,592) (10,840) (29,500) (28,217)
-------- -------- -------- --------
Earnings Before Income Taxes 52,953 54,821 105,510 93,111
Income taxes 20,101 20,788 39,793 33,766
-------- -------- -------- --------
Net Income 32,852 34,033 65,717 59,345
Dividends on Preferred Stock 54 54 162 162
-------- -------- -------- --------
Net Income After Dividends on Preferred Stock $ 32,798 $ 33,979 $ 65,555 $ 59,183
======== ======== ======== ========
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
56
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- ----
(in thousands)
Operating Activities:
Net income $ 65,717 $ 59,345
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 65,161 60,127
Deferred income taxes 3,890 (6,310)
Tax benefit of stock options 1,596 922
Other, net (6,449) (2,031)
Changes in certain current assets and liabilities --
Receivables, net (3,452) (39,199)
Fossil fuel stock 4,946 7,047
Materials and supplies (3,430) (1,567)
Other current assets 15,338 3,945
Accounts payable (7,847) (1,969)
Taxes accrued 27,724 37,834
Other current liabilities 7,392 (4,737)
` -------- ---------
Net cash provided from operating activities 170,586 113,407
-------- ---------
Investing Activities:
Gross property additions (64,806) (88,894)
Cost of removal net of salvage (5,628) (2,676)
Other (7,505) (18,334)
-------- ---------
Net cash used for investing activities (77,939) (109,904)
-------- ---------
Financing Activities:
Decrease in notes payable, net (28,479) (29,386)
Proceeds --
Pollution control bonds 61,625 55,000
Senior notes 225,000 45,000
Capital contributions from parent company 10,016 37,000
Redemptions --
Pollution control bonds (61,625) (55,000)
Senior notes (151,757) (343)
Other long-term debt (20,000) -
Shares subject to mandatory redemption (40,000) -
Payment of preferred stock dividends (162) (162)
Payment of common stock dividends (52,650) (49,125)
Other (10,301) (2,631)
-------- ---------
Net cash provided from (used for) financing activities (68,333) 353
-------- ---------
Net Change in Cash and Cash Equivalents 24,314 3,856
Cash and Cash Equivalents at Beginning of Period 13,278 2,244
-------- ---------
Cash and Cash Equivalents at End of Period $ 37,592 $ 6,100
======== =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $154 and $1,391 capitalized for 2003 and 2002, respectively) $30,647 $32,220
Income taxes (net of refunds) $8,377 $7,737
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
57
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Assets 2003 2002
- ------ ---------------- ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 37,592 $ 13,278
Receivables --
Customer accounts receivable 59,854 48,609
Unbilled revenues 25,304 28,077
Under recovered regulatory clause revenues 29,157 29,549
Other accounts and notes receivable 4,869 6,618
Affiliated companies 6,506 8,678
Accumulated provision for uncollectible accounts (1,129) (889)
Fossil fuel stock, at average cost 32,245 37,191
Materials and supplies, at average cost 38,269 34,840
Prepaid taxes - 12,704
Prepaid service agreement 4,526 4,535
Other 6,974 9,599
------------ -----------
Total current assets 244,167 232,789
------------ -----------
Property, Plant, and Equipment:
In service 2,290,492 2,248,156
Less accumulated provision for depreciation 987,993 946,408
------------ -----------
1,302,499 1,301,748
Construction work in progress 39,787 35,708
------------ -----------
Total property, plant, and equipment 1,342,286 1,337,456
------------ -----------
Other Property and Investments 12,456 10,157
------------ -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 17,875 18,798
Prepaid pension costs 40,585 36,298
Unamortized debt issuance expense 6,864 3,900
Unamortized premium on reacquired debt 18,444 14,052
Other 25,635 20,379
------------ -----------
Total deferred charges and other assets 109,403 93,427
------------ -----------
Total Assets $ 1,708,312 $ 1,673,829
============ ===========
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
58
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ --------------- ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 50,000 $ 100,000
Notes payable - 28,479
Accounts payable --
Affiliated 29,121 26,395
Other 24,012 39,685
Customer deposits 17,999 16,047
Taxes accrued --
Income taxes 26,908 10,718
Other 20,652 9,170
Interest accrued 6,512 7,875
Vacation pay accrued 5,044 5,044
Other 7,374 3,933
------------ -----------
Total current liabilities 187,622 247,346
------------ -----------
Long-term Debt 514,493 452,040
------------ -----------
Shares Subject to Mandatory Redemption 115,000 115,000
------------ -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 172,055 167,689
Deferred credits related to income taxes 26,866 29,692
Accumulated deferred investment tax credits 20,817 22,289
Employee benefits provisions 43,485 39,656
Other 51,672 46,376
------------ -----------
Total deferred credits and other liabilities 314,895 305,702
------------ -----------
Total Liabilities 1,132,010 1,120,088
------------ -----------
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 361,381 349,769
Premium on preferred stock 12 12
Retained earnings 175,303 162,398
Accumulated other comprehensive loss (2,690) (734)
------------ -----------
Total common stockholder's equity 572,066 549,505
------------ -----------
Total Liabilities and Stockholder's Equity $ 1,708,312 $ 1,673,829
============ ===========
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
59
GULF POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ---------------------------
2003 2002 2003 2002
----- ---- ---- ----
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 32,798 $ 33,979 $ 65,555 $ 59,183
Other comprehensive income:
Changes in fair value of qualifying hedges, net of tax
of $198, $0, $(1,228), $0, respectively 314 - (1,956) -
---------- ----------- --------- ----------
COMPREHENSIVE INCOME $ 33,112 $ 33,979 $ 63,599 $ 59,183
========== =========== ========= ==========
__________________________________________________________________________________________________________________________________
GULF POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At At
September 30, December 31,
2003 2002
------------ -------------
(in thousands)
Balance at beginning of period $ (734) $ -
Change in current period (1,956) (734)
----------- -------
BALANCE AT END OF PERIOD $ (2,690) $ (734)
=========== =======
__________________________________________________________________________________________________________________________________
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
60
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2003 vs. THIRD 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 third quarter
and year-to-date 2003 was $32.8 million and $65.6 million, respectively,
compared to $34 million and $59.2 million for the corresponding periods in 2002.
Earnings for the third quarter 2003 decreased $1.2 million, or 3.5%, primarily
due to higher operating expenses which were partially offset by higher operating
revenues and lower interest expense. Earnings increased year-to-date 2003 by
$6.4 million, or 10.8%, mainly due to higher operating revenues when compared to
the same period in 2002 primarily as a result of the retail rate increase that
took effect in June 2002.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------------ -------------------------------
` (in thousands) % (in thousands) %
Retail sales.................................. $6,824 3.4 $36,011 7.1
Sales for resale - non-affiliates............. (2,089) (9.6) (1,574) (2.7)
Sales for resale - affiliates.................. 3,174 22.4 15,710 64.8
Other revenues................................ (621) (5.5) (732) (2.5)
Fuel expense.................................. 8,868 10.1 43,036 22.1
Purchased power - non-affiliates.............. (4,867) (60.6) (7,634) (36.9)
Purchased power - affiliates.................. 4,882 91.9 (7,643) (21.5)
Other operation expense....................... 1,321 4.5 6,848 7.8
Maintenance expense........................... (232) (2.0) (8,333) (15.5)
Taxes other than income taxes................. 988 5.5 4,813 10.2
Other income (expense), net................... 557 N/M (2,083) (109.4)
N/M Not meaningful
Retail sales. Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales decreased by $2.3 million,
or 2%, for the third quarter 2003 and increased by $19 million, or 6.5%,
year-to-date 2003 when compared to the corresponding periods in 2002. Retail
sales revenue was higher year-to-date 2003 than in year-to-date 2002 primarily
due to the retail rate increase in June 2002 and an increase in the number of
customers. The decrease in retail sales revenue during the third quarter 2003 is
primarily due to mild weather.
Sales for resale - non-affiliates. The third quarter and year-to-date 2003
decreases in sales for resale to non-affiliates are attributed to lower demand
for energy by these customers. These transactions did not have a significant
impact on earnings since the energy is sold at variable cost.
61
GULF 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 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 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. In the third quarter and year-to-date 2003, other revenues
were lower due to a $1.7 million settlement related to a PPA recorded in 2002,
partially offset by increases in miscellaneous service revenues.
Fuel expense. Fuel expense during the third quarter and year-to-date 2003
was higher primarily due to increased generation to meet the demand for energy
and higher average cost of fuel. Since energy expenses are generally offset by
energy revenues through Gulf Power's fuel cost recovery mechanism, these
expenses do not have a material impact on net income.
Purchased power - non-affiliates. In the third quarter 2003, purchased
power from non-affiliates decreased primarily due to the availability of lower
cost alternatives within the Southern Company system when compared to the same
period in 2002. The decrease in year-to-date 2003 when compared to the
corresponding period in 2002 is directly related to commercial operation of
Plant Smith Unit 3.
Other operation expense. The third quarter and year-to-date 2003 increases
are primarily due to higher cost associated with production, customer accounts
and administrative and general expenses when compared to the same periods in
2002. Customer accounts expense increased by $0.3 million and $1.6 million for
the third quarter and year-to-date 2003, respectively. Administrative and
general expenses increased by $0.3 million and $2.5 million in the third quarter
and year-to-date 2003, respectively, mainly due to relocation expenses and
insurance expenses.
Maintenance expense. In the third quarter and year-to-date 2003,
maintenance expense was lower when compared to the corresponding periods in 2002
due to a decrease in the amount of planned turbine and boiler inspections and
repairs.
Taxes other than income taxes. During the third quarter and year-to-date
2003, taxes other than income taxes increased as a result of higher property
taxes related to higher plant in service amounts, and higher revenue taxes
related to the 2002 base rate increase when compared to the same periods in the
prior year.
Other income (expense), net. The decrease in other income for year-to-date
2003 is a result of reductions in Allowance for Equity Funds Used during
Construction following the completion of Plant Smith Unit 3 when compared to the
same period in the prior year.
62
GULF 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. 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 - The SOUTHERN System - "Risk Factors" and Item 7 -
MANAGEMENT'S DISCUSSION AND 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. In addition, Gulf Power's business activities are
subject to extensive governmental regulation related to public health and the
environment. Litigation over environmental issues and claims of various types,
including property damage, personal injury and citizen enforcement of
environmental requirements, has increased generally throughout the United
States. In particular, personal injury claims for damages caused by alleged
exposure to hazardous materials have become more frequent. The ultimate outcome
of such litigation against Gulf Power cannot be predicted at this time; however,
management does not anticipate that the liabilities, if any, arising from such
current proceedings would have a material adverse effect on Gulf Power's
financial statements.
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Gulf Power.
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 and Note (E) to the Condensed
Financial Statements herein. On October 27, 2003, the EPA published a final rule
providing that certain equipment replacements be excluded from New Source Review
and Prevention of Significant Deterioration provisions of the Clean Air Act
under the definition of "routine maintenance, repair and replacement." This
final rule must be adopted by the State of Florida in order to apply to Gulf
Power's facilities. If fully implemented, this final regulation could affect the
applicability of these regulations to activities at Gulf Power's facilities. The
final outcome of these matters cannot now be determined.
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 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 proposal. Reactions to the White Paper by certain Southeastern state
regulators reflect significant continuing differences in opinion between the
FERC and those state regulatory commissions over questions of jurisdiction and
protection of retail customers. These significant differences between state
63
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 Gulf Power is a prerequisite
to the formation of SeTrans. Pending energy legislation may also impact these
issues. Any impact of the FERC proposals on Gulf Power 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 Note (M) to the Condensed Financial Statements for
information regarding FERC approval of the Open Access Transmission Tariff. This
settlement is not expected to have a material effect on Gulf Power's future
earnings.
Reference is made to the Notes to the Condensed Financial Statements herein
for discussion of various contingencies and other matters which may affect
future earnings potential.
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 costs 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 costs 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 costs of retiring most long-lived assets over the life of the
related asset through depreciation expense.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges.
64
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This conclusion is subject to ongoing discussions with the FASB and may change.
Gulf Power's forward electricity contracts continue to qualify for the normal
sales exception and are recorded on an accrual basis. The implementation of
Statement No. 149 did not have a material effect on Gulf Power's financial
statements.
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Gulf Power's financial
statements as it affects only the classification of amounts in the Statements of
Income.
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 was effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003. 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 any impact on Gulf Power's Statements of Income
and Cash Flows.
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 October 9, 2003, the FASB issued Staff
Position No. FIN 46-6, which deferred the effective date of Interpretation No.
46 until December 31, 2003 for interests held in variable interest entities or
potential variable interest entities created before February 1, 2003. Current
analysis indicates that the trusts established by Gulf Power to issue trust
preferred securities are variable interest entities under Interpretation No. 46
and, further, that Gulf Power is not the primary beneficiary of these trusts. If
this conclusion is finalized, effective December 31, 2003, the trust assets and
liabilities, including the preferred securities issued by the trusts, will be
deconsolidated, the investments in the trusts will be reflected under the equity
method, and the loans from the trusts to Gulf Power will be reflected as
long-term notes payable to affiliates on the balance sheet. Based on the
September 30, 2003 values, such treatment would result in an increase of
approximately $3.5 million to both total assets and total liabilities. These
reclassifications would not have any impact on net income or cash flow.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Gulf Power's financial condition during the first nine months
of 2003 included the addition of approximately $64.8 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.
Ongoing 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.
65
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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
September 30, 2003 approximately $41 million of cash and cash equivalents and
$66 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 September 30, 2003, Gulf Power had no notes payable or
commercial paper outstanding. Management believes that the need for working
capital can be adequately met by utilizing lines of credit without maintaining
large cash balances.
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.
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 purchase of coal
supplies, the purchase and sale of electricity through the wholesale electricity
market and, to a lesser extent, similar contracts for gas purchases. Gulf Power
has received approval from the Florida PSC to recover prudently incurred costs
related to its fuel hedging program through the fuel cost recovery mechanism.
The fair value of derivative energy contracts at September 30, 2003 was as
follows:
Third Quarter
2003 Year-to-Date
Changes Changes
---------------------------------------------------------------------------
Fair Value
---------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $1,018 $2,336
Contracts realized or settled (1,835) (4,695)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 85 1,627
--------------------------------------------------------------------------
Contracts at September 30, 2003 $ (732) $ (732)
=========================================================================
66
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of September 30, 2003
Valuation Prices
---------------------------------------------------------------------------
Total Maturity
-------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $(732) $165 $(897)
External sources - - -
Models and other methods - - -
--------------------------------------------------------------------------
Contracts at September 30, 2003 $(732) $165 $(897)
===========================================================================
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 September 30, 2003, the fair value of
derivative energy contracts was reflected in the financial statements as
follows:
Amounts
- ---------------------------------------------------------------
(in thousands)
Regulatory assets, net $(1,093)
Other comprehensive income -
Net income 361
- ---------------------------------------------------------------
Total fair value $ (732)
===============================================================
For the quarter and year-to-date periods ended September 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 the first half of 2003, Gulf Power issued $65 million of Senior Notes.
The proceeds from this issue was used to redeem $40 million of Senior Notes and
$25 million of Junior Subordinated Notes.
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.
67
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 were 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 was used to
repay a portion of Gulf Power's short-term indebtedness.
In September 2003, Gulf Power issued $40 million of Series I 5.75% Senior
Notes due September 15, 2033. The proceeds from this issue were used in October
2003 to redeem the $45 million outstanding principal amount of Gulf Power
Capital Trust II 7.00% Cumulative Quarterly Income Preferred Securities.
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.
68
MISSISSIPPI POWER COMPANY
69
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Operating Revenues:
Retail sales $150,860 $159,097 $398,888 $416,165
Sales for resale --
Non-affiliates 67,396 64,421 197,141 168,755
Affiliates 5,968 14,959 17,856 35,028
Contract termination - - 62,111 -
Other revenues 3,590 4,600 10,064 11,565
-------- -------- --------- --------
Total operating revenues 227,814 243,077 686,060 631,513
-------- -------- --------- --------
Operating Expenses:
Fuel 66,109 88,331 172,829 215,305
Purchased power --
Non-affiliates 3,121 6,134 14,449 13,391
Affiliates 21,194 6,201 59,281 23,994
Other operations 38,560 39,026 123,466 111,490
Maintenance 12,397 15,050 45,408 56,327
Depreciation and amortization 13,968 14,166 40,943 42,596
Taxes other than income taxes 14,148 14,159 41,231 41,070
-------- -------- --------- --------
Total operating expenses 169,497 183,067 497,607 504,173
-------- -------- --------- --------
Operating Income 58,317 60,010 188,453 127,340
Other Income and (Expense):
Interest expense (3,383) (4,394) (10,920) (13,719)
Distributions on shares subject to mandatory redemption (630) (616) (1,890) (2,386)
Other income (expense), net 2,170 (235) 2,935 1,110
-------- -------- --------- --------
Total other income and (expense) (1,843) (5,245) (9,875) (14,995)
-------- -------- --------- --------
Earnings Before Income Taxes 56,474 54,765 178,578 112,345
Income taxes 21,584 20,878 68,226 42,681
-------- -------- --------- --------
Net Income 34,890 33,887 110,352 69,664
Dividends on Preferred Stock 503 503 1,510 1,510
-------- -------- --------- --------
Net Income After Dividends on Preferred Stock $ 34,387 $ 33,384 $ 108,842 $ 68,154
======== ======== ========= ========
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
70
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- ----
(in thousands)
Operating Activities:
Net income $ 110,352 $ 69,664
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 46,180 45,784
Deferred income taxes and investment tax credits, net 3,682 (7,147)
Tax benefit of stock options 1,876 1,779
Other, net (61) 3,688
Changes in certain current assets and liabilities --
Receivables, net 8,846 3,722
Fossil fuel stock (3,914) 1,896
Materials and supplies 64 140
Other current assets 8,643 (8,757)
Accounts payable (29,609) (9,400)
Taxes accrued 7,138 19,325
Other current liabilities (12,274) 24,275
---------- ---------
Net cash provided from operating activities 140,923 144,969
---------- ---------
Investing Activities:
Gross property additions (41,636) (48,858)
Other (6,166) (12,463)
---------- ---------
Net cash used for investing activities (47,802) (61,321)
---------- ---------
Financing Activities:
Increase (decrease) in notes payable, net - (15,973)
Proceeds --
Senior notes 90,000 80,000
Shares subject to mandatory redemption - 35,000
Capital contributions from parent company 79 10,000
Redemptions --
First mortgage bonds (33,350) (650)
Pollution control bonds (850) -
Senior notes (86,628) (80,418)
Shares subject to mandatory redemption - (35,000)
Payment of preferred stock dividends (1,510) (1,510)
Payment of common stock dividends (49,500) (47,625)
Other (1,185) (1,144)
---------- ---------
Net cash used for financing activities (82,944) (57,320)
---------- ---------
Net Change in Cash and Cash Equivalents 10,177 26,328
Cash and Cash Equivalents at Beginning of Period 62,695 18,950
---------- ---------
Cash and Cash Equivalents at End of Period $ 72,872 $ 45,278
========== =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest $12,918 $11,476
Income taxes (net of refunds) $47,589 $28,653
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
71
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Assets 2003 2002
- ------ ---------------- --------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 72,872 $ 62,695
Receivables --
Customer accounts receivable 42,319 31,136
Unbilled revenues 19,036 18,434
Under recovered regulatory clause revenues 13,786 27,233
Other accounts and notes receivable 6,751 8,056
Affiliated companies 14,975 20,674
Accumulated provision for uncollectible accounts (897) (718)
Fossil fuel stock, at average cost 31,217 27,303
Materials and supplies, at average cost 21,999 22,063
Assets from risk management activities 3,139 13,061
Deferred income tax assets 17,181 18,675
Other 8,747 7,469
----------- -----------
Total current assets 251,125 256,081
----------- -----------
Property, Plant, and Equipment:
In service 1,812,229 1,786,378
Less accumulated provision for depreciation 746,667 722,231
----------- -----------
1,065,562 1,064,147
Construction work in progress 33,612 34,065
----------- -----------
Total property, plant, and equipment 1,099,174 1,098,212
----------- -----------
Other Property and Investments 1,830 1,768
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 12,150 12,617
Prepaid pension costs 17,374 14,993
Unamortized premium on reacquired debt 10,409 7,776
Prepaid rent 15,229 -
Other 24,332 20,719
----------- -----------
Total deferred charges and other assets 79,494 56,105
----------- -----------
Total Assets $ 1,431,623 $ 1,412,166
=========== ===========
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements
72
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 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 16,771 22,396
Other 67,568 91,710
Customer deposits 14,761 6,855
Taxes accrued --
Income taxes 27,368 12,042
Other 33,276 41,464
Interest accrued 4,347 6,562
Vacation pay accrued 5,782 5,782
Regulatory clauses over recovery 28,408 35,680
Deferred revenue 1,763 -
Other 8,104 8,504
----------- -----------
Total current liabilities 288,148 300,195
----------- -----------
Long-term Debt 202,486 243,715
----------- -----------
Shares Subject to Mandatory Redemption 35,000 35,000
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 149,346 146,631
Deferred credits related to income taxes 23,815 20,798
Accumulated deferred investment tax credits 20,144 21,054
Employee benefits provisions 51,494 49,869
Plant Daniel lease guarantee obligation, at fair value 15,229 -
Other 34,901 45,142
----------- -----------
Total deferred credits and other liabilities 294,929 283,494
----------- -----------
Total Liabilities 820,563 862,404
----------- -----------
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 255,262 195,920
Accumulated other comprehensive loss (1,264) (1,264)
----------- -----------
Total common stockholder's equity 579,251 517,953
----------- -----------
Total Liabilities and Stockholder's Equity $ 1,431,623 $ 1,412,166
=========== ===========
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
73
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2003 vs. THIRD 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 third
quarter and year-to-date 2003 was $34.4 million and $108.8 million,
respectively, compared to $33.4 million and $68.1 million for the corresponding
periods of 2002. Earnings in the third quarter and year-to-date 2003 increased
by $1 million, or 3%, and $40.7 million, or 59.7%, respectively. The third
quarter 2003 increase in earnings is attributed to lower maintenance expense, a
decrease in interest expense and the recognition of revenue under a transmission
facilities agreement previously reserved for refund in accordance with a recent
order from the FERC. Reference is made to Note (R) to the Condensed Financial
Statements herein for additional information on the FERC order. The year-to-date
2003 increase is primarily a result of a gain of $38 million after-tax related
to the termination of a PPA with Dynegy. Reference is made to Note (N) 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)
--------------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------------ -------------------------------
(in thousands) % (in thousands) %
Retail sales.................................. $ (8,237) (5.2) $ (17,277) (4.2)
Sales for resale - non-affiliates............. 2,975 4.6 28,386 16.8
Sales for resale - affiliates.................. (8,991) (60.1) (17,172) (49.0)
Contract termination.......................... - - 62,111 N/M
Other revenues................................ (1,010) (22.0) (1,501) (13.0)
Fuel expense.................................. (22,222) (25.2) (42,476) (19.7)
Purchased power - non-affiliates.............. (3,013) (49.1) 1,058 7.9
Purchased power - affiliates.................. 14,993 241.8 35,287 147.1
Other operation expense....................... (466) (1.2) 11,976 10.7
Maintenance expense........................... (2,653) (17.6) (10,919) (19.4)
Interest expense.............................. (1,011) (23.0) (2,799) (20.4)
Other income (expense), net................... 2,405 N/M 1,825 164.4
N/M Not meaningful
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue for the third quarter 2003 remained flat when
compared to the same period in 2002 but decreased by $1.2 million, or 0.5%,
year-to-date 2003 when compared to the same period in 2002 is a result of
decreases in retail kilowatt-hour energy sales. The reason for the flat and
downward results is lower kilowatt-hour energy sales due to milder-than-normal
weather in Mississippi Power's service area and the sluggish economy.
74
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - non-affiliates. The increased revenues from sales for
resale to non-affiliates in the third quarter and year-to-date 2003 are
primarily due to an increase in the average sales price per kilowatt-hour and
increased kilowatt-hour energy sales to wholesale non-affiliated customers when
compared to the corresponding periods in 2002.
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. This reflects the $62 million of revenues recorded
upon the termination of a PPA with Dynegy. Reference is made to Note (N) to the
Condensed Financial Statements herein for additional information.
Other revenues. The third quarter and year-to-date 2003 decreases in other
revenues when compared to the same periods in 2002 are mainly attributed to an
environmental insurance refund of approximately $1 million recorded in 2002.
Fuel expense. In the third quarter and year-to-date 2003, fuel expense was
lower as a result of decreased generation in both of these periods and the lower
cost of fuel when compared to the same periods in 2002. In the third quarter
2003, Mississippi Power had opportunities to purchase power at rates less than
the cost to generate it. 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.
Purchased power-non-affiliates. The decrease in this expense in the third
quarter 2003 is primarily attributed to increased utilization of electricity
within the Southern Company system when compared to the same period in 2002 as a
result of mild summer weather in Southern Company's retail service territory.
The year-to-date 2003 increase in purchased power from non-affiliates is a
result of more economical power being available for purchase from these sources.
Other operation expense. In the third quarter 2003, other operation expense
remained relatively flat but increased year-to-date 2003 as a result of
approximately $11 million incurred to restructure the lease agreement for the
combined cycle generating units at Plant Daniel in the second quarter of 2003.
Reference is made to Note (S) to the Condensed Financial Statements herein for
additional information.
Maintenance expense. The third quarter and year-to-date 2003 decreases in
maintenance expenses, when compared to the corresponding periods in the prior
year, are primarily due to scheduled maintenance performed at Plant Watson and
Plant Daniel in 2002 and lower maintenance expense associated with a long-term
service agreement associated with the combined cycle units.
Interest expense. The decreases in the third quarter and year-to-date 2003
as compared to the same periods in 2002 are attributed to a lower amount of debt
outstanding and lower interest rates.
75
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other income (expense), net. The increases in other income during the third
quarter and year-to-date 2003 are primarily attributed to the recognition of
revenue previously reserved for refund as a result of a FERC order related to a
contract for the use of transmission facilities. Reference is made to Note (R)
to the Condensed Financial Statements herein for additional information.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales. For additional information relating to these issues, see Item 1
- - BUSINESS - The SOUTHERN System - "Risk Factors" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of Mississippi Power in
the Form 10-K.
Mississippi Power is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Mississippi Power's business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Mississippi Power cannot be predicted at this
time; however, management does not anticipate that the liabilities, if any,
arising from such current proceedings would have a material adverse effect on
Mississippi Power's financial statements.
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 and Note (E) to the Condensed Financial Statements herein.
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 approval 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 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.
76
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Note (M) to the Condensed Financial Statements for
information regarding FERC approval of the Open Access Transmission Tariff. This
settlement is not expected to have a material effect on Mississippi Power's
future earnings.
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Mississippi Power.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" in Item 7 of the Form 10-K. On October 27, 2003, the EPA published a
final rule providing that certain equipment replacements be excluded from New
Source Review and Prevention of Significant Deterioration provisions of the
Clean Air Act under the definition of "routine maintenance, repair and
replacement." This final rule must be adopted by the State of Mississippi in
order to apply to Mississippi Power's facilities. If fully implemented, this
final regulation could affect the applicability of these regulations to
activities at Mississippi Power's facilities. The final outcome of these matters
cannot now be determined.
Reference is made to Note (N) to the Condensed Financial Statements herein
for information regarding the termination of a PPA between Dynegy and
Mississippi Power. As a result of this PPA termination, Mississippi Power
continues to review alternatives for this capacity. The final outcome of this
matter cannot now be determined.
Reference is made to the Notes 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.
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 (S) 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 L.P. ("Juniper"),
consolidation is not required.
77
MISSISSIPPI 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 costs 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 costs 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 costs of retiring most long-lived assets over the life
of the related asset through depreciation expense.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges.
This conclusion is subject to ongoing discussions with the FASB and may change.
Mississippi Power's forward electricity contracts continue to qualify for the
normal sales exception and are recorded on an accrual basis. The implementation
of Statement No. 149 did not have a material effect on Mississippi Power's
financial statements.
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Mississippi Power's
financial statements as it affects only the classification of amounts in the
Statements of Income.
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 $15.2 million liability for the fair value of its residual
value guarantee associated with the lease of two generating units at Plant
Daniel. Reference is made to Note (S) to the Condensed Financial Statements
herein for additional information.
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 was effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003. 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 any impact on Mississippi Power's Statements of
Income and Cash Flows.
78
MISSISSIPPI POWER COMPANY
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, Mississippi Power adopted
Interpretation No. 46 with no financial statement impact following completion of
restructuring of 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 (S) to the Condensed Financial Statements
herein for further information on the lease restructuring. On October 9, 2003,
the FASB issued Staff Position No. FIN 46-6, which deferred the effective date
of Interpretation No. 46 until December 31, 2003 for interests held in variable
interest entities or potential variable interest entities created before
February 1, 2003. Current analysis indicates that the trust established by
Mississippi Power to issue trust preferred securities is a variable interest
entity under Interpretation No. 46 and, further, that Mississippi Power is not
the primary beneficiary of the trust. If this conclusion is finalized, effective
December 31, 2003, the trust assets and liabilities, including the preferred
securities issued by the trust, will be deconsolidated, the investments in the
trust will be reflected under the equity method, and the loans from the trust
to Mississippi Power will be reflected as long-term notes payable to affiliates
on the balance sheet. Based on the September 30, 2003 values, such treatment
would result in an increase of approximately $1.1 million to both total assets
and total liabilities. These reclassifications would not have any impact on net
income or cash flow.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Major changes in Mississippi Power's financial condition during the first nine
months of 2003 included the addition of approximately $41.6 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.
Ongoing 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. Mississippi Power expects to refinance
these maturities with additional long-term debt.
79
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet short-term cash needs and contingencies, Mississippi Power had at
September 30, 2003 approximately $72.8 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 September 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.
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 (S) to the Condensed
Financial Statements herein for additional information. In June 2003, Escatawpa
sold its ownership interests in the facility to 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.
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.
Due to cost-based rate regulation, Mississippi Power has limited exposure
to market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, Mississippi Power enters into fixed price contracts for the purchase and
sale of electricity through the wholesale electricity market. Mississippi Power
has also implemented retail fuel hedging programs at the instruction of its PSC
and wholesale fuel hedging programs under agreements with wholesale customers.
The fair value of derivative, fuel and energy contracts was as follows:
80
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Third Quarter
2003 Year-to-Date
Changes Changes
--------------------------------------------------------------------------
Fair Value
--------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $8,709 $12,864
Contracts realized or settled (5,051) (14,378)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes (1,277) 3,895
---------------------------------------------------------------------------
Contracts at September 30, 2003 $2,381 $ 2,381
===========================================================================
Source of September 30, 2003
Valuation Prices
---------------------------------------------------------------------------
Total Maturity
-----------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $2,381 $2,454 $(73)
External sources - - -
Models and other methods - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Contracts at September 30, 2003 $2,381 $2,454 $(73)
===========================================================================
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 September 30,
2003, the fair value of derivative energy contracts reflected in the financial
statements was as follows:
Amounts
------------------------------------------------------------
(in thousands)
Regulatory liabilities, net $1,997
Other comprehensive income -
Net income 384
------------------------------------------------------------
Total fair value $2,381
============================================================
For the quarter and year-to-date periods ended September 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.
81
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
82
SAVANNAH ELECTRIC
AND
POWER COMPANY
83
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Operating Revenues:
Retail sales $95,364 $93,530 $234,378 $222,770
Sales for resale --
Non-affiliates 2,219 1,728 6,026 4,758
Affiliates 1,627 957 4,863 3,119
Other revenues 1,056 756 2,891 2,062
------- ------ ------- -------
Total operating revenues 100,266 96,971 248,158 232,709
------- ------ ------- -------
Operating Expenses:
Fuel 18,060 18,805 42,079 41,881
Purchased power --
Non-affiliates 2,287 2,270 5,689 5,404
Affiliates 26,017 23,117 67,110 52,640
Other operations 13,905 13,796 40,886 39,794
Maintenance 5,266 5,273 17,865 18,045
Depreciation and amortization 5,121 5,072 15,270 17,660
Taxes other than income taxes 4,026 3,984 11,125 11,172
------- ------ ------- -------
Total operating expenses 74,682 72,317 200,024 186,596
------- ------ ------- -------
Operating Income 25,584 24,654 48,134 46,113
Other Income and (Expense):
Interest expense, net of amounts capitalized (2,378) (2,821) (7,472) (8,295)
Distributions on shares subject to mandatory redemption (685) (685) (2,055) (2,055)
Other income (expense), net 784 (533) 214 (1,066)
------- ------ ------- -------
Total other income and (expense) (2,279) (4,039) (9,313) (11,416)
------- ------ ------- -------
Earnings Before Income Taxes 23,305 20,615 38,821 34,697
Income taxes 8,927 7,467 14,638 12,712
------- ------ ------- -------
Net Income $14,378 $13,148 $24,183 $21,985
======= ======= ======= =======
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
84
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- ----
(in thousands)
Operating Activities:
Net income $ 24,183 $ 21,985
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 16,836 19,109
Deferred income taxes and investment tax credits, net 1,375 (6,593)
Pension, postretirement, and other employee benefits 4,417 4,438
Tax benefit of stock options 860 1,437
Other, net 523 (2,806)
Changes in certain current assets and liabilities --
Receivables, net (4,607) (1,090)
Fossil fuel stock (375) 1,663
Materials and supplies (384) 3,572
Other current assets 4,593 (3,905)
Accounts payable (1,029) 4,121
Taxes accrued 10,374 3,391
Other current liabilities (4,618) 3,214
------- -------
Net cash provided from operating activities 52,148 48,536
------- -------
Investing Activities:
Gross property additions (27,469) (26,354)
Other 133 (2,192)
------- -------
Net cash used for investing activities (27,336) (28,546)
------- -------
Financing Activities:
Increase (decrease) in notes payable, net 6,148 (26,467)
Proceeds --
Pollution control bonds 13,870 -
Other long-term debt - 25,840
Capital contributions from parent company 5,000 -
Redemptions --
First mortgage bonds - (436)
Pollution control bonds (13,870) -
Senior notes (20,000) -
Other long-term debt (420) -
Payment of common stock dividends (17,250) (17,025)
Other (153) (72)
------- -------
Net cash used for financing activities (26,675) (18,160)
------- -------
Net Change in Cash and Cash Equivalents (1,863) 1,830
Cash and Cash Equivalents at Beginning of Period 3,978 2,391
------- -------
Cash and Cash Equivalents at End of Period $ 2,115 $ 4,221
======= =======
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $162 and $142 capitalized for 2003 and 2002, respectively) $7,609 $8,559
Income taxes (net of refunds) $1,900 $18,889
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
85
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
2003 2002
Assets ---------------- ---------------
- ------ (in thousands)
Current Assets:
Cash and cash equivalents $ 2,115 $ 3,978
Receivables --
Customer accounts receivable 30,267 22,631
Unbilled revenues 11,618 11,531
Other accounts and notes receivable 739 2,937
Affiliated companies 412 1,102
Accumulated provision for uncollectible accounts (910) (682)
Fossil fuel stock, at average cost 8,704 8,328
Materials and supplies, at average cost 9,970 9,586
Prepaid taxes 21,303 24,414
Other 1,464 2,066
--------- ---------
Total current assets 85,682 85,891
--------- ---------
Property, Plant, and Equipment:
In service 901,323 880,604
Less accumulated provision for depreciation 433,909 416,232
--------- ---------
467,414 464,372
Construction work in progress 12,798 6,082
--------- ---------
Total property, plant, and equipment 480,212 470,454
--------- ---------
Other Property and Investments 2,540 3,648
--------- ---------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 10,482 11,692
Cash surrender value of life insurance for deferred compensation plans 22,250 21,943
Unamortized debt issuance expense 3,707 3,757
Unamortized premium on reacquired debt 7,659 8,103
Other 17,410 11,717
--------- ---------
Total deferred charges and other assets 61,508 57,212
--------- ---------
Total Assets $ 629,942 $ 617,205
========= =========
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
86
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ --------------- --------------
(in thousands)
Current Liabilities:
Securities due within one year $ 912 $ 20,892
Notes payable 9,044 2,897
Accounts payable --
Affiliated 12,432 7,889
Other 9,282 15,769
Customer deposits 6,912 6,781
Taxes accrued --
Income taxes 7,567 311
Other 6,435 3,317
Interest accrued 4,100 3,268
Vacation pay accrued 2,508 2,427
Other 10,754 15,233
--------- ---------
Total current liabilities 69,946 78,784
--------- ---------
Long-term Debt 167,612 168,052
--------- ---------
Shares Subject to Mandatory Redemption 40,000 40,000
--------- ---------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 81,591 78,970
Deferred credits related to income taxes 10,417 12,445
Accumulated deferred investment tax credits 8,791 9,289
Employee benefits provisions 38,036 33,619
Other 21,672 16,242
--------- ---------
Total deferred credits and other liabilities 160,507 150,565
--------- ---------
Total Liabilities 438,065 437,401
--------- ---------
Common Stockholder's Equity:
Common stock, par value $5 per share --
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares 54,223 54,223
Paid-in capital 22,637 16,776
Retained earnings 116,981 110,049
Accumulated other comprehensive loss (1,964) (1,244)
--------- ---------
Total common stockholder's equity 191,877 179,804
--------- ---------
Total Liabilities and Stockholder's Equity $ 629,942 $ 617,205
========= =========
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
87
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $ 14,378 $ 13,148 $ 24,183 $ 21,985
Other comprehensive income:
Changes in fair value of qualifying hedges, net of tax
of $(457), $0, $(457), $0, respectively (724) - (724) -
Less: Reclassification adjustment for amounts included in net
income, net of tax of $3, $0, $3, $0, respectively 4 - 4 -
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 13,658 $ 13,148 $ 23,463 $ 21,985
========= ========= ========= =========
_________________________________________________________________________________________________________________________________
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At At
September 30, December 31,
2003 2002
------------- -------------
(in thousands)
Balance at beginning of period $ (1,244) $ -
Change in current period (720) (1,244)
---------- ---------
BALANCE AT END OF PERIOD $ (1,964) $ (1,244)
========== =========
________________________________________________________________________________________________________________________________
The accompanying notes as they relate to Savannah Electric are an integral part of these condensed financial statements.
88
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2003 vs. THIRD QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Savannah Electric's net income for the third quarter and year-to-date 2003 was
$14.4 million and $24.2 million, respectively, compared to $13.1 million and
$22.0 million for the corresponding periods of 2002. Earnings increased by $1.2
million, or 9.4%, and $2.2 million, or 10%, in the third quarter and
year-to-date 2003, respectively, due primarily to higher operating revenues
resulting primarily from the June 2002 base rate increase, an increase in other
income, net and a decrease in interest expense which was partially offset by
operating expenses.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------------------
Third Quarter Year-To-Date
--------------------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales.................................. $ 1,834 2.0 $ 11,608 5.2
Sales for resale - non-affiliates............. 491 28.4 1,268 26.6
Sales for resale - affiliates................. 670 70.0 1,744 55.9
Other revenues................................ 300 39.7 829 40.2
Purchased power - affiliates.................. 2,900 12.5 14,470 27.5
Interest expense, net of amounts
capitalized................................ (443) (15.7) (823) (9.9)
Other income (expense), net................... 1,317 247.1 1,280 120.1
Retail sales. Excluding fuel revenues, which do not affect net income,
retail sales revenue decreased by $0.3 million, or 0.5%, in the third quarter
2003 and increased by $1.9 million, or 1.4%, year-to-date 2003 when compared to
the corresponding periods in 2002. The third quarter 2003 decrease in retail
sales revenue is mainly attributed to a 3.1% decrease in retail kilowatt-hour
energy sales as a result of milder-than-normal temperatures. The year-to-date
2003 increase is primarily due to the base rate increase that took effect in
June 2002, as well as increased usage by several industrial customers.
Sales for resale - non-affiliates. In the third quarter and year-to-date
2003, revenues from sales for resale to non-affiliates increased due to higher
demand for energy of 13.5% and 25.5%, respectively.
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. Sales for
resale to affiliates increased in the third quarter and year-to-date 2003
primarily due to the combination of increased demand by Southern Power to meet
contractual obligations and the availability of power due to milder-than-normal
weather in Savannah Electric's service territory. These transactions do not have
a significant impact on earnings.
89
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other revenues. The third quarter and year-to-date 2003 increases in other
revenues when compared to the same periods in 2002 are attributed to new
miscellaneous service fees implemented as part of the 2002 base rate case.
Purchased power - affiliates. Purchased power from affiliates increased in
the third quarter and year-to date 2003 due to the Plant Wansley PPA between
Savannah Electric and Southern Power that began in June 2002. The capacity
component of these transactions remained constant in the third quarter 2003 and
increased by $5.9 million year-to-date 2003 when compared to the corresponding
periods in 2002. Capacity costs of purchased power are generally recovered
through base rates. In December 2002, an accounting order was approved by the
Georgia PSC which allows Savannah Electric to defer approximately $3.8 million
annually in Plant Wansley purchased power costs, which the Georgia PSC had ruled
to be outside of the test period in Savannah Electric's base rate order. The net
impact of these transactions year-to-date 2003 was a decrease to purchased
power expense of $0.5 million. Reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" and to Note 3 under
"Retail Regulatory Matters to the financial statements in Item 8 in the Form
10-K for Savannah Electric for additional information on the Georgia PSC
December 2002 order. Purchased power from affiliates also included 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.
Interest expense, net of amounts capitalized. During the third quarter and
year-to-date 2003, this expense decreased as a result of both a lower amount of
debt outstanding and lower interest rates when compared to the same periods in
the prior year.
Other income (expense), net. The increases in income during the third
quarter and year-to-date 2003 are primarily attributed to a distribution of the
proceeds from the sale of a mutual life insurance company in which Savannah
Electric held policies used to fund its non-qualified benefit plans. This income
was partially offset by increased contributions.
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 - The SOUTHERN System -
"Risks Factors" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of Savannah Electric in the Form 10-K.
Savannah Electric is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Savannah Electric's business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States. In particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Savannah
90
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Electric cannot be predicted at this time; however, management does not
anticipate that the liabilities, if any, arising from such current proceedings
would have a material adverse effect on Savannah Electric's financial
statements.
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Savannah Electric.
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 and Note (E)
to the Condensed Financial Statements herein. On October 27, 2003, the EPA
published a final rule providing that certain equipment replacements be excluded
from New Source Review and Prevention of Significant Deterioration provisions of
the Clean Air Act under the definition of "routine maintenance, repair and
replacement." This final rule must be adopted by the State of Georgia in order
to apply to Savannah Electric's facilities. If fully implemented, this final
regulation could affect the applicability of these regulations to activities at
Savannah Electric's facilities. The final outcome of these matters cannot now be
determined.
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 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 Note (M) to the Condensed Financial Statements for
information regarding FERC approval of the Open Access Transmission Tariff. This
settlement is not expected to have a material effect on Savannah Electric's
future earnings.
91
SAVANNAH ELECTRIC AND 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 -
"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 (Q) to the Condensed
Financial Statements herein for information regarding the FERC approval process
for this PPA.
Reference is made to the Notes 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.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges. This conclusion
is subject to ongoing discussions with the FASB and may change. Savannah
Electric's forward electricity contracts continue to qualify for the normal
sales exception and are recorded on an accrual basis. The implementation of
Statement No. 149 did not have a material effect on Savannah Electric's
financial statements.
92
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Savannah Electric's
financial statements as it affects only the classification of amounts in the
Statements of Income.
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 was effective for financial instruments entered into or modified after May
31, 2003 and otherwise on July 1, 2003. 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 any impact on Savannah Electric's Statements of
Income and Cash Flows.
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 October 9, 2003, the FASB issued Staff
Position No. FIN 46-6, which deferred the effective date of Interpretation No.
46 until December 31, 2003 for interests held in variable interest entities or
potential variable interest entities created before February 1, 2003. Current
analysis indicates that the trust established by Savannah Electric to issue
trust preferred securities is a variable interest entity under Interpretation
No. 46 and, further, that Savannah Electric is not the primary beneficiary of
the trust. If this conclusion is finalized, effective December 31, 2003, the
trust assets and liabilities, including the preferred securities issued by the
trust, will be deconsolidated, the investments in the trust will be reflected
under the equity method, and the loans from the trust to Savannah Electric will
be reflected as long-term notes payable to affiliates on the balance sheet.
Based on the September 30, 2003 values, such treatment would result in an
increase of approximately $1.2 million to both total assets and total
liabilities. These reclassifications would not have any impact on net income or
cash flow.
FINANCIAL CONDITION
Overview
Major changes in Savannah Electric's financial condition during the first nine
months of 2003 included the addition of approximately $27.5 million to utility
plant. The funds for these additions and other capital requirements were derived
primarily from operations. See Savannah Electric's Condensed Statements of Cash
Flows herein for further details.
Ongoing 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.
93
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sources of Capital
Savannah Electric plans to obtain the funds required for construction and other
purposes from sources similar to those used in the past. 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
September 30, 2003 approximately $2.1 million of cash and cash equivalents and
$55 million of unused committed credit arrangements with banks, of which $10
million expires in 2003 and $45 million expires in 2004 and beyond. Of the
unused credit arrangements expiring in 2003 and 2004, $30 million include two
year term loan options executable at the expiration date. The credit
arrangements provide liquidity support to some of Savannah Electric's
obligations with respect to its variable rate debt and its commercial paper.
Savannah Electric 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 September 30, 2003, Savannah Electric
had $9 million of outstanding commercial paper. Since Savannah Electric has no
major generating plants under construction, management believes that the need
for working capital can be adequately met by utilizing lines of credit.
Credit Rating Risk
Savannah Electric does not have any credit agreements that would require
material changes in payment schedules or terminations as a result of a credit
rating downgrade.
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 and oil 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 September 30, 2003 was as
follows:
Third Quarter
2003 Year-to-Date
Changes Changes
---------------------------------------------------------------------------
Fair Value
---------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $177 $ 626
Contracts realized or settled (549) (1,680)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 70 752
---------------------------------------------------------------------------
Contracts at September 30, 2003 $(302) $(302)
===========================================================================
94
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of September 30, 2003
Valuation Prices
--------------------------------------------------------------------------
Total Maturity
-----------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $(302) $118 $(420)
External sources - - -
Models and other methods - - -
--------------------------------------------------------------------------
Contracts at September 30, 2003 $(302) $118 $(420)
==========================================================================
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 September 30, 2003, Savannah Electric had approximately $0.4
million in regulatory assets related to unrealized losses 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 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 into 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. In addition, Savannah Electric entered into
a swap to hedge interest payments associated with a variable rate bank note. The
swap is for a notional amount of $20 million at a fixed interest rate of 2.06%
and matures in December 2004.
Savannah Electric plans to continue, to the extent possible, a program to
retire higher-cost debt and replace these securities with lower-cost capital.
95
SOUTHERN POWER COMPANY
96
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ----- ----
(in thousands) (in thousands)
Operating Revenues:
Sales for resale --
Non-affiliates $ 93,251 $ 43,458 $212,517 $ 86,300
Affiliates 112,258 92,445 253,627 126,592
Contract termination - - 80,000 -
Other revenues 3,115 292 8,200 379
--------- --------- -------- --------
Total Operating Revenues 208,624 136,195 554,344 213,271
--------- --------- -------- --------
Operating Expenses:
Fuel 49,440 50,740 104,676 71,905
Purchased power --
Non-affiliates 18,399 20,489 49,959 31,214
Affiliates 43,399 4,407 93,001 9,198
Other operations 12,362 6,597 30,597 14,999
Maintenance 2,253 934 4,733 1,805
Depreciation and amortization 11,634 6,294 26,240 11,779
Taxes other than income taxes 3,132 1,437 6,495 2,940
--------- --------- -------- --------
Total operating expenses 140,619 90,898 315,701 143,840
--------- --------- -------- --------
Operating Income 68,005 45,297 238,643 69,431
Other Income and (Expense):
Interest expense, net of amounts capitalized (13,587) (3,167) (17,930) (4,362)
Other income (expense), net (1,288) (3,375) (1,159) (4,595)
--------- --------- -------- --------
Total other income and (expense) (14,875) (6,542) (19,089) (8,957)
--------- --------- -------- --------
Earnings Before Income Taxes 53,130 38,755 219,554 60,474
Income taxes 12,991 11,426 77,367 19,832
--------- --------- -------- --------
Earnings Before Cumulative Effect of
Accounting Change 40,139 27,329 142,187 40,642
Cumulative effect of accounting change --
less income taxes of $231 thousand - - 367 -
--------- --------- -------- --------
Net Income $ 40,139 $ 27,329 $142,554 $ 40,642
========= ========= ======== ========
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
97
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months
Ended September 30,
2003 2002
---- -----
(in thousands)
Operating Activities:
Net income $ 142,554 $ 40,642
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 28,590 14,216
Deferred income taxes and investment tax credits, net 11,271 5,818
Deferred capacity revenues 26,097 28,365
Settlement of interest rate swaps on senior notes (93,298) (16,885)
Other, net 1,373 5,478
Changes in certain current assets and liabilities --
Receivables, net (28,757) (38,015)
Fossil fuel stock 5,082 (3,429)
Materials and supplies (469) (435)
Other current assets (17,133) (6,261)
Accounts payable (1,792) 18,766
Taxes accrued 17,272 16,689
Interest accrued (6,696) 11,581
Other current liabilities 151 (936)
--------- ----------
Net cash provided from operating activities 84,245 75,594
--------- ----------
Investing Activities:
Gross property additions (277,509) (1,062,304)
Change in construction payables, net (18,641) (55,711)
Other 1,146 (340)
--------- ----------
Net cash used for investing activities (295,004) (1,118,355)
--------- ----------
Financing Activities:
Increase in notes payable, net 82,693 212,900
Proceeds --
Senior notes 575,000 575,000
Capital contributions from parent company 385 275,640
Redemptions --
Other long-term debt (380,404) (17,001)
Other (9,133) (7,441)
--------- ----------
Net cash provided from financing activities 268,541 1,039,098
--------- ----------
Net Change in Cash and Cash Equivalents 57,782 (3,663)
Cash and Cash Equivalents at Beginning of Period 19,474 3,711
--------- ----------
Cash and Cash Equivalents at End of Period $ 77,256 $ 48
========= ==========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of $30,015 and $25,255 capitalized for 2003 and 2002, respectively) $111,668 $16,885
Income taxes (net of refunds) $60,266 $2,194
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
98
SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At September 30, At December 31,
Assets 2003 2002
- ------ ---------------- ---------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 77,256 $ 19,474
Receivables --
Customer accounts receivable 6,354 6,609
Affiliated companies 40,567 11,555
Accumulated provision for uncollectible accounts (350) (350)
Fossil fuel stock, at average cost 5,949 11,031
Materials and supplies, at average cost 7,022 6,553
Prepayments 25,233 8,796
Assets from risk management activities 1,198 8,386
Other 2,265 1,568
----------- -----------
Total current assets 165,494 73,622
----------- -----------
Property, Plant, and Equipment:
In service 1,675,675 896,163
Less accumulated provision for depreciation 47,191 21,590
----------- -----------
1,628,484 874,573
Construction work in progress 593,826 1,082,987
----------- -----------
Total property, plant, and equipment 2,222,310 1,957,560
----------- -----------
Deferred Charges and Other Assets:
Accumulated deferred income taxes 33,751 38,591
Unamortized debt issuance expense 19,195 12,177
Other 2,862 4,026
----------- -----------
Total deferred charges and other assets 55,808 54,794
----------- -----------
Total Assets $ 2,443,612 $ 2,085,976
=========== ===========
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
99
SOUTHERN POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
September 30, At December 31,
Liabilities and Stockholder's Equity 2003 2002
- ------------------------------------ ------------- ---------------
(in thousands)
Current Liabilities:
Securities due within one year $ 200 $ 200
Notes payable 102,681 -
Notes payable to parent 500 210,488
Accounts payable --
Affiliated 18,638 37,748
Other 3,199 4,522
Taxes accrued --
Income taxes 14,582 3,915
Other 10,918 4,313
Interest accrued 14,017 20,713
Other 280 3,484
----------- -----------
Total current liabilities 165,015 285,383
----------- -----------
Long-Term Debt:
Senior notes 1,150,000 575,000
Other long-term debt 1,685 382,089
Unamortized debt discount, net (2,625) (1,210)
----------- -----------
Long-term debt 1,149,060 955,879
----------- -----------
Deferred Credits and Other Liabilities:
Obligations under risk management activities - 63,191
Deferred capacity revenues--
Affiliated 44,734 13,075
Other 420 3,147
Other--
Affiliated 15,061 15,644
Other 86 3,053
----------- -----------
Total deferred credits and other liabilities 60,301 98,110
----------- -----------
Total Liabilities 1,374,376 1,339,372
----------- -----------
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 205,031 62,477
Accumulated other comprehensive loss (57,410) (47,103)
----------- -----------
Total common stockholder's equity 1,069,236 746,604
----------- -----------
Total Liabilities and Stockholder's Equity $ 2,443,612 $ 2,085,976
=========== ===========
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
100
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- --------------------------------
2003 2002 2003 2002
-------- ------- ---------- ---------
(in thousands) (in thousands)
Net Income $ 40,139 $ 27,329 $ 142,554 $ 40,642
Other comprehensive loss:
Changes in fair value of qualifying hedges, net of tax
of $1,072, $(11,773), $(7,492), $(28,170), respectively 1,711 (25,226) (12,276) (51,418)
Less: Reclassification adjustment for amounts included
in net income, net of tax of $794, $166, $910, $190, respectively 1,265 260 1,969 298
-------- ---------- --------- ----------
COMPREHENSIVE INCOME $ 43,115 $ 2,363 $ 132,247 $ (10,478)
======== ========== ========= ==========
__________________________________________________________________________________________________________________________________
SOUTHERN POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE LOSS (UNAUDITED)
At At
September 30, December 31,
2003 2002
------------- --------------
(in thousands)
Balance at beginning of period $ (47,103) $ 6,689
Change in current period (10,307) (53,792)
--------- -----------
BALANCE AT END OF PERIOD $ (57,410) $ (47,103)
========= ===========
__________________________________________________________________________________________________________________________________
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
101
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 2003 vs. THIRD QUARTER 2002
AND
YEAR-TO-DATE 2003 vs. YEAR-TO-DATE 2002
RESULTS OF OPERATIONS
Earnings
Southern Power's net income for third quarter and year-to-date 2003 was $40.1
million and $142.5 million, respectively, compared to $27.3 million and $40.6
million for the corresponding periods of 2002. The increase in third quarter
2003 earnings of $12.8 million, or 46.9%, was due primarily to the sale of
wholesale capacity and energy under new PPAs with Alabama Power and Georgia
Power beginning in June 2003 for Plant Franklin Unit 2 and Plant Harris Unit 1.
Additional sales to affiliated and non-affiliated companies from Plant Harris
Unit 2, which also went into service in June 2003, were another factor in the
increase. The year-to-date 2003 increase in earnings of $101.9 million, or
250.8%, is attributed primarily to a gain of $50 million recognized in May 2003
upon the termination of Dynegy's obligations under PPAs related to Plant
Dahlberg and Plant Franklin. Reference is made to Note (N) to the Condensed
Financial Statements herein for additional information regarding the termination
of these PPAs. Other factors contributing to the increases for the third quarter
and year-to-date 2003 were non-recurring energy sales transactions related to
test period generation for units placed in service in June 2003, as well as
manufacturer's tax credits from the State of Georgia related to construction of
Plants Dahlberg and Wansley.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------------
Third Quarter Year-To-Date
--------------------------------------------------------------
(in thousands) % (in thousands) %
Sales for resale - non-affiliates................ $49,793 114.6 $ 126,217 146.3
Sales for resale - affiliates..................... 19,813 21.4 127,035 100.3
Contract termination............................. - - 80,000 N/M
Other revenues................................... 2,823 N/M 7,821 N/M
Fuel expense..................................... (1,300) (2.6) 32,771 45.6
Purchased power - non-affiliates................. (2,090) (10.2) 18,745 60.1
Purchased power - affiliates..................... 38,992 N/M 83,803 N/M
Other operation expense.......................... 5,765 87.4 15,598 104.0
Depreciation and amortization.................... 5,340 84.8 14,461 122.8
Interest expense, net of amounts capitalized..... 10,420 N/M 13,568 N/M
Other income (expense), net...................... 2,087 61.8 3,436 74.8
N/M Not meaningful
102
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - non-affiliates. In the third quarter and year-to-date
2003, revenues from sales for resale to non-affiliates were higher when compared
to the corresponding periods in 2002. The reasons for these increases were
additional wholesale capacity and energy sales to non-affiliates due to
commercial operation of Plant Franklin Unit 1, which was not fully obligated
under a long-term PPA until June 2003, and test period energy sales transactions
for Plant Franklin Unit 2 and Plant Harris Units 1 and 2 which were placed into
commercial operation in June 2003 and which provided some additional available
capacity.
Sales for resale - affiliates. During the third quarter and year-to-date
2003, sales for resale to affiliates increased primarily due to a full nine
months of energy and capacity sales through PPAs with Georgia Power and Savannah
Electric that began in June 2002. New PPAs with Alabama Power and Georgia Power
that commenced in June 2003 also contributed to the increase. 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. This revenue is the result of the May 2003
termination of Dynegy's PPAs related to Plants Dahlberg and Franklin. Reference
is made to Note (N) to the Condensed Financial Statements herein for further
information.
Other revenues. In the third quarter and year-to-date 2003, the increases
in other revenues are primarily attributed to scheduling and administrative fees
on wholesale contracts that were not in place during the first half of 2002.
Fuel expense. Fuel expense in the third quarter 2003 decreased slightly but
increased year-to-date 2003 when compared to the same period in 2002. The third
quarter 2003 decrease was the result of a reduction in generation and the
utilization of lower cost purchased power to fulfill commitments. The
year-to-date 2003 increase resulted from commercial operation of units at Plant
Wansley and Plant Franklin Unit 1 in June 2002 as well as commercial operation
of new units at Plant Franklin and Plant Harris Units 1 and 2 in June 2003.
Purchased power - non-affiliates. The decrease in purchased power from
non-affiliates during the third quarter 2003 is primarily due to the
availability of lower cost energy from affiliates, primarily as a result of mild
summer weather in the Southern Company's retail service territory. The
year-to-date 2003 increase in purchased power from non-affiliates when compared
to the corresponding period in 2002 is mainly due to the availability of market
power at prices lower than Southern Power's self generation or from affiliates,
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. The availability of power at prices lower
than Southern Power's self-generation accounted for the third quarter and
year-to-date 2003 increases in purchased power from affiliates. Expenses from
purchased power transactions will vary depending on demand, availability and the
cost of generating resources accessible throughout the Southern Company system.
Other operation expense. During the third quarter and year-to-date 2003,
other operation expense increased when compared to the same periods in the prior
year due mainly to administrative and general expenses associated with the
commercial operation of units at Plant Wansley and Plant Franklin Unit 1 in June
2002 as well as commercial operation of new units at Plant Franklin and Plant
Harris Units 1 and 2 in June 2003.
103
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Depreciation and amortization. New generating units placed into service in
June 2003 are the main drivers for the increases in depreciation and
amortization in the third quarter. The units placed in service in June 2002 are
the other significant factor in the year-to-date 2003 increase when compared to
the corresponding period in 2002.
Interest expense, net of amounts capitalized. In the third quarter and
year-to-date 2003, interest expense, net of amounts capitalized increased when
compared to the same periods in 2002 due to a lower percentage of interest costs
being capitalized as projects have reached completion and an increase in the
amount of senior notes outstanding.
Other income (expense), net. The third quarter and year-to-date 2003
changes in this item are principally due to lower unrealized losses on
derivative energy contracts during these periods as compared to the same periods
in 2002. See "Exposure to Market Risks" herein for additional information on
these derivative energy contracts.
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 - The SOUTHERN System - "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. In October 2003, Southern Power placed
Plant Stanton A into commercial operation. In June 2004, Southern Power's PPA
with Georgia Power will begin for Plant Harris Unit 2. PPAs for the other units
became effective upon commercial operation. Southern Power also has Plant
McIntosh Units 10 and 11 under construction. Reference is made to Note (Q) 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. Reference is also made to Note (N)
to the Condensed Financial Statements herein for information regarding the
termination of PPAs between Dynegy and Southern Power. Because of the
terminations of the PPAs, Southern Power is completing limited construction
activities on Plant Franklin Unit 3 to preserve the long-term viability of the
project. Current projections indicate completion in the 2008-2011 period. The
length of the deferral period will depend on forecasted capacity needs and other
wholesale market opportunities. Southern Power is also continuing to explore
alternatives for their existing capacity. The final outcome of these matters
cannot now be determined.
104
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
Comprehensive energy legislation has been passed by both the U.S. House of
Representatives and the Senate. Significant differences exist in the legislation
and a joint conference is underway to formulate a compromise final bill. While
the form of this final bill is not yet known, it is expected to address a number
of issues related to the electric utility industry and could affect the business
operations and financial condition of Southern Power.
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 is subject to certain claims and legal actions arising in
the ordinary course of business. In addition, Southern Power's business
activities are subject to extensive governmental regulation related to public
health and the environment. Litigation over environmental issues and claims of
various types, including property damage, personal injury and citizen
enforcement of environmental requirements, has increased generally throughout
the United States; in particular, personal injury claims for damages caused by
alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such litigation against Southern Power cannot be predicted at this
time; however, management does not anticipate that the liabilities, if any,
arising from such current proceedings would have a material adverse effect on
Southern Power's financial statements.
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 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 proposal. Reactions to the White Paper by certain Southeastern state
regulators reflect significant continuing differences in opinion between the
FERC and those 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 FERC proposals on
Southern Company and its subsidiaries 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.
105
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is also made to the Notes 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.
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.
FASB Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," which further amends and clarifies the
accounting and reporting for derivative instruments became effective generally
for financial instruments entered into or modified after June 30, 2003. Current
interpretations of Statement No. 149 indicate that certain electricity forward
transactions subject to unplanned netting (including those typically referred to
as "book outs") may not continue to qualify as cash flow hedges. This conclusion
is subject to ongoing discussions with the FASB and may change. Southern Power's
forward electricity contracts continue to qualify for the normal sales exception
and are recorded on an accrual basis. The implementation of Statement No. 149
did not have a material effect on Southern Power's financial statements.
106
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In July 2003, the EITF reached a consensus on Issue No. 03-11, which
addresses the reporting of realized gains and losses on derivative instruments
that became effective on October 1, 2003, and is currently being interpreted to
require book outs to be recorded on a net basis in operating revenues. Adoption
of this standard will not have a material impact on Southern Power's financial
statements as it affects only the classification of amounts in the Statements of
Income.
FINANCIAL CONDITION AND LIQUIDITY
Overview
The major change in Southern Power's financial condition during the first nine
months of 2003 was the addition of approximately $278 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, subordinated loans from Southern Company, the Series C
Senior Notes issued in July 2003 and ongoing operations. See Southern Power's
Condensed Statements of Cash Flows herein for further details.
Ongoing 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.
Financing Activities
During the first nine months of 2003, Southern Power repaid subordinated loans
from Southern Company of approximately $20 million, net of additional
borrowings. In March 2003, $190 million of notes payable to Southern Company
were converted to a capital contribution from Southern Company. Reference is
made to Note 7 in Southern Power's Form 10-K for information regarding its
unsecured revolving credit facility and subordinated loans from Southern
Company. Effective April 2003, the credit facility for Southern Power was
reduced to $650 million to reflect lower short-term borrowing needs. In
September 2003, the SEC approved Southern Power's payment of dividends in an
amount up to $190 million to Southern Company from capital surplus. The first
such dividend of $77 million, recorded as a reduction of paid-in capital, was
made in October 2003. Equity contributions and subordinated loans from Southern
Company are projected to total approximately $850 million to Southern Power by
the end of 2003. No additional 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.
107
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sources of Capital
Southern Power's current liabilities frequently exceed current assets because of
the continued use of short-term debt as an interim funding source for Southern
Power's ongoing construction program and the seasonality of the electricity
business. In February 2003, Southern Power initiated a commercial paper program
to fund a portion of the construction costs of new generating facilities. The
amount of commercial paper initially represented about 45% of total debt, but is
forecasted to decline to less than 20% at year-end 2005. Southern Power's
strategy is to refinance most of such short-term borrowings with long-term
securities following commercial operation of the generating facilities. At
September 30, 2003, Southern Power had outstanding $102.7 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 liquidity and capital resource requirements, Southern Power had at
September 30, 2003 approximately $650 million of unused committed credit
arrangements with banks 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 (Q) to the Condensed Financial Statements herein
for information regarding the FERC approval process for Southern Power's PPAs
with Georgia Power and Savannah Electric for Plant McIntosh Units 10 and 11.
Southern Power also has access to loans from Southern Company to meet any
additional Plant McIntosh funding needs should other funding sources not be
adequate.
Credit Rating Risk
Southern Power does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are certain physical electricity sale contracts and fixed-price
physical gas purchases 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 September 30, 2003, the maximum potential collateral
requirements under the electricity sale contracts and financial instrument
agreements were approximately $159 million. At September 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,
certain commodity prices and, occasionally, currency exchange rates. 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.
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 payments
108
SOUTHERN POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
arising from the 2003 planned issuance of senior notes. Changes in the fair
values of these swaps are deferred in Other Comprehensive Income. Upon the
issuance of the senior notes in July 2003, the swaps were settled at a loss of
approximately $93.3 million that is being 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 September 30, 2003, including derivatives 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 were marked to market through the Statement of Income
until realized and settled in August 2003.
In prior years, to reduce its exposure to fluctuations in the exchange rate
for Euros, Southern Power entered into forward Euro purchase contracts
designated as fair value hedges of certain firm equipment purchase commitments
that required payment in Euros. As of May 2003, all Euro payments have been made
and the resulting gains associated with the hedges effectively reduced the
purchase price of the equipment, which is included in plant-in-service or
construction work in progress.
Unrealized gains and losses on electric and gas contracts qualifying as
cash flow hedges of anticipated purchases and sales are deferred in Other
Comprehensive Income. Unrealized gains and losses on contracts that do not
qualify as cash flow hedges are recognized in the Statements of Income as
incurred. For the three months ended September 30, 2003 and 2002, approximately
$1.3 million and $2.3 million, respectively, of losses were recognized in Other
Income in the Statements of Income. For the nine months ended September 30, 2003
and 2002, approximately $1.2 million and $4.9 million, respectively, of losses
were recognized in Other Income in the Statements of Income. Realized gains and
losses on hedged transactions are recognized in revenues and/or fuel expense in
the Statements of Income as incurred. The fair values of derivative energy
contracts recognized on the balance sheet at September 30, 2003 were as follows:
Third Quarter
2003 Year-to-Date
Changes Changes
------------------------------------------------------------------------
Fair Value
------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $ (704) $3,864
Contracts realized or settled (26) (3,516)
New contracts at inception - -
Current period changes 1,648 570
-----------------------------------------------------------------------
Contracts at September 30, 2003 $ 918 $ 918
========================================================================
At September 30, 2003, all of these contracts are based on actively quoted
market prices.
109
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, O, S, T
Alabama Power A, E, F, H, I, J, L, M, O
Georgia Power A, E, G, H, I, J, L, M, O, P, Q
Gulf Power A, E, H, I, J, L, M
Mississippi Power A, E, H, J, M, N, R, S
Savannah Electric A, E, H, J, L, M, Q
Southern Power A, E, J, L, N, P, Q
110
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 September 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 September 30, 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. If Southern
Company is ultimately required to make any payments related to these
potential obligations, Mirant's indemnification obligation to
Southern Company would represent an unsecured pre-bankruptcy claim,
subject to compromise pursuant to Mirant's final reorganization
plan.
111
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 has filed 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.
112
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(D) 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 September 30,
2003, Southern Company's total investment in these entities was
approximately $32 million.
On June 30, 2003, the IRS issued an announcement that suspended the
issuance of new private letter rulings and indicated that it might also
revoke existing private letter rulings on tax credits for synthetic fuels
pursuant to IRC Section 29 pending 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. On October
29, 2003, the IRS announced that it has completed its review and has
determined that the test procedures and results used by taxpayers are
scientifically valid if the procedures are applied in a consistent and
unbiased manner. The IRS stated that the processes they approved do not
produce the level of chemical change required by IRC Section 29, but they
will, nevertheless, resume issuing private letter rulings. The IRS will
require taxpayers applying for future rulings to implement and maintain
certain sampling and quality control procedures, as well as additional
documentation and record retention procedures. The IRS also plans to
extend these procedures to taxpayers already holding rulings on the issue
of significant chemical change.
On October 30, 2003, the Senate Permanent Subcommittee on Investigations
announced that it has begun a separate investigation of the synthetic
fuel industry and its producers for potential abuses of these tax
credits.
The IRS is currently auditing AFP for tax years 1999 and 2000 and, prior
to the October announcement discussed above, had released an analysis
report prepared by its chemical expert that challenges the existence of
significant chemical change at AFP. The IRS is also currently auditing
Carbontronics for tax years 2000 and 2001. From the inception of Southern
Company's investment in these entities through September 30, 2003,
Southern Company has recognized through income approximately $250 million
(net of approximately $37 million reserved) in tax credits related to its
share of the synthetic fuel production at these entities.
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 IRC Section 29. The ultimate outcome of these matters cannot
now be determined.
113
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(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 LITIGATION
ERISA
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
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" and seeks unspecified monetary damages. 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. On September 2, 2003, the United States District
Court for the Northern District of Georgia consolidated all pending and
future ERISA actions arising out of the same facts, and the plaintiffs
filed a consolidated amended ERISA complaint on September 23, 2003. The
plaintiffs seek to represent a class of persons who were participants
in or beneficiaries of certain Mirant Employee Savings Plans between
September 27, 2000, and July 22, 2003. The consolidated amended
complaint alleges that the defendants breached their fiduciary duties
and violated ERISA by failing to investigate whether Mirant stock was a
prudent investment for the plans, by continuing and promoting Mirant
stock as an investment alternative for participants in the plans, and
by failing to disclose information about Mirant's financial condition
and about its improper activities in the California energy markets.
Southern Company denies any wrongdoing and intends to defend this
action.
Securities
Reference is made to Note 3 under "Mirant Securities Litigation" of
Southern Company in Item 8 of the Form 10-K. In this consolidated
securities action, the remaining claims are 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. Southern Company filed an answer to the
consolidated amended class action complaint on September 3, 2003, and
discovery began on that date. Plaintiffs have also filed a motion for
class certification. 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.
114
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Bankruptcy Impacts
The Bankruptcy Code automatically stays all litigation as to Mirant. On
September 23, 2003, a motion was filed with the bankruptcy court
requesting an extension of this automatic stay to all other non-debtor
defendants, including Southern Company and the named current and/or
former Southern Company officers. On October 23, 2003, the bankruptcy
court entered an order authorizing Southern Company's insurance
companies to pay related defense costs. On November 5, 2003, the
bankruptcy court granted the motion to extend the automatic stay, and
the ERISA and Securities Litigation is therefore stayed until further
order from the bankruptcy court.
The final outcome of these matters 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 August 8,
2003, the EPA filed a petition for rehearing en banc with the U.S.
Court of Appeals for the Eleventh Circuit ("Court of Appeals")
regarding the Court of Appeals' June 24, 2003 order which held that the
court did not have jurisdiction to decide the TVA appeal because the
challenged Administrative Compliance order did not constitute final
agency action. On September 16, 2003, the Court of Appeals denied the
EPA's petition for rehearing. The EPA has ninety (90) days to petition
the United States Supreme Court for certiorari review of the Court of
Appeals' order. On September 23, 2003, the EPA and Alabama Power
jointly notified the Alabama district court of the Court of Appeals'
denial of the EPA's petition for rehearing en banc, and they jointly
requested that the court keep that case stayed until the time for
filing a petition for certiorari with the United States Supreme Court
expires. On October 6, 2003, the Alabama district court granted their
request and continued the stay for an additional ninety (90) days. At
this time, no party to the case in the federal district court in
Atlanta, Georgia against Georgia Power and Savannah Electric, 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.
Since the inception of the New Source Review proceedings against
Georgia Power, Alabama Power and Savannah Electric, the EPA has also
been proceeding with similar New Source Review enforcement actions
against other utilities, involving many of the same legal issues.
During the third quarter of 2003, district courts addressing these
cases have issued opinions which reached conflicting conclusions.
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. On September 23, 2003, the U.S. Bankruptcy Court confirmed the
plan of reorganization. The plan of reorganization is expected to
become effective before the end of 2003, and, pursuant to the plan,
Southern Company's equity interest in Mobile Energy will be
extinguished. The reorganization does not impact Southern Company's
outstanding guarantees of certain potential obligations of Mobile
Energy that represent a maximum contingent liability of $19 million at
September 30, 2003. By their terms, these guarantees terminate in 2019
and 2021. Under an obligation that is secured by a priority interest in
Mobile Energy's assets, Mobile Energy agreed to indemnify Southern
Company for any amounts that may be paid under these guarantees. The
ultimate effect of the guarantees on Southern Company cannot now be
determined.
115
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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.
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.
RIGHT OF WAY LITIGATION
Reference is made to Note 3 under "Right of Way Litigation" of Southern
Company, Georgia Power, Gulf Power, Mississippi Power and Savannah
Electric in Item 8 of the Form 10-K. With respect to one lawsuit
brought by landowners regarding the installation and use of fiber optic
cable over Gulf Power rights of way located on the landowners'
property, on November 7, 2003, the Second Circuit Court in Gadsden
County Florida ruled in favor of the plaintiff's motion for partial
summary judgment. The question of damages, if any, will be decided at a
future trial. In the event of an adverse verdict on damages, Gulf Power
could appeal the verdicts on both liability and damages. Management of
Southern Company and its subsidiaries believe that the defendant
companies in this and other similar litigation have complied with
applicable laws. An adverse outcome in these matters could result in
substantial judgments; however, the final outcome 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 June 2004. Both PPAs have been
certificated by the Alabama PSC. As a result, Alabama Power's
retail rates were adjusted beginning July 2003 by approximately 2.6%
under Rate CNP (Certificated New Plant), which allows Alabama Power
to recover costs associated with certificated new plants including
PPAs.
116
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(G) In May 2003, Georgia Power filed for a fuel cost recovery rate
increase. On August 19, 2003, the Georgia PSC issued an order approving
a stipulation reached by Georgia Power, the Consumers' Utility Counsel
Division, Georgia Textile Manufacturers Association, Georgia Industrial
Group and the Staff of the Georgia PSC. The stipulation allows Georgia
Power to increase customer fuel rates to recover existing
under-recovered deferred fuel costs over the period of October 1, 2003
through March 31, 2005, as well as future projected fuel costs. The new
fuel rate represents an average annual increase in rates paid by
customers of approximately 1.6%.
(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 September 30, 2003, the total outstanding loans
guaranteed by all of the operating companies was $12.6 million, of
which Georgia Power is responsible for $10.2 million and Gulf Power is
responsible for $0.7 million. Total loan loss reserves of $3.2 million
($2.1 million for Georgia Power and $0.2 million for Gulf Power) have
been recorded.
In addition, further reference is made to Note 4 for Alabama Power and
Georgia Power relating to certain obligations incurred in connection
with outstanding debt of SEGCO. In May 2003, SEGCO issued an additional
$50 million in senior notes. Alabama Power guaranteed the debt
obligation and in October 2003, Georgia Power agreed to reimburse
Alabama Power for the pro rata portion of such obligation corresponding
to its then proportionate ownership of stock of SEGCO if Alabama Power
is called upon to make such payment under its guaranty.
(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 costs 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 costs
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 September 30, 2003, amounts recorded in Accumulated Depreciation
that represent regulatory liabilities related to such removal
costs totaled $1.3 billion, consisting of $571 million, $418 million,
$149 million, $78 million and $36 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. 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
117
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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 ($0.4 million after taxes), representing
removal costs previously accrued.
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 September 30, 2003
is $345 million, $394 million and $739 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 Plant Farley 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). In
September 2003, Alabama Power filed an application with the NRC to
extend the operating license for Plant Farley for 20 additional years.
For additional information, see Note 1 to the financial statements of
Alabama Power in Item 8 of the Form 10-K.
Georgia Power expects to complete new site-specific decommissioning
studies for Plants Hatch and Vogtle prior to December 31, 2003.
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 09/30/03
-------- -------- ------- --------- --------- --------
(in millions)
Alabama Power $ - $301.0 $- $ 17.8 $34.5 $353.3
Georgia Power - 469.1 - 23.0 - 492.1
Gulf Power - 4.0 - 0.2 - 4.2
Mississippi Power - 1.0 - - - 1.0
Savannah Electric - 3.2 - 0.2 - 3.4
Southern Company $ - $778.3 $- $41.2 $34.5 $854.0
118
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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
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 nine-month periods
ending September 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 Nine Nine
Ended Ended Months Months
September September Ended Ended
30, 2003 30, 2002 September 30, September
2003 30, 2002
-------------- -------------- --------------- --------------
Interest Rate 3.1% 3.0% 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 21.7% 25.9% 23.6% 26.1%
Expected annual dividends on common stock $1.40 $1.37 $1.37 $1.34
Weighted average fair value of stock options
granted $3.38 $3.57 $3.59 $3.37
119
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The pro forma impact of fair-value accounting for options granted on
net income is as follows:
As Reported Pro Forma
------------------------------------
Three Months Ended September 30, 2003
Net income (in millions) $619 $614
Earnings per share (dollars):
Basic $0.85 $0.84
Diluted $0.84 $0.83
Three Months Ended September 30, 2002
Net income (in millions) $595 $590
Earnings per share (dollars):
Basic $0.84 $0.83
Diluted $0.83 $0.82
Nine Months Ended September 30, 2003
Net income (in millions) $1,349 $1,336
Earnings per share (dollars):
Basic $1.86 $1.84
Diluted $1.85 $1.83
Nine Months Ended September 30, 2002
Net income (in millions) $1,151 $1,136
Earnings per share (dollars):
Basic $1.63 $1.61
Diluted $1.62 $1.60
Diluted Earnings Per Share
Three Months Ended Three Months Ended Nine Months Nine Months
September 30, 2003 September 30, 2002 Ended Ended
September 30, September 30, 2002
(in thousands) 2003
----------------------------------- ------------------- ------------------- ------------------ -------------------
As Reported Shares 729,816 710,647 724,462 705,946
Effect of options 5,039 5,817 5,208 5,400
Diluted Shares 734,855 716,464 729,670 711,346
(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
and treasury rate locks (together "derivatives") to hedge
exposure to interest rate changes. Derivatives related to fixed rate
securities are accounted for as fair value hedges; derivatives
related to variable rate securities or forecasted transactions are
accounted for as cash flow hedges. The derivatives are generally
structured to mirror the terms of the hedged debt instruments;
therefore, no material ineffectiveness has been recorded in earnings.
As of September 30, 2003, the following swaps were outstanding:
120
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Fair Value Hedges
---------------------------------------------------------------------------------------------
Notional Fixed Rate Variable Rate Maturity Fair Value
Amount Received Paid Date September 30, 2003
----------------------------------------------------------------------------------------------------------------------
Southern Company $400 million 5.3% 6-month LIBOR February 2007 $33.3 million
(in arrears)
less 0.103%
----------------------------------------------------------------------------------------------------------------------
Southern Company $40 million 7.63% 6-month LIBOR December 2009 $1.4 million
(in arrears)
plus 2.92%
Cash Flow Hedges
---------------------------------------------------------------------------------------------
Weighted Average
Variable Rate Fixed Rate
Notional Received Paid Maturity Fair Value
Amount Date September 30, 2003
---------------------------------------------------------------------------------------------------------------------
Variable Rate
Securities
---------------------------------------------------------------------------------------------------------------------
Southern Company $200 million 1-month LIBOR 3.1975% June 2004 $(3.0) million
Alabama Power $350 million 3-month 3.015% December 2003 $(1.5) million
LIBOR plus
0.12%
Alabama Power $486 million BMA Index 1.6254% January 2004 $(1.0) million
Alabama Power $486 million BMA Index 1.9923% January 2007 $3.2 million
Alabama Power $195 million 3-month LIBOR 1.89% April 2006 $1.7 million
Georgia Power $250 million 3-month 1.96% February 2005 $(1.5) million
LIBOR plus
0.125%
Georgia Power $50 million 3-month 1.56% January 2005 $0
LIBOR plus
0.10%
Georgia Power $873 million BMA Index 1.39% December 2004 $(1.9) million
Savannah Electric $20 million 3-month 2.06% December 2004 $(0.1) million
LIBOR plus
0.375%
-----------------------------------------------------------------------------------------------------------------
Forecasted Transactions
-------------------------------------------------------------------------------------------- --------------------
Alabama Power $350 million 3-month LIBOR 2.35% December 2006 $2.2 million
Savannah Electric $25 million 3-month LIBOR 5.03% December 2013 $(1.1) million
121
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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 $500 million of interest rate
swaps and incurred a loss of $93.3 million which is reflected in Other
Comprehensive Income.
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 $60 million of interest rate swaps
and incurred a loss of $3.3 million which is reflected in Other
Comprehensive Income.
In September 2003, Georgia Power completed the issuance of $100 million
of 4.9% senior notes due September 15, 2013. In connection with the
issuance of these notes Georgia Power settled a $100 million treasury
lock and incurred a loss of $2.5 million which is reflected in Other
Comprehensive Income.
For the twelve month period ended September 30, 2004, the following
table reflects the estimated pre-tax gains (losses) that will be
reclassified from Other Comprehensive Income to Interest Expense.
(in Millions)
- ---------------------------------------------------------
Alabama Power $(13.0)
Georgia Power (4.9)
Gulf Power (0.3)
Mississippi Power -
Savannah Electric (0.6)
Southern Power (10.3)
Southern Company $(32.0)
(M) In October 2003, the FERC approved a new Open Access Transmission
Tariff for the operating companies of $1.73 per kilowatt-month based
on an 11.25% return on equity. The operating companies had requested
a rate increase effective January 2002 based on a 13% return on
equity. Pending FERC approval, the operating companies collected the
new rate based on the 13% return on equity, but recorded revenue
subject to refund for amounts above the previously approved rate of
$1.37 per kilowatt-month. As of September 30, 2003, revenue subject to
refund totaled approximately $22.2 million ($10 million, $9.5 million,
$1 million, $1.5 million, and $0.2 million for Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, and Savannah Electric,
respectively). As a result of the final settlement, a total of
approximately $5.4 million was refunded to the operating company
transmission customers in October 2003. The remaining $16.7 million
was recorded as revenue ($7.6 million, $7.2 million, $0.7 million,
$1.1 million, and $0.1 million for Alabama Power, Georgia Power, Gulf
Power, Mississippi Power and Savannah Electric, respectively).
(N) 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.
122
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
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 terminated 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.
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 the PPAs, Southern Power is completing
limited construction activities on Plant Franklin Unit 3 to preserve
the long-term viability of the project. Current projections indicate
completion in the 2008-2011 period. 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
=====================================================================
(O) 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 August 20, 2003, the NRC increased 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 has not
changed.
123
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(P) 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. Southern Power completed
its purchase obligations under these contracts during the first quarter
2003.
(Q) 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.
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 completed in September 2003, the fair
market value of the land has been established at $320,000 and this
matter has been concluded.
(R) 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 and a
minimal change in revenues for 2004 forward.
124
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(S) 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 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 nine month periods ended September 30, 2003 and 2002,
Mississippi Power recognized approximately $19.3 million and $19
million, respectively, in lease expenses, including approximately $2.2
million in each year related to the amortization of the initial
acquisition cost. In addition, $10.6 million in lease termination costs
were included in other operation expenses in the second quarter of
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 $15.2 million for the fair
market value of this residual value guarantee in the accompanying
balance sheet.
125
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(T) Southern Company's reportable business segment is the sale of
electricity in the Southeast by the five operating
companies and Southern Power. The All Other column includes parent
Southern Company, which does not allocate operating expenses to
business segments. Also, this category includes segments below the
quantitative threshold for separate disclosure. These segments include
alternative fuel investments, energy-related 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 September 30, 2003:
Operating revenues $ 3,225 $ 100 $(5) $ 3,320
Segment net income (loss) 603 16 - 619
Nine Months Ended September 30, 2003:
Operating revenues 8,352 376 (16) 8,712
Segment net income (loss) 1,313 36 - 1,349
Total assets at September 30, 2003 $32,449 $1,722 $(278) $33,893
--------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2002:
Operating revenues $ 3,177 $ 77 $ (6) $ 3,248
Segment net income (loss) 589 (34) 40 595
Nine Months Ended September 30, 2002:
Operating revenues 7,881 227 (16) 8,092
Segment net income (loss) 1,162 (53) 42 1,151
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 September 30, 2003 $2,757 $ 378 $ 90 $3,225
Three Months Ended September 30, 2002 2,749 344 84 3,177
Nine Months Ended September 30, 2003 6,907 1,035 410 8,352
Nine Months Ended September 30, 2002 6,778 870 233 7,881
126
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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
(10) Material Contracts
Southern Company
(a) 1 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(a) 2 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(a) 3 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated
effective May 1, 2000.
(a) 4 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated
effective February 23, 2001.
(a) 5 - Amended and Restated Supplemental Pension Agreement
between Georgia Power, Southern Company,
SCS and C. B. Harreld dated September 17, 2003.
Alabama Power
(b) 1 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)1 herein)
(b) 2 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)2 herein)
(b) 3 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated
effective May 1, 2000. (See Exhibit 10(a)3 herein)
(b) 4 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated
effective February 23, 2001. (See Exhibit 10(a)4
herein)
127
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
Georgia Power
(c) 1 - Amended and Restated Supplemental Pension Agreement
between Georgia Power, Southern
Company, SCS and C. B. Harreld dated September 17,
2003. (See Exhibit 10(a)5 herein.)
(c) 2 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)1 herein)
(c) 3 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)2 herein)
(c) 4 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated
effective May 1, 2000. (See Exhibit 10(a)3 herein)
(c) 5 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated
effective February 23, 2001. (See Exhibit 10(a)4
herein)
Gulf Power
(d) 1 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)1 herein)
(d) 2 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)2 herein)
(d) 3 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated effective
May 1, 2000. (See Exhibit 10(a)3 herein)
(d) 4 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated
effective February 23, 2001. (See Exhibit 10(a)4
herein)
(d) 5 - Separation Agreement and First Amendment to
Separation Agreement between Gulf Power and
John E. Hodges effective July 1, 2003.
(d) 6 - Consulting Agreement between Gulf Power Company and
John E. Hodges effective July 1, 2003.
(d) 7 - Separation Agreement between Gulf Power Company and
Warren E. Tate effective September 1, 2003.
128
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
Mississippi Power
(e) 1 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)1 herein)
(e) 2 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)2 herein)
(e) 3 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated effective
May 1, 2000. (See Exhibit 10(a)3 herein)
(e) 4 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated
effective February 23, 2001. (See Exhibit 10(a)4
herein)
Savannah Electric
(f) 1 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)1 herein)
(f) 2 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)2 herein)
(f) 3 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated effective
May 1, 2000. (See Exhibit 10(a)3 herein)
(f) 4 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated
effective February 23, 2001. (See Exhibit 10(a)4
herein)
Southern Power
(g) 1 - Second, Third, Fourth and Fifth Amendments to the
Southern Company Employee Savings Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)1 herein)
(g) 2 - Second, Third, Fourth and Fifth Amendments to The
Southern Company Employee Stock Ownership Plan,
Amended and Restated effective January 1, 2002.
(See Exhibit 10(a)2 herein)
(g) 3 - First Amendment to the Southern Company Supplemental
Benefit Plan, Amended and Restated effective
May 1, 2000. (See Exhibit 10(a)3 herein)
129
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
(g) 4 - First Amendment to the Southern Company Deferred
Compensation Plan, Amended and Restated effective
February 23, 2001. (See Exhibit 10(a)4 herein)
(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.)
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. (Designated in
Form 10-Q for the Quarter ended June 30, 2003,
File No. 1-6468 as Exhibit 24(c)(2) and incorporated
herein by reference.)
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.)
130
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
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.
(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.
131
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
Mississippi Power
(e) 1 - Certificate of Mississippi Power's Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
(e) 2 - Certificate of Mississippi Power's Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
Savannah Electric
(f) 1 - Certificate of Savannah Electric's Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
(f) 2 - Certificate of Savannah Electric's Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
Southern Power
(g) 1 - Certificate of Southern Power's Chief Executive
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
(g) 2 - Certificate of Southern Power's Chief Financial
Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
(32) Section 906 Certifications
Southern Company
(a) - Certificate of Southern Company's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Alabama Power
(b) - Certificate of Alabama Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
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.
132
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. (Continued)
--------
Mississippi Power
(e) - Certificate of Mississippi Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Savannah Electric
(f) - Certificate of Savannah Electric's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
Southern Power
(g) - Certificate of Southern Power's Chief Executive
Officer and Chief Financial Officer required by
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
-------------------
The registrants collectively and separately furnished
Current Reports on Form 8-K dated July 29, 2003:
Item reported: Item 12
Financial statements filed: None
Georgia Power filed Current Reports on Form 8-K dated
September 8, 2003 and September 23, 2003:
Item reported: Items 5 and 7
Financial statements filed: None
Gulf Power filed Current Reports on Form 8-K dated July
10, 2003 and September 5, 2003:
Item reported: Items 5 and 7
Financial statements filed: None
133
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: November 12, 2003
134
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: November 12, 2003
135
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: November 12, 2003
136
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: November 12, 2003
137
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: November 12, 2003
138
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: November 12, 2003
139
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: November 12, 2003
140