===================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997
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
(770) 393-0650
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)
333 Piedmont Avenue, N.E.
Atlanta, Georgia 30308
(404) 526-6526
0-2429 Gulf Power Company 59-0276810
(A Maine Corporation)
500 Bayfront Parkway
Pensacola, Florida 32501
(850) 444-6111
0-6849 Mississippi Power Company 64-0205820
(A Mississippi Corporation)
2992 West Beach
Gulfport, Mississippi 39501
(601) 864-1211
1-5072 Savannah Electric and Power Company 58-0418070
(A Georgia Corporation)
600 East Bay Street
Savannah, Georgia 31401
(912) 644-7171
===================================================================================================================
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No____
Description of Shares Outstanding
Registrant Common Stock at July 31, 1997
The Southern Company Par Value $5 Per Share 685,435,398
Alabama Power Company Par Value $40 Per Share 5,608,955
Georgia Power Company No Par Value 7,761,500
Gulf Power Company No Par Value 992,717
Mississippi Power Company Without Par Value 1,121,000
Savannah Electric and Power Company Par Value $5 Per Share 10,844,635
This combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company and Savannah Electric and Power Company. Information contained
herein relating to any individual company is filed by such company on its own
behalf. Each company makes no representation as to information relating to the
other companies.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 1997
Page
Number
DEFINITIONS........................................................................................................ 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) and
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........................................................ 6
Condensed Consolidated Statements of Cash Flows.................................................... 7
Condensed Consolidated Balance Sheets.............................................................. 8
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 10
Alabama Power Company
Condensed Statements of Income..................................................................... 16
Condensed Statements of Cash Flows................................................................. 17
Condensed Balance Sheets........................................................................... 18
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 20
Exhibit 1 - Report of Independent Public Accountants............................................... 24
Georgia Power Company
Condensed Statements of Income..................................................................... 26
Condensed Statements of Cash Flows................................................................. 27
Condensed Balance Sheets........................................................................... 28
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 30
Exhibit 1 - Report of Independent Public Accountants............................................... 34
Gulf Power Company
Condensed Statements of Income..................................................................... 36
Condensed Statements of Cash Flows................................................................. 37
Condensed Balance Sheets........................................................................... 38
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 40
Mississippi Power Company
Condensed Statements of Income..................................................................... 45
Condensed Statements of Cash Flows................................................................. 46
Condensed Balance Sheets........................................................................... 47
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 49
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 53
Condensed Statements of Cash Flows................................................................. 54
Condensed Balance Sheets........................................................................... 55
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 57
Notes to the Condensed Financial Statements........................................................... 60
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 68
Item 2. Changes in Securities..................................................................................... Inapplicable
Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 68
Item 5. Other Information......................................................................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 70
Signatures ............................................................................................... 72
DEFINITIONS
TERM MEANING
affiliates.................................. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH
ALABAMA..................................... Alabama Power Company
CEPA........................................ Consolidated Electric Power Asia
Clean Air Act............................... Clean Air Act Amendments of 1990
ECO Plan.................................... Environmental Compliance Overview Plan
Energy Act ................................. Energy Policy Act of 1992
EWG......................................... Exempt wholesale generator
FASB........................................ Financial Accounting Standards Board
FERC........................................ Federal Energy Regulatory Commission
Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA,
GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended
December 31, 1996
FUCO........................................ Foreign utility company
GEORGIA..................................... Georgia Power Company
GULF........................................ Gulf Power Company
MEAG........................................ Municipal Electric Authority of Georgia
MISSISSIPPI................................. Mississippi Power Company
OPC......................................... Oglethorpe Power Corporation
operating affiliates........................ see affiliates
operating companies......................... see affiliates
PEP......................................... Performance Evaluation Plan
PSC......................................... Public Service Commission
SAVANNAH.................................... Savannah Electric and Power Company
SEC......................................... Securities and Exchange Commission
SOUTHERN.................................... The Southern Company
Southern Energy............................. Southern Energy, Inc. (formerly Southern Electric International, Inc.),
including SOUTHERN subsidiaries managed or controlled by Southern
Energy
SWEB........................................ South Western Electricity plc (United Kingdom)
TVA......................................... Tennessee Valley Authority
4
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
OPERATING REVENUES $ 2,717,195 $ 2,563,507 $ 5,301,609 $ 4,992,862
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Operation--
Fuel 517,251 555,321 1,003,006 1,058,031
Purchased power 483,176 238,954 941,417 510,451
Other (Note H) 458,188 475,682 883,535 926,743
Maintenance 211,553 197,340 402,845 383,717
Depreciation and amortization 286,907 249,217 579,031 495,836
Amortization of deferred Plant Vogtle costs (Note M) 37,584 33,234 75,211 66,993
Taxes other than income taxes 139,273 153,541 290,967 322,208
Income taxes 153,706 210,320 299,888 370,923
-------------- -------------- -------------- --------------
Total operating expenses 2,287,638 2,113,609 4,475,900 4,134,902
-------------- -------------- -------------- --------------
OPERATING INCOME 429,557 449,898 825,709 857,960
OTHER INCOME:
Allowance for equity funds used during construction 832 184 1,623 1,044
Interest income 20,139 12,079 48,223 27,807
Other, net 18,389 7,155 32,599 29,501
Income taxes applicable to other income 8,609 25,105 13,048 21,945
-------------- -------------- -------------- --------------
INCOME BEFORE INTEREST CHARGES 477,526 494,421 921,202 938,257
-------------- -------------- -------------- --------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 165,145 123,578 317,345 263,346
Allowance for debt funds used during construction (3,988) (5,478) (8,584) (10,789)
Interest on notes payable 26,109 42,260 55,428 64,807
Amortization of debt discount, premium and expense, net 8,835 7,965 16,355 20,940
Other interest charges 10,745 11,708 28,868 28,152
Minority interest in subsidiaries 12,823 1,382 28,342 826
Distributions on capital and preferred
securities of subsidiary companies 28,870 4,039 50,393 7,640
Preferred dividends of subsidiary companies 14,192 21,707 31,247 43,200
-------------- -------------- -------------- --------------
Interest charges and other, net 262,731 207,161 519,394 418,122
-------------- -------------- -------------- --------------
CONSOLIDATED NET INCOME $ 214,795 $ 287,260 $ 401,808 $ 520,135
============== ============== ============== ==============
AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (Thousands) 682,786 671,757 680,806 670,931
EARNINGS PER SHARE OF COMMON STOCK $0.31 $0.43 $0.59 $0.78
CASH DIVIDENDS PAID PER SHARE
OF COMMON STOCK $0.325 $0.315 $0.65 $0.63
The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Six Months
Ended June 30,
1997 1996
OPERATING ACTIVITIES:
Consolidated net income $ 401,808 $ 520,135
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization 683,854 608,643
Deferred income taxes and investment tax credits (3,336) 9,265
Allowance for equity funds used during construction (1,623) (1,044)
Amortization of deferred Plant Vogtle costs (Note M) 75,211 66,993
Gain on asset sales (15,879) (24,965)
Other, net 19,988 45,328
Changes in certain current assets and liabilities--
Receivables, net (87,114) (66,659)
Fossil fuel stock (57,751) 9,564
Materials and supplies 14,766 16,630
Prepayments (66,438) (48,522)
Payables (4,102) (102,684)
Customer deposits 2,398 (84,412)
Taxes Accrued 79,212 (8,627)
Other 111,225 (45,480)
---------------- ----------------
Net cash provided from operating activities 1,152,219 894,165
---------------- ----------------
INVESTING ACTIVITIES:
Gross property additions (789,528) (642,501)
Southern Energy business acquisitions (1,854,064) -
Sales of property 15,392 20,895
Other (28,128) (102,653)
---------------- ----------------
Net cash used for investing activities (2,656,328) (724,259)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds--
Common stock 167,945 95,826
Capital and preferred securities 1,321,250 97,000
First mortgage bonds - 60,000
Pollution control obligations 103,870 84,620
Other long-term debt 1,009,865 644,148
Retirements--
Preferred stock (269,683) -
First mortgage bonds (83,574) (284,574)
Pollution control obligations (13,870) (40,115)
Other long-term debt (314,403) (1,422,917)
Special deposits-redemption funds (134,307) (51,345)
Notes payable, net 155,064 920,124
Payment of common stock dividends (441,738) (422,353)
Miscellaneous (58,347) (3,155)
---------------- ----------------
Net cash provided from (used for) financing activities 1,442,072 (322,741)
---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (62,037) (152,835)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 444,832 772,340
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 382,795 $ 619,505
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $373,619 $344,035
Income taxes $270,350 $303,355
Southern Energy business acquisitions--
Fair value of assets acquired $3,650,064 -
Less cash paid for common stock 1,854,064 -
-------------- --------------
Liabilities assumed $1,796,000 -
============== ==============
The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
7
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At June 30,
1997 At December 31,
(Unaudited) 1996
---------------- -----------------
UTILITY PLANT:
Plant in service $ 33,562,405 $ 33,260,914
Less accumulated provision for depreciation 11,420,098 10,921,242
---------------- ---------------
22,142,307 22,339,672
Nuclear fuel, at amortized cost 226,631 245,702
Construction work in progress 824,315 683,924
---------------- ---------------
Total 23,193,253 23,269,298
---------------- ---------------
OTHER PROPERTY AND INVESTMENTS:
Goodwill, being amortized 1,756,976 318,142
Leasehold interests 1,799,545 415,600
Equity investments in subsidiaries 833,889 227,097
Nuclear decommissioning trusts, at market 331,612 278,938
Miscellaneous 279,408 261,175
---------------- ---------------
Total 5,001,430 1,500,952
---------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents 382,795 444,832
Special deposits 236,994 61,868
Receivables, less accumulated provisions for uncollectible accounts
of $34,751 at June 30, 1997 and $31,587 at December 31, 1996 2,008,799 1,440,678
Fossil fuel stock, at average cost 328,699 269,940
Materials and supplies, at average cost 498,216 509,409
Prepayments 316,796 252,977
Vacation pay deferred 75,545 77,195
---------------- ---------------
Total 3,847,844 3,056,899
---------------- ---------------
DEFERRED CHARGES:
Deferred charges related to income taxes 1,268,860 1,302,342
Deferred Plant Vogtle costs (Note M) 95,778 170,988
Debt expense, being amortized 102,274 78,042
Premium on reacquired debt, being amortized 279,257 289,019
Miscellaneous 623,683 624,262
---------------- ---------------
Total 2,369,852 2,464,653
---------------- ---------------
TOTAL ASSETS $ 34,412,379 $ 30,291,802
================ ===============
The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At June 30,
1997 At December 31,
(Unaudited) 1996
---------------- ------------------
CAPITALIZATION:
Common stock, par value $5 per share-
Authorized -- 1 billion shares
Outstanding -- June 30, 1997: 684,868,295 shares
-- December 31, 1996: 677,035,961 shares $ 3,424,341 $ 3,385,180
Paid-in capital 2,190,378 2,067,228
Retained earnings 3,723,644 3,763,987
---------------- ----------------
9,338,363 9,216,395
Preferred stock of subsidiaries 739,615 979,527
Subsidiary obligated mandatorily redeemable
capital and preferred securities (Note I) 1,744,465 422,000
Long-term debt 9,630,366 7,935,269
---------------- ----------------
Total 21,452,809 18,553,191
---------------- ----------------
CURRENT LIABILITIES:
Preferred stock of subsidiaries due within one year 143,757 173,528
Long-term debt due within one year 591,029 191,411
Notes payable 1,707,887 1,482,822
Accounts payable 861,582 787,809
Customer deposits 133,942 131,544
Taxes accrued--
Income taxes 61,608 11,965
Other 234,075 192,921
Interest accrued 243,301 187,152
Vacation pay accrued 103,727 103,514
Miscellaneous 670,914 535,366
---------------- ----------------
Total 4,751,822 3,798,032
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 4,654,483 4,738,085
Deferred credits related to income taxes 854,223 879,090
Accumulated deferred investment tax credits 772,474 787,545
Employee benefits provisions 466,456 439,176
Minority interests in subsidiaries 736,159 374,922
Prepaid capacity revenues 116,351 122,496
Department of Energy assessments 80,523 80,523
Disallowed Plant Vogtle capacity buyback costs 56,635 57,250
Storm damage reserves 37,609 35,112
Miscellaneous 432,835 426,380
---------------- ----------------
Total 8,207,748 7,940,579
---------------- ----------------
TOTAL CAPITALIZATION AND LIABILITIES $ 34,412,379 $ 30,291,802
================ ================
The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
SECOND QUARTER 1997 vs. SECOND QUARTER 1996
AND
YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996
RESULTS OF OPERATIONS
Earnings
SOUTHERN's consolidated net income for the second quarter and year-to-date
1997 was $215 million ($0.31 per share) and $402 million ($0.59 per share),
respectively, compared to $287 million ($0.43 per share) and $520 million ($0.78
per share) for the corresponding periods of 1996. This 25.2% and 22.7% decrease
in earnings for the quarter and year-to-date 1997, respectively, was mainly due
to the milder-than-normal weather in the operating companies' service
territories.
SOUTHERN's traditional core business is primarily represented by
its five domestic electric utility operating companies, which provide electric
service in four Southeastern states. Another significant portion of SOUTHERN's
business is its non-traditional business primarily represented by Southern
Energy, which owns and manages international and domestic businesses for
SOUTHERN. Businesses acquired by Southern Energy have been included in the
consolidated statements of income since the date of acquisition. Certain changes
in operating revenues and expenses from the prior period are the result of such
acquisitions.
Significant income statement items appropriate for discussion
include the following:
Increase (Decrease)
--------------------------------------------------------------
Second Quarter Year-To-Date
------------------------------- ------------------------------
(in thousands) % (in thousands) %
Operating revenues............................... $153,688 6.0 $308,747 6.2
Purchased power expense.......................... 244,222 102.2 430,966 84.4
Depreciation and amortization expense............ 37,690 15.1 83,195 16.8
Taxes other than income taxes.................... (14,268) (9.3) (31,241) (9.7)
Interest income.................................. 8,060 66.7 20,416 73.4
Interest on long-term debt....................... 41,567 33.6 53,999 20.5
Interest on notes payable........................ (16,151) (38.2) (9,379) (14.5)
Minority interest in subsidiaries................ 11,441 N/M 27,516 N/M
Distributions on capital and preferred
securities of subsidiary companies............ 24,831 N/M 42,753 N/M
Preferred dividends of subsidiary
companies..................................... (7,515) (34.6) (11,953) (27.7)
N/M - Not meaningful.
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating revenues. Operating revenues for the traditional core business
for the second quarter decreased $159 million or 7.2% and year-to-date decreased
$240 million or 5.7%, compared to the same periods of 1996. Operating revenues
for non-traditional business were up $312 million or 85.6% for the quarter and
$549 million or 69.2% for year-to-date. The decrease in traditional core
revenues was mainly due to decreases of 4.8% and 3.1% for the quarter and
year-to-date, respectively, in the amount of energy sold as a result of
milder-than-normal temperatures. Energy sales to residential customers showed a
15.0% decrease for the quarter and a 12.3% decrease year-to-date, as further
evidence of the effect of milder weather. The increase in non-traditional
operating revenues was primarily attributable to increased sales by Southern
Energy's energy marketing organization. These revenues were $273 million and
$430 million for the current quarter and year-to-date 1997, respectively.
Purchased power expense. For the traditional core business, purchased power
expenses were down 31.1% and 33.1% for the quarter and year-to-date,
respectively, as a result of the milder temperatures throughout the Southern
electric system. For the non-traditional business, purchased power expenses were
up 145.6% and 115.9% for the quarter and year-to-date, respectively, due
primarily to increases on purchases in connection with Southern Energy's energy
marketing activities. These purchases increased $266 million and $422 million
for the quarter and year-to-date, respectively.
Depreciation and amortization expense. The increases in depreciation and
amortization expense of the traditional core business for the quarter and
year-to-date compared to the same periods in 1996, can be attributed primarily
to an $8 million and $28 million charge for the quarter and year-to-date 1997
pursuant to GEORGIA's retail accounting order as discussed in Note (L) in the
"Notes to the Condensed Financial Statements" herein. Further, additions to
utility plant contributed to the increase in depreciation and amortization for
the quarter and year-to-date 1997. For the non-traditional business,
depreciation and amortization increased by $22.3 million and $39.4 million fo
the quarter and year-to-date, compared to the corresponding periods of 1996,
primarily because of the acquisition of CEPA in January 1997.
Taxes other than income taxes. Taxes other than income taxes for the
second quarter and year-to-date of 1997 when compared to the corresponding
periods of 1996 decreased primarily due to reductions of $18 million for the
quarter and $34 million year-to-date attributable to SWEB. These decreases
resulted from the lowering, in November 1996, of the taxes on electricity
sales in the United Kingdom from 10% to 3.7%.
Interest income. The increase in interest income for the quarter and
year-to-date as compared to the same periods of 1996, is due to a $9 million
increase for the quarter and a $19 million increase year-to-date in interest
income for the non-traditional business, primarily CEPA.
Interest on long-term debt. Interest on long-term debt for the quarter and
year-to-date 1997 compared to the same periods of 1996, increased primarily due
to non-traditional business activities, primarily CEPA. Southern Energy's
interest on long-term debt increased $45.1 million for the quarter and $65.2
million year-to-date 1997 compared to the corresponding periods in 1996, mainly
as a result of the CEPA acquisition.
Interest on notes payable. Interest on notes payable for the quarter and
year-to-date 1997 compared to the same periods of 1996, decreased primarily
due to a reduction in the amount of notes payable outstanding for the
non-traditional business.
11
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Minority interest. The increase in minority interest for the quarter and
year-to-date 1997 compared to the same periods in the previous year was due
primarily to the 20% minority interest in CEPA and to the sale in July 1996 of a
25% share of SWEB.
Distributions on capital and preferred securities of subsidiaries. This
increase for the quarter and year-to-date 1997 resulted from the sales of
securities in 1996 and the first half of 1997. See Note (I) in the "Notes to the
Condensed Financial Statements" herein for additional information.
Preferred dividends of subsidiary companies. The decrease in this item for
the quarter and year-to-date compared to the same periods in the previous year
is due to redemptions of preferred stock, including redemptions during the first
and second quarters of 1997. See "Financing Activities" 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 ranging from energy sales growth to a less regulated, more competitive
environment, with non-traditional business becoming more significant.
In May 1997, SOUTHERN announced that, through Southern Energy, it had
agreed to purchase 25% of the outstanding common stock of Berliner Kraft und
Licht AG (Bewag), the vertically integrated electric utility that serves Berlin,
Germany, for approximately $830 million. The purchase is subject to approval by
European regulators.
On July 2, 1997, the new Labor government in the United Kingdom introduced
its first budget which included a windfall profit tax on privatized utilities.
Based on the proposed method of calculating this tax, SWEB estimates its
liability to be approximately $160 million. The tax is proposed to be payable in
two equal installments on or before December 1, 1997, and December 1, 1998. The
budget became effective on July 31, 1997.
In July 1997, Southern Energy entered into an agreement to acquire Hopewell
Holdings Limited's (Hopewell) 19.99% share of CEPA. Under this agreement,
Southern Energy will buy from Hopewell its CEPA shares in exchange for $150
million and CEPA's 80% interest in the Tanjung Jati B Project. The Tanjung Jati
B Project is a 1,320 megawatt coal-fired power station in Central Java,
Indonesia. As a result of the transaction, Southern Energy will own over 99.9%
of CEPA's shares.
In August 1997, a subsidiary of SOUTHERN entered into an agreement with
Vastar Resources Inc. (Vastar) providing for the organization of a limited
partnership to which the parties are to contribute their gas and power trading
and marketing businesses. SOUTHERN and Vastar will initially acquire indirect
ownership interests of 60% and 40%, respectively, of the new entity. In
addition, the SOUTHERN subsidiary will pay $40 million to Vastar in connection
with the partnership's formation, which is expected to occur in early September
1997.
For additional information relating to non-traditional business activities,
including information relating to the acquisition in January 1997 of Southern
Energy's 80% interest in CEPA, see Item 1 - BUSINESS - "New Business
Development" in the Form 10-K.
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, SOUTHERN is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
"Environmental Matters" of SOUTHERN in the Form 10-K.
In February, 1997, the FASB issued Statement No. 128, Earnings Per Share.
The standard simplifies the computation of earnings per share (EPS) required by
existing rules. SOUTHERN will adopt this standard on December 31, 1997. If EPS
amounts were computed as specified by Statement No. 128, basic EPS and diluted
EPS would be equal, and would equal the amounts currently reported in the
"Condensed Statements of Income."
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of "comprehensive
income," which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. SOUTHERN will adopt the standard in
1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information. Statement No. 131, which supersedes
Statement Nos. 14, 18, 24 and 30, establishes new standards for segment
reporting, using the "management approach," in which reportable segments are
based on the same criteria on which management disaggregates a business for
making operating decisions and assessing performance. SOUTHERN is in the process
of evaluating Statement No. 131 and its impact and will adopt the standard by
1998.
Reference is made to Notes (B), (C), (D), (G), (J), (K), (L), (M), (N) and
(P) in the "Notes to the Condensed Financial Statements" herein for discussion
of various contingencies and other matters which may affect future earnings
potential. Reference is also made to Part II - Item 1 - "Legal Proceedings"
herein.
FINANCIAL CONDITION
Overview
Major changes in SOUTHERN's financial condition during the first six months of
1997 included the addition of approximately $790 million to utility plant and
the acquisition of CEPA. The funds for these additions and other capital
requirements were from operations and sales of securities. See SOUTHERN's
Condensed Statements of Cash Flows for further details.
Financing Activities
During the first six months of 1997, retirements of the operating companies'
first mortgage bonds totaled $80 million and redemptions of preferred stock
totaled $270 million. Subsidiaries of SOUTHERN, ALABAMA, GEORGIA, GULF and
MISSISSIPPI have formed statutory business trusts which sold, during the first
half of 1997, an aggregate of $1.3 billion of trust preferred or capital
securities. See Note (I) in the "Notes to the Condensed Financial Statements"
herein for further details.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the first six months of 1997, SOUTHERN raised $168 million from the
issuance of new common stock under SOUTHERN's various stock plans. The market
price of SOUTHERN's common stock at June 30, 1997 was $21.875 per share and the
book value was $13.64 per share, representing a market-to-book ratio of 160%,
compared to $22.625, $13.61 and 166%, respectively, at the end of 1996. The
dividend for the second quarter of 1997 was $0.325 per share.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of SOUTHERN
under "Capital Requirements for Construction," "Environmental Matters" and
"Other Capital Requirements" in the Form 10-K for a description of the Southern
electric system's capital requirements for its construction program,
environmental compliance efforts, sinking fund requirements and maturing debt.
Approximately $735 million will be required by June 30, 1998, for present
sinking fund requirements, redemption of preferred stock and redemptions and
maturities of long-term debt. Also, the operating companies plan to continue, to
the extent possible, a program to retire higher-cost debt and preferred stock
and replace these securities with lower-cost capital.
Sources of Capital
In addition to the financing activities previously described, SOUTHERN may
require additional equity capital during the remainder of the year. The amounts
and timing of additional equity capital to be raised in 1997, as well as in
subsequent years, will be contingent on SOUTHERN's investment opportunities. The
operating companies plan to obtain the funds required for construction and other
purposes from sources similar to those used in the past. The amount, type and
timing of any financings--if needed--will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions and other factors.
Currently, each of the operating companies expects to have adequate earnings
coverage ratios for any anticipated security sales through at least 1999. See
Item 1 BUSINESS - "Financing Programs" in the Form 10-K for additional
information.
To meet short-term cash needs and contingencies, the SOUTHERN system had at
June 30, 1997, approximately $383 million of cash and cash equivalents and
approximately $3,965 million of unused credit arrangements with banks (including
$962 million of such arrangements under which borrowings may be made only to
fund purchase obligations of the operating companies relating to variable rate
pollution control bonds). At June 30, 1997, the system companies had outstanding
approximately $319 million of short-term notes payable and $1.4 billion of
commercial paper. Since SOUTHERN's construction program with respect to major
generating projects in the traditional core business has been completed,
management believes that the need for working capital can be adequately met by
utilizing lines of credit without maintaining large cash balances.
See Note (D) in the "Notes to the Condensed Financial Statements"
herein for discussion of financial derivative contracts entered into by
SOUTHERN.
14
ALABAMA POWER COMPANY
15
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING REVENUES:
Revenues $ 699,219 $ 727,843 $ 1,357,324 $ 1,383,244
Revenues from affiliates 28,870 51,744 75,533 129,152
------------ ------------ -------------- --------------
Total operating revenues 728,089 779,587 1,432,857 1,512,396
------------ ------------ -------------- --------------
OPERATING EXPENSES:
Operation--
Fuel 202,213 211,020 406,571 422,649
Purchased power from non-affiliates 4,770 10,889 8,144 19,856
Purchased power from affiliates 25,451 24,017 45,509 39,863
Other 127,726 134,187 242,004 251,184
Maintenance 77,547 68,059 146,497 130,993
Depreciation and amortization 79,630 79,819 165,282 159,717
Taxes other than income taxes 45,935 43,673 95,392 93,737
Federal and state income taxes 39,067 56,250 74,253 100,672
------------ ------------ -------------- --------------
Total operating expenses 602,339 627,914 1,183,652 1,218,671
------------ ------------ -------------- --------------
OPERATING INCOME 125,750 151,673 249,205 293,725
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction - 32 - 433
Income from subsidiary 1,005 967 1,985 1,941
Interest income 4,657 5,315 15,747 14,985
Other, net (6,277) (14,996) (14,649) (22,619)
Income taxes applicable to other income 1,094 14,465 386 14,095
------------ ------------ -------------- --------------
INCOME BEFORE INTEREST CHARGES 126,229 157,456 252,674 302,560
------------ ------------ -------------- --------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 41,845 42,312 83,228 84,888
Allowance for debt funds used during construction (1,434) (1,846) (2,380) (3,722)
Interest on interim obligations 6,466 5,751 10,872 11,478
Amortization of debt discount, premium and expense, net 2,402 2,272 4,798 9,644
Other interest charges 3,259 4,776 13,963 14,958
Distributions on preferred securities of subsidiary trusts 5,589 1,788 10,586 3,140
------------ ------------ -------------- --------------
Total Interest charges and other 58,127 55,053 121,067 120,386
------------ ------------ -------------- --------------
NET INCOME 68,102 102,403 131,607 182,174
DIVIDENDS ON PREFERRED STOCK 4,965 6,625 10,663 13,237
------------ ------------ -------------- --------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 63,137 $ 95,778 $ 120,944 $ 168,937
============ ============ ============== ==============
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
16
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Six Months
Ended June 30,
1997 1996
OPERATING ACTIVITIES:
Net income $ 131,607 $ 182,174
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 194,622 198,735
Deferred income taxes and investment tax credits, net 5,479 (2,830)
Allowance for equity funds used during construction - (433)
Other, net (26,840) 17,395
Changes in certain current assets and liabilities--
Receivables, net 428 (27,979)
Inventories (29,247) 6,925
Prepayments (44,517) (43,803)
Payables (78,032) (54,441)
Taxes accrued 34,576 26,521
Energy cost recovery, retail 7,120 29,781
Other (18,666) (707)
-------------- --------------
Net cash provided from operating activities 176,530 331,338
-------------- --------------
INVESTING ACTIVITIES:
Gross property additions (193,632) (221,021)
Other (18,024) (33,413)
------------- --------------
Net cash used for investing activities (211,656) (254,434)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds--
Company obligated mandatorily redeemable preferred securities 200,000 97,000
Retirements--
Preferred stock (112,000) -
First mortgage bonds (19,801) (83,797)
Other long-term debt (495) (481)
Interim obligations, net 148,029 85,017
Payment of preferred stock dividends (11,749) (13,261)
Payment of common stock dividends (165,700) (152,400)
Miscellaneous (6,407) (3,031)
------------- --------------
Net cash provided from (used for) financing activities 31,877 (70,953)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,249) 5,951
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,587 12,616
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,338 $ 18,567
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 100,921 $ 94,323
Income taxes 70,120 99,855
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
17
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At June 30,
1997 At December 31,
(Unaudited) 1996
---------------- -----------------
UTILITY PLANT:
Plant in service $ 10,910,095 $ 10,806,921
Less accumulated provision for depreciation 4,266,191 4,113,622
---------------- ---------------
6,643,904 6,693,299
Nuclear fuel, at amortized cost 104,353 123,862
Construction work in progress 318,028 256,802
---------------- ---------------
Total 7,066,285 7,073,963
---------------- ---------------
OTHER PROPERTY AND INVESTMENTS:
Southern Electric Generating Company, at equity 25,370 26,032
Nuclear decommissioning trusts 160,962 148,760
Miscellaneous 21,681 20,243
---------------- ---------------
Total 208,013 195,035
---------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents 6,338 9,587
Receivables--
Customer accounts receivable 340,052 334,150
Other accounts and notes receivable 25,952 28,524
Affiliated companies 42,066 47,630
Accumulated provision for uncollectible accounts (1,873) (1,171)
Refundable income taxes 8,364 5,856
Fossil fuel stock, at average cost 118,049 81,704
Materials and supplies, at average cost 160,694 167,792
Prepayments 176,387 131,870
Vacation pay deferred 27,083 28,369
---------------- ---------------
Total 903,112 834,311
---------------- ---------------
DEFERRED CHARGES:
Deferred charges related to income taxes 408,560 410,010
Debt expense, being amortized 7,532 7,398
Premium on reacquired debt, being amortized 80,981 84,149
Uranium enrichment decontamination and decommissioning fund 37,490 37,490
Miscellaneous 102,107 91,490
---------------- ---------------
Total 636,670 630,537
---------------- ---------------
TOTAL ASSETS $ 8,814,080 $ 8,733,846
================ ===============
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
18
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At June 30,
1997 At December 31,
(Unaudited) 1996
-------------- ----------------
CAPITALIZATION:
Common stock equity--
Common stock (par value $40 per share)--
authorized 6,000,000 shares; outstanding 5,608,955 shares $ 224,358 $ 224,358
Paid-in capital 1,304,645 1,304,645
Premium on preferred stock 99 146
Retained earnings 1,140,575 1,185,128
-------------- --------------
2,669,677 2,714,277
Preferred stock 278,400 340,400
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding Company Junior Subordinated Notes (Note I) 297,000 97,000
Long-term debt 2,298,860 2,354,006
-------------- --------------
Total 5,543,937 5,505,683
-------------- --------------
CURRENT LIABILITIES:
Preferred stock due within one year 50,000 100,000
Long-term debt due within one year 50,970 20,753
Notes payable 94,000 -
Commercial paper 418,882 364,853
Accounts payable--
Affiliated companies 56,025 64,307
Other 112,421 182,563
Customer deposits 33,542 32,003
Taxes accrued--
Federal and state income 31,008 35,638
Other 45,433 15,271
Interest accrued 54,010 51,941
Vacation pay accrued 27,083 28,369
Miscellaneous 80,089 96,485
-------------- --------------
Total 1,053,463 992,183
-------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 1,199,165 1,177,687
Accumulated deferred investment tax credits 288,466 294,071
Prepaid capacity revenues, net 116,351 122,496
Uranium enrichment decontamination and decommissioning fund 33,741 33,741
Deferred credits related to income taxes 356,389 364,792
Natural disaster reserve 22,129 20,757
Miscellaneous 200,439 222,436
-------------- --------------
Total 2,216,680 2,235,980
-------------- --------------
TOTAL CAPITALIZATION AND LIABILITIES $ 8,814,080 $ 8,733,846
============== ==============
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
19
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1997 vs. SECOND QUARTER 1996
AND
YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996
RESULTS OF OPERATIONS
Earnings
ALABAMA's net income after dividends on preferred stock for the second quarter
and year-to-date 1997 was $63.1 million and $120.9 million, respectively,
compared to $95.8 million and $168.9 million for the corresponding periods of
1996. Earnings decreased 34.1% for the quarter and 28.4% year-to-date due
primarily to extremely mild weather and a decrease in prices charged to
commercial and industrial customers.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------
Second Quarter Year-To-Date
-------------------------- -----------------------------
(in thousands) % (in thousands) %
Revenues............................................. $(28,624) (3.9) $(25,920) (1.9)
Revenues from affiliates............................. (22,874) (44.2) (53,619) (41.5)
Purchased power from non-affiliates.................. (6,119) (56.2) (11,712) (59.0)
Other operation expense.............................. (6,461) (4.8) (9,180) (3.7)
Maintenance.......................................... 9,488 13.9 15,504 11.8
Income taxes applicable to other income.............. (13,371) (92.4) (13,709) (97.3)
Distributions on preferred securities of
subsidiary trusts................................. 3,801 212.6 7,446 237.1
Dividends on preferred stock......................... (1,660) (25.1) (2,574) (19.4)
Revenues. Excluding fuel revenues, which represent the pass-through of fuel
expenses and do not affect net income, revenues for the second quarter and
year-to-date 1997 decreased $40.4 million and $56.6 million, respectively,
compared to the corresponding periods of 1996. The decrease in revenues was due
to a reduction in the sale of energy to retail customers and a reduction in the
rates charged to industrial and commercial customers. Retail energy sales were
down by 4.1% for the quarter and 2.7% year-to-date primarily due to a 15.5%
decrease for the quarter and a 12.5% decrease year-to-date in energy sales to
residential customers. This decrease in energy sales to residential customers is
primarily a result of much milder-than-normal temperatures.
Revenues from affiliates. Revenues from sales to affiliated companies
within the Southern electric system, as well as purchases of energy, will vary
from period to period depending on demand, the availability, and cost of
generating resources at each company. These transactions did not have a
significant impact on earnings.
Purchased power from non-affiliates. This decrease for the quarter and
year-to-date 1997 resulted from reduced demand for energy due to mild
temperatures.
20
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other operation expense. The decrease in other operation expense for both
the current quarter and year-to-date 1997 is primarily due to lower
administrative and general expenses compared to the same periods of 1996.
Maintenance expense. Maintenance expense increased for the second quarter
and year-to-date 1997 compared to the same periods of 1996 primarily due to an
increase in the accrual of estimated maintenance expenses related to nuclear
refueling outages.
Income taxes applicable to other income. The primary reason for this change
is attributable to ALABAMA's donation in June 1996 of certain nonutility
property which resulted in a reduction of income taxes applicable to other
income of approximately $10.6 million.
Distributions on preferred securities of subsidiary trusts. The change in
this item resulted primarily from the issuance of additional mandatorily
redeemable preferred securities. For additional information, see Item 7
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Structure" of ALABAMA in the
Form 10-K.
Dividends on preferred stock. The decrease for the quarter and year-to-date
1997, compared to the corresponding periods of 1996, is due to redemptions
during the first half of 1997.
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 ranging from energy sales growth to a less regulated, more competitive
environment.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, the Southern electric system
is positioning the business to meet the challenge of increasing competition. For
additional information, see Item 1 - BUSINESS - "Competition" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in
the Form 10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
"Environmental Matters" of ALABAMA in the Form 10-K.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of "comprehensive
income," which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. ALABAMA will adopt the standard in
1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement No. 131, which
supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for
segment reporting, using the "management approach," in which reportable
segments are based on the same criteria on which management disaggregates a
business for making operating decisions and assessing performance. ALABAMA is
in the process of evaluating Statement No. 131 and its impact and will adopt
the standard by 1998.
21
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Notes (B), (C), (G), (H), (J) and (K) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
Reference is also made to Part II - Item 1 - "Legal Proceedings" herein.
FINANCIAL CONDITION
Overview
Major changes in ALABAMA's financial condition during the first six months of
1997 included the addition of approximately $193.6 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operating activities. See ALABAMA's Condensed Statements of Cash Flows for
further details.
Financing Activities
During the first half of 1997, redemptions of first mortgage bonds and preferred
stock of ALABAMA totaled $131.8 million. Also, Alabama Power Capital Trust II, a
statutory business trust established for the purpose of holding ALABAMA's junior
subordinated notes and issuing trust preferred securities and common securities,
sold $200.0 million of its 7.60% trust originated preferred securities which are
guaranteed by ALABAMA. Additionally, ALABAMA redeemed $50 million of 7.60%
preferred stock (Second 1992 Series) in July 1997. For additional information,
see Note (I) in the "Notes to the Condensed Financial Statements" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Structure" of ALABAMA in the
Form 10-K.
ALABAMA will continue to retire higher-cost debt and preferred stock and
replace these securities with lower-cost capital, if market conditions permit.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA
under "Capital Requirements," "Other Capital Requirements" and "Environmental
Matters" in the Form 10-K for a description of ALABAMA's capital requirements
for its construction program, maturing debt and environmental compliance
efforts.
Sources of Capital
In addition to the financing activities previously described herein, ALABAMA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. Currently,
ALABAMA expects to have adequate earnings coverage ratios for any anticipated
security sales through at least 1999. See Item 1 - BUSINESS - "Financing
Programs" in the Form 10-K for additional information.
22
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet short-term cash needs and contingencies, ALABAMA had at June 30,
1997, approximately $6.3 million of cash and cash equivalents and had unused
committed lines of credit of approximately $814 million (including $208 million
of such lines under which borrowings may be made only to fund purchase
obligations relating to variable rate pollution control bonds) with regulatory
authority for up to $750 million of short-term borrowings. At June 30, 1997,
ALABAMA had outstanding $94.0 million of short-term notes payable to banks and
$418.9 million of commercial paper. Since ALABAMA has no major traditional
generating plants under construction, management believes that the need for
working capital can be adequately met by utilizing lines of credit without
maintaining large cash balances.
23
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ALABAMA POWER COMPANY:
We have reviewed the accompanying condensed balance sheet of ALABAMA POWER
COMPANY as of June 30, 1997, and the related condensed statements of income and
cash flows for the three-month and six-month periods ended June 30, 1997 and
1996. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1996
(not presented herein) and, in our report dated February 12, 1997, we expressed
an unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed balance sheet as of December 31, 1996 is
fairly stated, in all material respects, in relation to the balance sheet from
which it has been derived.
/S/ Arthur Andersen LLP
Birmingham, Alabama
August 8, 1997
24
GEORGIA POWER COMPANY
25
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING REVENUES:
Revenues $ 1,003,962 $ 1,125,309 $ 1,955,415 $ 2,140,662
Revenues from affiliates 11,384 8,857 18,643 22,323
-------------- -------------- -------------- --------------
Total operating revenues 1,015,346 1,134,166 1,974,058 2,162,985
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Operation--
Fuel 202,000 214,191 380,629 402,685
Purchased power from non-affiliates 31,894 40,852 58,669 77,772
Purchased power from affiliates 32,213 57,281 73,584 122,757
Provision for separation benefits (Note H) 2,267 8,374 2,871 26,874
Other 160,881 195,459 311,886 361,003
Maintenance 79,337 76,777 154,287 152,603
Depreciation and amortization 117,525 107,748 246,827 215,268
Amortization of deferred Plant Vogtle costs (Note M) 37,584 33,234 75,211 66,993
Taxes other than income taxes 50,086 51,714 104,017 106,860
Federal and state income taxes 96,751 115,555 181,400 205,239
-------------- -------------- -------------- --------------
Total operating expenses 810,538 901,185 1,589,381 1,738,054
-------------- -------------- -------------- --------------
OPERATING INCOME 204,808 232,981 384,677 424,931
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 697 - 1,239 255
Equity in earnings of unconsolidated subsidiary 1,005 968 1,985 1,941
Interest income 2,275 2,013 2,870 2,914
Other, net (5,252) (5,717) (10,850) (9,390)
Income taxes applicable to other income 1,601 2,388 3,967 2,526
-------------- -------------- -------------- --------------
INCOME BEFORE INTEREST CHARGES 205,134 232,633 383,888 423,177
-------------- -------------- -------------- --------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 50,357 52,680 98,812 106,110
Allowance for debt funds used during construction (2,426) (3,301) (5,926) (6,491)
Interest on interim obligations 2,745 6,118 6,438 11,157
Amortization of debt discount, premium and expense, net 3,717 3,625 7,491 7,472
Other interest charges 3,060 5,133 5,984 8,248
Distributions on preferred securities of subsidiary companies 10,749 2,250 20,166 4,500
-------------- -------------- -------------- --------------
Interest charges and other, net 68,202 66,505 132,965 130,996
-------------- -------------- -------------- --------------
NET INCOME 136,932 166,128 250,923 292,181
DIVIDENDS ON PREFERRED STOCK 6,422 11,839 14,378 23,491
-------------- -------------- -------------- --------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 130,510 $ 154,289 $ 236,545 $ 268,690
============== ============== ============== ==============
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
26
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Six Months
Ended June 30,
1997 1996
OPERATING ACTIVITIES:
Net income $ 250,923 $ 292,181
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 297,654 264,814
Deferred income taxes and investment tax credits, net (28,586) 14,365
Allowance for equity funds used during construction (1,239) (255)
Amortization of deferred Plant Vogtle costs (Note M) 75,211 66,993
Other, net 43,804 41,927
Changes in certain current assets and liabilities--
Receivables, net 53,617 (13,207)
Inventories (17,345) 8,552
Payables (62,605) (26,551)
Taxes accrued 34,221 27,766
Energy cost recovery, retail 20,776 (5,618)
Other (26,739) (13,416)
-------------- --------------
Net cash provided from operating activities 639,692 657,551
-------------- --------------
INVESTING ACTIVITIES:
Gross property additions (228,986) (242,457)
Other (11,611) (53,953)
-------------- --------------
Net cash used for investing activities (240,597) (296,410)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds--
Preferred securities 364,250 -
Pollution control bonds 90,000 51,345
First mortgage bonds - 10,000
Retirements--
Preferred stock (133,183) -
Pollution control bonds - (6,840)
First mortgage bonds (60,258) (150,000)
Special deposits - redemption funds (45,546) (51,345)
Interim obligations, net (328,594) 40,737
Payment of preferred stock dividends (14,976) (23,364)
Payment of common stock dividends (253,700) (243,600)
Miscellaneous (13,048) (204)
-------------- --------------
Net cash used for financing activities (395,055) (373,271)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,040 (12,130)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,356 28,930
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,396 $ 16,800
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 125,492 $ 126,668
Income taxes (net of refunds) 166,981 166,178
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
27
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At June 30,
1997 At December 31,
(Unaudited) 1996
---------------- ------------------
UTILITY PLANT:
Plant in service $ 14,915,851 $ 14,769,573
Less accumulated provision for depreciation 5,021,893 4,793,638
---------------- ----------------
9,893,958 9,975,935
Nuclear fuel, at amortized cost 122,278 121,840
Construction work in progress 257,623 256,141
---------------- ----------------
Total 10,273,859 10,353,916
---------------- ----------------
OTHER PROPERTY AND INVESTMENTS:
Southern Electric Generating Company, at equity 25,370 26,032
Nuclear decommissioning trusts, at market 170,650 130,178
Miscellaneous 88,626 103,787
---------------- ----------------
Total 284,646 259,997
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 19,396 15,356
Receivables--
Customer accounts receivable 379,682 392,328
Other accounts and notes receivable 164,389 159,499
Affiliated companies 16,270 20,095
Accumulated provision for uncollectible accounts (3,000) (4,000)
Fossil fuel stock, at average cost 140,391 117,382
Materials and supplies, at average cost 253,156 258,820
Prepayments 102,609 109,771
Vacation pay deferred 39,601 39,965
---------------- ----------------
Total 1,112,494 1,109,216
---------------- ----------------
DEFERRED CHARGES:
Deferred charges related to income taxes 786,862 818,418
Deferred Plant Vogtle costs (Note M) 95,778 170,988
Premium on reacquired debt, being amortized 161,169 166,670
Debt expense, being amortized 43,201 32,693
Miscellaneous 157,086 159,153
---------------- ----------------
Total 1,244,096 1,347,922
---------------- ----------------
TOTAL ASSETS $ 12,915,095 $ 13,071,051
================ ================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
28
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At June 30,
1997 At December 31,
(Unaudited) 1996
---------------- ------------------
CAPITALIZATION:
Common stock equity--
Common stock (without par value)--
authorized 15,000,000 shares; outstanding 7,761,500 shares $ 344,250 $ 344,250
Paid-in capital 2,134,886 2,134,886
Premium on preferred stock 371 371
Retained earnings 1,657,610 1,674,774
---------------- ----------------
4,137,117 4,154,281
Preferred stock 321,699 464,611
Company obligated mandatorily redeemable preferred securities
of subsidiaries substantially all of whose assets are junior
subordinated debentures or notes (Note I) 689,250 325,000
Long-term debt 3,200,707 3,200,419
---------------- ----------------
Total 8,348,773 8,144,311
---------------- ----------------
CURRENT LIABILITIES:
Preferred stock due within one year 58,757 49,028
Long-term debt due within one year 90,380 60,622
Notes payable to banks 1,300 207,300
Commercial paper 100,602 223,196
Accounts payable--
Affiliated companies 70,099 66,821
Other 197,129 263,093
Customer deposits 68,661 64,901
Taxes accrued--
Federal and state income 54,533 15,497
Other 95,846 100,661
Interest accrued 79,918 79,936
Vacation pay accrued 31,666 38,597
Miscellaneous 122,480 114,530
---------------- ----------------
Total 971,371 1,284,182
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 2,462,759 2,522,945
Accumulated deferred investment tax credits 408,117 415,477
Deferred credits related to income taxes 368,666 382,381
Employee benefits provisions 181,118 186,319
Disallowed Plant Vogtle capacity buyback costs 56,635 57,250
Miscellaneous 117,656 78,186
---------------- ----------------
Total 3,594,951 3,642,558
---------------- ----------------
TOTAL CAPITALIZATION AND LIABILITIES $ 12,915,095 $ 13,071,051
================ ================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
29
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1997 vs. SECOND QUARTER 1996
AND
YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996
RESULTS OF OPERATIONS
Earnings
GEORGIA's net income after dividends on preferred stock for the second quarter
and year-to-date 1997 was $130.5 million and $236.5 million, respectively,
compared to $154.3 million and $268.7 million for the corresponding periods in
1996. Earnings decreased by 15.4% for the quarter and 12.0% year-to-date
primarily as a result of decreased revenues due to milder-than-normal weather
experienced during both periods.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
-------------------------------------------------------
Second Quarter Year-To-Date
-------------------------- ----------------------------
(in thousands) % (in thousands) %
Revenues............................................. $(121,347) (10.8) $(185,247) (8.7)
Revenues from affiliates............................. 2,527 28.5 (3,680) (16.5)
Purchased power from non-affiliates.................. (8,958) (21.9) (19,103) (24.6)
Purchased power from affiliates...................... (25,068) (43.8) (49,173) (40.1)
Other operation expense.............................. (34,578) (17.7) (49,117) (13.6)
Depreciation and amortization expense................ 9,777 9.1 31,559 14.7
Distributions on preferred securities
of subsidiary companies........................... 8,499 377.7 15,666 348.1
Dividends on preferred stock......................... (5,417) (45.8) (9,113) (38.8)
Revenues. Excluding fuel revenues, which represent the pass-through of fuel
expenses and do not affect income, revenues for the second quarter of 1997
decreased $77 million and for year-to-date 1997 decreased $108 million, compared
to the corresponding periods of 1996. Retail revenues, excluding fuel revenues,
decreased 9.1%, or $72 million for the current quarter and 7.0%, or $105 million
year-to-date as compared to the corresponding periods of 1996. The decrease in
retail revenues is primarily due to a decrease in residential and commercial
kilowatt-hours sold. Retail energy sales to residential and commercial customers
decreased 16.1% and 2.4%, respectively, for the second quarter 1997 and 12.9%
and 2.0%, respectively, for year-to-date 1997 when compared to the corresponding
periods in 1996, as a result of milder-than-normal temperatures. Additionally,
although industrial sales remained relatively constant for the second quarter of
1997 and increased 1.6% year-to-date 1997 when compared to the corresponding
periods in 1996, industrial revenues decreased primarily as a result of more
customers taking advantage of load management rates.
Revenues from affiliates and Purchased power from affiliates. Revenues from
sales to affiliated companies within the Southern electric system, as well as
purchases of energy, will vary from period to period depending on demand and the
availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
30
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased power from non-affiliates. The decrease in purchased power from
non-affiliates for the second quarter and year-to-date 1997 compared to the
corresponding periods of 1996 resulted from a decrease in energy purchases due
to milder-than-normal temperatures.
Other operation expense. The decrease in other operation expense for the
current quarter and year-to-date is primarily due to an adjustment in 1996 to a
deferred regulatory asset as a result of changes in GEORGIA's retiree benefits
plan and lower administrative and general expenses compared to corresponding
periods of 1996.
Depreciation and amortization expense. The increase in depreciation and
amortization for the current quarter and year-to-date compared to the same
period of 1996 is primarily due to additional depreciation charges of $8 million
and $28 million, respectively, pursuant to a Georgia PSC retail accounting order
discussed below. See "Future Earnings Potential" below and Note (L) in the
"Notes to the Condensed Financial Statements" herein for further details.
Distributions on preferred securities of subsidiary companies. The increase
in this item resulted primarily from the issuance of additional mandatorily
redeemable preferred securities in August 1996, January 1997 and June 1997. For
additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Financing Activities" of GEORGIA in the Form 10-K, and Note (I) in the "Notes
to the Condensed Financial Statements" herein.
Dividends on preferred stock. The decline in dividends on preferred stock
in each period reflects the redemption of various issues of such securities.
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 energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, the Southern electric system
is positioning the business to meet the challenge of increasing competition. For
additional information, see Item 1 - BUSINESS - "Competition" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in
the Form 10-K.
Effective January 1, 1996, GEORGIA began operating under a three-year
retail accounting order. Under the order, GEORGIA's earnings are evaluated
against a retail return on common equity range of 10% to 12.5%. GEORGIA is
required to absorb cost increases of approximately $29.0 million annually during
the order's three-year operation, including $14.0 million annually of
accelerated depreciation of electric plant. Reference is made to Note (L) in the
"Notes to the Condensed Financial Statements" herein for additional information.
The staff of the Georgia PSC has issued a report regarding its prudence
review of the Rocky Mountain pumped storage hydroelectric plant. Reference is
made to Note (N) in the "Notes to the Condensed Financial Statements" herein for
additional information.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
"Environmental Issues" of GEORGIA in the Form 10-K.
31
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of "comprehensive
income," which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. GEORGIA will adopt the standard in
1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement No. 131, which
supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for
segment reporting, using the "management approach," in which reportable
segments are based on the same criteria on which management disaggregates a
business for making operating decisions and assessing performance. GEORGIA is
in the process of evaluating Statement No. 131 and its impact and will adopt
the standard by 1998.
Reference is made to Notes (B), (C), (G) and (L) through (P) in the "Notes
to the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
Reference is also made to Part II - Item 1 - "Legal Proceedings" herein.
FINANCIAL CONDITION
Overview
The major change in GEORGIA's financial condition during the first six months of
1997 was the addition of approximately $229 million to utility plant. The funds
for these additions and other capital requirements were derived primarily from
operations. See GEORGIA's Condensed Statements of Cash Flows for further
details.
Financing Activities
During the first half of 1997, maturities and redemptions of first mortgage
bonds and preferred stock by GEORGIA totaled $193 million. In January 1997,
Georgia Power Capital Trust II, a statutory business trust established for the
purpose of holding GEORGIA's junior subordinated notes and issuing trust
preferred securities and common securities, sold $175.0 million of its 7.60%
trust preferred securities, which are guaranteed by GEORGIA. (See Note (I) in
the " Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Financing Activities" of GEORGIA in the Form 10-K for
further details.)
In April 1997, GEORGIA sold, through public authorities, $90.0 million of
variable rate pollution control revenue bonds due 2032. The proceeds were
applied to the redemption on July 1, 1997 of $90.0 million outstanding principal
amount of 8.375% pollution control revenue bonds.
In June 1997, Georgia Power Capital Trust III , a statutory business trust
established for the purpose of holding GEORGIA's junior subordinated notes and
issuing trust preferred securities and common securities, sold $189.3 million of
its 7.75% quarterly income preferred securities, which are guaranteed by
GEORGIA. (See Note (I) in the " Notes to the Condensed Financial Statements" for
further details.)
GEORGIA plans to continue, to the extent possible, a program to retire
higher-cost debt and preferred stock and replace these securities with
lower-cost capital.
32
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA
under "Liquidity and Capital Requirements" and "Environmental Issues" in the
Form 10-K for a description of GEORGIA's capital requirements for its
construction program and environmental compliance efforts.
Sources of Capital
In addition to the financing activities previously described herein, GEORGIA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. Currently,
GEORGIA expects to have adequate earnings coverage ratios for any anticipated
security sales through at least 1999. See Item 1 - BUSINESS - "Financing
Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GEORGIA had at June 30,
1997, approximately $19.4 million of cash and cash equivalents and approximately
$946.1 million of unused credit arrangements with banks (including $681.1
million of such arrangements under which borrowings may be made only to fund
purchase obligations relating to variable rate pollution control bonds). At June
30, 1997, GEORGIA had outstanding $1.3 million of short-term notes payable to
banks and $100.6 million of commercial paper. Since GEORGIA has no major
generating plants under construction, management believes that the need for
working capital can be adequately met by utilizing lines of credit without
maintaining large cash balances.
33
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO GEORGIA POWER COMPANY:
We have reviewed the accompanying condensed balance sheet of GEORGIA POWER
COMPANY (a Georgia corporation) as of June 30, 1997, and the related condensed
statements of income and cash flows for the three-month and six-month periods
ended June 30, 1997 and 1996. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1996
(not presented herein), and, in our report dated February 12, 1997, we expressed
an unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying condensed balance sheet as of December 31, 1996, is
fairly stated, in all material respects, in relation to the balance sheet from
which it has been derived.
/S/ Arthur Andersen LLP
Atlanta, Georgia
August 8, 1997
34
GULF POWER COMPANY
35
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING REVENUES:
Revenues $ 139,443 $ 150,323 $ 279,647 $ 303,993
Revenues from affiliates 5,849 3,498 7,019 4,749
------------- ------------- ------------ ------------
Total operating revenues 145,292 153,821 286,666 308,742
------------- ------------- ------------ ------------
OPERATING EXPENSES:
Operation--
Fuel 40,782 45,922 77,774 84,135
Purchased power from non-affiliates 1,693 2,187 2,789 3,863
Purchased power from affiliates 6,036 6,023 14,899 25,342
Other 31,207 29,102 61,827 54,738
Maintenance 13,291 14,315 22,801 29,362
Depreciation and amortization 14,446 14,089 28,892 28,174
Taxes other than income taxes 12,264 12,384 25,039 25,850
Federal and state income taxes 6,420 8,234 13,280 15,512
------------- ------------- ------------ ------------
Total operating expenses 126,139 132,256 247,301 266,976
------------- ------------- ------------ ------------
OPERATING INCOME 19,153 21,565 39,365 41,766
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 1 2 2 11
Interest income 179 417 508 766
Other, net 61 (276) (193) (747)
Income taxes applicable to other income (144) (97) (221) (93)
------------- ------------- ------------ ------------
INCOME BEFORE INTEREST CHARGES 19,250 21,611 39,461 41,703
------------- ------------- ------------ ------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 5,490 6,236 11,287 12,384
Other interest charges 806 223 1,522 505
Interest on notes payable 239 625 522 1,129
Amortization of debt discount, premium, and expense, net 570 518 1,136 1,043
Allowance for debt funds used during construction (3) (10) (6) (58)
Distributions on preferred securities of subsidiary trust 762 - 1,279 -
------------- ------------- ------------ ------------
Interest charges and other, net 7,864 7,592 15,740 15,003
------------- ------------- ------------ ------------
NET INCOME 11,386 14,019 23,721 26,700
DIVIDENDS ON PREFERRED STOCK 1,000 1,438 2,595 2,861
------------- ------------- ------------ ------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 10,386 $ 12,581 $ 21,126 $ 23,839
============= ============= ============ ============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
36
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Six Months
Ended June 30,
1997 1996
OPERATING ACTIVITIES:
Net income $ 23,721 $ 26,700
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 36,026 37,052
Deferred income taxes (3,015) 1,483
Allowance for equity funds used during construction (2) (11)
Deferred costs of 1995 coal contract renegotiation 1,246 4,227
Other, net 2,379 605
Changes in certain current assets and liabilities--
Receivables, net (105) (7,004)
Inventories (7,180) 5,759
Payables (1,539) (7,546)
Taxes accrued 7,218 12,753
Current costs of 1995 coal contract renegotiation 7,313 (3,771)
Other (4,178) (7,154)
----------- ------------
Net cash provided from operating activities 61,884 63,093
------------ ------------
INVESTING ACTIVITIES:
Gross property additions (21,543) (38,212)
Other (1,221) (2,583)
----------- ------------
Net cash used for investing activities (22,764) (40,795)
------------ ------------
FINANCING ACTIVITIES:
Proceeds--
Preferred securities 40,000 -
First mortgage bonds - 30,000
Pollution control bonds - 33,275
Other long-term debt - 22,148
Retirements--
Preferred stock (24,500) -
First mortgage bonds - (1,750)
Pollution control bonds - (33,275)
Other long-term debt (7,868) (27,263)
Notes payable, net (5,500) (16,000)
Payment of preferred stock dividends (3,048) (2,861)
Payment of common stock dividends (36,700) (24,700)
Miscellaneous (1,527) (1,754)
----------- ------------
Net cash used for financing activities (39,143) (22,180)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 51 118
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 807 680
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 858 $ 798
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 11,181 $ 12,850
Income taxes 13,073 4,271
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
37
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At June 30,
1997 At December 31,
(Unaudited) 1996
-------------- ---------------
UTILITY PLANT:
Plant in service $ 1,742,147 $ 1,734,510
Less accumulated provision for depreciation 716,852 694,245
-------------- --------------
1,025,295 1,040,265
Construction work in progress 29,430 23,465
-------------- --------------
Total 1,054,725 1,063,730
-------------- --------------
OTHER PROPERTY AND INVESTMENTS: 633 652
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents 858 807
Receivables--
Customer accounts receivable 68,020 67,727
Other accounts and notes receivable 3,022 3,098
Affiliated companies 1,572 1,821
Accumulated provision for uncollectible accounts (652) (789)
Fossil fuel stock, at average cost 35,525 28,352
Materials and supplies, at average cost 30,259 30,252
Current portion of deferred coal contract costs 9,002 16,389
Regulatory clauses under recovery 1,910 4,144
Prepaid income taxes - 353
Other prepayments 10,345 8,833
Vacation pay deferred 4,055 4,055
-------------- --------------
Total 163,916 165,042
-------------- --------------
DEFERRED CHARGES:
Deferred charges related to income taxes 28,006 28,313
Debt expense and loss, being amortized 22,686 23,308
Deferred coal contract costs 7,046 13,126
Deferred storm charges 1,525 3,275
Miscellaneous 11,564 10,920
-------------- --------------
Total 70,827 78,942
-------------- --------------
TOTAL ASSETS $ 1,290,101 $ 1,308,366
============== ==============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
38
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At June 30,
1997 At December 31,
(Unaudited) 1996
-------------- ---------------
CAPITALIZATION:
Common stock equity--
Common stock (without par value)--
authorized and outstanding--992,717 shares $ 38,060 $ 38,060
Paid-in capital 218,438 218,438
Premium on preferred stock 44 81
Retained earnings 173,541 179,179
-------------- --------------
430,083 435,758
Preferred stock 65,102 65,102
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding Company Junior Subordinated Notes (Note I) 40,000 -
Long-term debt 307,540 331,880
-------------- --------------
Total 842,725 832,740
-------------- --------------
CURRENT LIABILITIES:
Preferred stock due within one year - 24,500
Long-term debt due within one year 56,431 40,972
Notes payable 19,500 25,000
Accounts payable--
Affiliated companies 8,114 10,274
Other 22,473 22,496
Customer deposits 13,721 13,464
Taxes accrued--
Federal and state income 1,617 -
Other 12,117 8,342
Interest accrued 8,160 7,629
Regulatory clauses over recovery 3,229 5,884
Vacation pay accrued 4,055 4,055
Dividends declared 1,100 11,453
Miscellaneous 2,561 5,668
-------------- --------------
Total 153,078 179,737
-------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 164,193 163,857
Deferred credits related to income taxes 62,169 64,354
Accumulated deferred investment tax credits 32,656 33,760
Accumulated provision for postretirement benefits 19,263 18,339
Miscellaneous 16,017 15,579
-------------- --------------
Total 294,298 295,889
-------------- --------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,290,101 $ 1,308,366
============== ==============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
39
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1997 vs. SECOND QUARTER 1996
AND
YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996
RESULTS OF OPERATIONS
Earnings
GULF's net income after dividends on preferred stock for the second quarter and
year-to-date 1997 was $10.4 million and $21.1 million, respectively, compared to
$12.6 million and $23.8 million for the corresponding periods of 1996. The
earnings decrease of 17.4% and 11.4% for the quarter and year-to-date,
respectively, was primarily due to milder-than-normal temperatures.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
----------------------------------------------------------
Second Quarter Year-To-Date
------------------------------ ---------------------------
(in thousands) % (in thousands) %
Revenues......................................... $(10,880) (7.2) $(24,346) (8.0)
Revenues from affiliates......................... 2,351 67.2 2,270 47.8
Fuel expense..................................... (5,140) (11.2) (6,361) (7.6)
Purchased power from affiliates.................. 13 0.2 (10,443) (41.2)
Other operation expense.......................... 2,105 7.2 7,089 13.0
Maintenance expense.............................. (1,024) (7.2) (6,561) (22.3)
Distributions on preferred securities of
subsidiary trust............................. 762 N/A 1,279 N/A
Dividends on preferred stock..................... (438) (30.5) (266) (9.3)
N/A - Not applicable
Revenues. Excluding fuel and other revenues which represent the
pass-through of fuel expense and certain other expenses and do not affect net
income, revenues for the second quarter and year-to-date 1997 decreased $3.4
million or 3.8% and $9.8 million or 5.6%, respectively, compared to the
corresponding periods of 1996. Retail revenues decreased 5.2% for the quarter
and 5.5% year-to-date due primarily to a decrease in the amount of energy sold
to residential customers. Sales to residential customers for the quarter and
year-to-date decreased 8.9% and 10.4%, respectively, due to the
milder-than-normal temperatures. Energy sales to industrial customers increased
8.1% and 3.3% for the quarter and year-to-date 1997, respectively, however
revenues from this sector had only a slight increase of 0.7% for the quarter and
a 1.6% decrease year-to-date 1997 primarily due to the participation of these
customers in the Real-Time-Pricing program. See Item 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K for
information on initiatives to remain competitive and to meet conservation goals
set by the Florida PSC.
Revenues from affiliates and Purchased power from affiliates. Purchased
power from affiliates year-to-date compared to the corresponding period of 1996
was lower due to maintenance outages at Plant Crist and Plant Daniel during the
first half of 1996. Revenues from sales to affiliated companies within the
Southern electric system, as well as purchases of energy, will vary from period
to period depending on demand and the availability
40
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
and cost of generating resources at each company. These transactions do not
have a significant impact on earnings.
Fuel expense. The decrease in fuel expense for the second quarter and
year-to-date 1997 was primarily due to decreased generation as a result of the
milder-than-normal temperatures and a lower cost of fuel.
Other operation expense. The increase in other operation expense was
primarily due to an increase in amortization costs related to the buyout and
renegotiation of a coal supply contract.
Maintenance expense. The decrease in maintenance expense for the second
quarter and year-to-date is primarily due to the scheduled maintenance on
production facilities which occurred in the first half of 1996 at Plant Crist
and Plant Daniel.
Distributions on preferred securities of subsidiary trust. See "Financing
Activities" herein for details relating to the January 1997 issuance by Gulf
Power Capital Trust I of its 7.625% trust preferred securities.
Dividends on preferred stock. This decrease for the second quarter and
year-to-date 1997 when compared to the corresponding periods of 1996 is due to
preferred stock redemptions in the first quarter of 1997.
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 ranging from energy sales growth to a potentially less regulated, more
competitive environment.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, the Southern electric system
is positioning the business to meet the challenge of increasing competition. For
additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the
Form 10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs are not fully recovered through GULF's Environmental Cost Recovery Clause.
For additional information about the Clean Air Act and other environmental
issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" of GULF in the Form 10-K.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of "comprehensive
income," which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. GULF will adopt the standard in 1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement No. 131, which
supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for
segment reporting, using the "management approach," in which reportable
segments are based on the same criteria on which management disaggregates a
business for making operating decisions and assessing performance. GULF is in
the process of evaluating Statement No. 131 and its impact and will adopt the
standard by 1998.
41
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Notes (B) and (G) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
FINANCIAL CONDITION
Overview
Major changes in GULF's financial condition during the first six months of 1997
included the addition of approximately $21.5 million to utility plant. The funds
for these additions and other capital requirements were derived primarily from
operations. See GULF's Condensed Statements of Cash Flows for further details.
Financing Activities
During the first quarter of 1997, Gulf Power Capital Trust I, a statutory
business trust established for the purpose of holding GULF's junior subordinated
notes and issuing trust preferred securities and common securities, sold $40
million of its 7.625% trust preferred securities which are guaranteed by GULF.
For additional information, see Note (I) in the "Notes to the Condensed
Financial Statements" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Sources of Capital" of GULF in the Form 10-K. A portion of these proceeds was
used to redeem $5 million of 7.88% cumulative preferred stock, $5 million of
7.52% cumulative preferred stock and $14.5 million of 7.00% cumulative preferred
stock during the first quarter of 1997 and $15 million of 7.30% cumulative
preferred stock in August 1997.
On July 1, 1997, GULF sold, through public authorities, $40.93 million of
variable rate pollution control revenue refunding bonds due July 1, 2022. The
proceeds were used to redeem $32 million aggregate principal amount of 8.25%
pollution control revenue refunding bonds; $5 million aggregate principal amount
of 6.75% pollution control revenue refunding bonds; and $3.93 million aggregate
principal amount of 6.75% pollution control revenue refunding bonds.
Also, on August 1, 1997, GULF sold $20 million of Series B 7.50% Junior
Subordinated Notes due June 30, 2037. The proceeds were used to pay a portion of
the scheduled maturity of $25 million of 5.875% first mortgage bonds that were
due on August 1, 1997.
GULF plans to continue, to the extent possible, a program to retire
higher-cost debt and preferred stock and replace these securities with
lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under
"Capital Requirements for Construction," "Environmental Matters" and "Other
Capital Requirements" in the Form 10-K for a description of GULF's capital
requirements for its construction program, environmental compliance efforts and
maturing debt.
42
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 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. Currently,
GULF expects to have adequate earnings coverage ratios for any anticipated
security sales through at least 1999. See Item 1 - BUSINESS - "Financing
Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GULF had at June 30, 1997,
approximately $0.9 million of cash and cash equivalents and $95.9 million of
unused committed lines of credit with banks (including $61.9 million liquidity
support for variable rate pollution control bonds). At June 30, 1997, GULF had
outstanding $19.5 million of short-term notes payable to banks. Since GULF has
no major generating plants under construction, management believes that the need
for working capital can be adequately met by utilizing lines of credit without
maintaining large cash balances.
43
MISSISSIPPI POWER COMPANY
44
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
OPERATING REVENUES:
Revenues $ 127,350 $ 130,340 $ 245,139 $ 255,300
Revenues from affiliates 1,565 6,409 679 8,403
------------ -------------- ------------ ------------
Total operating revenues 128,915 136,749 245,818 263,703
------------ -------------- ------------ ------------
OPERATING EXPENSES:
Operation--
Fuel 30,489 36,577 60,030 66,477
Purchased power from non-affiliates 1,714 4,243 2,198 5,936
Purchased power from affiliates 10,628 7,521 21,143 20,519
Other 23,847 26,514 44,671 51,272
Maintenance 12,392 14,542 22,004 24,838
Depreciation and amortization 11,399 11,980 22,593 23,353
Taxes other than income taxes 11,283 10,727 22,180 21,450
Federal and state income taxes 7,823 6,954 14,527 14,093
------------ -------------- ------------ ------------
Total operating expenses 109,575 119,058 209,346 227,938
------------ -------------- ------------ ------------
OPERATING INCOME 19,340 17,691 36,472 35,765
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 7 29 11 124
Interest income 221 122 362 178
Other, net 966 1,302 1,620 2,732
Income taxes applicable to other income (443) (471) (772) (1,023)
------------ -------------- ------------ ------------
INCOME BEFORE INTEREST CHARGES 20,091 18,673 37,693 37,776
------------ -------------- ------------ ------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 4,994 4,935 9,889 10,428
Allowance for debt funds used during construction (15) (212) (23) (316)
Interest on notes payable 9 621 56 851
Amortization of debt discount, premium, and expense, net 387 396 774 769
Other interest charges 175 309 314 500
Distributions on preferred securities of subsidiary trust 699 - 971 -
------------ -------------- ------------ ------------
Interest charges and other, net 6,249 6,049 11,981 12,232
------------ -------------- ------------ ------------
NET INCOME 13,842 12,624 25,712 25,544
DIVIDENDS ON PREFERRED STOCK 1,224 1,224 2,449 2,449
------------ -------------- ------------ ------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 12,618 $ 11,400 $ 23,263 $ 23,095
============ ============== ============ ============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
45
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Six Months
Ended June 30,
1997 1996
OPERATING ACTIVITIES:
Net income $ 25,712 $ 25,544
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 24,652 26,802
Deferred income taxes 1,326 (2,233)
Allowance for equity funds used during construction (11) (124)
Other, net 333 (1,630)
Changes in certain current assets and liabilities--
Receivables, net (3,478) (8,281)
Inventories (2,449) 2,195
Payables (7,294) (3,295)
Taxes accrued (13,007) (11,164)
Other (990) (1,184)
------------ ------------
Net cash provided from operating activities 24,794 26,630
------------ ------------
INVESTING ACTIVITIES:
Gross property additions (26,681) (28,810)
Other (1,528) (1,769)
------------ ------------
Net cash used for investing activities (28,209) (30,579)
------------ ------------
FINANCING ACTIVITIES:
Proceeds--
Capital contribution - 27
Preferred securities 35,000 -
Other long-term debt - 30,000
Retirements--
First mortgage bonds - (45,447)
Other long-term debt - (20,000)
Notes payable, net - 55,000
Payment of preferred stock dividends (2,449) (2,449)
Payment of common stock dividends (23,400) (21,300)
Miscellaneous - (2,932)
------------ ------------
Net cash provided from (used for) financing activities 9,151 (7,101)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,736 (11,050)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,058 12,641
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,794 $ 1,591
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 2,864 $ 11,647
Income taxes 13,307 14,472
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
46
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At June 30,
1997 At December 31,
(Unaudited) 1996
-------------- ----------------
UTILITY PLANT:
Plant in service, at original cost $ 1,497,632 $ 1,483,875
Less accumulated provision for depreciation 548,478 526,776
-------------- --------------
949,154 957,099
Construction work in progress 44,304 35,100
-------------- --------------
Total 993,458 992,199
-------------- --------------
OTHER PROPERTY AND INVESTMENTS: 3,002 3,054
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents 12,794 7,058
Receivables--
Customer accounts receivable 28,283 26,364
Regulatory clauses under recovery 8,869 7,300
Other accounts and notes receivable 7,531 7,468
Affiliated companies 6,042 6,329
Accumulated provision for uncollectible accounts (625) (839)
Fossil fuel stock, at average cost 15,400 12,168
Materials and supplies, at average cost 20,300 21,083
Current portion of accumulated deferred income taxes 3,862 7,227
Prepayments 5,751 4,744
Vacation pay deferred 4,806 4,806
-------------- --------------
Total 113,013 103,708
-------------- --------------
DEFERRED CHARGES:
Debt expense and loss, being amortized 11,600 12,220
Deferred charges related to income taxes 22,806 22,274
Long-term notes receivable 3,140 3,737
Miscellaneous 7,594 5,135
-------------- --------------
Total 45,140 43,366
-------------- --------------
TOTAL ASSETS $ 1,154,613 $ 1,142,327
============== ==============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
47
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At June 30,
1997 At December 31,
(Unaudited) 1996
-------------- ----------------
CAPITALIZATION:
Common stock equity--
Common stock (without par value)--
authorized 1,130,000 shares; outstanding 1,121,000 shares $ 37,691 $ 37,691
Paid-in capital 179,389 179,389
Premium on preferred stock 372 372
Retained earnings 166,145 166,282
-------------- --------------
383,597 383,734
Preferred stock 39,414 74,414
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding Company Junior Subordinated Notes (Note I) 35,000 -
Long-term debt 291,532 326,379
-------------- --------------
Total 749,543 784,527
-------------- --------------
CURRENT LIABILITIES:
Preferred stock due within one year 35,000 -
Long-term debt due within one year 35,010 10
Accounts payable--
Affiliated companies 5,558 4,136
Regulatory clauses over recovery 9,420 8,788
Other 26,651 38,720
Customer deposits 3,412 3,154
Taxes accrued--
Federal and state income 632 -
Other 18,806 32,445
Interest accrued 4,238 4,384
Miscellaneous 13,777 13,942
-------------- --------------
Total 152,504 105,579
-------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 132,466 133,437
Accumulated deferred investment tax credits 27,727 28,333
Deferred credits related to income taxes 40,032 40,568
Postretirement benefits 22,426 21,850
Accumulated provision for property damage 13,705 12,955
Miscellaneous 16,210 15,078
-------------- --------------
Total 252,566 252,221
-------------- --------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,154,613 $ 1,142,327
============== ==============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
48
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1997 vs. SECOND QUARTER 1996
AND
YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996
RESULTS OF OPERATIONS
Earnings
MISSISSIPPI's net income after dividends on preferred stock for the second
quarter and year-to-date 1997 was $12.6 million and $23.3 million, respectively,
compared to $11.4 million and $23.1 million for the corresponding periods of
1996. Earnings for the current quarter increased by 10.7% primarily as a result
of lower operating expenses. For the year-to-date period, earnings were
relatively flat as evidenced by the slight 0.7% increase.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
--------------------------------------------------------
Second Quarter Year-To-Date
--------------------------- ----------------------------
(in thousands) % (in thousands) %
Revenues........................................... $(2,990) (2.3) $(10,161) (4.0)
Revenues from affiliates........................... (4,844) (75.6) (7,724) (91.9)
Fuel expense....................................... (6,088) (16.6) (6,447) (9.7)
Purchased power from affiliates.................... 3,107 41.3 624 3.0
Other operation expense............................ (2,667) (10.1) (6,601) (12.9)
Maintenance expense................................ (2,150) (14.8) (2,834) (11.4)
Revenues. The decrease in revenues was primarily due to a 7.8% decrease for
the quarter and a 4.8% decrease for year-to-date in the amount of energy sold.
Total retail energy sales decreased 2.9% and 2.1% for the quarter and
year-to-date, respectively, primarily due to a 13.4% and 10.3% decrease in the
amount of energy sold to residential customers. Retail revenues, excluding those
revenues which represent the recovery of fuel expense and certain other expenses
and do not affect income, decreased $0.8 million for the quarter and $4.4
million for year-to-date 1997 primarily due to milder temperatures experienced
during these periods as compared to 1996. Second quarter and year-to-date
revenues from territorial wholesale customers, excluding fuel revenues which do
not affect income, decreased $0.2 million and $3.2 million, respectively,
compared to the same periods of 1996, with a decrease in energy sales of 4.5%
and 4.0%, respectively.
Fuel expense. The second quarter and year-to-date 1997 decreases can be
attributed to the lower cost of fuel and to decreases in generation of 12.0% for
the quarter and 4.4% year-to-date 1997. Generation decreased due to the reduced
demand for energy resulting from milder temperatures.
Revenues from affiliates and Purchased power from affiliates. Revenues from
sales to affiliated companies within the Southern electric system, as well as
purchases of energy, will vary from period to period depending on demand and the
availability and cost of generating resources at each company. In addition, the
second quarter and year-to-date 1997 periods reflect adjustments in affiliated
billings. These transactions do not have a significant impact on earnings.
49
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Other operation expense. This decrease for the quarter and year-to-date
1997 as compared to the corresponding periods of 1996 is primarily due to lower
administrative and general expenses.
Maintenance expense. Maintenance expenses will vary from period to period
depending on the timing and scheduling of maintenance outages and other
projects.
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 ranging from energy sales growth to a less regulated, more competitive
environment. Operating revenues will be affected by any changes in rates under
the PEP and ECO plans. The PEP has proven to be a stabilizing force on electric
rates, with only moderate changes in rates taking place. MISSISSIPPI's 1997
annual filing under the ECO Plan with the Mississippi PSC resulted in an
approved annual revenue requirement increase of $0.9 million, effective April
1997.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, the Southern electric system
is positioning the business to meet the challenge of increasing competition. For
additional information, see Item 1 - BUSINESS - "Competition" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
MISSISSIPPI in the Form 10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be recovered. For additional information about the Clean Air Act
and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of "comprehensive
income," which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. MISSISSIPPI will adopt the standard in
1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement No. 131, which
supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for
segment reporting, using the "management approach," in which reportable
segments are based on the same criteria on which management disaggregates a
business for making operating decisions and assessing performance. MISSISSIPPI
is in the process of evaluating Statement No. 131 and its impact and will adopt
the standard by 1998.
Employees of MISSISSIPPI, in certain areas, including finance,
environmental quality and external affairs, are being offered a Career
Transition Plan. This voluntary plan is an effort to find appropriate ways to
reduce employees, while at the same time providing employees with choices about
their future. The costs to be incurred in connection with this plan are unknown
at the present time.
Reference is made to Notes (B), (G) and (H) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential. Reference is also made to
Part II - Item 1 - "Legal Proceedings" herein.
50
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in MISSISSIPPI's financial condition during the first six months
of 1997 included the addition of approximately $26.7 million to utility plant.
The funds for these additions and other capital requirements were derived
primarily from operations. See MISSISSIPPI's Condensed Statements of Cash Flows
for further details.
Financing Activities
During the first quarter of 1997, Mississippi Power Capital Trust I, a statutory
business trust established for the purpose of holding MISSISSIPPI's junior
subordinated notes and issuing trust preferred securities and common securities,
sold $35 million of its 7.75% trust originated preferred securities which are
guaranteed by MISSISSIPPI. For additional information, see Note (I) in the
"Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Sources of Capital" of MISSISSIPPI in the Form 10-K.
MISSISSIPPI plans to continue, to the extent possible, a program to retire
higher-cost debt and preferred stock and replace these securities with
lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of
MISSISSIPPI under "Capital Requirements for Construction," "Environmental
Matters" and "Other Capital Requirements" in the Form 10-K for a description of
MISSISSIPPI's capital requirements for its construction program, environmental
compliance efforts, sinking fund requirements and maturities of long-term debt.
Sources of Capital
In addition to the financing activities previously described herein, MISSISSIPPI
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. Currently,
MISSISSIPPI expects to have adequate earnings coverage ratios for any
anticipated security sales through at least 1999. See Item 1 - BUSINESS -
"Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, MISSISSIPPI had at June
30, 1997, approximately $12.8 million of cash and cash equivalents and
approximately $76.3 million of unused committed credit arrangements with banks
(including $10.8 million of such arrangements under which borrowings may be made
only to fund purchase obligations relating to variable rate pollution control
bonds). At June 30, 1997, MISSISSIPPI had no short-term borrowings outstanding.
Since MISSISSIPPI has no major generating plants under construction, management
believes that the need for working capital can be adequately met by utilizing
lines of credit without maintaining large cash balances.
51
SAVANNAH ELECTRIC
AND
POWER COMPANY
52
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
OPERATING REVENUES:
Revenues $ 52,298 $ 61,183 $ 95,185 $ 110,550
Revenues from affiliates 218 723 276 1,931
----------- ---------- ---------- ------------
Total operating revenues 52,516 61,906 95,461 112,481
----------- ---------- ---------- ------------
OPERATING EXPENSES:
Operation--
Fuel 6,937 8,743 10,454 12,692
Purchased power from non-affiliates 277 662 682 1,212
Purchased power from affiliates 10,748 15,670 20,030 31,520
Other 10,968 11,410 21,642 21,693
Maintenance 3,518 3,321 6,560 6,451
Depreciation and amortization 5,028 4,902 10,020 9,804
Taxes other than income taxes 2,774 3,158 5,615 6,178
Federal and state income taxes 3,640 4,254 5,715 6,583
----------- ---------- ---------- ------------
Total operating expenses 43,890 52,120 80,718 96,133
----------- ---------- ---------- ------------
OPERATING INCOME 8,626 9,786 14,743 16,348
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 60 98 205 181
Interest income 122 103 124 105
Other, net 93 (402) (91) (718)
Income taxes applicable to other income (83) 116 (13) 233
----------- ---------- ---------- ------------
INCOME BEFORE INTEREST CHARGES 8,818 9,701 14,968 16,149
----------- ---------- ---------- ------------
INTEREST CHARGES:
Interest on long-term debt 2,841 3,104 5,612 6,018
Allowance for debt funds used during construction (61) (94) (141) (176)
Interest on notes payable 60 36 120 138
Amortization of debt discount, premium, and expense, net 185 107 366 211
Other interest charges 76 108 168 197
----------- ---------- ---------- ------------
Net interest charges 3,101 3,261 6,125 6,388
----------- ---------- ---------- ------------
NET INCOME 5,717 6,440 8,843 9,761
DIVIDENDS ON PREFERRED STOCK 581 581 1,162 1,162
----------- ---------- ---------- ------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 5,136 $ 5,859 $ 7,681 $ 8,599
=========== ========== ========== ============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
53
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Six Months
Ended June 30,
1997 1996
OPERATING ACTIVITIES:
Net income $ 8,843 $ 9,761
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 10,299 10,241
Deferred income taxes and investment tax credits, net 211 3,264
Allowance for equity funds used during construction (205) (181)
Other, net 1,128 1,444
Changes in certain current assets and liabilities--
Receivables, net 1,829 (7,835)
Inventories 1,411 (608)
Payables (3,161) 5,287
Taxes accrued 1,173 2,103
Other (2,767) (2,503)
------------- ------------
Net cash provided from operating activities 18,761 20,973
------------- ------------
INVESTING ACTIVITIES:
Gross property additions (10,364) (15,150)
Other (1,508) (3,936)
------------- ------------
Net cash used for investing activities (11,872) (19,086)
------------- ------------
FINANCING ACTIVITIES:
Proceeds--
First mortgage bonds - 20,000
Other long-term debt 13,870 17,000
Retirements--
First mortgage bonds - (1,200)
Other long-term debt (14,104) (146)
Notes payable, net 3,000 (4,000)
Payment of preferred stock dividends (1,162) (1,162)
Payment of common stock dividends (10,500) (9,600)
Miscellaneous (254) (257)
------------- ------------
Net cash provided from (used for) financing activities (9,150) 20,635
------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,261) 22,522
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,214 877
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,953 $ 23,399
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 6,042 $ 5,935
Income taxes 5,313 2,547
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
54
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At June 30,
1997 At December 31,
(Unaudited) 1996
------------- --------------
UTILITY PLANT:
Plant in service, at original cost $ 749,948 $ 739,461
Less accumulated provision for depreciation 312,652 304,760
------------- ------------
437,296 434,701
Construction work in progress 11,288 13,463
------------- ------------
Total 448,584 448,164
------------- ------------
OTHER PROPERTY AND INVESTMENTS: 1,784 1,785
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents 2,953 5,214
Special deposits 240 1,395
Receivables--
Customer accounts receivable 21,557 18,827
Other accounts and notes receivable 770 769
Affiliated companies 718 844
Accumulated provision for uncollectible accounts (477) (632)
Fuel cost under recovery 3,855 7,289
Fossil fuel stock, at average cost 4,905 5,892
Materials and supplies, at average cost 7,589 8,013
Prepayments 8,768 6,135
------------- ------------
Total 50,878 53,746
------------- ------------
DEFERRED CHARGES:
Deferred charges related to income taxes 18,883 19,167
Premium on reacquired debt, being amortized 7,455 7,142
Cash surrender value of life insurance for deferred compensation plans 10,288 10,288
Miscellaneous 2,018 2,003
------------- ------------
Total 38,644 38,600
------------- ------------
TOTAL ASSETS $ 539,890 $ 542,295
============= ============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
55
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At June 30,
1997 At December 31,
(Unaudited) 1996
------------- --------------
CAPITALIZATION:
Common stock 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 8,688 8,688
Retained earnings 106,554 109,373
------------- ------------
169,465 172,284
Preferred stock 35,000 35,000
Long-term debt 161,997 161,801
------------- ------------
Total 366,462 369,085
------------- ------------
CURRENT LIABILITIES:
Long-term debt due within one year 631 637
Notes payable 8,000 5,000
Accounts payable--
Affiliated companies 4,927 6,374
Other 6,977 10,201
Customer deposits 5,396 5,232
Taxes accrued--
Federal and state income - -
Other 2,188 1,015
Interest accrued 4,991 5,275
Vacation pay accrued 2,112 2,038
Miscellaneous 5,549 7,470
------------- ------------
Total 40,771 43,242
------------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 78,469 76,654
Accumulated deferred investment tax credits 12,939 13,271
Deferred credits related to income taxes 22,737 22,792
Deferred compensation plans 9,012 8,602
Postretirement benefits 6,038 5,472
Miscellaneous 3,462 3,177
------------- ------------
Total 132,657 129,968
------------- ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 539,890 $ 542,295
============= ============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
56
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1997 vs. SECOND QUARTER 1996
AND
YEAR-TO-DATE 1997 vs. YEAR-TO-DATE 1996
RESULTS OF OPERATIONS
Earnings
SAVANNAH's net income after dividends on preferred stock for the second quarter
and year-to-date 1997 was $5.1 million and $7.7 million, as compared to $5.9
million and $8.6 million for the corresponding periods of 1996. Earnings
decreased 12.3% for the quarter and 10.7% for year-to-date due to a decrease in
operating revenues caused primarily by milder-than-normal temperatures.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------
Second Quarter Year-To-Date
--------------------------- -----------------------------
(in thousands) % (in thousands) %
Revenues....................................... $(8,885) (14.5) $(15,365) (13.9)
Revenues from affiliates....................... (505) (69.8) (1,655) (85.7)
Fuel expense................................... (1,806) (20.7) (2,238) (17.6)
Purchased power from affiliates................ (4,922) (31.4) (11,490) (36.5)
Taxes other than income taxes.................. (384) (12.2) (563) (9.1)
Revenues. Excluding fuel revenues, which represent the pass-through of
fuel expenses and do not affect income, revenues for the quarter and
year-to-date decreased $2.3 million and $2.9 million, respectively, compared to
the corresponding periods of 1996. Revenues decreased as a result of decreased
energy sales to residential, commercial and industrial customers of 14.7%, 4.3%,
9.4%, respectively, for the quarter and 11.6%, 1.8% and 1.8%, respectively, for
year-to-date. The decreases were primarily due to milder-than-normal
temperatures during the quarter and year-to-date for the residential and
commercial sectors. The decreases in the industrial class were due to a decrease
in the energy requirements of one of SAVANNAH's major industrial customers.
Fuel expenses. The decreases for the quarter and year-to-date can be
attributed to a decrease in the average cost of fuel and the overall lower
demand for energy.
Revenues from affiliates and Purchased power from affiliates. Revenues from
sales to affiliated companies within the Southern electric system, as well as
purchases of energy, will vary from period to period depending on demand and the
availability and cost of generating resources at each company. In addition, the
second quarter and year-to-date 1997 reflect an adjustment in affiliated
billings. These transactions do not have a significant impact on earnings.
Taxes other than income taxes. The decreases for the quarter and
year-to-date 1997 were due to a true-up of property tax accrual to actual tax
expense in 1996 and lower franchise taxes.
57
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors ranging from energy sales growth to a less regulated, more competitive
environment.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, the Southern electric system
is positioning the business to meet the challenge of increasing competition. For
additional information, see Item 1 - BUSINESS - "Competition" and Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH
in the Form 10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be offset. For additional information about the Clean Air Act and
other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS
"Environmental Matters" of SAVANNAH in the Form 10-K.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of "comprehensive
income," which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. SAVANNAH will adopt the standard in
1998.
In June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information. Statement No. 131, which
supersedes Statement Nos. 14, 18, 24 and 30, establishes new standards for
segment reporting, using the "management approach," in which reportable
segments are based on the same criteria on which management disaggregates a
business for making operating decisions and assessing performance. SAVANNAH is
in the process of evaluating Statement No. 131 and its impact and will adopt
the standard by 1998.
Reference is made to Notes (B) and (Q) in the "Notes to the Condensed
Financial Statements" herein for discussion of various contingencies and other
matters which may affect future earnings potential.
FINANCIAL CONDITION
Overview
Major changes in SAVANNAH's financial condition during the first six months of
1997 included the addition of approximately $10.4 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations. See SAVANNAH's Condensed Statements of Cash Flows for further
details.
Financing Activities
In April 1997, SAVANNAH sold, through a public authority, $13.87 million of
variable rate pollution control revenue bonds due 2037. The proceeds were
applied to the redemption in May 1997 of $13.87 million of 6 3/4% pollution
control revenue bonds.
SAVANNAH plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these obligations with lower-cost capital.
58
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sources of Capital
SAVANNAH plans to obtain the funds required for construction and other purposes
from sources similar to those used in the past. The amount, type and timing of
any financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. Currently,
SAVANNAH expects to have adequate earnings coverage ratios for any anticipated
security sales through at least 1999. See Item 1 - BUSINESS - "Financing
Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, SAVANNAH had at June 30,
1997, approximately $3.0 million of cash and cash equivalents and approximately
$32.5 million of unused credit arrangements with banks. At June 30, 1997,
SAVANNAH had $8.0 million of short-term notes payable to banks. Since SAVANNAH
has no major generating plants under construction, management believes that the
need for working capital can be adequately met by utilizing lines of credit.
59
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
INDEX TO APPLICABLE NOTES TO
FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes
SOUTHERN A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P
ALABAMA A, B, C, G, H, I, J, K
GEORGIA A, B, C, G, H, I, L, M, N, O, P
GULF A, B, G, H, I
MISSISSIPPI A, B, G, H, I
SAVANNAH A, B, H, Q
60
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) The condensed financial statements of the registrants included herein
have been prepared by each registrant, without audit, pursuant to the
rules and regulations of the SEC. In the opinion of each registrant's
management, the information regarding such registrant furnished herein
reflects all adjustments (which included only normal recurring
adjustments) necessary to present fairly the results for the periods
ended June 30, 1997 and 1996. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
each registrant believes that the disclosures regarding such
registrant are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and the notes
thereto included in each registrant's latest annual report on Form
10-K. Certain prior-period amounts have been reclassified to conform
with current-period presentation.
The condensed financial statements of ALABAMA and GEORGIA included
herein have been reviewed by ALABAMA's and GEORGIA's independent public
accountants as set forth in their reports included herein as Exhibit 1 to
ALABAMA's and GEORGIA's condensed financial statements.
(B) SOUTHERN's operating affiliates 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, and determine if any other
assets have been impaired. For additional information, see Note 1 to the
financial statements of each registrant in Item 8 of the Form 10-K.
(C) The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry--including
SOUTHERN's--regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating facilities in the financial
statements. In response to these questions, the FASB has decided to review
the accounting for liabilities related to closure and removal of
long-lived assets, including nuclear decommissioning. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial
statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and
Nuclear Decommissioning" in Item 8 of the Form 10-K.
(D) SOUTHERN engages in price risk management activities for trading and
non-trading purposes. Reference is made to Note 1 to the financial
statements of SOUTHERN in Item 8 of the Form 10-K for a discussion of
these activities. Activities for non-trading purposes consist of
transactions that are employed to mitigate SOUTHERN's risk related to
interest rate and foreign currency fluctuations. At June 30, 1997, the
status of outstanding non-trading related derivative contracts was as
follows:
61
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Year of
Maturity or Notional Unrealized
Type Termination Amount Gain (Loss)
(in thousands)
Interest rate swaps 2002-2012 $778,071 $(9,533)
2001-2012 (pound)500,000 $(25,485)
Cross currency swaps 2001-2007 (pound)455,399 $(22,540)
(pound) - Denotes British pounds sterling.
Net unrealized gains and losses on outstanding positions with respect to
trading activities were not material at June 30, 1997.
(E) On January 29, 1997, Southern Energy, a wholly-owned subsidiary of
SOUTHERN, completed the acquisition of an 80% interest in CEPA for a total
net investment of approximately $2.0 billion. (Reference is made to the
Current Report on Form 8-K of SOUTHERN dated October 9, 1996 for a more
detailed description of the acquisition. In addition, reference is also
made to "Management's Discussion and Analysis - Future Earnings Potential"
of SOUTHERN herein for information relating to the proposed acquisition by
Southern Energy of an additional 19.99% interest in CEPA.)
The acquisition of CEPA was accounted for as a purchase with the $1.5
billion excess of the acquisition cost over the preliminary estimate of
the fair value of CEPA's net assets being assigned to goodwill. The
allocation of the purchase price is preliminary and may be revised at a
later date. Goodwill will be amortized on a straight-line basis over 40
years. Results of operations of CEPA are included in the condensed
consolidated financial statements subsequent to January 29, 1997.
The following unaudited pro forma combined results of operations for
the three months ended June 30, 1997 and 1996 and the six months ended
June 30, 1997 and 1996 have been prepared assuming the acquisition of CEPA
had occurred at the beginning of each period. The pro forma results assume
acquisition financing of $764 million of short-term borrowings, $792
million of long-term notes and $400 million of capital securities and
SOUTHERN's assumed effective composite interest rate on these obligations
for each period presented was 6.70%. Eventually, the existing borrowing
may be replaced by some other combination of long-term debt and equity.
62
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
The pro forma results are provided for information only. The results
are not necessarily indicative of the actual results that would have been
realized had the acquisition occurred on the indicated dates, nor are they
necessarily indicative of future results of operations of the combined
companies.
As Reported and Pro Forma Information (Unaudited)
(Stated in Thousands of Dollars, except per share)
For the Three Months Ended June 30,
1997 1996
As Reported Pro Forma As Reported Pro Forma
Operating revenues $2,717,195 $2,717,195 $2,563,507 $2,588,057
Consolidated Net Income 214,795 214,795 287,260 276,793
Earnings Per Share of Common Stock $0.31 $0.31 $0.43 $0.41
For the Six Months Ended June 30,
1997 1996
As Reported Pro Forma As Reported Pro Forma
Operating revenues $5,301,609 $5,322,266 $4,992,862 $5,026,753
Consolidated Net Income 401,808 399,133 520,135 492,641
Earnings Per Share of Common Stock $0.59 $0.59 $0.78 $0.73
63
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(F) SOUTHERN's principal business segment -- or its traditional core business
-- is the five electric utility operating companies, which provide
electric service in four southeastern states. The other reportable
business segment is Southern Energy, which owns and operates power
production and delivery facilities in the United States and various
international markets. Financial data for business segments and geographic
areas are as follows: (in thousands)
Business Segments Operating Operating Operating Operating Total
Revenues Income Revenues Income Assets
For the Three Months Ended For the Six Months Ended At
June 30, 1997 June 30, 1997 June 30, 1997
------------------------------ ------------------------------- -------------
Traditional core business $2,039,796 $364,344 $3,959,078 $698,773 $25,067,443
Southern Energy 677,399 65,213 1,342,531 126,936 9,344,936
------------ ---------- ----------- --------- -------------
Consolidated $2,717,195 $429,557 $5,301,609 $825,709 $34,412,379
========== ======== ========== ======== ===========
For the Three Months Ended For the Six Months Ended At
June 30, 1996 June 30, 1996 December 31, 1996
------------------------------ ------------------------------- -----------------
Traditional core business $2,198,620 $425,724 $4,199,172 $799,776 $25,367,558
Southern Energy 364,887 24,174 793,690 58,184 4,924,244
------------ ---------- ------------ ---------- -------------
Consolidated $2,563,507 $449,898 $4,992,862 $857,960 $30,291,802
========== ======== ========== ======== ===========
Geographic Areas Operating Operating Operating Operating Total
Revenues Income Revenues Income Assets
For the Three Months Ended For the Six Months Ended At
June 30, 1997 June 30, 1997 June 30, 1997
------------------------------ ------------------------------- -------------
Domestic $2,333,315 $366,896 $4,431,790 $704,430 $25,814,270
International:
Europe 270,027 32,702 657,384 71,181 2,868,908
Asia 70,576 28,176 113,705 46,506 4,286,442
Other 43,277 1,783 98,730 3,592 1,442,759
------------- ----------- ------------- ----------- -------------
Total $2,717,195 $429,557 $5,301,609 $825,709 $34,412,379
========== ======== ========== ======== ===========
For the Three Months Ended For the Six Months Ended At
June 30, 1996 June 30, 1996 December 31, 1996
------------------------------ ------------------------------- -----------------
Domestic $2,224,333 $432,402 $4,246,067 $813,992 $25,868,253
International:
Europe 273,273 17,106 628,181 41,955 2,965,578
Asia - - - - -
Other 65,901 390 118,614 2,013 1,457,971
------------- ------------ ------------ ----------- -------------
Total $2,563,507 $449,898 $4,992,862 $857,960 $30,291,802
========== ======== ========== ======== ===========
(G) Reference is made to Note 3 to each of the registrant's financial
statements, except SAVANNAH's, in Item 8 of the Form 10-K for a discussion
of the proceedings initiated by the FERC regarding the reasonableness of
the return on common equity on certain of the Southern electric system's
wholesale rate schedules and contracts.
64
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(H) Certain of the registrants and other SOUTHERN subsidiaries have instituted
work force reduction programs. The expenses recognized under these
programs and the unamortized balance of expenses deferred under regulatory
orders were as follows: (in thousands)
Three Months Ended Six Months Ended Unamortized Balance
June 30, June 30, at June 30, 1997
----------------------- -------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
ALABAMA $8,885 $8,044 $17,483 $12,409 $32,817
GEORGIA 2,267 8,374 2,871 26,874 -
GULF 91 1,275 1,242 2,234 -
MISSISSIPPI 51 1,528 104 1,778 1,991
SAVANNAH 12 234 27 234 -
OTHER 123 26 47 214 -
--------- ------- --------- -------- ---------
SOUTHERN
system $11,429 $19,481 $21,774 $43,743 $34,808
======= ======= ======= ======= =========
(I) During the first six months of 1997, statutory business trusts formed by
ALABAMA, GEORGIA, GULF, MISSISSIPPI, Southern Investments UK plc ("SIUK")
and Southern Company Capital Funding, Inc. ("Southern Capital"), of which
the respective companies own all the common securities, issued mandatorily
redeemable preferred or capital securities as follows: (in thousands)
Maturity Date
Date of Issue Amount Rate Notes of Notes
ALABAMA 1/16/97 $200,000 7.60% $206,000 12/31/2036
GEORGIA 1/16/97 175,000 7.60 180,000 12/31/2036
GULF 1/31/97 40,000 7.625 41,000 12/31/2036
MISSISSIPPI 2/26/97 35,000 7.75 36,000 2/15/2037
SIUK 1/29/97 82,000 8.23 85,000 2/1/2027
Southern Capital 2/4/97 325,000 8.19 335,000 2/1/2037
Southern Capital 2/4/97 75,000 8.14 77,000 2/15/2027
GEORGIA 6/11/97 189,250 7.75 195,000 3/31/2037
Southern Capital 6/6/97 200,000 7.75 206,000 3/31/2037
Substantially all the assets of each trust are junior subordinated notes
issued by the related company in the respective approximate principal
amounts set forth above. The notes of Southern Capital are guaranteed by
SOUTHERN. ALABAMA, GEORGIA, GULF, MISSISSIPPI, SIUK and SOUTHERN each
considers that the mechanisms and obligations relating to the preferred or
capital securities issued for its benefit, taken together, constitute a
full and unconditional guarantee by it of the respective trusts' payment
obligations with respect to the preferred or capital securities. Reference
is also made to Note 9 to the financial statements of ALABAMA and GEORGIA
in the Form 10-K.
65
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(J) In June 1995, the Alabama PSC issued a rate order granting ALABAMA's
request for gradual adjustments to move toward parity among customer
classes. This order also calls for a moratorium on any periodic retail
rate increases (but not decreases) until July 2001. In December 1995, the
Alabama PSC issued an order authorizing ALABAMA to reduce balance sheet
items--such as plant and deferred charges--at any time ALABAMA's actual
base rate revenues exceed the budgeted revenues. Reference is made to Note
3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the
Form 10-K for additional information. In April 1997, the Alabama PSC
issued an additional order authorizing ALABAMA to reduce balance sheet
asset items. This order authorizes the reduction of such items up to an
amount equal to 5 times the total estimated annual revenue reduction
resulting from future rate reductions.
(K) In 1996, legal actions against ALABAMA were filed in several counties in
Alabama charging ALABAMA with fraud and non-compliance with regulatory
statutes relating to the offer, sale and financing of "extended service
contracts" in connection with the sale of electric appliances. See Note 3
to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form
10-K for additional information.
(L) In February 1996, the Georgia PSC approved a three-year accounting order,
effective January 1, 1996, which is currently under appeal. GEORGIA is
continuing to recognize expenses in accordance with the accounting order
while it is under appeal. Under the order, earnings in excess of a 12.5%
retail return on common equity will be used to accelerate the
amortization of regulatory assets or depreciation of electric plant.
Accordingly, for earnings in excess of the 12.5% return, GEORGIA recorded
charges of $8 million and $28 million, respectively, for the three
months and six months ended June 30, 1997 (presented in the accompanying
financial statements as depreciation expense and as an addition to the
reserve for depreciation). For additional information, reference is made
to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8
of the Form 10-K.
(M) In 1987 and 1989, the Georgia PSC ordered that the allowed costs of Plant
Vogtle, a two-unit nuclear facility of which GEORGIA owns 45.7%, be phased
into rates. Pursuant to the orders, GEORGIA recorded a deferred return
under phase-in plans until October 1991 when the allowed investment was
fully reflected in rates. In 1991, the Georgia PSC levelized the remaining
Plant Vogtle declining capacity buyback expenses over a six-year period.
In addition, GEORGIA deferred certain Plant Vogtle operating expenses and
financing costs under accounting orders issued by the Georgia PSC. These
Georgia PSC orders provide for the recovery of deferred costs within 10
years. The unamortized balance of these deferred costs at June 30, 1997,
was $95.8 million.
(N) Reference is made to Note 3 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information concerning the
recovery by GEORGIA of its costs associated with the Rocky Mountain
pumped storage hydroelectric plant. At June 30, 1997, GEORGIA's net
investment in the plant was approximately $167 million. In
August 1997, the staff of the Georgia PSC issued a report regarding its
prudence review of the plant. The report recommends that of GEORGIA's
initial $202 million investment in the plant, approximately $79 million
be allowed in rate base, with a disallowance of approximately
$123 million. The report also concludes that GEORGIA should be
allowed to retain the benefits of the plant's lower fuel costs (as
compared to alternative sources of generation). The report states that
as an alternative, it may be reasonable to provide a larger allowance in
rate base and allow customers to receive the benefit of the fuel savings.
GEORGIA estimates the present value of the fuel benefits over the life of
the plant to be in the range of approximately $50 million to $70 million.
The Georgia PSC intends to conclude hearings on this matter in December
1997, at which time the Georgia PSC will take the matter under advisement
for future action. While GEORGIA disagrees with the Georgia PSC staff's
conclusions, the outcome of this matter cannot now be determined.
66
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(O) Reference is made to Note 3 to the financial statements of GEORGIA in Item
8 of the Form 10-K for information relating to an agreement reached
January 10, 1997, between GEORGIA and MEAG relating to a new power supply
relationship. A power supply contract entered into between GEORGIA and
MEAG has been approved by FERC.
(P) Reference is made to Note 3 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's
designation as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act and other
environmental contingencies.
(Q) SAVANNAH is currently undergoing an earnings review by the Georgia PSC.
SAVANNAH and the Georgia PSC staff met in June 1997 and will meet in
August 1997 to discuss resolution of the review.
67
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(1) Reference is made to the Notes to the Condensed
Financial Statements herein for information regarding
certain legal and administrative proceedings in which
SOUTHERN and its reporting subsidiaries are involved.
(2) Reference is made to Item 3 - LEGAL PROCEEDINGS in the
Form 10-K for information regarding a tax deficiency
notice received from the Internal Revenue Service
relating to GEORGIA's tax accounting for the sale in
1984 of an interest in Plant Vogtle and related capacity
and energy buyback commitments.
(3) ALABAMA, GEORGIA and MISSISSIPPI, et al. v. TVA
(U.S. District Court for the Northern District of
Alabama)
On July 24, 1997, ALABAMA, GEORGIA, MISSISSIPPI and
other plaintiffs entered into an agreement with TVA that
will settle the action filed in April 1997, which sought
to enjoin TVA from violating a 1959 act that prohibits
TVA from selling power outside the area that was being
served by it in 1957. In the settlement agreement, TVA
agrees that it will enter into exchange power
arrangements only with authorized entities to which it
may lawfully sell such power under the 1959 act, and
that it will not knowingly engage in such transactions
where the authorized entity is reselling that power to
unauthorized entities.
Item 4. Submission of Matters to a Vote of Security Holders.
SOUTHERN
SOUTHERN held its annual meeting of stockholders on May 28,
1997. Each nominee for director of SOUTHERN received the
requisite plurality of votes. The vote tabulation was as
follows:
Nominees Shares For Shares Withhold Vote
John C. Adams 509,862,951 9,405,885
A. D. Correll 509,761,454 9,507,382
A. W. Dahlberg 509,826,971 9,441,866
Paul J. DeNicola 509,923,297 9,345,539
Jack Edwards 503,710,753 15,558,084
H. Allen Franklin 509,956,952 9,311,885
Bruce S. Gordon 508,734,126 10,534,710
L. G. Hardman III 509,862,328 9,406,508
Elmer B. Harris 509,779,120 9,489,717
William A. Parker, Jr. 490,423,219 28,845,516
William J. Rushton, III 509,513,378 9,755,458
Gloria M. Shatto 509,507,344 9,761,493
Gerald J. St. Pe 490,870,363 28,398,473
Herbert Stockham 509,470,107 9,798,729
68
Item 4. Submission of Matters to a Vote of Security Holders.(Continued)
ALABAMA
ALABAMA held its annual common stockholders meeting on April
25, 1997, and the following persons were elected to serve as
directors of ALABAMA:
Whit Armstrong William V. Muse
A. W. Dahlberg John T. Porter
Peter V. Gregerson, Sr. Robert D. Powers
Bill M. Guthrie John W. Rouse
Elmer B. Harris William J. Rushton, III
Carl E. Jones, Jr. James H. Sanford
Wallace D. Malone, Jr. John Cox Webb, IV
All of the 5,608,955 outstanding shares of ALABAMA's common
stock are owned by SOUTHERN and were voted for the election of
such directors.
GEORGIA
By written consent, in lieu of the annual meeting of
stockholders of GEORGIA, effective May 21, 1997, the following
persons were elected to serve as directors of GEORGIA:
Daniel P. Amos James R. Lientz, Jr.
Juanita P. Baranco William A. Parker, Jr.
Bennett A. Brown G. Joseph Prendergast
A. W. Dahlberg Herman J. Russell
William A. Fickling, Jr. Gloria M. Shatto
H. Allen Franklin William Jerry Vereen
L. G. Hardman III Carl Ware
Warren Y. Jobe Thomas R. Williams
All of the 7,761,500 outstanding shares of GEORGIA's common
stock are owned by SOUTHERN and were voted for the election of
such directors.
GULF
By written consent, in lieu of the annual meeting of
stockholders of GULF, effective June 24, 1997, the following
persons were elected to serve as directors of GULF:
Travis J. Bowden W. Deck Hull, Jr.
Paul J. DeNicola Joseph K. Tannehill
Fred C. Donovan Barbara H. Thames
All of the 992,717 outstanding shares of GULF's common stock
are owned by SOUTHERN and were voted for the election of such
directors.
69
Item 4. Submission of Matters to a Vote of Security Holders.(Continued)
MISSISSIPPI
MISSISSIPPI held its annual stockholders meeting on April 1,
1997, and the following persons were elected to serve as
directors of MISSISSIPPI:
Paul J. DeNicola Aubrey K. Lucas
Edwin E. Downer George A. Schloegel
Dwight H. Evans Philip J. Terrell
Robert S. Gaddis N. Eugene Warr
Walter H. Hurt, III
All of the 1,121,000 outstanding shares of MISSISSIPPI's common
stock are owned by SOUTHERN and were voted for the election of
such directors.
SAVANNAH
SAVANNAH held its annual stockholders meeting on May 20, 1997,
and the following persons were elected to serve as directors of
SAVANNAH:
Helen Quattlebaum Artley Walter D. Gnann
Archie H. Davis Robert B. Miller, III
Paul J. DeNicola Arnold M. Tenenbaum
Arthur M. Gignilliat, Jr
All of the 10,844,635 outstanding shares of SAVANNAH's common
stock are owned by SOUTHERN and were voted for the election of
such directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 24 - Powers of Attorney and resolutions.
(Designated in the Form 10-K for the
year ended December 31, 1996, File
Nos. 1-3526, 1-3164, 1-6468, 0-2429,
0-6849 and 1-5072 as Exhibits 24(a),
24(b), 24(c), 24(d), 24(e) and 24(f),
respectively, and incorporated herein
by reference.)
Exhibits 27 - Financial Data Schedules
(a) SOUTHERN
(b) ALABAMA
(c) GEORGIA
(d) GULF
(e) MISSISSIPPI
(f) SAVANNAH
70
Item 6. Exhibits and Reports on Form 8-K.
(b) Reports on Form 8-K. (Continued)
SOUTHERN filed a Current Report on Form 8-K dated
June 5, 1997:
Items reported: Item 5
Item 7
Financial statements filed: None
GEORGIA filed a Current Report on Form 8-K dated
June 6, 1997:
Items reported: Item 5
Item 7
Financial statements filed: None
71
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 A. W. Dahlberg
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By W. L. Westbrook
Financial Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 1997
- - - - - - - --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
ALABAMA POWER COMPANY
By Elmer B. Harris
President and Chief Executive Officer
(Principal Executive Officer)
By William B. Hutchins, III
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 1997
72
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 H. Allen Franklin
President and Chief Executive Officer
(Principal Executive Officer)
By Warren Y. Jobe
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 1997
- - - - - - - --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GULF POWER COMPANY
By Travis J. Bowden
President and Chief Executive Officer
(Principal Executive Officer)
By A. E. Scarbrough
Vice President - Finance
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 1997
73
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 Dwight H. Evans
President and Chief Executive Officer
(Principal Executive Officer)
By Michael W. Southern
Vice President, Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 1997
- - - - - - - --------------------------------------------------------------------------------
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 Arthur M. Gignilliat, Jr.
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By Kirby R. Willis
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 1997
74