=================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
1-3526 The Southern Company 58-0690070
(A Delaware Corporation)
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(404) 506-5000
1-3164 Alabama Power Company 63-0004250
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35291
(205) 257-1000
1-6468 Georgia Power Company 58-0257110
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
0-2429 Gulf Power Company 59-0276810
(A Maine Corporation)
One Energy Place
Pensacola, Florida 32520-0102
(850) 444-6111
0-6849 Mississippi Power Company 64-0205820
(A Mississippi Corporation)
2992 West Beach
Gulfport, Mississippi 39501
(228) 864-1211
1-5072 Savannah Electric and Power Company 58-0418070
(A Georgia Corporation)
600 East Bay Street
Savannah, Georgia 31401
(912) 644-7171
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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 October 31, 1998
The Southern Company Par Value $5 Per Share 697,240,412
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
September 30, 1998
Page
Number
DEFINITIONS........................................................................................................ 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
Condensed Consolidated Statements of Income........................................................ 6
Condensed Consolidated Statements of Cash Flows.................................................... 7
Condensed Consolidated Balance Sheets.............................................................. 8
Consolidated Statements of Comprehensive Income.................................................... 10
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 11
Alabama Power Company
Condensed Statements of Income..................................................................... 21
Condensed Statements of Cash Flows................................................................. 22
Condensed Balance Sheets........................................................................... 23
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 25
Exhibit 1 - Report of Independent Public Accountants............................................... 30
Georgia Power Company
Condensed Statements of Income..................................................................... 32
Condensed Statements of Cash Flows................................................................. 33
Condensed Balance Sheets........................................................................... 34
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 36
Exhibit 1 - Report of Independent Public Accountants............................................... 41
Gulf Power Company
Condensed Statements of Income..................................................................... 43
Condensed Statements of Cash Flows................................................................. 44
Condensed Balance Sheets........................................................................... 45
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 47
Mississippi Power Company
Condensed Statements of Income..................................................................... 52
Condensed Statements of Cash Flows................................................................. 53
Condensed Balance Sheets........................................................................... 54
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 56
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 61
Condensed Statements of Cash Flows................................................................. 62
Condensed Balance Sheets........................................................................... 63
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 65
Notes to the Condensed Financial Statements........................................................... 69
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 70
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 76
Item 2. Changes in Securities..................................................................................... Inapplicable
Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders....................................................... Inapplicable
Item 5. Other Information......................................................................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 76
Signatures ............................................................................................... 77
3
DEFINITIONS
TERM MEANING
affiliates.................................. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH
ALABAMA..................................... Alabama Power Company
BEWAG....................................... Berliner Kraft und Licht AG
CEPA........................................ Consolidated Electric Power Asia Limited
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, 1997
FUCO........................................ Foreign utility company
GEORGIA..................................... Georgia Power Company
GULF........................................ Gulf Power Company
MISSISSIPPI................................. Mississippi Power Company
Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services
Holdings, Inc.
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 SEI Holdings, Inc.),
including SOUTHERN subsidiaries managed or controlled by Southern
Energy
SOUTHERN system............................. SOUTHERN, affiliates, Southern Energy, and other subsidiaries
SWEB........................................ South Western Electricity plc (United Kingdom)
TVA......................................... Tennessee Valley Authority
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes forward-looking statements
in addition to historical information. The registrants caution that there are
various important factors that could cause actual results to differ materially
from those indicated in the forward-looking statements; accordingly, there can
be no assurance that such indicated results will be realized. These factors
include legislative and regulatory initiatives regarding deregulation and
restructuring of the electric utility industry; the extent and timing of the
entry of additional competition in the markets of SOUTHERN's subsidiaries;
challenges related to Year 2000 readiness; potential business strategies,
including acquisitions or dispositions of assets or internal restructuring, that
may be pursued by the registrants; state and federal rate regulation in the
United States; changes in or application of environmental and other laws and
regulations to which SOUTHERN and its subsidiaries are subject; political, legal
and economic conditions and developments in the United States and in foreign
countries in which the subsidiaries operate; financial market conditions and the
results of financing efforts; changes in commodity prices and interest rates;
weather and other natural phenomena; the performance of projects undertaken by
the non-traditional business and the success of efforts to invest in and develop
new opportunities; and other factors discussed elsewhere herein and in other
reports (including Form 10-K) filed from time to time by the registrants with
the SEC.
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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
OPERATING REVENUES $ 3,456,785 $ 4,071,204 $ 8,883,881 $ 9,372,813
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Operation--
Fuel 738,223 694,152 1,829,055 1,697,158
Purchased power 329,493 1,138,447 940,470 2,079,864
Other (Note G) 539,234 480,519 1,534,068 1,364,054
Maintenance 207,988 164,748 642,657 567,593
Depreciation and amortization 418,704 357,564 1,169,418 936,595
Amortization of deferred Plant Vogtle costs (Note M) 7,785 37,580 23,357 112,791
Taxes other than income taxes 148,614 145,668 439,105 436,635
Income taxes 315,510 332,182 615,693 632,070
-------------- -------------- -------------- --------------
Total operating expenses 2,705,551 3,350,860 7,193,823 7,826,760
-------------- -------------- -------------- --------------
OPERATING INCOME 751,234 720,344 1,690,058 1,546,053
OTHER INCOME:
Equity in earnings of unconsolidated subsidiaries 32,012 10,683 77,148 22,044
Interest income 44,420 40,867 195,833 107,158
Other, net (25,990) (11,712) (41,894) 11,148
Income taxes applicable to other income 25,192 14,355 32,304 27,403
United Kingdom Windfall Profit Tax - (148,062) - (148,062)
-------------- -------------- -------------- --------------
INCOME BEFORE INTEREST CHARGES 826,868 626,475 1,953,449 1,565,744
-------------- -------------- -------------- --------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 179,428 171,731 532,177 507,144
Interest on notes payable 24,391 26,406 85,827 81,834
Amortization of debt discount, premium and expense, net 16,356 9,395 56,828 25,750
Other interest charges, net 18,459 14,108 64,467 34,391
Minority interests in subsidiaries 27,280 (15,454) 56,990 12,888
Distributions on capital and preferred
securities of subsidiary companies 38,953 34,572 109,619 84,965
Preferred dividends of subsidiary companies 5,972 11,007 19,037 42,254
-------------- -------------- -------------- --------------
Interest charges and other, net 310,839 251,765 924,945 789,226
-------------- -------------- -------------- --------------
CONSOLIDATED NET INCOME $ 516,029 $ 374,710 $ 1,028,504 $ 776,518
============== ============== ============== ==============
AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (Thousands) 697,797 687,159 696,836 682,924
BASIC AND DILUTED EARNINGS
PER SHARE OF COMMON STOCK $0.74 $0.55 $1.48 $1.14
CASH DIVIDENDS PAID PER SHARE
OF COMMON STOCK $0.335 $0.325 $1.005 $0.975
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 Nine Months
Ended September 30,
1998 1997
OPERATING ACTIVITIES:
Consolidated net income $ 1,028,504 $ 776,518
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation and amortization 1,350,767 1,112,051
Deferred income taxes and investment tax credits (41,190) (16,696)
Allowance for equity funds used during construction (3,750) (4,272)
Amortization of deferred Plant Vogtle costs (Note M) 23,357 112,791
Gain on asset sales (32,597) (16,167)
Other, net 11,573 27,712
Changes in certain current assets and liabilities--
Receivables, net (336,406) (378,115)
Special deposits-other 4,248 (41,953)
Fossil fuel stock 3,879 33,942
Materials and supplies 19,470 18,553
Prepayments (27,507) 24,326
Payables (210,481) 34,266
Taxes Accrued 272,111 478,208
Other (34,734) 87,514
---------------- ----------------
Net cash provided from operating activities 2,027,244 2,248,678
---------------- ----------------
INVESTING ACTIVITIES:
Gross property additions (1,374,245) (1,220,017)
Southern Energy business acquisitions (235,157) (2,812,404)
Sale of additional interest in SWEB 170,000 -
Sales of property 19,142 33,270
Other 14,910 (42,086)
---------------- ----------------
Net cash used for investing activities (1,405,350) (4,041,237)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds--
Common stock 168,491 270,632
Capital and preferred securities 245,000 1,321,250
Preferred stock 200,000 -
Pollution control obligations 210,300 339,500
Other long-term debt 1,573,488 1,827,088
Notes Receivable 240,792 -
Retirements/repurchases--
Common stock repurchased (60,307) -
Preferred stock (49,432) (428,440)
First mortgage bonds (774,845) (112,409)
Pollution control obligations (209,780) (289,500)
Other long-term debt (215,699) (534,095)
Notes Receivable (89,679) -
Special deposits-redemption funds (5) (6,877)
Notes payable, net (801,777) 316,104
Payment of common stock dividends (699,835) (664,718)
Miscellaneous (101,133) (70,453)
---------------- ----------------
Net cash provided from (used for) financing activities (364,421) 1,968,082
---------------- ----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 257,473 175,523
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 600,820 444,832
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 858,293 $ 620,355
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $814,573 $674,499
Income taxes $534,502 $427,029
Southern Energy business acquisitions--
Fair value of assets acquired $235,157 $4,795,324
Less cash paid for common stock 235,157 2,812,404
-------------- --------------
Liabilities assumed - $1,982,920
============== ==============
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 September 30,
1998 At December 31,
(Unaudited) 1997
----------------- -----------------
UTILITY PLANT:
Plant in service $ 34,792,320 $ 34,044,182
Less accumulated provision for depreciation 12,927,060 11,933,718
---------------- ----------------
21,865,260 22,110,464
Nuclear fuel, at amortized cost 211,186 230,154
Construction work in progress 1,681,892 1,311,540
---------------- ----------------
Total 23,758,338 23,652,158
---------------- ----------------
OTHER PROPERTY AND INVESTMENTS:
Goodwill, being amortized 1,882,559 1,887,574
Leasehold interests, being amortized 1,328,753 1,388,928
Equity investments in subsidiaries 1,548,807 1,167,739
Long-term notes receivable 357,708 460,448
Nuclear decommissioning trusts, at market 435,911 387,425
Miscellaneous 208,969 281,488
---------------- ----------------
Total 5,762,707 5,573,602
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 858,293 600,820
Special deposits 81,877 103,462
Receivables, less accumulated provisions for uncollectible accounts
of $82,947 at September 30, 1998 and $77,056 at December 31, 1997 2,190,389 2,014,117
Fossil fuel stock, at average cost 213,372 217,251
Materials and supplies, at average cost 485,843 492,516
Prepayments 103,024 98,398
Vacation pay deferred 78,910 78,866
---------------- ----------------
Total 4,011,708 3,605,430
---------------- ----------------
DEFERRED CHARGES:
Deferred charges related to income taxes 1,076,286 1,142,045
Prepaid pension costs 488,367 398,736
Deferred Plant Vogtle costs (Note M) 27,055 50,412
Debt expense, being amortized 111,249 101,068
Premium on reacquired debt, being amortized 269,333 285,149
Miscellaneous 446,665 461,910
---------------- ----------------
Total 2,418,955 2,439,320
---------------- ----------------
TOTAL ASSETS $ 35,951,708 $ 35,270,510
================ ================
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 September 30,
1998 At December 31,
(Unaudited) 1997
---------------- -----------------
CAPITALIZATION:
Common stock, par value $5 per share-
Authorized -- 1 billion shares
Issued -- At September 30, 1998: 699,771,324 shares
-- At December 31, 1997: 693,423,039 shares $ 3,498,857 $ 3,467,115
Paid-in capital 2,461,899 2,330,538
Retained earnings 4,164,073 3,842,135
Accumulated other comprehensive income 22,820 7,176
---------------- ---------------
10,147,649 9,646,964
Less treasury stock, at cost-
At September 30, 1998: 2,031,565 shares (Note R) 57,263 -
---------------- --------------
10,090,386 9,646,964
Preferred stock of subsidiaries 405,912 493,346
Subsidiary obligated mandatorily redeemable
capital and preferred securities (Note I) 1,991,220 1,743,520
Long-term debt 10,697,270 10,273,606
---------------- ---------------
Total 23,184,788 22,157,436
---------------- ---------------
CURRENT LIABILITIES:
Amount of securities due within one year 1,192,667 783,805
Notes payable 1,370,091 2,064,249
Accounts payable 772,482 1,048,266
Customer deposits 126,723 133,018
Taxes accrued--
Income taxes 337,741 119,782
Other 350,065 259,297
Interest accrued 188,933 261,668
Vacation pay accrued 110,526 108,207
Miscellaneous 551,743 608,761
---------------- ---------------
Total 5,000,971 5,387,053
---------------- ---------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 4,502,100 4,649,826
Deferred credits related to income taxes 735,524 745,674
Accumulated deferred investment tax credits 731,208 753,861
Employee benefits provisions 479,852 447,188
Minority interests in subsidiaries 592,472 434,987
Prepaid capacity revenues 99,711 109,982
Department of Energy assessments 72,193 72,193
Disallowed Plant Vogtle capacity buyback costs 54,821 55,856
Storm damage reserves 55,491 38,407
Miscellaneous 442,577 418,047
---------------- ---------------
Total 7,765,949 7,726,021
---------------- ---------------
TOTAL CAPITALIZATION AND LIABILITIES $ 35,951,708 $ 35,270,510
================ ===============
The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Stated in Thousands of Dollars)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------- -------------- --------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Consolidated net income $516,029 $374,710 $1,028,504 $776,518
Other comprehensive income:
Foreign currency translation adjustments 21,069 (6,664) 24,067 (15,173)
Less Applicable income taxes 7,374 (2,333) 8,423 (5,311)
-------- ----------- -------------- ----------
CONSOLIDATED COMPREHENSIVE INCOME $529,724 $370,379 $1,044,148 $766,656
======== ======== ========== ========
- --------------------------------------------------------------------- -------------- -------------- --------------- --------------
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(Stated in Thousands of Dollars)
At September 30, 1998 At December 31, 1997
Balance at beginning of period $ 7,176 $13,689
Change in current period 15,644 (6,513)
-------- ---------
BALANCE AT END OF PERIOD $22,820 $ 7,176
======= ========
- --------------------------------------------------------------------- ----------------------------- ---------------------------
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 1998 vs. THIRD QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Earnings
SOUTHERN's consolidated net income for the third
quarter and year-to-date 1998 was $516 million ($0.74 per share) and $1.0
billion ($1.48 per share), respectively, compared to $375 million ($0.55 per
share) and $777 million ($1.14 per share) for the corresponding periods of 1997.
Earnings for the third quarter and year-to-date 1998 improved due to strong
performance from both the traditional and non-traditional businesses and the
effect of the windfall profit tax, a one-time charge in the third quarter of
1997, which reduced 1997 earnings by $111 million or about $0.16 per share.
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 result from such acquisitions. Significant income
statement items appropriate for discussion include the following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Operating revenues............................... $(614,419) (15.1) $(488,932) (5.2)
Fuel expense..................................... 44,071 6.3 131,897 7.8
Purchased power expense.......................... (808,954) (71.1) (1,139,394) (54.8)
Other operation expense.......................... 58,715 12.2 170,014 12.5
Maintenance expense.............................. 43,240 26.2 75,064 13.2
Depreciation and amortization ................... 61,140 17.1 232,823 24.9
Amortization of deferred Plant Vogtle costs...... (29,795) (79.3) (89,434) (79.3)
Equity in earnings of unconsolidated subsidiaries
21,329 199.7 55,104 250.0
Interest income.................................. 3,553 8.7 88,675 82.8
Minority interest................................ 42,734 276.5 44,102 342.2
11
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 third quarter and year-to-date 1998 increased $221 million or 8.0% and
$680 million or 10.2%, respectively, compared to the corresponding periods of
1997. Traditional core business revenues increased for the third quarter and
year-to-date 1998 primarily due to increases in energy sales of 3.5% and 7.7%,
respectively. Sales of energy to residential, and commercial customers rose by
9.1% and 6.2%, respectively, for the quarter and 15.2% and 7.5%, year-to-date,
respectively, due to hotter temperatures during these periods when compared to
the milder-than-normal temperatures recorded in the corresponding periods in
1997. Retail revenues, excluding fuel and any demand-side program revenues which
generally do not affect income, increased $128 million for the third quarter and
$430 million for year-to-date 1998. Operating revenues for non-traditional
business were down by $835 million or 63.5% for the quarter and $1 billion or
43.4% year-to-date when compared to the same periods in 1997 due primarily to a
change to the equity method of reporting for Southern Energy's energy marketing
activities. Prior to January 1998, these activities were accounted for on a
consolidated basis. (See Note (D) in the "Notes to the Condensed Financial
Statements" herein.)
Fuel expense. The third quarter and year-to-date 1998 increases are
attributed to increased generation necessary to meet the higher demand for
energy.
Purchased power expense. Purchased power expenses for the traditional core
business rose by $66 million or 67.1% and $171 million or 100.1%, respectively,
for the third quarter and year-to-date 1998. These expenses increased primarily
due to the increased sale of energy to the different classes of retail
customers. For non-traditional business, purchased power expenses dropped $875
million or 84.2% for the quarter and $1 billion or 68.7% year-to-date when
compared to the corresponding periods in 1997. The change in reporting for
Southern Energy's energy marketing activities, as mentioned above, is the
principal reason for this decrease.
Other operation expense. The increases for the current quarter and
year-to-date 1998 are primarily in the traditional business. In the traditional
business, these expenses were up $39 million or 10.3% for the quarter and $104
million or 9.8% year-to-date 1998 when compared to the corresponding periods in
1997. The reasons for the increases include the additional costs incurred for a
new customer service system, modifications of certain information systems for
year 2000 compliance and property damage and other reserves.
Maintenance expense. Third quarter and year-to-date 1998 increases are
primarily in the traditional business. The third quarter and year-to-date
increases are mainly a result of additional expenses related to work on
distribution lines and nuclear facilities. In addition, maintenance on steam
generating facilities also contributed to the year-to-date increase.
Depreciation and amortization expense. Depreciation and amortization
expense of the traditional core business for the quarter and year-to-date,
increased compared to the corresponding periods in 1997. These increases are
attributed primarily to additional depreciation charges of $37.1 million for the
quarter and $176.4 million year-to-date, pursuant to GEORGIA's retail accounting
order as discussed in Note (L) in the "Notes to the Condensed Financial
Statements" herein and additions to utility plant.
Amortization of deferred Plant Vogtle costs. Decreases in these costs for
the quarter and year-to-date are due to the completion in September 1997 of the
amortization of levelized buybacks and Plant Vogtle Unit 1 cost deferrals under
the 1987 Georgia PSC order. See Note (M) in the "Notes to the Condensed
Financial Statements", herein for further details.
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Equity in earnings of unconsolidated subsidiaries. The increases in this
item for the quarter and year-to-date 1998 are primarily attributed to the
investment in BEWAG which was acquired in September 1997.
Interest income. For the traditional business, interest income for the
third quarter and year-to-date increased $9 million or 77.2% and $94 million or
298.0%, respectively. The year-to-date 1998 increase is primarily attributed to
the settlement between SOUTHERN and the IRS relating to tax issues for the years
1984 through 1987. For additional information, see Note (H) in the "Notes to the
Condensed Financial Statements" herein. The third quarter and year-to-date 1998
increases are also attributed to recognized gains on investments held by the
nuclear decommissioning trust for ALABAMA ($7.5 million for the third quarter
and $19.7 million year-to-date), although these increases were offset by a
concurrent recognition of other interest charges in accordance with FERC
requirements.
Minority interest. The increases in minority interest for the current
quarter and year-to-date are attributed to the one-time third quarter 1997
charge related to the windfall profit tax in the United Kingdom and the June
1998 sale of an additional interest in SWEB.
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. For
information relating to non-traditional business activities, see Item 1 -
BUSINESS -"Non-Traditional Business" in the Form 10-K.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, 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 September 1998, the EPA
issued the final regional ozone rule to the states for implementation. The
states have one year to adopt rules implementing the EPA rules. The final rule
affects 22 states, including Alabama and Georgia, and the District of Columbia.
The EPA rules are expected to be challenged in the courts by several states and
industry groups. Implementation of the final state rules could require
substantial further NOx reductions from fossil-fueled generating facilities and
other industry in these states. The compliance cost of these additional NOx
reductions could be significant. However, expected costs cannot be determined
until the result of legal challenges are known and the states have adopted their
final rules.
For information relating to Year 2000 readiness, see "YEAR 2000 READINESS"
below.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In May 1998, SOUTHERN through its subsidiary Southern Energy announced that
it had agreed to purchase electric generating assets in New England from
subsidiaries of Commonwealth Energy System and Eastern Utilities Associates for
$537 million. Southern Energy will own and operate the plants which have a
combined generating capacity of 1,260 megawatts, while Southern Company Energy
Marketing, which markets electricity and natural gas nationwide, will sell the
output to the divesting utilities and in the open market.
In June 1998, SOUTHERN, through its subsidiary Southern Energy, sold an
additional 26% interest in SWEB Holdings Limited, the holding company for SWEB,
to PP&L Resources for $170 million.
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which must be adopted
by 1999, requires capitalization of certain costs of internal-use software.
Adoption of the SOP is not expected to have a material impact on the financial
statements.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. While SOUTHERN has not
yet quantified the impact of adopting this statement on its financial
statements, it could increase volatility in earnings and other comprehensive
income.
Reference is made to Notes (B), (C), (D), (E), (F), (G), (H), (J) through
(O) 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. Reference is also made to Part II - Item 1 - "Legal
Proceedings" herein.
YEAR 2000 READINESS
Year 2000 Challenge
To save valuable storage space, mainframe computer programmers in the 1960s and
1970s shortened the year portion of date entries to just two digits. The date
January 1, 1998, for example, was recorded by a computer as 01/01/98. Computers
assumed, in effect, that all years began with "19." This practice was widely
adopted by programmers of additional computer platforms, such as personal
computers, and hard wired into computer chips and processors found in some
equipment. This approach, intended to save processing time and storage space
within computers, was used until the mid-90s.
If these functions are not corrected before the Year 2000 arrives, affected
software systems and devices containing computer chips or clocks could
automatically roll back to 1900 instead of moving forward to 2000. Some affected
software and devices will function without incident. Others may experience
erroneous results or the interruption of a process. This challenge does not
affect all software or all computer-controlled equipment.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SOUTHERN depends on complex computer systems for many aspects of its
operations, which include generation, transmission and distribution of
electricity, as well as other business support activities. SOUTHERN's goal is to
have mission-critical assets Year 2000-ready by June 1999. "Mission-critical"
refers to devices or software that are required to maintain operations. "Year
2000 ready" means that the system or application is determined suitable for
continued use through the Year 2000. Mission-critical systems include, but are
not limited to, reactor control systems, safe shutdown systems,
turbine/generator systems, control center computer systems, customer service
systems, energy management systems, and telephone switches and equipment.
Year 2000 Program
SOUTHERN executive management recognizes the seriousness of the Year 2000
challenge and has dedicated resources it considers adequate to address the
issue. A steering committee of SOUTHERN system executives reviews Millennium
Project progress on a monthly basis, and the SOUTHERN and subsidiary boards
receive periodic updates and progress reports.
SOUTHERN's traditional business consists of the generation and distribution
of electricity in the service territories of ALABAMA, GEORGIA, GULF,
MISSISSIPPI, and SAVANNAH.
SOUTHERN's non-traditional business is represented by various interests in
the United States and several countries throughout the world. Readiness in the
non-traditional business is generally scheduled to follow the traditional
business.
SOUTHERN's Millennium Project is divided into two phases:
Phase 1 began in 1996 and consisted of identifying and assessing corporate
assets (software systems and devices that contain a computer chip or clock)
within the traditional business. This first phase was completed on schedule in
June 1997.
Phase 2, which consists of testing and remediating high priority systems and
devices, is targeted for completion in June 1999. Contingency planning is
included in this phase. The Millennium Project will continue to monitor
SOUTHERN's affected computer systems, devices and applications through the end
of 1999, and into the year 2000.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
At the end of the third quarter of 1998, SOUTHERN's progress toward Year
2000 readiness is as follows:
Year 2000 Readiness of Mission-Critical Systems - Traditional Business
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
Year 2000 Generation Energy Transmission Telecommunications Business
Phases Management and Systems Information Systems
Systems Distribution
Systems
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
Inventory C C C C C
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
Assessment C C C C C
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
Remediation/ PC PC PC PC PC
Testing
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
Contingency PC PC PC NS NS
Planning
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
Projected
Completion 6/99* 6/99 1/99 6/99 3/99
- ------------------- ------------- ---------------- ----------------- ------------------------ --------------------
*One generating unit will complete testing during its next scheduled maintenance
cycle, October 1999.
Legend: C Phase Complete
PC Phase Partially Complete
NS Phase Not Started
Contingency strategies for each area of business will be completed in
December 1998; detailed plans are scheduled for completion by June 1999.
Material Third Parties
SOUTHERN is currently reviewing the Year 2000 readiness of material third
parties which provide goods and services crucial to SOUTHERN's operations.
SOUTHERN is developing contingency plans based on its assessment of each third
party's ability to continue supplying critical goods and services to SOUTHERN.
Among such critical third parties are fuel, transportation, telecommunications,
water, chemical, and other suppliers.
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Year 2000 Preparation Costs
Within the traditional business current projected costs of SOUTHERN's Year 2000
readiness are approximately $91 million. This includes costs for time and labor
necessary to identify, test and renovate affected devices and systems during a
process that will last almost four years. From its inception through September
30, 1998, the Year 2000 program costs, recognized primarily as expense, amounted
to $39 million. In addition to the traditional business costs, current
projections put Year 2000 program costs at approximately $23 million for the
non-traditional business, based on SOUTHERN's ownership.
Risks associated with Year 2000 Challenge
SOUTHERN is implementing a detailed process to minimize the possibility of
service interruptions related to Year 2000 challenges. Because SOUTHERN is
taking what it believes to be prudent steps to prepare for the Year 2000,
SOUTHERN expects any interruptions in service that may occur within the
traditional business service territory to be isolated and short in duration.
SOUTHERN expects the risks associated with Year 2000 challenges to be no
more severe than the scenarios that SOUTHERN's electric system is routinely
prepared to handle. This scenario consists of the loss of one of the largest
generating units and/or the loss of any single bulk transmission element in its
traditional business service territory. SOUTHERN has followed a proven
methodology for identifying and assessing software and devices containing
potential Year 2000 challenges. Remediation and testing of those devices has
been scheduled. SOUTHERN is also assessing risks associated with critical assets
and third-party suppliers. Following risk assessment, SOUTHERN is preparing
contingency plans as appropriate and is participating in North American Electric
Reliability Council-coordinated national drills during 1999. A description of
SOUTHERN's contingency planning follows below.
There is a potential for some earnings erosion caused by reduced electrical
demand by customers because of their Year 2000 issues.
Contingency Plans
Because of experience with hurricanes and other storms, operating companies are
skilled at using contingency plans in unusual circumstances. As part of Year
2000 business continuity and contingency planning, SOUTHERN is drawing on that
experience in making risk assessments and developing additional plans to deal
specifically with situations that could arise relative to external suppliers and
other Year 2000 challenges.
Contingency planning efforts for the non-traditional business are generally
in the initial phase due to the schedule of those businesses' Year 2000
programs. Because of the level of detail of SOUTHERN's contingency planning
process, management feels that the contingency plans will keep any service
interruptions that may occur within the traditional business service territory
isolated and short in duration.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in SOUTHERN's financial condition during the first nine months of
1998 included $1.4 billion used for gross property additions to utility plant;
$235 million used for Southern Energy acquisitions; and $189 million received
from property sales. The funds for these additions, acquisitions 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 nine months of 1998, retirements of the operating companies'
first mortgage bonds and preferred stock totaled $775 million and $49 million,
respectively. A subsidiary of GULF formed a statutory business trust which sold,
during the first nine months of 1998, $45 million of trust preferred securities.
In June 1998, a subsidiary of SOUTHERN formed a statutory business trust which
sold $200 million of trust originated preferred securities. See Note (I) in the
"Notes to the Condensed Financial Statements" herein for further details. Also
during the first nine months of 1998, ALABAMA issued $200 million of 7% senior
notes due December 31, 2047, $190 million of 7% senior notes due March 31, 2048,
$200 million of preferred stock consisting of $162 million of 5.20% Class A
preferred stock and $38 million of 5.83% Class A preferred stock, $225 million
of 6.50% senior insured quarterly notes due September 30, 2018, $100 million of
6.25% senior notes due September 30, 2010, $100 million of 6.375% senior insured
quarterly notes due September 30, 2018. Also in the first nine months of 1998,
GEORGIA issued $145 million of 6 7/8% senior notes due December 31, 2047; GULF
issued $50 million of 6.70% senior notes due June 30, 2038; MISSISSIPPI issued
$55 million of 6.75% senior notes due June 30, 2038 and $35 million of 6.05%
senior notes due May 1, 2003; and SAVANNAH issued $30 million of 6 5/8% senior
notes due March 17, 2015. Further, an aggregate of $210 million of pollution
control bonds were issued by ALABAMA, GEORGIA and MISSISSIPPI, the proceeds of
which were used for refunding purposes.
In October 1998, ALABAMA issued $160 million of 5 3/8% senior notes due
October 1, 2008 and in November 1998, ALABAMA issued $225 million of 5.49%
senior notes due November 1, 2005.
During the first nine months of 1998, SOUTHERN raised $168 million from the
issuance of 6.5 million shares of common stock under SOUTHERN's various stock
plans and used $60 million to repurchase 2.1 million shares of common stock
under a new stock repurchase program. See Note (R) in the "Notes to the
Condensed Financial Statements" herein for discussion of such program. The
market price of SOUTHERN's common stock at September 30, 1998 was $29.4375 per
share and the book value was $14.46 per share, representing a market-to-book
ratio of 204%, compared to $25.875, $13.91 and 186%, respectively, at the end of
1997. The dividend for the third quarter of 1998 was $0.335 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 $1.2 billion will be required by September 30, 1999, for present
sinking fund requirements, redemption of preferred stock and
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 1998, 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.
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
September 30, 1998, approximately $858 million of cash and cash equivalents and
approximately $4.9 billion of unused credit arrangements with banks (including
$1,368 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 September 30, 1998, the system companies had
outstanding approximately $424 million of short-term notes payable and $946
million of commercial paper. Management believes that the need for working
capital can be adequately met by utilizing lines of credit without maintaining
large cash balances.
See Note (D) in the "Notes to the Condensed Financial Statements" herein
for discussion of financial derivative contracts entered into by SOUTHERN.
19
ALABAMA POWER COMPANY
20
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
OPERATING REVENUES:
Revenues $ 1,044,460 $ 932,313 $ 2,569,085 $ 2,289,637
Revenues from affiliates 13,528 30,133 69,123 105,666
-------------- ------------- -------------- --------------
Total operating revenues 1,057,988 962,446 2,638,208 2,395,303
-------------- ------------- -------------- --------------
OPERATING EXPENSES:
Operation--
Fuel 262,473 253,645 671,118 660,216
Purchased power from non-affiliates 39,191 25,036 81,876 33,180
Purchased power from affiliates 66,021 25,313 128,270 70,822
Other 138,141 125,618 378,396 367,622
Maintenance 80,053 47,171 230,389 193,668
Depreciation and amortization 84,256 82,346 256,636 247,628
Taxes other than income taxes 45,544 43,161 141,104 138,553
Federal and state income taxes 100,246 110,669 198,899 184,922
-------------- ------------- -------------- --------------
Total operating expenses 815,925 712,959 2,086,688 1,896,611
-------------- ------------- -------------- --------------
OPERATING INCOME 242,063 249,487 551,520 498,692
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 1,414 - 2,309 -
Income from subsidiary 913 876 2,753 2,861
Interest income 17,209 7,879 55,707 23,626
Other, net (10,091) (5,993) (25,533) (20,642)
Income taxes applicable to other income 5,600 7,033 3,284 7,419
-------------- ------------- -------------- --------------
INCOME BEFORE INTEREST CHARGES 257,108 259,282 590,040 511,956
-------------- ------------- -------------- --------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 48,524 41,618 140,955 124,846
Allowance for debt funds used during construction (1,298) (299) (2,850) (2,679)
Interest on interim obligations 3,177 7,144 10,524 18,016
Amortization of debt discount, premium and expense, net 10,143 2,403 40,024 7,201
Other interest charges 13,736 7,382 39,971 21,345
Distributions on preferred securities of subsidiary companies 5,588 5,588 16,765 16,174
-------------- ------------- -------------- --------------
Total Interest charges and other 79,870 63,836 245,389 184,903
-------------- ------------- -------------- --------------
NET INCOME 177,238 195,446 344,651 327,053
DIVIDENDS ON PREFERRED STOCK 3,280 3,646 9,902 14,309
-------------- ------------- -------------- --------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 173,958 $ 191,800 $ 334,749 $ 312,744
============== ============= ============== ==============
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
21
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Nine Months
Ended September 30,
1998 1997
OPERATING ACTIVITIES:
Net income $ 344,651 $ 327,053
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 332,663 294,436
Deferred income taxes and investment tax credits, net 21,431 1,147
Allowance for equity funds used during construction (2,309) -
Other, net (2,592) (25,156)
Changes in certain current assets and liabilities--
Receivables, net (38,485) (75,636)
Inventories 1,972 2,439
Prepayments (5,973) (13,362)
Payables (59,857) (76,033)
Taxes accrued 70,046 114,784
Energy cost recovery, retail (75,508) (3,015)
Other (39,553) (17,027)
------------ ------------
Net cash provided from operating activities 546,486 529,630
-------------- --------------
INVESTING ACTIVITIES:
Gross property additions (420,660) (290,200)
Other (19,822) (32,258)
------------ ------------
Net cash used for investing activities (440,482) (322,458)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds--
Capital contributions 30,000 -
Company obligated mandatorily redeemable preferred securities - 200,000
Preferred stock 200,000
Pollution control bonds 106,790 -
Other long-term debt 815,000 -
Retirements--
Preferred stock - (162,000)
Pollution control bonds (106,790) -
First mortgage bonds (396,500) (19,801)
Other long-term debt (753) (693)
Interim obligations, net (214,873) 55,083
Payment of preferred stock dividends (10,053) (17,027)
Payment of common stock dividends (271,700) (251,800)
Miscellaneous (49,919) (6,407)
------------ ------------
Net cash provided from (used for) financing activities 101,202 (202,645)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 207,206 4,527
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,957 9,587
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 231,163 $ 14,114
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 188,933 $ 162,897
Income taxes 155,010 97,705
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
22
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At September 30,
1998 At December 31,
(Unaudited) 1997
---------------- ------------------
UTILITY PLANT:
Plant in service $ 11,235,677 $ 11,070,323
Less accumulated provision for depreciation 4,582,088 4,384,180
---------------- ----------------
6,653,589 6,686,143
Nuclear fuel, at amortized cost 101,171 103,272
Construction work in progress 474,994 311,223
---------------- ----------------
Total 7,229,754 7,100,638
---------------- ----------------
OTHER PROPERTY AND INVESTMENTS:
Southern Electric Generating Company, at equity 24,118 24,972
Nuclear decommissioning trusts 197,397 193,008
Miscellaneous 22,329 22,233
---------------- ----------------
Total 243,844 240,213
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 231,163 23,957
Receivables--
Customer accounts receivable 455,794 368,255
Other accounts and notes receivable 49,538 28,921
Affiliated companies 32,102 50,353
Accumulated provision for uncollectible accounts (2,853) (2,272)
Fossil fuel stock, at average cost 91,089 74,186
Materials and supplies, at average cost 142,726 161,601
Prepayments 26,426 20,453
Vacation pay deferred 28,783 28,783
---------------- ----------------
Total 1,054,768 754,237
---------------- ----------------
DEFERRED CHARGES:
Deferred charges related to income taxes 387,548 384,549
Debt expense, being amortized 7,334 7,276
Premium on reacquired debt, being amortized 69,550 81,417
Prepaid pension costs 159,728 130,733
Department of Energy assessments 34,416 34,416
Miscellaneous 69,922 79,388
---------------- ----------------
Total 728,498 717,779
---------------- ----------------
TOTAL ASSETS $ 9,256,864 $ 8,812,867
================ ================
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
23
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At September 30,
1998 At December 31,
(Unaudited) 1997
-------------- ----------------
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 1,334,645 1,304,645
Premium on preferred stock 99 99
Retained earnings 1,278,176 1,221,467
-------------- ---------------
2,837,278 2,750,569
Preferred stock 317,512 255,512
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding Company Junior Subordinated Notes 297,000 297,000
Long-term debt 2,674,893 2,473,202
-------------- ---------------
Total 6,126,683 5,776,283
-------------- ---------------
CURRENT LIABILITIES:
Preferred stock due within one year 138,000 -
Long-term debt due within one year 275,611 75,336
Commercial paper 92,009 306,882
Accounts payable--
Affiliated companies 63,157 79,822
Other 111,902 159,146
Customer deposits 30,667 34,968
Taxes accrued--
Federal and state income 85,920 21,177
Other 58,560 15,309
Interest accrued 28,038 50,722
Vacation pay accrued 28,783 28,783
Miscellaneous 66,647 103,602
-------------- ---------------
Total 979,294 875,747
-------------- ---------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 1,176,853 1,192,265
Accumulated deferred investment tax credits 274,480 282,873
Prepaid capacity revenues, net 99,711 109,982
Department of Energy Assessments 30,592 30,592
Deferred credits related to income taxes 329,222 327,328
Natural disaster reserve 26,587 22,416
Miscellaneous 213,442 195,381
-------------- ---------------
Total 2,150,887 2,160,837
-------------- ---------------
TOTAL CAPITALIZATION AND LIABILITIES $ 9,256,864 $ 8,812,867
============== ===============
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
24
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 1998 vs. THIRD QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Earnings
ALABAMA's net income after dividends on preferred stock for the third quarter
and year-to-date 1998 was $174.0 million and $334.7 million, respectively,
compared to $191.8 million and $312.7 million for the corresponding periods of
1997. Current quarter earnings decreased $17.8 million or 9.3% when compared to
the same period in 1997 primarily as a result of higher operating expenses.
Year-to-date 1998 earnings increased by $22.0 million or 7.0% when compared to
the corresponding period in 1997 due primarily to increased operating revenues.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Revenues......................................... $112,147 12.0 $279,448 12.2
Revenues from affiliates......................... (16,605) (55.1) (36,543) (34.6)
Purchased power from non-affiliates ............. 14,155 56.5 48,696 146.8
Purchased power from affiliates.................. 40,708 160.8 57,448 81.1
Maintenance expense.............................. 32,882 69.7 36,721 19.0
Interest income.................................. 9,330 118.4 32,081 135.8
Interest on long-term debt....................... 6,906 16.6 16,109 12.9
Interest on interim obligations.................. (3,967) (55.5) (7,492) (41.6)
Amortization of debt discount, premium and expense, net
7,740 322.1 32,823 455.8
Other interest charges........................... 6,354 86.1 18,626 87.3
Dividends on preferred stock..................... (366) (10.0) (4,407) (30.8)
Revenues. The increase in revenues for the third quarter and year-to-date
1998 was primarily due to increases in territorial energy sales. Territorial
revenues increased $106.0 million and $256.6 million, respectively, for the
current quarter and year-to-date 1998, when compared to the corresponding
periods in 1997. Increases in territorial revenues are attributed to increased
retail sales of 2.8% and 8.0% for the third quarter and year-to-date,
respectively, resulting from hotter weather during these periods, as compared to
the milder-than-normal weather for the corresponding periods in 1997. Also
contributing to the year-to-date increase was a strong economy in the company's
service territory. Retail revenues, excluding those revenues which represent the
recovery of fuel expense and certain other expenses and do not affect income,
increased $38.3 million and $130.2 million, for the current quarter and
year-to-date, respectively. Non-territorial wholesale revenues increased $3.4
million and $16.5 million for the third quarter and year-to-date, respectively,
as compared to the same periods in 1997.
25
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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, 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. These expenses rose for the current
quarter and year-to-date 1998 when compared to the corresponding periods of 1997
primarily due to increased purchases related to power marketing activities, a
majority of which were resold to non-affiliated third parties. These
transactions had no significant effect on net income.
Maintenance expense. These costs increased for the third quarter primarily
due to maintenance of distribution lines and nuclear plant. Year-to-date 1998
costs increased from the amounts recorded in the same period in 1997 as a result
of higher expenses related to the maintenance of distribution lines and steam
plant.
Interest income. Third quarter and year-to-date 1998 increases are
attributed to increased interest income of $7.5 million and $19.7 million,
respectively, primarily as a result of recognized gains on investments held by
the nuclear decommissioning trust. The increases in interest income related to
the nuclear decommissioning trust were offset by a concurrent recognition of
other interest charges in accordance with FERC requirements. Additionally, in
the second quarter of 1998 ALABAMA recorded its portion ($11.5 million) of the
tax settlement between SOUTHERN and the IRS which also contributed to the
year-to-date increase (for additional information, see Note (H) in the "Notes to
the Condensed Financial Statements" herein).
Interest on long-term debt. Continued sales of senior notes throughout the
first nine months of 1998 resulted in higher interest expense for the current
quarter and year-to-date 1998.
Interest on interim obligations. The third quarter and year-to-date 1998
decreases in these interest charges result from a reduction in the amount of
outstanding short-term debt.
Amortization of debt discount, premium and expense, net. The third quarter
and the year-to-date 1998 increases from the same periods in 1997 are attributed
to ALABAMA's accelerated amortization of premiums incurred in connection with
the refinancing of high-cost debt, in the amounts of $8.0 million and $33.0
million, respectively, as allowed by the Alabama PSC. See Note (J) in the "Notes
to the Condensed Financial Statements" herein for further details.
Other interest charges. The third quarter and year-to-date 1998 increases
are primarily due to interest charges related to the nuclear decommissioning
trust. These charges increased by $5.5 million and $16.1 million, respectively.
These increases in interest charges were offset by a concurrent recognition of
interest income in accordance with FERC requirements.
Dividends on preferred stock. Current quarter and year-to-date 1998
dividends decreased when compared to the corresponding periods of 1997 due to
redemptions of preferred stock.
26
ALABAMA 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 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 September 1998, the EPA
issued the final regional ozone rule to the states for implementation. The
states have one year to adopt rules implementing the EPA rules. The final rule
affects 22 states, including Alabama. The EPA rules are expected to be
challenged in the courts by several states and industry groups. Implementation
of the final state rules could require substantial further NOx reductions from
fossil-fueled generating facilities and other industry in these states. The
compliance cost of these additional NOx reductions could be significant.
However, expected costs cannot be determined until the result of legal
challenges are known and the states have adopted their final rules.
ALABAMA's plans to achieve Year 2000 readiness have been implemented and
are included in the SOUTHERN system's Year 2000 Program. The costs related to
ALABAMA's Year 2000 program are expected to be $29.6 million. From its inception
through September 30, 1998, the Year 2000 program costs, recognized primarily as
expense, amounted to $9.8 million. For additional information, see SOUTHERN's
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION - "Future Earnings Potential", herein.
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which must be adopted
by 1999, requires capitalization of certain costs of internal-use software.
Adoption of the SOP is not expected to have a material impact on ALABAMA's
financial statements.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. ALABAMA is in the
process of evaluating the impact of this statement on its financial statements.
Reference is made to Notes (B), (C), (F), (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.
27
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in ALABAMA's financial condition during the first nine months of
1998 included the addition of approximately $420.7 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 nine months of 1998, redemptions and maturities of first
mortgage bonds of ALABAMA totaled $396.5 million. In February 1998, ALABAMA
issued $200.0 million of 7% senior notes due December 31, 2047. The proceeds
were used to repay a portion of ALABAMA's short-term indebtedness. In April
1998, ALABAMA issued $190.0 million of 7% senior notes due March 31, 2048. The
proceeds were used to redeem $124.2 million of ALABAMA's First Mortgage Bonds, 8
3/4% Series due December 1, 2021 and to repay a portion of outstanding
short-term indebtedness.
In June 1998, ALABAMA sold, through public authorities, $106.79 million of
variable rate pollution control revenue bonds due June 1, 2028. The proceeds
from these sales were used to redeem, in July 1998, $106.79 million aggregate
principal amount of pollution control revenue bonds.
In August 1998, ALABAMA sold $200.0 million aggregate amount of Class A
preferred stock, consisting of $162.0 million of 5.20% Class A preferred stock
and $38.0 million of 5.83% Class A preferred stock. Also in August, ALABAMA
issued $225.0 million of 6.50% senior insured quarterly notes due September 30,
2018. Proceeds were used to redeem, in September 1998, $198.0 million
outstanding principal amount of its First Mortgage Bonds, 8 1/2% Series due May
1, 2022 and to repay a portion of its outstanding short-term indebtedness.
In September 1998, ALABAMA issued $100.0 million of 6.25% senior notes due
September 30, 2010 and $100.0 million of 6.375% senior insured quarterly notes
due September 30, 2018. The proceeds from these sales were used to repay a
portion of its outstanding short-term indebtedness and to redeem, in October
1998, $99.6 million outstanding principal amount of its First Mortgage Bonds,
8.30% Series due July 1, 2022.
In October 1998, ALABAMA issued $160.0 million of 5 3/8% senior notes due
October 1, 2008. Proceeds from this sale will be used in connection with
ALABAMA's on-going construction program, to pay scheduled maturities and/or
refundings of its securities, to repay outstanding short-term indebtedness, and
for other general corporate purposes.
On November 3, 1998, ALABAMA issued $225.0 million of 5.49% senior notes
due November 1, 2005. The proceeds will be used to redeem, in December 1998,
$100.0 million outstanding principal amount of its First Mortgage Bonds, 6.85%
Series due August 1, 2002 and, in January 1999, $125.0 million outstanding
principal amount of its First Mortgage Bonds, 7.00% Series due January 1, 2003.
28
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ALABAMA redeemed $38.0 million of 6.40% Class A preferred stock in October
1998 and $50.0 million of 6.40% Class A preferred stock in November 1998.
Additional scheduled redemptions are as follows: in November 1998, ALABAMA will
redeem $175.0 million outstanding principal amount of its First Mortgage Bonds,
7.25% Series due August 1, 2007, and in January 1999, ALABAMA will redeem $50.0
million of its Adjustable Rate Class A preferred stock.
ALABAMA will continue to retire higher-cost debt and preferred stock and
replace these securities with lower-cost capital as 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. See Item 1
- - BUSINESS "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, ALABAMA had at September
30, 1998, approximately $231.2 million of cash and cash equivalents and had
unused committed lines of credit of approximately $786.0 million (including
$315.0 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. Reference
is made to "Financing Activities" above for information related to the planned
redemptions of certain First Mortgage Bonds. At September 30, 1998, ALABAMA had
outstanding $92.0 million of commercial paper.
29
Exhibit 1
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 September 30, 1998, and the related condensed statements of income
for the three-month and nine-month periods ended September 30, 1998 and 1997 and
cash flows for the nine-month periods ended September 30, 1998 and 1997. 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, 1997
(not presented herein) and, in our report dated February 11, 1998, 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, 1997 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
November 6, 1998
30
GEORGIA POWER COMPANY
31
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
OPERATING REVENUES:
Revenues $ 1,482,495 $ 1,396,896 $ 3,667,980 $ 3,352,311
Revenues from affiliates 47,832 9,736 72,804 28,379
-------------- -------------- -------------- --------------
Total operating revenues 1,530,327 1,406,632 3,740,784 3,380,690
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Operation--
Fuel 298,338 276,814 722,999 657,443
Purchased power from non-affiliates 90,912 54,624 195,140 113,293
Purchased power from affiliates 35,119 45,148 115,481 118,732
Other 212,741 180,092 576,433 494,849
Maintenance 79,006 71,565 251,044 225,852
Depreciation and amortization 233,743 187,710 632,605 434,537
Amortization of deferred Plant Vogtle costs (Note M) 7,785 37,580 23,357 112,791
Taxes other than income taxes 58,645 55,829 166,079 159,846
Federal and state income taxes 189,490 179,637 368,133 361,037
-------------- -------------- -------------- --------------
Total operating expenses 1,205,779 1,088,999 3,051,271 2,678,380
-------------- -------------- -------------- --------------
OPERATING INCOME 324,548 317,633 689,513 702,310
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 1,172 2,610 1,350 3,849
Equity in earnings of unconsolidated subsidiary 913 876 2,753 2,861
Interest income 3,033 3,317 67,944 6,187
Other, net (11,339) (8,330) (39,838) (19,180)
Income taxes applicable to other income 3,586 14,739 (9,626) 18,706
-------------- -------------- -------------- --------------
INCOME BEFORE INTEREST CHARGES 321,913 330,845 712,096 714,733
-------------- -------------- -------------- --------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 44,489 48,092 134,797 146,904
Allowance for debt funds used during construction (2,061) (1,500) (6,063) (7,426)
Interest on interim obligations 2,561 356 11,074 6,794
Amortization of debt discount, premium and expense, net 3,323 3,388 9,974 10,879
Other interest charges 3,089 4,332 18,223 10,316
Distributions on preferred securities of subsidiary companies 13,601 13,601 40,726 33,767
-------------- -------------- -------------- --------------
Interest charges and other, net 65,002 68,269 208,731 201,234
-------------- -------------- -------------- --------------
NET INCOME 256,911 262,576 503,365 513,499
DIVIDENDS ON PREFERRED STOCK 1,447 5,132 5,311 19,510
-------------- -------------- -------------- --------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 255,464 $ 257,444 $ 498,054 $ 493,989
============== ============== ============== ==============
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
32
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Nine Months
Ended September 30,
1998 1997
OPERATING ACTIVITIES:
Net income $ 503,365 $ 513,499
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 708,055 519,380
Deferred income taxes and investment tax credits, net (73,091) (35,910)
Allowance for equity funds used during construction (1,350) (3,849)
Amortization of deferred Plant Vogtle costs (Note M) 23,357 112,791
Other, net 5,125 34,609
Changes in certain current assets and liabilities--
Receivables, net (348,649) (62,023)
Inventories 24,199 27,651
Payables 12,431 (29,752)
Taxes accrued 186,591 159,873
Energy cost recovery, retail (7,827) (11,887)
Other 16,923 (20,292)
-------------- --------------
Net cash provided from operating activities 1,049,129 1,204,090
-------------- --------------
INVESTING ACTIVITIES:
Gross property additions (334,113) (327,768)
Other 16,396 (20,831)
-------------- --------------
Net cash used for investing activities (317,717) (348,599)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds--
Preferred securities - 364,250
Pollution control bonds 89,990 284,700
Other long-term debt 145,000 -
Retirements--
Preferred stock (40,679) (191,940)
First mortgage bonds (220,460) (60,258)
Pollution control bonds (89,990) (234,700)
Special deposits - redemption funds - (5,546)
Interim obligations, net (265,407) (430,496)
Payment of preferred stock dividends (7,342) (21,665)
Payment of common stock dividends (397,100) (385,500)
Miscellaneous (6,876) (18,815)
-------------- --------------
Net cash used for financing activities (792,864) (699,970)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (61,452) 155,521
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 83,333 15,356
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,881 $ 170,877
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 210,226 $ 204,091
Income taxes (net of refunds) 308,271 264,593
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
33
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At September 30,
1998 At December 31,
(Unaudited) 1997
---------------- ------------------
UTILITY PLANT:
Plant in service $ 15,271,493 $ 15,082,570
Less accumulated provision for depreciation 5,932,342 5,319,680
---------------- ----------------
9,339,151 9,762,890
Nuclear fuel, at amortized cost 110,015 126,882
Construction work in progress 258,474 214,128
---------------- ----------------
Total 9,707,640 10,103,900
---------------- ----------------
OTHER PROPERTY AND INVESTMENTS:
Southern Electric Generating Company, at equity 24,118 24,973
Nuclear decommissioning trusts, at market 238,514 194,417
Miscellaneous 34,881 87,907
---------------- ----------------
Total 297,513 307,297
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 21,881 83,333
Receivables--
Customer accounts receivable 597,343 385,844
Other accounts and notes receivable 229,222 110,278
Affiliated companies 37,129 20,333
Accumulated provision for uncollectible accounts (4,500) (3,000)
Fossil fuel stock, at average cost 73,075 96,067
Materials and supplies, at average cost 239,180 240,387
Prepayments 17,820 27,503
Vacation pay deferred 41,040 40,996
---------------- ----------------
Total 1,252,190 1,001,741
---------------- ----------------
DEFERRED CHARGES:
Deferred charges related to income taxes 619,255 688,472
Deferred Plant Vogtle costs (Note M) 27,055 50,412
Premium on reacquired debt, being amortized 162,181 166,609
Prepaid pension costs 94,649 67,777
Debt expense, being amortized 43,679 40,927
Miscellaneous 136,747 146,593
---------------- ----------------
Total 1,083,566 1,160,790
---------------- ----------------
TOTAL ASSETS $ 12,340,909 $ 12,573,728
================ ================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
34
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At September 30,
1998 At December 31,
(Unaudited) 1997
---------------- ------------------
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 1,930,092 1,929,971
Premium on preferred stock 160 160
Retained earnings 1,846,884 1,745,347
---------------- ----------------
4,121,386 4,019,728
Preferred stock 52,355 157,247
Company obligated mandatorily redeemable preferred securities
of subsidiaries substantially all of whose assets are junior
subordinated debentures or notes 689,250 689,250
Long-term debt 2,933,431 2,982,835
---------------- ----------------
Total 7,796,422 7,849,060
---------------- ----------------
CURRENT LIABILITIES:
Preferred stock due within one year 64,213 -
Long-term debt due within one year 195,420 220,855
Notes payable to banks - 142,300
Commercial paper 100,823 223,930
Accounts payable--
Affiliated companies 59,697 71,373
Other 267,084 261,293
Customer deposits 69,045 68,618
Taxes accrued--
Federal and state income 147,059 4,480
Other 155,553 111,541
Interest accrued 60,968 72,437
Miscellaneous 125,416 105,683
---------------- ----------------
Total 1,245,278 1,282,510
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 2,273,388 2,417,547
Accumulated deferred investment tax credits 386,089 397,202
Deferred credits related to income taxes 288,784 297,560
Employee benefits provisions 185,664 169,887
Miscellaneous 165,284 159,962
---------------- ----------------
Total 3,299,209 3,442,158
---------------- ----------------
TOTAL CAPITALIZATION AND LIABILITIES $ 12,340,909 $ 12,573,728
================ ================
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
35
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 1998 vs. THIRD QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Earnings
GEORGIA's net income after dividends on preferred stock for the third quarter
and year-to-date 1998 was $255.5 million and $498.1 million, respectively,
compared to $257.4 million and $494.0 million for the corresponding periods in
1997. Earnings decreased by $1.9 million or 0.7% for the current quarter and
increased by $4.1 million or 0.8% year-to-date 1998.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Revenues......................................... $85,599 6.1 $315,669 9.4
Revenues from affiliates......................... 38,096 391.3 44,425 156.5
Fuel expense..................................... 21,524 7.8 65,556 10.0
Purchased power from non-affiliates ............. 36,288 66.4 81,847 72.2
Purchased power from affiliates.................. (10,029) (22.2) (3,251) (2.7)
Other operation expense.......................... 32,649 18.1 81,584 16.5
Maintenance expense.............................. 7,441 10.4 25,192 11.2
Depreciation and amortization expense............ 46,033 24.5 198,068 45.6
Amortization of deferred Plant Vogtle costs...... (29,795) (79.3) (89,434) (79.3)
Interest income.................................. (284) (8.6) 61,757 N/M
Other, net....................................... (3,009) (36.1) (20,658) (107.7)
Income taxes applicable to other income.......... (11,153) (75.7) (28,332) (151.5)
Other interest charges........................... (1,243) (28.7) 7,907 76.6
Distributions on preferred securities of
subsidiary companies.......................... - - 6,959 20.6
Dividends on preferred stock..................... (3,685) (71.8) (14,199) (72.8)
- ------------
N/M - Not meaningful
Revenues. Revenue increases for the third quarter and year-to-date 1998
were mainly due to higher energy sales within the service area when compared to
the corresponding periods in 1997. Revenues within the service area increased by
$66.0 million and $286.6 million, respectively, for the third quarter and
year-to-date 1998.
Total energy sales increased primarily due to higher energy demands,
primarily in the retail sector. Hotter temperatures in the current quarter and
year-to-date 1998 when compared to the same periods in 1997 resulted in higher
energy sales primarily to residential and commercial customers.
36
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Energy sales to residential customers increased by 11.1% and 17.3% for the
current quarter and year-to-date, respectively, while energy sales to commercial
customers increased by 6.7% and 8.3% for the current quarter and year-to-date
1998, respectively. Retail revenues, excluding fuel and demand-side program
revenues which generally do not affect income, increased $80.3 million and
$255.8 million for the third quarter and year-to-date 1998, respectively, when
compared to the same periods in 1997.
Wholesale revenues within the service area remained relatively flat for the
third quarter and decreased $8.6 million year-to-date 1998 primarily as a result
of a scheduled reduction in capacity revenues under a power supply agreement
with OPC. Wholesale revenues outside the service area increased by $11.4 million
and $17.7 million for the third quarter and year-to-date 1998, respectively.
Third quarter and year-to-date increases were caused by increased wholesale
energy sales outside the service area, primarily from power marketing
activities. The increases in wholesale energy sales outside the service area
were primarily offset by the increases in purchased power from non-affiliates
and, as a result, had no significant effect on net income.
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.
Fuel expense. Current quarter and year-to-date 1998 expenses increased due
to increased generation to meet the higher demand for energy from our customers.
Purchased power from non-affiliates. The increases for the current quarter
and year-to-date 1998 were primarily due to increased energy purchases resulting
from higher demand and energy purchases related to power marketing activities, a
majority of which were resold to non-affiliated third parties. These
transactions had no significant effect on net income.
Other operation expense. These expenses increased for the quarter and
year-to-date 1998 when compared to the corresponding periods in 1997 due to
continuing expenses related to a new customer service system implemented in
January 1998, and modification of certain information systems for year 2000
compliance. For additional information on the year 2000 issue, see "Future
Earnings Potential" below.
Maintenance expense. Maintenance costs for the third quarter and
year-to-date 1998 rose due to higher expenses related primarily to scheduled
outages at steam power generating facilities and distribution line maintenance.
Depreciation and amortization expense. Current quarter and year-to-date
1998 increases when compared to the corresponding periods in 1997 were primarily
due to increases in additional depreciation charges of $37.1 million for the
third quarter and $176.4 million year-to-date, pursuant to a Georgia PSC retail
accounting order discussed below, and an increase in plant-in-service. See
"Future Earnings Potential" below and Note (L) in the "Notes to the Condensed
Financial Statements" herein for further details regarding the retail accounting
order.
37
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Amortization of deferred Plant Vogtle costs. The decreases in these costs
for the quarter and year-to-date result from the completion in September 1997 of
the amortization of levelized buybacks and Plant Vogtle Unit 1 cost deferrals
under the 1987 Georgia PSC order. See Note (M) in the "Notes to the Condensed
Financial Statements", herein for further details.
Interest income. The year-to-date 1998 increase is attributed primarily to
the recognition of $65.7 million in interest income resulting from the
resolution of tax issues between SOUTHERN and the IRS. For additional
information, see Note (H) in the "Notes to the Condensed Financial Statements"
herein.
Other, net. The changes for the third quarter and year-to-date 1998, were
primarily due to increases in donations and contributions.
Income taxes applicable to other income. The change in the third quarter is
primarily attributed to recognition in the third quarter 1997 of increased tax
benefits resulting from losses of the parent company allocated to GEORGIA under
the joint consolidated income tax agreement between SOUTHERN and its
subsidiaries. The change in year-to-date 1998 primarily resulted from taxes on
the additional interest income discussed above.
Other interest charges. The year-to-date 1998 increase, when compared with
the corresponding period in 1997, is primarily attributed to the recognition of
interest related to tax issues.
Distributions on preferred securities of subsidiary companies. This item
increased year-to-date 1998 primarily due to the issuance of additional
mandatorily redeemable preferred securities in June 1997. For additional
information, see Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing
Activities" of GEORGIA in the Form 10-K.
Dividends on preferred stock. The decreases for the current quarter and
year-to-date resulted from 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. Under the order, GEORGIA filed a
general rate case in June 1998. Reference is made to Note (L) in the "Notes to
the Condensed Financial Statements" herein for additional information.
38
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On January 14, 1998, the Georgia PSC ordered that GEORGIA be allowed
approximately $108 million of its $143 million investment in the Rocky Mountain
pumped storage hydroelectric plant in rate base as of December 31, 1998.
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. In September 1998, the EPA
issued the final regional ozone rule to the states for implementation. The
states have one year to adopt rules implementing the EPA rules. The final rule
affects 22 states, including Alabama and Georgia, and the District of Columbia.
The EPA rules are expected to be challenged in the courts by several states and
industry groups. Implementation of the final state rules could require
substantial further NOx reductions from fossil-fueled generating facilities and
other industry in these states. The compliance cost of these additional NOx
reductions could be significant. However, expected costs cannot be determined
until the result of legal challenges are known and the states have adopted their
final rules.
GEORGIA's plans to achieve Year 2000 compliance have been implemented and
are included in the SOUTHERN system's Year 2000 Program. The costs related to
GEORGIA's Year 2000 program are expected to be approximately $38 million. From
its inception through September 30, 1998, the Year 2000 program costs,
recognized as expense, amounted to $19 million. For additional information, see
SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION - "Future Earnings Potential", herein.
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which must be adopted
by 1999, requires capitalization of certain costs of internal-use software.
Adoption of the SOP is not expected to have a material impact on GEORGIA's
financial statements.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. GEORGIA is in the
process of evaluating the impact of this statement on its financial statements.
Reference is made to Notes (B), (C), (F), and (L) through (O) 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
The major change in GEORGIA's financial condition during the first nine months
of 1998 was the addition of approximately $334.1 million to gross 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.
39
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
During the first nine months of 1998, redemptions of first mortgage bonds and
preferred stock by GEORGIA totaled $220.5 million and $40.7 million,
respectively. In January 1998, GEORGIA issued $145.0 million of 6 7/8% senior
notes due December 31, 2047. The proceeds from this issuance were used to repay
a portion of GEORGIA's outstanding short-term indebtedness.
In March 1998, GEORGIA sold, through public authorities, $89.99 million
aggregate principal amount of variable rate pollution control revenue bonds with
$72.99 million aggregate principal amount due in 2024 and $17.0 million
aggregate principal amount due in 2025. The proceeds were used in April 1998 to
redeem $4.1 million aggregate principal amount of 6.20% pollution control
revenue bonds; $22.1 million aggregate principal amount of 6.00% pollution
control revenue bonds; $17.0 million aggregate principal amount of 5.90%
pollution control revenue bonds; and $46.79 million aggregate principal amount
of 5 3/8% pollution control revenue bonds.
In October 1998, GEORGIA redeemed $64.2 million of adjustable rate Class A
preferred stock.
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.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA
under "Liquidity and Capital Requirements" and "Environmental Issues" in the
Form 10-K for a description of GEORGIA's capital requirements for its
construction program and environmental compliance efforts.
Sources of Capital
In addition to the financing activities previously described herein, GEORGIA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GEORGIA had at September
30, 1998, approximately $21.9 million of cash and cash equivalents and
approximately $1.3 billion of unused credit arrangements with banks. Of the $1.3
billion, $980 million provides liquidity support to GEORGIA's variable rate
pollution control bonds. At September 30, 1998, GEORGIA had $100.8 million
outstanding in 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.
40
Exhibit 1
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 September 30, 1998, and the related
condensed statements of income for the three-month and nine-month periods ended
September 30, 1998 and 1997 and cash flows for the nine-month periods ended
September 30, 1998 and 1997. 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, 1997
(not presented herein), and, in our report dated February 11, 1998, 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, 1997, 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
November 6, 1998
41
GULF POWER COMPANY
42
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
OPERATING REVENUES:
Revenues $ 186,983 $ 187,841 $ 481,597 $ 467,488
Revenues from affiliates 12,394 5,869 35,860 12,888
------------ ------------ ------------- -------------
Total operating revenues 199,377 193,710 517,457 480,376
------------ ------------ ------------- -------------
OPERATING EXPENSES:
Operation--
Fuel 61,694 60,938 158,580 138,712
Purchased power from non-affiliates 12,823 6,908 25,812 9,697
Purchased power from affiliates 5,925 4,482 12,358 19,381
Other 27,942 31,414 93,392 93,241
Maintenance 11,858 9,731 39,345 32,532
Depreciation and amortization 14,819 14,470 45,931 43,362
Taxes other than income taxes 14,479 14,736 39,583 39,775
Federal and state income taxes 15,767 16,281 29,407 29,561
------------ ------------ ------------- -------------
Total operating expenses 165,307 158,960 444,408 406,261
------------ ------------ ------------- -------------
OPERATING INCOME 34,070 34,750 73,049 74,115
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction - - - 2
Interest income 213 387 530 895
Other, net (307) (81) (1,713) (274)
Income taxes applicable to other income 921 979 1,221 758
------------ ------------ ------------- -------------
INCOME BEFORE INTEREST CHARGES 34,897 36,035 73,087 75,496
------------ ------------ ------------- -------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 5,098 5,691 14,700 16,978
Other interest charges 327 438 3,427 1,960
Interest on notes payable 274 242 1,093 764
Amortization of debt discount, premium, and expense, net 498 592 1,598 1,728
Allowance for debt funds used during construction - - - (6)
Distributions on preferred securities of subsidiary companies 1,550 763 4,484 2,042
------------ ------------ ------------- -------------
Interest charges and other, net 7,747 7,726 25,302 23,466
------------ ------------ ------------- -------------
NET INCOME 27,150 28,309 47,785 52,030
DIVIDENDS ON PREFERRED STOCK 161 825 579 3,420
------------ ------------ ------------- -------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 26,989 27,484 $ 47,206 $ 48,610
============ ============ ============= =============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
43
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Nine Months
Ended September 30,
1998 1997
OPERATING ACTIVITIES:
Net income $ 47,785 $ 52,030
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 51,498 54,642
Deferred income taxes (5,437) (3,573)
Deferred costs of 1995 coal contract renegotiation - 1,246
Other, net 13,005 1,660
Changes in certain current assets and liabilities--
Receivables, net 1,493 (7,590)
Inventories (4,870) 8,610
Payables (8,366) 1,531
Taxes accrued 18,465 23,368
Current costs of 1995 coal contract renegotiation 812 10,529
Other (7,842) (3,183)
-------------- --------------
Net cash provided from operating activities 106,543 139,270
-------------- --------------
INVESTING ACTIVITIES:
Gross property additions (39,940) (31,968)
Other (3,215) (1,709)
--------------- -------------
Net cash used for investing activities (43,155) (33,677)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds--
Preferred securities 45,000 40,000
Pollution Control Bonds - 40,930
Other long-term debt 50,000 20,000
Retirements--
Preferred stock (8,666) (39,500)
First mortgage bonds (45,000) (25,000)
Pollution Control Bonds - (40,930)
Other long-term debt (8,327) (13,482)
Notes payable, net (36,500) (25,000)
Payment of preferred stock dividends (726) (4,148)
Payment of common stock dividends (52,300) (50,500)
Miscellaneous (4,158) (3,413)
-------------- -------------
Net cash used for financing activities (60,677) (101,043)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,711 4,550
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,707 807
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,418 $ 5,357
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 19,261 $ 17,572
Income taxes 22,065 17,644
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
44
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At September 30,
1998 At December 31,
(Unaudited) 1997
-------------- ----------------
UTILITY PLANT:
Plant in service $ 1,797,215 $ 1,762,244
Less accumulated provision for depreciation 775,787 737,767
-------------- --------------
1,021,428 1,024,477
Construction work in progress 25,362 31,030
-------------- --------------
Total 1,046,790 1,055,507
-------------- --------------
OTHER PROPERTY AND INVESTMENTS: 636 622
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents 7,418 4,707
Receivables--
Customer accounts receivable 68,050 63,691
Other accounts and notes receivable 2,350 2,744
Affiliated companies 2,066 7,329
Accumulated provision for uncollectible accounts (990) (796)
Fossil fuel stock, at average cost 24,540 19,296
Materials and supplies, at average cost 28,260 28,634
Current portion of deferred coal contract costs - 4,456
Regulatory clauses under recovery 9,436 1,675
Prepayments 924 2,171
Vacation pay deferred 4,057 4,057
-------------- --------------
Total 146,111 137,964
-------------- --------------
DEFERRED CHARGES:
Deferred charges related to income taxes 26,616 26,586
Debt expense and loss, being amortized 21,872 22,941
Prepaid pension costs 12,924 10,385
Deferred storm charges - 703
Miscellaneous 10,416 10,904
-------------- --------------
Total 71,828 71,519
-------------- --------------
TOTAL ASSETS $ 1,265,365 $ 1,265,612
============== ==============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
45
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At September 30,
1998 At December 31,
(Unaudited) 1997
-------------- ----------------
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 12 12
Retained earnings 176,215 172,208
-------------- --------------
432,725 428,718
Preferred stock 4,236 13,691
Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding Company Junior Subordinated Notes (Note I) 85,000 40,000
Long-term debt 344,263 296,993
-------------- --------------
Total 866,224 779,402
-------------- --------------
CURRENT LIABILITIES:
Preferred stock due within one year 789 -
Long-term debt due within one year - 53,327
Notes payable 10,500 47,000
Accounts payable--
Affiliated companies 8,534 14,334
Other 16,075 20,205
Customer deposits 12,831 13,778
Taxes accrued--
Federal and state income 12,227 -
Other 16,167 8,258
Interest accrued 8,177 7,227
Regulatory clauses over recovery 4,211 5,062
Vacation pay accrued 4,057 4,057
Dividends declared 63 10,210
Miscellaneous 1,682 8,739
-------------- --------------
Total 95,313 192,197
-------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 161,543 166,302
Deferred credits related to income taxes 54,752 56,935
Accumulated provision for property damage 11,263 -
Accumulated deferred investment tax credits 29,903 31,552
Accumulated provision for postretirement benefits 22,648 20,491
Miscellaneous 23,719 18,733
-------------- --------------
Total 303,828 294,013
-------------- --------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,265,365 $ 1,265,612
============== ==============
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
46
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 1998 vs. THIRD QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Earnings
GULF's net income after dividends on preferred stock for the third quarter and
year-to-date 1998 was $27.0 million and $47.2 million, respectively, compared to
$27.5 million and $48.6 million for the corresponding periods of 1997.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Revenues......................................... $ (858) (0.5) $14,109 3.0
Revenues from affiliates......................... 6,525 111.2 22,972 178.2
Fuel expense..................................... 756 1.2 19,868 14.3
Purchased power from non-affiliates ............. 5,915 85.6 16,115 166.2
Purchased power from affiliates.................. 1,443 32.2 (7,023) (36.2)
Maintenance expense.............................. 2,127 21.9 6,813 20.9
Interest on long-term debt....................... (593) (10.4) (2,278) (13.4)
Distributions on preferred securities of
of subsidiary companies....................... 787 103.1 2,442 119.6
Revenues. Revenues for the third quarter decreased slightly due to a
decrease in revenues that represent the recovery of fuel expense and certain
other expenses and do not affect income. Excluding these recovery revenues,
retail revenues increased $5.4 million for the quarter and $21.8 million
year-to-date. These increases are primarily attributable to increases in retail
energy sales of 3.4% for the quarter and 7.0% year-to-date due to hotter
temperatures when compared to the milder-than-normal temperatures in the
corresponding periods in 1997. Revenues from non-territorial wholesale energy
sales increased $1.1 million for the quarter and $4.5 million year-to-date when
compared to the same periods of 1997. The increases in non-territorial wholesale
energy sales were primarily due to increased sales through power marketing
activities. These sales were largely offset by purchases from non-affiliates
and, as a result, had no significant effect on net income.
47
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
Fuel expense. The increases in fuel expense are attributed to increased
generation resulting from a higher demand for energy.
Purchased power from non-affiliates. The increases in purchased power from
non-affiliates when compared to the same periods in 1997 can primarily be
attributed to an increase in energy purchases resulting from hotter-than-normal
weather.
Maintenance expense. The increase in maintenance expense for the third
quarter is primarily due to routine line maintenance, while the year-to-date
increase is primarily attributed to scheduled maintenance performed on
production facilities at Plant Crist and Plant Smith during the first half of
1998.
Interest on long-term debt. Third quarter and year-to-date 1998 decreases
reflect the refinancing of $40.93 million of pollution control revenue refunding
bonds during July 1997 and a reduction in first mortgage bonds outstanding.
Distributions on preferred securities of subsidiary companies. See
"Financing Activities" herein for details relating to the January 1998 issuance
by Gulf Power Capital Trust II of its 7.00% trust preferred 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 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 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.
GULF's plans to achieve Year 2000 readiness have been implemented and are
included in the SOUTHERN system's Year 2000 Program. The costs related to GULF's
Year 2000 program are expected to be $4.8 million. From its inception through
September 30, 1998, the Year 2000 program costs, recognized as expense, amounted
to $1.8 million. For additional information, see SOUTHERN's MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -
"Future Earnings Potential", herein.
48
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which must be adopted
by 1999, requires capitalization of certain costs of internal-use software.
Adoption of the SOP is not expected to have a material impact on GULF's
financial statements.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. GULF is in the process
of evaluating the impact of this statement on its financial statements.
Reference is made to Notes (B) and (F) 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 nine months of 1998
included the addition of approximately $39.9 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 nine months of 1998, maturities and redemptions of first
mortgage bonds by GULF totaled $45.0 million. In January 1998, Gulf Power
Capital Trust II, a statutory business trust established for the purpose of
holding GULF's junior subordinated notes and issuing trust preferred securities
and common securities, sold $45 million of its 7.00% 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. The proceeds were
used to repay short-term indebtedness that was used to redeem $45.0 million of
cumulative preferred stock.
In June 1998, GULF issued and sold $50.0 million of its Series A 6.70%
Senior Insured Quarterly Notes due June 30, 2038. The proceeds from the sale
were used to pay at maturity, in July 1998, $30.0 million outstanding principal
amount of its First Mortgage Bonds, 5.0% Series due July 1, 1998, and to repay
a portion of its outstanding short-term indebtedness. Such short-term
indebtedness was incurred in part to pay at maturity $15.0 million principal
amount of First Mortgage Bonds, 5.55% Series due April 1, 1998.
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.
49
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF
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.
Sources of Capital
In addition to the financing activities previously described herein, GULF plans
to obtain the funds required for construction and other purposes from sources
similar to those used in the past. The amount, type and timing of any
financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GULF had at September 30,
1998, approximately $7.4 million of cash and cash equivalents and $41.0 million
of unused committed lines of credit with banks in addition to $61.9 million
liquidity support for variable rate pollution control bonds. At September 30,
1998, GULF had $10.5 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.
50
MISSISSIPPI POWER COMPANY
51
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
OPERATING REVENUES:
Revenues $ 183,293 $ 163,622 $ 452,638 $ 408,761
Revenues from affiliates 8,406 8,252 17,829 8,931
------------ ------------ ------------- -------------
Total operating revenues 191,699 171,874 470,467 417,692
------------ ------------ ------------- -------------
OPERATING EXPENSES:
Operation--
Fuel 53,763 49,858 126,164 109,888
Purchased power from non-affiliates 17,880 10,721 31,168 12,919
Purchased power from affiliates 8,498 5,295 24,912 26,438
Other 24,213 27,241 81,161 71,912
Maintenance 12,672 10,423 35,630 32,427
Depreciation and amortization 11,456 11,417 34,550 34,010
Taxes other than income taxes 12,269 11,736 35,509 33,916
Federal and state income taxes 16,781 14,742 31,716 29,269
------------ ------------ ------------- -------------
Total operating expenses 157,532 141,433 400,810 350,779
------------ ------------ ------------- -------------
OPERATING INCOME 34,167 30,441 69,657 66,913
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction - 11 - 22
Interest income 337 182 600 544
Other, net 1,016 955 1,879 2,575
Income taxes applicable to other income 358 615 4 (157)
------------ ------------ ------------- -------------
INCOME BEFORE INTEREST CHARGES 35,878 32,204 72,140 69,897
------------ ------------ ------------- -------------
INTEREST CHARGES AND OTHER:
Interest on long-term debt 5,510 4,968 15,431 14,857
Allowance for debt funds used during construction - (22) - (45)
Interest on notes payable - 40 918 96
Amortization of debt discount, premium, and expense, net 364 408 1,087 1,182
Other interest charges 493 125 696 439
Distributions on preferred securities of subsidiary companies 699 699 2,097 1,670
------------ ------------ ------------- -------------
Interest charges and other, net 7,066 6,218 20,229 18,199
------------ ------------ ------------- -------------
NET INCOME 28,812 25,986 51,911 51,698
DIVIDENDS ON PREFERRED STOCK 503 823 1,502 3,272
------------ ------------ ------------- -------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 28,309 $ 25,163 $ 50,409 $ 48,426
============ ============ ============= =============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
52
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Nine Months
Ended September 30,
1998 1997
OPERATING ACTIVITIES:
Net income $ 51,911 $ 51,698
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 37,604 37,082
Deferred income taxes (1,480) 1,042
Allowance for equity funds used during construction - (22)
Other, net (4,127) 249
Changes in certain current assets and liabilities--
Receivables, net (7,959) (10,340)
Inventories (2,921) 2,044
Payables (3,046) (7,213)
Taxes accrued 16,140 5,675
Other (997) 309
------------ ------------
Net cash provided from operating activities 85,125 80,524
------------ ------------
INVESTING ACTIVITIES:
Gross property additions (45,269) (38,509)
Other (266) (144)
------------ ------------
Net cash used for investing activities (45,535) (38,653)
------------ ------------
FINANCING ACTIVITIES:
Proceeds--
Preferred securities - 35,000
Pollution control bonds 13,520 -
Other long-term debt 90,000 -
Retirements--
Preferred stock (87) (35,000)
First mortgage bonds (75,000) -
Pollution control bonds (13,000) -
Payment of preferred stock dividends (1,502) (3,272)
Payment of common stock dividends (38,300) (35,600)
Miscellaneous (2,178) (1,283)
------------ ------------
Net cash used for financing activities (26,547) (40,155)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 13,043 1,716
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,432 7,058
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,475 $ 8,774
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 16,612 $ 2,864
Income taxes 9,259 16,310
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
53
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At September 30,
1998 At December 31,
(Unaudited) 1997
-------------- ----------------
UTILITY PLANT:
Plant in service, at original cost $ 1,523,440 $ 1,518,402
Less accumulated provision for depreciation 578,303 559,098
-------------- ---------------
945,137 959,304
Construction work in progress 64,917 41,083
-------------- ---------------
Total 1,010,054 1,000,387
-------------- ---------------
OTHER PROPERTY AND INVESTMENTS: 648 650
-------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents 17,475 4,432
Receivables--
Customer accounts receivable 46,165 32,220
Regulatory clauses under recovery 7,774 7,619
Other accounts and notes receivable 6,526 8,666
Affiliated companies 3,621 7,398
Accumulated provision for uncollectible accounts (922) (698)
Fossil fuel stock, at average cost 13,484 10,651
Materials and supplies, at average cost 19,540 19,452
Current portion of accumulated deferred income taxes 9,108 8,379
Prepayments 2,069 1,791
Vacation pay deferred 5,030 5,030
-------------- ---------------
Total 129,870 104,940
-------------- ---------------
DEFERRED CHARGES:
Debt expense and loss, being amortized 13,874 12,234
Deferred charges related to income taxes 22,526 21,906
Long-term notes receivable 2,239 2,837
Work force reduction plan 12,148 18,236
Miscellaneous 15,956 5,639
-------------- ---------------
Total 66,743 60,852
-------------- ---------------
TOTAL ASSETS $ 1,207,315 $ 1,166,829
============== ===============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
54
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At September 30,
1998 At December 31,
(Unaudited) 1997
-------------- ----------------
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 326 327
Retained earnings 182,526 170,417
-------------- ---------------
399,932 387,824
Preferred stock 31,809 31,896
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding Company Junior Subordinated Notes 35,000 35,000
Long-term debt 342,736 291,665
-------------- ---------------
Total 809,477 746,385
-------------- ---------------
CURRENT LIABILITIES:
Long-term debt due within one year 20 35,020
Accounts payable--
Affiliated companies 14,958 8,548
Regulatory clauses over recovery 4,432 15,476
Other 37,195 34,065
Customer deposits 3,239 3,225
Taxes accrued--
Federal and state income 22,743 1,101
Other 28,357 33,859
Interest accrued 4,400 4,098
Miscellaneous 11,708 12,797
-------------- ---------------
Total 127,052 148,189
-------------- ---------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 135,200 134,645
Accumulated deferred investment tax credits 26,215 27,121
Deferred credits related to income taxes 37,517 38,203
Postretirement benefits 25,651 25,145
Accumulated provision for property damage 15,116 13,991
Work force reduction plan 13,265 15,700
Miscellaneous 17,822 17,450
-------------- ---------------
Total 270,786 272,255
-------------- ---------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,207,315 $ 1,166,829
============== ===============
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
55
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 1998 vs. THIRD QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Earnings
MISSISSIPPI's net income after dividends on preferred stock for the third
quarter and year-to-date 1998 was $28.3 million and $50.4 million, respectively,
compared to $25.2 million and $48.4 million for the corresponding periods of
1997. Improvements in third quarter and year-to-date 1998 earnings are directly
related to increases in operating revenues.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Revenues......................................... $19,671 12.0 $43,877 10.7
Revenues from affiliates......................... 154 1.9 8,898 99.6
Fuel expense..................................... 3,905 7.8 16,276 14.8
Purchased power from non-affiliates ............. 7,159 66.8 18,249 141.3
Purchased power from affiliates.................. 3,203 60.5 (1,526) (5.8)
Other operation expense.......................... (3,028) (11.1) 9,249 12.9
Maintenance expense.............................. 2,249 21.6 3,203 9.9
Revenues. Revenues increased due to growth in territorial energy sales and
non-territorial wholesale energy sales. Revenues from territorial energy sales
increased $15.2 million for the quarter and $33.8 million year-to-date when
compared to the same periods in 1997. Territorial energy sales increases are
mainly due to higher retail energy sales to residential and commercial
customers. Energy sales to residential customers increased 10.3% for the quarter
and 13.3% year-to-date while sales to commercial customers increased 8.1% for
the quarter and 9.9% year-to-date primarily due to hotter-than-normal
temperatures as compared to the milder-than-normal temperatures recorded in the
same periods in 1997. Revenues from non-territorial energy sales increased $3.9
million and $8.6 million for the third quarter and year-to-date, respectively.
The increase in non-territorial wholesale energy sales was primarily offset by
the increases in purchased power from non-affiliates, and as a result, had no
significant effect on net income. Retail revenues, excluding those revenues
which represent the recovery of fuel expense and certain other expenses and do
not affect income, increased $4.0 million and $13.3 million, for the current
quarter and year-to-date, respectively. Wholesale territorial revenues,
excluding fuel revenues which do not affect income, increased $2.6 million for
the quarter and $5.5 million year-to-date.
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
56
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
depending on demand and the availability and cost of generating resources at
each company. These transactions do not have a significant impact on earnings.
Fuel expense. These expenses were up for the current quarter and
year-to-date due to higher demands for energy warranting increased generation
when compared to the corresponding periods in 1997.
Purchased power from non-affiliates. Current quarter and year-to-date
increases in purchased power from non-affiliates are attributed to MISSISSIPPI's
exercise of its option to purchase summer peaking capacity and increased
territorial demand.
Additionally, higher-than-normal energy prices contributed to the year-to-date
increase.
Other operation expense. The decrease in other operation expense is
primarily due to higher administrative and general expenses during the third
quarter of 1997. The year-to-date increase is attributed to increased expenses
related to transmission and distribution as well as the amortization of the work
force reduction plan. See Note (G) in the "Notes to the Condensed Financial
Statements", herein for further details.
Maintenance expense. The increases for the current quarter and year-to-date
1998 as compared to the same period in 1997 are primarily due to scheduled
transmission and distribution line maintenance.
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.
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. MISSISSIPPI's 1998 ECO Plan filing was approved, as
filed, by the Mississippi PSC on March 17, 1998 and resulted in a small decrease
in customer prices. 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.
MISSISSIPPI's plans to achieve Year 2000 readiness have been implemented
and are included in the SOUTHERN system's Year 2000 Program. The costs related
to MISSISSIPPI's Year 2000 program are expected to be $4.9 million. From its
inception through September 30, 1998, the Year 2000 program costs, recognized as
expense, amounted to $1.8 million. For additional information, see SOUTHERN's
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION - "Future Earnings Potential", herein.
57
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which must be adopted
by 1999, requires capitalization of certain costs of internal-use software.
Adoption of the SOP is not expected to have a material impact on MISSISSIPPI's
financial statements.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. MISSISSIPPI is in the
process of evaluating the impact of this statement on its financial statements.
Hurricane Georges struck MISSISSIPPI's service area early on Monday,
September 28, causing power outages and widespread flooding in certain counties.
Preliminary estimates place the cost of repairing MISSISSIPPI's damaged
facilities at between $12 and $17 million, of which approximately $3 million
will be recovered from insurance. MISSISSIPPI has a reserve provision for
property damage which, as of September 1998, had an accrued balance of $15.1
million. Most of the cost of repairing damaged facilities will be charged to the
property damage reserve; income will not be significantly affected by these
restoration costs.
Reference is made to Notes (B), (F) 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 MISSISSIPPI's financial condition during the first nine months
of 1998 included the addition of approximately $45.3 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 nine months of 1998, maturities and redemptions of preferred
stock and first mortgage bonds for MISSISSIPPI totaled $75.0 million.
In May 1998, MISSISSIPPI sold through public authorities, $13.52 million of
variable rate pollution control revenue refunding bonds due May 1, 2028. The
proceeds were used to redeem $13.0 million of the 6.20% Series pollution control
revenue bonds and to pay certain costs of issuance. Also in May 1998,
MISSISSIPPI sold $35.0 million of its Series B 6.05% Senior Notes due May 1,
2003 and $55.0 million of its Series A 6.75% Senior Insured Quarterly Notes due
June 30, 2038. The proceeds from these sales were used to repay MISSISSIPPI's
outstanding short-term indebtedness and for other general corporate purposes.
For additional information, see 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.
58
MISSISSIPPI 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
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. 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
September 30, 1998, approximately $17.5 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 September 30, 1998, MISSISSIPPI had no short-term notes payable
outstanding. Management believes that the need for working capital can be
adequately met by utilizing lines of credit without maintaining large cash
balances.
59
SAVANNAH ELECTRIC
AND
POWER COMPANY
60
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(Stated in Thousands of Dollars)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
OPERATING REVENUES:
Revenues $ 82,746 $ 78,716 $ 199,437 $ 173,901
Revenues from affiliates 1,478 1,184 2,784 1,460
---------- ---------- ------------ ------------
Total operating revenues 84,224 79,900 202,221 175,361
---------- ---------- ------------ ------------
OPERATING EXPENSES:
Operation--
Fuel 21,193 16,609 42,447 27,063
Purchased power from non-affiliates 4,514 1,669 8,450 2,351
Purchased power from affiliates 8,830 11,756 28,210 31,786
Other 11,958 11,737 34,795 33,379
Maintenance 3,747 2,991 12,309 9,551
Depreciation and amortization 5,759 5,027 16,275 15,047
Taxes other than income taxes 3,446 3,208 9,412 8,823
Federal and state income taxes 8,721 9,372 16,447 15,087
---------- ---------- ------------ ------------
Total operating expenses 68,168 62,369 168,345 143,087
---------- ---------- ------------ ------------
OPERATING INCOME 16,056 17,531 33,876 32,274
OTHER INCOME (EXPENSE):
Allowance for equity funds used during construction 46 11 91 216
Interest income 120 41 255 165
Other, net (821) (767) (1,691) (858)
Income taxes applicable to other income 561 1,046 839 1,033
---------- ---------- ------------ ------------
INCOME BEFORE INTEREST CHARGES 15,962 17,862 33,370 32,830
---------- ---------- ------------ ------------
INTEREST CHARGES:
Interest on long-term debt 2,542 2,677 7,860 8,289
Allowance for debt funds used during construction (34) (8) (82) (149)
Interest on notes payable 40 54 178 174
Amortization of debt discount, premium, and expense, net 221 186 628 552
Other interest charges 94 96 292 264
---------- ---------- ------------ ------------
Net interest charges 2,863 3,005 8,876 9,130
---------- ---------- ------------ ------------
NET INCOME 13,099 14,857 24,494 23,700
DIVIDENDS ON PREFERRED STOCK 581 581 1,743 1,743
---------- ---------- ------------ ------------
NET INCOME AFTER DIVIDENDS ON
PREFERRED STOCK $ 12,518 $ 14,276 $ 22,751 $ 21,957
========== ========== ============ ============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
61
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in Thousands of Dollars)
For the Nine Months
Ended September 30,
1998 1997
OPERATING ACTIVITIES:
Net income $ 24,494 $ 23,700
Adjustments to reconcile net income to net cash provided by operating activities--
Depreciation and amortization 17,552 15,712
Deferred income taxes and investment tax credits, net 6,077 2,179
Allowance for equity funds used during construction (91) (216)
Other, net (893) (255)
Changes in certain current assets and liabilities--
Receivables, net (16,866) (10,197)
Inventories (256) 464
Payables 3,729 5,231
Taxes accrued 2,655 6,772
Other (1,655) 1,386
------------ -------------
Net cash provided from operating activities 34,746 44,776
------------ -------------
INVESTING ACTIVITIES:
Gross property additions (9,800) (14,938)
Other (660) (1,385)
------------ -------------
Net cash used for investing activities (10,460) (16,323)
------------ -------------
FINANCING ACTIVITIES:
Proceeds--
Other long-term debt 50,000 13,870
Retirements--
First mortgage bonds (30,000) -
Other long-term debt (20,522) (14,263)
Notes payable, net 1,000 (5,000)
Payment of preferred stock dividends (1,743) (1,743)
Payment of common stock dividends (17,400) (16,000)
Miscellaneous (2,232) (350)
------------ -------------
Net cash used for financing activities (20,897) (23,486)
------------ -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,389 4,967
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,144 5,214
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,533 $ 10,181
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for--
Interest (net of amount capitalized) $ 9,335 $ 9,457
Income taxes 5,138 5,382
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
62
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
ASSETS
At September 30,
1998 At December 31,
(Unaudited) 1997
------------ --------------
UTILITY PLANT:
Plant in service, at original cost $ 769,500 $ 760,694
Less accumulated provision for depreciation 336,976 321,509
------------ ------------
432,524 439,185
Construction work in progress 7,461 7,709
------------ ------------
Total 439,985 446,894
------------ ------------
OTHER PROPERTY AND INVESTMENTS: 1,420 1,783
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 9,533 6,144
Special deposits - 94
Receivables--
Customer accounts receivable 28,231 21,148
Other accounts and notes receivable 697 720
Affiliated companies 1,157 1,128
Accumulated provision for uncollectible accounts (396) (354)
Fuel cost under recovery 17,607 7,694
Fossil fuel stock, at average cost 5,852 5,205
Materials and supplies, at average cost 6,589 6,980
Prepayments 736 5,922
------------ ------------
Total 70,006 54,681
------------ ------------
DEFERRED CHARGES:
Deferred charges related to income taxes 17,164 17,267
Debt issue expense, being amortized 2,213 2,255
Premium on reacquired debt, being amortized 8,766 7,121
Prepaid pension costs 3,692 3,424
Cash surrender value of life insurance for deferred compensation plans 12,119 12,130
Miscellaneous 4,022 1,797
------------ ------------
Total 47,976 43,994
------------ ------------
TOTAL ASSETS $ 559,387 $ 547,352
============ ============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
63
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS
(Stated in Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
At September 30,
1998 At December 31,
(Unaudited) 1997
------------- --------------
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 118,070 112,720
------------- ------------
180,981 175,631
Preferred stock - 35,000
Long-term debt 163,389 142,846
------------- ------------
Total 344,370 353,477
------------- ------------
CURRENT LIABILITIES:
Preferred stock due within one year 35,000 -
Long-term debt due within one year 699 21,764
Notes payable 1,000 -
Accounts payable--
Affiliated companies 5,410 6,025
Other 11,305 7,862
Customer deposits 5,275 5,541
Taxes accrued--
Federal and state income 3,272 534
Other 4,084 2,791
Interest accrued 3,831 4,963
Vacation pay accrued 1,978 1,893
Miscellaneous 5,948 9,031
------------- ------------
Total 77,802 60,404
------------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 82,940 80,697
Accumulated deferred investment tax credits 12,109 12,607
Deferred credits related to income taxes 21,379 21,469
Deferred compensation plans 9,631 9,272
Postretirement benefits 6,962 6,011
Miscellaneous 4,194 3,415
------------- ------------
Total 137,215 133,471
------------- ------------
TOTAL CAPITALIZATION AND LIABILITIES $ 559,387 $ 547,352
============= ============
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
64
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THIRD QUARTER 1998 vs. THIRD QUARTER 1997
AND
YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997
RESULTS OF OPERATIONS
Earnings
SAVANNAH's net income after dividends on preferred stock for the third quarter
and year-to-date 1998 was $12.5 million and $22.8 million, respectively, as
compared to $14.3 million and $22.0 million for the same periods of 1997. The
decrease in earnings for the third quarter was due to higher operating expenses.
Year-to-date 1998 earnings rose slightly as a result of increased operating
revenues.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Third Quarter Year-To-Date
------------------------------- -------------------------------
(in thousands) % (in thousands) %
Revenues......................................... $4,030 5.1 $25,536 14.7
Fuel expense..................................... 4,584 27.6 15,384 56.8
Purchased power from non-affiliates ............. 2,845 170.5 6,099 259.4
Purchased power from affiliates.................. (2,926) (24.9) (3,576) (11.3)
Maintenance expense.............................. 756 25.3 2,758 28.9
Depreciation and amortization expense............ 732 14.6 1,228 8.2
Revenues. Revenues increased for the current quarter and year-to-date 1998
due to higher territorial energy sales. Territorial revenues increased by $3.1
million for the third quarter and $23.4 million year-to-date due to increases in
retail energy sales. Retail energy sales for the current quarter and
year-to-date 1998 were up by 1.9% and 8.3%, respectively, reflecting
hotter-than-normal temperatures as compared to the milder-than-normal
temperatures recorded in the same periods in 1997. Retail revenues, excluding
those revenues which represent the recovery of fuel expense and do not affect
income, increased $0.1 million for the quarter and $8.8 million year-to-date.
Fuel expenses. The increases for the third quarter and year-to-date 1998
are attributable to higher demand for energy during these periods when compared
to the same periods in 1997.
Purchased power from non-affiliates. The increase in purchased power from
non-affiliates is primarily attributed to an increase in energy purchases
related to increased power marketing activities, a majority of which were resold
to non-affiliated third parties. These transactions had no significant effect on
net income.
65
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Purchased power from affiliates. Purchases of energy within the Southern
electric system will vary from period to period depending on demand and the
availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
Maintenance expense. Third quarter and year-to-date 1998 increases when
compared to the same periods in 1997 result from a scheduled turbine outage at
Plant Kraft Unit 3 and boiler outages at Plants Kraft and McIntosh.
Depreciation and amortization expense. The third quarter and year-to-date
increases are primarily due to additional depreciation charges pursuant to the
Georgia PSC accounting order. For additional information, see Note (P) in the
"Notes to the Condensed Financial Statements" herein for details regarding the
accounting order.
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.
In June 1998, the Georgia PSC approved and adopted a modified stipulation
between the Georgia PSC and SAVANNAH, resolving the issues in the SAVANNAH
earnings review. See Note (P) in the "Notes to the Condensed Financial
Statements" for additional information.
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 September 1998, the EPA
issued the final regional ozone rule to the states for implementation. The
states have one year to adopt rules implementing the EPA rules. The final rule
affects 22 states, including Alabama and Georgia, and the District of Columbia.
The EPA rules are expected to be challenged in the courts by several states and
industry groups. Implementation of the final state rules could require
substantial further NOx reductions from fossil-fueled generating facilities and
other industry in these states. The compliance cost of these additional NOx
reductions could be significant. However, expected costs cannot be determined
until the result of legal challenges are known and the states have adopted their
final rules.
SAVANNAH's plans to achieve Year 2000 readiness have been implemented and
are included in the SOUTHERN system's Year 2000 Program. The costs related to
SAVANNAH's Year 2000 program are expected to be $1.2 million. From its inception
through September 30, 1998, the Year 2000 program costs, recognized as expense,
amounted to $0.5 million. For additional information, see SOUTHERN's
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION - "Future Earnings Potential", herein.
66
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In March 1998, the American Institute of Certified Public Accountants
issued a new Statement of Position (SOP), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which must be adopted
by 1999, requires capitalization of certain costs of internal-use software.
Adoption of the SOP is not expected to have a material impact on SAVANNAH's
financial statements.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. SAVANNAH is in the
process of evaluating the impact of this statement on its financial statements.
Reference is made to Notes (B) 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.
FINANCIAL CONDITION
Overview
Major changes in SAVANNAH's financial condition during the first nine months of
1998 included the addition of approximately $9.8 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
During the first nine months of 1998, maturities and redemptions of first
mortgage bonds by SAVANNAH totaled $30.0 million. In March 1998, SAVANNAH issued
$30.0 million of Series A 6 5/8% senior retail intermediate bonds due March 17,
2015. The proceeds of the sales were used by SAVANNAH to redeem in April 1998
the $28.9 million outstanding principal amount of its 8.30% Series First
Mortgage Bonds due July 1, 2022.
SAVANNAH has announced the planned redemption of all the outstanding shares
of its 6.64% preferred stock ($35.0 million) in November 1998.
SAVANNAH plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these obligations with lower-cost capital.
Sources of Capital
SAVANNAH plans to obtain the funds required for construction and other purposes
from sources similar to those used in the past. The amount, type and timing of
any financings--if needed--will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
67
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
To meet short-term cash needs and contingencies, SAVANNAH had at September
30, 1998, approximately $9.5 million of cash and cash equivalents and
approximately $39.5 million of unused credit arrangements with banks. At
September 30, 1998, SAVANNAH had $1.0 million outstanding of 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.
68
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, Q, R
ALABAMA A, B, C, F, G, H, J, K
GEORGIA A, B, C, F, G, H, L, M, N, O
GULF A, B, F, G, I
MISSISSIPPI A, B, F, G
SAVANNAH A, B, P
69
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) The condensed financial statements of the registrants included herein have
been prepared by each registrant, without audit, pursuant to the rules and
regulations of the SEC. In the opinion of each registrant's management, the
information regarding such registrant furnished herein reflects all
adjustments necessary to present fairly the results for the periods ended
September 30, 1998 and 1997. 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 unrecoverable 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 obligations related to the retirement 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. Reference is made to
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative Financial Instruments"
and 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 exchange rate
fluctuations. At September 30, 1998, the status of outstanding non-trading
related derivative contracts was as follows:
70
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Year of
Maturity or Notional Unrealized
Type Termination Amount Gain (Loss)
(in thousands)
Interest rate swaps 2002-2016 $992,825 $(93,010)
2001-2012 (pound)600,000 $(88,792)
2002-2007 DM691,000 $(27,733)
Cross currency swaps 2001-2007 (pound)428,800 $18,408
Cross currency swaption 2003 DM570,000 $(17,741)
(pound) - Denotes British pounds sterling.
DM - Denotes Deutschemark.
Effective in January 1998, Southern Energy and Vastar Resources, Inc.
combined their energy trading and marketing activities to form a joint
venture. Southern Energy's investment in the joint venture is accounted
for under the equity method of accounting. SOUTHERN and Vastar have
jointly made guarantees to certain counterparties regarding performance of
contractual commitments by the joint venture. At September 30, 1998,
outstanding guarantees related to the estimated fair value of net
contractual commitments were approximately $130 million.
(E) Effective December 31, 1997, SOUTHERN adopted FASB Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information.
SOUTHERN's principal business segment -- or its traditional core business
-- is the five regulated electric utility operating companies that provide
electric service in four southeastern states. The other reportable business
segment is non-traditional energy services provided by Southern Energy,
which develops and manages electricity and other energy-related projects
both in the United States and abroad. In 1997, non-traditional domestic
services included revenues related to energy trading and marketing. As
discussed in Note (D) above, effective January 1998, that business is
accounted for under the equity method and its revenues are not reflected
below for 1998. Intersegment revenues are not material. Financial data for
business segments for the periods covered in the Form 10-Q are as follows:
Regulated
Domestic Non-Traditional Services All
Electric (Southern Energy) Other Reconciling
Utilities International (Note) Eliminations Consolidated
Domestic Total
------------ -------------------------------- --------- ------------- ---------------
Three Months Ended September 30, 1998: (in millions)
Operating revenues $2,977 $ 400 $ 34 $ 434 $ 49 $ (3) $ 3,457
Segment net income (loss) 497 51 7 58 (31) (7) 517
Nine Months Ended September 30, 1998:
Operating revenues 7,362 1,286 101 1,387 144 (9) 8,884
Segment net income (loss) 953 142 14 156 (55) (25) 1,029
Total assets at 9/30/98 24,840 9,835 1,877 11,712 1,346 (1,946) 35,952
----------------------------------------- ------------ ---------- ---------- ---------- --------- ------------- ---------------
Three Months Ended September 30, 1997:
Operating revenues $ 2,756 $ 373 $ 916 $1,289 $ 28 $ (2) $ 4,071
Segment net income (loss) 516 (92) (1) (93) (44) (4) 375
Nine Months Ended September 30, 1997:
Operating revenues 6,682 1,238 1,394 2,632 66 (7) 9,373
Segment net income (loss) 926 (50) (2) (52) (93) (4) 777
Total assets at 12/31/97 24,555 9,225 1,832 11,057 1,224 (1,565) 35,271
------------------------------------------ ----------- ----------- -------- ---------- --------- -------------- ---------------
71
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(Note) The all other category includes parent SOUTHERN, which does not
allocate operating expenses to business segments. Also, this category
includes segments below the quantitative threshold for separate
disclosure. These segments include a wireless communication company and a
developmental company for energy products and services. Non-traditional
services exclude interest expense to parent SOUTHERN.
(F) Reference is made to Notes 3 and 7 to each of the registrant's financial
statements, except SAVANNAH's, in Item 8 of the Form 10-K and to Note (F)
in each of such registrant's quarterly report on Form 10-Q for the quarters
ended March 31, and June 30, 1998, 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, a discussion of the long-term power sales
agreements and a discussion of a complaint filed by three customers in
April 1998 under such agreements. On September 21, 1998, the FERC entered
separate orders (i) affirming the outcome of the Administrative Law Judges'
opinions in both the 1991 and 1994 proceedings, resulting in no change in
the wholesale power contracts or rate schedules which were the subject of
such proceedings, and (ii) dismissing the complaint filed by the three
customers under the long-term power sales agreements. These customers have
filed applications for rehearing regarding both FERC orders.
(G) 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 Nine Months Ended Unamortized Balance
September 30, September 30, at September 30, 1998
----------------------- -------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
ALABAMA $4,917 $8,759 $16,371 $26,242 $6,459
GEORGIA 1,051 1,641 2,850 4,512 -
GULF 300 950 2,869 2,192 -
MISSISSIPPI 1 1,088 6,143 1,192 12,148
SAVANNAH 6 378 22 1,185 -
Other (1) 74 146 121 -
---------- ------- --------- -------- ---------
SOUTHERN
system $6,274 $12,890 $28,401 $35,444 $ 18,607
======= ======== ======== ======== ========
(H) Reference is made to Note 3 to the financial statements of SOUTHERN,
ALABAMA and GEORGIA in Item 8 of the Form 10-K for information relating to
a settlement agreement entered into between SOUTHERN and the Internal
Revenue Service on certain tax issues for the years 1984 through 1987. The
agreement received final approval by the Joint Congressional Committee on
Taxation in June 1998 and, as a result, ALABAMA and GEORGIA recognized
$11.5 million and $65.7 million, respectively, in interest income in 1998.
72
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(I) During the first nine months of 1998, statutory business trusts, formed by
GULF and Southern Company Capital Funding, Inc. ("Southern Capital"), of
which such companies own all the common securities, issued mandatorily
redeemable preferred or capital securities as follows: (in thousands)
Maturity Date
Company Date of Issue Amount Rate Notes of Notes
GULF 1/20/98 $45,000 7.00% $46,392 12/31/2037
Southern Capital 6/25/98 $200,000 7 1/8% $206,186 6/30/2028
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. GULF and SOUTHERN consider 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
securities or capital securities.
(J) Reference is made to Note 3 to the financial statements of SOUTHERN and
ALABAMA in Item 8 of the Form 10-K for information relating to retail rate
adjustment procedures.
(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) Reference is made to Note 3 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information concerning a three-year
accounting order approved by the Georgia PSC effective January 1, 1996.
Under the order, earnings in excess of a 12.5% retail return on common
equity are to 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 $113.8 million and $281.3
million for the three months and nine months ended September 30, 1998,
respectively (presented in the accompanying financial statements as
depreciation expense of electric plant and as an addition to the reserve
for depreciation).
Further, under the order, GEORGIA filed a general rate case in June
1998. In its rate case filing, GEORGIA proposes to extend the current
accounting order for three years, with one-third of earnings in excess of
a 12.5% retail return on common equity reducing rates while continuing to
apply the remaining two-thirds to the acceleration of the amortization of
regulatory assets or the depreciation of electric plant. GEORGIA also
proposes a $50.0 million rate reduction for certain small business
customers. In its direct testimony filed in early October 1998 the
Advocate Staff of the Georgia PSC proposed certain adjustments to
GEORGIA's general rate case filing that indicate a $564.0 million revenue
surplus. The Advocate Staff further recognizes the benefits of and does
not necessarily oppose an accounting order, provided certain modifications
are made to GEORGIA's proposal. GEORGIA disagrees with the Advocate
Staff's proposed adjustments and believes extending the current accounting
order, with the changes proposed by GEORGIA, is appropriate. A decision is
expected by the Georgia PSC by December 18, 1998.
73
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(M) Reference is made to Note 1 to the financial statements of SOUTHERN and
GEORGIA in Item 8 of the Form 10-K for information relating to Plant
Vogtle phase-in plans resulting from orders of 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 September 30,
1998, was $27.1 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. On January 14, 1998, the Georgia PSC ordered that
GEORGIA be allowed approximately $108 million of its $143 million
investment in the plant in rate base as of December 31, 1998. GEORGIA has
appealed the Georgia PSC's order to the Superior Court of Fulton County,
Georgia. If such order is ultimately upheld, GEORGIA will be required to
record a charge to earnings currently estimated at approximately $23
million, after taxes. The final outcome of this matter cannot now be
determined. Accordingly, no provision related to the Georgia PSC's
disallowance has been recorded.
(O) 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.
(P) On June 10, 1998, the Georgia PSC approved for SAVANNAH a four-year
accounting order. Under this order, SAVANNAH will reduce its Small Business
4 rate by approximately $11.0 million over the four years; expense an
additional $1.95 million for storm damage accrual over 4 years from the
date of this order; accrue $8.0 million in accelerated depreciation on
generating assets, which will be accumulated in a regulatory liability
account; file quarterly surveillance reports and agree not to file an
application to increase its rates except upon significant changes in
economic conditions, capital markets, new laws or regulation or other
reasons, deemed appropriate by the Georgia PSC. Further, the order gives
SAVANNAH discretionary authority to expense an additional accrual to storm
damage reserve up to an annual maximum of $1.5 million from the date of
this order and to accrue additional accelerated depreciation up to a
cumulative cap of $12.0 million over the 4 years from the date of the
order. The accelerated depreciation allowed under the order is to provide
for the mitigation of potentially strandable costs.
(Q) Mobile Energy (a wholly-owned SOUTHERN subsidiary) received notice in May
1998 from a major customer of the customer's intention to close its pulp
mill in Mobile, Alabama, for which Mobile Energy provides electricity,
steam and other services. The intended closure of the mill would be
effective September 1, 1999. The mill provided approximately 50% of Mobile
Energy's operating revenues for the quarter and nine-month period ended
September 30, 1998 and for the year ended December 31, 1997. Mobile Energy
is evaluating the announced closure of the mill to determine its options
and the potential impact on its business. In the event that a sufficient
alternative revenue source is not obtained, the mill closure will have a
material adverse effect on Mobile Energy's revenues, and, thereafter, it
will not have sufficient cash flows to pay principal and interest on its
senior debt, including $234 million of first mortgage bonds and $85 million
related to tax-exempt bonds. There can be no assurance that any available
alternative will permit Mobile Energy to pay its debt service. At September
30, 1998, Mobile Energy had total assets of $385 million and equity of $19
million. The ultimate outcome of this situation cannot now be determined.
74
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(R) In July 1998, SOUTHERN's Board of Directors authorized the Company to make
open market purchases of its common stock in an aggregate amount not to
exceed $300 million through March 31, 1999. The purpose of the program is
to provide shares of common stock for the purchase requirements of
SOUTHERN's various stockholder, employee and outside director stock
purchase plans. Under the program, 2.1 million shares have been purchased
and 150 thousand shares were sold through September 30, 1998.
75
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
(1) In August 1998, the U.S. Court of Appeals for the Eleventh
Circuit denied a consumer group's petition for review of the
order of the SEC which in effect permits SOUTHERN to use the
proceeds from financings for investment in "exempt wholesale
generators" and "foreign utility companies" (each as defined in
the Public Utility Holding Company Act of 1935) without
specific project approval by the SEC up to an amount not
exceeding, in total, 100% of SOUTHERN's consolidated retained
earnings. See Item 1 - BUSINESS - "Non-Traditional Business" in
the Form 10-K.
(2) Reference is made to the Notes to the Condensed Financial
Statements herein for information regarding certain legal and
administrative proceedings in which SOUTHERN and its reporting
subsidiaries are involved.
Item 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, 1997, 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
(b) Reports on Form 8-K.
ALABAMA filed Current Reports on Form 8-K dated August,
5, 1998, August 10, 1998, August, 11, 1998, September
8, 1998 and September 16, 1998:
Items reported: Item 5
Item 7
Financial statements filed: None
76
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
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: November 12, 1998
- -------------------------------------------------------------------------------
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, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 12, 1998
77
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 David M. Ratcliffe
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 12, 1998
- -------------------------------------------------------------------------------
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: November 12, 1998
78
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: November 12, 1998
- ------------------------------------------------------------------------------
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 G. Edison Holland, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
By Kirby R. Willis
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: November 12, 1998
79