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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ----------------------------------- -----------------
1-3526 The Southern Company 58-0690070
(A Delaware Corporation)
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(404) 506-5000
1-3164 Alabama Power Company 63-0004250
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35291
(205) 257-1000
1-6468 Georgia Power Company 58-0257110
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
0-2429 Gulf Power Company 59-0276810
(A Maine Corporation)
One Energy Place
Pensacola, Florida 32520
(850) 444-6111
001-11229 Mississippi Power Company 64-0205820
(A Mississippi Corporation)
2992 West Beach
Gulfport, Mississippi 39501
(228) 864-1211
1-5072 Savannah Electric and Power Company 58-0418070
(A Georgia Corporation)
600 East Bay Street
Savannah, Georgia 31401
(912) 644-7171
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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 July 31, 2002
- ---------- ------------ ------------------
The Southern Company Par Value $5 Per Share 708,661,642
Alabama Power Company Par Value $40 Per Share 6,000,000
Georgia Power Company No Par Value 7,761,500
Gulf Power Company No Par Value 992,717
Mississippi Power Company Without Par Value 1,121,000
Savannah Electric and Power Company Par Value $5 Per Share 10,844,635
This combined Form 10-Q is separately filed by The Southern Company,
Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi
Power Company and Savannah Electric and Power Company. Information contained
herein relating to any individual company is filed by such company on its own
behalf. Each company makes no representation as to information relating to the
other companies.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2002
Page
Number
DEFINITIONS......................................................................................................... 4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
The Southern Company and Subsidiary Companies
Condensed Consolidated Statements of Income........................................................ 7
Condensed Consolidated Statements of Cash Flows.................................................... 8
Condensed Consolidated Balance Sheets.............................................................. 9
Condensed Consolidated Statements of Comprehensive Income and
Accumulated Other Comprehensive Income.......................................................... 11
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 12
Alabama Power Company
Condensed Statements of Income..................................................................... 22
Condensed Statements of Cash Flows................................................................. 23
Condensed Balance Sheets........................................................................... 24
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 26
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 27
Georgia Power Company
Condensed Statements of Income..................................................................... 34
Condensed Statements of Cash Flows................................................................. 35
Condensed Balance Sheets........................................................................... 36
Condensed Statements of Comprehensive Income and
Accumulated Other Comprehensive Income......................................................... 38
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 39
Gulf Power Company
Condensed Statements of Income..................................................................... 46
Condensed Statements of Cash Flows................................................................. 47
Condensed Balance Sheets........................................................................... 48
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 50
Mississippi Power Company
Condensed Statements of Income..................................................................... 57
Condensed Statements of Cash Flows................................................................. 58
Condensed Balance Sheets........................................................................... 59
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 61
Savannah Electric and Power Company
Condensed Statements of Income..................................................................... 69
Condensed Statements of Cash Flows................................................................. 70
Condensed Balance Sheets........................................................................... 71
Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 73
Notes to the Condensed Financial Statements........................................................... 79
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 85
Item 2. Changes in Securities and Use of Proceeds................................................................. Inapplicable
Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 85
Item 5. Other Information......................................................................................... Inapplicable
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 87
Signatures ............................................................................................... 88
3
DEFINITIONS
TERM MEANING
ALABAMA..................................... Alabama Power Company
Clean Air Act .............................. Clean Air Act Amendments of 1990
ECO Plan.................................... Environmental Compliance Overview Plan
Energy Act ................................. Energy Policy Act of 1992
EPA......................................... U. S. Environmental Protection Agency
FASB........................................ Financial Accounting Standards Board
FERC ...................................... Federal Energy Regulatory Commission
Form 10-K.................................. Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA,
GEORGIA, GULF, MISSISSIPPI and SAVANNAH
for the year ended December 31, 2001
GEORGIA..................................... Georgia Power Company
GULF........................................ Gulf Power Company
ISA......................................... Independent System Administrator
Mirant...................................... Mirant Corporation
MISSISSIPPI................................. Mississippi Power Company
Mobile Energy .............................. Mobile Energy Services Company, L.L.C. and
Mobile Energy Services Holdings, Inc.
Moody's..................................... Moody's Investors Service, Inc.
operating companies......................... ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH
PEP......................................... Performance Evaluation Plan
PSC ........................................ Public Service Commission
RTO......................................... Regional Transmission Organization
S&P......................................... Standard and Poor's Ratings Services
SAVANNAH.................................... Savannah Electric and Power Company
SCS......................................... Southern Company Services, Inc.
SEC......................................... Securities and Exchange Commission
SeTrans .................................... A proposed regional transmission organization consisting
of eleven public and private companies, including SOUTHERN, located
in eight southeastern states
SOUTHERN.................................... The Southern Company
Southern Gas................................ Southern Company Gas LLC
Southern Power.............................. Southern Power Company
SOUTHERN system............................. SOUTHERN, the operating companies and other subsidiaries
TVA......................................... Tennessee Valley Authority
4
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking and historical
information. In some cases, forward-looking statements can be identified by
terminology such as "may," "would," "will," "could," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "projects," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. SOUTHERN cautions that there are various important factors that
could cause actual results to differ materially from those indicated in the
forward-looking statements; accordingly, there can be no assurance that such
indicated results will be realized. These factors include the impact of recent
and future federal and state regulatory change, including legislative and
regulatory initiatives regarding deregulation and restructuring of the electric
utility industry and also changes in environmental and other laws and
regulations to which SOUTHERN and its subsidiaries are subject, as well as
changes in application of existing laws and regulations; current and future
litigation, including the pending EPA civil action against certain SOUTHERN
subsidiaries and the diversity litigation against certain SOUTHERN subsidiaries;
the effect, extent and timing of the entry of additional competition in the
markets in which SOUTHERN's subsidiaries operate; the impact of fluctuations in
commodity prices, interest rates, and customer demand; state and federal rate
regulations; political, legal, and economic conditions and developments in the
United States; the performance of projects undertaken by the non-traditional
business and the success of efforts to invest in and develop new opportunities;
internal restructuring or other restructuring options that may be pursued;
potential business strategies, including acquisitions or dispositions of assets
or businesses, which cannot be assured to be completed or beneficial to SOUTHERN
or its subsidiaries; the effects of, and changes in, economic conditions in the
areas in which SOUTHERN's subsidiaries operate; the direct and indirect effects
on SOUTHERN's business resulting from the terrorist incidents on September 11,
2001, or any similar such incidents or responses to such incidents; financial
market conditions and the results of financing efforts; the timing and
acceptance of SOUTHERN's new product and service offerings; the ability of
SOUTHERN to obtain additional generating capacity at competitive prices; weather
and other natural phenomena; and other factors discussed elsewhere herein and in
other reports (including the Form 10-K) filed from time to time with the SEC.
5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $2,185,048 $2,148,173 $4,028,767 $4,033,918
Sales for resale 293,475 286,994 526,154 547,040
Other revenues 152,249 126,637 289,439 250,364
---------- ---------- ---------- ----------
Total operating revenues 2,630,772 2,561,804 4,844,360 4,831,322
---------- ---------- ---------- ----------
Operating Expenses:
Fuel 686,544 654,906 1,260,737 1,262,387
Purchased power 123,644 197,331 191,261 311,357
Other operations 522,704 476,410 967,956 881,841
Maintenance 247,019 229,641 475,809 455,498
Depreciation and amortization 254,271 283,387 499,906 587,053
Taxes other than income taxes 137,877 134,904 277,724 272,213
---------- ---------- ---------- ----------
Total operating expenses 1,972,059 1,976,579 3,673,393 3,770,349
---------- ---------- ---------- ----------
Operating Income 658,713 585,225 1,170,967 1,060,973
Other Income:
Interest income 4,141 6,665 8,944 12,475
Equity in losses of subsidiaries (25,751) (16,039) (41,655) (18,736)
Other, net 20,434 26,145 22,166 28,749
---------- ---------- ---------- ----------
Earnings From Continuing Operations
Before Interest and Income Taxes 657,537 601,996 1,160,422 1,083,461
---------- ---------- ---------- ----------
Interest and Other:
Interest expense, net 123,219 146,137 243,772 291,869
Distributions on capital and preferred
securities of subsidiaries 43,649 42,099 86,176 84,340
Preferred dividends of subsidiaries 4,396 4,614 8,777 9,419
---------- ---------- ---------- ----------
Total interest and other 171,264 192,850 338,725 385,628
---------- ---------- ---------- ----------
Earnings From Continuing Operations Before
Income Taxes 486,273 409,146 821,697 697,833
Income taxes 154,881 138,758 266,019 248,702
---------- ---------- ---------- ----------
Earnings From Continuing Operations Before
Cumulative Effect of Accounting Change 331,392 270,388 555,678 449,131
Cumulative effect of accounting change --
less income taxes of $477 - - - 770
---------- ---------- ---------- ----------
Earnings From Continuing Operations 331,392 270,388 555,678 449,901
Earnings from discontinued operations, net of income
taxes of $961 for the three months and
$92,713 for the six months ended 2001 - 2,185 - 142,217
---------- ---------- ---------- ----------
Consolidated Net Income $ 331,392 $ 272,573 $ 555,678 $ 592,118
========== ========== ========== ==========
Common Stock Data:
Basic earnings per share of common stock --
Earnings per share from continuing operations $0.47 $0.40 $0.79 $0.66
Earnings per share from discontinued operations $0.00 ($0.01) $0.00 $0.20
---------- ---------- ---------- ----------
Consolidated Basic Earnings Per Share $0.47 $0.39 $0.79 $0.86
========== ========== ========== ==========
Diluted earnings per share of common stock --
Earnings per share from continuing operations $0.46 $0.40 $0.78 $0.66
Earnings per share from discontinued operations $0.00 ($0.01) $0.00 $0.20
---------- ---------- ---------- ----------
Consolidated Diluted Earnings Per Share $0.46 $0.39 $0.78 $0.86
========== ========== ========== ==========
Average number of basic shares of common
stock outstanding (in thousands) 706,181 686,702 703,596 684,638
Average number of diluted shares of common
stock outstanding (in thousands) 712,165 691,404 709,137 690,941
Cash dividends paid per share of common stock $0.335 $0.335 $0.67 $0.67
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
7
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
----------- -----------
(in thousands)
Operating Activities:
Consolidated net income $ 555,678 $ 592,118
Adjustments to reconcile consolidated net income
to net cash provided from operating activities --
Less income from discontinued operations - 142,217
Depreciation and amortization 551,663 663,396
Deferred income taxes and investment tax credits 22,729 (40,739)
Equity in losses of subsidiaries 41,655 18,736
Other, net (48,906) (124,827)
Changes in certain current assets and liabilities --
Receivables, net (38,478) 78,216
Fossil fuel stock 20,027 (193,386)
Materials and supplies 12,806 (84)
Accounts payable (67,922) (158,122)
Other (7,858) 127,993
----------- -----------
Net cash provided from operating activities of continuing operations 1,041,394 821,084
----------- -----------
Investing Activities:
Gross property additions (1,409,984) (1,411,839)
Other (171,759) (124,786)
----------- -----------
Net cash used for investing activities of continuing operations (1,581,743) (1,536,625)
----------- -----------
Financing Activities:
Increase (decrease) in notes payable, net (247,899) 822,266
Proceeds --
Other long-term debt 1,477,291 689,877
Capital and preferred securities 475,000 -
Common stock 247,830 195,329
Redemptions --
First mortgage bonds (7,444) (396,166)
Other long-term debt (541,692) (111,828)
Capital and preferred securities (35,000) -
Payment of common stock dividends (470,426) (457,931)
Other (36,618) (24,969)
----------- --------
Net cash provided from financing activities of continuing operations 861,042 716,578
----------- --------
Net Increase in Cash and Cash Equivalents 320,693 1,037
Cash and Cash Equivalents at Beginning of Period 354,015 199,191
----------- -----------
Cash and Cash Equivalents at End of Period $ 674,708 $ 200,228
=========== ===========
Supplemental Cash Flow Information From Continuing Operations:
Cash paid during the period for --
Interest (net of amount capitalized) $213,496 $313,843
Income taxes (net of refunds) $241,385 $227,632
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2002 2001
- ------ ----------------- ----------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 674,708 $ 354,015
Receivables, less accumulated provisions for uncollectible accounts
of $21,498 at June 30, 2002 and $24,383
at December 31, 2001 1,305,382 1,146,263
Under recovered retail fuel clause revenue 165,968 280,003
Fossil fuel stock, at average cost 374,429 394,457
Materials and supplies, at average cost 537,366 550,217
Other 286,776 231,425
----------- -----------
Total current assets 3,344,629 2,956,380
----------- -----------
Property, Plant, and Equipment:
In service 37,240,419 35,813,369
Less accumulated depreciation 15,375,873 15,020,415
----------- -----------
21,864,546 20,792,954
Nuclear fuel, at amortized cost 202,908 201,548
Construction work in progress 1,887,549 2,089,259
----------- -----------
Property, plant, and equipment 23,955,003 23,083,761
----------- -----------
Other Property and Investments:
Nuclear decommissioning trusts, at fair value 680,851 681,688
Leveraged leases 684,762 655,308
Other 194,754 193,055
----------- -----------
Total other property and investments 1,560,367 1,530,051
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 909,609 924,139
Prepaid pension costs 714,021 641,099
Debt expense, being amortized 113,187 102,768
Premium on reacquired debt, being amortized 269,722 279,800
Other 443,934 389,867
----------- -----------
Total deferred charges and other assets 2,450,473 2,337,673
----------- -----------
Total Assets $31,310,472 $29,907,865
=========== ===========
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholders' Equity 2002 2001
- ------------------------------------ -------------- -----------------
(in thousands)
Current Liabilities:
Securities due within one year $ 1,625,936 $ 428,671
Notes payable 1,669,866 1,902,312
Accounts payable 683,622 833,860
Customer deposits 163,900 152,579
Taxes accrued --
Income taxes 231,010 159,764
Other 193,410 193,735
Interest accrued 199,776 117,959
Vacation pay accrued 125,251 124,608
Other 386,765 473,369
----------- -----------
Total current liabilities 5,279,536 4,386,857
----------- -----------
Long-term debt 8,026,795 8,296,878
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 4,099,261 4,097,403
Deferred credits related to income taxes 478,428 500,151
Accumulated deferred investment tax credits 620,311 634,020
Employee benefits provisions 554,664 532,515
Prepaid capacity revenues 37,422 40,730
Other 842,063 790,961
----------- -----------
Total deferred credits and other liabilities 6,632,149 6,595,780
----------- -----------
Company or subsidiary obligated mandatorily redeemable
capital and preferred securities 2,716,250 2,276,250
----------- -----------
Cumulative preferred stock of subsidiaries 368,126 368,126
----------- -----------
Common Stockholders' Equity:
Common stock, par value $5 per share --
Authorized -- 1 billion shares
Issued -- June 30, 2002: 708,224,282 shares;
-- December 31, 2001: 700,622,308 shares 3,541,121 3,503,112
Paid-in capital 175,543 14,380
Treasury, at cost -- June 30, 2002: 118,445 shares;
-- December 31, 2001: 2,278,240 shares (2,204) (57,309)
Retained earnings 4,595,370 4,516,642
Accumulated other comprehensive income (22,214) 7,149
----------- -----------
Total common stockholders' equity 8,287,616 7,983,974
----------- -----------
Total Liabilities and Stockholders' Equity $31,310,472 $29,907,865
=========== ===========
The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ----------------------
2002 2001 2002 2001
----- ------ ----- -----
(in thousands) (in thousands)
Consolidated net income $331,392 $272,573 $ 555,678 $ 592,118
Other comprehensive income - continuing operations:
Change in fair value of marketable securities 431 (113) 291 202
Cumulative effect of accounting change for qualifying - - - 286
hedges, net of tax of $180
Changes in fair value of qualifying hedges, net of tax of (35,941) (479) (29,692) 27
$(22,483), $(297), $(18,439), and $(61), respectively
Less: Reclassification adjustment for amounts included in 38 - 38 -
net income, net of tax of $24 -------- ------ -------- ---------
Total other comprehensive income - Continuing operations (35,472) (592) (29,363) 515
-------- ------ -------- ---------
Other comprehensive income - discontinued operations:
Cumulative effect of accounting change for qualifying - - - (249,246)
hedges, net of tax of $(121,326)
Changes in fair value of qualifying hedges, net of tax of - - - (103,962)
$(50,606)
Less: Reclassification adjustment for amounts included in - - - 59,857
net income, net of tax of $29,137
Foreign currency translation adjustments, net of tax of
$(10,319) - (21,199)
-------- ------ --------- ----------
Total other comprehensive income - discontinued operations - - - (314,550)
-------- ------ --------- ----------
CONSOLIDATED COMPREHENSIVE INCOME $295,920 $271,981 $ 526,315 $ 278,083
======== ======== ========= ==========
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED)
At
At June 30, December 31,
2002 2001
------------- --------------
(in thousands)
Balance at beginning of period - continuing operations $7,149 $ 249
Change in current period - continuing operations (29,363) 6,900
-------- --------
BALANCE AT END OF PERIOD - Continuing Operations (22,214) 7,149
--------- --------
Balance at beginning of period - discontinued operations - (93,847)
Change in current period - discontinued operations - 93,847
-------- --------
BALANCE AT END OF PERIOD - Discontinued Operations - -
-------- --------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME ($22,214) $ 7,149
======== ========
11
The accompanying notes as they relate to SOUTHERN are an integral part of these statments.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
RESULTS OF OPERATIONS
SOUTHERN is focusing on three main businesses in the Southeast: its traditional
business, represented by its five operating companies providing electric service
in four states; a growing competitive generation business in the eight state
"Super Southeast" region; and energy-related products and services for its
retail customers.
Earnings
SOUTHERN's second quarter 2002 and year-to-date 2002 earnings from continuing
operations were $331 million ($0.47 per share) and $555.7 million ($0.79 per
share), respectively, compared with $270.4 million ($0.40 per share) and $449.9
million ($0.66 per share) in the second quarter and year-to-date 2001. The
increases in earnings for the second quarter and year-to-date 2002 are due to
several positive factors, including increased demand for electricity, continued
customer growth, lower interest rates and the overall impact of regulatory rate
proceedings at each of the operating companies, partially offset by the impact
of higher operation and maintenance costs associated with new generation units
that have come on line in the past year. Contributing significantly to the
increased demand for electricity was the warmer weather experienced in the
second quarter 2002 contrasted with the unusually mild temperatures that
dampened demand in 2001. In July 2002, SOUTHERN raised its annual dividend by 3
cents to $1.37 per share, or $0.3425 per quarter.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
-----------------------------------------------------------------
Second Quarter Year-To-Date
-----------------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales $ 36,875 1.7 $ (5,151) (0.1)
Other revenues 25,612 20.2 39,075 15.6
Fuel expense 31,638 4.8 (1,650) (0.1)
Purchased power expense (73,687) (37.3) (120,096) (38.6)
Other operations expense 46,294 9.7 86,115 9.8
Maintenance expense 17,378 7.6 20,311 4.5
Depreciation and amortization (29,116) (10.3) (87,147) (14.8)
Equity in losses of subsidiaries (9,712) (60.6) (22,919) (122.3)
Interest expense, net (22,918) (15.7) (48,097) (16.5)
----------------------------------------------------------------
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue was up by $63 million, or 4.2%, in the second
quarter 2002 and $59 million, or 2.1%, year-to-date 2002 when compared to the
same periods in the prior year. Energy sales to residential, commercial and
industrial customers for the second quarter 2002 increased by 7.8%, 3.1% and
1.5%, respectively, as compared to the comparable reporting period in 2001. For
year-to-date 2002 as compared to 2001, energy sales to residential and
commercial customers increased by 5.3% and 2.3%, respectively, while sales to
industrial customers declined by 0.3%. As indicated above, energy sales in the
residential and commercial sectors for both reporting periods benefited from the
warmer weather experienced this year as compared to the milder than normal
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
temperatures experienced in 2001 and from an approximate 1.5% increase in the
number of residential customers served. Energy sales to industrial customers
continue to be negatively affected by the sluggish economic conditions.
Other revenues. The increase in other revenues for the second quarter 2002
compared to 2001 is primarily due to a $10 million increase in revenues from
SOUTHERN's wireless communications subsidiary related to increases in
subscribers. Additional increases of $5.0 million related to a purchase power
contract settlement, $3.5 million in transmission revenues and $2.5 million in
customer account fees also contributed. A significant portion of the remaining
year-to-date increase is due to revenues from the operations of a subsidiary
formed in April 2001 that provides services related to alternative fuel
products.
Fuel expense. As a result of increased energy sales caused by warmer
temperatures, fuel expense was higher in the second quarter 2002. A significant
portion of this increase relates to a new 574 megawatt generating unit (Plant
Smith Unit 3) placed in service by GULF in April 2002 and to increased fuel
expenses incurred by Southern Power, SOUTHERN's competitive wholesale generating
subsidiary. In June 2002, Southern Power placed in service three new
combined-cycle generating units, Plant Franklin Unit No. 1 (previously known as
Plant Goat Rock) and Plant Wansley Units No. 6 and No. 7 (aggregating 1,705
megawatts). For year-to-date 2002, fuel expense decreased slightly, primarily
due to the lower price of natural gas during the first quarter 2002 compared to
2001.
Purchased power expense. In the second quarter 2002 and year-to-date 2002,
purchased power expense decreased mainly due to lower costs associated with
these energy purchases and commercial operation of new units at MISSISSIPPI's
Plant Daniel in May 2001, GULF's Plant Smith in April 2002 and Southern Power's
units as described above when compared to the corresponding periods in 2001.
Since energy expenses are usually offset by energy revenues through the
operating companies' cost recovery mechanisms, these expenses do not have a
significant impact on earnings.
Other operations expense. For the second quarter 2002 compared to 2001, the
increase in other operations expense is primarily related to a $33 million
increase in administrative and general expenses and an $11 million increase in
operation expenses due to increased fossil steam production. The increase in
administrative and general expenses primarily relates to increases of $8 million
in transportation expenses and $10 million in other operating expenses for the
alternative fuel products subsidiary formed in April 2001; $8 million for
SOUTHERN's wireless communications subsidiary as a result of its customer
growth; and $5 million for Southern Power due to the operation of its generating
plants beginning in August 2001. Similar increases in administrative and general
expenses are reflected in the total year-to-date increase for other operations
expense.
Maintenance expense. These expenses were higher in each reporting period
when compared to the same periods in 2001 because of scheduled work performed on
power generating, transmission and distribution facilities.
Depreciation and amortization. While depreciation and amortization expense
varied among the individual subsidiaries in the current reporting periods due to
changes in utility plant in service, there was an overall decrease primarily as
a result of GEORGIA's discontinuing accelerated depreciation and beginning
amortization of the regulatory liability for accelerated cost recovery in
January 2002 in accordance with its new retail rate order. For the second
quarter 2002 and year-to-date 2002, the decrease in depreciation and
amortization related to GEORGIA amounted to $38.5 million and $107 million,
respectively. Reference is made to Note (H) in the "Notes to the Condensed
Financial Statements" herein.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Equity in losses of subsidiaries. The increase for the second quarter 2002
and year-to-date 2002, compared to the same periods in 2001, is primarily
attributed to SOUTHERN's investments in partnerships producing alternative fuel
products. SOUTHERN formed a new subsidiary in April 2001 to hold its investment
in a partnership producing alternative fuel products.
Interest expense, net. During the second quarter 2002 and year-to-date
2002, interest expense, net decreased primarily due to a reduction in interest
rates compared to the same periods in 2001. SOUTHERN and its subsidiaries engage
in new external financing for refunding purposes and to finance ongoing
construction programs. The decrease in average rates was partially offset by a
$927 million net increase in outstanding long-term debt (including current
portions).
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors. The two major factors are the ability of the operating companies to
achieve energy sales growth while containing costs in a more competitive
environment and the profitability of the new competitive market-based wholesale
generating facilities being added. For additional information relating to the
other businesses, see Item 1 - BUSINESS - "Southern Power" and "Other Business"
in the Form 10-K.
Also, reference is made to Note (B) in the "Notes to the Condensed
Financial Statements" herein for information relating to the spin off of Mirant
from SOUTHERN, including Mirant's recent announcement related to investigations
into potential 2001 accounting issues. If any of these issues require
adjustments and relate to periods prior to the spin off, SOUTHERN's earnings
from discontinued operations and net assets of discontinued operations for such
periods would be affected. Any such issues would have no effect on SOUTHERN's
2002 earnings or its future earnings potential.
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 recovered. For additional information about the Clean Air Act
and other environmental issues, including the EPA litigation, see Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the
financial statements of SOUTHERN in the Form 10-K. On July 30, 2002, the U. S.
District Court in Alabama extended the stay of the proceeding in Alabama through
late October 2002.
On April 25, 2002, the Stakeholder Advisory Committee met and selected the
candidates that will be considered for the SeTrans ISA. On June 27, 2002,
SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order
seeking the FERC's guidance on various issues. The petition asks for a response
from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain
Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Industry Restructuring" for each of the registrants in the Form 10-K
for additional information.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On June 3, 2002, SOUTHERN formed a wholly-owned subsidiary, Southern
Company Gas LLC. Southern Gas will operate as a retail gas marketer in the State
of Georgia. On July 19, 2002, Southern Gas completed its acquisition out of
bankruptcy from The New Power Company ("New Power") of approximately 210,000
retail natural gas customers located in the State of Georgia, representing a 15%
market share. Southern Gas also purchased from New Power proprietary risk
management software and hardware systems, natural gas inventory and accounts
receivable. The total purchase price was approximately $60 million. The results
of operations of Southern Gas will be included in the consolidated financial
statements from the date of acquisition.
On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled
"Remedying Undue Discrimination Through Open Access Transmission Service and
Standard Electricity Market Design." The FERC has indicated that the proposal,
if adopted, would (among other things): (i) require transmission assets of
jurisdictional utilities to be operated by an independent entity; (ii) establish
a standard market design; (iii) establish a single type of transmission service
that applies to all customers; (iv) assert jurisdiction over the transmission
component of bundled retail service; (v) establish a generation reserve margin;
(vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise
the FERC policy on the pricing of transmission expansions. Comments on the
proposal are due 75 days after its issuance. Any impact of this proposal on
SOUTHERN and its subsidiaries will depend on the form in which final rules may
be ultimately adopted.
Reference is made to Note 5 to SOUTHERN's financial statements in the Form
10-K, regarding Long-Term Power Sales Agreements. MISSISSIPPI and Southern Power
have capacity sale contracts with a customer that is currently experiencing
liquidity problems and has had its credit rating reduced below investment grade.
Minimum capacity revenues under these contracts average approximately $13
million annually through May 2005 for Southern Power and $21 million annually
for MISSISSIPPI through May 2011. The customer has provided letters of credit
expiring in February 2003 and totaling $20 million to Southern Power and $26
million to MISSISSIPPI. These letters of credit can be drawn if they are not
replaced by acceptable security prior to expiration or if the customer defaults
under the contract. In the event of such a default, and if MISSISSIPPI and
Southern Power were unable to resell that capacity in the market, future
earnings could be affected. The outcome cannot now be determined.
Reference is made to Notes (B) through (I), (N) and (O) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
Reference is also made to Part II - Item 1 - "Legal Proceedings" herein.
Reference is also made to Note (E) in the "Notes to the Condensed Financial
Statements" for information relating to certain lawsuits regarding the
installation of fiber optic cable over existing easements of certain SOUTHERN
subsidiaries.
Accounting Policies
Critical Policy
SOUTHERN's significant accounting policies are described in Note 1 to the
financial statements of SOUTHERN in Item 8 of the Form 10-K. SOUTHERN's only
critical accounting policy involves rate regulation. The operating companies are
subject to the provisions of FASB Statement No. 71, "Accounting for the Effects
of Certain Types of Regulation." In the event that a portion of a company's
operations is no longer subject to these provisions, the company would be
required to write off related regulatory assets and liabilities that are not
specifically recoverable and determine if any other assets, including plant,
have been impaired.
15
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
Effective January 1, 2001, SOUTHERN adopted FASB Statement No. 133, "Accounting
for Derivatives and Hedging Activities," as amended, and changed the method of
accounting for derivative instruments. Derivatives are now reflected on the
Condensed Consolidated Balance Sheet as either an asset or liability measured at
fair market value, and the changes in the fair value are currently recognized in
earnings unless specific hedge accounting criteria are met. Reference is made to
"Exposure to Market Risks" below and Note (N) in the "Notes to the Condensed
Financial Statements" herein for information relating to derivative instruments.
In June 2001, the FASB issued Statement No. 143, "Asset Retirement
Obligations," which establishes new accounting and reporting standards for legal
obligations associated with retiring assets, including decommissioning nuclear
plants. The liability for an asset's future retirement must be recorded in the
period in which the liability is incurred. The cost must be capitalized as part
of the related long-lived asset and depreciated over the asset's useful life.
Changes in the liability resulting from the passage of time will be recognized
as operating expenses. Statement No. 143 must be adopted by January 1, 2003.
SOUTHERN is currently assessing the impact of adopting Statement No. 143 on its
financial statements. Reference is made to Note 1 to the financial statements of
SOUTHERN under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form
10-K.
FINANCIAL CONDITION
Overview
Major changes in SOUTHERN's financial condition during the first six months of
2002 included $1.4 billion used for gross property additions to utility plant.
The funds for these additions and other capital requirements were primarily
obtained from issuances of other long-term debt. See SOUTHERN's Condensed
Consolidated Statements of Cash Flows for further details.
Off-Balance Sheet Financing Arrangements
In May 2001, MISSISSIPPI began the initial 10-year term of an operating lease
agreement signed in 1999 with Escatawpa Funding, Limited Partnership
("Escatawpa"), a special purpose entity, to use a combined-cycle generating
facility located at MISSISSIPPI's Plant Daniel. The facility cost approximately
$370 million. The lease provides for a residual value guarantee -- approximately
71% of the completion cost -- by MISSISSIPPI that is due upon termination of the
lease in certain circumstances. Reference is made to Note 9 to the financial
statements in Item 8 of SOUTHERN in the Form 10-K and Note 4 to the financial
statements in Item 8 of MISSISSIPPI in the Form 10-K for additional information.
In June 2002, the FASB issued an exposure draft for comment on a proposed
interpretation on "Consolidation of Certain Special-Purpose Entities," an
interpretation of Accounting Research Bulletin No. 51. It is expected that the
exposure draft would be finalized by year end, with an effective date for
existing transactions subject to the interpretation, including MISSISSIPPI's
lease transaction, to be implemented on April 1, 2003. This interpretation is in
draft form; the final pronouncement may differ from the draft. However, in its
current draft form, MISSISSIPPI would be deemed to be the "primary beneficiary"
of its lease arrangement with Escatawpa and would be required to consolidate the
leased asset and related debt on its books or to restructure the existing
arrangement to comply with the final rules. Until final rules are approved by
the FASB, MISSISSIPPI will continue to analyze the impact of the exposure draft.
MISSSISSIPPI's current operating lease arrangement with Escatawpa has been
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
reviewed and approved by the Mississippi PSC and is reflected and approved for
recovery in both its retail and wholesale rate jurisdictions. Consolidation of
the leased asset and related debt could require MISSISSIPPI to seek additional
regulatory review.
In 2001, Southern Power entered into a financial arrangement with
Westdeutsche Landesbank Girozentrale ("WestLB") whereby Southern Power could
assign up to $125 million in vendor contracts for equipment to WestLB. For
accounting purposes, WestLB was the owner of the contracts. Southern Power acted
as an agent for WestLB and instructed WestLB when to make payments to the
vendors. Southern Power terminated this arrangement and reacquired these assets
in March 2002 for their original cost of $61 million.
Credit Rating Risk
SOUTHERN and its subsidiaries do not have any credit agreements that would
require material changes in payment schedules or terminations as a result of a
credit rating downgrade. There are certain contracts that could require
collateral -- but not accelerated payment -- in the event of a credit rating
change to below investment grade. These contracts are primarily for physical
electricity sales, fixed-price physical gas purchases and agreements covering
interest rate swaps and currency swaps. At June 30, 2002, the maximum potential
collateral requirements under the electricity sale contracts were approximately
$404 million. Generally, collateral may be provided for by a SOUTHERN guaranty,
letter of credit or cash. At June 30, 2002, there were no material collateral
requirements for the gas purchase contracts or other financial instrument
agreements.
Exposure to Market Risks
SOUTHERN's market risk exposures relative to interest rate changes have not
changed materially compared with the previous reporting period, December 31,
2001. In addition, SOUTHERN is not aware of any facts or circumstances that
would significantly affect such exposures in the near term.
Due to cost-based rate regulations, the operating companies have limited
exposure to market volatility in interest rates, commodity fuel prices and
prices of electricity. To mitigate residual risks relative to movements in
electricity prices, the operating companies and Southern Power enter into fixed
price contracts for the purchase and sale of electricity through the wholesale
electricity market and, to a lesser extent, similar contracts for gas purchases.
Also, ALABAMA, MISSISSIPPI and SAVANNAH have implemented fuel-hedging programs
at the instruction of their respective PSCs. The fair value of derivative energy
contracts at June 30, 2002 is as follows:
Second Quarter
2002 Year-to-Date
Changes Changes
- -----------------------------------------------------------------------
Fair Value
-------------------------------------------------------------------
(in thousands)
Contracts beginning of period $32,314 $ 1,290
Contracts realized or settled (8,403) (9,511)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 5,269 37,401
-----------------------------------------------------------------
Contracts at June 30, 2002 $29,180 $29,180
=================================================================
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of June 30, 2002
Valuation Prices
---------------------------------------------------------------------------
Maturity
Total -----------------------------
Fair Value Year 1 1-3 Years
----------------------------------------------------------------------------
(in thousands)
Actively quoted $29,180 $18,747 $10,433
External sources - - -
Models and other methods - - -
---------------------------------------------------------------------------
Contracts at June 30, 2002 $29,180 $18,747 $10,433
===========================================================================
Unrealized gains and losses from mark to market adjustments on contracts
related to the PSC-approved fuel hedging programs are recorded as regulatory
assets and liabilities. Realized gains and losses from these programs are
included in fuel expense and are recovered through the operating companies' fuel
cost recovery clauses. In addition, unrealized gains and losses on electric and
gas contracts used to hedge anticipated purchases and sales are deferred in
other comprehensive income. Gains and losses on contracts that do not represent
hedges are recognized in the Statements of Income as incurred.
At June 30, 2002, SOUTHERN had approximately $25.8 million in regulatory
liabilities related to unrealized gains on mark to market derivative contracts
associated with fuel hedging programs. For the quarters ended June 30, 2002 and
2001, approximately $3.7 million and $0.1 million, respectively, of gains were
recognized in income. For the six months ended June 30, 2002 and 2001,
approximately $6.1 million and $4.2 million, respectively, of losses were
recognized in income. For additional information, reference is made to Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" of SOUTHERN in the
Form 10-K, Note 1 to the financial statements of SOUTHERN in Item 8 of the Form
10-K and Note (N) in the "Notes to the Condensed Financial Statements" herein.
Financing Activities
In January 2002, GULF issued $45 million of Series E 6.00% Senior Notes due
January 30, 2012. The proceeds from the sale were used by GULF to finance
certain construction costs incurred in connection with Plant Smith Unit 3 and
for general corporate purposes.
Also, in January 2002, Southern Company Capital Funding, Inc. issued $400
million of Series A 5.30% Senior Notes due February 1, 2007 and $25 million of
Series B Floating Rate Senior Notes due February 1, 2004, which are guaranteed
by SOUTHERN. The proceeds from these sales were loaned to SOUTHERN and applied
by SOUTHERN to repay a portion of its outstanding short-term indebtedness. In
connection with the $400 million issuance, SOUTHERN entered into an interest
rate swap to exchange 5.30% fixed for a floating 6-month LIBOR less 0.103%.
Reference is made to Note (N) in the "Notes to the Condensed Financial
Statements" herein for additional information relating to derivative
instruments.
In March 2002, MISSISSIPPI issued $80 million of Series D Floating Rate
Senior Notes due March 12, 2004. The proceeds of the sale were used to repay $80
million of Series C Floating Rate Senior Notes due March 28, 2002. Also in March
2002, Mississippi Power Capital Trust II, a statutory business trust, sold $35
million of its 7.20% Trust Originated Preferred Securities, which are guaranteed
by MISSISSIPPI, for the purpose of redeeming in May 2002 $35 million of
Mississippi Power Capital Trust I 7.75% Trust Originated Preferred Securities.
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 2002, ALABAMA issued $350 million of Series P Floating Rate Senior
Notes due December 29, 2002. The proceeds from the sale were used to redeem, in
July 2002, $345.5 million aggregate principal amount of its First Mortgage
Bonds, 7.75% Series due February 1, 2023, 7.45% Series due July 1, 2023 and
7.30% Series due November 1, 2023. In connection with the issuance, ALABAMA
entered into interest rate swap agreements to fix the floating rate at 3.015%.
Reference is made to Note (N) in the "Notes to the Condensed Financial
Statements" herein for additional information relating to derivative
instruments.
In June 2002, Georgia Power Capital Trust V, a statutory business trust,
sold $440 million of its 7?% Trust Preferred Securities, which are guaranteed by
GEORGIA. The net proceeds from this issuance were used to repay a portion of
GEORGIA's outstanding short-term indebtedness.
In June 2002, Southern Power issued $575 million of 6.25% Senior Notes,
Series A due July 15, 2012. The net proceeds were used to reduce outstanding
indebtedness under a revolving credit agreement and to reduce loans from
SOUTHERN. Southern Power also settled several interest rate swap agreements
entered into in anticipation of this issuance for $16.9 million. This amount has
been deferred in other comprehensive income and will be amortized to interest
expense over the life of the senior notes. Reference is made to Note (N) in the
"Notes to the Condensed Financial Statements" herein for additional information
relating to derivative instruments.
Also in June 2002, SOUTHERN entered into interest rate swaps related to the
LIBOR component of its anticipated issuances of fixed rate commercial paper. The
swaps fixed the 1-month LIBOR at an average 3.1975%. The swaps relate to $400
million notional commercial paper issuances through June 2003 and $200 million
notional commercial paper issuances through June 2004. Reference is made to Note
(N) in the "Notes to the Condensed Financial Statements" herein for additional
information relating to derivative instruments.
In July 2002, GEORGIA issued $300 million of Series J 4.875% Senior Notes
due July 15, 2007. The net proceeds from this issuance were used to repay a
portion of a $350 million bank loan. In anticipation of this issuance, GEORGIA
entered into interest rate swaps related to the 5 year treasury rate. These
swaps fixed the 5 year treasury rate at an average 4.018% on a $300 million
notional amount. The swaps were settled prior to the actual senior note issuance
for $(0.5) million. This amount will be amortized as a credit to interest
expense over the life of the senior notes.
Also in July 2002, Southern Company Capital Trust VI, a statutory business
trust, sold $200 million of its 7.125% Trust Preferred Securities, which are
guaranteed by SOUTHERN. The net proceeds will be used to redeem, in August 2002,
the outstanding $200 million aggregate liquidation amount of Southern Company
Capital Trust III 7.75% Cumulative Quarterly Income Preferred Securities.
The market price of SOUTHERN's common stock at June 30, 2002 was $27.40 per
share and the book value was $11.71 per share, representing a market-to-book
ratio of 234%, compared to $25.35, $11.43 and 222%, respectively, at the end of
2001. The dividend for the second quarter 2002 was $0.3425 per share.
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
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 - "Capital
Requirements for Construction," "Other Capital Requirements" and "Environmental
Matters" of SOUTHERN in the Form 10-K for a description of the SOUTHERN system's
capital requirements for its construction program, sinking fund requirements,
maturing debt and environmental compliance efforts. Approximately $1.6 billion
will be required by June 30, 2003 for redemptions and maturities of long-term
debt. Also, SOUTHERN and its subsidiaries plan to continue, to the extent
possible, a program to retire higher-cost debt and replace these securities with
lower-cost capital.
Sources of Capital
In addition to the financing activities previously described, SOUTHERN may
require additional equity capital over the next several years. The amounts and
timing of additional equity capital to be raised will be contingent on
SOUTHERN's investment opportunities. The operating companies and Southern Power
plan to obtain the funds required for construction and other purposes from
sources similar to those used in the past, which were primarily from internal
sources and by the issuances of new debt and preferred equity securities, term
loans and short-term borrowings. However, the amount, type and timing of any
financings -- if needed -- will depend upon market conditions and regulatory
approval. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for
additional information.
To meet short-term cash needs and contingencies, the SOUTHERN system had at
June 30, 2002 approximately $674.7 million of cash and cash equivalents and
approximately $4.7 billion of unused credit arrangements with banks, of which
$1.3 billion expire in 2002 and $3.4 billion expire in 2003 and beyond. These
unused credit arrangements also provide liquidity support to variable rate
pollution control bonds and commercial paper programs. The operating companies
may also meet short-term cash needs through a SOUTHERN subsidiary organized to
issue and sell commercial paper and extendible commercial notes at the request
and for the benefit of each of the operating companies. At June 30, 2002, the
SOUTHERN system had extendible commercial notes outstanding of $67 million,
short-term notes payable outstanding of $409 million and commercial paper
outstanding of $1.194 billion. Management believes that the need for working
capital can be adequately met by utilizing lines of credit without maintaining
large cash balances.
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
Reference is made herein to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price
Risk" for each registrant and Note 1 to the financial statements of each
registrant in Item 8 of the Form 10-K. Reference is also made to Note (N) in the
"Notes to the Condensed Financial Statements" herein for information relating to
derivative instruments.
20
ALABAMA POWER COMPANY
21
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------------------- --------------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $736,174 $712,507 $1,368,071 $1,347,279
Sales for resale --
Non-affiliates 119,540 122,484 214,163 232,946
Affiliates 42,497 44,990 97,174 120,123
Other revenues 26,132 23,886 47,184 53,521
--------- -------- ---------- ----------
Total operating revenues 924,343 903,867 1,726,592 1,753,869
--------- -------- ---------- ----------
Operating Expenses:
Fuel 233,536 233,308 443,833 492,763
Purchased power --
Non-affiliates 20,413 41,691 36,184 76,000
Affiliates 41,913 51,023 74,643 87,009
Other 141,510 144,000 261,572 255,002
Maintenance 77,701 88,209 154,515 164,569
Depreciation and amortization 98,934 97,087 197,209 192,604
Taxes other than income taxes 54,103 54,335 111,603 111,681
--------- -------- ---------- ----------
Total operating expenses 668,110 709,653 1,279,559 1,379,628
--------- -------- ---------- ----------
Operating Income 256,233 194,214 447,033 374,241
Other Income (Expense):
Interest income 3,190 3,116 6,352 6,956
Equity in earnings of subsidiaries 863 944 1,815 1,999
Other, net (2,455) (633) (11,965) (3,273)
--------- -------- ---------- ----------
Earnings Before Interest and Income Taxes 257,831 197,641 443,235 379,923
--------- -------- ---------- ----------
Interest and Other:
Interest expense, net 58,568 62,804 114,217 121,469
Distributions on preferred securities of subsidiary 5,995 6,214 12,014 12,570
--------- -------- ---------- ----------
Total interest and other, net 64,563 69,018 126,231 134,039
--------- -------- ---------- ----------
Earnings Before Income Taxes 193,268 128,623 317,004 245,884
Income taxes 73,884 49,305 121,424 92,915
--------- -------- ---------- ----------
Net Income Before Cumulative Effect of
Accounting Change 119,384 79,318 195,580 152,969
Cumulative effect of accounting change --
less income taxes of $215 thousand - - - 353
--------- -------- ---------- ----------
Net Income 119,384 79,318 195,580 153,322
Dividends on Preferred Stock 3,671 3,890 7,327 7,942
--------- -------- ---------- ----------
Net Income After Dividends on Preferred Stock $ 115,713 $ 75,428 $ 188,253 $ 145,380
========= ======== ========== ==========
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
22
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
------------ --------------
(in thousands)
Operating Activities:
Net income $ 195,580 $ 153,322
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 232,518 215,388
Deferred income taxes and investment tax credits, net (19,574) 25,070
Other, net 11,163 (59,034)
Changes in certain current assets and liabilities --
Receivables, net (59,055) 56,338
Fossil fuel stock 13,166 (33,496)
Materials and supplies 4,950 2,391
Accounts payable (60,648) (145,497)
Energy cost recovery, retail 65,227 39,611
Other 12,515 (7,927)
----------- ---------
Net cash provided from operating activities 395,842 246,166
----------- ---------
Investing Activities:
Gross property additions (345,823) (443,294)
Sales of Property - 102,068
Other (24,189) (22,296)
--------- ---------
Net cash used for investing activities (370,012) (363,522)
---------- ---------
Financing Activities:
Increase in notes payable, net 134,651 224,351
Proceeds --
Common stock - 15,642
Other long-term debt 350,000 10,000
Capital contributions from parent company 2,396 84,366
Redemptions --
First mortgage bonds (4,498) (7,484)
Other long-term debt (1,274) (2,232)
Payment of preferred stock dividends (7,219) (7,590)
Payment of common stock dividends (215,500) (198,800)
Other 4,959 (11)
---------- ----------
Net cash provided from financing activities 263,515 118,242
---------- ----------
Net Increase in Cash and Cash Equivalents 289,345 886
Cash and Cash Equivalents at Beginning of Period 35,756 14,247
---------- ----------
Cash and Cash Equivalents at End of Period $ 325,101 $ 15,133
========== ==========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $86,015 $121,607
Income taxes (net of refunds) $121,615 $69,526
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
23
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2002 2001
- ------ ---------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 325,101 $ 35,756
Receivables --
Customer accounts receivable 353,663 281,985
Under recovered retail fuel clause revenue 18,271 83,497
Other accounts and notes receivable 49,076 49,940
Affiliated companies 60,256 72,639
Accumulated provision for uncollectible accounts (4,614) (5,237)
Fossil fuel stock, at average cost 86,112 99,278
Materials and supplies, at average cost 186,374 191,324
Other 125,011 74,640
------------ -----------
Total current assets 1,199,250 883,822
----------- -----------
Property, Plant, and Equipment:
In service 13,431,972 13,159,560
Less accumulated provision for depreciation 5,477,045 5,309,557
----------- -----------
7,954,927 7,850,003
Nuclear fuel, at amortized cost 83,330 88,777
Construction work in progress 387,503 357,906
----------- -----------
Total property, plant, and equipment 8,425,760 8,296,686
----------- -----------
Other Property and Investments:
Equity investments in subsidiaries 44,395 44,483
Nuclear decommissioning trusts 322,030 317,508
Other 17,161 12,503
----------- -----------
Total other property and investments 383,586 374,494
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 330,370 334,830
Prepaid pension costs 359,559 329,259
Debt expense, being amortized 7,905 8,150
Premium on reacquired debt, being amortized 73,157 77,173
Department of Energy assessments 21,015 21,015
Other 109,472 108,031
----------- -----------
Total deferred charges and other assets 901,478 878,458
----------- -----------
Total Assets $10,910,074 $10,433,460
=========== ===========
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
24
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2002 2001
- ------------------------------------ ------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 763,427 $ 5,382
Notes payable 144,648 9,996
Accounts payable --
Affiliated 111,202 98,268
Other 78,636 151,705
Customer deposits 44,719 42,124
Taxes accrued --
Income taxes 128,555 113,003
Other 57,095 19,023
Interest accrued 63,186 35,522
Vacation pay accrued 32,324 32,324
Other 69,741 93,589
----------- -----------
Total current liabilities 1,493,533 600,936
----------- -----------
Long-term debt 3,329,591 3,742,346
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 1,375,765 1,387,661
Deferred credits related to income taxes 194,262 202,881
Accumulated deferred investment tax credits 232,751 238,225
Employee benefits provisions 126,857 115,078
Prepaid capacity revenues 37,422 40,730
Other 169,916 130,214
----------- -----------
Total deferred credits and other liabilities 2,136,973 2,114,789
----------- -----------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 347,000 347,000
----------- -----------
Cumulative preferred stock 317,512 317,512
----------- -----------
Common Stockholder's Equity:
Common stock, par value $40 per share --
Authorized - 6,000,000 shares
Outstanding - 6,000,000 shares
Par value 240,000 240,000
Paid-in capital 1,853,073 1,850,676
Premium on preferred stock 99 99
Retained earnings 1,192,807 1,220,102
Accumulated other comprehensive income (514) -
----------- -----------
Total common stockholder's equity 3,285,465 3,310,877
----------- -----------
Total Liabilities and Stockholder's Equity $10,910,074 $10,433,460
=========== ===========
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
25
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------------------- ------------------------
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $115,713 $75,428 $188,253 $145,380
Other comprehensive income:
Changes in fair value of qualifying hedges,
net of tax of $312 and $312, respectively (514) - (514) -
-------- ------- --------- --------
COMPREHENSIVE INCOME $115,199 $75,428 $187,739 $145,380
======== ======= ======== ========
- ------------------------------------------------------------------------------------------------------------------------------
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED)
At June 30, At December 31,
2002 2001
------------- ----------------
(in thousands)
Balance at beginning of period $ - $ -
Change in current period (514) -
------ -----
BALANCE AT END OF PERIOD $ (514) $ -
====== ======
The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
26
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
RESULTS OF OPERATIONS
Earnings
ALABAMA's net income after dividends on preferred stock for the second quarter
2002 and year-to-date 2002 was $115.7 million and $188.3 million, respectively,
compared to $75.4 million and $145.4 million for the corresponding periods of
2001. The increase in earnings for both periods is primarily attributable to
increased territorial sales and retail rates when compared to the corresponding
periods in the prior year. More favorable weather conditions in the second
quarter 2002 as compared to the unusually mild weather experienced in the
comparable period in 2001 contributed to these increases in territorial sales.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
----------------------------------------------------------
Second Quarter Year-To-Date
----------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales $ 23,667 3.3 $ 20,792 1.5
Sales for resale - non-affiliates (2,944) (2.4) (18,783) (8.1)
Sales for resale - affiliates (2,493) (5.5) (22,949) (19.1)
Other revenues 2,246 9.4 (6,337) (11.8)
Fuel expense 228 0.1 (48,930) (9.9)
Purchased power - non-affiliates (21,278) (51.1) (39,816) (52.4)
Purchased power - affiliates (9,110) (17.9) (12,366) (14.2)
Maintenance expense (10,508) (11.9) (10,054) (6.1)
Other, net (1,822) (287.8) (8,692) (265.6)
Interest expense, net (4,236) (6.7) (7,252) (6.0)
----------------------------------------------------------
Retail sales. Excluding energy cost recovery revenues, which generally do
not affect net income, retail sales revenue was higher by $49.3 million, or
9.6%, for the second quarter 2002 and $75.8 million, or 7.9%, year-to-date 2002
when compared to the corresponding periods in 2001. Energy sales to residential
and commercial customers increased by 5.5% and 4.6% and by 4.5% and 2.6%,
respectively, for the second quarter 2002 and year-to-date 2002 as compared to
the corresponding periods of 2001 due primarily to more favorable weather
conditions in 2002. Energy sales to industrial customers increased only slightly
when compared to the previous reporting periods due to the continuing effect of
less than favorable economic conditions.
Sales for resale - non-affiliates. For both reporting periods above, the
demand for energy by non-affiliates was lower when compared to the same periods
in 2001. These transactions did not have a significant impact on earnings since
the energy is usually sold at variable cost.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies within the SOUTHERN system, as
well as purchases of energy, will vary depending on demand and the availability
27
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
and cost of generating resources at each company. These transactions did not
have a significant impact on earnings.
Other revenues. During the second quarter 2002, other revenues increased
primarily due to an increase in revenue associated with transmission of
electricity and an increase in rent from electric property when compared to the
same period in 2001. However, for year-to-date 2002, other revenues decreased
because revenues from gas-fueled cogeneration steam facilities were lower when
compared to the same period in 2001 due primarily to lower gas prices and lower
demand. Since cogeneration steam revenues are generally offset by fuel expenses,
these revenues did not have a significant impact on earnings.
Fuel expense. Fuel expense for the second quarter 2002 remained relatively
unchanged as compared to the corresponding quarter in 2001; however, such
expense decreased year-to-date 2002 as compared to year-to-date 2001 due mainly
to the lower price of natural gas in the first quarter 2002. Since energy
expenses are generally offset by energy revenues, these expenses did not have a
significant impact on earnings.
Purchased power - non-affiliates. In the second quarter 2002 and
year-to-date 2002, purchased power from non-affiliates when compared to the
corresponding periods in 2001 decreased due to lower costs associated with these
energy purchases. These expenses do not have a significant impact on earnings
since energy expenses are generally offset by energy revenues through ALABAMA's
energy cost recovery clause.
Maintenance expense. Maintenance expense decreased during the second
quarter 2002 and year-to-date 2002 primarily as a result of decreased
maintenance of overhead lines when compared to the corresponding periods of
2001.
Other, net. The decrease during the second quarter 2002 when compared to
the same period in 2001 was primarily due to a decrease in merchandise net
income in 2002 and a gain on disposition of property recognized in 2001. The
year-to-date 2002 amount decreased from 2001 primarily due to a reduction in
Allowance for Funds Used During Construction reflecting the commercial operation
of Plant Barry Unit 7 in May 2001 and an increase in non-utility expenses.
Interest expense, net. The decreases in this expense for the second quarter
2002 and for year-to-date 2002 as compared to the corresponding periods in 2001
primarily resulted from decreases in interest on long-term debt and notes
payable mainly due to lower interest rates.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, ALABAMA is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form
10-K.
28
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot be recovered. For additional information about the Clean Air Act
and other environmental issues, including the EPA litigation, see Item 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the
financial statements of ALABAMA in the Form 10-K. On July 30, 2002, the U. S.
District Court in Alabama extended the stay of the proceeding in Alabama through
late October 2002.
On April 25, 2002, the Stakeholder Advisory Committee met and selected the
candidates that will be considered for the SeTrans ISA. On June 27, 2002,
SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order
seeking the FERC's guidance on various issues. The petition asks for a response
from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain
Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Industry Restructuring" of ALABAMA in the Form 10-K for additional
information.
On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled
"Remedying Undue Discrimination Through Open Access Transmission Service and
Standard Electricity Market Design." The FERC has indicated that the proposal,
if adopted, would (among other things): (i) require transmission assets of
jurisdictional utilities to be operated by an independent entity; (ii) establish
a standard market design; (iii) establish a single type of transmission service
that applies to all customers; (iv) assert jurisdiction over the transmission
component of bundled retail service; (v) establish a generation reserve margin;
(vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise
the FERC policy on the pricing of transmission expansions. Comments on the
proposal are due 75 days after its issuance. Any impact of this proposal on
SOUTHERN and its subsidiaries will depend on the form in which final rules may
be ultimately adopted.
Reference is made to Notes (C) through (E), (G) and (N) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
Reference is also made to Part II - Item 1 - "Legal Proceedings" herein.
Accounting Policies
Critical Policy
ALABAMA's significant accounting policies are described in Note 1 to the
financial statements of ALABAMA in Item 8 of the Form 10-K. ALABAMA's only
critical accounting policy involves rate regulation. ALABAMA is subject to the
provisions of FASB Statement No. 71, "Accounting for the Effects of Certain
Types of Regulation." In the event that a portion of ALABAMA's operations is no
longer subject to these provisions, ALABAMA would be required to write off
related regulatory assets and liabilities that are not specifically recoverable
and determine if any other assets have been impaired.
New Accounting Standards
Effective January 1, 2001, ALABAMA adopted FASB Statement No. 133, "Accounting
for Derivatives and Hedging Activities," as amended, and changed the method of
accounting for derivative instruments. Derivatives are now reflected on the
Condensed Balance Sheet as either an asset or liability measured at fair market
value, and the changes in the fair value are currently recognized in earnings
unless specific hedge accounting criteria are met. Reference is made to
"Exposure to Market Risks" below and Note (N) in the "Notes to the Condensed
Financial Statements" herein for information relating to derivative instruments.
29
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 2001, the FASB issued Statement No. 143, "Asset Retirement
Obligations," which establishes new accounting and reporting standards for legal
obligations associated with retiring assets, including decommissioning nuclear
plants. The liability for an asset's future retirement must be recorded in the
period in which the liability is incurred. The cost must be capitalized as part
of the related long-lived asset and depreciated over the asset's useful life.
Changes in the liability resulting from the passage of time will be recognized
as operating expenses. Statement No. 143 must be adopted by January 1, 2003.
ALABAMA is currently assessing the impact of adopting Statement No. 143 on its
financial statements. Reference is made to Note 1 to the financial statements of
ALABAMA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form
10-K.
FINANCIAL CONDITION
Overview
Major changes in ALABAMA's financial condition during the first six months of
2002 included the addition of approximately $346 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.
Credit Rating Risk
ALABAMA does not have any credit agreements that would require material changes
in payment schedules or terminations as a result of a credit rating downgrade.
Exposure to Market Risks
ALABAMA's market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2001 reporting period. In
addition, ALABAMA is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
Due to cost-based rate regulations, ALABAMA has limited exposure to market
volatility in interest rates, commodity fuel prices and prices of electricity.
To mitigate residual risks relative to movements in electricity prices, ALABAMA
enters into fixed price contracts for the purchase and sale of electricity
through the wholesale electricity market and, to a lesser extent, similar
contracts for gas purchases. ALABAMA has also
30
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
implemented a retail fuel hedging program at the instruction of its PSC. The
fair value of derivative energy contracts at June 30, 2002 is as follows:
Second Quarter
2002 Year-to-Date
Changes Changes
-------------------------------------------------------------------------
Fair Value
-------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $23,311 $ 214
Contracts realized or settled (4,646) (7,069)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes (110) 25,410
-------------------------------------------------------------------------
Contracts at June 30, 2002 $18,555 $18,555
=========================================================================
Source of June 30, 2002
Valuation Prices
-------------------------------------------------------------------------
Maturity
Total ------------------------------
Fair Value Year 1 1-3 Years
-------------------------------------------------------------------------
(in thousands)
Actively quoted $18,555 $13,716 $4,839
External sources - - -
Models and other methods - - -
-------------------------------------------------------------------------
Contracts at June 30, 2002 $18,555 $13,716 $4,839
=========================================================================
Unrealized gains and losses from mark to market adjustments on contracts
related to the retail fuel hedging programs are recorded as regulatory assets
and liabilities. At June 30, 2002, ALABAMA had approximately $18.9 million in
regulatory liabilities related to unrealized gains on mark to market derivative
contracts associated with its fuel hedging programs. Realized gains and losses
from these programs are included in fuel expense and are recovered through
ALABAMA's fuel cost recovery clause. Gains and losses on contracts that do not
represent hedges are recognized in the Statements of Income as incurred. For the
quarters ended June 30, 2002 and 2001, approximately $1.0 million and $(0.2)
million, respectively, of gains (losses) were recognized in income. For the six
months ended June 30, 2002 and 2001, approximately $2.4 million and $2.7
million, respectively, of losses were recognized in income.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risk" of ALABAMA in the Form 10-K
and Note 1 to the financial statements of ALABAMA in Item 8 of the Form 10-K and
to Note (N) in the "Notes to the Condensed Financial Statements" herein.
31
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
In June 2002, ALABAMA issued $350 million of Series P Floating Rate Senior Notes
due December 29, 2003. The proceeds from the sale were used to redeem, in July
2002, $345.5 million aggregate principal amount of its First Mortgage Bonds,
7.75% Series due February 1, 2023, 7.45% Series due July 1, 2023 and 7.30%
Series due November 1, 2023. At the time of the issuance of these Senior Notes,
ALABAMA entered into interest rate swap agreements to fix the floating rate at
3.015%. Reference is made to Note (N) in the "Notes to the Condensed Financial
Statements" herein for additional information relating to derivative
instruments.
ALABAMA plans to continue, when economically feasible, a program to retire
higher-cost debt and preferred stock and replace these obligations with
lower-cost capital if market conditions permit.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA
under "Capital Requirements," "Other Capital Requirements" and "Environmental
Matters" in the Form 10-K for a description of ALABAMA's capital requirements
for its construction program, maturing debt and environmental compliance
efforts.
Sources of Capital
In addition to the financing activities previously described herein, ALABAMA
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings -- if needed -- will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, ALABAMA had at June 30,
2002 approximately $325 million of cash and cash equivalents, unused committed
lines of credit of approximately $916 million (including $454 million of such
lines which are dedicated to funding purchase obligations relating to variable
rate pollution control bonds) and an extendible commercial note program. Of
these lines of credit, unless extended, $75 million expire at various times
during 2002, $451 million expire in 2003 and $390 million expire in 2004.
ALABAMA may also meet short-term cash needs through a SOUTHERN subsidiary
organized to issue and sell commercial paper and extendible commercial notes at
the request and for the benefit of ALABAMA and other SOUTHERN subsidiaries.
ALABAMA has regulatory authority for up to $1.0 billion of short-term
borrowings. At June 30, 2002, ALABAMA had outstanding $130 million of commercial
paper and $15 million in notes payable to banks. Management believes that the
need for working capital can be adequately met by utilizing lines of credit
without maintaining large cash balances.
32
GEORGIA POWER COMPANY
33
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------------------------ ------------------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $1,062,070 $1,093,733 $1,966,984 $2,042,878
Sales for resale --
Non-affiliates 72,322 92,760 122,372 180,351
Affiliates 25,282 35,281 41,789 71,058
Other revenues 44,811 37,509 80,103 73,025
---------- ---------- ---------- ----------
Total operating revenues 1,204,485 1,259,283 2,211,248 2,367,312
---------- ---------- ---------- ----------
Operating Expenses:
Fuel 255,792 252,438 483,169 481,130
Purchased power --
Non-affiliates 65,280 118,991 103,070 173,096
Affiliates 98,716 73,285 157,496 152,580
Other 204,694 196,528 378,514 372,102
Maintenance 108,461 104,941 212,315 211,606
Depreciation and amortization 101,206 139,679 197,003 303,928
Taxes other than income taxes 49,857 51,747 99,432 101,848
---------- ---------- ---------- ----------
Total operating expenses 884,006 937,609 1,630,999 1,796,290
---------- ---------- ---------- ----------
Operating Income 320,479 321,674 580,249 571,022
Other Income (Expense):
Interest income 378 1,206 879 1,808
Equity in earnings of subsidiaries 917 947 1,888 1,956
Other, net 7,224 8,210 3,391 (156)
---------- ---------- ---------- ----------
Earnings Before Interest and Income Taxes 328,998 332,037 586,407 574,630
---------- ---------- ---------- ----------
Interest Charges and Other:
Interest expense, net 41,453 50,290 82,048 101,189
Distributions on preferred securities of subsidiaries 15,647 14,776 30,423 29,552
---------- ---------- ---------- ----------
Total interest charges and other, net 57,100 65,066 112,471 130,741
---------- ---------- ---------- ----------
Earnings Before Income Taxes 271,898 266,971 473,936 443,889
Income taxes 100,933 103,698 176,058 173,031
---------- ---------- ---------- ----------
Net Income Before Cumulative Effect of
Accounting Change 170,965 163,273 297,878 270,858
Cumulative effect of accounting change --
less income taxes of $162 thousand - - - 257
---------- ---------- ---------- ----------
Net Income 170,965 163,273 297,878 271,115
Dividends on Preferred Stock 167 167 335 335
---------- ---------- ---------- ----------
Net Income After Dividends on Preferred Stock $ 170,798 $ 163,106 $ 297,543 $ 270,780
========== ========== =========== ==========
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
34
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
------------- -----------
(in thousands)
Operating Activities:
Net income $ 297,878 $ 271,115
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 195,235 341,607
Deferred income taxes and investment tax credits, net 22,448 (68,186)
Other, net (11,423) (492)
Changes in certain current assets and liabilities --
Receivables, net 19,444 43,215
Fossil fuel stock 19,988 (101,637)
Materials and supplies 7,625 385
Accounts payable (75,937) (110,312)
Energy cost recovery, retail 36,873 12,386
Other 43,250 92,336
--------- ---------
Net cash provided from operating activities 555,381 480,417
--------- ---------
Investing Activities:
Gross property additions (434,403) (740,218)
Sales of property 387,212 -
Other (54,351) (43,712)
--------- ---------
Net cash used for investing activities (101,542) (783,930)
---------- ---------
Financing Activities:
Increase in notes payable, net 85,407 93,568
Proceeds --
Senior notes - 600,000
Preferred securities 440,000 -
Capital contributions from parent company 5,397 200,433
Retirements --
First mortgage bonds (1,860) (332,040)
Pollution control bonds (7,800) -
Senior notes (300,000) -
Capital distributions to parent company (200,000) -
Payment of preferred stock dividends (344) (240)
Payment of common stock dividends (271,450) (265,400)
Other (15,276) (7,111)
--------- ---------
Net cash provided from (used for) financing activities (265,926) 289,210
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 187,913 (14,303)
Cash and Cash Equivalents at Beginning of Period 23,260 29,370
--------- ---------
Cash and Cash Equivalents at End of Period $ 211,173 $ 15,067
========= =========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $79,084 $100,945
Income taxes (net of refunds) $95,482 $140,690
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
35
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2002 2001
- ------ ------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 211,173 $ 23,260
Receivables --
Customer accounts receivable 425,764 376,322
Under recovered retail fuel clause revenue 124,589 161,462
Other accounts and notes receivable 91,783 129,073
Affiliated companies 29,809 69,355
Accumulated provision for uncollectible accounts (6,442) (8,895)
Fossil fuel stock, at average cost 182,770 202,759
Materials and supplies, at average cost 271,613 279,237
Other 89,843 125,246
----------- -----------
Total current assets 1,420,902 1,357,819
----------- -----------
Property, Plant, and Equipment:
In service 17,108,341 16,886,399
Less accumulated provision for depreciation 7,348,515 7,243,209
----------- -----------
9,759,826 9,643,190
Nuclear fuel, at amortized cost 119,578 112,771
Construction work in progress 590,576 883,285
----------- -----------
Property, plant, and equipment 10,469,980 10,639,246
----------- -----------
Other Property and Investments:
Equity investments in subsidiaries 35,016 35,209
Nuclear decommissioning trusts 358,821 364,180
Other 30,904 29,618
----------- -----------
Total other property and investments 424,741 429,007
----------- -----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 533,871 543,584
Prepaid pension costs 307,755 273,405
Debt expense, being amortized 71,367 58,165
Premium on reacquired debt, being amortized 167,971 173,724
Other 161,931 136,137
----------- -----------
Total deferred charges and other assets 1,242,895 1,185,015
----------- -----------
Total Assets $13,558,518 $13,611,087
=========== ===========
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
36
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2002 2001
- ------------------------------------ ------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 766,293 $ 311,620
Notes payable 832,944 747,537
Accounts payable --
Affiliated 117,089 109,591
Other 295,580 409,253
Customer deposits 89,193 83,172
Taxes accrued --
Income taxes 93,375 35,247
Other 94,231 125,807
Interest accrued 73,836 46,942
Vacation pay accrued 41,391 41,830
Other 96,149 120,980
----------- -----------
Total current liabilities 2,500,081 2,031,979
----------- -----------
Long-term debt 2,196,422 2,961,726
----------- -----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 2,162,674 2,163,959
Deferred credits related to income taxes 221,014 229,216
Accumulated deferred investment tax credits 331,238 337,482
Employee benefits provisions 251,758 244,648
Other 422,346 440,773
----------- -----------
Total deferred credits and other liabilities 3,389,030 3,416,078
----------- -----------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 1,229,250 789,250
----------- -----------
Preferred stock 14,569 14,569
----------- -----------
Common Stockholder's Equity:
Common stock, without par value--
Authorized - 15,000,000 shares
Outstanding - 7,761,500 shares 344,250 344,250
Paid-in capital 1,987,954 2,182,557
Premium on preferred stock 40 40
Retained earnings 1,896,885 1,870,791
Accumulated other comprehensive income 37 (153)
----------- -----------
Total common stockholder's equity 4,229,166 4,397,485
----------- -----------
Total Liabilities and Stockholder's Equity $13,558,518 $13,611,087
=========== ===========
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
37
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2002 2001 2002 2001
------ ------ ------ -----
(in thousands) (in thousands)
Net Income After Dividends on Preferred Stock $170,798 $163,106 $297,543 $270,780
Other comprehensive income:
Cumulative effect of accounting change for
qualifying hedges, net of tax of $180 - - - 286
Changes in fair value of qualifying hedges,
net of tax of $(37), $(297), $120, $(61),respectively (58) (479) 190 27
-------- -------- -------- --------
COMPREHENSIVE INCOME $170,740 $162,627 $297,733 $271,093
======== ======== ======== ========
_________________________________________________________________________________________________________________________________
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED)
At June 30, At December 31,
2002 2001
------------- ----------------
(in thousands)
Balance at beginning of period $(153) $ -
Change in current period 190 (153)
----- ------
BALANCE AT END OF PERIOD $ 37 $ (153)
===== ======
________________________________________________________________________________________________________________________________
The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
38
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
RESULTS OF OPERATIONS
Earnings
GEORGIA's net income after dividends on preferred stock for the second quarter
and year-to-date 2002 was $170.8 million and $297.5 million, respectively,
compared to $163.1 million and $270.8 million for the corresponding periods in
2001. Earnings increased by $7.7 million, or 4.7%, for the second quarter 2002
and $26.8 million, or 9.9%, year-to-date 2002 when compared to the same periods
in 2001 primarily due to elimination of accelerated depreciation under the 2001
retail rate order and, to a lesser extent, reductions in interest expense.
(Reference is made to Note (H) in the "Notes to Condensed Financial Statements"
herein for additional information.)
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
-----------------------------------------------------------------
Second Quarter Year-To-Date
-----------------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales $ (31,663) (2.9) $ (75,894) (3.7)
Sales for resale - non-affiliates (20,438) (22.0) (57,979) (32.1)
Sales for resale - affiliates (9,999) (28.3) (29,269) (41.2)
Purchased power - non-affiliates (53,711) (45.1) (70,026) (40.5)
Purchased power - affiliates 25,431 34.7 4,916 3.2
Depreciation and amortization (38,473) (27.5) (106,925) (35.2)
Interest expense, net (8,837) (17.6) (19,141) (18.9)
-----------------------------------------------------------------
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue decreased in the second quarter 2002 by $15.1
million, or 1.9%, and year-to-date 2002 by $59.8, or 4.1%, when compared to the
corresponding periods in 2001. The decreases for both periods are primarily due
to a rate decrease pursuant to the new retail rate order effective January 1,
2002. (Reference is made to Note (H) in the "Notes to Condensed Financial
Statements" herein for additional information.) The effect of the rate decrease
in the second quarter 2002 and year-to-date 2002 was approximately $25.5 million
and $55.1 million, respectively. While total retail revenues for the two periods
resulted in decreases as compared to the corresponding periods in 2001,
residential revenues increased 5.8% for the second quarter 2002 and 3.9%
year-to-date 2002 due to increased usage because of warmer weather and an
increase in the number of customers. For the second quarter and year-to-date
2002, revenues from commercial customers were down by 5.6% and 3.4%, and
revenues from industrial customers were down by 9.7% and 13.6%, respectively.
The sluggish economy continues to be a major factor affecting sales to
commercial and industrial customers.
Sales for resale - non-affiliates. In the second quarter 2002 and
year-to-date 2002, sales for resale to non-affiliates decreased in part as a
direct result of reduced energy sales to these customers. These transactions did
not have a significant impact on earnings since the energy is usually sold at
variable cost. The transfer of Plant Dahlberg to Southern Power on July 31, 2001
also resulted in lower sales in 2002.
39
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates. Revenues from sales for resale to affiliated
companies within the SOUTHERN system will vary depending on demand and the
availability and cost of generating resources at each company. These
transactions did not have a significant impact on earnings.
Purchased power - non-affiliates. During the second quarter 2002 and
year-to-date 2002, these purchases were lower when compared to the same periods
in 2001 primarily due to reduced demand for energy from non-affiliates. In 2001,
these expenses were also higher due to decreased hydro generation and higher
natural gas and oil prices. These expenses do not have a significant impact on
earnings since energy expenses are generally offset by energy revenues through
GEORGIA's fuel cost recovery clause.
Purchased power - affiliates. Expenses for purchased power from affiliated
companies within the SOUTHERN system will also vary depending on demand and the
availability and cost of generating resources at each company. In addition,
GEORGIA also entered into power purchase agreements with Southern Power
beginning in June 2002. The energy component of these transactions will have no
significant impact on earnings since energy expenses are generally offset by
energy revenues through GEORGIA's fuel cost recovery clause. The capacity
component of these transactions, however, will result in higher expenses in
future periods.
Depreciation and amortization. Depreciation and amortization decreased in
the second quarter 2002 and year-to-date 2002 primarily as a result of
discontinuing accelerated depreciation and beginning amortization of the
regulatory liability for accelerated cost recovery in January 2002 in accordance
with the new retail rate order. Reference is made to Note (H) in the "Notes to
the Condensed Financial Statements" herein.
Interest expense, net. The decrease in this item during the second quarter
2002 and year-to-date 2002 from the comparable periods in 2001 is primarily due
to a reduction in interest rates and the accrual of interest on accelerated
amortization in 2001 under the prior retail rate order, which ceased effective
January 1, 2002.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
GEORGIA has entered into power purchase agreements which will result in
higher capacity and operating and maintenance payments beginning in June 2002.
Under the new retail rate order effective January 1, 2002, these costs will be
reflected in rates evenly over the next three years.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, GEORGIA is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form
10-K.
In January 2002, GEORGIA began operating under a new three-year retail rate
order. Under the terms of the order, earnings will be evaluated annually against
a retail return on common equity range of 10 percent to 12.95 percent.
Two-thirds of any earnings above the 12.95 percent return will be applied to
rate refunds, with the remaining one-third retained by GEORGIA. Retail rates
were decreased by $118 million effective January 1, 2002. Reference is made to
Note (H) in the "Notes to the Condensed Financial Statements" herein and Item
40
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of
GEORGIA in the Form 10-K for additional information.
In January 2002, GEORGIA transferred ownership of two units at Plant
Wansley with a net book value of $389.9 million to Southern Power, an affiliated
company.
On April 25, 2002, the Stakeholder Advisory Committee met and selected the
candidates that will be considered for the SeTrans ISA. On June 27, 2002,
SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order
seeking the FERC's guidance on various issues. The petition asks for a response
from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain
Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Industry Restructuring" of GEORGIA in the Form 10-K for additional
information.
On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled
"Remedying Undue Discrimination Through Open Access Transmission Service and
Standard Electricity Market Design." The FERC has indicated that the proposal,
if adopted, would (among other things): (i) require transmission assets of
jurisdictional utilities to be operated by an independent entity; (ii) establish
a standard market design; (iii) establish a single type of transmission service
that applies to all customers; (iv) assert jurisdiction over the transmission
component of bundled retail service; (v) establish a generation reserve margin;
(vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise
the FERC policy on the pricing of transmission expansions. Comments on the
proposal are due 75 days after its issuance. Any impact of this proposal on
SOUTHERN and its subsidiaries will depend on the form in which final rules may
be ultimately adopted.
Compliance costs related to the Clean Air Act and other environmental
issues could affect earnings if such costs cannot be recovered. For additional
information, including information on the EPA litigation, see Item 7 -
MANAGEMENT'S DISCUSSION AND Analysis - "Environmental Issues" of GEORGIA and
Note 3 to the financial statements of GEORGIA in Item 8 of the Form 10-K.
Reference is made to Notes (C) through (E) and (I) 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. Reference is also made to
Note (E) in the "Notes to the Condensed Financial Statements" for information
relating to certain lawsuits regarding the installation of fiber optic cable
over GEORGIA's existing easements.
Accounting Policies
Critical Policy
GEORGIA's significant accounting policies are described in Note 1 to the
financial statements of GEORGIA in Item 8 of the Form 10-K. GEORGIA's only
critical accounting policy involves rate regulation. GEORGIA is subject to the
provisions of FASB Statement No. 71, "Accounting for the Effects of Certain
Types of Regulation." In the event that a portion of GEORGIA's operations is no
longer subject to these provisions, GEORGIA would be required to write off
related regulatory assets and liabilities that are not specifically recoverable
and determine if any other assets, including plant, have been impaired.
41
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
New Accounting Standards
Effective January 1, 2001, GEORGIA adopted FASB Statement No. 133, "Accounting
for Derivatives and Hedging Activities," as amended, and changed the method of
accounting for derivative instruments. Derivatives are now reflected on the
Condensed Balance Sheet as either an asset or liability measured at fair market
value, and the changes in the fair value are currently recognized in earnings
unless specific hedge accounting criteria are met. Reference is made to
"Exposure to Market Risks" below for information relating to derivative
instruments.
In June 2001, the FASB issued Statement No. 143, "Asset Retirement
Obligations," which establishes new accounting and reporting standards for legal
obligations associated with retiring assets, including decommissioning nuclear
plants. The liability for an asset's future retirement must be recorded in the
period in which the liability is incurred. The cost must be capitalized as part
of the related long-lived asset and depreciated over the asset's useful life.
Changes in the liability resulting from the passage of time will be recognized
as operating expenses. Statement No. 143 must be adopted by January 1, 2003.
GEORGIA is currently assessing the impact of adopting Statement No. 143 on its
financial statements. Reference is made to Note 1 to the financial statements of
GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form
10-K.
FINANCIAL CONDITION
Overview
The major changes in GEORGIA's financial condition during the first six months
of 2002 were the sale of two units at Plant Wansley to Southern Power and the
addition of approximately $434.4 million to utility plant. The funds for these
additions and other capital requirements were derived primarily from operations.
See GEORGIA's Condensed Statements of Cash Flows for further details.
Credit Rating Risk
GEORGIA does not have any credit agreements that would require material changes
in payment schedules or terminations as a result of a credit rating downgrade.
There are certain physical electricity sale contracts that could require
collateral -- but not termination -- in the event of a credit rating change to
below investment grade. Generally, collateral may be provided for by a SOUTHERN
guaranty, letter of credit or cash. At June 30, 2002, the maximum potential
collateral requirements were approximately $230 million.
Exposure to Market Risks
GEORGIA's market risk exposures relative to interest rate changes have not
changed materially compared with the previous reporting period, December 31,
2001. In addition, GEORGIA is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
Due to cost-based rate regulations, GEORGIA has limited exposure to market
volatility in interest rates, commodity fuel prices and prices of electricity.
To mitigate residual risks relative to movements in electricity prices, GEORGIA
enters into fixed price contracts for the purchase and sale of electricity
through the wholesale
42
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
electricity market and, to a lesser extent, similar contracts for gas purchases.
The fair value of derivative energy contracts at June 30, 2002 is as follows:
Second Quarter
2002 Year-to-Date
Changes Changes
----------------------------------------------------------------------------
Fair Value
-----------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $(1,660) $ 362
Contracts realized or settled 150 275
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 1,113 (1,034)
----------------------------------------------------------------------------
Contracts at June 30, 2002 $ (397) $ (397)
============================================================================
Source of June 30, 2002
Valuation Prices
--------------------------------------------------------------------------
Maturity
Total -------------------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $(397) $(407) $10
External sources - -
Models and other methods - - -
---------------------------------------------------------------------------
Contracts at June 30, 2002 $(397) $(407) $10
===========================================================================
Realized gains and losses are recognized in the Statements of Income as
incurred. For the quarters ended June 30, 2002 and 2001, approximately $1.3
million and $0.3 million, respectively, of gains were recognized in income. For
the six months ended June 30, 2002 and 2001, approximately $1.2 million and $0.2
million, respectively, of losses were recognized in income.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of GEORGIA in the Form 10-K
and Note 1 to the financial statements of GEORGIA in Item 8 of the Form 10-K.
Financing Activities
In June 2002, Georgia Power Capital Trust V, a statutory business trust, sold
$440 million of its 7?% Trust Preferred Securities, which are guaranteed by
GEORGIA. The net proceeds from this issuance were used to repay a portion of
GEORGIA's outstanding short-term indebtedness.
In July 2002, GEORGIA issued $300 million of Series J 4.875% Senior Notes
due July 15, 2007. The net proceeds from this issuance were used to prepay a
portion of a $350 million bank loan. In anticipation of this issuance, GEORGIA
entered into interest rate swaps related to the 5 year treasury rate. These
swaps fixed the 5 year treasury rate at an average 4.018% on a $300 million
notional amount. The swaps were settled prior to the actual senior note issuance
for $(0.5) million. This amount will be amortized as a credit to interest
expense over the life of the senior notes.
43
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GEORGIA plans to continue, when economically feasible, a program to retire
higher-cost debt and replace these obligations with lower-cost capital if market
conditions permit.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA
under "Liquidity and Capital Requirements," "Other Capital Requirements" and
"Environmental Issues" in the Form 10-K for a description of GEORGIA's capital
requirements for its construction program, maturing debt and environmental
compliance efforts.
Sources of Capital
GEORGIA plans to obtain the funds required for construction and other purposes
from sources similar to those used in the past. The amount, type and timing of
any financings -- if needed -- will depend upon maintenance of adequate
earnings, regulatory approval, prevailing market conditions and other factors.
See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional
information.
To meet short-term cash needs and contingencies, GEORGIA had at June 30,
2002 approximately $211.2 million of cash and cash equivalents and approximately
$1.765 billion of unused credit arrangements with banks, of which $90 million
expire in 2002 and $1.675 billion expire in 2003. The credit arrangements
provide liquidity support to GEORGIA's obligations with respect to variable rate
pollution control bonds and its commercial paper program. GEORGIA may also meet
short-term cash needs through a SOUTHERN subsidiary organized to issue and sell
commercial paper and extendible commercial notes at the request and for the
benefit of GEORGIA and other SOUTHERN subsidiaries. At June 30, 2002, GEORGIA
had outstanding $832.9 million of notes payable. Management believes that the
need for working capital can be adequately met by utilizing lines of credit
without maintaining large cash balances.
44
GULF POWER COMPANY
45
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
--------- ------------ -------- -----------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $172,781 $143,415 $306,275 $272,245
Sales for resale --
Non-affiliates 18,684 20,297 36,118 40,444
Affiliates 7,514 9,056 10,095 17,666
Other revenues 11,008 7,662 18,432 15,104
-------- -------- -------- --------
Total operating revenues 209,987 180,430 370,920 345,459
-------- -------- -------- --------
Operating Expenses:
Fuel 70,142 53,138 106,897 102,470
Purchased power --
Non-affiliates 6,848 16,537 12,652 25,038
Affiliates 13,130 6,014 30,191 17,580
Other 30,985 29,009 57,910 56,235
Maintenance 23,749 14,376 41,938 27,835
Depreciation and amortization 19,083 16,932 36,374 33,607
Taxes other than income taxes 14,876 13,722 29,291 27,207
-------- -------- -------- --------
Total operating expenses 178,813 149,728 315,253 289,972
-------- -------- -------- --------
Operating Income 31,174 30,702 55,667 55,487
Other Income (Expense):
Interest income 6 337 155 507
Other, net 179 222 1,806 (577)
-------- -------- -------- --------
Earnings Before Interest and Income Taxes 31,359 31,261 57,628 55,417
-------- -------- -------- --------
Interest and Other:
Interest expense, net 8,146 6,423 15,132 12,696
Distributions on preferred securities of subsidiary 2,103 1,550 4,206 3,100
-------- -------- -------- --------
Total interest charges and other, net 10,249 7,973 19,338 15,796
-------- -------- -------- --------
Earnings Before Income Taxes 21,110 23,288 38,290 39,621
Income taxes 7,569 8,464 12,978 14,615
-------- -------- -------- --------
Net Income Before Cumulative Effect of
Accounting Change 13,541 14,824 25,312 25,006
Cumulative effect of accounting change --
less income taxes of $42 thousand - - - 68
-------- -------- -------- --------
Net Income 13,541 14,824 25,312 25,074
Dividends on Preferred Stock 54 54 108 108
-------- -------- -------- --------
Net Income After Dividends on Preferred Stock $ 13,487 $ 14,770 $ 25,204 $ 24,966
======== ======== ======== ========
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
46
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
--------------- ---------------
(in thousands)
Operating Activities:
Net income $ 25,312 $ 25,074
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 38,700 35,554
Deferred income taxes and investment tax credits, net (4,049) (1,737)
Other, net (25) 547
Changes in certain current assets and liabilities --
Receivables, net (25,427) 5,791
Fossil fuel stock (12,757) (24,143)
Materials and supplies (465) (279)
Accounts payable 2,200 (36,430)
Regulatory clauses under/over recovery (2,581) (5,307)
Other 19,354 23,037
--------- --------
Net cash provided from operating activities 40,262 22,107
--------- --------
Investing Activities:
Gross property additions (67,948) (163,048)
Other (17,977) 22,471
-------- --------
Net cash used for investing activities (85,925) (140,577)
-------- --------
Financing Activities:
Increase (decrease) in notes payable, net (3,187) 73,225
Proceeds --
Other long-term debt 44,803 -
Capital contributions from parent company 37,782 70,000
Retirements --
Other long-term debt - (71)
Payment of preferred stock dividends (108) (108)
Payment of common stock dividends (32,750) (26,800)
Other (594) -
-------- --------
Net cash provided from financing activities 45,946 116,246
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 283 (2,224)
Cash and Cash Equivalents at Beginning of Period 2,244 4,381
-------- --------
Cash and Cash Equivalents at End of Period $ 2,527 $2,157
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $19,999 $14,734
Income taxes (net of refunds) $2,503 $7,748
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
47
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2002 2001
- ------ ------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 2,527 $ 2,244
Receivables --
Customer accounts receivable 86,050 64,113
Under recovered regulatory clauses 25,789 24,912
Other accounts and notes receivable 8,208 4,316
Affiliated companies 4,721 2,689
Accumulated provision for uncollectible accounts (1,147) (1,342)
Fossil fuel stock, at average cost 60,412 47,655
Materials and supplies, at average cost 29,322 28,857
Other 7,379 12,662
---------- ----------
Total current assets 223,261 186,106
---------- ----------
Property, Plant, and Equipment:
In service 2,205,796 1,951,512
Less accumulated provision for depreciation 930,945 912,581
---------- ----------
1,274,851 1,038,931
Construction work in progress 61,381 264,525
---------- ----------
Property, plant, and equipment 1,336,232 1,303,456
---------- ----------
Other Property and Investments 10,096 7,049
---------- ----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 17,098 16,766
Prepaid pension costs 33,180 29,980
Debt expense, being amortized 2,582 3,036
Premium on reacquired debt, being amortized 13,780 14,518
Other 12,896 12,222
---------- ----------
Total deferred charges and other assets 79,536 76,522
---------- ----------
Total Assets $1,649,125 $1,573,133
========== ==========
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
48
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2002 2001
- ------------------------------------ ----------------- --------------------
(in thousands)
Current Liabilities:
Notes payable $ 84,124 $ 87,311
Accounts payable --
Affiliated 23,340 18,202
Other 26,314 38,308
Customer deposits 16,325 14,506
Taxes accrued --
Income taxes 17,331 8,162
Other 13,337 8,053
Interest accrued 8,643 8,305
Provision for rate refund - 1,530
Vacation pay accrued 4,725 4,725
Regulatory clauses over recovery 2,015 3,719
Other 5,003 6,528
---------- ----------
Total current liabilities 201,157 199,349
---------- ----------
Long-term debt 511,938 467,784
---------- ----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 159,232 161,968
Deferred credits related to income taxes 26,404 28,293
Accumulated deferred investment tax credits 23,096 24,056
Employee benefits provisions 38,421 41,508
Other 34,512 26,045
---------- ----------
Total deferred credits and other liabilities 281,665 281,870
---------- ----------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 115,000 115,000
---------- ----------
Preferred stock 4,236 4,236
---------- ----------
Common Stockholder's Equity:
Common stock, without par value--
Authorized - 992,717 shares
Outstanding - 992,717 shares 38,060 38,060
Paid-in capital 343,741 305,960
Premium on preferred stock 12 12
Retained earnings 153,316 160,862
---------- ----------
Total common stockholder's equity 535,129 504,894
---------- ----------
Total Liabilities and Stockholder's Equity $1,649,125 $1,573,133
========== ==========
The accompanying notes as they relate to GULF are an integral part of these condensed statements.
49
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
RESULTS OF OPERATIONS
Earnings
GULF's net income after dividends on preferred stock for the second quarter 2002
and year-to-date 2002 was $13.5 million and $25.2 million, respectively,
compared to $14.8 million and $25.0 million for the corresponding periods in
2001. Earnings for the second quarter 2002 decreased by $1.3 million, or 8.7%,
primarily due to increases in certain expenses, including maintenance expense
and interest expense. While earnings for year-to-date 2002 remained relatively
unchanged, there were several significant variations in individual categories
which are addressed below.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
-----------------------------------------------------------
Second Quarter Year-To-Date
-----------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales $29,366 20.5 $ 34,030 12.5
Sales for resale - non-affiliates (1,613) (7.9) (4,326) (10.7)
Sales for resale - affiliates (1,542) (17.0) (7,571) (42.9)
Other revenues 3,346 43.7 3,328 22.0
Fuel expense 17,004 32.0 4,427 4.3
Purchased power - non-affiliates (9,689) (58.6) (12,386) (49.5)
Purchased power - affiliates 7,116 118.3 12,611 71.7
Maintenance expense 9,373 65.2 14,103 50.7
Depreciation and amortization 2,151 12.7 2,767 8.2
Other, net (43) (19.4) 2,383 413.0
Interest expense, net 1,723 26.8 2,436 19.2
Distributions on preferred securities
of subsidiary 553 35.7 1,106 35.7
-----------------------------------------------------------
Retail sales. Excluding the recovery of fuel expense and certain other
expenses that do not affect net income, retail sales increased by $13.2 million,
or 15.5%, for the second quarter 2002 and by $18.3 million, or 11.3%,
year-to-date 2002. For both of the above reporting periods, retail sales
revenues were higher than the corresponding periods in 2001 primarily due to
warmer weather, growth in the number of customers and the retail rate increase
which went into effect in June 2002. (Reference is made to Note (J) in the
"Notes to Condensed Financial Statements" herein for additional information.)
During the second quarter 2002, retail energy sales to residential, commercial
and industrial customers increased by 7.7%, 7.3% and 1.0%, respectively, as
compared to the same period in 2001. For year-to-date 2002 as compared to 2001,
retail energy sales to residential and commercial customers increased by 6.9%
and 5.3%, respectively, while energy sales to industrial customers decreased by
2.4%. Sales to industrial customers continue to be affected by the sluggish
economy.
50
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - non-affiliates. During each of the above reporting
periods, sales for resale to non-affiliates decreased when compared to the
corresponding periods in 2001 mainly due to reduced demand for energy by these
customers. These transactions do not have a significant impact on earnings since
the energy is usually sold at variable cost.
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary depending on demand and the availability
and cost of generating resources at each company. These transactions do not have
a significant impact on earnings.
Other revenues. The increases in other revenues for both reporting periods
shown above as compared to the comparable periods in 2001 are primarily due to a
$1.7 million settlement related to a power purchase agreement, a $1 million gain
on sale of gas and an increase of $0.5 million in franchise fees over the
previous periods.
Fuel expense. The increase in fuel expense during the second quarter 2002
and year-to-date 2002 is mainly attributed to the commercial operation of Plant
Smith Unit 3 beginning in April 2002. Since energy expenses are generally offset
by energy revenues through GULF's fuel cost recovery mechanism, these expenses
do not have a significant impact on net income.
Purchased power - non-affiliates. During the second quarter 2002 and
year-to-date 2002, purchased power from non-affiliates decreased primarily due
to lower costs for energy compared to the same periods in 2001. Since energy
expenses are generally offset by energy revenues through GULF's fuel clause
recovery mechanism, these expenses do not have a significant impact on net
income.
Maintenance expense. The increases in maintenance expense for the two
reporting periods as compared to the comparable periods in 2001 primarily
resulted from planned turbine and boiler inspections and repairs for GULF's
generating facilities.
Depreciation and amortization. The increase in this expense for the second
quarter 2002 and year-to-date 2002 resulted primarily from an increase in plant
in service, including the addition of Plant Smith Unit 3, as compared to the
previous reporting periods in 2001.
Other, net. The increase in this item for the year-to-date 2002 period when
compared to the same period in 2001 is primarily due to higher allowance for
equity funds used during construction related to Plant Smith Unit 3, which went
into commercial operation in April 2002.
Interest expense, net. The primary reason for the increase in this expense
for both reporting periods relates to additional sales of an aggregate amount of
$180 million of senior notes.
Distributions on preferred securities of subsidiary. As a result of the
sale in November 2001 of $30 million of 7.375% Trust Preferred Securities, these
distributions increased in both reporting periods as compared to the comparable
periods in 2001.
51
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, GULF is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form
10-K.
Compliance costs related to the Clean Air Act could affect earnings if such
costs are not fully recovered through GULF's Environmental Cost Recovery Clause.
For additional information about the Clean Air Act and other environmental
issues, including the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of
GULF in the Form 10-K.
In 1999, the Florida PSC approved GULF's plan to reduce its authorized rate
of return, reduce retail base rates and share revenues with its customers. The
revenue sharing plan expired on April 22, 2002 at the commercial in-service date
of Plant Smith Unit 3. Based upon the actual revenues for January through April
2002, there will be no refund to customers for this period. For additional
information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future
Earnings Potential" of GULF in the Form 10-K.
In April 2002, the Florida PSC approved an annual base rate increase for
GULF of $53.2 million which became effective in June 2002. Reference is made to
Note (J) in the "Notes to the Condensed Financial Statements" herein and Item 7
- - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in
the Form 10-K for additional information.
On April 25, 2002, the Stakeholder Advisory Committee met and selected the
candidates that will be considered for the SeTrans ISA. On June 27, 2002,
SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order
seeking the FERC's guidance on various issues. The petition asks for a response
from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain
Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Industry Restructuring" of GULF in the Form 10-K for additional
information.
On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled
"Remedying Undue Discrimination Through Open Access Transmission Service and
Standard Electricity Market Design." The FERC has indicated that the proposal,
if adopted, would (among other things): (i) require transmission assets of
jurisdictional utilities to be operated by an independent entity; (ii) establish
a standard market design; (iii) establish a single type of transmission service
that applies to all customers; (iv) assert jurisdiction over the transmission
component of bundled retail service; (v) establish a generation reserve margin;
(vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise
the FERC policy on the pricing of transmission expansions. Comments on the
proposal are due 75 days after its issuance. Any impact of this proposal will
depend on the form in which final rules may be ultimately adopted.
52
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Notes (C) through (E) and (J) 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. Reference is also made to
Note (E) in the "Notes to the Condensed Financial Statements" for information
relating to certain lawsuits regarding the installation of fiber optic cable
over GULF's existing easements.
Accounting Policies
Critical Policy
GULF's significant accounting policies are described in Note 1 to the financial
statements of GULF in Item 8 of the Form 10-K. GULF's only critical accounting
policy involves rate regulation. GULF is subject to the provisions of FASB
Statement No. 71, "Accounting for the Effects of Certain Types of Regulation."
In the event that a portion of GULF's operations is no longer subject to these
provisions, GULF would be required to write off related regulatory assets and
liabilities that are not specifically recoverable and determine if any other
assets, including plant, have been impaired.
New Accounting Standards
Effective January 1, 2001, GULF adopted FASB Statement No. 133, "Accounting for
Derivatives and Hedging Activities," as amended, and changed the method of
accounting for derivative instruments. Derivatives are now reflected on the
Condensed Balance Sheet as either an asset or liability measured at fair market
value, and the changes in the fair value are currently recognized in earnings
unless specific hedge accounting criteria are met. Reference is made to
"Exposure to Market Risks" below for information relating to derivative
instruments.
In June 2001, the FASB issued Statement No. 143, "Asset Retirement
Obligations," which establishes new accounting and reporting standards for legal
obligations associated with retiring assets. The liability for an asset's future
retirement must be recorded in the period in which the liability is incurred.
The cost must be capitalized as part of the related long-lived asset and
depreciated over the asset's useful life. Changes in the liability resulting
from the passage of time will be recognized as operating expenses. Statement No.
143 must be adopted by January 1, 2003. GULF is currently assessing the impact
of adopting Statement No. 143 on its financial statements.
FINANCIAL CONDITION
Overview
Major changes in GULF's financial condition during the first six months of 2002
included the addition of approximately $67.9 million to utility plant. The funds
for these additions and other capital requirements were derived primarily from
operations, other long-term debt and capital contributions from SOUTHERN. See
GULF's Condensed Statements of Cash Flows for further details.
Credit Rating Risk
GULF does not have any credit agreements that would require material changes in
payment schedules or terminations as a result of a credit rating downgrade.
53
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Exposure to Market Risks
GULF's market risk exposures relative to interest rate changes have not changed
materially compared with the previous reporting period, December 31, 2001. In
addition, GULF is not aware of any facts or circumstances that would
significantly affect such exposures in the near term.
Due to cost-based rate regulations, GULF has limited exposure to market
volatility in interest rates, commodity fuel prices and prices of electricity.
To mitigate residual risks relative to movements in electricity prices, GULF
enters into fixed price contracts for the purchase and sale of electricity
through the wholesale electricity market and, to a lesser extent, similar
contracts for gas purchases. The fair value of derivative energy contracts at
June 30, 2002 is as follows:
Second Quarter
2002 Year-to-Date
Changes Changes
----------------------------------------------------------------------------
Fair Value
----------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $(268) $(110)
Contracts realized or settled 24 45
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 180 1
---------------------------------------------------------------------------
Contracts at June 30, 2002 $ (64) $ (64)
===========================================================================
Source of June 30, 2002
Valuation Prices
--------------------------------------------------------------------------
Maturity
Total -------------------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $(64) $(66) $2
External sources - - -
Models and other methods - - -
---------------------------------------------------------------------------
Contracts at June 30, 2002 $(64) $(66) $2
===========================================================================
Realized gains and losses are recognized in the Statements of Income as
incurred. These amounts were not material for the quarter and year-to-date
periods ended June 30, 2002 and 2001.
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Exposure to Market Risks" of GULF in the Form 10-K and Note 1 to the financial
statements of GULF in Item 8 of the Form 10-K for additional information.
Financing Activities
In January 2002, GULF issued $45 million of Series E 6.00% Senior Notes due
January 30, 2012. The proceeds from the sale were used by GULF to finance
certain construction costs incurred in connection with
54
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Plant Smith Unit 3, GULF's 574 megawatt combined cycle facility, which was
placed in service in April 2002, and for general corporate purposes.
GULF plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these securities with lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under
"Capital Requirements for Construction," "Other Capital Requirements" and
"Environmental Matters" in the Form 10-K for a description of GULF's capital
requirements for its construction program, maturing debt and environmental
compliance efforts.
Sources of Capital
In addition to the financing activities previously described herein, GULF plans
to obtain the funds required for construction and other purposes from sources
similar to those used in the past. The amount, type and timing of any financings
- -- if needed -- will depend upon maintenance of adequate earnings, regulatory
approval, prevailing market conditions and other factors. See Item 1 - BUSINESS
- - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, GULF had at June 30, 2002
approximately $2.5 million of cash and cash equivalents and $61.9 million of
unused committed lines of credit with banks that expire in 2002 and $61.5
million that expire in 2003. The credit arrangements provide liquidity support
to GULF's obligations with respect to variable rate pollution control bonds and
commercial paper. GULF may also meet short-term cash needs through a SOUTHERN
subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of GULF and other SOUTHERN
subsidiaries. At June 30, 2002, GULF had outstanding $84.1 million of notes
payable. Management believes that the need for working capital can be adequately
met by utilizing lines of credit without maintaining large cash balances.
55
MISSISSIPPI POWER COMPANY
56
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
------ -------- ------- ------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $138,601 $127,802 $257,068 $242,381
Sales for resale --
Non-affiliates 52,182 49,437 104,334 89,725
Affiliates 10,456 23,604 20,069 35,592
Other revenues 4,139 3,106 6,965 7,563
-------- -------- -------- --------
Total operating revenues 205,378 203,949 388,436 375,261
-------- -------- -------- --------
Operating Expenses:
Fuel 66,772 73,064 126,974 110,548
Purchased power --
Non-affiliates 4,416 14,183 7,257 28,806
Affiliates 10,387 13,167 17,793 44,703
Other 37,103 32,764 72,464 59,133
Maintenance 20,606 13,441 41,277 27,289
Depreciation and amortization 13,918 13,962 28,430 25,878
Taxes other than income taxes 13,719 10,728 26,911 22,649
-------- -------- -------- --------
Total operating expenses 166,921 171,309 321,106 319,006
-------- -------- -------- --------
Operating Income 38,457 32,640 67,330 56,255
Other Income:
Interest income 82 79 168 223
Other, net 1,070 1,856 1,177 2,063
-------- -------- -------- --------
Earnings Before Interest and Income Taxes 39,609 34,575 68,675 58,541
Interest Expense and Other: -------- -------- -------- --------
Interest expense, net 4,279 6,218 9,325 13,164
Distributions on preferred securities of subsidiary 1,022 678 1,770 1,356
-------- -------- -------- --------
Total interest charges and other, net 5,301 6,896 11,095 14,520
-------- -------- -------- --------
Earnings Before Income Taxes 34,308 27,679 57,580 44,021
Income taxes 13,016 10,605 21,803 16,729
-------- -------- -------- --------
Net Income Before Cumulative Effect of
Accounting Change 21,292 17,074 35,777 27,292
Cumulative effect of accounting change --
less income taxes of $43 thousand - - - 70
-------- -------- -------- --------
Net Income 21,292 17,074 35,777 27,362
Dividends on Preferred Stock 504 503 1,007 1,034
-------- -------- -------- --------
Net Income After Dividends on Preferred Stock $20,788 $ 16,571 $ 34,770 $ 26,328
======== ========= ======== ========
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
57
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
-------------- ---------------
(in thousands)
Operating Activities:
Net income $ 35,777 $ 27,362
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 30,486 27,836
Deferred income taxes and investment tax credits, net (6,021) (239)
Other, net 5,953 2,086
Changes in certain current assets and liabilities --
Receivables, net 3,463 (10,692)
Fossil fuel stock (1,768) (30,500)
Materials and supplies (1,092) (1,153)
Accounts payable (13,723) 6,861
Other 10,679 231
-------- --------
Net cash provided from operating activities 63,754 21,792
-------- --------
Investing Activities:
Gross property additions (36,813) (23,032)
Other (10,713) (5,358)
-------- --------
Net cash used for investing activities (47,526) (28,390)
-------- --------
Financing Activities:
Increase in notes payable, net 9,922 22,724
Proceeds --
Senior notes 80,000 -
Preferred securities 35,000 -
Capital contributions from parent company 682 70,000
Retirements --
First mortgage bonds (650) (36,000)
Senior notes (80,190) (20,547)
Preferred securities (35,000) -
Payment of preferred stock dividends (1,007) (1,034)
Payment of common stock dividends (31,750) (25,300)
Other 106 (78)
-------- --------
Net cash provided from (used for) financing activities (22,887) 9,765
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (6,659) 3,167
Cash and Cash Equivalents at Beginning of Period 18,950 7,531
-------- --------
Cash and Cash Equivalents at End of Period $ 12,291 $ 10,698
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $7,490 $14,616
Income taxes (net of refunds) $7,231 $1,472
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
58
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2002 2001
- ------ -------------------- --------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 12,291 $ 18,950
Receivables --
Customer accounts receivable 61,946 48,200
Under recovered regulatory clauses 21,341 15,086
Other accounts and notes receivable 7,091 26,068
Affiliated companies 18,164 22,569
Accumulated provision for uncollectible accounts (897) (856)
Fossil fuel stock, at average cost 33,257 31,489
Materials and supplies, at average cost 24,314 23,223
Other 24,081 16,002
---------- ----------
Total current assets 201,588 200,731
---------- ----------
Property, Plant, and Equipment:
In service 1,780,529 1,741,499
Less accumulated provision for depreciation 718,436 698,681
---------- ----------
1,062,093 1,042,818
Construction work in progress 32,247 38,253
---------- ----------
Property, plant, and equipment 1,094,340 1,081,071
---------- ----------
Other Property and Investments 5,090 1,900
---------- ----------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 13,006 13,394
Prepaid pension costs 13,071 11,171
Debt expense, being amortized 3,046 4,396
Premium on reacquired debt, being amortized 7,501 6,719
Other 18,270 20,821
---------- ----------
Total deferred charges and other assets 54,894 56,501
---------- ----------
Total Assets $1,355,912 $1,340,203
========== ==========
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
59
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2002 2001
- ------------------------------------ -------------------- --------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 35,020 $ 80,020
Notes payable 25,894 15,973
Accounts payable --
Affiliated 17,293 6,175
Other 66,720 92,538
Customer deposits 6,992 6,540
Taxes accrued --
Income taxes 35,573 14,981
Other 22,356 35,282
Interest accrued 6,951 5,079
Vacation pay accrued 5,810 5,810
Regulatory clauses over recovery 22,692 13,296
Other 8,821 12,041
---------- ----------
Total current liabilities 254,122 287,735
---------- ----------
Long-term debt 277,935 233,753
---------- ----------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 136,508 138,913
Deferred credits related to income taxes 22,212 23,626
Accumulated deferred investment tax credits 21,661 22,268
Employee benefits provisions 48,849 45,827
Other 32,434 29,592
---------- ----------
Total deferred credits and other liabilities 261,664 260,226
---------- ----------
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding company junior
subordinated notes 35,000 35,000
---------- ----------
Preferred stock 31,809 31,809
---------- ----------
Common Stockholder's Equity:
Common stock equity --
Authorized - 1,130,000 shares
Outstanding - 1,121,000 shares
Par value 37,691 37,691
Paid-in capital 267,937 267,256
Premium on preferred stock 326 326
Retained earnings 189,428 186,407
---------- ----------
Total common stockholder's equity 495,382 491,680
---------- ----------
Total Liabilities and Stockholder's Equity $1,355,912 $1,340,203
========== ==========
The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
60
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
RESULTS OF OPERATIONS
Earnings
MISSISSIPPI's net income after dividends on preferred stock for the second
quarter 2002 and year-to date 2002 was $20.8 million and $34.8 million,
respectively, compared to $16.6 million and $26.3 million for the corresponding
periods of 2001. Earnings were up $4.2 million, or 25.4%, for the second quarter
2002 and up $8.4 million, or 32.1%, year-to-date 2002 primarily due to higher
operating revenues and lower interest expense.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
----------------------------------------------------------------
Second Quarter Year-To-Date
----------------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales $ 10,799 8.4 $ 14,687 6.1
Sales for resale - non-affiliates 2,745 5.6 14,609 16.3
Sale for resale - affiliates (13,148) (55.7) (15,523) (43.6)
Fuel expense (6,292) (8.6) 16,426 14.9
Purchased power - non-affiliates (9,767) (68.9) (21,549) (74.8)
Purchased power - affiliates (2,780) (21.1) (26,910) (60.2)
Other operation expense 4,339 13.2 13,331 22.5
Maintenance expense 7,165 53.3 13,988 51.3
Depreciation and amortization (44) (0.3) 2,552 9.9
Taxes other than income taxes 2,991 27.9 4,262 18.8
Interest expense, net (1,939) (31.2) (3,839) (29.2)
----------------------------------------------------------------
Retail sales. Excluding fuel revenues, which generally do not affect net
income, retail sales revenue was up by $12.0 million, or 16.2%, in the second
quarter 2002 and by $22.6 million, or 16.6%, year-to-date 2002 when compared to
the corresponding periods in 2001 primarily due to the retail rate increase
which took effect in January 2002 and, to a lesser extent, higher retail energy
sales. (Reference is made to Note (K) in the "Notes to Condensed Financial
Statements" herein for additional information.) Retail energy sales in the
second quarter 2002 compared to the same period in 2001 increased for
residential and commercial customers by 3.2% and 3.8%, respectively, while sales
to industrial customers decreased by 3.2%. For year-to-date 2002 as compared to
the comparable period in 2001, total retail sales increased 4.3% and 2.6% for
residential and commercial customers, respectively, and decreased 0.9% for
industrial customers. Sales to industrial customers continue to be affected by
the sluggish economy.
Sales for resale - non-affiliates. During the second quarter 2002 and
year-to-date 2002, sales for resale to non-affiliates increased mainly due to
demand for energy by non-affiliates and additional power sales as a result of
the commercial operation in May 2001 of Plant Daniel Units 3 and 4 when compared
to the corresponding periods in 2001.
61
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales for resale - affiliates and Purchased power - affiliates. Revenues
from sales for resale to affiliated companies, as well as purchases of energy,
within the SOUTHERN system will vary depending on demand and the availability
and cost of generating resources at each company. These transactions do not have
a significant impact on earnings.
Fuel expense. Lower fuel expenses in the second quarter 2002 when compared
to the same period in the prior year are primarily attributed to lower unit fuel
prices. For year-to-date 2002, higher fuel expenses as compared to 2001 resulted
from increased generation and the commercial operation in May 2001 of Plant
Daniel Units 3 and 4. Since energy expenses are generally offset by energy
revenues through MISSISSIPPI's fuel cost recovery clause, these expenses do not
have a significant impact on earnings.
Purchased power - non-affiliates. In the second quarter 2002 and
year-to-date 2002, purchased power from non-affiliates decreased primarily due
to commercial operation of the new units at Plant Daniel in May 2001. These
transactions do not have a significant impact on net income since energy
expenses are generally offset by energy revenues through MISSISSIPPI's fuel cost
recovery clause.
Other operation expense. In the second quarter 2002 and year-to-date 2002,
other operation expense increased over the same periods in 2001 primarily as a
result of lease payments related to the commercial operation of Plant Daniel
Units 3 and 4, which began in May 2001.
Maintenance expense. During the second quarter 2002 and year-to-date 2002,
maintenance expense increased when compared to the corresponding periods in 2001
primarily as a result of scheduled maintenance performed at Plant Watson and
Plant Daniel in 2002.
Depreciation and amortization. The year-to-date 2002 increase over the
corresponding period in 2001 is primarily due to amortization of MISSISSIPPI's
regulatory asset related to the ECO Plan. For additional information about the
ECO Plan, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental
Matters" of MISSISSIPPI in the Form 10-K.
Taxes other than income taxes. This expense for the second quarter 2002 and
year-to-date 2002 increased primarily as a result of the additional property
taxes related to the commercial operation of Plant Daniel Units 3 and 4.
Interest expense, net. The decreases in this expense for the second quarter
2002 and for year-to-date 2002 as compared to the corresponding periods in 2001
primarily result from decreases in interest on long-term debt and notes payable
as a result of lower interest rates on debt outstanding.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales.
In December 2001, the Mississippi PSC approved MISSISSIPPI's annual retail
rate increase of approximately $39 million, which became effective in January
2002. For additional information, see Note (K) in the "Notes to the Condensed
Financial Statements" herein.
62
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of MISSISSIPPI in the Form 10-K regarding the
settlement agreement between MISSISSIPPI and certain wholesale customers to
increase its wholesale tariff rates effective June 1, 2002. In March 2002, that
agreement was filed with the FERC for approval. On April 19, 2002, the FERC
accepted for filing the settlement agreement and placed the new tariff rates in
effect June 1, 2002 without modifying the agreement reached between MISSISSIPPI
and its customers. For additional information, see Note (L) in the "Notes to the
Condensed Financial Statements" herein.
With the enactment of the Energy Act and new legislation being discussed at
the federal level to expand customer choice, MISSISSIPPI is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form
10-K.
MISSISSIPPI's 2002 ECO Plan filing was approved, as filed, by the
Mississippi PSC on March 5, 2002 and resulted in a slight increase in rates.
Compliance costs related to the Clean Air Act could affect earnings if such
costs cannot continue to be recovered. For additional information about the
Clean Air Act and other environmental issues, including the EPA litigation, see
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note
3 to the financial statements of MISSISSIPPI in the Form 10-K.
On April 25, 2002, the Stakeholder Advisory Committee met and selected the
candidates that will be considered for the SeTrans ISA. On June 27, 2002,
SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order
seeking the FERC's guidance on various issues. The petition asks for a response
from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain
Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Industry Restructuring" of MISSISSIPPI in the Form 10-K for
additional information.
On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled
"Remedying Undue Discrimination Through Open Access Transmission Service and
Standard Electricity Market Design." The FERC has indicated that the proposal,
if adopted, would (among other things): (i) require transmission assets of
jurisdictional utilities to be operated by an independent entity; (ii) establish
a standard market design; (iii) establish a single type of transmission service
that applies to all customers; (iv) assert jurisdiction over the transmission
component of bundled retail service; (v) establish a generation reserve margin;
(vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise
the FERC policy on the pricing of transmission expansions. Comments on the
proposal are due 75 days after its issuance. Any impact of this proposal on
SOUTHERN and its subsidiaries will depend on the form in which final rules may
be ultimately adopted.
Reference is made to Note 6 to MISSISSIPPI's financial statements in the
Form 10-K, regarding Long-Term Capacity Sales Agreements. MISSISSIPPI has
entered into a capacity sale contract under which minimum capacity revenues to
MISSISSIPPI would average approximately $21 million annually through May 2011.
The customer for that capacity is currently experiencing liquidity problems and
has had its credit rating reduced below investment grade. The customer has
provided MISSISSIPPI with a $26 million letter of credit expiring in February
2003. This letter of credit can be drawn if it is not replaced by acceptable
security prior to expiration or if the customer defaults under the contract. In
the event of such a default, and if MISSISSIPPI were unable to resell that
capacity in the market, future earnings could be affected. The outcome cannot
now be determined.
63
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reference is made to Notes (C) through (E), (K) and (L) in the "Notes to
the Condensed Financial Statements" herein for discussion of various
contingencies and other matters which may affect future earnings potential.
Reference is also made to Part II - Item 1 - "Legal Proceedings" herein.
Reference is also made to Note (E) in the "Notes to the Condensed Financial
Statements" for information relating to certain lawsuits regarding the
installation of fiber optic cable over MISSISSIPPI's existing easements.
Accounting Policies
Critical Policy
MISSISSIPPI's significant accounting policies are described in Note 1 to the
financial statements of MISSISSIPPI in Item 8 of the Form 10-K. MISSISSIPPI's
critical accounting policy involves rate regulation. MISSISSIPPI is subject to
the provisions of FASB Statement No. 71, "Accounting for the Effects of Certain
Types of Regulation." In the event that a portion of MISSISSIPPI's operations is
no longer subject to these provisions, MISSISSIPPI would be required to write
off related regulatory assets and liabilities that are not specifically
recoverable and determine if any other assets, including plant, have been
impaired.
Additionally, MISSISSIPPI accounts for its lease agreement with Escatawpa
Funding, Limited Partnership ("Escatawpa") as an operating lease. Under this
agreement, Escatawpa, a special purpose entity, is owner-lessor of the
combined-cycle generating units at MISSISSIPPI's Plant Daniel. MISSISSIPPI does
not consolidate this entity since parties unrelated to MISSISSIPPI have made
substantive residual equity capital investments in excess of 3 percent. In June
2002, the FASB issued an exposure draft for comment of a proposed interpretation
on "Consolidation of Certain Special-Purpose Entities," an interpretation of
Accounting Research Bulletin No. 51. It is expected that the exposure draft
would be finalized by year end, with an effective date for existing transactions
subject to the interpretation, including MISSISSIPPI's lease transaction, to be
implemented on April 1, 2003. This interpretation is in draft form; the final
pronouncement may differ from the draft. However, in its current draft form,
MISSISSIPPI would be deemed to be the "primary beneficiary" of its lease
arrangement with Escatawpa and would be required to consolidate the leased asset
and related debt on its books or to restructure the existing arrangement to
comply with the final rules. Until final rules are approved by the FASB,
MISSISSIPPI will continue to analyze the impact of the exposure draft.
MISSSISSIPPI's current operating lease arrangement with Escatawpa has been
reviewed and approved by the Mississippi PSC and is reflected and approved for
recovery in both its retail and wholesale rate jurisdictions. Consolidation of
the leased asset and related debt could require MISSISSIPPI to seek additional
regulatory review.
New Accounting Standards
Effective January 1, 2001, MISSISSIPPI adopted FASB Statement No. 133,
"Accounting for Derivatives and Hedging Activities," as amended, and changed the
method of accounting for derivative instruments. Derivatives are now reflected
on the Condensed Balance Sheet as either an asset or liability measured at fair
market value, and the changes in the fair value are currently recognized in
earnings unless specific hedge accounting criteria are met. Reference is made to
"Exposure to Market Risks" below for information relating to derivative
instruments.
64
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In June 2001, the FASB issued Statement No. 143, "Asset Retirement
Obligations," which establishes new accounting and reporting standards for legal
obligations associated with retiring assets. The liability for an asset's future
retirement must be recorded in the period in which the liability is incurred.
The cost must be capitalized as part of the related long-lived asset and
depreciated over the asset's useful life. Changes in the liability resulting
from the passage of time will be recognized as operating expenses. Statement No.
143 must be adopted by January 1, 2003. MISSISSIPPI is currently assessing the
impact of adopting Statement No. 143 on its financial statements.
FINANCIAL CONDITION
Overview
Major changes in MISSISSIPPI's financial condition during the first six months
of 2002 included the addition of approximately $36.8 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.
Off-Balance Sheet Financing Arrangements
In May 2001, MISSISSIPPI began the initial 10-year term of an operating lease
agreement signed in 1999 with Escatawpa, a special purpose entity, to use a
combined-cycle generating facility located at MISSISSIPPI's Plant Daniel. The
facility cost approximately $370 million. The lease provides for a residual
value guarantee -- approximately 71 percent of the completion cost -- by
MISSISSIPPI that is due upon termination of the lease in certain circumstances.
Reference is made to Note 4 to the financial statements in Item 8 of MISSISSIPPI
in the Form 10-K and to "Critical Policy" above for additional information.
Credit Rating Risk
MISSISSIPPI does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade. There are certain fixed-price physical gas purchase contracts that
could require collateral -- but not accelerated payment -- in the event of a
credit rating change to below investment grade; however, at June 30, 2002, this
exposure was immaterial.
Exposure to Market Risks
MISSISSIPPI's market risk exposures relative to interest rate changes have not
changed materially compared with the previous reporting period, December 31,
2001. In addition, MISSISSIPPI is not aware of any facts or circumstances that
would significantly affect such exposures in the near term.
Due to cost-based rate regulations, MISSISSIPPI has limited exposure to
market volatility in interest rates, commodity fuel prices and prices of
electricity. To mitigate residual risks relative to movements in electricity
prices, MISSISSIPPI enters into fixed price contracts for the purchase and sale
of electricity through the wholesale electricity market and, to a lesser extent,
similar contracts for gas purchases. MISSISSIPPI has also implemented retail and
65
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
wholesale fuel hedging programs at the instruction of its PSC. The fair value
of derivative energy contracts is as follows:
Second Quarter
2002 Year-to-Date
Changes Changes
----------------------------------------------------------------------------
Fair Value
----------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $5,180 $(3,830)
Contracts realized or settled (210) (190)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes 1,874 10,864
----------------------------------------------------------------------------
Contracts at June 30, 2002 $6,844 $ 6,844
============================================================================
Source of June 30, 2002
Valuation Prices
--------------------------------------------------------------------------
Maturity
Total -------------------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $6,844 $3,495 $3,349
External sources - - -
Models and other methods - - -
--------------------------------------------------------------------------
Contracts at June 30, 2002 $6,844 $3,495 $3,349
===========================================================================
Unrealized gains and losses from mark to market adjustments on contracts
related to the retail and wholesale fuel hedging programs are recorded as
regulatory assets and liabilities. At June 30, 2002, MISSISSIPPI had
approximately $6.9 million in regulatory liabilities related to unrealized gains
on mark to market derivative contracts associated with its fuel hedging
programs. Realized gains and losses from these programs are included in fuel
expense and are recovered through MISSISSIPPI's energy cost management clauses.
Reference is made to Note 1 to the financial statements of MISSISSIPPI in Item 8
of the Form 10-K and Note (L) in the "Notes to the Condensed Financial
Statements" herein regarding the respective approvals of the retail and
wholesale energy cost management clauses. Gains and losses on contracts that do
not represent hedges are recognized in the Statements of Income as incurred. For
the quarter and year-to-date periods ended June 30, 2002 and 2001, these amounts
were not material.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of MISSISSIPPI in the Form
10-K and Note 1 to the financial statements of MISSISSIPPI in Item 8 of the Form
10-K.
66
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financing Activities
In March 2002, MISSISSIPPI issued $80 million of Series D Floating Rate Senior
Notes due March 12, 2004. The proceeds of the sale were used to repay $80
million of Series C Floating Rate Senior Notes due March 28, 2002. Also in March
2002, Mississippi Power Capital Trust II, a statutory business trust, sold $35
million of its 7.20% Trust Originated Preferred Securities, which are guaranteed
by MISSISSIPPI, for the purpose of redeeming in May 2002 $35 million of
Mississippi Power Capital Trust I 7.75% Trust Originated Preferred Securities.
MISSISSIPPI plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these securities with lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of
MISSISSIPPI under "Capital Requirements for Construction," "Environmental
Matters" and "Other Capital Requirements" and Note 3 to the financial statements
in the Form 10-K for a description of MISSISSIPPI's capital requirements for its
construction program, environmental compliance efforts and maturities of
long-term debt.
Sources of Capital
In addition to the financing activities previously described herein, MISSISSIPPI
plans to obtain the funds required for construction and other purposes from
sources similar to those used in the past. The amount, type and timing of any
financings -- if needed -- will depend upon maintenance of adequate earnings,
regulatory approval, prevailing market conditions and other factors. See Item 1
- - BUSINESS - "Financing Programs" in the Form 10-K for additional information.
To meet short-term cash needs and contingencies, MISSISSIPPI had at June
30, 2002 approximately $12.3 million of cash and cash equivalents and $74.5
million of committed credit arrangements with banks that expire in 2002 and $50
million that expire in 2003. The credit arrangements provide liquidity support
to MISSISSIPPI's obligations with respect to variable rate pollution control
bonds and commercial paper. MISSISSIPPI may also meet short-term cash needs
through a SOUTHERN subsidiary organized to issue and sell commercial paper and
extendible commercial notes at the request and for the benefit of MISSISSIPPI
and other SOUTHERN subsidiaries. At June 30, 2002, MISSISSIPPI had outstanding
$25.9 million of notes payable. Management believes that the need for working
capital can be adequately met by utilizing lines of credit without maintaining
large cash balances.
67
SAVANNAH ELECTRIC
AND
POWER COMPANY
68
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
--------------------- ---------------------
(in thousands) (in thousands)
Operating Revenues:
Retail sales $74,293 $70,716 $129,240 $129,135
Sales for resale --
Non-affiliates 2,097 2,016 3,030 3,574
Affiliates 1,264 651 2,162 1,878
Other revenues 706 587 1,306 1,074
------ ------- -------- --------
Total operating revenues 78,360 73,970 135,738 135,661
------ ------- -------- --------
Operating Expenses:
Fuel 14,148 13,119 23,076 22,513
Purchased power --
Non-affiliates 2,067 5,756 3,134 8,082
Affiliates 17,396 12,957 29,523 28,705
Other 12,926 12,599 25,998 24,280
Maintenance 7,447 4,949 12,772 10,997
Depreciation and amortization 6,079 6,460 12,588 12,920
Taxes other than income taxes 3,703 3,510 7,188 6,745
------ ------- -------- --------
Total operating expenses 63,766 59,350 114,279 114,242
------ ------- -------- --------
Operating Income 14,594 14,620 21,459 21,419
Other Income (Expense):
Interest income 14 84 27 117
Other, net 79 (574) (560) (1,185)
------ ------- -------- --------
Earnings Before Interest and Income Taxes 14,687 14,130 20,926 20,351
------ ------- -------- --------
Interest Charges and Other:
Interest expense, net 2,705 3,264 5,474 6,540
Distributions on preferred securities of subsidiary 685 685 1,370 1,370
------ ------- -------- --------
Total interest charges and other, net 3,390 3,949 6,844 7,910
------ ------- -------- --------
Earnings Before Income Taxes 11,297 10,181 14,082 12,441
Income taxes 4,262 3,935 5,245 4,741
------ ------- -------- --------
Net Income Before Cumulative Effect of
Accounting Change 7,035 6,246 8,837 7,700
Cumulative effect of accounting change --
less income taxes of $14 thousand - - - 22
------- ------- -------- --------
Net Income $ 7,035 $ 6,246 $ 8,837 $ 7,722
======= ======= ======== ========
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
69
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months
Ended June 30,
2002 2001
-------------- ---------------
(in thousands)
Operating Activities:
Net income $ 8,837 $ 7,722
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 12,968 13,945
Deferred income taxes and investment tax credits, net (6,056) (5,097)
Other, net (34) 1,955
Changes in certain current assets and liabilities --
Receivables, net 2,207 (5,096)
Fossil fuel stock 1,056 (3,610)
Materials and supplies 3,712 (261)
Accounts payable 4,120 (8,431)
Other (1,645) 13,559
-------- --------
Net cash provided from operating activities 25,165 14,686
-------- --------
Investing Activities:
Gross property additions (20,432) (18,546)
Other, net 510 229
-------- --------
Net cash used for investing activities (19,922) (18,317)
-------- --------
Financing Activities:
Increase in notes payable, net 4,351 5,540
Proceeds --
Other long-term debt 159 65,000
Capital contributions from parent company 1,267 -
Retirements --
First mortgage bonds (436) (20,642)
Other long-term debt - (30,441)
Payment of common stock dividends (11,350) (10,900)
Other (25) (355)
-------- --------
Net cash provided from (used for) financing activities (6,034) 8,202
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (791) 4,571
Cash and Cash Equivalents at Beginning of Period 2,391 -
-------- - --------
Cash and Cash Equivalents at End of Period $ 1,600 $ 4,571
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $5,536 $7,354
Income taxes (net of refunds) $15,148 ($2,915)
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
70
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Assets 2002 2001
- ------ ------------------- -------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 1,600 $ 2,391
Receivables --
Customer accounts receivable 39,384 29,959
Under recovered retail fuel clause revenue - 11,974
Other accounts and notes receivable 2,612 2,882
Affiliated companies 1,875 1,170
Accumulated provision for uncollectible accounts (593) (500)
Fossil fuel stock, at average cost 8,795 9,851
Materials and supplies, at average cost 9,257 12,969
Prepaid Taxes 19,073 12,511
Other 3,736 586
-------- --------
Total current assets 85,739 83,793
-------- --------
Property, Plant, and Equipment:
In service 866,142 855,290
Less accumulated provision for depreciation 414,468 402,492
-------- --------
451,674 452,798
Construction work in progress 18,208 8,540
-------- --------
Property, plant, and equipment 469,882 461,338
-------- --------
Other Property and Investments 3,093 2,742
-------- --------
Deferred Charges and Other Assets:
Deferred charges related to income taxes 11,988 12,283
Cash surrender value of life insurance for deferred compensation plans 20,358 20,002
Debt expense, being amortized 3,087 3,197
Premium on reacquired debt, being amortized 6,567 6,890
Other 8,389 4,498
-------- --------
Total deferred charges and other assets 50,389 46,870
-------- --------
Total Assets $609,103 $594,743
======== ========
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
71
SAVANNAH ELECTRIC AND POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
At June 30, At December 31,
Liabilities and Stockholder's Equity 2002 2001
- ------------------------------------ ------------------- ------------------
(in thousands)
Current Liabilities:
Securities due within one year $ 20,803 $ 1,178
Notes payable 36,510 32,159
Accounts payable --
Affiliated 11,219 5,087
Other 10,061 10,160
Customer deposits 6,671 6,237
Taxes accrued --
Income taxes 214 2,587
Other 2,661 1,668
Interest accrued 4,794 4,014
Vacation pay accrued 2,419 2,361
Other 9,891 9,097
-------- --------
Total current liabilities 105,243 74,548
-------- --------
Long-term debt 140,807 160,709
-------- --------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes 78,207 77,331
Deferred credits related to income taxes 13,110 13,776
Accumulated deferred investment tax credits 9,620 9,952
Employee benefits provisions 30,639 27,486
Other 15,805 14,023
-------- --------
Total deferred credits and other liabilities 147,381 142,568
-------- --------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes 40,000 40,000
-------- --------
Common Stockholder's Equity:
Common stock, par value $5 per share --
Authorized - 16,000,000 shares
Outstanding - 10,844,635 shares
Par value 54,223 54,223
Paid-in capital 14,094 12,826
Retained earnings 107,355 109,869
-------- --------
Total common stockholder's equity 175,672 176,918
-------- --------
Total Liabilities and Stockholder's Equity $609,103 $594,743
======== ========
The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
72
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 2002 vs. SECOND QUARTER 2001
AND
YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001
RESULTS OF OPERATIONS
Earnings
SAVANNAH's net income for the second quarter 2002 and year-to-date 2002 was $7.0
million and $8.8 million, respectively, as compared to $6.2 million and $7.7
million for the corresponding periods of 2001. Earnings increased by $0.8
million, or 12.6%, in the second quarter 2002 and increased by $1.1 million, or
14.4%, year-to-date 2002. The increases in earnings for both periods were
primarily due to higher operating revenues and lower interest charges offset
somewhat by higher operating expenses.
Significant income statement items appropriate for discussion include the
following:
Increase (Decrease)
---------------------------------------------------------------
Second Quarter Year-To-Date
---------------------------------------------------------------
(in thousands) % (in thousands) %
Retail sales $ 3,577 5.1 $ 105 0.1
Sales for resale - non-affiliates 81 4.0 (544) (15.2)
Sale for resale - affiliates 613 94.2 284 15.1
Fuel expense 1,029 7.8 563 2.5
Purchased power - non-affiliates (3,689) (64.1) (4,948) (61.2)
Purchased power - affiliates 4,439 34.3 818 2.8
Maintenance expense 2,498 50.5 1,775 16.1
Interest expense, net (559) (17.1) (1,066) (16.3)
---------------------------------------------------------------
Retail sales. Excluding fuel revenues which do not affect net income,
retail sales revenue increased by $3.4 million, or 8.2%, for the second quarter
2002 and by $4.9 million, or 6.5%, for year-to-date 2002 when compared to the
corresponding periods in 2001 mainly due to increased usage reflecting hotter
weather and to an increase in the number of customers served. For the second
quarter 2002, energy sales to residential and commercial customers increased by
7.9% and 7.7%, respectively, while sales to industrial customers decreased by
1.5%. For year-to-date 2002, energy sales to residential and commercial
customers increased by 1.7% and 6.5%, respectively, while sales to industrial
customers decreased by 5.7%. Industrial sales continue to be negatively affected
by the sluggish economy.
Sales for resale - non-affiliates. While sales for resale to non-affiliates
did not change significantly during the second quarter 2002, there was a
decrease year-to-date 2002 when compared to the corresponding period in 2001 as
a result of lower demand from these customers outside SAVANNAH's service area.
These transactions do not have a significant impact on earnings since the energy
is usually sold at variable cost.
Sales for resale - affiliates. Revenues from sales for resale to affiliated
companies within the SOUTHERN system will vary depending on demand and the
availability and cost of generating resources at each company. These
transactions do not have a significant impact on earnings.
73
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Fuel expense. Fuel expense increased in the second quarter 2002 and
year-to-date 2002 compared to the same periods in 2001 primarily due to
increased coal prices.
Purchased power - affiliates. Purchases of energy within the SOUTHERN
system will vary depending on demand and cost of generation resources at each
company. Effective June 2002, SAVANNAH began purchasing energy and capacity from
Southern Power's Plant Wansley Units No. 6 and No. 7 under a 7 1/2 year power
purchase agreement.
Purchased power - non-affiliates. During the second quarter 2002 and
year-to-date 2002, these purchases were lower when compared to the same periods
in 2001 primarily due to reduced demand for energy from non-affiliates. These
transactions do not have a significant impact on net income since energy
expenses are generally offset by energy revenues through SAVANNAH's fuel cost
recovery clause.
Maintenance expense. The increases in this item for the second quarter 2002
and year-to-date 2002 compared to the corresponding periods in 2001 are
primarily attributed to scheduled maintenance outages at one of SAVANNAH's steam
plants and expenses for major maintenance on the combustion turbines at Plant
McIntosh.
Interest expense, net. This expense decreased in each reporting period as a
result of a lower amount of debt outstanding and lower interest rates.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of
future earnings potential. The level of future earnings depends on numerous
factors including regulatory matters and the effect of weather and the economy
on energy sales. For information regarding the results of a recent rate filing,
reference is made to Note (M) in the "Notes to the Condensed Financial
Statements" herein for additional information.
With the enactment of the Energy Act and new legislation being discussed at
federal and state levels to expand customer choice, SAVANNAH is positioning the
business to meet the challenge of increasing competition. For additional
information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form
10-K.
Compliance costs related to the Clean Air Act and other environmental
issues could affect earnings if such costs cannot be recovered. For additional
information about the Clean Air Act and other environmental issues, including
the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Environmental Matters" and Note 3 to the financial statements of SAVANNAH in
the Form 10-K.
On April 25, 2002, the Stakeholder Advisory Committee met and selected the
candidates that will be considered for the SeTrans ISA. On June 27, 2002,
SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order
seeking the FERC's guidance on various issues. The petition asks for a response
from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain
Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND
ANALYSIS - "Industry Restructuring" of SAVANNAH in the Form 10-K for additional
information.
74
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled
"Remedying Undue Discrimination Through Open Access Transmission Service and
Standard Electricity Market Design." The FERC has indicated that the proposal,
if adopted, would (among other things): (i) require transmission assets of
jurisdictional utilities to be operated by an independent entity; (ii) establish
a standard market design; (iii) establish a single type of transmission service
that applies to all customers; (iv) assert jurisdiction over the transmission
component of bundled retail service; (v) establish a generation reserve margin;
(vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise
the FERC policy on the pricing of transmission expansions. Comments on the
proposal are due 75 days after its issuance. Any impact of this proposal on
SOUTHERN and its subsidiaries will depend on the form in which final rules may
be ultimately adopted.
Reference is made to Notes (C) through (E) and (M) in the "Notes to the
Condensed Financial Statements" herein for discussion of various contingencies
and other matters which may affect future earnings potential. Reference is also
made to Part II - Item 1 - "Legal Proceedings" herein. Reference is also made to
Note (E) in the "Notes to the Condensed Financial Statements" for information
relating to certain lawsuits regarding the installation of fiber optic cable
over SAVANNAH's existing easements.
Accounting Policies
Critical Policy
SAVANNAH's significant accounting policies are described in Note 1 to the
financial statements of SAVANNAH in Item 8 of the Form 10-K. SAVANNAH's only
critical accounting policy involves rate regulation. SAVANNAH is subject to the
provisions of FASB Statement No. 71, "Accounting for the Effects of Certain
Types of Regulation." In the event that a portion of SAVANNAH's operations is no
longer subject to these provisions, SAVANNAH would be required to write off
related regulatory assets and liabilities that are not specifically recoverable
and determine if any other assets, including plant, have been impaired.
New Accounting Standards
Effective January 1, 2001, SAVANNAH adopted FASB Statement No. 133, "Accounting
for Derivatives and Hedging Activities," as amended, and changed the method of
accounting for derivative instruments. Derivatives are now reflected on the
Condensed Balance Sheet as either an asset or liability measured at fair market
value, and the changes in the fair value are currently recognized in earnings
unless specific hedge accounting criteria are met. Reference is made to
"Exposure to Market Risks" below for information relating to derivative
instruments.
In June 2001, the FASB issued Statement No. 143, "Asset Retirement
Obligations," which establishes new accounting and reporting standards for legal
obligations associated with retiring assets. The liability for an asset's future
retirement must be recorded in the period in which the liability is incurred.
The cost must be capitalized as part of the related long-lived asset and
depreciated over the asset's useful life. Changes in the liability resulting
from the passage of time will be recognized as operating expenses. Statement No.
143 must be adopted by January 1, 2003. SAVANNAH is currently assessing the
impact of adopting Statement No. 143 on its financial statements.
75
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Overview
Major changes in SAVANNAH's financial condition during the first six months of
2002 included the addition of approximately $20.4 million to utility plant. The
funds for these additions and other capital requirements were derived primarily
from operations. See SAVANNAH's Condensed Statements of Cash Flows for further
details.
Credit Rating Risk
SAVANNAH does not have any credit agreements that would require material changes
in payment schedules or terminations as a result of a credit rating downgrade.
Exposure to Market Risks
SAVANNAH's market risk exposures relative to interest rate changes have not
changed materially compared with the previous reporting period, December 31,
2001. In addition, SAVANNAH is not aware of any facts or circumstances that
would significantly affect such exposures in the near term.
Due to cost-based rate regulations, SAVANNAH has limited exposure to market
volatility in interest rates, commodity fuel prices and prices of electricity.
To mitigate residual risks relative to movements in electricity prices, SAVANNAH
enters into fixed price contracts for the purchase and sale of electricity
through the wholesale electricity market and, to a lesser extent, similar
contracts for gas purchases. SAVANNAH has also implemented a retail fuel hedging
program at the instruction of its PSC. The fair value of derivative energy
contracts at June 30, 2002 is as follows:
Second Quarter
2002 Year-to-Date
Changes Changes
----------------------------------------------------------------------------
Fair Value
---------------------------------------------------------------------------
(in thousands)
Contracts beginning of period $ 6 $(1,053)
Contracts realized or settled (43) (36)
New contracts at inception - -
Changes in valuation techniques - -
Current period changes (10) 1,042
-------------------------------------------------------------------------
Contracts at June 30, 2002 $(47) $ (47)
========================================================================
76
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Source of June 30, 2002
Valuation Prices
--------------------------------------------------------------------------
Maturity
Total -------------------------------
Fair Value Year 1 1-3 Years
--------------------------------------------------------------------------
(in thousands)
Actively quoted $(47) $(245) $198
External sources - - -
Models and other methods - - -
---------------------------------------------------------------------------
Contracts at June 30, 2002 $(47) $(245) $198
==========================================================================
Unrealized gains and losses from mark to market adjustments on contracts
related to the retail fuel hedging programs are recorded as regulatory assets
and liabilities. At June 30, 2002, SAVANNAH had approximately $47 thousand in
regulatory assets related to unrealized losses on mark to market derivative
contracts associated with its fuel hedging programs. Realized gains and losses
from these programs are included in fuel expense and are recovered through
SAVANNAH's fuel cost recovery clause. Gains and losses on contracts that do not
represent hedges are recognized in the Statements of Income as incurred. For the
quarter and year-to-date periods ended June 30, 2002 and 2001, these amounts
were not material.
For additional information, reference is made to Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of SAVANNAH in the Form
10-K and Note 1 to the financial statements of SAVANNAH in Item 8 of the Form
10-K.
Financing Activities
SAVANNAH plans to continue, to the extent possible, a program to retire
higher-cost debt and replace these securities with lower-cost capital.
Capital Requirements
Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of SAVANNAH
under "Capital Requirements for Construction," "Other Capital Requirements" and
"Environmental Matters" in the Form 10-K for a description of SAVANNAH's capital
requirements for its construction program, maturing debt and environmental
compliance efforts.
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
77
SAVANNAH ELECTRIC AND POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
earnings,regulatory approval, prevailing market conditions and other factors.
See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional
information.
To meet short-term cash needs and contingencies, SAVANNAH had at June 30,
2002 approximately $1.6 million of cash and cash equivalents and $65.5 million
of committed credit arrangements with banks, of which $25.5 million expire in
2002, $30 million expire in 2003 and $10 million expire in 2005. The credit
arrangements provide liquidity support to SAVANNAH's obligations with respect to
variable rate pollution control bonds and commercial paper. SAVANNAH may also
meet short-term cash needs through a SOUTHERN subsidiary organized to issue and
sell commercial paper and extendible commercial notes at the request and for the
benefit of SAVANNAH and other SOUTHERN subsidiaries. At June 30, 2002, SAVANNAH
had outstanding $36.5 million of notes payable. 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.
78
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, N, O
ALABAMA A, C, D, E, G, N
GEORGIA A, C, D, E, H, I
GULF A, C, D, E, J
MISSISSIPPI A, C, D, E, K, L
SAVANNAH A, C, D, E, M
79
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SAVANNAH ELECTRIC AND POWER COMPANY
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(A) The condensed financial statements of the registrants included herein
have been prepared by each registrant, without audit, pursuant to the
rules and regulations of the SEC. In the opinion of each registrant's
management, the information regarding such registrant furnished herein
reflects all adjustments necessary to present fairly the results of
operations for the periods ended June 30, 2002 and 2001. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant
to such rules and regulations, although each registrant believes that
the disclosures regarding such registrant are adequate to make the
information presented not misleading. Disclosure which would
substantially duplicate the disclosure in the Form 10-K and details
which have not changed significally in amount or composition since the
filing of the Form 10-K are omitted from this Form 10-Q. Therefore,
it is suggested that these condensed financial statements of each
registrant be read in conjunction with the financial statements of such
registrant and the notes thereto included in the Form 10-K. Certain
prior period amounts have been reclassified to conform with current
period presentation. Due to seasonal variations in the demand for
energy, operating results for the periods presented do not necessarily
indicate operating results for the entire year.
(B) Reference is made to Note 11 to the financial statements of SOUTHERN in
Item 8 and MANAGEMENT'S DISCUSSION AND ANALYSIS - "Overview of
Consolidated Earnings and Dividends" of SOUTHERN in Item 7 of the Form
10-K for information on the spin off of Mirant from SOUTHERN.
On April 2, 2001, SOUTHERN completed the spin off of Mirant with a tax
free distribution to SOUTHERN's shareholders of its remaining ownership
of 272 million Mirant shares. Shares from the spin off were distributed
at a ratio of approximately 0.4 share of Mirant common stock for every
share of SOUTHERN common stock held at the record date. The
distribution resulted in charges of approximately $3.2 billion and $0.4
billion to SOUTHERN's paid-in capital and retained earnings,
respectively. The distribution was treated as a non-cash transaction
for purposes of the cash flow.
As a result of the spin off, SOUTHERN's financial statements reflect
Mirant as discontinued operations. All historical financial statements
presented and footnotes have been reclassified to conform to this
presentation.
Mirant recently announced that it is reviewing several accounting
issues pertaining to its 2001 financial statements. These issues
include potential overstatements of $85 million of gas inventory, $100
million of accounts payable and $68 million of accounts receivable.
Mirant also has announced that the SEC has initiated a related informal
inquiry. If any issues require adjustments to Mirant's financial
statements and relate to periods prior to April 2, 2001, SOUTHERN's
earnings from discontinued operations and net assets of discontinued
operations for such periods would be affected. Mirant's internal
investigation and the SEC's inquiry into these issues have not yet been
completed and the ultimate outcome cannot now be determined.
80
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(C) The operating companies are subject to the provisions of FASB Statement
No. 71, "Accounting for the Effects of Certain Types of Regulation." In
the event that a portion of a company's operations is no longer subject
to these provisions, the company would be required to write off related
regulatory assets and liabilities that are not specifically recoverable
and determine if any other assets have been impaired. For additional
information, see Note 1 to the financial statements of each registrant
in Item 8 of the Form 10-K.
(D) Reference is made to Note 3 to the financial statements of SOUTHERN,
ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH in Item 8 of the Form
10-K for information on EPA litigation. On July 30, 2002, the U. S.
District Court in Alabama extended the stay of the proceeding in
Alabama through late October 2002.
(E) Reference is made to Note 3 to the financial statements of each
registrant in Item 8 and to Legal Proceedings in Item 3 of the Form
10-K for information relating to various lawsuits.
In recent months, affiliates of SOUTHERN, including GEORGIA, GULF,
MISSISSIPPI, SAVANNAH and Southern Telecom, Inc. (collectively,
"Defendants"), have been named as defendants in numerous lawsuits
brought by landowners regarding the installation and use of fiber optic
cable over Defendants' rights of way located on the landowners'
property. The plaintiffs' lawsuits claim that Defendants may not use or
sublease to third parties some or all of the fiber optic communications
lines on the rights of way that cross the plaintiffs' properties, and
that such actions by Defendants exceed the easements or other property
rights held by Defendants. The plaintiffs assert claims for, among
other things, trespass and unjust enrichment, and the plaintiffs seek
compensatory and punitive damages and injunctive relief. Defendants
believe that the plaintiffs' claims are without merit and are
vigorously defending these cases. An adverse outcome in these matters
could result in substantial judgments; however, at this time, the
ultimate outcome of these cases cannot be determined.
(F) SOUTHERN has made separate guarantees to certain counterparties
regarding performance of contractual commitments by Mirant's trading
and marketing subsidiaries. At June 30, 2002, the total notional amount
of guarantees was $52.0 million, all of which will expire by 2007. The
estimated fair value of net contractual commitments outstanding was
approximately $22.8 million. SOUTHERN's potential exposure under these
contractual commitments is not expected to materially differ from the
estimated fair value. Subsequent to the spin off, Mirant began paying
SOUTHERN a monthly fee of 1% on the average aggregate maximum principal
amount of all guarantees outstanding until they are replaced or expire.
Mirant must use reasonable efforts to release SOUTHERN from all such
support arrangements and will indemnify SOUTHERN for any obligations
incurred.
Reference is made to Note 9 to the financial statements of SOUTHERN
under the caption "Guarantees" in Item 8 of the Form 10-K.
(G) Reference is made to Item 1 - Business - "Rate Proceedings" and 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. On March 5, 2002, the Alabama PSC approved a revision to
ALABAMA's rates that provide for periodic adjustments based upon
ALABAMA's earned return on end-of-period retail common equity. This
revision provides for an annual, rather than quarterly, adjustment and
imposes a 3 percent limit on any such annual adjustment. The return on
common equity range of 13.0 to 14.5 percent remains unchanged. In April
2002, retail rates were increased by 2 percent in accordance with the
Rate Stabilization and Equalization Plan. The Alabama PSC also accepted
81
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
ALABAMA's proposal to lower the energy cost recovery factor for the
billing months April 2002 through December 2002.
(H) On December 20, 2001, the Georgia PSC approved a new three-year retail
rate order for GEORGIA ending December 31, 2004. Under the terms of the
order, earnings will be evaluated annually against a retail return on
common equity range of 10 percent to 12.95 percent. Two-thirds of any
earnings above the 12.95 percent return will be applied to rate
refunds, with the remaining one-third retained by GEORGIA. Retail rates
were decreased by $118 million effective January 1, 2002. Pursuant to a
previous three-year accounting order, GEORGIA recorded $332 million of
accelerated cost amortization and interest thereon which has been
credited to a regulatory liability account as mandated by the Georgia
PSC. Under the new rate order, the accelerated amortization and the
interest will be amortized equally over three years as a credit to
expense beginning in January 2002. Effective January 1, 2002, GEORGIA
discontinued recording accelerated depreciation and amortization.
GEORGIA will not file for a general base rate increase unless its
projected retail return on common equity falls below 10 percent.
GEORGIA is required to file a general rate case on July 1, 2004, in
response to which the Georgia PSC would be expected to determine
whether the rate order should be continued, modified or discontinued.
See Note 3 to the financial statements of GEORGIA in Item 8 of the
Form 10-K under "Retail Rate Orders" for additional information.
(I) 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.
(J) On September 10, 2001, GULF filed a request with the Florida PSC for a
base rate increase of $69.9 million. This increase is necessary to
cover costs related to GULF's new combined cycle facility, Smith Unit
3, increases in operation and maintenance expenses and capital
additions. In its brief filed with the Florida PSC, GULF reduced its
request to $64.9 million, primarily to reflect lower financing costs
related to Smith Unit 3 and a 25-year depreciable life for Smith Unit 3
(rather than the 20-year life as originally filed). On April 26, 2002,
the Florida PSC voted to grant GULF a $53.2 million, or 8.9 percent,
annual increase, which reflects an authorized return on equity of 12.00
percent. The new rates resulting from the revenue increase were
approved by the Florida PSC on May 8, 2002 and became effective on June
7, 2002.
(K) In August 2001, MISSISSIPPI filed a request with the Mississippi PSC
to increase annual retail rate revenues by approximately $46.4 million.
In order to consider MISSISSIPPI's request, the Mississippi PSC
suspended the semi-annual evaluations under PEP. In December 2001, the
Mississippi PSC approved an increase of approximately $39 million,
which took effect in January 2002. Additionally, the Mississippi PSC
ordered MISSISSIPPI to reactivate the semi-annual evaluations under
PEP, beginning with the 12-month period ending December 31, 2002. PEP
will remain in effect until the Mississippi PSC modifies, suspends or
terminates the plan. On April 30, 2002, the Mississippi PSC held and
concluded hearings on a review of the return on equity models used in
PEP in setting MISSISSIPPI's authorized return on equity. In May 2002,
the Mississippi PSC issued an order adopting new return on equity
models to be used in the PEP process. The new models are very similar
to those that established the $39 million rate increase authorized in
December 2001 and will be incorporated into the PEP evaluation filing
for the period ending December 31, 2002.
82
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(L) Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS -
"Future Earnings Potential" of MISSISSIPPI in the Form 10-K regarding
the settlement agreement between MISSISSIPPI and certain wholesale
customers to increase its wholesale tariff rates effective June 1,
2002. In March 2002, that agreement was filed with the FERC for
approval. On April 19, 2002, the FERC accepted for filing the
settlement agreement and placed the new tariff rates in effect June 1,
2002 without modifying the agreement reached between MISSISSIPPI and
its customers. The settlement agreement results in an annual increase
of approximately $10.5 million and the adoption of an Energy Cost
Management clause similar to the one approved by MISSISSIPPI's retail
jurisdiction. Reference is made to Note 1 to the financial statements
of MISSISSIPPI in Item 8 of the Form 10-K for further information on
the Energy Cost Management clause. MISSISSIPPI's order from the FERC
constitutes final agency action on this matter.
(M) SAVANNAH filed a base rate case on November 30, 2001. The primary
reason for this base rate case was to recover significant new revenue
requirements related to a 200 MW Plant Wansley Power Purchase Agreement
which began in June 2002, as well as other operation and maintenance
changes. The requested increase was $24.4 million or 7.6 percent of
total revenues. SAVANNAH also filed for a simultaneous fuel cost
recovery decrease to offset most, if not all, of the base rate
increase. On May 30, 2002, the Georgia PSC approved a $7.8 million
base rate increase and an authorized return on equity of 12.0 percent
rather than the $24.4 million and 13.5 percent return on equity which
were requested. At the same time, the Georgia PSC also approved a
$44.3 million fuel cost allowance reduction. SAVANNAH had requested a
$41.3 million fuel cost reduction. All customers saw a net rate
decrease effective June 2002. On June 10, 2002, SAVANNAH filed for
reconsideration of the Georgia PSC base rate case order, seeking
additional revenues. On August 6, 2002, the Georgia PSC voted to deny
SAVANNAH's request for reconsideration in this matter. SAVANNAH is
currently evaluating its options as a result of this decision.
(N) In addition to the fixed price electric and gas contracts used to
mitigate exposure to volatile energy prices (see "Exposure to Market
Risks" in MANAGEMENT'S DISCUSSION AND ANALYSIS), SOUTHERN and certain
of its subsidiaries enter into interest rate swaps to hedge exposure to
interest rate changes. Swaps related to fixed rate securities are
accounted for as fair value hedges; swaps related to variable rate
securities or forecasted transactions are accounted for as cash flow
hedges. The swaps are generally structured to mirror the terms of the
hedged debt instruments; therefore, no ineffectiveness has been
recorded in earnings. As of June 30, 2002, the following swaps were
outstanding:
Fair Value Hedges
-----------------------------------------------------------------------------------------------------------------
Notional Fixed Rate Variable Maturity Fair Value
Amount Received Rate Paid Date June 30, 2002
-----------------------------------------------------------------------------------------------------------------
SOUTHERN $400 million 5.3% 6-month LIBOR February 2007 $13,387,000
less 0.103%
83
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Cash Flow Hedges
----------------------------------------------------------------------------------------------------------------------
Weighted
Average Fair Value
Notional Variable Rate Fixed Rate Maturity June 30, 2002 (Included
Amount Received Paid Date in OCI)
----------------------------------------------------------------------------------------------------------------------
SOUTHERN $400 million; 1-month LIBOR June 2003; $(2,016,000)
$200 million 3.1975% June 2004
ALABAMA $350 million 3-month LIBOR 3.015% December 2003 $ (826,000)
plus 0.12%
Southern Power $350 million 1-month LIBOR 6.2348% June 2013 $(9,755,000)
Southern Power $100 million 1-month LIBOR 6.1863% June 2008 $(3,557,000)
For the quarter and year-to-date periods ended June 30, 2002,
approximately $0.1 million was reclassified from other comprehensive
income to interest expense. For the 12-month period ended June 2003,
approximately $1.7 million is expected to be reclassified.
(O) SOUTHERN's reportable business segment is sale of electricity in the
Southeast by the operating companies and Southern Power. Net income and
total assets for discontinued operations are included in the
Reconciling Eliminations columns. The All Other category includes
parent SOUTHERN, which does not allocate operating expenses to business
segments, and segments below the quantitative threshold for separate
disclosure. These segments include telecommunications, energy products
and services, and leasing and financing services. Intersegment revenues
are not material. Financial data for business segments for the periods
covered in the Form 10-Q are as follows:
Electric All Reconciling
Utilities Other Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------
(in millions)
Three Months Ended June 30, 2002:
Operating revenues $ 2,564 $ 73 $ (7) $ 2,630
Segment net income (loss) 341 (11) 2 332
Six Months Ended June 30, 2002
Operating revenues $ 4,704 $ 150 $ (10) $ 4,844
Segment net income (loss) 573 (19) 2 556
Total assets at June 30, 2002 $30,147 $ 874 $289 $31,310
---------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2001:
Operating revenues $ 2,503 $ 65 $ (7) $ 2,561
Segment net income (loss) 276 1 (5) 272
Six Months Ended June 30, 2001
Operating revenue $ 4,724 $ 117 $ (10) $ 4,831
Segment net income (loss) 475 (24) 141 592
Total assets at December 31, 2001 $28,724 $2,420 $(1,236) $29,908
---------------------------------------------------------------------------------------------------------------
84
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the Notes to the Condensed Financial
Statements herein for information regarding certain legal and
administrative proceedings in which SOUTHERN and its reporting
subsidiaries are involved.
Item 4. Submission of Matters to a Vote of Security Holders.
SOUTHERN
SOUTHERN held its annual meeting of shareholders on May 22,
2002. Each nominee for director of SOUTHERN received the
requisite plurality of votes for election. The vote tabulation
was as follows:
Nominees Shares For Shares Withhold Vote
Daniel P. Amos 481,196,602 7,727,880
Dorrit J. Bern 478,611,773 10,312,709
Thomas F. Chapman 480,932,152 7,992,330
Allen Franklin 480,176,304 7,748,178
Bruce S. Gordon 481,056,715 7,867,767
L. G. Hardman III 478,709,123 10,215,359
Donald M. James 481,213,365 7,711,117
Zack T. Pate 478,861,711 10,062,771
Gerald J. St. Pe 478,672,567 10,251,915
In addition, at the annual meeting, shareholders were entitled
to vote on a stockholder recommendation that SOUTHERN invest
in renewable energy sources. The vote tabulation was
35,651,610 shares for 350,728,358 shares against and
17,806,735 shares abstaining. As a result of this vote, the
stockholder proposal was rejected.
85
Item 4. Submission of Matters to a Vote of Security Holders.
(Continued)
ALABAMA
ALABAMA held its annual meeting of common shareholders and
preferred shareholders on April 26, 2002, and the following
persons were elected to serve as directors of ALABAMA:
Whit Armstrong Charles D. McCrary
David J. Cooper, Sr. Mayer Mitchell
Allen Franklin Robert D. Powers
R. Kent Henslee Andreas Renschler
Carl E. Jones, Jr. C. Dowd Ritter
Patricia M. King James H. Sanford
James K. Lowder John Cox Webb, IV
Wallace D. Malone, Jr. James W. Wright
All 6,000,000 of the then outstanding shares of ALABAMA's
common stock are owned by SOUTHERN and were voted in favor of
the nominees for directors. None of the shares of preferred
stock or Class A preferred stock were voted.
GEORGIA
GEORGIA held its annual meeting of common shareholders and
preferred shareholders on May 15, 2002, and the following
persons were elected to serve as directors of GEORGIA:
Juanita P. Baranco G. Joseph Prendergast
Anna R. Cablik David M. Ratcliffe
William A. Fickling, Jr. Richard W. Ussery
Allen Franklin William Jerry Vereen
L. G. Hardman III Carl Ware
James R. Lientz, Jr. E. Jenner Wood, III
All of the 7,761,500 outstanding shares of GEORGIA's common
stock are owned by SOUTHERN and were voted in favor of the
nominees for directors. None of the shares of preferred stock
were voted.
GULF
GULF held its annual meeting of common shareholders and
preferred shareholders on May 15, 2002, and the following
persons were elected to serve as directors of GULF:
C. LeDon Anchors Allen Franklin
Travis J. Bowden William A. Pullum
Fred C. Donovan, Sr. Joseph K. Tannehill
All of the 992,717 outstanding shares of GULF's common stock
are owned by SOUTHERN and were voted in favor of the nominees
for directors. None of the shares of preferred stock were
voted.
86
Item 4. Submission of Matters to a Vote of Security Holders.
(Continued)
MISSISSIPPI
MISSISSIPPI held its annual meeting of common shareholders and
preferred shareholders on May 15, 2002, and the following
persons were elected to serve as directors of MISSISSIPPI:
Tommy E. Dulaney George A. Schloegel
Michael D. Garrett Philip J. Terrell
Linda T. Howard N. Eugene Warr
Aubrey K. Lucas
All of the 1,121,000 outstanding shares of MISSISSIPPI's
common stock are owned by SOUTHERN and were voted in favor of
the nominees for directors. None of the shares of preferred
stock were voted.
SAVANNAH
By written consent, in lieu of the annual meeting of
stockholders of SAVANNAH, effective May 2, 2002, the following
persons were elected to serve as directors of SAVANNAH:
Gus H. Bell, III Anthony R. James
Archie H. Davis Robert B. Miller, III
Walter D. Gnann Arnold M. Tenenbaum
All of the 10,844,635 outstanding shares of SOUTHERN's common
stock are owned by SOUTHERN and were voted in favor of the
nominees for directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
--------
Exhibit 24 - (a) Powers of Attorney and resolutions.
(Designated in the Form 10-K for the
year ended December 31, 2001, 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.)
(b) Power of Attorney for GEORGIA.
(c) Power of Attorney for GULF.
(b) Reports on Form 8-K.
-------------------
SOUTHERN filed a Current Report on Form 8-K dated
July 24, 2002:
Items reported: Items 5 and 7
Financial statements filed: None
ALABAMA filed a Current Report on Form 8-K dated
June 21, 2002:
Items reported: Items 5 and 7
Financial statements filed None
GEORGIA filed Current Reports on Form 8-K dated
June 13, 2002 and June 27, 2002:
Items reported: Items 5 and 7
Financial statements filed: None
87
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
THE SOUTHERN COMPANY
By Allen Franklin
Chairman and Chief Executive Officer
(Principal Executive Officer)
By Gale E. Klappa
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 2002
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
ALABAMA POWER COMPANY
By Charles D. McCrary
President and Chief Executive Officer
(Principal Executive Officer)
By William B. Hutchins, III
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 2002
88
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
GEORGIA POWER COMPANY
By David M. Ratcliffe
President and Chief Executive Officer
(Principal Executive Officer)
By Allen L. Leverett
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 2002
- -------------------------------------------------------------------------------
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 Thomas A. Fanning
President and Chief Executive Officer
(Principal Executive Officer)
By Ronnie Labrato
Vice President, Chief Financial Officer and Comptroller
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 2002
89
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
MISSISSIPPI POWER COMPANY
By Michael D. Garrett
President and Chief Executive Officer
(Principal Executive Officer)
By Michael W. Southern
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 2002
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature of the undersigned company
shall be deemed to relate only to matters having reference to such company and
any subsidiaries thereof.
SAVANNAH ELECTRIC AND POWER COMPANY
By Anthony R. James
President and Chief Executive Officer
(Principal Executive Officer)
By Kirby R. Willis
Vice President, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ Wayne Boston
(Wayne Boston, Attorney-in-fact)
Date: August 12, 2002
90