=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2001 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 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 ==================================== ==========================================
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No____ Description of Shares Outstanding Registrant Common Stock at October 31, 2001 The Southern Company Par Value $5 Per Share 695,131,435 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 September 30, 2001 <TABLE> <CAPTION> Page Number <S> <C> 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..................................................................... 20 Condensed Statements of Cash Flows................................................................. 21 Condensed Balance Sheets........................................................................... 22 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 24 Georgia Power Company Condensed Statements of Income..................................................................... 30 Condensed Statements of Cash Flows................................................................. 31 Condensed Balance Sheets........................................................................... 32 Condensed Statements of Comprehensive Income and Accumulated Other Comprehensive Income..................................................................... 34 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 35 Gulf Power Company Condensed Statements of Income..................................................................... 41 Condensed Statements of Cash Flows................................................................. 42 Condensed Balance Sheets........................................................................... 43 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 45 Mississippi Power Company Condensed Statements of Income..................................................................... 51 Condensed Statements of Cash Flows................................................................. 52 Condensed Balance Sheets........................................................................... 53 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 55 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 61 Condensed Statements of Cash Flows................................................................. 62 Condensed Balance Sheets........................................................................... 63 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 65 Notes to the Condensed Financial Statements........................................................... 69 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 75 Item 2. Changes in Securities and Use of Proceeds................................................................. Inapplicable Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders....................................................... Inapplicable Item 5. Other Information......................................................................................... Inapplicable Item 6. Exhibits and Reports on Form 8-K.......................................................................... 75 Signatures ............................................................................................... 76 </TABLE> 3
<TABLE> <CAPTION> DEFINITIONS TERM MEANING <S> <C> 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, 2000 GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company integrated Southeast utilities.............. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH Mirant...................................... Mirant Corporation (formerly Southern Energy, Inc.) MISSISSIPPI................................. Mississippi Power Company Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission RTO......................................... Regional Transmission Organization SAVANNAH.................................... Savannah Electric and Power Company SCS......................................... Southern Company Services, Inc. SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company SOUTHERN system............................. SOUTHERN, the integrated Southeast utilities and other subsidiaries TVA......................................... Tennessee Valley Authority </TABLE> 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," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which SOUTHERN and its subsidiaries are subject, as well as changes in application of existing laws and regulations; current and future litigation, including the EPA civil action against certain subsidiaries of SOUTHERN and the diversity litigation against certain subsidiaries of SOUTHERN; the effects, extent and timing 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 regulation in the United States; political and legal 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 or 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
<TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ------------- ---------------- -------------------- ----------------- (in thousands) (in thousands) Operating Revenues: <S> <C> <C> <C> <C> Retail sales $2,611,359 $2,732,295 $6,639,693 $6,703,288 Sales for resale 382,612 325,136 929,652 732,253 Other revenues 170,490 139,944 426,438 336,179 ------------- ---------------- -------------------- ----------------- Total operating revenues 3,164,461 3,197,375 7,995,783 7,771,720 ------------- ---------------- -------------------- ----------------- Operating Expenses: Operation -- Fuel 751,297 778,508 2,013,684 1,946,961 Purchased power 337,549 321,142 648,906 551,976 Other operations 466,301 454,182 1,349,013 1,307,327 Maintenance 186,661 173,472 642,159 599,186 Depreciation and amortization 282,396 286,940 869,449 890,015 Taxes other than income taxes 142,372 144,341 414,585 411,357 ------------- ---------------- -------------------- ----------------- Total operating expenses 2,166,576 2,158,585 5,937,796 5,706,822 ------------- ---------------- -------------------- ----------------- Operating Income 997,885 1,038,790 2,057,987 2,064,898 Other Income: Interest income 5,607 12,518 17,653 33,276 Equity in losses of unconsolidated subsidiaries (18,491) (5,343) (37,227) (16,798) Other, net 33,871 10,085 62,589 36,958 ------------- ---------------- -------------------- ----------------- Earnings From Continuing Operations Before Interest and Income Taxes 1,018,872 1,056,050 2,101,002 2,118,334 ------------- ---------------- -------------------- ----------------- Interest and Other: Interest expense, net 133,517 169,799 424,055 492,032 Distributions on capital and preferred securities of subsidiaries 42,015 42,261 126,355 126,781 Preferred dividends of subsidiaries 4,550 4,801 13,969 14,259 ------------- ---------------- -------------------- ----------------- Total interest and other 180,082 216,861 564,379 633,072 ------------- ---------------- -------------------- ----------------- Earnings From Continuing Operations Before Income Taxes 838,790 839,189 1,536,623 1,485,262 Income taxes 284,412 315,889 533,115 555,461 ------------- ---------------- -------------------- ----------------- Earnings From Continuing Operations Before Cumulative Effect of Accounting Change 554,378 523,300 1,003,508 929,801 Cumulative effect of accounting change -- less income taxes of $477 - - 771 - ------------- ---------------- -------------------- ----------------- Earnings From Continuing Operations 554,378 523,300 1,004,279 929,801 Earnings from discontinued operations, net of income taxes of $0 and $85,365 for the three months and $92,713 and $55,947 for the nine months ended 2001 and 2000, respectively - 90,233 142,217 271,080 ------------- ---------------- -------------------- ----------------- Consolidated Net Income $554,378 $613,533 $1,146,496 $1,200,881 ============= ================ ==================== ================= Common Stock Data: Basic earnings per share of common stock -- Earnings per share from continuing operations $0.80 $0.81 $1.46 $1.43 Earnings per share from discontinued operations $0.00 $0.14 $0.21 $0.42 ------------- ---------------- -------------------- ----------------- Consolidated Basic Earnings Per Share $0.80 $0.95 $1.67 $1.85 ============= ================ ==================== ================= Diluted earnings per share of common stock -- Earnings per share from continuing operations $0.79 $0.81 $1.45 $1.43 Earnings per share from discontinued operations $0.00 $0.14 $0.21 $0.42 ------------ ---------------- -------------------- ----------------- Consolidated Diluted Earnings Per Share $0.79 $0.95 $1.66 $1.85 ============= ================ ==================== ================= Average number of basic shares of common stock outstanding (in thousands) 691,687 649,347 686,988 650,392 Average number of diluted shares of common stock outstanding (in thousands) 696,728 650,869 691,068 651,225 Cash dividends paid per share of common stock $0.335 $0.335 $1.005 $1.005 The accompanying notes as they relate to SOUTHERN are an integral part of these statements. </TABLE> 7
<TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 ----------------- ----------------- (in thousands) Operating Activities: <S> <C> <C> Consolidated net income $1,146,496 $1,200,881 Adjustments to reconcile consolidated net income to net cash provided from operating activities -- Less income from discontinued operations 142,217 271,080 Depreciation and amortization 991,014 1,017,874 Deferred income taxes and investment tax credits 5,248 84,523 Equity in losses of unconsolidated subsidiaries 37,227 16,798 Other, net (558,316) (169,884) Changes in certain current assets and liabilities -- Receivables, net (96,286) (363,846) Fossil fuel stock (132,012) 57,208 Materials and supplies (24,749) (6,233) Accounts payable (177,191) 2,793 Other 455,721 222,985 ----------------- ----------------- Net cash provided from operating activities of continuing operations 1,504,935 1,792,019 ----------------- ----------------- Investing Activities: Gross property additions (2,016,408) (1,533,883) Other (63,180) (109,239) ----------------- ----------------- Net cash used for investing activities of continuing operations (2,079,588) (1,643,122) ----------------- ----------------- Financing Activities: Increase (decrease) in notes payable, net 199,728 42,429 Proceeds -- Other long-term debt 1,469,012 742,610 Common stock 327,668 60,470 Redemptions -- First mortgage bonds (615,773) (211,009) Other long-term debt (295,242) (165,118) Preferred stock - (383) Common stock repurchased - (414,643) Payment of common stock dividends (689,123) (655,135) Other (20,037) (16,849) ----------------- ----------------- Net cash provided from (used for) financing activities of continuing operations 376,233 (617,628) ----------------- ----------------- Cash provided by discontinued operations 304,853 510,198 ----------------- ----------------- Net Increase in Cash and Cash Equivalents 106,433 41,467 Cash and Cash Equivalents at Beginning of Period 199,191 153,955 ----------------- ----------------- Cash and Cash Equivalents at End of Period $305,624 $195,422 ================= ================= Supplemental Cash Flow Information From Continuing Operations: Cash paid during the period for -- Interest (net of amount capitalized) $422,158 $564,846 Income taxes (net of refunds) $251,645 $290,564 The accompanying notes as they relate to SOUTHERN are an integral part of these statements. </TABLE> 8
<TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS At September 30, 2001 At December 31, Assets (Unaudited) 2000 ------------------- ------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 305,624 $ 199,191 Special deposits 34,677 5,895 Receivables, less accumulated provisions for uncollectible accounts of $22,952 at September 30, 2001 and $21,799 at December 31, 2000 1,439,469 1,311,457 Under recovered retail fuel clause revenue 381,485 418,077 Fossil fuel stock, at average cost 327,217 195,206 Materials and supplies, at average cost 532,174 507,425 Other 252,606 187,948 ------------------- ------------------- Total current assets 3,273,252 2,825,199 ------------------- ------------------- Property, Plant, and Equipment: In service 35,486,122 34,187,808 Less accumulated depreciation 14,828,004 14,348,763 ------------------- ------------------- 20,658,118 19,839,045 Nuclear fuel, at amortized cost 196,089 214,620 Construction work in progress 1,920,080 1,568,737 ------------------- ------------------- Total property, plant, and equipment 22,774,287 21,622,402 ------------------- ------------------- Other Property and Investments: Nuclear decommissioning trusts, at fair value 646,854 689,561 Net assets of discontinued operations - 3,320,497 Leveraged leases 640,567 595,952 Other 178,467 165,332 ------------------- ------------------- Total other property and investments 1,465,888 4,771,342 ------------------- ------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 938,741 956,673 Prepaid pension costs 593,541 498,279 Debt expense, being amortized 104,627 99,442 Premium on reacquired debt, being amortized 278,942 280,239 Other 369,433 308,082 ------------------- ------------------- Total deferred charges and other assets 2,285,284 2,142,715 ------------------- ------------------- Total Assets $29,798,711 $31,361,658 =================== =================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements. </TABLE> 9
<TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS At September 30, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 ------------------- ------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 528,956 $ 67,324 Notes payable 1,879,371 1,679,643 Accounts payable 662,586 870,032 Customer deposits 149,592 139,798 Taxes accrued -- Income taxes 438,258 87,731 Other 276,766 208,143 Interest accrued 175,748 120,770 Vacation pay accrued 119,894 118,710 Other 414,941 444,600 ------------------- ------------------- Total current liabilities 4,646,112 3,736,751 ------------------- ------------------- Long-term debt 7,940,585 7,842,491 ------------------- ------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 4,134,253 4,074,265 Deferred credits related to income taxes 513,362 551,259 Accumulated deferred investment tax credits 641,453 663,579 Employee benefits provisions 507,654 478,414 Prepaid capacity revenues 42,237 58,377 Other 786,579 651,805 ------------------- ------------------- Total deferred credits and other liabilities 6,625,538 6,477,699 ------------------- ------------------- Company or subsidiary obligated mandatorily redeemable capital and preferred securities 2,246,250 2,246,250 ------------------- ------------------- Cumulative preferred stock of subsidiaries 368,126 368,126 ------------------- ------------------- Common Stockholders' Equity: Common stock, par value $5 per share -- Authorized -- 1 billion shares Issued -- September 30, 2001: 700,622,308 shares; -- December 31, 2000: 700,622,308 shares 3,503,112 3,503,112 Paid-in capital 9,665 3,153,461 Treasury, at cost -- September 30, 2001: 6,398,506 shares; -- December 31, 2000: 19,464,122 shares (174,926) (544,515) Retained earnings 4,643,091 4,671,881 Accumulated other comprehensive income (8,842) (93,598) ------------------- ------------------- Total common stockholders' equity 7,972,100 10,690,341 ------------------- ------------------- Total Liabilities and Stockholders' Equity $29,798,711 $31,361,658 =================== =================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements. </TABLE> 10
<TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------------- -------------------------------- 2001 2000 2001 2000 ----------- -------------- ------------- -------------- (in thousands) (in thousands) <S> <C> <C> <C> <C> Consolidated net income $554,378 $613,533 $ 1,146,496 $1,200,881 Other comprehensive income - continuing operations: Cumulative effect of accounting change - - 466 - Current period changes in fair value (15,227) 202 (14,863) 202 Related income tax benefits 5,621 (78) 5,306 (78) ----------- -------------- ------------- -------------- Total other comprehensive income - Continuing operations (9,606) 124 (9,091) 124 ----------- -------------- ------------- -------------- Other comprehensive income - discontinued operations: Cumulative effect of accounting change, net of income tax - - (249,246) - Current period changes in fair value, net of income tax - - (103,962) - Current period reclassifications to net income, net of income tax - - 59,857 - Foreign currency translation adjustments and other, net of income tax - 3,741 (21,199) (14,844) ----------- -------------- ------------- -------------- Total other comprehensive income - discontinued operations - 3,741 (314,550) (14,844) ----------- -------------- ------------- -------------- CONSOLIDATED COMPREHENSIVE INCOME $544,772 $617,398 $ 822,855 $1,186,161 =========== ============== ============= ============== </TABLE> <TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME At September 30, At 2001 December 31, (Unaudited) 2000 ------------------- -------------- (in thousands) <S> <C> <C> Balance at beginning of period - continuing operations $ 249 $ - Change in current period - continuing operations (9,091) 249 ------------------- -------------- BALANCE AT END OF PERIOD - Continuing Operations (8,842) 249 ------------------- -------------- Balance at beginning of period - discontinued operations (93,847) (92,395) Change in current period - discontinued operations - (1,452) Impact of spin-off 93,847 - ------------------- -------------- BALANCE AT END OF PERIOD - Discontinued Operations - (93,847) ------------------- -------------- TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME ($ 8,842) ($93,598) =================== ============== The accompanying notes as they relate to SOUTHERN are an integral part of these statements. </TABLE> 11
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2001 vs. THIRD QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Effective April 2, 2001, SOUTHERN completed a spin off of its remaining ownership of 272 million Mirant shares to SOUTHERN's shareholders in a tax free distribution. Shares from the spin off were distributed at a rate of approximately 0.4 share of Mirant common stock for every share of SOUTHERN common stock held at the record date. As a result of the spin off, SOUTHERN's financial statements reflect Mirant as discontinued operations. SOUTHERN is now focusing on three main businesses in the Southeast: its traditional business, represented by its five integrated Southeast utilities 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 third quarter and year-to-date 2001 earnings from continuing operations were $554 million ($0.80 per share) and $1.0 billion ($1.46 per share), respectively, compared with $523 million ($0.81 per share) and $930 million ($1.43 per share) in the third quarter and year-to-date 2000. The third quarter and year-to-date 2001 increases in earnings are primarily due to continued customer growth, strong performance in SOUTHERN's competitive generation business and lower interest expense from declining short-term debt and reduced interest rates. <TABLE> <CAPTION> Significant income statement items appropriate for discussion include the following: Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % <S> <C> <C> <C> <C> Retail sales..................................... $(120,936) (4.4) $(63,595) (0.9) Sales for resale................................. 57,476 17.7 197,399 27.0 Other revenues................................... 30,546 21.8 90,259 26.8 Purchased power expense.......................... 16,405 5.1 96,928 17.6 Maintenance expense.............................. 13,189 7.6 42,973 7.2 Interest income.................................. (6,911) (55.2) (15,623) (46.9) Equity in losses of unconsolidated subsidiaries (13,148) (246.1) (20,429) (121.6) Other, net....................................... 23,786 235.9 25,631 69.4 Interest expense, net............................ (36,282) (21.4) (67,977) (13.8) </TABLE> 12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was down by $41 million, or 2.2%, in the third quarter of 2001 and $37 million, or 0.8%, year-to-date 2001 compared to the same periods in the prior year. Retail sales revenue in the third quarter and year-to-date 2001 decreased due primarily to lower energy sales that resulted from milder weather and the slowdown in manufacturing activities in SOUTHERN's service area when compared to the same periods in 2000. Retail energy sales were down by 3.5% and 2.1% for the third quarter and year-to-date 2001, respectively. The decrease in year-to-date 2001 retail sales revenue was partially offset by an increase in commercial revenues due to a 2.2% increase in commercial energy sales. Sales for resale. Increased demand for energy from outside of SOUTHERN's service territory led to increases in the third quarter and year-to-date 2001. Also reflected in these revenues are sales from Plant Dahlberg, which went into service in the second quarter of 2000, and Plant Daniel Units 3 and 4, which went into service in the second quarter of 2001. Other revenues. The third quarter 2001 increase in other revenues is primarily attributed to growth in project revenue at SOUTHERN's energy services subsidiary and revenues from services provided to an alternative fuel partnership under an agreement that began in April 2001. The year-to-date 2001 increase is attributed to several factors including revenues from energy services and alternative fuel services as mentioned above; and increased revenues from gas-fueled cogeneration steam facilities, transmission of electricity to others, distribution equipment rentals and outdoor lighting. However, cogeneration revenues generally have no material effect on net income since they are generally equal to related fuel expenses. Purchased power expense. During the third quarter and year-to-date 2001, purchased power expense increased primarily due to increased demand for energy by wholesale customers when compared to the same periods in 2000. Since energy expenses are usually offset by energy revenues, these expenses do not have a significant impact on earnings. Maintenance expense. During the third quarter and year-to-date 2001, these expenses increased when compared to the same periods in 2000 primarily due to scheduled work performed on power generating facilities and transmission and distribution facilities. Interest income. For the third quarter and year-to-date 2001, interest income decreased from the amounts recorded in the same periods in 2000 mainly due to decreases in the recognized gains on investments held by the nuclear decommissioning trusts, which were offset by a concurrent reduction of other interest charges in accordance with FERC requirements. Equity in losses of unconsolidated subsidiaries. The third quarter and year-to-date 2001 decreases in this item primarily relate to the investment by SOUTHERN in partnerships producing alternative fuel products. Other, net. These increases in the third quarter and year-to-date 2001 are mainly attributed to mark to market adjustments for derivative electric contracts as required by FASB Statement No. 133 and gains on property sales. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. 13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Interest expense, net. Interest on long-term debt and interest on notes payable decreased during the third quarter and year-to-date 2001 when compared to the corresponding periods in 2000. The factors contributing to these decreases include the redemption of first mortgage bonds and the repayment of other long-term debt in the first half of 2001 and declining short-term debt and lower interest rates on outstanding notes payable. 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 integrated Southeast utilities 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 - "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. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, SOUTHERN is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of SOUTHERN in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with a number of non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process and directed the parties to participate in the mediation for 45 days. The parties to the mediation failed to reach agreement on a single RTO for the Southeast. On November 7, 2001, the FERC suspended the December 15, 2001 deadline to form an RTO established in its order issued December 20, 1999. SOUTHERN continues to work with the other entities to develop an RTO. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SOUTHERN in the Form 10-K for information on EPA litigation. Reference is made to Notes (B) through (K), (N) and (Q) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. 14
THE 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 and its subsidiaries adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 are effective beginning in 2002 and are not expected to have a material impact on SOUTHERN's financial statements. Additionally 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 fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost 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 2003. SOUTHERN has not yet quantified the impact of adopting Statement No. 143 on its financial statements. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of Statement No. 144 are effective beginning in 2002 and are not expected to have a material impact on SOUTHERN's financial statements. 15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first nine months of 2001 included $2.0 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were from operations and other long-term debt. See SOUTHERN's Condensed Consolidated Statements of Cash Flows for further details. Financing Activities In February 2001, GEORGIA issued $350 million aggregate principal amount of senior notes consisting of $200 million of Series F 5.75% Senior Notes due January 31, 2003 and $150 million of Series G 6.20% Senior Notes due February 1, 2006. The proceeds of the sale were applied to redeem $200 million of GEORGIA's First Mortgage Bonds, 6 5/8% Series due April 2003 and to repay a portion of GEORGIA's outstanding short-term indebtedness. Also in February 2001, GEORGIA issued $100 million of Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011. The proceeds of this sale were used to repay an additional portion of GEORGIA's outstanding short-term indebtedness. In April 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due April 1, 2031. The proceeds of the sale were used to pay certain costs incurred in connection with the acquisition, construction, installation and equipping of certain local district heating facilities and sewage and solid waste facilities at ALABAMA's Theodore Cogeneration Plant. In May 2001, GEORGIA issued $150 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds of this sale were used in May 2001 to repurchase $47 million aggregate principal amount of GEORGIA's First Mortgage Bonds, 7.70% Series due May 1, 2025, $1.9 million aggregate principal amount of GEORGIA's First Mortgage Bonds, 6 7/8% Series due April 1, 2008 and $8.1 million aggregate principal amount of GEORGIA's First Mortgage Bonds, 6.07% Series due December 1, 2005 and to redeem in June 2001 $75 million outstanding principal amount of GEORGIA's First Mortgage Bonds, 6.35% Series due August 1, 2003. The remainder was used to repay a portion of GEORGIA's outstanding short-term indebtedness. Also in May 2001, SAVANNAH issued $65 million aggregate principal amount of senior notes consisting of $20 million of Series B 5.12% Senior Notes due May 15, 2003 and $45 million of Series C 6.55% Senior Notes due May 15, 2008. The proceeds of the sale were used to redeem in June 2001 the $20 million outstanding principal amount of SAVANNAH's First Mortgage Bonds, 6 3/8% Series due July 1, 2003 and to repay $30 million in bank loans and a portion of SAVANNAH's outstanding short-term indebtedness. In July 2001, GEORGIA sold, through public authorities, an aggregate principal amount of $58.845 million of pollution control revenue bonds due July 1, 2031. Also in July 2001, GEORGIA sold, through public authorities, $67 million of pollution control revenue bonds due July 1, 2016. The proceeds of these sales will be used to redeem various series of outstanding pollution control revenue bonds. In August 2001, ALABAMA issued $275 million of Series N 4.875% Senior Notes due September 1, 2004 and $167 million of Series O Floating Rate Senior Notes due March 3, 2003. The proceeds of these sales of senior notes were used to redeem the $131.5 million outstanding principal amount of its First Mortgage Bonds, 9% Series due December 1, 2024 and for other corporate purposes including the repayment of a portion of ALABAMA's short-term indebtedness. Also in August 2001, GULF issued $60 million of Series C 4.69% Senior Notes due August 1, 2003. The proceeds of the sale will be used to redeem $30 million outstanding principal amount of GULF's First Mortgage Bonds, 6 1/8% Series due July 1, 2003 and to repay a portion of GULF's short-term indebtedness. 16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In September 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due September 1, 2031. The proceeds from this sale were used to pay certain costs incurred in connection with the acquisition, construction, installation and equipping of certain solid waste disposal facilities at ALABAMA's James M. Barry Generating Plant. Also in September 2001, GEORGIA sold, through public authorities, $14.075 million of pollution control revenue bonds due September 1, 2018 and $28.065 million of pollution control revenue bonds due September 1, 2024. In October 2001, GEORGIA sold, through public authorities, $83.515 million of pollution control bonds due January 1, 2012 and $133.535 million of pollution control bonds due January 1, 2032. The proceeds of these issues were used to redeem various outstanding amounts of pollution control revenue bonds. Also in October 2001, GULF issued $75 million of Series D 6.10% Senior Notes due September 30, 2016. The proceeds of this sale will be used to prepay a portion of a $100 million bank loan. The market price of SOUTHERN's common stock at September 30, 2001 was $23.98 per share and the book value was $11.48 per share, representing a market-to-book ratio of 209%, compared to $33.25, $15.69 and 212%, respectively, at the end of 2000. The decreases in market price and book value per share reflect the impact of the Mirant spin off. The dividend for the third quarter of 2001 was $0.335 per share. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements," "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 $529 million will be required by September 30, 2002 for redemptions and maturities of long-term debt. Also, the integrated Southeast utilities 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 integrated Southeast utilities plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon 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 September 30, 2001 approximately $306 million of cash and cash equivalents and approximately $5 billion of unused credit arrangements with banks. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. SOUTHERN's integrated Southeast utilities may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of each of the integrated Southeast utilities. At September 30, 2001, the SOUTHERN system had short-term notes payable outstanding of $105 million and commercial paper outstanding of $1.8 billion. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 17
PART I Item 3. Quantitative And Qualitative Disclosures About Market Risk. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K. Additional reference is made to Notes (C), (D) and (I) in the "Notes to the Condensed Financial Statements" contained herein for additional information regarding commodity-related marketing and price risk management activities. 18
ALABAMA POWER COMPANY 19
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- (in thousands) (in thousands) Operating Revenues: <S> <C> <C> <C> <C> Retail sales $814,392 $945,964 $2,161,671 $2,299,660 Sales for resale -- Non-affiliates 150,701 140,726 383,647 350,542 Affiliates 69,196 25,954 189,319 73,046 Other revenues 26,428 24,651 79,949 60,682 ---------------- ---------------- ---------------- ---------------- Total operating revenues 1,060,717 1,137,295 2,814,586 2,783,930 ---------------- ---------------- ---------------- ---------------- Operating Expenses: Operation -- Fuel 285,945 285,316 778,708 698,711 Purchased power -- Non-affiliates 51,862 75,066 127,862 130,939 Affiliates 31,340 53,798 118,349 134,585 Other 123,202 126,654 378,204 374,263 Maintenance 57,898 60,021 222,467 220,617 Depreciation and amortization 93,862 92,760 286,466 274,458 Taxes other than income taxes 54,789 53,773 166,470 160,013 ---------------- ---------------- ---------------- ---------------- Total operating expenses 698,898 747,388 2,078,526 1,993,586 ---------------- ---------------- ---------------- ---------------- Operating Income 361,819 389,907 736,060 790,344 Other Income: Interest income 1,650 8,943 8,177 23,420 Equity in earnings of unconsolidated subsidiaries 1,002 847 3,001 2,344 Other, net 1,341 1,298 (2,834) 109 ---------------- ---------------- ---------------- ---------------- Earnings Before Interest and Income Taxes 365,812 400,995 744,404 816,217 ---------------- ---------------- ---------------- ---------------- Interest and Other: Interest expense, net 61,801 63,574 181,939 186,479 Distributions on preferred securities of subsidiary 6,130 6,418 18,700 19,125 ---------------- ---------------- ---------------- ---------------- Total interest and other, net 67,931 69,992 200,639 205,604 ---------------- ---------------- ---------------- ---------------- Earnings Before Income Taxes 297,881 331,003 543,765 610,613 Income taxes 114,562 118,201 207,477 219,120 ---------------- ---------------- ---------------- ---------------- Net Income Before Cumulative Effect of Accounting Change 183,319 212,802 336,288 391,493 Cumulative effect of accounting change -- less income taxes of $215 thousand - - 353 - ---------------- ---------------- ---------------- ---------------- Net Income 183,319 212,802 336,641 391,493 Dividends on Preferred Stock 3,824 4,076 11,766 12,080 ---------------- ---------------- ---------------- ---------------- Net Income After Dividends on Preferred Stock $179,495 $208,726 $324,875 $379,413 ================ ================ ================ ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 20
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 ----------------- ----------------- (in thousands) Operating Activities: <S> <C> <C> Net income $336,641 $391,493 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 325,019 309,042 Deferred income taxes and investment tax credits, net 35,103 48,140 Other, net (48,112) (19,326) Changes in certain current assets and liabilities -- Receivables, net (42,028) (115,011) Fossil fuel stock (25,362) 9,362 Materials and supplies (2,402) (5,995) Accounts payable (157,010) (16,369) Energy cost recovery, retail 102,035 (71,436) Other 149,563 128,000 ----------------- ----------------- Net cash provided from operating activities 673,447 657,900 ----------------- ----------------- Investing Activities: Gross property additions (462,030) (622,469) Other (9,470) (47,449) ----------------- ----------------- Net cash used for investing activities (471,500) (669,918) ----------------- ----------------- Financing Activities: Increase (decrease) in notes payable, net (190,032) 45,527 Proceeds -- Common stock 15,642 - Other long-term debt 462,000 250,000 Capital contributions from parent company 88,443 167,004 Redemptions -- First mortgage bonds (138,991) (111,009) Other long-term debt (2,855) (4,141) Payment of preferred stock dividends (11,241) (11,988) Payment of common stock dividends (296,400) (313,200) Other (9,557) (951) ----------------- ----------------- Net cash provided from (used for) financing activities (82,991) 21,242 ----------------- ----------------- Net Change in Cash and Cash Equivalents 118,956 9,224 Cash and Cash Equivalents at Beginning of Period 14,247 19,475 ----------------- ----------------- Cash and Cash Equivalents at End of Period $ 133,203 $ 28,699 ================= ================= Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $152,616 $163,022 Income taxes (net of refunds) $73,874 $60,777 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 21
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 133,203 $ 14,247 Receivables -- Customer accounts receivable 385,581 337,870 Under recovered retail fuel clause revenue 135,782 237,817 Other accounts and notes receivable 71,610 60,315 Affiliated companies 77,652 95,704 Accumulated provision for uncollectible accounts (5,163) (6,237) Fossil fuel stock, at average cost 85,977 60,615 Materials and supplies, at average cost 180,701 178,299 Other 86,289 52,624 ------------------- -------------------- Total current assets 1,151,632 1,031,254 ------------------- -------------------- Property, Plant, and Equipment: In service 13,074,035 12,431,575 Less accumulated provision for depreciation 5,236,760 5,107,822 ------------------- -------------------- 7,837,275 7,323,753 Nuclear fuel, at amortized cost 93,788 94,050 Construction work in progress 361,666 744,974 ------------------- -------------------- Total property, plant, and equipment 8,292,729 8,162,777 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 43,092 38,623 Nuclear decommissioning trusts 302,848 313,895 Other 12,569 13,612 ------------------- -------------------- Total other property and investments 358,509 366,130 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 343,377 345,550 Prepaid pension costs 310,387 268,259 Debt expense, being amortized 8,146 8,758 Premium on reacquired debt, being amortized 79,113 76,020 Department of Energy assessments 24,588 24,588 Other 101,787 95,772 ------------------- -------------------- Total deferred charges and other assets 867,398 818,947 ------------------- -------------------- Total Assets $10,670,268 $10,379,108 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 22
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 860 $ 844 Notes payable 91,311 281,343 Accounts payable -- Affiliated 91,164 124,534 Other 85,937 209,205 Customer deposits 41,054 36,814 Taxes accrued -- Income taxes 169,636 65,505 Other 72,835 19,471 Interest accrued 69,312 33,186 Vacation pay accrued 31,711 31,711 Other 78,194 97,743 ------------------- -------------------- Total current liabilities 732,014 900,356 ------------------- -------------------- Long-term debt 3,747,150 3,425,527 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,442,709 1,401,424 Deferred credits related to income taxes 208,713 222,485 Accumulated deferred investment tax credits 240,989 249,280 Employee benefits provisions 87,738 84,816 Prepaid capacity revenues 42,237 58,377 Other 175,554 176,559 ------------------- -------------------- Total deferred credits and other liabilities 2,197,940 2,192,941 ------------------- -------------------- 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 (5,608,955 at December 31, 2000) Par value 240,000 224,358 Paid-in capital 1,831,806 1,743,363 Premium on preferred stock 99 99 Retained earnings 1,256,747 1,227,952 ------------------- -------------------- Total common stockholder's equity 3,328,652 3,195,772 ------------------- -------------------- Total Liabilities and Stockholder's Equity $10,670,268 $10,379,108 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 23
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2001 vs. THIRD QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the third quarter and year-to-date 2001 was $179.5 million and $324.9 million, respectively, compared to $208.7 million and $379.4 million for the corresponding periods of 2000. The decreases in the third quarter and year-to-date 2001 of $29.2 million, or 14%, and $54.5 million, or 14.4%, respectively, were primarily due to lower retail sales revenue. Significant income statement items appropriate for discussion include the following: <TABLE> <CAPTION> Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % <S> <C> <C> <C> <C> Retail sales..................................... $(131,572) (13.9) $(137,989) (6.0) Sales for resale - non-affiliates................ 9,975 7.1 33,105 9.4 Sales for resale - affiliates.................... 43,242 166.6 116,273 159.2 Other revenues................................... 1,777 7.2 19,267 31.8 Fuel expense..................................... 629 0.2 79,997 11.4 Purchased power - non-affiliates................. (23,204) (30.9) (3,077) (2.3) Purchased power - affiliates..................... (22,458) (41.7) (16,236) (12.1) Interest income.................................. (7,293) (81.5) (15,243) (65.1) </TABLE> Retail sales. Excluding energy cost recovery revenues, which generally do not affect net income, retail sales revenue was lower by $27.3 million, or 4.2%, for the third quarter 2001 and $42.9 million, or 2.6%, year-to-date 2001 when compared to the same periods in 2000 due primarily to decreased energy sales to retail customers. As a result of milder weather, energy sales to residential customers decreased for the third quarter and year-to-date 2001 by 8.8% and 2.8% respectively. Energy sales to industrial customers were down for the third quarter and year-to-date 2001 by 5.1% and 7.0%, respectively, due to a slower economy. Sales for resale - non-affiliates. During the third quarter and year-to-date 2001, the demand for energy by non-affiliates increased when compared to the same periods in 2000. 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 from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Other revenues. The year-to-date 2001 increase is primarily a result of increased steam sales in conjunction with the operation of cogeneration facilities. Since cogeneration steam revenues are generally offset by fuel expenses, these revenues did not have a significant impact on earnings. 24
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. The year-to-date 2001 increase in fuel expense results from increased generation by gas fueled plants when compared to the same period in 2000. Since energy expenses are generally offset by energy revenues, these expenses did not have a significant impact on earnings. Purchased power - non-affiliates. The third quarter and year-to-date 2001 decreases when compared to the same periods in 2000 are a result of increased hydro generation and lower demand for energy in ALABAMA's service territory. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Interest income. For the third quarter and year-to-date 2001, the decreases in interest income are primarily due to a decrease in recognized gains on investments held by the nuclear decommissioning trusts, which were offset by a concurrent reduction of other interest charges in accordance with FERC requirements. 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. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of ALABAMA in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with a number of non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process and directed the parties to participate in the mediation for 45 days. The parties to the mediation failed to reach agreement on a single RTO for the Southeast. On November 7, 2001, the FERC suspended the December 15, 2001 deadline to form an RTO established in its order issued December 20, 1999. SOUTHERN continues to work with the other entities to develop an RTO. 25
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of ALABAMA in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F), (K) 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. New Accounting Standards Effective January 1, 2001, ALABAMA adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 are effective beginning in 2002 and are not expected to have a material impact on ALABAMA's financial statements. Additionally 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 fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost 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 2003. ALABAMA has not yet quantified the impact of adopting Statement No. 143 on its financial statements. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of Statement No. 144 are effective beginning in 2002 and are not expected to have a material impact on ALABAMA's financial statements. 26
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first nine months of 2001 included the addition of approximately $462 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities, the sale of additional common stock to SOUTHERN and capital contributions from SOUTHERN. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities In April 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due April 1, 2031. The proceeds of the sale were used to pay certain costs incurred in connection with the acquisition, construction, installation and equipping of certain local district heating facilities and sewage and solid waste facilities at ALABAMA's Theodore Congeneration Plant. In August 2001, ALABAMA issued $275 million of Series N 4.875% Senior Notes due September 1, 2004 and $167 million of Series O Floating Rate Senior Notes due March 3, 2003. The proceeds of these sales of senior notes were used to redeem the $131.5 million outstanding principal amount of its First Mortgage Bonds, 9% Series due December 1, 2024 and for other corporate purposes including the repayment of a portion of ALABAMA's short-term indebtedness. In September 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due September 1, 2031. The proceeds from this sale were used to pay certain costs incurred in connection with the acquisition, construction, installation and equipping of certain solid waste disposal facilities at ALABAMA's James M. Barry Generating Plant. ALABAMA plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. 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. 27
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, ALABAMA had at September 30, 2001 approximately $133.2 million of cash and cash equivalents, unused committed lines of credit of approximately $973.7 million (including $438.9 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. ALABAMA may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper 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 September 30, 2001, ALABAMA had outstanding $91 million of commercial paper. 28
GEORGIA POWER COMPANY 29
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ---------------- ---------------- ----------------- ---------------- (in thousands) (in thousands) Operating Revenues: <S> <C> <C> <C> <C> Retail sales $1,399,929 $1,361,515 $3,442,807 $3,365,826 Sales for resale -- Non-affiliates 121,370 112,899 301,721 218,698 Affiliates 15,712 35,617 86,770 78,770 Other revenues 41,957 35,273 114,982 94,326 ---------------- ---------------- ----------------- ---------------- Total operating revenues 1,578,968 1,545,304 3,946,280 3,757,620 ---------------- ---------------- ----------------- ---------------- Operating Expenses: Operation -- Fuel 268,177 320,827 749,307 801,130 Purchased power -- Non-affiliates 227,841 158,999 400,937 287,539 Affiliates 83,642 49,153 236,222 138,621 Other 194,301 193,885 566,403 554,397 Maintenance 94,375 83,777 305,981 270,318 Depreciation and amortization 140,113 144,411 444,041 475,981 Taxes other than income taxes 55,909 57,094 157,757 158,603 ---------------- ---------------- ----------------- ---------------- Total operating expenses 1,064,358 1,008,146 2,860,648 2,686,589 ---------------- ---------------- ----------------- ---------------- Operating Income 514,610 537,158 1,085,632 1,071,031 Other Income (Expense): Interest income 1,511 815 3,319 2,001 Equity in earnings of unconsolidated subsidiaries 1,038 747 2,994 2,276 Other, net 12,903 (4,593) 12,747 (8,863) ---------------- ---------------- ----------------- ---------------- Earnings Before Interest and Income Taxes 530,062 534,127 1,104,692 1,066,445 ---------------- ---------------- ----------------- ---------------- Interest Charges and Other: Interest expense, net 40,601 54,830 141,790 154,941 Distributions on preferred securities of subsidiaries 14,776 14,776 44,328 44,328 ---------------- ---------------- ----------------- ---------------- Total interest charges and other, net 55,377 69,606 186,118 199,269 ---------------- ---------------- ----------------- ---------------- Earnings Before Income Taxes 474,685 464,521 918,574 867,176 Income taxes 176,177 180,861 349,208 340,945 ---------------- ---------------- ----------------- ---------------- Net Income Before Cumulative Effect of Accounting Change 298,508 283,660 569,366 526,231 Cumulative effect of accounting change -- less income taxes of $162 thousand - - 257 - ---------------- ---------------- ----------------- ---------------- Net Income 298,508 283,660 569,623 526,231 Dividends on Preferred Stock 168 168 503 507 ---------------- ---------------- ----------------- ---------------- Net Income After Dividends on Preferred Stock $ 298,340 $ 283,492 $ 569,120 $ 525,724 ================ ================ ================= ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 30
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 ---------------- ---------------- (in thousands) Operating Activities: <S> <C> <C> Net income $569,623 $526,231 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 505,215 530,013 Deferred income taxes and investment tax credits, net (21,373) (12,955) Other, net (34,967) (12,485) Changes in certain current assets and liabilities -- Receivables, net (53,883) (129,937) Fossil fuel stock (55,027) 25,852 Materials and supplies (12,577) (5,287) Accounts payable (82,848) (6,112) Energy cost recovery, retail (62,570) (113,011) Other 235,334 147,355 ---------------- ---------------- Net cash provided from operating activities 986,927 949,664 ---------------- ---------------- Investing Activities: Gross property additions (1,073,616) (728,116) Other 230,959 (26,399) ---------------- ---------------- Net cash used for investing activities (842,657) (754,515) ---------------- ---------------- Financing Activities: Decrease in notes payable, net (132,282) (238,842) Proceeds -- Other long-term debt 767,985 378,725 Capital contributions from parent company 203,206 268,799 Retirements -- First mortgage bonds (390,140) (100,000) Other long-term debt (153,910) (78,725) Preferred stock - (383) Payment of preferred stock dividends (429) (508) Payment of common stock dividends (396,300) (412,700) Other (30,359) (2,848) ---------------- ---------------- Net cash used for financing activities (132,229) (186,482) ---------------- ---------------- Net Change in Cash and Cash Equivalents 12,041 8,667 Cash and Cash Equivalents at Beginning of Period 29,370 34,660 ---------------- ---------------- Cash and Cash Equivalents at End of Period $ 41,411 $ 43,327 ================ ================ Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $153,972 $169,221 Income taxes (net of refunds) $142,363 $195,055 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 31
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 41,411 $ 29,370 Receivables -- Customer accounts receivable 528,269 465,249 Under recovered retail fuel clause revenue 194,193 131,623 Other accounts and notes receivable 140,654 156,143 Affiliated companies 29,459 13,312 Accumulated provision for uncollectible accounts (9,250) (5,100) Fossil fuel stock, at average cost 154,490 99,463 Materials and supplies, at average cost 276,186 263,609 Other 106,862 97,515 ------------------- -------------------- Total current assets 1,462,274 1,251,184 ------------------- -------------------- Property, Plant, and Equipment: In service 16,734,794 16,469,706 Less accumulated provision for depreciation 7,151,981 6,914,512 ------------------- -------------------- 9,582,813 9,555,194 Nuclear fuel, at amortized cost 102,301 120,570 Construction work in progress 1,070,517 652,264 ------------------- -------------------- Total property, plant, and equipment 10,755,631 10,328,028 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 27,865 25,485 Nuclear decommissioning trusts 344,006 375,666 Other 40,161 33,829 ------------------- -------------------- Total other property and investments 412,032 434,980 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 550,313 565,982 Prepaid pension costs 251,531 205,113 Debt expense, being amortized 60,379 53,748 Premium on reacquired debt, being amortized 170,195 173,610 Other 114,448 120,964 ------------------- -------------------- Total deferred charges and other assets 1,146,866 1,119,417 ------------------- -------------------- Total Assets $13,776,803 $13,133,609 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 32
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 315,997 $ 1,808 Notes payable and commercial paper 571,557 703,839 Accounts payable -- Affiliated 96,683 117,168 Other 308,014 397,550 Customer deposits 82,052 78,540 Taxes accrued -- Income taxes 248,070 5,151 Other 147,767 137,511 Interest accrued 72,929 47,244 Vacation pay accrued 39,501 38,865 Other 114,827 153,400 ------------------- -------------------- Total current liabilities 1,997,397 1,681,076 ------------------- -------------------- Long-term debt 2,951,368 3,041,939 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,154,059 2,182,783 Deferred credits related to income taxes 233,703 247,067 Accumulated deferred investment tax credits 341,182 352,282 Employee benefits provisions 190,445 177,444 Other 479,970 397,655 ------------------- -------------------- Total deferred credits and other liabilities 3,399,359 3,357,231 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 789,250 789,250 ------------------- -------------------- 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 2,320,703 2,117,497 Premium on preferred stock 40 40 Retained earnings 1,960,576 1,787,757 Accumulated other comprehensive income (709) - ------------------- -------------------- Total common stockholder's equity 4,624,860 4,249,544 ------------------- -------------------- Total Liabilities and Stockholder's Equity $13,776,803 $13,133,609 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 33
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------------------- ---------------------------------------- 2001 2000 2001 2000 -------------- ------------------ -------------------- -------------- (in thousands) (in thousands) <S> <C> <C> <C> <C> Net Income After Dividends on Preferred Stock $298,340 $283,492 $569,120 $525,724 Other comprehensive income: Cumulative effect of accounting change - - 466 - Current period changes in fair value (1,649) - (1,682) - Related income tax benefit (expense) 627 - 507 - -------------- ------------------ -------------------- -------------- COMPREHENSIVE INCOME $297,318 $283,492 $568,411 $525,724 ============== ================== ==================== ============== </TABLE> <TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED) At September 30, At December 31, 2001 2000 -------------------- -------------- (in thousands) <S> <C> <C> Balance at beginning of period $ - $ - Change in current period (709) - -------------------- -------------- BALANCE AT END OF PERIOD ($ 709) $ - ==================== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 34
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2001 vs. THIRD QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the third quarter and year-to-date 2001 was $298.3 million and $569.1 million, respectively, compared to $283.5 million and $525.7 million for the corresponding periods in 2000. Earnings increased by $14.8 million, or 5.2%, for the third quarter 2001 and $43.4 million, or 8.3%, year-to-date 2001 when compared to the same periods in 2000 due primarily to increased operating revenues and lower interest charges, that were partially offset by increased operating expenses. Significant income statement items appropriate for discussion include the following: <TABLE> <CAPTION> Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % <S> <C> <C> <C> <C> Retail sales..................................... $38,414 2.8 $76,981 2.3 Sales for resale - non-affiliates................ 8,471 7.5 83,023 38.0 Sales for resale - affiliates.................... (19,905) (55.9) 8,000 10.2 Other revenues................................... 6,684 18.9 20,656 21.9 Fuel expense..................................... (52,650) (16.4) (51,823) (6.5) Purchased power - non-affiliates................. 68,842 43.3 113,398 39.4 Purchased power - affiliates..................... 34,489 70.2 97,601 70.4 Maintenance expense.............................. 10,598 12.7 35,663 13.2 Other, net....................................... 17,496 380.9 21,610 243.8 Interest expense, net............................ (14,229) (26.0) (13,151) (8.5) </TABLE> Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue decreased in the third quarter of 2001 by $6.8 million, or 0.7%, and increased year-to-date 2001 by $5.2 million, or 0.2%, when compared to the same periods in 2000. The third quarter 2001 decrease was primarily due to lower energy sales to residential and industrial customers as a result of mild weather and the continued slowdown in manufacturing activity in GEORGIA's service territory, partially offset by a 2.9% increase in commercial energy sales due to an increased number of commercial customers. The year-to-date 2001 retail sales revenue was higher due to a 4.1% increase in energy sales to commercial customers, partially offset by the mild weather. Sales for resale - non-affiliates. In the third quarter and year-to-date 2001, sales for resale to non-affiliates increased when compared to the corresponding periods in the previous year as a result of increased demand for energy which was in large part offset by energy expenses. Also, reflected in these revenues are sales from Plant Dahlberg which went into service in the second quarter of 2000. In July 2001, ownership of Plant Dahlberg's generating assets were transferred to another SOUTHERN subsidiary. 35
GEORGIA 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 from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Other revenues. Higher revenues from transmission of electricity to others, distribution equipment rentals and outdoor lighting are the main reasons for the third quarter and year-to-date 2001 increases when compared to the same periods in the prior year. Fuel expense. The third quarter and year-to-date 2001 decreases in fuel expense are attributed to a decrease in fossil generation and increased hydro generation when compared to the same periods in 2000. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power - non-affiliates. Third quarter and year-to-date 2001 increases are related to increased demand for energy by wholesale customers and increased prices for natural gas and oil. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Maintenance expense. During the third quarter and year-to-date 2001, maintenance expense was higher when compared to the same periods in 2000 primarily due to scheduled work performed on power generating facilities and transmission facilities. Other, net. In the third quarter and year-to-date 2001, other income increased due to mark to market adjustments for derivative electric contracts as required by FASB Statement No. 133 and gains on property sales. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. Interest expense, net. During the third quarter and year-to-date 2001, interest expense decreased due to lower interest rates when compared to the corresponding periods in 2000. 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, 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. Pursuant to GEORGIA's existing rate order approved by the Georgia PSC, GEORGIA was required to file a general rate case with the Georgia PSC by July 1, 2001. Accordingly, on June 29, 2001, GEORGIA filed a rate plan with the Georgia PSC. Reference is made to Note (G) in the "Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K for additional information. 36
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On July 31, 2001, GEORGIA transferred ownership of the Plant Dahlberg generating assets at net book value of $260.1 million to Southern Power Company, an affiliated company. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with a number of non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process and directed the parties to participate in the mediation for 45 days. The parties to the mediation failed to reach agreement on a single RTO for the Southeast. On November 7, 2001, the FERC suspended the December 15, 2001 deadline to form an RTO established in its order issued December 20, 1999. SOUTHERN continues to work with the other entities to develop an RTO. Compliance costs related to the Clean Air Act and other environmental issues could affect earnings. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Issues" of GEORGIA and Note 3 to the financial statements of GEORGIA in the Form 10-K for information on the EPA litigation. Reference is made to Notes (C) through (H), (K) 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. New Accounting Standards Effective January 1, 2001, GEORGIA adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 are effective beginning in 2002 and are not expected to have a material impact on GEORGIA's financial statements. 37
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Additionally 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 fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost 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 2003. GEORGIA has not yet quantified the impact of adopting Statement No. 143 on its financial statements. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of Statement No. 144 are effective beginning in 2002 and are not expected to have a material impact on GEORGIA's financial statements. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first nine months of 2001 was the addition of approximately $1.1 billion to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and capital contributions from SOUTHERN. See GEORGIA's Condensed Statements of Cash Flows for further details. Financing Activities In February 2001, GEORGIA issued $350 million aggregate principal amount of senior notes consisting of $200 million of Series F 5.75% Senior Notes due January 31, 2003 and $150 million of Series G 6.20% Senior Notes due February 1, 2006. The proceeds of the sale were applied to redeem $200 million outstanding principal amount of First Mortgage Bonds, 6 5/8% Series due April 2003 and to repay a portion of GEORGIA's outstanding short-term indebtedness. Also in February 2001, GEORGIA issued $100 million of Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011. The proceeds of this sale were used to repay an additional portion of GEORGIA's outstanding short-term indebtedness. In May 2001, GEORGIA issued $150 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds of this sale were used in May 2001 to repurchase $47 million aggregate principal amount of First Mortgage Bonds, 7.70% Series due May 1, 2025, $1.9 million aggregate principal amount of First Mortgage Bonds, 6 7/8% Series due April 1, 2008 and $8.1 million aggregate principal amount of First Mortgage Bonds, 6.07% Series due December 1, 2005, and to redeem in June 2001 $75 million outstanding principal amount of GEORGIA's First Mortgage Bonds, 6.35% Series due August 1, 2003. The remainder was used to repay a portion of GEORGIA's outstanding short-term indebtedness. 38
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In July 2001, GEORGIA sold, through public authorities, an aggregate principal amount of $58.845 million of pollution control revenue bonds due July 1, 2031. Also in July 2001, GEORGIA sold, through public authorities, $67 million of pollution control revenue bonds due July 1, 2016. The proceeds of these sales are being used to redeem various series of outstanding pollution control revenue bonds. In September 2001, GEORGIA sold, through public authorities, $14.075 million pollution control revenue bonds due September 1, 2018 and $28.065 million pollution control revenue bonds due September 1, 2024. In October 2001, GEORGIA sold, through public authorities, $83.515 million of pollution control bonds due January 1, 2012 and $133.535 million of pollution control bonds due January 1, 2032. The proceeds of these issues were used to redeem various outstanding amounts of pollution control revenue bonds. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GEORGIA had at September 30, 2001 approximately $41.4 million of cash and cash equivalents and approximately $1.765 billion of unused credit arrangements with banks. 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 at the request and for the benefit of GEORGIA and other SOUTHERN subsidiaries. At September 30, 2001, GEORGIA had outstanding $105 million of notes payable and $466.6 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 39
GULF POWER COMPANY 40
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ---------------- ---------------- --------------- -------------- (in thousands) (in thousands) Operating Revenues: <S> <C> <C> <C> <C> Retail sales $163,573 $169,975 $430,234 $429,142 Sales for resale -- Non-affiliates 26,220 21,480 66,664 49,067 Affiliates 3,507 18,602 21,173 47,835 Other revenues 33,316 22,476 54,004 27,107 ---------------- ---------------- --------------- -------------- Total operating revenues 226,616 232,533 572,075 553,151 ---------------- ---------------- --------------- -------------- Operating Expenses: Operation -- Fuel 55,982 63,767 158,452 162,430 Purchased power -- Non-affiliates 34,954 40,144 59,992 62,539 Affiliates 15,224 5,217 32,804 11,953 Other 29,289 27,671 85,524 84,838 Maintenance 13,172 10,527 41,007 40,049 Depreciation and amortization 16,738 16,489 50,345 49,299 Taxes other than income taxes 15,753 16,104 42,960 42,917 ---------------- ---------------- --------------- -------------- Total operating expenses 181,112 179,919 471,084 454,025 ---------------- ---------------- --------------- -------------- Operating Income 45,504 52,614 100,991 99,126 Other Income (Expense): Interest income 518 164 1,025 891 Other, net 1,984 (1,731) 1,407 (3,169) ---------------- ---------------- --------------- -------------- Earnings Before Interest and Income Taxes 48,006 51,047 103,423 96,848 ---------------- ---------------- --------------- -------------- Interest and Other: Interest expenses, net 5,705 7,050 18,401 21,614 Distributions on preferred securities of subsidiary 1,550 1,550 4,650 4,650 ---------------- ---------------- --------------- -------------- Total interest charges and other, net 7,255 8,600 23,051 26,264 ---------------- ---------------- --------------- -------------- Earnings Before Income Taxes 40,751 42,447 80,372 70,584 Income taxes 14,040 15,955 28,655 26,404 ---------------- ---------------- --------------- -------------- Net Income Before Cumulative Effect of Accounting Change 26,711 26,492 51,717 44,180 Cumulative effect of accounting change -- less income taxes of $42 thousand - - 68 - ---------------- ---------------- --------------- -------------- Net Income 26,711 26,492 51,785 44,180 Dividends on Preferred Stock 54 54 162 162 ---------------- ---------------- --------------- -------------- Net Income After Dividends on Preferred Stock $26,657 $26,438 $51,623 $44,018 ================ ================ =============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 41
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 --------------- --------------- (in thousands) Operating Activities: <S> <C> <C> Net income $51,785 $44,180 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 53,343 52,317 Deferred income taxes and investment tax credits, net 6,331 (3,492) Other, net (543) 7,925 Changes in certain current assets and liabilities -- Receivables, net 6,919 (3,443) Fossil fuel stock (23,509) 11,403 Materials and supplies (491) 1,508 Accounts payable 8,477 3,635 Regulatory clauses under recovery (29,544) (3,462) Other 11,745 17,254 --------------- --------------- Net cash provided from operating activities 84,513 127,825 --------------- --------------- Investing Activities: Gross property additions (209,747) (67,119) Other (1,252) (9,832) --------------- --------------- Net cash used for investing activities (210,999) (76,951) --------------- --------------- Financing Activities: Increase (decrease) in notes payable, net (34,900) (27,500) Proceeds -- Other long-term debt 159,323 - Capital contributions from parent company 70,318 8,683 Retirements -- First mortgage bonds (30,000) - Other long-term debt - (1,442) Payment of preferred stock dividends (162) (162) Payment of common stock dividends (40,100) (44,300) Other (184) (22) --------------- --------------- Net cash provided from (used for) financing activities 124,295 (64,743) --------------- --------------- Net Change in Cash and Cash Equivalents (2,191) (13,869) Cash and Cash Equivalents at Beginning of Period 4,381 15,753 --------------- --------------- Cash and Cash Equivalents at End of Period $ 2,190 $1,884 =============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $23,064 $25,851 Income taxes (net of refunds) 22,043 20,222 The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 42
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 2,190 $ 4,381 Receivables -- Customer accounts receivable 74,030 69,820 Under recovered regulatory clauses 27,726 2,112 Other accounts and notes receivable 2,885 2,179 Affiliated companies 2,772 15,026 Accumulated provision for uncollectible accounts (1,436) (1,302) Fossil fuel stock, at average cost 40,277 16,768 Materials and supplies, at average cost 29,524 29,033 Other 7,176 6,543 ------------------- -------------------- Total current assets 185,144 144,560 ------------------- -------------------- Property, Plant, and Equipment: In service 1,916,208 1,892,023 Less accumulated provision for depreciation 902,574 867,260 ------------------- -------------------- 1,013,634 1,024,763 Construction work in progress 240,655 71,008 ------------------- -------------------- Total property, plant, and equipment 1,254,289 1,095,771 ------------------- -------------------- Other Property and Investments 7,016 4,510 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 16,565 15,963 Prepaid pension costs 27,788 23,491 Debt expense, being amortized 2,279 2,392 Premium on reacquired debt, being amortized 14,887 15,866 Other 18,519 12,943 ------------------- -------------------- Total deferred charges and other assets 80,038 70,655 ------------------- -------------------- Total Assets $1,526,487 $1,315,496 =================== ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 43
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 100,000 $ - Notes payable 8,100 43,000 Accounts payable -- Affiliated 18,046 17,558 Other 51,949 38,153 Customer deposits 14,290 13,474 Taxes accrued -- Income taxes 4,935 3,864 Other 17,505 8,749 Interest accrued 7,325 8,324 Provision for rate refund 3,033 7,203 Vacation pay accrued 4,512 4,512 Other 8,519 8,432 ------------------- -------------------- Total current liabilities $ 238,214 $153,269 ------------------- -------------------- Long-term debt 395,531 365,993 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 167,898 155,074 Deferred credits related to income taxes 30,784 38,255 Accumulated deferred investment tax credits 24,536 25,792 Employee benefits provisions 36,952 34,507 Other 34,117 25,992 ------------------- -------------------- Total deferred credits and other liabilities 294,287 279,620 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 85,000 85,000 ------------------- -------------------- 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 303,794 233,476 Premium on preferred stock 12 12 Retained earnings 167,353 155,830 ------------------- -------------------- Total common stockholder's equity 509,219 427,378 ------------------- -------------------- Total Liabilities and Stockholder's Equity $1,526,487 $1,315,496 =================== ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 44
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2001 vs. THIRD QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the third quarter and year-to-date 2001 was $26.7 million and $51.6 million, respectively, compared to $26.4 million and $44 million for the same periods in 2000. Third quarter 2001 earnings remained relatively flat due to lower operating revenues and higher operating expenses. Year-to-date 2001 earnings increased primarily due to an increase in other income and lower interest charges. Significant income statement items appropriate for discussion include the following: <TABLE> <CAPTION> Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % <S> <C> <C> <C> <C> Retail sales..................................... $(6,402) (3.8) $1,092 0.3 Sales for resale - non-affiliates................ 4,740 22.1 17,597 35.9 Sales for resale - affiliates.................... (15,095) (81.1) (26,662) (55.7) Other revenues................................... 10,840 48.2 26,897 99.2 Fuel expense..................................... (7,785) (12.2) (3,978) (2.4) Purchased power - non-affiliates................. (5,190) (12.9) (2,547) (4.1) Purchased power - affiliates..................... 10,007 191.8 20,851 174.4 Maintenance expense.............................. 2,645 25.1 958 2.4 Other, net....................................... 3,715 214.6 4,576 144.4 Interest expense, net............................ (1,345) (19.1) (3,213) (14.9) </TABLE> Retail sales. Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales decreased by $1.9 million, or 1.8%, for the third quarter 2001 and increased by $4.4 million, or 1.7%, year-to-date 2001. Retail sales revenue for the third quarter 2001 decreased due mainly to lower energy sales to retail customers when compared to the same period in 2000 due to milder weather. For year-to-date 2001, retail sales revenue increased due to a 2.9% increase in retail energy sales resulting from growth in the number of customers served by GULF. Sales for resale - non-affiliates. In the third quarter 2001, sales for resale to non-affiliates increased due primarily to increased demand for energy outside of GULF's territory. For year-to-date 2001, the increase in sales for resale to non-affiliates is mainly attributed to increased unit power energy sales and higher demand for energy outside of GULF's territory. 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 from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 45
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other revenues. For the third quarter and year-to-date 2001, increases in other revenues are primarily attributed to fuel clause adjustments made to other operating revenues to reflect the difference between recoverable costs and the amounts actually reflected in current rates. The recovery provisions generally equal the related expenses and have no material effect on net income. Fuel expense. During the third quarter and year-to-date 2001, fuel expense decreased due mainly to reduced generation when compared to the same periods in 2000. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income. Purchased power - non-affiliates. In the third quarter and year-to-date 2001, purchased power from non-affiliates decreased when compared to the corresponding periods in 2000 primarily due to purchasing lower cost energy from affiliates. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income. Maintenance expense. The increases for the third quarter and year-to-date 2001 when compared to the same periods in the prior year are mainly due to scheduled maintenance performed on power generating and distribution facilities. Other, net. For the third quarter and year-to-date 2001, other, net increased when compared to the corresponding periods in 2000 due primarily to a higher allowance for equity funds used during construction for the current year related to the construction of GULF's new combined cycle unit. Interest expense, net. Decreases for the third quarter and year-to-date 2001, when compared to the corresponding periods in 2000, result from higher allowance for debt funds used during construction for the current year related to the construction of GULF's new combined cycle unit, as well as lower interest rates on notes payable and variable rate pollution control bonds. 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, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" 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. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. 46
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with a number of non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process and directed the parties to participate in the mediation for 45 days. The parties to the mediation failed to reach agreement on a single RTO for the Southeast. On November 7, 2001, the FERC suspended the December 15, 2001 deadline to form an RTO established in its order issued December 20, 1999. SOUTHERN continues to work with the other entities to develop an RTO. On September 10, 2001, GULF filed a request with the Florida PSC for a base rate increase of approximately $70 million. Reference is made to Note (P) 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. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of GULF in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F),(K) and (P) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. New Accounting Standards Effective January 1, 2001, GULF adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 are effective beginning in 2002 and are not expected to have a material impact on GULF's financial statements. 47
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Additionally 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 fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost 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 2003. GULF has not yet quantified the impact of adopting Statement No. 143 on its financial statements. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of Statement No. 144 are effective beginning in 2002 and are not expected to have a material impact on GULF's financial statements. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first nine months of 2001 included the addition of approximately $210 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations, capital contributions from SOUTHERN and other long-term debt. See GULF's Condensed Statements of Cash Flows for further details. Financing Activities In August 2001, GULF issued $60 million of Series C 4.69% Senior Notes due August 1, 2003. The proceeds of the sale will be used to redeem $30 million outstanding principal amount of GULF's First Mortgage Bonds, 6 1/8% Series due July 1, 2003 and to repay a portion of GULF's short-term indebtedness. In October 2001, GULF issued $75 million of Series D 6.10% Senior Notes due September 30, 2016. The proceeds of this sale will be used to prepay a portion of a $100 million bank loan. 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" and "Environmental Matters" in the Form 10-K for a description of GULF's capital requirements for its construction program and environmental compliance efforts. 48
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital In addition to the financing activities previously described herein, GULF plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GULF had at September 30, 2001 approximately $2.2 million of cash and cash equivalents and $123 million of unused committed lines of credit with banks. 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 at the request and for the benefit of GULF and other SOUTHERN subsidiaries. At September 30, 2001, GULF had outstanding $8.1 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 49
MISSISSIPPI POWER COMPANY 50
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ---------------- ---------------- ---------------- -------------- (in thousands) (in thousands) Operating Revenues: <S> <C> <C> <C> <C> Retail sales $145,067 $159,862 $387,448 $393,573 Sales for resale -- Non-affiliates 67,514 48,058 157,239 110,407 Affiliates 19,859 8,022 55,451 16,906 Other revenues 3,476 4,177 11,039 9,966 ---------------- ---------------- ---------------- -------------- Total operating revenues 235,916 220,119 611,177 530,852 ---------------- ---------------- ---------------- -------------- Operating Expenses: Operation -- Fuel 92,741 56,878 203,289 146,451 Purchased power -- Non-affiliates 9,546 32,578 38,352 49,738 Affiliates 5,879 12,948 50,582 36,003 Other 36,208 27,531 95,341 82,216 Maintenance 13,167 10,732 40,456 40,916 Depreciation and amortization 13,986 12,537 39,864 37,758 Taxes other than income taxes 11,126 12,972 33,775 37,104 ---------------- ---------------- ---------------- -------------- Total operating expenses 182,653 166,176 501,659 430,186 ---------------- ---------------- ---------------- -------------- Operating Income 53,263 53,943 109,518 100,666 Other Income: Interest income 195 117 418 257 Other, net 1,964 530 4,027 1,321 ---------------- ---------------- ---------------- -------------- Earnings Before Interest and Income Taxes 55,422 54,590 113,963 102,244 ---------------- ---------------- ---------------- -------------- Interest Expense and Other: Interest expense, net 4,800 6,746 17,964 21,189 Distributions on preferred securities of subsidiary 678 636 2,034 2,034 ---------------- ---------------- ---------------- -------------- Total interest charges and other, net 5,478 7,382 19,998 23,223 ---------------- ---------------- ---------------- -------------- Earnings Before Income Taxes 49,944 47,208 93,965 79,021 Income taxes 19,061 17,943 35,790 29,795 ---------------- ---------------- ---------------- -------------- Net Income Before Cumulative Effect of Accounting Change 30,883 29,265 58,175 49,226 Cumulative effect of accounting change -- less income taxes of $43 thousand - - 70 - ---------------- ---------------- ---------------- -------------- Net Income 30,883 29,265 58,245 49,226 Dividends on Preferred Stock 504 503 1,538 1,510 ---------------- ---------------- ---------------- -------------- Net Income After Dividends on Preferred Stock $30,379 $ 28,762 $56,707 $ 47,716 ================ ================ ================ ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 51
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 -------------- --------------- (in thousands) Operating Activities: <S> <C> <C> Net income $58,245 $49,226 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 42,868 41,118 Deferred income taxes and investment tax credits, net (8,082) 797 Other, net 6,481 6,502 Changes in certain current assets and liabilities -- Receivables, net (20,660) (20,436) Fossil fuel stock (23,763) 9,821 Materials and supplies (2,909) (950) Accounts payable 27,625 (8,091) Other 37,269 17,887 -------------- --------------- Net cash provided from operating activities 117,074 95,874 -------------- --------------- Investing Activities: Gross property additions (37,433) (60,282) Other (6,121) (10,602) -------------- --------------- Net cash used for investing activities (43,554) (70,884) -------------- --------------- Financing Activities: Increase (decrease) in notes payable, net (39,075) (40,500) Proceeds -- Other long-term debt - 100,000 Capital contributions from parent company 70,579 9,770 Retirements -- First mortgage bonds (36,000) - Other long-term debt (20,718) (51,176) Payment of preferred stock dividends (1,538) (1,510) Payment of common stock dividends (37,800) (41,100) Other (77) (465) -------------- --------------- Net cash used for financing activities (64,629) (24,981) -------------- --------------- Net Change in Cash and Cash Equivalents 8,891 9 Cash and Cash Equivalents at Beginning of Period 7,531 173 -------------- --------------- Cash and Cash Equivalents at End of Period $16,422 $ 182 ============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $16,176 $20,679 Income taxes (net of refunds) $4,493 $3,425 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 52
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Assets (Unaudited) 2000 -------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 16,422 $ 7,531 Receivables -- Customer accounts receivable 60,733 48,001 Under recovered regulatory clauses 13,549 24,063 Other accounts and notes receivable 30,989 21,843 Affiliated companies 19,539 10,071 Accumulated provision for uncollectible accounts (882) (571) Fossil fuel stock, at average cost 34,983 11,220 Materials and supplies, at average cost 24,603 21,694 Other 14,626 8,320 -------------------- -------------------- Total current assets 214,562 152,172 -------------------- -------------------- Property, Plant, and Equipment: In service 1,711,684 1,665,879 Less accumulated provision for depreciation 687,980 652,891 -------------------- -------------------- 1,023,704 1,012,988 Construction work in progress 48,976 60,951 -------------------- -------------------- Total property, plant, and equipment 1,072,680 1,073,939 -------------------- -------------------- Other Property and Investments 1,690 2,268 -------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 13,321 13,860 Prepaid pension costs 9,506 6,724 Debt expense, being amortized 4,440 4,628 Premium on reacquired debt, being amortized 6,890 7,168 Other 20,177 14,312 -------------------- -------------------- Total deferred charges and other assets 54,334 46,692 -------------------- -------------------- Total Assets $1,343,266 $1,275,071 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 53
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 -------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 80,020 $ 20 Notes payable 16,925 56,000 Accounts payable -- Affiliated 3,983 10,715 Other 79,022 48,146 Customer deposits 6,114 5,274 Taxes accrued -- Income taxes 49,679 8,769 Other 28,776 36,799 Interest accrued 6,534 4,482 Vacation pay accrued 5,701 5,701 Other 10,389 7,003 -------------------- -------------------- Total current liabilities 287,143 182,909 -------------------- -------------------- Long-term debt 234,045 370,511 -------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 137,480 139,909 Deferred credits related to income taxes 23,880 25,603 Accumulated deferred investment tax credits 22,571 23,481 Employee benefits provisions 35,664 34,671 Workforce reduction plan 8,627 9,734 Other 32,663 16,546 -------------------- -------------------- Total deferred credits and other liabilities 260,885 249,944 -------------------- -------------------- 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 264,740 194,161 Premium on preferred stock 326 326 Retained earnings 191,627 172,720 -------------------- -------------------- Total common stockholder's equity 494,384 404,898 -------------------- -------------------- Total Liabilities and Stockholder's Equity $1,343,266 $1,275,071 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 54
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2001 vs. THIRD QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the third quarter and year-to-date 2001 was $30.4 million and $56.7 million, respectively, compared to $28.8 million and $47.7 million for the corresponding periods of 2000. For the third quarter 2001, earnings were up mainly due to lower interest charges. The year-to-date 2001 increase in earnings is primarily attributed to higher operating revenues, higher other income and lower interest charges. Significant income statement items appropriate for discussion include the following: <TABLE> <CAPTION> Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % <S> <C> <C> <C> <C> Retail sales..................................... $(14,795) (9.3) $ (6,125) (1.6) Sales for resale - non-affiliates................ 19,456 40.5 46,832 42.4 Sales for resale - affiliates.................... 11,837 147.6 38,545 228.0 Fuel expense..................................... 35,863 63.1 56,838 38.8 Purchased power - non-affiliates................. (23,032) (70.7) (11,386) (22.9) Purchased power - affiliates..................... (7,069) (54.6) 14,579 40.5 Other operation expense.......................... 8,677 31.5 13,125 16.0 Maintenance expense.............................. 2,435 22.7 (460) (1.1) Taxes other than income taxes.................... (1,846) (14.2) (3,329) (9.0) Other, net....................................... 1,434 270.6 2,706 204.8 Interest expense, net............................ (1,946) (28.8) (3,225) (15.2) </TABLE> Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was down by $3.8 million, or 1.7%, in the third quarter 2001 and $3.5 million, or 4.0%, year-to-date 2001 when compared to the corresponding periods in 2000 due to lower retail energy sales. Retail energy sales decreased by 3.6% and 2.5% for the third quarter and year-to-date, respectively, primarily due to mild weather when compared to the same periods in 2000. Sales for resale - non-affiliates. The third quarter and year-to-date 2001 increases in these sales are primarily attributed to increased demand for energy by non-affiliates and additional power sales as a result of the commercial operation of Plant Daniel Units 3 and 4 when compared to the corresponding periods in 2000. 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 from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 55
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Fuel expense in the third quarter and year-to-date 2001 increased when compared to the same periods in 2000 due primarily to the higher cost of fuel. Additionally, year-to-date 2001 fuel expense increased due to commercial operation of Plant Daniel Units 3 and 4 in the spring of 2001. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power - non-affiliates. The third quarter and year-to-date 2001 decreases are primarily due to the expiration of certain purchased power contracts and to the 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. Other operation expense. Increases for the third quarter and year-to-date 2001, when compared to the corresponding periods in 2000, are related to the commercial operation of Plant Daniel Units 3 and 4 which began in May 2001. Maintenance expense. For the third quarter 2001, the increase in maintenance expense when compared to the same period in 2000 is directly related to commercial operation of Plant Daniel Units 3 and 4. Taxes other than income taxes. These taxes were lower for the third quarter and year-to-date 2001 due principally to reduced ad valorem taxes related to a change in the tax rate compared to the same periods in the prior year. Other, net. The third quarter and year-to-date 2001 increases are mainly due to the completion of project work requested by customers when compared to the corresponding periods in 2000. Interest expense, net. Third quarter and year-to-date 2001 interest expenses decreased 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, the effect of weather, and the economy on energy sales. On August 3, 2001, MISSISSIPPI filed a request with the Mississippi PSC to increase annual retail rate revenues by approximately $46.4 million. The requested increase would take effect in January 2002. As a result of the filing, the Mississippi PSC suspended the semi-annual evaluations under MISSISSIPPI's formula rate plan until an order is issued on MISSISSIPPI's request. Hearings on this matter were held before the Mississippi PSC on November 7, 8 and 9, 2001. The Mississippi PSC is required to rule on MISSISSIPPI'S request in early December 2001. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, 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 2001 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 7, 2001, and resulted in a slight increase in customer prices. Compliance costs related to the Clean Air Act could affect 56
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION earnings if such costs cannot continue to be recovered. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with a number of non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process and directed the parties to participate in the mediation for 45 days. The parties to the mediation failed to reach agreement on a single RTO for the Southeast. On November 7, 2001, the FERC suspended the December 15, 2001 deadline to form an RTO established in its order issued December 20, 1999. SOUTHERN continues to work with the other entities to develop an RTO. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of MISSISSIPPI in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F), (K),(L) 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. New Accounting Standards Effective January 1, 2001, MISSISSIPPI adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 are effective beginning in 2002 and are not expected to have a material impact on MISSISSIPPI's financial statements. 57
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Additionally 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 fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost 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 2003. MISSISSIPPI has not yet quantified the impact of adopting Statement No. 143 on its financial statements. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of Statement No. 144 are effective beginning in 2002 and are not expected to have a material impact on MISSISSIPPI's financial statements. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first nine months of 2001 included the addition of approximately $37.4 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and capital contributions from SOUTHERN. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activity" and Note 4 to the financial statements of MISSISSIPPI in the Form 10-K. Effective May 4, 2001, in connection with commercial operation of a 1,064-megawatt natural gas combined cycle facility, MISSISSIPPI entered into the initial 10-year lease term with Escatawpa Funding, Limited Partnership. The final completion cost will be approximately $370 million. Reference is made to Note (L) in the "Notes to the Condensed Financial Statements" herein for additional information. 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, sinking fund requirements and maturities of long-term debt. 58
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital In addition to the financing activities previously described herein, MISSISSIPPI plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, MISSISSIPPI had at September 30, 2001 approximately $16.4 million of cash and cash equivalents and approximately $124.3 million of unused committed credit arrangements with banks. The credit arrangements provide liquidity support to MISSISSIPPI's obligation 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 at the request and for the benefit of MISSISSIPPI and other SOUTHERN subsidiaries. At September 30, 2001, MISSISSIPPI had outstanding $16.9 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 59
SAVANNAH ELECTRIC AND POWER COMPANY 60
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 ---------------- ---------------- --------------- -------------- (in thousands) (in thousands) Operating Revenues: <S> <C> <C> <C> <C> Retail sales $88,398 $94,979 $217,533 $215,087 Sales for resale -- Non-affiliates 3,808 1,973 7,382 3,539 Affiliates 638 1,297 2,516 4,051 Other revenues 739 600 1,813 1,342 ---------------- ---------------- --------------- -------------- Total operating revenues 93,583 98,849 229,244 224,019 ---------------- ---------------- --------------- -------------- Operating Expenses: Operation -- Fuel 18,096 19,676 40,609 46,186 Purchased power -- Non-affiliates 13,510 14,510 21,592 22,103 Affiliates 12,391 12,518 41,096 29,138 Other 12,959 13,538 38,110 38,186 Maintenance 4,336 4,653 15,333 14,797 Depreciation and amortization 6,461 6,309 19,381 18,927 Taxes other than income taxes 3,934 3,585 10,679 9,939 ---------------- ---------------- --------------- -------------- Total operating expenses 71,687 74,789 186,800 179,276 ---------------- ---------------- --------------- -------------- Operating Income 21,896 24,060 42,444 44,743 Other Income (Expense): Interest income 33 51 150 130 Other, net 126 (124) (188) (528) ---------------- ---------------- --------------- -------------- Earnings Before Interest and Income Taxes 22,055 23,987 42,406 44,345 ---------------- ---------------- --------------- -------------- Interest Charges and Other: Interest expense, net 3,049 3,190 9,589 9,390 Distributions on preferred securities of subsidiary 685 685 2,055 2,055 ---------------- ---------------- --------------- -------------- Total interest charges and other, net 3,734 3,875 11,644 11,445 ---------------- ---------------- --------------- -------------- Earnings Before Income Taxes 18,321 20,112 30,762 32,900 Income taxes 7,012 7,761 11,753 12,619 ---------------- ---------------- --------------- -------------- Net Income Before Cumulative Effect of Accounting Change 11,309 12,351 19,009 20,281 Cumulative effect of accounting change -- less income taxes of $14 thousand - - 22 - ---------------- ---------------- --------------- -------------- Net Income $ 11,309 $ 12,351 $ 19,031 $ 20,281 ================ ================ =============== ============== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 61
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2001 2000 --------------- --------------- (in thousands) Operating Activities: <S> <C> <C> Net income $19,031 $20,281 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 20,865 20,161 Deferred income taxes and investment tax credits, net (10,667) 235 Other, net 5,273 4,602 Changes in certain current assets and liabilities -- Receivables, net 1,468 (22,257) Fossil fuel stock (973) 770 Materials and supplies (633) (802) Accounts payable (13,186) (266) Other 27,760 4,006 --------------- --------------- Net cash provided from operating activities 48,938 26,730 --------------- --------------- Investing Activities: Gross property additions (25,404) (20,325) Other, net (472) (2,504) --------------- --------------- Net cash used for investing activities (25,876) (22,829) --------------- --------------- Financing Activities: Increase (decrease) in notes payable, net (19,160) 15,800 Proceeds -- Other long-term debt 65,000 - Capital contributions from parent company 277 - Retirements -- First mortgage bonds (20,642) - Other long-term debt (30,630) (374) Payment of common stock dividends (16,300) (18,300) Other (394) (12) --------------- --------------- Net cash used for financing activities (21,849) (2,886) --------------- --------------- Net Change in Cash and Cash Equivalents 1,213 1,015 Cash and Cash Equivalents at Beginning of Period - 6,553 --------------- --------------- Cash and Cash Equivalents at End of Period $1,213 $7,568 =============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $10,503 $9,036 Income taxes (net of refunds) (1,982) 10,955 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 62
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 1,213 $ - Receivables -- Customer accounts receivable 42,488 28,189 Under recovered retail fuel clause revenue 24,055 39,632 Other accounts and notes receivable 1,082 1,412 Affiliated companies 922 738 Accumulated provision for uncollectible accounts (451) (407) Fossil fuel stock, at average cost 8,112 7,140 Materials and supplies, at average cost 9,577 8,944 Prepaid Taxes - 8,651 Other 1,056 377 ------------------- -------------------- Total current assets 88,054 94,676 ------------------- -------------------- Property, Plant, and Equipment: In service 853,110 829,270 Less accumulated provision for depreciation 399,232 382,030 ------------------- -------------------- 453,878 447,240 Construction work in progress 6,555 6,782 ------------------- -------------------- Total property, plant, and equipment 460,433 454,022 ------------------- -------------------- Other Property and Investments 2,631 2,066 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 12,012 12,404 Cash surrender value of life insurance for deferred compensation plans 17,632 17,954 Debt expense, being amortized 3,252 3,003 Premium on reacquired debt, being amortized 7,061 7,575 Other 3,113 2,527 ------------------- -------------------- Total deferred charges and other assets 43,070 43,463 ------------------- -------------------- Total Assets $594,188 $594,227 =================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 63
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 768 $ 30,698 Notes payable 26,240 45,400 Accounts payable -- Affiliated 4,721 16,153 Other 5,816 7,738 Customer deposits 6,082 5,696 Taxes accrued -- Income taxes 9,928 3,450 Other 4,621 1,435 Interest accrued 5,434 4,541 Vacation pay accrued 2,382 2,276 Other 7,000 7,973 ------------------- -------------------- Total current liabilities 72,992 125,360 ------------------- -------------------- Long-term debt 160,560 116,902 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 79,418 79,756 Deferred credits related to income taxes 14,604 16,038 Accumulated deferred investment tax credits 10,118 10,616 Deferred compensation plans 13,139 11,968 Employee benefits provisions 12,828 9,236 Other 12,526 9,357 ------------------- -------------------- Total deferred credits and other liabilities 142,633 136,971 ------------------- -------------------- 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 11,543 11,265 Retained earnings 112,237 109,506 ------------------- -------------------- Total common stockholder's equity 178,003 174,994 ------------------- -------------------- Total Liabilities and Stockholder's Equity $594,188 $594,227 =================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 64
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2001 vs. THIRD QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings SAVANNAH's net income for the third quarter and year-to-date 2001 was $11.3 million and $19.0 million, respectively, as compared to $12.4 million and $20.3 million for the corresponding periods of 2000. Third quarter 2001 earnings were down $1 million, or 8.4%, primarily due to lower operating revenues. Year-to-date 2001 earnings decrease of $1.2 million, or 6.2%, is primarily attributed to higher operating expenses. Significant income statement items appropriate for discussion include the following: <TABLE> <CAPTION> Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % <S> <C> <C> <C> <C> Retail sales..................................... $(6,581) (6.9) $ 2,446 1.1 Sales for resale - non-affiliates................ 1,835 93.0 3,843 108.6 Sales for resale - affiliates.................... (659) (50.8) (1,535) (37.9) Fuel expense..................................... (1,580) (8.0) (5,577) (12.1) Purchased power - non-affiliates................. (1,000) (6.9) (511) (2.3) Purchased power - affiliates..................... (127) (1.0) 11,958 41.0 Taxes other than income taxes.................... 349 9.7 740 7.4 </TABLE> Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue decreased by $1.6 million, or 3%, for the third quarter of 2001 and decreased by $0.5 million, or 0.4%, year-to-date 2001 when compared to the corresponding periods in 2000. During the third quarter 2001, retail sales revenue decreased primarily due to decreases in retail energy sales of 2.3% and 4.6%, respectively, to residential and industrial customers. Retail energy sales to residential customers were affected by the mild weather and industrial energy sales were affected by reduced demand from industrial customers using energy during off-peak hours and a slowing economy in the third quarter of 2001. The year-to-date 2001 increase in retail sales revenue is attributed to a 1.6% increase in energy sales to retail customers caused by growth in the number of customers served by SAVANNAH, partially offset by a decrease in industrial sales revenue. Sales for resale - non-affiliates. For the third quarter and year-to-date 2001, these sales to non-affiliates revenues were higher due mainly to increased energy sales to non-affiliated wholesale customers when compared to the corresponding periods in 2000. 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 from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 65
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. During the third quarter and year-to-date 2001, reduced generation due to lower demand for energy and lower average cost of fuel consumed resulted in fuel expense being lower when compared to the same periods in 2000. Purchased power - non-affiliates. The third quarter and year-to-date 2001 decreases are primarily due to lower demand for energy in SAVANNAH's service area. These transactions do not have a significant impact on net income since energy expenses are generally offset by energy revenues. Taxes other than income taxes. The increases for the third quarter and year-to-date 2001 are primarily attributed to higher franchise fees related to an increase in SAVANNAH's billed revenues. 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, 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 offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of SAVANNAH in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with a number of non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process and directed the parties to participate in the mediation for 45 days. The parties to the mediation failed to reach agreement on a single RTO for the Southeast. On November 7, 2001, the FERC suspended the December 15, 2001 deadline to form an RTO established in its order issued December 20, 1999. SOUTHERN continues to work with the other entities to develop an RTO. 66
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SAVANNAH in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F), (K) 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. New Accounting Standards Effective January 1, 2001, SAVANNAH adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 are effective beginning in 2002 and are not expected to have a material impact on SAVANNAH's financial statements. Additionally 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 fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost 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 2003. SAVANNAH has not yet quantified the impact of adopting Statement No. 143 on its financial statements. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business contained in APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Statement No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations. The provisions of Statement No. 144 are effective beginning in 2002 and are not expected to have a material impact on SAVANNAH's financial statements. 67
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 nine months of 2001 included the addition of approximately $25.4 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations, credit arrangements with banks and financings. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities In May 2001, SAVANNAH issued $65 million aggregate principal amount of senior notes consisting of $20 million of Series B 5.12% Senior Notes due May 15, 2003 and $45 million of Series C 6.55% Senior Notes due May 15, 2008. The proceeds of the sale were used to redeem in June 2001 the $20 million outstanding principal amount of SAVANNAH's First Mortgage Bonds, 6 3/8% Series due July 1, 2003 and to repay $30 million in bank loans and a portion of SAVANNAH's outstanding short-term indebtedness. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. Sources of Capital SAVANNAH plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, SAVANNAH had at September 30, 2001 approximately $1.2 million of cash and cash equivalents and approximately $65.5 million of unused committed credit arrangements with banks. The credit arrangements provide liquidity support to SAVANNAH's obligation 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 at the request and for the benefit of SAVANNAH and other SOUTHERN subsidiaries. At September 30, 2001, SAVANNAH had outstanding $26.2 million of commercial paper. Since SAVANNAH has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit. 68
NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, G, H, I, J, K, N, Q ALABAMA A, C, D, E, F, K, N GEORGIA A, C, D, E, F, G, H, K, M GULF A, C, D, E, F, K, P MISSISSIPPI A, C, D, E, F, K, L, O SAVANNAH A, C, D, E, F, K, M 69
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (A) The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended September 30, 2001 and 2000. 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. 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 "Discontinued Operations" of SOUTHERN in Item 7 of the Form 10-K for information on the spin off of Mirant. 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 $3,323 million and $260 million to SOUTHERN's paid-in capital and retained earnings, respectively. 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, with the historical assets and liabilities of Mirant presented on the Condensed Consolidated Balance Sheet as net assets of discontinued operations. (C) On January 1, 2001, SOUTHERN and its subsidiaries adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Statement No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SOUTHERN utilizes financial instruments to reduce its exposure to changes in interest rates and foreign currency exchange rates. Such financial instruments are generally structured so that their terms are substantially identical to (and their changes in market value are highly correlated to) those of SOUTHERN's recorded liabilities or unrecorded firm commitments. Thus, these instruments generally qualify as hedges under Statement No. 133. 70
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) The integrated Southeast utilities also enter into commodity related forward and option contracts to limit exposure to changing prices on certain fuel purchases and electricity purchases and sales. Substantially all of the integrated Southeast utilities' bulk energy purchases and sales contracts meet the definition of a derivative under Statement No. 133. In many cases, these contracts qualify for Statement No. 133's normal purchase and sale exception and are, therefore, accounted for under the accrual method. Others qualify as cash flow hedges of anticipated transactions, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Contracts that do not qualify for the normal purchase and sale exception and do not meet the hedge requirements are marked to market through current period income. The cumulative effect of adoption was a reduction of approximately $300 million in comprehensive income, which was all related to discontinued operations. The impact on net income was immaterial to each of the integrated Southeast utilities individually and less than $0.01 per share to SOUTHERN on a consolidated basis. The mark to market adjustments recorded during the third quarter of 2001 were also immaterial. The application and interpretation of Statement No. 133's requirements are still evolving and further guidance from the FASB is expected, which could further impact the financial statements of SOUTHERN and the integrated Southeast utilities. Also, as wholesale energy markets mature, the accounting for future transactions could be significantly impacted by Statement No. 133, resulting in more volatility in net income and comprehensive income. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" of SOUTHERN and the integrated Southeast utilities in Item 7 for each of the registrants in the Form 10-K, and Note 1 to the financial statements of SOUTHERN under the caption "Financial Instruments for Non-Trading Activities" in Item 8 of the Form 10-K. (D) SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH engage in price risk management activities. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" in SOUTHERN; and "Exposure to Market Risks," in ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH. Reference is also made to Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA in Item 8 of the Form 10-K for a discussion of these activities. In May 2001, the Georgia PSC ordered that SAVANNAH implement a natural gas/oil hedging program effective June 1, 2001. In June 2001, the Mississippi PSC approved MISSISSIPPI's Energy Cost Management Clause, effective June 1, 2001. In November 2001, the Alabama PSC approved ALABAMA's energy hedging program effective November 1, 2001. These programs have been designed as a means to mitigate the effects of volatile fuel prices and to better match the cost recovery of fuel and energy related transactions. (E) The integrated Southeast utilities 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. (F) 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. 71
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (G) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning a three-year rate order approved by the Georgia PSC effective January 1, 1999. The order decreased annual retail rates by $262 million effective January 1, 1999 and by an additional $24 million effective January 1, 2000. The order further provides for $85 million each year, plus up to $50 million annually of any earnings above a 12.5% retail return on common equity during the second and third years, to be applied to accelerated amortization or depreciation of assets. In May 2000, the Georgia PSC ordered that these funds be maintained in a regulatory liability account and that interest be accrued on the account at the prime rate. These amounts are reflected on the balance sheets in deferred credits and other liabilities, other. Two-thirds of any additional earnings above the 12.5% return will be applied to rate reductions and the remaining one-third retained by GEORGIA. Pursuant to this provision, GEORGIA recognized accelerated amortization of $14.6 million in the third quarter of 2001, $25.9 million in the third quarter of 2000, $63.8 million year-to-date 2001 and $113.8 million year-to-date 2000. As mandated by the Georgia PSC, GEORGIA has recorded accumulated interest of $21.9 million on the amounts in the regulatory liability account. Pursuant to GEORGIA's existing rate order, GEORGIA was required to file a general rate case with the Georgia PSC by July 1, 2001. Accordingly, on June 29, 2001, GEORGIA filed a rate plan with the Georgia PSC. GEORGIA's filing showed a base rate revenue deficiency of $103 million for the test period. GEORGIA's rate plan proposal waives the base rate increase in favor of a five-year plan that includes several modifications to the existing rate order. GEORGIA requested to continue operating within an earnings band, but requested that the mid-point of the band be increased by 100 basis points, to a range of between 11% and 13.5 % return on equity. As part of the proposal, GEORGIA also requested a continuation of the sharing mechanism that was approved in 1998. The new proposal would allow customers to keep two-thirds of any amount above the earnings range that can be attributed to weather, while GEORGIA would keep one-third. GEORGIA and its customers would each keep half of all other earnings above the range. GEORGIA also proposed a certified capacity cost recovery clause that would become effective on June 1, 2002. In its direct testimony filed on October 12, 2001, the Advocate Staff of the Georgia PSC proposed certain adjustments to GEORGIA's general rate case filing that indicate a $418 million revenue surplus. The Advocate Staff supports a three-year continuation of the current rate plan without the modifications proposed by GEORGIA and rejects the proposed certified capacity cost recovery clause. GEORGIA disagrees with the Advocate Staff's proposed adjustments. The Georgia PSC is expected to issue its decision by December 20, 2001 to be effective January 1, 2002. (H) 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. (I) SOUTHERN has made separate guarantees to certain counterparties regarding performance of contractual commitments by Mirant's trading and marketing subsidiaries. At September 30, 2001, the total notional amount of guarantees was $80.5 million and the estimated fair value of net contractual commitments outstanding was approximately $6.4 million. Based upon a statistical analysis of credit risk, SOUTHERN's potential exposure under these contractual commitments would not 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. 72
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (J) With respect to Mobile Energy, reference is made to Note 3 to the financial statements of SOUTHERN in Item 8 and to Legal Proceedings in Item 3 of the Form 10-K for information relating to (i) petitions for Chapter 11 bankruptcy relief which were filed in the U. S. Bankruptcy Court for the Southern District of Alabama and (ii) proposed settlement discussions among the affected parties. (K) 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. (L) Effective May 4, 2001, in connection with commercial operation of the 1,064-megawatt natural gas combined cycle facility at MISSISSIPPI's Plant Daniel (the "Facility"), MISSISSIPPI entered into the initial 10-year lease term under its lease arrangement for the Facility with Escatawpa Funding, Limited Partnership. The final completion cost will be approximately $370 million. The lease provides for a residual value guarantee (approximately 71% of the acquisition cost) by MISSISSIPPI that is due upon termination of the lease in certain circumstances. The lease also includes purchase and renewal options. Upon termination of the lease, at MISSISSIPPI's option, MISSISSIPPI may either exercise its purchase option or the Facility can be sold to a third party. MISSISSIPPI expects the fair market value of the leased facility to substantially reduce or eliminate MISSISSIPPI's payment under the residual value guarantee. The annual amount of future minimum operating lease payments exclusive of any payment related to this guarantee will approximate $30 million during the initial term. (M) In April 2001, SAVANNAH received an order from the Georgia PSC allowing SAVANNAH to set the fuel cost recovery rate to recover its approximately $40 million deferred fuel balance over three years and to recover approximately $137 million in projected annual fuel and purchased power costs, for a total recovery of approximately $150 million per year. The order "capped" energy strip purchases at $100 per megawatt. Any purchase agreement for summer energy strips priced in excess of the "cap" requires that the amount above $100 per megawatt be "imputed" as capacity and recovered through non-fuel rates. In a reconsideration of the SAVANNAH order, decided in a June 11, 2001 Administrative Session, the Georgia PSC ordered that all costs for energy purchases contracted for prior to April 30, 2001 may be recovered through the fuel clause. In May 2001, the Georgia PSC approved an increase to the retail fuel rate allowing GEORGIA to recover $87 million of unrecovered fuel costs over the next 24 months. (N) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for information relating to retail rate adjustment procedures. Effective July 2001, retail rates were adjusted under Rate CNP, Certificated New Plant, which allows ALABAMA to begin to recover costs for a new generating plant after it goes into commercial operation. ALABAMA placed Plant Barry, Unit 7 into commercial operation on May 1, 2001. Effective October 2001, ALABAMA increased retail rates by 2% under the Rate RSE, Rate Stabilization Equalization. (O) On August 3, 2001, MISSISSIPPI filed a request with the Mississippi PSC to increase annual retail rate revenues by approximately $46.4 million. Hearings on this matter were held before the Mississippi PSC on November 7, 8 and 9, 2001. The Mississippi PSC is required to rule on MISSISSIPPI's request in early December 2001. The requested increase would be effective in January 2002. (P) On September 10, 2001, GULF filed a request for a base rate increase with the Florida PSC. The total amount of the requested increase is approximately $70 million based on a return on equity of 13.0%. The requested increase is designed to cover the costs associated with the commercial operation of GULF's Plant Smith Unit 3 and other operating costs. Hearings in this matter are currently set for February 25 through March 1, 2002, with a decision by the Florida PSC expected in early May 2002. There can be no assurance that the request, as submitted by GULF, will be approved by the Florida PSC. 73
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (Q) SOUTHERN's reportable business segment is the five integrated Southeast utilities that provide electric service in four states. 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: <TABLE> <CAPTION> Integrated Southeast All Reconciling Utilities Other Eliminations Consolidated ----------------- -------------- ---------------- ----------------- (in millions) Three Months Ended September 30, 2001: <S> <C> <C> <C> <C> Operating revenues $ 3,082 $ 88 $ (5) $ 3,165 Segment net income (loss) 546 8 - 554 Nine Months Ended September 30, 2001: Operating revenues $ 7,806 $ 207 $ (17) $ 7,996 Segment net income (loss) 1,021 (17) 142 1,146 Total assets at September 30, 2001 $28,822 $ 2,773 $ (1,796) $ 29,799 ---------------------------------------------------- ----------------- -------------- ---------------- ----------------- Three Months Ended September 30, 2000: Operating revenues $ 3,142 $ 65 $ (9) $ 3,198 Segment net income (loss) 560 (36) 90 614 Nine Months Ended September 30, 2000: Operating revenues $ 7,619 $ 184 $ (31) $ 7,772 Segment net income (loss) 1,017 (87) 271 1,201 Total assets at December 31, 2000 $ 26,917 $ 2,200 $ 2,245 $ 31,362 --------------------------------------------------- ----------------- -------------- ---------------- ----------------- </TABLE> 74
PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) Cooper et al. v. GEORGIA, SOUTHERN, SCS and Southern Company Energy Solutions, Inc. (Superior Court of Fulton County, Georgia) On October 11, 2001, the United States District Court for the Northern District of Georgia denied plaintiffs' motion for class certification. On October 24, 2001, the plaintiffs filed a motion to reconsider the order denying class certification. The defendants filed a brief in opposition to the motion to reconsider on October 29, 2001. The final outcome of the case cannot now be determined. Reference is made to Note 3 to SOUTHERN's and GEORGIA's financial statements in Item 8 of the Form 10-K under the caption "Race Discrimination Litigation" for additional information. (2) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. -------- Exhibit 24 - (a) Powers of Attorney and resolutions. (Designated in the Form 10-K for the year ended December 31, 2000, 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) Reports on Form 8-K. ------------------- ALABAMA filed a Current Report on Form 8-K dated August 22, 2001: Items reported: Items 5 and 7 Financial statements filed: None GULF filed Current Reports on Form 8-K dated July 31, 2001 and October 5, 2001: Items reported: Items 5 and 7 Financial statements filed: None 75
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 H. Allen Franklin Chairman and Chief Executive Officer (Principal Executive Officer) By Gale E. Klappa Financial Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2001 - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANY By Charles D. McCrary President and Chief Executive Officer (Principal Executive Officer) By William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2001 76
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANY By David M. Ratcliffe President and Chief Executive Officer (Principal Executive Officer) By Thomas A. Fanning Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2001 - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By Ronnie Labrato Vice President, Chief Financial Officer and Comptroller (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2001 77
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. 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: November 13, 2001 - ------------------------------------------------------------------------------- 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: November 13, 2001 78