============================================================================== 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 March 31, 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____ <TABLE> <CAPTION> Description of Shares Outstanding Registrant Common Stock at April 30, 2001 - - - - - - - ---------- ---------------- ------------------ <S> <C> <C> The Southern Company Par Value $5 Per Share 685,024,375 Alabama Power Company Par Value $40 Per Share 5,608,955 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635 This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Savannah Electric and Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies. </TABLE> 2
<TABLE> <CAPTION> INDEX TO QUARTERLY REPORT ON FORM 10-Q March 31, 2001 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..................................................................... 18 Condensed Statements of Cash Flows................................................................. 19 Condensed Balance Sheets........................................................................... 20 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 22 Georgia Power Company Condensed Statements of Income..................................................................... 26 Condensed Statements of Cash Flows................................................................. 27 Condensed Balance Sheets........................................................................... 28 Condensed Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income.......................................................... 30 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 31 Gulf Power Company Condensed Statements of Income..................................................................... 36 Condensed Statements of Cash Flows................................................................. 37 Condensed Balance Sheets........................................................................... 38 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 40 Mississippi Power Company Condensed Statements of Income..................................................................... 45 Condensed Statements of Cash Flows................................................................. 46 Condensed Balance Sheets........................................................................... 47 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 49 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 53 Condensed Statements of Cash Flows................................................................. 54 Condensed Balance Sheets........................................................................... 55 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 57 Notes to the Condensed Financial Statements........................................................... 60 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 65 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.......................................................................... 65 Signatures ............................................................................................... 66 </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, integrated Southeast utilities and other subsidiaries </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 pending EPA civil action against certain of the integrated Southeast utilities and the race discrimination litigation against certain of SOUTHERN's subsidiaries; the effects, extent and timing of the entry of additional competition in the markets of SOUTHERN's subsidiaries; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial; internal restructuring or other restructuring options that may be pursued by SOUTHERN; state and federal rate regulation in the United States; political, legal and economic conditions and developments in the United States; financial market conditions and the results of financing efforts; the impact of fluctuations in commodity prices, interest rates and customer demand; weather and other natural phenomena; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; the timing and acceptance of SOUTHERN's new product and service offerings; the ability of SOUTHERN to obtain additional generating capacity at competitive prices; and other factors discussed elsewhere herein and in other reports (including 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 Ended March 31, 2001 2000 ------------------------------------- (in thousands) Operating Revenues: <S> <C> <C> Retail sales $1,882,478 $1,782,708 Sales for resale 260,046 177,929 Other revenues 126,994 90,966 ----------------- ------------------ Total operating revenues 2,269,518 2,051,603 ----------------- ------------------ Operating Expenses: Operation -- Fuel 607,481 524,073 Purchased power 114,026 74,429 Other operations 405,865 387,363 Maintenance 225,857 210,942 Depreciation and amortization 303,666 291,674 Taxes other than income taxes 137,309 135,179 ----------------- ------------------ Total operating expenses 1,794,204 1,623,660 ----------------- ------------------ Operating Income 475,314 427,943 Other Income: Interest income 5,455 8,967 Equity in earnings of unconsolidated subsidiaries (2,697) (5,778) Other, net 2,549 11,654 ----------------- ------------------ Earnings From Continuing Operations Before Interest and Income Taxes 480,621 442,786 ----------------- ------------------ Interest and Other: Interest expense, net 144,888 152,947 Distributions on capital and preferred securities of subsidiaries 42,241 42,242 Preferred dividends of subsidiaries 4,805 4,695 ----------------- ------------------ Total interest and other 191,934 199,884 ----------------- ------------------ Earnings From Continuing Operations Before Income Taxes 288,687 242,902 Income taxes 109,945 91,747 ----------------- ------------------ Earnings From Continuing Operations Before Cumulative Effect of Accounting Change 178,742 151,155 Cumulative effect as of January 1, 2001 of accounting change -- less income taxes of $477 thousand 771 - ----------------- ------------------ Earnings From Continuing Operations 179,513 151,155 Earnings from discontinued operations, net of income taxes of $91,752 thousand and $(30,237) thousand for 2001 and 2000, respectively 140,032 94,289 ----------------- ------------------ Consolidated Net Income $319,545 $245,444 ================= ================== Common Stock Data: Basic and diluted earnings per share of common stock -- Earnings per share from continuing operations $0.26 $0.23 Earnings per share from discontinued operations $0.21 $0.15 ----------------- ------------------ Consolidated Basic and Diluted Earnings Per Share $0.47 $0.38 ================= ================== Average number of shares of common stock outstanding (in thousands) 682,575 653,134 Cash dividends paid per share of common stock $0.335 $0.335 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 Three Months Ended March 31, 2001 2000 ----------------- ----------------- (in thousands) Operating Activities: <S> <C> <C> Consolidated net income $319,545 $245,444 Adjustments to reconcile consolidated net income to net cash provided from operating activities -- Less income from discontinued operations 140,032 94,289 Depreciation and amortization 327,793 355,889 Deferred income taxes and investment tax credits (30,355) (5,818) Equity in earnings of unconsolidated subsidiaries 2,697 5,778 Other, net (344,997) (89,667) Changes in certain current assets and liabilities -- Receivables, net 328,409 230,742 Fossil fuel stock (134,413) (1,767) Materials and supplies 533 (9,897) Accounts payable (209,598) (106,333) Other 1,813 (235,021) ----------------- ----------------- Net cash provided from operating activities of continuing operations 121,395 295,061 ----------------- ----------------- Investing Activities: Gross property additions (670,183) (455,126) Other (76,900) (99,292) ----------------- ----------------- Net cash used for investing activities of continuing operations (747,083) (554,418) ----------------- ----------------- Financing Activities: Increase (decrease) in notes payable, net 197,365 599,806 Proceeds -- Other long-term debt 458,582 420,737 Common stock 87,880 43 Redemptions -- First mortgage bonds (200,000) (200,000) Other long-term debt (6,145) (52,146) Preferred stock - (279) Common stock repurchased - (414,298) Payment of common stock dividends (228,320) (220,557) Other (5,777) (10,700) ----------------- ----------------- Net cash provided from financing activities of continuing operations 303,585 122,606 ----------------- ----------------- Cash provided by discontinued operations 302,668 69,765 ----------------- ----------------- Net Decrease in Cash and Cash Equivalents (19,435) (66,986) Cash and Cash Equivalents at Beginning of Year 199,191 153,955 ----------------- ----------------- Cash and Cash Equivalents at End of Year $179,756 $86,969 ================= ================= Supplemental Cash Flow Information From Continuing Operations: Cash paid during the period for -- Interest (net of amount capitalized) $144,450 $169,384 Income taxes (net of refunds) ($4,069) $3,126 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 March 31, 2001 At December 31, Assets (Unaudited) 2000 ------------------- ------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 179,756 $ 199,191 Special deposits 10,258 5,895 Receivables, less accumulated provisions for uncollectible accounts of $25,143 thousand at March 31, 2001 and $21,799 thousand at December 31, 2000 1,019,388 1,311,457 Under recovered retail fuel clause revenue 351,492 418,077 Fossil fuel stock, at average cost 329,619 195,206 Materials and supplies, at average cost 506,892 507,425 Other 253,716 187,948 ------------------- ------------------- Total current assets 2,651,121 2,825,199 ------------------- ------------------- Property, Plant, and Equipment: In service 34,451,062 34,187,808 Less accumulated depreciation 14,525,469 14,348,763 ------------------- ------------------- 19,925,593 19,839,045 Nuclear fuel, at amortized cost 196,809 214,620 Construction work in progress 1,917,697 1,568,737 ------------------- ------------------- Total property, plant, and equipment 22,040,099 21,622,402 ------------------- ------------------- Other Property and Investments: Nuclear decommissioning trusts, at fair value 670,355 689,561 Net assets of discontinued operations 3,157,861 3,320,497 Leveraged leases 610,864 595,952 Other 219,004 165,332 ------------------- ------------------- Total other property and investments 4,658,084 4,771,342 ------------------- ------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 951,018 956,673 Prepaid pension costs 528,906 498,279 Debt expense, being amortized 76,266 99,442 Premium on reacquired debt, being amortized 275,148 280,239 Other 346,395 308,082 ------------------- ------------------- Total deferred charges and other assets 2,177,733 2,142,715 ------------------- ------------------- Total Assets $31,527,037 $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 March 31, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 ------------------- ------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 467,756 $ 67,324 Notes payable 1,877,008 1,679,643 Accounts payable 632,840 870,032 Customer deposits 143,468 139,798 Taxes accrued -- Income taxes 236,099 87,731 Other 119,173 208,143 Interest accrued 186,832 120,770 Vacation pay accrued 118,158 118,710 Other 340,886 444,600 ------------------- ------------------- Total current liabilities 4,122,220 3,736,751 ------------------- ------------------- Long-term debt 7,695,096 7,842,491 ------------------- ------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 4,074,455 4,074,265 Deferred credits related to income taxes 540,061 551,259 Accumulated deferred investment tax credits 656,135 663,579 Employee benefits provisions 492,704 478,414 Prepaid capacity revenues 52,634 58,377 Other 716,713 651,805 ------------------- ------------------- Total deferred credits and other liabilities 6,532,702 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 -- March 31, 2001: 700,622,308 shares; -- December 31, 2000: 700,622,308 shares 3,503,112 3,503,112 Paid-in capital 3,168,454 3,153,461 Treasury, at cost -- March 31, 2001: 16,617,726 shares; -- December 31, 2000: 19,464,122 shares (465,288) (544,515) Retained earnings 4,763,406 4,671,881 Accumulated other comprehensive income (407,041) (93,598) ------------------- ------------------- Total common stockholders' equity 10,562,643 10,690,341 ------------------- ------------------- Total Liabilities and Stockholders' Equity $31,527,037 $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 Ended March 31, ----------------------------------------- 2001 2000 ----------------------------------------- (in thousands) <S> <C> <C> Consolidated net income $319,545 $245,444 Other comprehensive income - continuing operations: Cumulative effect of accounting change 466 - Current period changes in fair value 1,324 - Related income tax benefits (683) - ------------------- ------------------ Total other comprehensive income - continuing operations 1,107 - ------------------- ------------------ 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 (21,199) (2,918) ------------------- ------------------ Total other comprehensive income - discontinued operations (314,550) (2,918) ------------------- ------------------ CONSOLIDATED COMPREHENSIVE INCOME $ 6,102 $242,526 =================== ================== </TABLE> <TABLE> <CAPTION> THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME At March 31, 2001 At December 31, (Unaudited) 2000 ------------------- ------------------ (in thousands) <S> <C> <C> Balance at beginning of period - continuing operations $ 249 $ - Change in current period - continuing operations 1,107 249 ------------------- ------------------ BALANCE AT END OF PERIOD - Continuing Operations 1,356 249 ------------------- ------------------ Balance at beginning of period - discontinued operations (93,847) (92,395) Change in current period - discontinued operations (314,550) (1,452) ------------------- ------------------ BALANCE AT END OF PERIOD - Discontinued Operations (408,397) (93,847) ------------------- ------------------ TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME ($407,041) ($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 FIRST QUARTER 2001 vs. FIRST QUARTER 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 March 31, 2001 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 reported consolidated net income for the first quarter of 2001 was $320 million ($0.47 per share), compared to $245 million ($0.38 per share) for the corresponding period of 2000. Excluding Mirant's contributions, SOUTHERN's first quarter 2001 earnings from operations were $180 million ($0.26 per share), compared with $151 million ($0.23 per share) in the first quarter of 2000. The increase in earnings for the current quarter is primarily due to higher operating revenues partially offset by higher operating expenses. Significant income statement items appropriate for discussion include the following: Increase (Decrease) ------------------------------- First Quarter ------------------------------- (in thousands) % Retail sales.......................... $99,770 5.6 Sales for resale...................... 82,117 46.2 Other revenues........................ 36,028 39.6 Fuel expense.......................... 83,408 15.9 Purchased power expense............... 39,597 53.2 Maintenance expense................... 14,915 7.1 Retail sales revenue. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was up by $47 million in the first quarter of 2001 from the same period in 2000 due to a 0.9% increase in retail energy sales. Retail energy sales were higher during the current quarter due primarily to weather and growth in the number of customers served by the integrated Southeast utilities. Sales for resale. The increase in this first quarter of 2001 from the same period in 2000 reflects increased demand for energy by non-affiliates. Since this energy is usually sold at variable cost, these transactions do not have a significant impact on earnings. Wholesale energy sales from Plant Dahlberg which went into service in the second quarter of 2000 also contributed to the sales for resale revenue increase in the first quarter of 2001. 12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other revenues. During the first quarter of 2001, other revenues were higher than the amount recorded in the same period in 2000 due primarily to increased revenues from gas-fueled cogeneration steam facilities, higher revenues from transmission of electricity for others and pole attachment rentals and fuel clause adjustments. Revenues from cogeneration activities are generally offset by fuel expenses and do not have a significant impact on earnings. The fuel clause adjustments reflect the difference between recoverable costs and the amounts actually reflected in current rates; further, the recovery provisions generally equal related expenses and have no material effect on net income. Fuel expense. For the first quarter of 2001, fuel expenses increased from the same period in 2000 due primarily to increased generation from gas-fueled plants at a time of higher natural gas prices. Since energy expenses are usually offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power expense. This expense increased during the first quarter of 2001 from the same period in 2000 due primarily to higher costs associated with these purchases as well as increased demand related to the drought in GEORGIA's service area. Since energy expenses are usually offset by energy revenues, these expenses do not have a significant impact on earnings. Maintenance expense. These expenses increased in the first quarter of 2001 when compared to the same period in 2000 due primarily to scheduled work performed at steam generating, transmission and distribution facilities. 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 cost 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. 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. 13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Notes (B) through (L) 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. Adoption of New Accounting Standard Effective January 1, 2001, SOUTHERN and its subsidiaries adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All 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. FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first three months of 2001 included $670 million 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. Reference is made to SOUTHERN's Condensed Consolidated Statements of Comprehensive Income herein for information relating to other comprehensive income. 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 Series G 6.20% Senior Notes due February 1, 2006. The proceeds of the sale were applied to redeem $200 million of 6 5/8% Series First Mortgage Bonds 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. In May 2001, GEORGIA issued $90 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds of this sale will be used to redeem in June 2001 the $75 million outstanding principal amount of GEORGIA's 6.35% Series, First Mortgage Bonds due August 1, 2003 and to repay a portion of GEORGIA's outstanding short-term indebtedness. The market price of SOUTHERN's common stock at March 31, 2001 with Mirant was $35.09 per share and the book value was $15.37 per share, representing a market-to-book ratio of 228%, compared to $33.25, $15.69 and 212%, respectively, at the end of 2000. The dividend for the first quarter of 2001 was $0.335 per share. 14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements", "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 and maturing debt, and environmental compliance efforts. Approximately $468 million will be required by March 31, 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 during the remainder of the year. The amounts and timing of additional equity capital to be raised in 2001, as well as in subsequent years, 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 March 31, 2001 approximately $180 million of cash and cash equivalents and approximately $5.1 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 March 31, 2001, the SOUTHERN system had short-term notes payable outstanding of $1.9 billion. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 15
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 (J) in the "Notes to the Condensed Financial Statements" contained herein for additional information regarding commodity-related marketing and price risk management activities. 16
ALABAMA POWER COMPANY 17
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 2001 2000 ---------------- ---------------- (in thousands) Operating Revenues: <S> <C> <C> Retail sales $634,772 $606,126 Sales for resale -- Non-affiliates 110,462 96,131 Affiliates 75,133 28,669 Other revenues 29,635 15,251 ---------------- ---------------- Total operating revenues 850,002 746,177 ---------------- ---------------- Operating Expenses: Operation -- Fuel 259,455 195,074 Purchased power -- Non-affiliates 34,309 18,872 Affiliates 35,986 26,865 Other 111,002 112,246 Maintenance 76,360 76,834 Depreciation and amortization 95,517 90,472 Taxes other than income taxes 57,346 54,152 ---------------- ---------------- Total operating expenses 669,975 574,515 ---------------- ---------------- Operating Income 180,027 171,662 Other Income: Interest income 3,486 5,926 Equity in earnings of unconsolidated subsidiaries 1,055 859 Other, net (3,130) (1,082) ---------------- ---------------- Earnings Before Interest and Income Taxes 181,438 177,365 ---------------- ---------------- Interest and Other: Interest expense, net 57,821 58,908 Distributions on preferred securities of subsidiary 6,356 6,336 ---------------- ---------------- Total interest and other, net 64,177 65,244 ---------------- ---------------- Earnings Before Income Taxes 117,261 112,121 Income taxes 43,610 40,641 ---------------- ---------------- Net Income Before Cumulative Effect of Accounting Change 73,651 71,480 Cumulative effect as of January 1, 2001 of accounting change -- less income taxes of $215 thousand 353 - ---------------- ---------------- Net Income 74,004 71,480 Dividends on Preferred Stock 4,052 3,968 ---------------- ---------------- Net Income After Dividends on Preferred Stock $69,952 $67,512 ================ ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 18
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 2001 2000 ----------------- ----------------- (in thousands) Operating Activities: <S> <C> <C> Net income $74,004 $71,480 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 106,491 101,947 Deferred income taxes and investment tax credits, net 2,656 (2,423) Other, net (33,180) (22,451) Changes in certain current assets and liabilities -- Receivables, net 131,403 40,702 Fossil fuel stock (31,782) (8,814) Materials and supplies 4,602 (7,327) Accounts payable (135,845) (48,113) Energy cost recovery, retail 30,624 23,037 Other (22,531) (17,973) ----------------- ----------------- Net cash provided from operating activities 126,442 130,065 ----------------- ----------------- Investing Activities: Gross property additions (194,434) (193,894) Other 5,367 (2,365) ----------------- ----------------- Net cash used for investing activities (189,067) (196,259) ----------------- ----------------- Financing Activities: Increase in notes payable, net 164,996 274,871 Redemptions -- First mortgage bonds - (100,000) Other long-term debt (1,179) (1,685) Payment of preferred stock dividends (3,699) (4,028) Payment of common stock dividends (101,200) (103,600) Other 191 (20) ----------------- ----------------- Net cash provided from financing activities 59,109 65,538 ----------------- ----------------- Net Change in Cash and Cash Equivalents (3,516) (656) Cash and Cash Equivalents at Beginning of Period 14,247 19,475 ----------------- ----------------- Cash and Cash Equivalents at End of Period $10,731 $18,819 ================= ================= Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $47,083 $50,316 Income taxes (net of refunds) $4,676 $529 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 19
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 10,731 $ 14,247 Receivables -- Customer accounts receivable 277,968 337,870 Under recovered retail fuel clause revenue 207,193 237,817 Other accounts and notes receivable 40,457 60,315 Affiliated companies 43,798 95,704 Accumulated provision for uncollectible accounts (5,974) (6,237) Fossil fuel stock, at average cost 92,397 60,615 Materials and supplies, at average cost 173,697 178,299 Other 97,214 52,624 ------------------- -------------------- Total current assets 937,481 1,031,254 ------------------- -------------------- Property, Plant, and Equipment: In service 12,557,523 12,431,575 Less accumulated provision for depreciation 5,184,726 5,107,822 ------------------- -------------------- 7,372,797 7,323,753 Nuclear fuel, at amortized cost 87,922 94,050 Construction work in progress 796,709 744,974 ------------------- -------------------- Total property, plant, and equipment 8,257,428 8,162,777 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 39,922 38,623 Nuclear decommissioning trusts 304,840 313,895 Other 14,039 13,612 ------------------- -------------------- Total other property and investments 358,801 366,130 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 344,826 345,550 Prepaid pension costs 282,302 268,259 Debt expense, being amortized 8,409 8,758 Premium on reacquired debt, being amortized 74,029 76,020 Department of Energy assessments 24,588 24,588 Other 104,345 95,772 ------------------- -------------------- Total deferred charges and other assets 838,499 818,947 ------------------- -------------------- Total Assets $10,392,209 $10,379,108 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 20
<TABLE> <CAPTION> ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 846 $ 844 Notes payable 446,339 281,343 Accounts payable -- Affiliated 105,944 124,534 Other 93,295 209,205 Customer deposits 38,217 36,814 Taxes accrued -- Income taxes 111,109 65,505 Other 37,329 19,471 Interest accrued 46,188 33,186 Vacation pay accrued 31,711 31,711 Other 51,097 97,743 ------------------- -------------------- Total current liabilities 962,075 900,356 ------------------- -------------------- Long-term debt 3,425,059 3,425,527 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,398,836 1,401,424 Deferred credits related to income taxes 217,894 222,485 Accumulated deferred investment tax credits 246,516 249,280 Employee benefits provisions 87,792 84,816 Prepaid capacity revenues 52,634 58,377 Other 172,058 176,559 ------------------- -------------------- Total deferred credits and other liabilities 2,175,730 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 - 5,608,955 shares Par value 224,358 224,358 Paid-in capital 1,743,371 1,743,363 Premium on preferred stock 99 99 Retained earnings 1,197,005 1,227,952 ------------------- -------------------- Total common stockholder's equity 3,164,833 3,195,772 ------------------- -------------------- Total Liabilities and Stockholder's Equity $10,392,209 $10,379,108 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. </TABLE> 21
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 2001 vs. FIRST QUARTER 2000 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the first quarter of 2001 was $70.0 million compared to $67.5 million for the corresponding period of 2000. The increase in first quarter 2001 earnings was primarily due to increased operating revenues which were partially offset by higher operating expenses. Significant income statement items appropriate for discussion include the following: Increase (Decrease) ----------------------------------- First Quarter ----------------------------------- (in thousands) % Retail sales........................... $28,646 4.7 Sales for resale - non-affiliates...... 14,331 14.9 Sales for resale - affiliates.......... 46,464 162.1 Other revenues......................... 14,384 94.3 Fuel expense........................... 64,381 33.0 Purchased power - non-affiliates....... 15,437 81.8 Purchased power - affiliates........... 9,121 34.0 Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was up by $4.3 million or 1% during the first quarter of 2001 when compared to the same period in 2000. Energy sales to industrial customers decreased as a result of a slower economy during the first quarter of 2001; however, energy sales to residential and commercial customers increased due to colder weather. Sales for resale - non-affiliates. For the first quarter of 2001 these sales were higher when compared to the same period in 2000 due to increased demand for energy by non-affiliates. 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. This increase in the first quarter of 2001 when compared to the same period in 2000 is primarily due to an increase in revenue from gas-fueled cogeneration steam facilities. Since cogeneration steam revenues are generally offset by fuel expenses, these revenues did not have a significant impact on earnings. Fuel expense. Increased generation from gas-fueled plants at a time of increased natural gas prices resulted in higher fuel expense for the first quarter of 2001 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. 22
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power - non-affiliates. Purchased power from non-affiliates increased for the first quarter of 2001 when compared to the corresponding period in 2000 due primarily to higher costs associated with these energy purchases. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, 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. 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 (G) and (L) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Adoption of New Accounting Standard Effective January 1, 2001, ALABAMA adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All 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. 23
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 three months of 2001 included the addition of approximately $194 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities In April 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due April 1, 2031. 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. To meet short-term cash needs and contingencies, ALABAMA had at March 31, 2001 approximately $11 million of cash and cash equivalents, unused committed lines of credit of approximately $925 million (including $418 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. ALABAMA has regulatory authority for up to $750 million of short-term borrowings. At March 31, 2001, ALABAMA had outstanding $300.7 million of commercial paper, $89.6 million of extendible commercial notes, and $56 million in notes payable to banks. 24
GEORGIA POWER COMPANY 25
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 2001 2000 ----------------- ---------------- (in thousands) Operating Revenues: <S> <C> <C> Retail sales $949,145 $909,028 Sales for resale -- Non-affiliates 87,591 43,689 Affiliates 35,777 11,933 Other revenues 35,516 26,989 ----------------- ---------------- Total operating revenues 1,108,029 991,639 ----------------- ---------------- Operating Expenses: Operation -- Fuel 228,692 210,907 Purchased power -- Non-affiliates 54,105 43,110 Affiliates 79,295 47,740 Other 175,574 158,983 Maintenance 106,665 98,133 Depreciation and amortization 164,249 157,767 Taxes other than income taxes 50,101 51,613 ----------------- ---------------- Total operating expenses 858,681 768,253 ----------------- ---------------- Operating Income 249,348 223,386 Other Income (Expense): Interest income 602 408 Equity in earnings of unconsolidated subsidiaries 1,009 853 Other, net (8,366) (6,225) ----------------- ---------------- Earnings Before Interest and Income Taxes 242,593 218,422 ----------------- ---------------- Interest Charges and Other: Interest expense, net 50,899 46,977 Distributions on preferred securities of subsidiaries 14,776 14,776 ----------------- ---------------- Total interest charges and other, net 65,675 61,753 ----------------- ---------------- Earnings Before Income Taxes 176,918 156,669 Income taxes 69,333 62,800 ----------------- ---------------- Net Income Before Cumulative Effect of Accounting Change 107,585 93,869 Cumulative effect as of January 1, 2001 of accounting change -- less income taxes of $162 thousand 257 - ----------------- ---------------- Net Income 107,842 93,869 Dividends on Preferred Stock 168 170 ----------------- ---------------- Net Income After Dividends on Preferred Stock $ 107,674 $ 93,699 ================= ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 26
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 2001 2000 --------------- ---------------- (in thousands) Operating Activities: <S> <C> <C> Net income $107,842 $93,869 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 169,340 201,886 Deferred income taxes and investment tax credits, net (45,751) (11,679) Other, net 4,206 (7,996) Changes in certain current assets and liabilities -- Receivables, net 122,153 48,673 Fossil fuel stock (69,881) 7,412 Materials and supplies (2,975) (1,361) Accounts payable (117,678) (65,168) Energy cost recovery, retail 38,874 (9,930) Other 70,846 (3,060) --------------- ---------------- Net cash provided from operating activities 276,976 252,646 --------------- ---------------- Investing Activities: Gross property additions (385,544) (212,360) Other (24,444) (74,899) --------------- ---------------- Net cash used for investing activities (409,988) (287,259) --------------- ---------------- Financing Activities: Increase (decrease) in notes payable, net (170,727) (50,097) Proceeds -- Other long-term debt 450,000 300,000 Capital contributions from parent company 200,000 - Retirements -- First mortgage bonds (200,000) (100,000) Preferred stock - (279) Payment of preferred stock dividends (83) (125) Payment of common stock dividends (134,500) (136,500) Other (4,775) (43) --------------- ---------------- Net cash provided from financing activities 139,915 12,956 --------------- ---------------- Net Change in Cash and Cash Equivalents 6,903 (21,657) Cash and Cash Equivalents at Beginning of Period 29,370 34,660 --------------- ---------------- Cash and Cash Equivalents at End of Period $ 36,273 $ 13,003 =============== ================ Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $38,299 $56,096 Income taxes (net of refunds) ($13,135) $1,604 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 27
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 36,273 $ 29,370 Receivables -- Customer accounts receivable 385,245 465,249 Under recovered retail fuel clause revenue 92,749 131,623 Other accounts and notes receivable 96,714 156,143 Affiliated companies 21,088 13,312 Accumulated provision for uncollectible accounts (9,250) (5,100) Fossil fuel stock, at average cost 169,344 99,463 Materials and supplies, at average cost 266,584 263,609 Other 129,882 97,515 ------------------- -------------------- Total current assets 1,188,629 1,251,184 ------------------- -------------------- Property, Plant, and Equipment: In service 16,555,456 16,469,706 Less accumulated provision for depreciation 6,974,952 6,914,512 ------------------- -------------------- 9,580,504 9,555,194 Nuclear fuel, at amortized cost 108,887 120,570 Construction work in progress 917,921 652,264 ------------------- -------------------- Total property, plant, and equipment 10,607,312 10,328,028 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 26,440 25,485 Nuclear decommissioning trusts 365,515 375,666 Other 37,786 33,829 ------------------- -------------------- Total other property and investments 429,741 434,980 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 560,491 565,982 Prepaid pension costs 220,586 205,113 Debt expense, being amortized 57,582 53,748 Premium on reacquired debt, being amortized 171,242 173,610 Other 114,557 120,964 ------------------- -------------------- Total deferred charges and other assets 1,124,458 1,119,417 ------------------- -------------------- Total Assets $13,350,140 $13,133,609 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 28
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 301,846 $ 1,808 Notes payable and commercial paper 533,112 703,839 Accounts payable -- Affiliated 66,967 117,168 Other 306,738 397,550 Customer deposits 80,134 78,540 Taxes accrued -- Income taxes 133,530 5,151 Other 53,983 137,511 Interest accrued 72,660 47,244 Vacation pay accrued 39,501 38,865 Other 152,898 153,400 ------------------- -------------------- Total current liabilities 1,741,369 1,681,076 ------------------- -------------------- Long-term debt 2,991,667 3,041,939 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,167,336 2,182,783 Deferred credits related to income taxes 242,520 247,067 Accumulated deferred investment tax credits 348,582 352,282 Employee benefits provisions 182,287 177,444 Other 449,050 397,655 ------------------- -------------------- Total deferred credits and other liabilities 3,389,775 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 2,317,497 2,117,497 Premium on preferred stock 40 40 Retained earnings 1,760,931 1,787,757 Accumulated other comprehensive income 792 - ------------------- -------------------- Total common stockholder's equity 4,423,510 4,249,544 ------------------- -------------------- Total Liabilities and Stockholder's Equity $13,350,140 $13,133,609 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 29
<TABLE> <CAPTION> GEORGIA POWER COMPANY CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months Ended March 31, ---------------------------------- 2001 2000 -------------- -------------- (in thousands) <S> <C> <C> Net Income After Dividends on Preferred Stock $107,674 $93,699 Other comprehensive income: Cumulative effect of accounting change 466 - Current period changes in fair value 825 - Related income tax benefits (499) - -------------- -------------- COMPREHENSIVE INCOME $108,466 $93,699 ============== ============== </TABLE> <TABLE> GEORGIA POWER COMPANY STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED) At March 31, At December 31, 2001 2000 -------------- -------------- (in thousands) <S> <C> <C> Balance at beginning of period $ - $ - Change in current period 792 - -------------- -------------- BALANCE AT END OF PERIOD $ 792 $ - ============== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. </TABLE> 30
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 2001 vs. FIRST QUARTER 2000 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the first quarter 2001 was $107.7 million compared to $93.7 million for the corresponding period in 2000. Earnings increased $14 million or 14.9% primarily due to increased operating revenues which were partially offset by increased operating expenses. Significant income statement items appropriate for discussion include the following: Increase (Decrease) ------------------------------- First Quarter ------------------------------- (in thousands) % Retail sales............................ $40,117 4.4 Sales for resale - non-affiliates...... 43,902 100.5 Sales for resale - affiliates........... 23,844 199.8 Other revenues.......................... 8,527 31.6 Fuel expense............................ 17,785 8.4 Purchased power - non-affiliates........ 10,995 25.5 Purchased power - affiliates............ 31,555 66.1 Other operation expense................. 16,591 10.4 Maintenance expense..................... 8,532 8.7 Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue in the first quarter of 2001 was higher compared to the same period in 2000 due primarily to increased energy sales to residential and commercial customers. Residential and commercial energy sales were up by 7.7% and 7.6%, respectively, due mainly to growth in the number of customers and weather. Sales for resale - non-affiliates. In the first quarter of 2001, these revenues increased compared to the same period in 2000 as a result of the higher demand for energy by non-affiliates. These transactions do not have a significant impact on earnings since the energy is usually sold at variable cost. These revenues also reflect sales from Plant Dahlberg which went into service in the second quarter of 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 did not have a significant impact on earnings. Other revenues. These revenues increased in the current quarter of 2001 when compared to the same period in 2000 due principally to higher revenues from transmission of electricity for others and pole attachment rentals. 31
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. These expenses increased in the first quarter of 2001 when compared to the same period in 2000 due primarily to increased generation from fossil-fueled plants to meet higher energy demands. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power - non-affiliates. For the first quarter of 2001, power purchased from non-affiliates increased when compared to the same period in 2000 due primarily to increased demand for energy as well as the effect of the drought in GEORGIA's service area on hydro generation 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. Other operation expense. Other operation expense increased during the first quarter of 2001 when compared to the corresponding period in 2000 as a result of higher costs associated with uncollectible accounts and injuries and damages expenses. Maintenance expense. The increase in this expense for the first quarter of 2001 when compared to the same period in 2000 is primarily attributed to scheduled work performed at steam generating facilities and at transmission and distribution facilities. 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 weather, regulatory matters and energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, 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. GEORGIA will file a general rate case on July 2, 2001, in response to which the Georgia PSC is expected to determine whether the current three-year rate order should be continued, modified or discontinued when it ends on December 31, 2001. Under the order, GEORGIA's earnings are evaluated against a retail return on common equity range of 10% to 12.5%. Reference is made to Note (H) 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. 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. 32
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On April 12, 2001, GEORGIA filed a fuel cost recovery case with the Georgia PSC to increase the retail fuel rate. The purpose of the filing is to review the current fuel price and consider adjusting that price to be more reflective of current fuel market conditions and to collect the under recovery of prior costs. Georgia state law allows GEORGIA to recover all fuel costs. As of March 31, 2001, GEORGIA was under recovered by $92.7 million. The Georgia PSC is expected to decide the case on May 24, 2001. 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 in the Form 10-K. Reference is made to Notes (C) through (I) and (L) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Adoption of New Accounting Standard Effective January 1, 2001, GEORGIA adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All 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. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first three months of 2001 was the addition of approximately $385.5 million 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 Series G 6.20% Senior Notes due February 1, 2006. The proceeds of the sale were applied to redeem $200 million of 6 5/8% Series First Mortgage Bonds 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 $90 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds of this sale will be used to redeem in June 2001 the $75 million outstanding principal amount of GEORGIA's 6.35% Series, First Mortgage Bonds due August 1, 2003 and to repay a portion of GEORGIA's outstanding short-term indebtedness. 33
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. 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 March 31, 2001 approximately $36.3 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. At March 31, 2001, GEORGIA had outstanding $533.1 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. 34
GULF POWER COMPANY 35
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 2001 2000 ------------------------------ (in thousands) Operating Revenues: <S> <C> <C> Retail sales $125,563 $116,807 Sales for resale -- Non-affiliates 20,147 10,978 Affiliates 8,610 8,667 Other revenues 10,709 2,046 --------------- -------------- Total operating revenues 165,029 138,498 --------------- -------------- Operating Expenses: Operation -- Fuel 49,332 41,643 Purchased power -- Non-affiliates 8,501 6,614 Affiliates 11,566 3,158 Other 27,226 27,188 Maintenance 13,459 14,176 Depreciation and amortization 16,675 16,367 Taxes other than income taxes 13,485 13,345 --------------- -------------- Total operating expenses 140,244 122,491 --------------- -------------- Operating Income 24,785 16,007 Other Income (Expense): Interest income 170 438 Other, net (799) (504) --------------- -------------- Earnings Before Interest and Income Taxes 24,156 15,941 --------------- -------------- Interest and Other: Interest expenses, net 6,273 7,068 Distributions on preferred securities of subsidiary 1,550 1,550 --------------- -------------- Total interest charges and other, net 7,823 8,618 --------------- -------------- Earnings Before Income Taxes 16,333 7,323 Income taxes 6,151 2,616 --------------- -------------- Net Income Before Cumulative Effect of Accounting Change 10,182 4,707 Cumulative effect as of January 1, 2001 of accounting change -- less income taxes of $42 thousand 68 - --------------- -------------- Net Income 10,250 4,707 Dividends on Preferred Stock 54 54 --------------- -------------- Net Income After Dividends on Preferred Stock $10,196 $4,653 =============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 36
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 2001 2000 --------------- --------------- (in thousands) Operating Activities: <S> <C> <C> Net income $10,250 $4,707 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 17,636 17,342 Deferred income taxes and investment tax credits, net (269) (3,587) Other, net 87 (725) Changes in certain current assets and liabilities -- Receivables, net 26,708 10,856 Fossil fuel stock (18,587) (5,319) Materials and supplies (225) 925 Accounts payable (18,470) (782) Other (1,222) 7,185 --------------- --------------- Net cash provided from operating activities 15,908 30,602 --------------- --------------- Investing Activities: Gross property additions (46,419) (18,605) Other (5,281) (8,795) --------------- --------------- Net cash used for investing activities (51,700) (27,400) --------------- --------------- Financing Activities: Increase (decrease) in notes payable, net (23,000) (2,500) Proceeds -- Capital contributions from parent company 70,000 - Retirements -- Other long-term debt (71) (20) Payment of preferred stock dividends (54) (54) Payment of common stock dividends (13,500) (14,600) Other - (22) --------------- --------------- Net cash provided from (used for) financing activities 33,375 (17,196) --------------- --------------- Net Change in Cash and Cash Equivalents (2,417) (13,994) Cash and Cash Equivalents at Beginning of Period 4,381 15,753 --------------- --------------- Cash and Cash Equivalents at End of Period $1,964 $1,759 =============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $7,041 $9,762 Income taxes (net of refunds) 2,499 - The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 37
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 1,964 $ 4,381 Receivables -- Customer accounts receivable 50,674 69,820 Other accounts and notes receivable 4,428 2,179 Affiliated companies 5,009 15,026 Accumulated provision for uncollectible accounts (1,096) (1,302) Fossil fuel stock, at average cost 35,355 16,768 Materials and supplies, at average cost 29,258 29,033 Regulatory clauses under recovery 4,074 2,112 Other 7,845 6,543 ------------------- -------------------- Total current assets 137,511 144,560 ------------------- -------------------- Property, Plant, and Equipment: In service 1,908,323 1,892,023 Less accumulated provision for depreciation 879,725 867,260 ------------------- -------------------- 1,028,598 1,024,763 Construction work in progress 97,161 71,008 ------------------- -------------------- Total property, plant, and equipment 1,125,759 1,095,771 ------------------- -------------------- Other Property and Investments 6,589 4,510 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 16,208 15,963 Prepaid pension costs 24,923 23,491 Debt expense, being amortized 2,353 2,392 Premium on reacquired debt, being amortized 15,498 15,866 Other 15,405 12,943 ------------------- -------------------- Total deferred charges and other assets 74,387 70,655 ------------------- -------------------- Total Assets $1,344,246 $1,315,496 =================== ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 38
<TABLE> <CAPTION> GULF POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Notes payable $ 20,000 $ 43,000 Accounts payable -- Affiliated 14,736 17,558 Other 24,610 38,153 Customer deposits 13,678 13,474 Taxes accrued -- Income taxes 7,536 3,864 Other 7,137 8,749 Interest accrued 8,720 8,324 Provision for rate refund 2,697 7,203 Vacation pay accrued 4,512 4,512 Regulatory clauses over recovery 5,574 6,848 Other 2,535 1,584 ------------------- -------------------- Total current liabilities 111,735 153,269 ------------------- -------------------- Long-term debt 366,009 365,993 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 155,999 155,074 Deferred credits related to income taxes 37,300 38,255 Accumulated deferred investment tax credits 25,312 25,792 Employee benefits provisions 35,536 34,507 Other 29,045 25,992 ------------------- -------------------- Total deferred credits and other liabilities 283,192 279,620 ------------------- -------------------- 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 303,476 233,476 Premium on preferred stock 12 12 Retained earnings 152,526 155,830 ------------------- -------------------- Total common stockholder's equity 494,074 427,378 ------------------- -------------------- Total Liabilities and Stockholder's Equity $1,344,246 $1,315,496 =================== ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements. </TABLE> 39
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 2001 vs. FIRST QUARTER 2000 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the first quarter of 2001 was $10.2 million compared to $4.7 million for the same period in 2000. GULF's earnings were up primarily due to higher operating revenues. Significant income statement items appropriate for discussion include the following: Increase (Decrease) ------------------------------- First Quarter ------------------------------- (in thousands) % Retail sales.......................... $8,756 7.5 Sales for resale - non-affiliates..... 9,169 83.5 Other revenues........................ 8,663 N/M Fuel expense.......................... 7,689 18.5 Purchased power - non-affiliates...... 1,887 28.5 Purchased power - affiliates.......... 8,408 266.2 - - - - - - - ------------- N/M - Not meaningful Retail sales. Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales increased $6.5 million or 9.3% during the first quarter of 2001 when compared to the same period of 2000. The increase in retail sales revenue is related to increases in energy sales of 13.6%, 4.9% and 10.1% to residential, commercial and industrial customers, respectively. The primary reasons for the energy sales increase are colder weather in January, warmer weather in March, and growth in the number of customers served by GULF. Sales for resale - non-affiliates. During the first quarter of 2001, these revenues increased when compared to the same period in 2000 due primarily to increased unit power energy sales. These transactions do not have a significant impact on earnings since the energy is usually sold at variable cost. Other revenues. The increase for the first quarter of 2001 is primarily related 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. For the first quarter of 2001, fuel expenses increased when compared to the same period in 2000 due mainly to increased generation to meet higher energy demand. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income. 40
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power - non-affiliates. The increase for the first quarter of 2001 when compared to the same period in 2000 is primarily attributed to an increase in capacity and energy purchases to meet the demand for energy. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income. Purchased power - affiliates. Purchases of energy from affiliates 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. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, 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. 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. 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 (E) and (G) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. 41
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Adoption of New Accounting Standard Effective January 1, 2001, GULF adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All 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. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first three months of 2001 included the addition of approximately $46.4 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and capital contributions from SOUTHERN. See GULF's Condensed Statements of Cash Flows for further details. Financing Activities 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, environmental compliance efforts and maturing debt. Sources of Capital In addition to the financing activities previously described herein, GULF plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - - - - - - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 42
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, GULF had at March 31, 2001 approximately $2.0 million of cash and cash equivalents and $52.5 million of unused committed lines of credit with banks in addition to $61.9 million of liquidity support for GULF's obligations with respect to variable rate pollution control bonds. 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. At March 31, 2001, GULF had short-term notes payable outstanding of $20 million. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 43
MISSISSIPPI POWER COMPANY 44
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 2001 2000 ---------------- -------------- (in thousands) Operating Revenues: <S> <C> <C> Retail sales $114,579 $100,962 Sales for resale -- Non-affiliates 40,288 26,562 Affiliates 11,988 4,581 Other revenues 4,457 2,600 ---------------- -------------- Total operating revenues 171,312 134,705 ---------------- -------------- Operating Expenses: Operation -- Fuel 37,484 37,060 Purchased power -- Non-affiliates 14,623 4,008 Affiliates 31,536 11,622 Other 26,369 26,731 Maintenance 13,848 12,937 Depreciation and amortization 11,916 11,713 Taxes other than income taxes 11,921 12,041 ---------------- -------------- Total operating expenses 147,697 116,112 ---------------- -------------- Operating Income 23,615 18,593 Other Income: Interest income 144 99 Other, net 207 354 ---------------- -------------- Earnings Before Interest and Income Taxes 23,966 19,046 ---------------- -------------- Interest Expense and Other: Interest expense, net 6,946 6,954 Distributions on preferred securities of subsidiary 678 699 ---------------- -------------- Total interest charges and other, net 7,624 7,653 ---------------- -------------- Earnings Before Income Taxes 16,342 11,393 Income taxes 6,124 4,168 ---------------- -------------- Net Income Before Cumulative Effect of Accounting Change 10,218 7,225 Cumulative effect as of January 1, 2001 of accounting change -- less income taxes of $43 thousand 70 - ---------------- -------------- Net Income 10,288 7,225 Dividends on Preferred Stock 531 503 ---------------- -------------- Net Income After Dividends on Preferred Stock $9,757 $ 6,722 ================ ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 45
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 2001 2000 -------------- --------------- (in thousands) Operating Activities: <S> <C> <C> Net income $10,288 $7,225 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 12,892 12,826 Deferred income taxes and investment tax credits, net (1,443) (7,811) Other, net (5,331) (1,402) Changes in certain current assets and liabilities -- Receivables, net 6,568 18,649 Fossil fuel stock (13,020) 3,999 Materials and supplies 133 (371) Accounts payable (1,545) (4,542) Other (15,268) (11,490) -------------- --------------- Net cash provided from (used for) operating activities (6,726) 17,083 -------------- --------------- Investing Activities: Gross property additions (14,151) (16,372) Other (3,972) (5,881) -------------- --------------- Net cash used for investing activities (18,123) (22,253) -------------- --------------- Financing Activities: Increase (decrease) in notes payable, net 34,200 (30,500) Proceeds -- Other long-term debt - 100,000 Retirements -- Other long-term debt (379) (50,208) Payment of preferred stock dividends (531) (503) Payment of common stock dividends (12,800) (13,600) -------------- --------------- Net cash provided from financing activities 20,490 5,189 -------------- --------------- Net Change in Cash and Cash Equivalents (4,359) 19 Cash and Cash Equivalents at Beginning of Period 7,531 173 -------------- --------------- Cash and Cash Equivalents at End of Period $3,172 $192 ============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $5,785 $5,882 Income taxes (net of refunds) $1,472 $73 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 46
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Assets (Unaudited) 2000 -------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 3,172 $ 7,531 Receivables -- Customer accounts receivable 40,823 48,001 Under recovered regulatory clauses 23,687 24,063 Other accounts and notes receivable 17,364 21,843 Affiliated companies 15,591 10,071 Accumulated provision for uncollectible accounts (626) (571) Fossil fuel stock, at average cost 24,240 11,220 Materials and supplies, at average cost 21,561 21,694 Other 12,702 8,320 -------------------- -------------------- Total current assets 158,514 152,172 -------------------- -------------------- Property, Plant, and Equipment: In service 1,673,232 1,665,879 Less accumulated provision for depreciation 662,174 652,891 -------------------- -------------------- 1,011,058 1,012,988 Construction work in progress 64,131 60,951 -------------------- -------------------- Total property, plant, and equipment 1,075,189 1,073,939 -------------------- -------------------- Other Property and Investments 2,500 2,268 -------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 13,764 13,860 Prepaid pension costs 7,651 6,724 Debt expense, being amortized 4,573 4,628 Premium on reacquired debt, being amortized 7,006 7,168 Other 22,007 14,312 -------------------- -------------------- Total deferred charges and other assets 55,001 46,692 -------------------- -------------------- Total Assets $1,291,204 $1,275,071 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 47
<TABLE> <CAPTION> MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 -------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 100,020 $ 20 Notes payable 90,200 56,000 Accounts payable -- Affiliated 5,222 10,715 Other 49,654 48,146 Customer deposits 5,572 5,274 Taxes accrued -- Income taxes 16,543 8,769 Other 14,257 36,799 Interest accrued 6,025 4,482 Vacation pay accrued 5,701 5,701 Other 8,198 7,003 -------------------- -------------------- Total current liabilities 301,392 182,909 -------------------- -------------------- Long-term debt 270,161 370,511 -------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 139,882 139,909 Deferred credits related to income taxes 24,937 25,603 Accumulated deferred investment tax credits 23,178 23,481 Employee benefits provisions 35,093 34,671 Workforce reduction plan 9,359 9,734 Other 18,538 16,546 -------------------- -------------------- Total deferred credits and other liabilities 250,987 249,944 -------------------- -------------------- 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 194,160 194,161 Premium on preferred stock 326 326 Retained earnings 169,678 172,720 -------------------- -------------------- Total common stockholder's equity 401,855 404,898 -------------------- -------------------- Total Liabilities and Stockholder's Equity $1,291,204 $1,275,071 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. </TABLE> 48
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 2001 vs. FIRST QUARTER 2000 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the first quarter of 2001 was $9.8 million, compared to $6.7 million for the corresponding period of 2000. Earnings increased in the first quarter of 2001 when compared to the same period in 2000 due primarily to higher operating revenues. Significant income statement items appropriate for discussion include the following: Increase (Decrease) ------------------------------- First Quarter ------------------------------- (in thousands) % Retail sales............................ $13,617 13.5 Sales for resale - non-affiliates....... 13,726 51.7 Sales for resale - affiliates........... 7,407 161.7 Other revenues.......................... 1,857 71.4 Purchased power - non-affiliates........ 10,615 264.8 Purchased power - affiliates............ 19,914 171.3 Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was up by $0.9 million or 1.4% during the current quarter of 2001 when compared to the corresponding period in 2000 due primarily to increased energy sales to residential customers. Energy sales to residential customers during the first quarter of 2001 increased due mainly to weather. Sales for resale - non-affiliates. The increase in sales for resale to non-affiliates during the first quarter of 2001, as compared to the same period in 2000, is primarily due to increased demand for energy from these non-affiliated companies. 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. Other revenues. These revenues increased in the first quarter of 2001 when compared to the same period in 2000 primarily as a result of sales of inventory. Purchased power - non-affiliates. In the first quarter of 2001, purchased power from non-affiliates was higher when compared to the same period in 2000 due mainly to the need to meet the higher demand for energy. These transactions do not have a significant impact on net income since energy expenses are generally offset by energy revenues. 49
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. Operating revenues will be affected by any changes in rates under the PEP and ECO plans. The PEP has proven to be a stabilizing force on electric rates, with only moderate changes in rates taking place. 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. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. 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. 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. 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 (E), (G) 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. Adoption of New Accounting Standard Effective January 1, 2001, MISSISSIPPI adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All 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. 50
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first three months of 2001 included the addition of approximately $14.2 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and financing activities. 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 (M) 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. 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 March 31, 2001 approximately $3.2 million of cash and cash equivalents and approximately $124.3 million of unused committed credit arrangements with banks. 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. At March 31, 2001, MISSISSIPPI had short-term notes payable outstanding of $90.2 million. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 51
SAVANNAH ELECTRIC AND POWER COMPANY 52
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months Ended March 31, 2001 2000 --------------- -------------- (in thousands) Operating Revenues: <S> <C> <C> Retail sales $58,419 $49,785 Sales for resale -- Non-affiliates 1,558 569 Affiliates 1,227 1,721 Other revenues 487 315 --------------- -------------- Total operating revenues 61,691 52,390 --------------- -------------- Operating Expenses: Operation -- Fuel 9,394 9,747 Purchased power -- Non-affiliates 2,326 2,188 Affiliates 15,748 8,050 Other 12,116 12,047 Maintenance 6,048 4,666 Depreciation and amortization 6,460 6,309 Taxes other than income taxes 3,235 3,044 --------------- -------------- Total operating expenses 55,327 46,051 --------------- -------------- Operating Income 6,364 6,339 Other Income (Expense): Interest income 33 41 Other, net (176) (142) --------------- -------------- Earnings Before Interest and Income Taxes 6,221 6,238 --------------- -------------- Interest Charges and Other: Interest expense, net 3,276 3,021 Distributions on preferred securities of subsidiary 685 685 --------------- -------------- Total interest charges and other, net 3,961 3,706 --------------- -------------- Earnings Before Income Taxes 2,260 2,532 Income taxes 806 889 --------------- -------------- Net Income Before Cumulative Effect of Accounting Change 1,454 1,643 Cumulative effect as of January 1, 2001 of accounting change -- less income taxes of $14 thousand 22 - --------------- -------------- Net Income $ 1,476 $ 1,643 =============== ============== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 53
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended March 31, 2001 2000 --------------- --------------- (in thousands) Operating Activities: <S> <C> <C> Net income $1,476 $1,643 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 6,999 6,777 Deferred income taxes and investment tax credits, net (699) (1,342) Other, net 2,140 1,563 Changes in certain current assets and liabilities -- Receivables, net 4,530 2,753 Fossil fuel stock (1,143) 955 Materials and supplies (206) (588) Accounts payable (9,931) 2,364 Other 2,054 (731) --------------- --------------- Net cash provided from operating activities 5,220 13,394 --------------- --------------- Investing Activities: Gross property additions (11,068) (7,049) Other, net 1,467 (2,683) --------------- --------------- Net cash used for investing activities (9,601) (9,732) --------------- --------------- Financing Activities: Increase (decrease) in notes payable, net 14,415 (400) Retirements -- Other long-term debt (254) (182) Payment of common stock dividends (5,500) (6,100) --------------- --------------- Net cash provided from (used for) financing activities 8,661 (6,682) --------------- --------------- Net Change in Cash and Cash Equivalents 4,280 (3,020) Cash and Cash Equivalents at Beginning of Period - 6,553 --------------- --------------- Cash and Cash Equivalents at End of Period $4,280 $3,533 =============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $3,532 $2,170 Income taxes (net of refunds) (3,459) 920 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 54
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Assets (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Assets: <S> <C> <C> Cash and cash equivalents $ 4,280 $ - Receivables -- Customer accounts receivable 24,129 28,189 Under recovered retail fuel clause revenue 39,452 39,632 Other accounts and notes receivable 1,120 1,412 Affiliated companies 693 738 Accumulated provision for uncollectible accounts (360) (407) Fossil fuel stock, at average cost 8,283 7,140 Materials and supplies, at average cost 9,150 8,944 Prepaid Taxes 3,673 8,651 Other 1,363 377 ------------------- -------------------- Total current assets 91,783 94,676 ------------------- -------------------- Property, Plant, and Equipment: In service 834,787 829,270 Less accumulated provision for depreciation 387,901 382,030 ------------------- -------------------- 446,886 447,240 Construction work in progress 12,000 6,782 ------------------- -------------------- Total property, plant, and equipment 458,886 454,022 ------------------- -------------------- Other Property and Investments 2,110 2,066 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 12,735 12,404 Cash surrender value of life insurance for deferred compensation plans 17,632 17,954 Debt expense, being amortized 2,963 3,003 Premium on reacquired debt, being amortized 7,373 7,575 Other 2,610 2,527 ------------------- -------------------- Total deferred charges and other assets 43,313 43,463 ------------------- -------------------- Total Assets $596,092 $594,227 =================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 55
<TABLE> <CAPTION> SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At March 31, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 ------------------- -------------------- (in thousands) Current Liabilities: <S> <C> <C> Securities due within one year $ 31,285 $ 30,698 Notes payable 59,815 45,400 Accounts payable -- Affiliated 6,813 16,153 Other 8,746 7,738 Customer deposits 5,867 5,696 Taxes accrued -- Income taxes 3,184 3,450 Other 2,566 1,435 Interest accrued 4,725 4,541 Vacation pay accrued 2,298 2,276 Other 4,342 7,973 ------------------- -------------------- Total current liabilities 129,641 125,360 ------------------- -------------------- Long-term debt 116,061 116,902 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 79,455 79,756 Deferred credits related to income taxes 15,660 16,038 Accumulated deferred investment tax credits 10,450 10,616 Deferred compensation plans 12,715 11,968 Employee benefits provisions 10,435 9,236 Other 10,704 9,357 ------------------- -------------------- Total deferred credits and other liabilities 139,419 136,971 ------------------- -------------------- 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 11,267 11,265 Retained earnings 105,481 109,506 ------------------- -------------------- Total common stockholder's equity 170,971 174,994 ------------------- -------------------- Total Liabilities and Stockholder's Equity $596,092 $594,227 =================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. </TABLE> 56
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 2001 vs. FIRST QUARTER 2000 RESULTS OF OPERATIONS Earnings SAVANNAH's net income for the first quarter of 2001 was $1.5 million as compared to $1.6 million for the corresponding period of 2000. Earnings were down slightly due primarily to higher operating expenses which fully offset higher operating revenues. Significant income statement items appropriate for discussion include the following: Increase (Decrease) ------------------------------- First Quarter ------------------------------- (in thousands) % Retail sales............................. $8,634 17.3 Sales for resale - non-affiliates........ 989 173.8 Sales for resale - affiliates............ (494) (28.7) Purchased power - affiliates............. 7,698 95.6 Maintenance expense...................... 1,382 29.6 Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue increased by $1.4 million for the first quarter of 2001 when compared to the same period in 2000 due mainly to an increase in total retail energy sales of 7.4%. Total retail energy sales increased as a result of weather and growth in the number of customers served by SAVANNAH. Sales for resale - non-affiliates. During the first quarter of 2001, sales for resale to non-affiliates increased due to higher demand for energy by these non-affiliates when compared to the corresponding period 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. Maintenance expense. During the first quarter of 2001, maintenance expenses were higher when compared to the corresponding period in 2000 due primarily to a scheduled major maintenance outage at one of SAVANNAH's plants. 57
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, 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 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. 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 (E), (G), (L) 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. Adoption of New Accounting Standard Effective January 1, 2001, SAVANNAH adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All 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. FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first three months of 2001 included the addition of approximately $11.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and credit arrangements with banks. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. 58
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital SAVANNAH plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. 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 March 31, 2001 approximately $4.3 million of cash and cash equivalents and approximately $65.5 million of unused committed credit arrangements with banks. 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. At March 31, 2001, SAVANNAH had short-term notes payable outstanding of $59.8 million. Since SAVANNAH has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit. 59
NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, G, H, I, J, K, L, N, O ALABAMA A, C, D, E, F, G, L GEORGIA A, C, D, E, F, G, H, I, L GULF A, C, D, E, G MISSISSIPPI A, C, D, E, G, M SAVANNAH A, C, D, E, G, L, N 60
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (A) The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended March 31, 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. 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. 61
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 meet the definition of a derivative under Statement No. 133. In many cases, these transactions meet Statement No. 133's normal purchase and sale exception and the related contracts are accounted for under the accrual method. Certain of these contracts 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. Certain other contracts do not meet the hedge requirements and 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 and less than $0.01 per share, to each of the integrated Southeast utilities individually, as well as to SOUTHERN on a consolidated basis. The mark to market adjustments recorded during the first quarter of 2001 were also immaterial. However, the application and interpretation of Statement No. 133's requirements is 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. (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) The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry--including SOUTHERN's--regarding the recognition, measurement and classification in the financial statements of decommissioning costs for nuclear generating facilities. In response to these questions, the FASB is reviewing the accounting for liabilities related to the retirement of long-lived assets, including nuclear decommissioning. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. (G) 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. 62
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (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 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 $37.6 million in the first quarter of 2001 and $36.6 million in the first quarter of 2000. (I) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's designation as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and other environmental contingencies. (J) SOUTHERN has made separate guarantees to certain counterparties regarding performance of contractual commitments by Mirant's trading and marketing subsidiaries. At March 31, 2001, the total notional amount of guarantees was $202.7 million and the estimated fair value of net contractual commitments outstanding was approximately $63 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. SOUTHERN also has guaranteed certain of Mirant's foreign currency swap transactions. At March 31, 2001, notional amounts under these swaps were the differences between(pound)22 million and $33.7 million and between DM370 million and $205.6 million; however, due to favorable exchange rates SOUTHERN had no exposure under these guarantees. The sterling and deutsche mark swaps expire in 2002 and 2003, respectively. Subsequent to the spin off, Mirant began paying SOUTHERN a monthly fee of 1 percent 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. (K) 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. 63
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (L) 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 various lawsuits. (M) 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. (N) On March 16, 2001, SAVANNAH submitted a filing with the Georgia PSC to establish a new fuel rate in order to better reflect current fuel cost and to collect the under-recovered balance. On April 26, 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 about $150 million per year. Reflected in the $137 million is a Georgia PSC ordered "cap" of $100 per megawatt on energy strips. 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. On May 11, 2001, SAVANNAH requested the Georgia PSC reconsider part of its order relating to the price of energy strips. The outcome of this matter cannot now be determined. (O) 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 and products and services 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 March 31, 2001: <S> <C> <C> <C> <C> Operating revenues $ 2,221 $ 49 $ - $ 2,270 Segment net income (loss) 199 (19) 140 320 Total assets at March 31, 2001 27,203 2,284 2,040 31,527 ----------------------------------------- ------------ --------- ------------- --------------------------- Three Months Ended March 31, 2000: Operating revenues $ 2,005 $ 57 $ (10) $ 2,052 Segment net income (loss) 176 (23) 92 245 Total assets at December 31, 2000 26,917 2,200 2,245 31,362 ------------------------------------------ ----------- --------- ------------- --------------------------- </TABLE> 64
PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. 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. ------------------- SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH filed Current Reports on Form 8-K dated February 28, 2001: Items reported: Item 7 Financial statements filed: Each registrant's financial statements for the year ended December 31, 2000. SOUTHERN filed Current Reports on Form 8-K dated February 19, 2001, March 2, 2001, March 6, 2001 and March 22, 2001: Items reported: Item 9 Financial statements filed: None SOUTHERN filed a Current Report on Form 8-K dated April 2, 2001: Items reported: Items 2, 7 and 9 Financial statements filed: Pro Forma Financial Information. GEORGIA filed Current Reports on Form 8-K dated January 26, 2001, February 16, 2001 and May 1, 2001: Items reported: Items 5 and 7 Financial statements filed: None 65
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: May 14, 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 Elmer B. Harris Chairman 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: May 14, 2001 66
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: May 14, 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 Comptroller and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: May 14, 2001 67
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, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: May 14, 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: May 14, 2001 68