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SEC Filing Summary: The Southern Company (10-Q)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, for The Southern Company (Southern) and its five operating utility subsidiaries: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric and Power. Southern operates in two primary segments: traditional regulated electric utilities in the Southeast and non-traditional energy services managed by Southern Energy, which includes international and domestic power generation assets.

Key Financial Metrics (Consolidated)

Figures in millions unless otherwise noted.

Material Changes vs. Prior Period

• Earnings Growth: Consolidated net income increased 19.2% in Q3 1999 compared to Q3 1998, driven by a 14% increase in traditional utility earnings and a 35.8% increase in non-traditional business earnings.
• Revenue Drivers: Operating revenues rose 8.1% in Q3 1999. Traditional utility revenues increased slightly due to higher retail energy sales and customer growth, though offset by rate reductions in Georgia. Southern Energy revenues surged 58.1% due to new acquisitions in New England, California, and New York.
• Expense Trends: Fuel expenses increased 21.0% in Q3 1999, primarily due to Southern Energy's new power generation assets. Depreciation and amortization decreased 21.3% compared to the prior year, reflecting the completion of amortization for deferred Plant Vogtle costs in 1998.
• One-Time Items: The quarter included a $69 million after-tax write-down of the investment in Mobile Energy (due to bankruptcy settlement discussions) and a $78 million after-tax gain on the sale of Southern Energy's share of SWEB's supply business.

Guidance, Outlook, and Risks

• Regulatory Environment: Georgia Power is operating under a new three-year rate order effective Jan 1, 1999, which reduced annual retail rates by $262 million. Gulf Power reached a settlement with the Florida PSC to reduce base rates by $10 million annually with a revenue-sharing mechanism.
• Environmental Compliance: Significant capital costs are anticipated for Clean Air Act compliance. Georgia Power estimates $664 million in capital costs for nitrogen oxide emission reductions. An EPA complaint regarding Clean Air Act violations at several coal-fired plants remains pending, with potential for substantial penalties and capital expenditures.
• Year 2000 Readiness: Southern declared its critical systems ready for the Year 2000 transition in June 1999. Total budgeted costs for the program are approximately $111 million ($91 million for traditional business, $20 million for non-traditional). Risks remain regarding third-party supplier readiness.
• Accounting Changes: The company notes that the adoption of FASB Statement No. 133 (Derivatives) in 2001 could increase earnings volatility, though the impact has not yet been quantified.
• Capital Allocation: Southern repurchased approximately $649 million of its common stock in the first nine months of 1999. The company maintains approximately $5.8 billion in unused credit arrangements to support liquidity.

Investor Verification Checklist

• Mobile Energy Exposure: Verify the status of the $69 million write-down and the remaining $21 million contingent liability guarantees related to Mobile Energy's bankruptcy.
• Georgia Rate Order Impact: Confirm the long-term earnings impact of the $262 million annual rate reduction and the 10-12.5% return on equity cap for Georgia Power.
• Environmental Liabilities: Assess the potential capital outlay and penalties associated with the EPA's Clean Air Act complaint and the $664 million compliance estimate for Georgia Power.
• Derivative Accounting: Monitor the quantification of FASB 133 adoption effects on future earnings volatility.
• Year 2000 Contingencies: Review any post-transition service interruptions or costs related to third-party supplier failures.