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Business Context and Reporting Period

This Form 10-Q covers the quarter ended March 31, 1999, for The Southern Company (Southern) and its five operating subsidiaries: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric and Power. Southern operates as a holding company with two primary segments: regulated domestic electric utilities and non-traditional energy services (Southern Energy). The filing includes unaudited consolidated financial statements and management discussion for the group and individual subsidiaries.

Key Financial Metrics

Note: Operating margins are not explicitly stated as a percentage in the text; however, operating income decreased by approximately $60 million year-over-year.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated operating revenues decreased by $53.3 million (2.1%). The traditional core business saw a $73 million drop, primarily driven by a retail rate reduction ordered by the Georgia Public Service Commission (PSC) and mild weather. Conversely, Southern Energy revenues increased by $13 million due to the December 1998 acquisition of Commonwealth Electric's generating business.
• Earnings Decrease: Net income fell by $17.4 million (7.2%). Traditional business earnings were lower due to the Georgia rate order and maintenance expenses. Non-traditional earnings rose significantly due to a $54 million settlement of contractor claims related to the Shajiao C power plant project in China.
• Expense Fluctuations: Fuel expenses increased by $38.1 million (8.0%), largely due to the New England acquisition and increased generation. Purchased power expenses dropped $33.6 million (10.9%) due to reduced power marketing activities. Maintenance expenses rose $21.3 million (10.6%) due to scheduled outages.
• Cash Flow Volatility: Net cash provided by operating activities dropped significantly from $563.9 million in Q1 1998 to $189.3 million in Q1 1999, primarily due to changes in working capital (specifically a decrease in receivables and an increase in accounts payable payments).

Guidance, Outlook, and Risks

• Regulatory Environment: Georgia Power is operating under a new three-year retail rate order effective January 1, 1999, which decreased annual retail rates by $262 million. Earnings are now evaluated against a return on common equity range of 10% to 12.5%. Gulf Power is facing a revised Florida PSC plan reducing the authorized return midpoint from 12.0% to 11.5% and requiring revenue sharing.
• Year 2000 (Y2K) Readiness: Southern projects total Y2K costs of approximately $91 million for the traditional business and $20 million for non-traditional business. As of March 31, 1999, $70 million and $11 million had been spent, respectively. Management expects critical systems to be ready by June 1999 but notes risks regarding third-party dependencies and potential service interruptions.
• Acquisitions and Divestitures: On April 15, 1999, Southern Energy completed the purchase of 3,065 MW of generating assets in California for approximately $801 million. Mobile Energy Services was deconsolidated in January 1999 following a Chapter 11 bankruptcy filing; Southern now accounts for it under the equity method.
• Accounting Changes: The company notes the upcoming adoption of FASB Statement No. 133 (Derivatives and Hedging) by the year 2000, which could increase earnings volatility. The impact has not yet been quantified.
• Legal and Environmental: Ongoing legal proceedings include FERC rate cases and environmental compliance costs related to the Clean Air Act. Alabama Power faces litigation regarding discharges into Lake Martin and "extended service contracts."

Investor Verification Checklist

• Georgia Rate Order Impact: Verify the long-term earnings impact of the $262 million annual rate reduction and the new 10-12.5% return on equity cap for Georgia Power.
• Y2K Cost Exposure: Confirm the remaining budget for Y2K remediation ($21 million projected remaining for traditional business) and the status of critical third-party supplier readiness.
• Mobile Energy Exposure: Review the status of the $36.1 million guarantee payment made to Mobile Energy bondholders and the potential for additional claims.
• California Acquisition Integration: Assess the financial integration and regulatory risks associated with the $801 million California generating asset purchase.
• Working Capital Trends: Investigate the significant year-over-year decline in operating cash flow ($374 million drop) to determine if it reflects seasonal timing or structural changes in receivables/payables management.