SO

Business Context and Reporting Period

This Form 10-Q covers the quarter ended March 31, 2002, for The Southern Company (Southern) and its five operating subsidiaries: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric and Power. The company operates primarily in the Southeastern United States, focusing on traditional electric utility services, competitive generation, and energy-related products. The filing includes unaudited consolidated financial statements and management discussion for the combined entity and individual subsidiaries.

Key Financial Metrics

Note: Q1 2001 Consolidated Net Income included $140 million from discontinued operations (Mirant spin-off), which is not present in 2002.

Material Changes vs. Prior Period

• Earnings Growth: Earnings from continuing operations increased 25% to $224.3 million, driven by lower interest costs, regulatory rate proceedings in Alabama, Georgia, and Mississippi, and increased energy sales in residential and commercial sectors.
• Revenue Decline: Total operating revenues decreased 2.5% to $2,213.6 million. Retail sales dropped 2.2% due to a slowdown in the industrial manufacturing sector. Sales for resale fell 10.5% due to lower demand.
• Expense Reductions: Fuel expenses decreased 5.5% and purchased power expenses dropped 40.7%, primarily due to lower natural gas prices and the commercial operation of new units at Plant Daniel. Depreciation and amortization fell 20.8% following the discontinuation of accelerated depreciation in Georgia.
• Cash Flow Improvement: Net cash provided by operating activities surged to $445.0 million from $121.4 million in the prior year, largely due to changes in working capital and the absence of discontinued operations adjustments.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Regulatory Environment: Georgia Power operates under a new three-year rate order (effective Jan 2002) with a return on equity range of 10% to 12.95%. Mississippi Power received a rate increase effective Jan 2002. Gulf Power received approval for an 8.9% rate increase effective June 2002.
• Capital Projects: Significant capital additions of $680 million were made in Q1 2002. Southern Power anticipates issuing unsecured senior notes by the end of Q2 2002 to reduce credit facility indebtedness.
• Competition: The company is positioning for increased competition following the Energy Act and state-level legislation expanding customer choice.

Risks and Contingencies

• Legal Proceedings: Pending EPA civil actions regarding Clean Air Act compliance and race discrimination litigation remain significant contingencies. A stay on Alabama proceedings was extended through late July 2002.
• Accounting Standards: The company is assessing the impact of FASB Statement No. 143 (Asset Retirement Obligations), required by Jan 1, 2003, which will affect nuclear decommissioning liabilities.
• Market Risk: While limited by cost-based rate regulations, the company faces exposure to interest rate changes and commodity prices. Maximum potential collateral requirements for electricity sales contracts were approximately $288 million at March 31, 2002.

Investor Verification Checklist

• Regulatory Rate Orders: Verify the impact of the new Georgia rate order (rate decrease of $118 million) and the upcoming Gulf Power rate increase on future cash flows.
• Industrial Demand: Monitor the slowdown in the manufacturing sector, which drove the decline in industrial energy sales.
• Environmental Compliance: Review the status of EPA litigation and the potential financial impact of Clean Air Act compliance costs if not fully recoverable through rates.
• Debt Maturities: Confirm the schedule for approximately $267 million in long-term debt redemptions and maturities due by March 31, 2003.
• Discontinued Operations: Ensure comparisons with 2001 exclude the $140 million earnings from Mirant (discontinued operations) to accurately assess organic growth.