Business Context and Reporting Period
This Form 10-Q is a combined quarterly report filed by The Southern Company (Southern) and its five operating subsidiaries (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric and Power), as well as Southern Power Company. The report covers the quarter and nine months ended September 30, 2002. Southern operates as a holding company for regulated electric utilities in the Southeast and a competitive wholesale generation business.
Key Financial Metrics (Consolidated)
Figures in millions unless otherwise noted.
| Metric | Q3 2002 | Q3 2001 | YTD 2002 | YTD 2001 |
|---|---|---|---|---|
| Total Operating Revenues | $3,248.0 | $3,164.5 | $8,092.4 | $7,995.8 |
| Operating Income | $1,070.1 | $998.3 | $2,241.0 | $2,059.3 |
| Net Income (Continuing Ops) | $595.4 | $554.4 | $1,151.1 | $1,004.3 |
| Diluted EPS (Continuing Ops) | $0.83 | $0.79 | $1.62 | $1.45 |
| Net Cash from Operating Activities | N/A | N/A | $2,255.2 | $1,809.8 |
| Net Cash Used in Investing Activities | N/A | N/A | ($2,258.4) | ($2,079.6) |
| Cash and Equivalents (End of Period) | $293.0 | $305.6 | $293.0 | $305.6 |
| Long-Term Debt | $8,826.4 | $8,296.9 | $8,826.4 | $8,296.9 |
Material Changes vs. Prior Period
- Earnings Growth: Consolidated net income from continuing operations increased 7.4% in Q3 2002 and 14.6% year-to-date compared to 2001. This was driven by increased electricity demand due to warmer weather, customer growth, and lower interest rates.
- Revenue Drivers: Retail sales revenue increased 4.3% in Q3 and 1.6% YTD. Excluding fuel revenues, retail sales were up 7.4% in Q3 and 4.2% YTD.
- Expense Trends:
- Fuel Expense: Increased 12.5% in Q3 and 4.6% YTD due to higher natural gas unit costs and the operation of new combined-cycle plants (Plant Franklin Unit 1, Plant Wansley Units 6 & 7, and Plant Smith Unit 3).
- Purchased Power: Decreased 45.6% in Q3 and 42.2% YTD as new internal generation capacity reduced reliance on external purchases.
- Depreciation: Decreased 6.0% in Q3 and 12.0% YTD, primarily due to Georgia Power discontinuing accelerated depreciation under a new rate order.
- Acquisitions: Southern Gas, a retail gas marketer, was formed in June 2002 and acquired 210,000 customers from New Power in July 2002 for approximately $60 million. Its results are included in consolidated statements beginning August 1, 2002.
Guidance, Outlook, and Risks
- Dividend: In July 2002, Southern raised its annual dividend by 3 cents to $1.37 per share ($0.3425 per quarter).
- Regulatory Environment: The company is navigating the Energy Policy Act of 1992 and potential FERC rulemaking regarding open access transmission and standard market design. A proposed Regional Transmission Organization (SeTrans) is in formation.
- Counterparty Risk (Dynegy): Southern Power and Mississippi Power have capacity sale contracts with Dynegy Inc., which is experiencing liquidity problems and has a below-investment-grade credit rating. Letters of credit totaling $70 million ($20M for Southern Power, $26M for Mississippi, plus $50M for future obligations) have been posted as security. Failure to renew these or a default could impact future earnings if capacity cannot be resold.
- Environmental Litigation: EPA civil actions against certain subsidiaries remain pending but are currently stayed until February 2003 or a ruling by the 11th Circuit Court of Appeals. Management does not anticipate a material adverse effect on financial position.
- Accounting Changes: The company is assessing the impact of FASB Statement No. 143 (Asset Retirement Obligations), effective January 1, 2003, which will require recording liabilities for nuclear decommissioning and other asset retirements.
- Mirant Spin-off: Mirant (spun off in 2001) identified accounting errors in its 2000-2001 statements. Southern does not expect this to affect its 2002 earnings or future financial position, as Mirant is reported as discontinued operations.
Investor Verification Checklist
- Weather Sensitivity: Verify the extent to which Q3 2002 earnings were driven by warmer weather compared to the unusually mild Q3 2001, as this may not be repeatable.
- Dynegy Exposure: Monitor the status of Dynegy's liquidity and the renewal of letters of credit expiring in February 2003, which secure approximately $34 million in annual capacity revenues.
- Regulatory Rate Orders: Review the impact of the new Georgia Power rate order (effective Jan 2002) which reduced rates and changed depreciation accounting, and the Florida PSC approval of Gulf Power's rate increase effective June 2002.
- Construction Costs: Track the $2.0 billion in gross property additions for the first nine months of 2002 and the associated financing costs, particularly for Southern Power's competitive generation projects.
- Environmental Compliance: Assess potential future costs related to Clean Air Act compliance and the outcome of the stayed EPA litigation.