SO

Business Context and Reporting Period

This Form 10-Q covers the quarterly and year-to-date periods ended June 30, 2000, for The Southern Company (Southern) and its five integrated Southeast utility subsidiaries: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric and Power. Southern also reports on Southern Energy, a subsidiary managing domestic and international energy projects. The filing includes unaudited consolidated financial statements and management discussion and analysis.

Key Financial Metrics (Six Months Ended June 30, 2000)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 10.2% year-to-date, driven by a 10.2% increase in the integrated Southeast utilities (due to customer base growth and warmer weather) and a 16.5% increase in Southern Energy (due to new generating units).
• Profitability: Net income rose 9.1% to $587.3 million. Earnings for the integrated utilities increased 5.7%, while Southern Energy earnings grew 17.8%, largely due to profitability from Asian business units (Sual generating units).
• Expense Trends: Fuel expenses surged 29.3% year-to-date, primarily attributed to Southern Energy's increased generation in New York and California. Conversely, purchased power expenses dropped 45.1% due to the sale of Southern Energy's former UK supply business.
• Depreciation: Depreciation and amortization increased 20.5%, partly due to accelerated amortization by Georgia Power under a new rate order.

Guidance, Outlook, and Risks

• Strategic Transactions: Southern Energy announced an agreement to purchase PEPCO's generating business for approximately $2.65 billion, expected to close in November 2000. Additionally, Southern Energy's UK subsidiary (WPD) submitted a bid to acquire Hyder plc for approximately $838 million.
• Corporate Restructuring: Southern plans an initial public offering (IPO) of up to 19.9% of Southern Energy, followed by a spin-off of the remaining ownership to shareholders within 12 months.
• Regulatory and Environmental Risks:
  • Georgia Power: Subject to a three-year rate order requiring accelerated depreciation and potential rate reductions if earnings exceed a 12.5% return on equity.
  • Mississippi Power: The Mississippi PSC suspended its review of retail restructuring, finding current rates reliable and low-cost.
  • Environmental: Compliance costs related to the Clean Air Act and ongoing EPA litigation remain significant contingencies.
• Accounting Changes: Adoption of FASB Statement No. 133 (Derivatives) by January 2001 is expected to increase earnings volatility, though the specific impact has not been quantified.
• Legal Proceedings: A race discrimination lawsuit was filed against Georgia Power in July 2000. Southern Energy faces a FERC proceeding regarding revenue allocation for California power agreements, with a potential refund liability of approximately $94 million if the appeal is unsuccessful.

Investor Verification Checklist

• Southern Energy Spin-off: Verify the timeline and market conditions for the planned IPO and subsequent spin-off of Southern Energy.
• PEPCO Acquisition: Confirm the closing status and financing details of the $2.65 billion PEPCO generating business purchase.
• FERC California Proceeding: Monitor the outcome of the appeal regarding the $158.8 million revenue requirement allocation, which could impact net income by approximately $33 million.
• Georgia Rate Order: Track Georgia Power's earnings relative to the 12.5% return threshold to assess potential future rate reductions or accelerated depreciation charges.
• Derivative Accounting: Review the impact of FASB 133 adoption on earnings volatility in the 2000 annual report.