Business Context and Reporting Period
This Form 10-K covers The Southern Company (SOUTHERN) and its five integrated Southeast utility subsidiaries: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric. The reporting period is the fiscal year ended December 31, 2000. SOUTHERN operates as a holding company providing electric service in Alabama, Georgia, Florida, and Mississippi. A significant corporate event during this period was the initial public offering of Mirant Corporation (formerly Southern Energy) in October 2000, with the remaining ownership scheduled for a tax-free spin-off to SOUTHERN stockholders in April 2001. Consequently, Mirant's results are presented as discontinued operations.
Key Financial Metrics
| Metric | 2000 | 1999 |
|---|---|---|
| Consolidated Net Income | $1,313 million | $1,276 million |
| EPS (Basic & Diluted) | $2.01 | $1.86 |
| Operating Revenues | $10,066 million | $9,317 million |
| Operating Income | $2,404 million | $2,250 million |
| Net Cash from Operating Activities | $2,818 million | $2,987 million |
| Total Assets | $31,362 million | $29,291 million |
| Long-Term Debt | $7,843 million | $7,251 million |
| Common Stockholders' Equity | $10,690 million | $9,204 million |
Integrated Southeast Utilities Performance: The five utilities generated $9,860 million in operating revenues and $1,109 million in net income for 2000. Earnings per share for the integrated utilities were $1.52 from continuing operations.
Material Changes vs. Prior Period
- Earnings Growth: Consolidated net income increased by $37 million (2.9%) to a record $1.31 billion. Adjusted earnings per share (excluding non-recurring items) rose to $2.13 from $1.90 in 1999.
- Revenue Drivers: Operating revenues increased by $749 million (8.0%). This was driven by a 6.4% increase in total kilowatt-hour sales, attributed to hotter-than-normal summer weather and customer growth in the Southeast.
- Expense Increases: Operating expenses rose by $595 million. Fuel and purchased power costs increased by $504 million due to higher energy demand and generation mix changes. Depreciation and amortization increased by $32 million, partly due to accelerated amortization related to the Georgia Power 1998 retail rate order.
- Discontinued Operations: Mirant contributed $319 million to net income in 2000, down from $361 million in 1999, reflecting the transition to a public company and subsequent spin-off.
Guidance, Outlook, and Risks
- Construction Program: SOUTHERN estimates construction expenditures of $2.9 billion for 2001, $2.6 billion for 2002, and $1.7 billion for 2003. Approximately 4,400 megawatts of new capacity will be dedicated to the wholesale market via the new subsidiary, Southern Power Company (SPC).
- Dividend Policy: The company declared a quarterly dividend of 33.5 cents per share in January 2001 ($1.34 annually). Management aims to maintain this dividend and grow it over time consistent with earnings expectations.
- Regulatory Risks:
- EPA Litigation: The EPA filed a civil action alleging Clean Air Act violations at five coal-fired facilities. An adverse outcome could require substantial capital expenditures and penalties.
- Environmental Compliance: Estimated capital expenditures for environmental quality control are $433 million in 2001, $459 million in 2002, and $115 million in 2003. Future costs related to ozone non-attainment and mercury emissions remain uncertain.
- Deregulation: While retail deregulation initiatives have been delayed in many states due to the California energy crisis, the company faces increasing competition in wholesale markets.
- Contingencies:
- Mobile Energy Services (MESH): A subsidiary in Chapter 11 bankruptcy. SOUTHERN recorded a $10 million after-tax write-down in 2000.
- California Litigation: SOUTHERN is named in lawsuits alleging manipulation of California wholesale power markets. Mirant has agreed to indemnify SOUTHERN for these claims.
Investor Verification Checklist
- Mirant Spin-off: Verify the final terms and tax implications of the Mirant spin-off scheduled for April 2001.
- EPA Litigation Status: Monitor the outcome of the EPA civil action regarding Clean Air Act violations, as penalties and required technology upgrades could impact future cash flows.
- Environmental Capital Expenditures: Track actual spending against the estimated $433 million budget for 2001 environmental compliance to assess potential rate case impacts.
- Wholesale Market Exposure: Evaluate the performance and risk profile of the new Southern Power Company (SPC) as it begins marketing wholesale generation assets.
- Georgia Power Rate Order: Review the status of the Georgia Public Service Commission's review of the 1998 retail rate order, which includes accelerated amortization and revenue sharing provisions.