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) for the fiscal year ended December 31, 1999. SOUTHERN operates as a holding company providing electric service in Alabama, Georgia, Florida, and Mississippi. The company also operates Southern Energy, a global subsidiary focused on independent power production, energy trading, and international utility operations.
Key Financial Metrics
| Metric | 1999 | 1998 |
|---|---|---|
| Consolidated Net Income | $1.276 billion | $977 million |
| Earnings Per Share (Diluted) | $1.86 | $1.40 |
| Operating Revenues | $11.585 billion | $11.403 billion |
| Operating Income | $2.779 billion | $2.310 billion |
| Net Cash from Operating Activities | $2.723 billion | $2.748 billion |
| Total Assets | $38.396 billion | $36.191 billion |
| Long-Term Debt | $11.747 billion | $10.472 billion |
| Common Equity to Total Capitalization | 38.9% | 42.9% |
Material Changes vs. Prior Period
- Earnings Growth: Consolidated net income increased 30.6% to a record $1.276 billion, driven primarily by strong growth in Southern Energy's competitive energy supply business and asset sales.
- Revenue Trends: Total operating revenues increased slightly by 1.6%. Traditional utility retail revenues declined due to a Georgia Power rate reduction effective January 1999 and milder weather, partially offset by growth in Southern Energy revenues.
- Expense Management: Total operating expenses decreased by 3.2% to $8.806 billion. This was largely due to a $308 million reduction in accelerated depreciation charges for Georgia Power following a 1998 rate order.
- Capital Structure: The company repurchased 32.8 million shares of common stock under a new program, reducing the common equity ratio to 38.9% from 42.9% in 1998.
Guidance, Outlook, and Risks
- Construction Program: Capital expenditures are budgeted at $3.0 billion for 2000, $3.8 billion for 2001, and $3.9 billion for 2002. This includes significant investments in combustion turbine capacity and environmental compliance.
- Regulatory Risks: The company faces significant uncertainty regarding the Federal Energy Regulatory Commission's (FERC) final rule on Regional Transmission Organizations (RTOs), requiring a filing by October 15, 2000. Additionally, potential industry restructuring and deregulation could impact the recovery of stranded investments.
- Environmental Litigation: The EPA filed a civil action in November 1999 alleging Clean Air Act violations at five coal-fired facilities. An adverse outcome could require substantial capital expenditures and penalties.
- Mobile Energy Bankruptcy: Southern Energy recorded a $69 million after-tax write-down related to its subsidiary Mobile Energy Services Company, which filed for Chapter 11 bankruptcy in January 1999.
- Dividend Policy: In January 1999, the company modified its dividend policy to lower the target payout ratio from 75% to 50% over time to fund reinvestment, though the quarterly dividend remained at 33.5 cents per share.
Investor Verification Checklist
- Rate Case Outcomes: Verify the status of the Georgia Power 1998 retail rate order and its impact on future earnings and rate reductions.
- Environmental Compliance Costs: Assess the potential financial impact of the EPA lawsuit and the estimated $850 million in future capital expenditures for ozone non-attainment compliance in Atlanta and Birmingham.
- Southern Energy Strategy: Review the progress of Southern Energy's international divestitures (Argentina/Chile) and its acquisition strategy in North America and Asia.
- RTO Participation: Monitor the company's filing regarding Regional Transmission Organizations and the potential impact on transmission pricing and stranded costs.
- Debt Refinancing: Track the company's ability to retire higher-cost debt and preferred stock to maintain a competitive cost of capital.