SO

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, for The Southern Company and its subsidiary operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Electric, and Southern Power). The registrants operate primarily in the Southeastern United States, providing regulated retail electric service and engaging in competitive wholesale generation.

Key Financial Metrics (Consolidated)

Material Changes vs. Prior Period

• Earnings Growth: Consolidated net income increased to $618.8 million for the quarter (from $595.4 million in 2002) and $1.35 billion year-to-date (from $1.15 billion in 2002). Growth was driven by customer base expansion, cost controls, and strong competitive generation results.
• Revenue Drivers: "Sales for resale" increased 9.6% in the quarter and 19.0% year-to-date due to higher wholesale market prices and new plant capacity. "Other electric revenues" surged 76.4% year-to-date, primarily due to $144 million in revenues from the termination of Power Purchase Agreements (PPAs) with Dynegy.
• Expense Increases: Fuel expense rose 10.9% in the quarter and 13.3% year-to-date due to higher average unit costs. However, these increases are largely offset by fuel cost recovery mechanisms in regulated operations.
• One-Time Gains: Year-to-date earnings included a one-time after-tax gain of approximately $88 million from the termination of PPAs with Dynegy subsidiaries.

Guidance, Outlook, Risks, and Unusual Items

• Regulatory Environment: Significant uncertainty exists regarding the formation of a Regional Transmission Organization (SeTrans) due to conflicts between FERC and state regulators. Comprehensive energy legislation is pending in Congress.
• Environmental Compliance: The EPA reclassified the Atlanta area as a "severe" nonattainment area for ozone. While Georgia Power does not anticipate incurring potential $23 million annual emissions fees, the outcome depends on future regulatory implementation. New Source Review enforcement actions remain pending.
• Mirant Bankruptcy: Mirant Corporation filed for Chapter 11 bankruptcy in July 2003. Southern Company has contingent liabilities (guarantees, litigation, tax indemnities) associated with Mirant, though management does not currently anticipate a material adverse effect.
• Accounting Changes: The company adopted FASB Statement No. 143 (Asset Retirement Obligations) effective January 1, 2003, recording liabilities for nuclear decommissioning and other asset retirements. FASB Statement No. 150 required the reclassification of $2.2 billion of mandatorily redeemable preferred securities as liabilities.
• Construction Deferral: Following the Dynegy PPA termination, Southern Power deferred completion of Plant Franklin Unit 3, with current projections indicating completion between 2008 and 2011.

Investor Verification Checklist

• Dynegy Termination Impact: Verify the sustainability of earnings following the one-time $88 million gain from Dynegy PPA terminations and the status of alternative capacity marketing for Plant Franklin Unit 3.
• Environmental Liabilities: Monitor the status of EPA New Source Review enforcement actions and the potential financial impact of the Atlanta ozone nonattainment reclassification on Georgia Power.
• Mirant Contingencies: Assess the potential exposure from Mirant's bankruptcy, specifically regarding indemnification obligations and joint tax liabilities.
• Regulatory Approvals: Track FERC approval processes for new PPAs (e.g., Plant McIntosh) and the resolution of SeTrans regulatory disputes.
• Debt Refinancing: Review the company's strategy for retiring higher-cost debt and the impact of interest rate swaps on future earnings.