Filed Pursuant to Rule 424(b)(5)
Registration Nos. 333-110950
333-110950-01
333-110950-02
333-110950-03
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 19, 2003)
$150,000,000
(ALABAMA POWER LOGO)
SERIES AA 5 5/8% SENIOR NOTES DUE APRIL 15, 2034
------------------------
Interest payable on January 15, April 15, July 15 and October 15
------------------------
THIS IS A PUBLIC OFFERING BY ALABAMA POWER COMPANY OF $150,000,000 OF ITS
SERIES AA 5 5/8% SENIOR NOTES DUE APRIL 15, 2034.
ALABAMA POWER COMPANY MAY REDEEM THE SERIES AA SENIOR NOTES, IN WHOLE OR IN
PART, AT ANY TIME ON OR AFTER APRIL 21, 2009 AT A PRICE EQUAL TO 100% OF THE
PRINCIPAL AMOUNT OF SERIES AA SENIOR NOTES TO BE REDEEMED PLUS ANY ACCRUED AND
UNPAID INTEREST TO THE DATE OF REDEMPTION.
PAYMENTS OF PRINCIPAL AND INTEREST ON THE SERIES AA SENIOR NOTES WHEN DUE
WILL BE INSURED BY A SURETY BOND TO BE ISSUED BY FINANCIAL GUARANTY INSURANCE
COMPANY.
------------------------
(FGIC LOGO)
------------------------
APPLICATION WILL BE MADE TO LIST THE SERIES AA SENIOR NOTES ON THE NEW YORK
STOCK EXCHANGE. IF APPROVED, ALABAMA POWER COMPANY EXPECTS TRADING OF THE SERIES
AA SENIOR NOTES TO BEGIN WITHIN 30 DAYS AFTER THE SERIES AA SENIOR NOTES ARE
FIRST ISSUED.
------------------------
SEE "RISK FACTORS" ON PAGE S-3 FOR A DESCRIPTION OF CERTAIN RISKS
ASSOCIATED WITH INVESTING IN THE SERIES AA SENIOR NOTES.
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PRICE 100% AND ACCRUED INTEREST, IF ANY
------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND ALABAMA POWER
PUBLIC COMMISSIONS COMPANY
-------------- ------------- --------------
Per Series AA Senior Note.............. 100.00% 3.15% 96.85%
Total.................................. $150,000,000 $4,725,000 $145,275,000
------------------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the accuracy
or adequacy of this Prospectus Supplement or the accompanying Prospectus. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the Series AA Senior Notes to purchasers
on April 21, 2004.
------------------------
MORGAN STANLEY
A.G. EDWARDS & SONS, INC.
CITIGROUP
MERRILL LYNCH & CO.
April 7, 2004
In making your investment decision, you should rely only on the information
contained or incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus. We have not authorized anyone to provide you with any
other information. If you receive any unauthorized information, you must not
rely on it.
We are offering to sell the Series AA Senior Notes only in places where
sales are permitted.
You should not assume that the information contained or incorporated by
reference in this Prospectus Supplement or the accompanying Prospectus,
including information incorporated by reference, is accurate as of any date
other than its respective date.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Risk Factors S-3
The Company S-3
Selected Financial Information S-3
Use of Proceeds S-4
Description of the Series AA Senior
Notes S-4
The Policy and the Insurer S-8
Ratings S-10
Underwriting S-11
Experts S-13
Appendix A -- Form of Policy A-1
PAGE
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PROSPECTUS
About this Prospectus 2
Risk Factors 2
Available Information 2
Incorporation of Certain Documents by
Reference 3
Selected Information 4
Alabama Power Company 4
The Trusts 5
Use of Proceeds 6
Description of the New Bonds 6
Description of the New Stock 9
Description of the Senior Notes 11
Description of the Junior Subordinated
Notes 14
Description of the Preferred
Securities 20
Description of the Guarantees 20
Relationship Among the Preferred
Securities, the Junior Subordinated
Notes and the Guarantees 23
Plan of Distribution 24
Legal Matters 25
Experts 25
S-2
RISK FACTORS
Investing in the Series AA Senior Notes involves risk. Please see the risk
factors in Alabama Power Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, which is incorporated by reference in this
Prospectus Supplement and the accompanying Prospectus. Before making an
investment decision, you should carefully consider these risks as well as other
information contained or incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus. The risks and uncertainties not presently known
to Alabama Power Company or that Alabama Power Company currently deems
immaterial may also impair its business operations, its financial results and
the value of the Series AA Senior Notes.
THE COMPANY
Alabama Power Company (the "Company") is a corporation organized under the
laws of the State of Alabama on November 10, 1927, by the consolidation of a
predecessor Alabama Power Company, Gulf Electric Company and Houston Power
Company. The Company has its principal office at 600 North 18th Street,
Birmingham, Alabama 35291, telephone (205) 257-1000. The Company is a wholly
owned subsidiary of The Southern Company ("Southern").
The Company is a regulated public utility engaged in the generation,
transmission, distribution and sale of electric energy within an approximately
44,500 square mile service area comprising most of the State of Alabama.
SELECTED FINANCIAL INFORMATION
The following selected financial data for the years ended December 31, 1999
through December 31, 2003 has been derived from the Company's audited financial
statements and related notes, incorporated by reference in this Prospectus
Supplement and the accompanying Prospectus. The information set forth below is
qualified in its entirety by reference to and, therefore, should be read
together with management's discussion and analysis of results of operations and
financial condition, the financial statements and related notes and other
financial information incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus.
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
(MILLIONS, EXCEPT RATIOS)
Operating Revenues.................................... $3,385 $3,667 $3,586 $3,711 $3,960
Earnings Before Income Taxes.......................... 658 698 650 768 781
Net Income After Dividends on Preferred Stock......... 400 420 387 461 473
Ratio of Earnings to Fixed Charges(1)................. 3.59 3.46 3.31 3.98 4.29
CAPITALIZATION
AS OF DECEMBER 31, 2003
-------------------------------
ACTUAL AS ADJUSTED(2)
------ ----------------------
(MILLIONS, EXCEPT PERCENTAGES)
Common Stock Equity......................................... $3,501 $3,525 45.1%
Cumulative Preferred Stock.................................. 373 473 6.0
Senior Notes................................................ 2,825 2,975 38.0
Mandatorily Redeemable Preferred Securities................. 300 300 3.8
Other Long-Term Debt........................................ 551 551 7.1
------ ------ -----
Total, excluding amounts due within one year of $526
million................................................ $7,550 $7,824 100.0%
====== ====== =====
---------------
(1) This ratio is computed as follows: (i) "Earnings" have been calculated by
adding to "Earnings Before Income Taxes" "Interest expense, net of amounts
capitalized," "Distributions on mandatorily redeemable preferred securities"
and the debt portion of allowance for funds used during construction; and
(ii) "Fixed Charges" consist of "Interest expense, net of amounts
capitalized," "Distributions on
S-3
mandatorily redeemable preferred securities" and the debt portion of
allowance for funds used during construction.
(2) Reflects: (i) the issuance in February 2004 of 500,000 shares of common
stock to Southern at $40.00 per share; (ii) the issuance in February 2004 of
4,000,000 shares ($100,000,000 aggregate stated capital) of 5.30% Class A
Preferred Stock, Cumulative, Par Value $1 Per Share (Stated Capital $25 Per
Share); (iii) the issuance in February 2004 of $200,000,000 aggregate
principal amount of Series Z 5.125% Senior Notes due February 15, 2019; (iv)
contributions to capital from Southern in March 2004 in the amount of
$4,000,000 and (v) the issuance of the Series AA Senior Notes and the
application of the use of proceeds as described herein.
USE OF PROCEEDS
The proceeds from the sale of the Series AA Senior Notes together with
other funds will be used by the Company to redeem on May 26, 2004 the Series J
6.75% Senior Notes due June 30, 2039 currently outstanding in the aggregate
principal amount of $200,000,000.
DESCRIPTION OF THE SERIES AA SENIOR NOTES
Set forth below is a description of the specific terms of the Series AA
5 5/8% Senior Notes due April 15, 2034 (the "Series AA Senior Notes"). This
description supplements, and should be read together with, the description of
the general terms and provisions of the senior notes set forth in the
accompanying Prospectus under the caption "Description of the Senior Notes." The
following description does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the description in the accompanying
Prospectus and the Senior Note Indenture (the "Senior Note Indenture") dated as
of December 1, 1997, as supplemented, between the Company and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as trustee (the "Senior Note
Indenture Trustee").
GENERAL
The Series AA Senior Notes will be issued as a series of senior notes under
the Senior Note Indenture. The Series AA Senior Notes will be initially issued
in the aggregate principal amount of $150,000,000. The Company may, without the
consent of the holders of the Series AA Senior Notes, issue additional notes
having the same ranking and interest rate, maturity and other terms, including
the benefit of the Policy (as defined below), as the Series AA Senior Notes
(except for the issue price and issue date). Any additional notes having such
similar terms, together with the Series AA Senior Notes, will constitute a
single series of senior notes under the Senior Note Indenture.
The entire principal amount of the Series AA Senior Notes will mature and
become due and payable, together with any accrued and unpaid interest thereon,
on April 15, 2034. The Series AA Senior Notes are not subject to any sinking
fund provision. The Series AA Senior Notes are available for purchase in
denominations of $25 and any integral multiple thereof.
INTEREST
Each Series AA Senior Note shall bear interest at the rate of 5 5/8% per
annum (the "Securities Rate") from the date of original issuance, payable
quarterly in arrears on January 15, April 15, July 15 and October 15 of each
year (each, an "Interest Payment Date") to the person in whose name such Series
AA Senior Note is registered at the close of business on the fifteenth calendar
day prior to such payment date (whether or not a Business Day). The initial
Interest Payment Date is July 15, 2004. The amount of interest payable will be
computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which interest is payable on the Series AA Senior Notes is not
a Business Day, then payment of the interest payable on such date will be made
on the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), with the same force and effect as
if made on such date. "Business Day" means a day other than (i) a Saturday or
Sunday, (ii) a day on which banks in New York, New York are
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authorized or obligated by law or executive order to remain closed or (iii) a
day on which the Senior Note Indenture Trustee's corporate trust office is
closed for business.
TRADING CHARACTERISTICS
The Series AA Senior Notes are expected to trade at a price that takes into
account the value, if any, of accrued but unpaid interest; thus, purchasers will
not pay and sellers will not receive accrued and unpaid interest with respect to
the Series AA Senior Notes that is not included in the trading price thereof.
Any portion of the trading price of a Series AA Senior Note received that is
attributable to accrued interest will be treated as ordinary interest income for
federal income tax purposes and will not be treated as part of the amount
realized for purposes of determining gain or loss on the disposition of the
Series AA Senior Note.
The trading price of the Series AA Senior Notes is likely to be sensitive
to the level of interest rates generally. If interest rates rise in general, the
trading price of the Series AA Senior Notes may decline to reflect the
additional yield requirements of the purchasers. Conversely, a decline in
interest rates may increase the trading price of the Series AA Senior Notes,
although any increase will be moderated by the Company's ability to call the
Series AA Senior Notes at any time on or after April 21, 2009.
SPECIAL INSURANCE PROVISIONS OF THE SENIOR NOTE INDENTURE
Subject to the provisions of the Senior Note Indenture, so long as the
Insurer (as defined below) is not in default under the Policy, the Insurer shall
be entitled to control and direct the enforcement of all rights and remedies
with respect to the Series AA Senior Notes upon the occurrence and continuation
of an Event of Default (as defined in the Senior Note Indenture).
RANKING
The Series AA Senior Notes will be direct, unsecured and unsubordinated
obligations of the Company and will rank equally with all other unsecured and
unsubordinated obligations of the Company. The Series AA Senior Notes will be
effectively subordinated to all secured debt of the Company, including its first
mortgage bonds, aggregating approximately $295,000,000 outstanding at December
31, 2003. The Senior Note Indenture contains no restrictions on the amount of
additional indebtedness that may be incurred by the Company.
OPTIONAL REDEMPTION
The Company shall have the right to redeem the Series AA Senior Notes, in
whole or in part, without premium, from time to time, on or after April 21,
2009, upon not less than 30 nor more than 60 days' notice, at a redemption price
equal to 100% of the principal amount to be redeemed plus any accrued and unpaid
interest (the "Redemption Price") to the date of redemption (the "Redemption
Date").
If notice of redemption is given as aforesaid, the Series AA Senior Notes
so to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price together with any accrued interest thereon, and from and after
such date (unless the Company shall default in the payment of the Redemption
Price and accrued interest) such Series AA Senior Notes shall cease to bear
interest. If any Series AA Senior Note called for redemption shall not be paid
upon surrender thereof for redemption, the principal shall, until paid, bear
interest from the Redemption Date at the Securities Rate. See "Description of
the Senior Notes -- Events of Default" in the accompanying Prospectus.
Subject to the foregoing and to applicable law (including, without
limitation, United States federal securities laws), the Company or its
affiliates may, at any time and from time to time, purchase outstanding Series
AA Senior Notes by tender, in the open market or by private agreement.
MANDATORY REDEMPTION
In the event that (a) the Company issues or incurs any Secured Debt (as
defined below) in addition to the Secured Debt of the Company outstanding as of
the date of the Insurance Agreement between the Company and the Insurer pursuant
to which the Insurer will issue the Policy (the "Insurance Agreement")
S-5
in an aggregate amount at any one time outstanding during the term of the
Insurance Agreement in excess of $200,000,000 and fails to issue to the Insurer
first mortgage bonds or obligations of the Company secured by a security
interest in assets of the Company to secure the payment to the Insurer of the
Company's reimbursement obligations under the Insurance Agreement or (b) the
Company merges, consolidates, reorganizes or converts or transfers all or
substantially all of the Company's assets and the Company's obligations under
the Series AA Senior Notes and the Insurance Agreement are not assumed by, and
do not become direct and primary obligations of, a regulated utility company, if
the Company was a regulated utility company immediately prior to such
transaction, then, unless the Insurer consents to such issuance or transaction,
the Company shall redeem the Series AA Senior Notes prior to the stated maturity
date, but in no event earlier than April 21, 2009, in whole, upon not less than
30 days' nor more than 60 days' notice at the Redemption Price. "Secured Debt"
means indebtedness of the Company that in the aggregate is secured by a lien or
liens on substantially all of the assets of the Company which are or would have
been, if the Company's first mortgage bond indenture has been satisfied and
discharged, subject to the lien of the Company's first mortgage bond indenture.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as the initial securities
depository for the Series AA Senior Notes. The Series AA Senior Notes will be
issued only as fully registered securities registered in the name of Cede & Co.,
DTC's nominee, or such other name as may be requested by an authorized
representative of DTC. One or more fully registered global Series AA Senior
Notes certificates will be issued, representing in the aggregate the total
principal amount of the Series AA Senior Notes, and will be deposited with the
Senior Note Indenture Trustee on behalf of DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "1934 Act"). DTC holds and provides asset servicing
for over 2 million issues of U.S. and non-U.S. equity issues, corporate and
municipal debt issues and money market instruments from over 85 countries that
DTC's participants ("Direct Participants") deposit with DTC. DTC also
facilitates the post-trade settlement among Direct Participants of sales and
other securities transactions in deposited securities, through electronic
computerized book-entry transfers and pledges between Direct Participants'
accounts. This eliminates the need for physical movement of securities
certificates. Direct Participants include both U.S. and non-U.S. securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is a wholly-owned subsidiary of The Depository Trust &
Clearing Corporation ("DTCC"). DTCC, in turn, is owned by a number of Direct
Participants of DTC and members of the National Securities Clearing Corporation,
Government Securities Clearing Corporation, MBS Clearing Corporation and
Emerging Markets Clearing Corporation (NSCC, GSCC, MBSCC and EMCC, also
subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the
American Stock Exchange LLC and the National Association of Securities Dealers,
Inc. Access to the DTC system is also available to others such as both U.S. and
non-U.S. securities brokers and dealers, banks, trust companies and clearing
corporations that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect Participants"). The
DTC rules applicable to its Direct and Indirect Participants are on file with
the Securities and Exchange Commission (the "Commission"). More information
about DTC can be found at www.dtcc.com.
Purchases of Series AA Senior Notes under the DTC system must be made by or
through Direct Participants, which will receive a credit for the Series AA
Senior Notes on DTC's records. The ownership interest of each actual purchaser
of Series AA Senior Notes ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Series AA Senior
Notes. Transfers of ownership interests in
S-6
the Series AA Senior Notes are to be accomplished by entries made on the books
of Direct and Indirect Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Series AA Senior Notes, except in the event that use of the
book-entry system for the Series AA Senior Notes is discontinued.
To facilitate subsequent transfers, all Series AA Senior Notes deposited by
Direct Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co., or such other name as may be requested by an authorized
representative of DTC. The deposit of Series AA Senior Notes with DTC and their
registration in the name of Cede & Co. or such other DTC nominee do not effect
any changes in beneficial ownership. DTC has no knowledge of the actual
Beneficial Owners of the Series AA Senior Notes. DTC's records reflect only the
identity of the Direct Participants to whose accounts such Series AA Senior
Notes are credited, which may or may not be the Beneficial Owners. The Direct
and Indirect Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Redemption notices shall be sent to DTC. If less than all of the Series AA
Senior Notes are being redeemed, DTC's practice is to determine by lot the
amount of interest of each Direct Participant in such Series AA Senior Notes to
be redeemed.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Although voting with respect to the Series AA Senior Notes is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. (nor any other
DTC nominee) will consent or vote with respect to Series AA Senior Notes. Under
its usual procedures, DTC mails an Omnibus Proxy to the Company as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Series AA Senior Notes are credited on the record date (identified in a listing
attached to the Omnibus Proxy).
Payments on the Series AA Senior Notes will be made to Cede & Co., or such
other nominee as may be requested by an authorized representative of DTC. DTC's
practice is to credit Direct Participants' accounts upon DTC's receipt of funds
and corresponding detail information from the Company or the Senior Note
Indenture Trustee on the relevant payment date in accordance with their
respective holdings shown on DTC's records. Payments by Direct or Indirect
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers registered in "street name," and will be the responsibility of such
Direct or Indirect Participant and not of DTC or the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment to Cede & Co. (or such other nominee as may be requested by an
authorized representative of DTC) is the responsibility of the Company,
disbursement of such payments to Direct Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner of a global Series AA Senior
Note will not be entitled to receive physical delivery of Series AA Senior
Notes. Accordingly, each Beneficial Owner must rely on the procedures of DTC to
exercise any rights under the Series AA Senior Notes. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of securities in definitive form. Such laws may impair the ability to
transfer beneficial interests in a global Series AA Senior Note.
DTC may discontinue providing its services as securities depository with
respect to the Series AA Senior Notes at any time by giving reasonable notice to
the Company. Under such circumstances, in the event that a successor securities
depository is not obtained, Series AA Senior Notes certificates will be printed
and delivered to the holders of record.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof. The Company has no
responsibility for the performance by DTC or its Direct or Indirect Participants
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of their respective obligations as described herein or under the rules and
procedures governing their respective operations.
THE POLICY AND THE INSURER
The following information has been furnished by Financial Guaranty
Insurance Company (the "Insurer") for use in this Prospectus Supplement.
Reference is made to Appendix A for a specimen of the Policy to be issued by the
Insurer. No representation is made by the Company or any Underwriter as to the
accuracy or completeness of any such information.
THE POLICY
Concurrently with the issuance of the Series AA Senior Notes, the Insurer
will issue a surety bond for the benefit of the holders of the Series AA Senior
Notes (the "Policy"). The Policy will unconditionally guarantee the payment of
principal of (at stated maturity) and interest on, the Series AA Senior Notes as
such payments shall become Due for Payment but shall be unpaid by reason of the
Company's Nonpayment (as defined below). The Insurer will make such payments to
U.S. Bank Trust National Association, or its successor, as its agent (the
"Fiscal Agent"), on the later of the date on which such principal or interest
(as applicable) is Due for Payment or on the business day (as defined in the
Policy) next following the day on which the Insurer shall have received
telephonic or telegraphic notice, subsequently confirmed in writing, or written
notice by registered or certified mail, from a holder of the Series AA Senior
Notes or the Paying Agent of the Nonpayment of such amount by the Company. The
Fiscal Agent will disburse such amount Due for Payment on any Series AA Senior
Note to the holder of such Series AA Senior Note or the Paying Agent upon
receipt by the Fiscal Agent of evidence satisfactory to the Fiscal Agent of the
holder's right to receive payment of the principal or interest Due for Payment
and evidence, including any appropriate instruments of assignment, that all of
such holder's rights to payment of such principal or interest (as applicable)
shall be vested in the Insurer. "Nonpayment" in respect of the Series AA Senior
Notes means the failure of the Company to have provided sufficient funds to the
Paying Agent for payment in full of all principal or interest Due for Payment
and includes any payment of principal or interest (as applicable) made to a
holder of a Series AA Senior Note by or on behalf of the Company which has been
recovered from such holder pursuant to the United States Bankruptcy Code by a
trustee in bankruptcy in accordance with a final, nonappealable order of a court
having competent jurisdiction. "Due for Payment" means, when referring to the
principal of a Series AA Senior Note, the stated maturity date thereof and does
not refer to any earlier date on which payment is due by reason of call for
redemption, acceleration or other advancement of maturity and means, when
referring to interest on a Series AA Senior Note, the stated date for payment of
interest.
The Policy is non-cancellable and the premium will be fully paid at the
time of issuance of the Series AA Senior Notes. The Policy covers failure to pay
principal of the Series AA Senior Notes on the stated maturity date and not on
any other date on which the Series AA Senior Notes may have been otherwise
called for redemption, accelerated or advanced in maturity, and covers the
failure to pay an installment of interest on the stated date for its payment.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
THE INSURER
The Insurer, a New York stock insurance corporation, is a direct,
wholly-owned subsidiary of FGIC Corporation, and provides financial guaranty
insurance for public finance and structured finance obligations. The Insurer is
licensed to engage in financial guaranty insurance in all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico and, through a branch, in
the United Kingdom.
On December 18, 2003, an investor group consisting of The PMI Group, Inc.
("PMI"), affiliates of The Blackstone Group L.P. ("Blackstone"), affiliates of
The Cypress Group L.L.C. ("Cypress") and affiliates of CIVC Partners L.P.
("CIVC") acquired FGIC Corporation (the "FGIC Acquisition") from a subsidiary of
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General Electric Capital Corporation ("GE Capital"). PMI, Blackstone, Cypress
and CIVC acquired approximately 42%, 23%, 23% and 7%, respectively, of FGIC
Corporation's common stock. FGIC Corporation paid GE Capital approximately
$284.3 million in pre-closing dividends from the proceeds of dividends it, in
turn, had received from the Insurer, and GE Capital retained approximately
$234.6 million in liquidation preference of FGIC Corporation's convertible
participating preferred stock and approximately 5% of FGIC Corporation's common
stock. Neither FGIC Corporation nor any of its shareholders is obligated to pay
any debts of the Insurer or any claims under any insurance policy, including the
Policy, issued by the Insurer.
The Insurer is subject to the insurance laws and regulations of the State
of New York, where the Insurer is domiciled, including Article 69 of the New
York Insurance Law ("Article 69"), a comprehensive financial guaranty insurance
statute. The Insurer is also subject to the insurance laws and regulations of
all other jurisdictions in which it is licensed to transact insurance business.
The insurance laws and regulations, as well as the level of supervisory
authority that may be exercised by the various insurance regulators, vary by
jurisdiction, but generally require insurance companies to maintain minimum
standards of business conduct and solvency, to meet certain financial tests, to
comply with requirements concerning permitted investments and the use of policy
forms and premium rates and to file quarterly and annual financial statements on
the basis of statutory accounting principles ("SAP") and other reports. In
addition, Article 69, among other things, limits the business of each financial
guaranty insurer to financial guaranty insurance and certain related lines.
For the years ended December 31, 2003 and December 31, 2002, the Insurer
had written directly, or assumed through reinsurance, guaranties of
approximately $42.4 billion and $47.9 billion par value of securities,
respectively (of which approximately 79% and 81%, respectively, constituted
guaranties of municipal bonds), for which it had collected gross premiums of
approximately $260.3 million and $232.6 million, respectively. For the twelve
months ended December 31, 2003, the Insurer had reinsured, through facultative
arrangements, approximately 2.0% of the risks it had written.
The following table sets forth the capitalization of the Insurer as of
December 31, 2002 and December 31, 2003, respectively, on the basis of generally
accepted accounting principles ("GAAP"). The December 31, 2003 balances reflect
the establishment of a new basis in the assets and the liabilities of the
Insurer resulting from the FGIC Acquisition and the application of purchase
accounting. The December 31, 2002 balances are based upon the historical basis
of the Insurer's assets and liabilities.
FINANCIAL GUARANTY INSURANCE COMPANY
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31,
2002 2003
------------ ------------
Unearned Premiums........................................... $ 684 $ 919
Other Liabilities........................................... 255 86
Stockholder's Equity
Common Stock................................................ 15 15
Additional Paid-in Capital.................................. 384 1,858
Accumulated Other Comprehensive Income...................... 49 2
Retained Earnings........................................... $1,741 94
------ ------
Total Stockholder's Equity.................................. $2,189 1,969
------ ------
Total Liabilities and Stockholder's Equity.................. $3,128 2,974
====== ======
The audited financial statements of the Insurer as of December 31, 2002 and
2003 and for each of the years in the three-year period ended December 31, 2003,
which are included as Exhibit 99.1 to the Current Report on Form 8-K of the
Company dated April 7, 2004 (Commission file number 1-3164) (the
"Form 8-K") in connection with the registration statement of which this
Prospectus Supplement is a part, are hereby incorporated by reference in this
Prospectus Supplement. Any statement contained herein under the
S-9
heading "The Insurer and the Policy" or in such Exhibit 99.1 shall be modified
or superseded to the extent required by any statement in any document
subsequently incorporated by reference in this Prospectus Supplement with the
approval of the Insurer, and shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
All financial statements of the Insurer (if any) included in documents
filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or
15(d) of the 1934 Act, subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Series AA Senior Notes shall be
deemed to be incorporated by reference into this Prospectus Supplement and to be
a part hereof from the respective dates of filing of such documents.
Copies of the Insurer's GAAP and SAP financial statements are available
upon request to: Financial Guaranty Insurance Company, 125 Park Avenue, New
York, NY 10017, Attention: Corporate Communications Department. The Insurer's
telephone number is (212) 312-3000.
Neither the Insurer nor any of its affiliates accepts any responsibility
for the accuracy or completeness of, nor have they participated in the
preparation of, the Prospectus Supplement, the accompanying Prospectus or any
information or disclosure that is provided to potential purchasers of the Series
AA Senior Notes, or omitted from such disclosure, other than with respect to the
accuracy of information regarding the Insurer and the Policy set forth under the
heading "The Insurer and the Policy" and in Appendix A. In addition, the Insurer
makes no representation regarding the Series AA Senior Notes or the advisability
of investing in the Series AA Senior Notes.
THE INSURER'S CREDIT RATINGS
The financial strength of the Insurer is rated "AAA" by Standard & Poor's,
a division of The McGraw-Hill Companies, Inc. ("S&P"), "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and "AAA" by Fitch Ratings. Each rating of
the Insurer should be evaluated independently. The ratings reflect the
respective ratings agencies' current assessments of the insurance financial
strength of the Insurer. Any further explanation of any rating may be obtained
only from the applicable rating agency. These ratings are not recommendations to
buy, sell or hold the Series AA Senior Notes, and are subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the market
price of the Series AA Senior Notes. The Insurer does not guarantee the market
price or investment value of the Series AA Senior Notes nor does it guarantee
that the ratings on the Series AA Senior Notes will not be revised or withdrawn.
RATINGS
It is anticipated that Moody's and S&P will assign the Series AA Senior
Notes the ratings of "Aaa" and "AAA," respectively, conditioned upon the
issuance and delivery by the Insurer at the time of delivery of the Series AA
Senior Notes of the Policy, insuring the timely payment of the principal of and
interest on the Series AA Senior Notes. Such ratings reflect only the views of
such rating agencies, and an explanation of the significance of such ratings may
be obtained only from such rating agencies at the following addresses: Moody's
Investors Service, Inc., 99 Church Street, New York, New York 10007; Standard &
Poor's, 25 Broadway, New York, New York 10004. There is no assurance that such
ratings will remain in effect for any period of time or that they will not be
revised downward or withdrawn entirely by said rating agencies if, in their
judgment, circumstances warrant. Neither the Company nor any Underwriter has
undertaken any responsibility to oppose any proposed downward revision or
withdrawal of a rating on the Series AA Senior Notes. Any such downward revision
or withdrawal of such ratings may have an adverse effect on the market price of
the Series AA Senior Notes.
At present, each of such rating agencies maintains four categories of
investment grade ratings. They are for S&P -- AAA, AA, A and BBB and for
Moody's -- Aaa, Aa, A and Baa. S&P defines "AAA" as the highest rating assigned
to a debt obligation. Moody's defines "Aaa" as representing the best quality
debt obligation carrying the smallest degree of investment risk.
S-10
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to the underwriters
named below (the "Underwriters") and each of the Underwriters has severally
agreed to purchase from the Company the principal amount of the Series AA Senior
Notes set forth opposite its name below:
PRINCIPAL AMOUNT OF
SERIES AA SENIOR
NAME NOTES
---- -------------------
Morgan Stanley & Co. Incorporated........................... $30,000,000
A.G. Edwards & Sons, Inc. .................................. 30,000,000
Citigroup Global Markets Inc. .............................. 30,000,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 30,000,000
ABI Capital Management, LLC................................. 7,500,000
Morgan Keegan & Company, Inc. .............................. 7,500,000
Pershing LLC................................................ 7,500,000
SunTrust Capital Markets, Inc. ............................. 7,500,000
------------
Total............................................. $150,000,000
============
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Series AA Senior
Notes offered hereby, if any of the Series AA Senior Notes are purchased.
The Underwriters propose to offer the Series AA Senior Notes directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus Supplement, and may offer them to certain securities dealers at
such price less a concession not in excess $0.50 per Series AA Senior Note. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.45 per Series AA Senior Note to certain brokers and dealers. After the
Series AA Senior Notes are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the Underwriters.
It is expected that delivery of the Series AA Senior Notes will be made,
against payment for the Series AA Senior Notes, on or about April 21, 2004,
which will be the tenth Business Day following the date of pricing of the Series
AA Senior Notes. Under Rule 15c6-1 under the 1934 Act purchases or sales of
securities in the secondary market generally are required to settle within three
Business Days (T+3), unless the parties to any such transactions expressly agree
otherwise. Accordingly, purchasers of the Series AA Senior Notes who wish to
trade the Series AA Senior Notes will be required, because the Series AA Senior
Notes initially will settle within ten Business Days (T + 10), to specify an
alternate settlement cycle at the time of any such trade to prevent a failed
settlement. Purchasers of the Series AA Senior Notes who wish to trade on the
date of this Prospectus Supplement should consult their own legal advisors.
Prior to the offering, there has been no public market for the Series AA
Senior Notes. The Company has applied to have the Series AA Senior Notes listed
on the New York Stock Exchange, and the Company expects trading in the Series AA
Senior Notes on the New York Stock Exchange to begin within 30 days after the
original issue date. In order to meet the requirements for listing the Series AA
Senior Notes, the Underwriters will undertake to sell lots of 100 or more Series
AA Senior Notes to a minimum of 400 beneficial holders.
The Series AA Senior Notes are a new issue of securities with no
established trading market, but the Company has been advised by the Underwriters
that they intend to make a market in the Series AA Senior Notes. The
Underwriters are not obligated, however, to do so and may discontinue their
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Series AA Senior Notes.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "1933 Act").
S-11
The Company's expenses associated with the offer and sale of the Series AA
Senior Notes are estimated to be $3,100,000, which includes the premium for the
Policy.
The Company has agreed with the Underwriters, that during the period 15
days from the date of the Underwriting Agreement, it will not sell, offer to
sell, grant any option for the sale of, or otherwise dispose of any Series AA
Senior Notes, any security convertible into, exchangeable into or exercisable
for the Series AA Senior Notes or any debt securities substantially similar to
the Series AA Senior Notes (except for the Series AA Senior Notes issued
pursuant to the Underwriting Agreement), without the prior written consent of
Morgan Stanley & Co. Incorporated. This agreement does not apply to issuances of
commercial paper or other debt securities with scheduled maturities of less than
one year.
In order to facilitate the offering of the Series AA Senior Notes, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Series AA Senior Notes. Specifically, the Underwriters
may over-allot in connection with the offering, creating short positions in the
Series AA Senior Notes for their own account. In addition, to cover
over-allotments or to stabilize the price of the Series AA Senior Notes, the
Underwriters may bid for, and purchase, Series AA Senior Notes in the open
market. The Underwriters may reclaim selling concessions allowed to an
Underwriter or dealer for distributing Series AA Senior Notes in the offering,
if the Underwriters repurchase previously distributed Series AA Senior Notes in
transactions to cover short positions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price of
the Series AA Senior Notes above independent market levels. The Underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Series AA Senior Notes. In
addition, neither the Company nor the Underwriters make any representation that
the Underwriters will engage in such transactions or that such transactions once
commenced will not be discontinued without notice.
Certain of the Underwriters and their affiliates engage in transactions
with, and, from time to time, have performed investment banking and/or
commercial banking services for, the Company and its affiliates in the ordinary
course of business and may do so in the future.
S-12
EXPERTS
The Company's financial statements and the related financial statement
schedule as of and for the years ended December 31, 2003 and 2002 incorporated
by reference in this Prospectus Supplement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports (which report on
the financial statements expresses an unqualified opinion and includes an
explanatory paragraph referring to the Company's change in its method of
accounting for asset retirement obligations), which are incorporated in this
Prospectus Supplement by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts, in
accounting and auditing.
Certain of the Company's financial statements incorporated by reference in
this Prospectus Supplement have been audited by Arthur Andersen LLP
("Andersen"), independent public accountants, as indicated in their reports with
respect to the financial statements, and are incorporated in this Prospectus
Supplement, in reliance upon the authority of Andersen as experts in giving such
reports. On March 28, 2002, Southern's Board of Directors, upon recommendation
of its Audit Committee, decided not to engage Andersen as the Company's
principal public accountants. The Company has not obtained a reissued report
from Andersen and has been unable to obtain, after reasonable efforts,
Andersen's written consent to incorporate by reference Andersen's reports on the
financial statements. Under these circumstances, Rule 437a under the 1933 Act
permits this Prospectus Supplement to be filed without a written consent from
Andersen. The absence of such written consent from Andersen may limit a holder's
ability to assert claims against Andersen under Section 11(a) of the 1933 Act
for any untrue statement of a material fact contained in the financial
statements audited by Andersen or any omissions to state a material fact
required to be stated in the financial statements.
The predecessor basis financial statements of the Insurer as of December
31, 2002 and for each of the years in the two-year period ended December 31,
2002, have been included in the Form 8-K of the Company, which is incorporated
by reference in the registration statement to which this Prospectus Supplement
relates in reliance upon the report of KPMG LLP, independent certified public
accountants, which is also incorporated by reference therein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of the Insurer as of December 31, 2003 and for the
periods from December 18, 2003 through December 31, 2003, and from January 1,
2003 through December 17, 2003 appearing in the Form 8-K of the Company, which
is incorporated by reference, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
S-13
APPENDIX A -- FORM OF POLICY
A-1
EXHIBIT A
[FGIC LOGO]
FINANCIAL GUARANTY INSURANCE COMPANY
125 Park Avenue
New York, NY 10017
T 212-312-3000
T 800-352-0001
SURETY BOND
--------------------------------------------------------------------------------
ISSUER: POLICY NUMBER:
------------------------------------
CONTROL NUMBER: 0010001
--------------------------------------------------------------------------------
OBLIGATIONS: PREMIUM:
-------------------------------------- ---- ------------------------------------
Financial Guaranty Insurance Company ("Financial Guaranty"), a New York stock
insurance company, in consideration of the payment of the premium and subject to
the terms of this Surety Bond, hereby unconditionally and irrevocably agrees to
pay to U.S. Bank Trust National Association or its successor, as its agent (the
"Fiscal Agent"), for the benefit of Noteholders, that portion of the principal
and interest on the above-described debt obligations (the "Notes") which shall
become Due for Payment but shall be unpaid by reason of Nonpayment by the
Issuer.
Financial Guaranty will make such payments to the Fiscal Agent on the date such
principal or interest becomes Due for Payment or on the Business Day next
following the day on which Financial Guaranty shall have received Notice of
Nonpayment, whichever is later. The Fiscal Agent will disburse to the Noteholder
the face amount of principal and interest which is then Due for Payment but is
unpaid by reason of Nonpayment by the Issuer but only upon receipt by the Fiscal
Agent, in form reasonably satisfactory to it, of (i) evidence of the
Noteholder's right to receive payment of the principal or interest Due for
Payment and (ii) evidence, including any appropriate instruments of assignment,
that all of the Noteholder's rights to payment of such principal or interest Due
for Payment shall thereupon vest in Financial Guaranty. Upon such disbursement,
Financial Guaranty shall become the owner of the Note, appurtenant coupon or
right to payment of principal or interest on such Note and shall be fully
subrogated to all of the Noteholder's rights thereunder, including the
Noteholder's right to payment thereof.
This Surety Bond is non-cancellable for any reason. The premium on this Surety
Bond is not refundable for any reason, including the payment of the Notes prior
to their stated maturity. This Surety Bond does not insure against loss of any
prepayment premium which may at any time be payable with respect to any Note.
As used herein, the term "Noteholder" means, as to a particular Note, the person
other than the Issuer who, at the time of Nonpayment, is entitled under the
terms of such Note to payment thereof. "Due for Payment" means, when referring
to the principal of a Note, the stated maturity date thereof and does not refer
to any earlier date on which payment is due by reason of call for redemption,
acceleration or other advancement of maturity and means, when referring to
interest on a Note, the stated date for payment of interest. "Nonpayment" in
respect of a Note means the failure of the Issuer to have provided sufficient
funds to the paying agent for payment in full of all principal and interest Due
for Payment on such Note. "Notice" means telephonic or telegraphic notice,
subsequently confirmed in writing, or written notice by registered or certified
mail, from a Noteholder or a paying agent for the Notes to Financial Guaranty.
"Business Day" means any day other than a Saturday, Sunday or a day on which the
Fiscal Agent is authorized by law to remain closed.
[FGIC LOGO]
FINANCIAL GUARANTY INSURANCE COMPANY
125 Park Avenue
New York, NY 10017
T 212-312-3000
T 800-352-0001
SURETY BOND
It is further understood that the term "Nonpayment" in respect of a Note
includes any payment of principal or interest made to a Noteholder by or on
behalf of the issuer of such Note which has been recovered from such Noteholder
pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in
accordance with a final, nonappealable order of a court having competent
jurisdiction
In Witness Whereof, Financial Guaranty has caused this Surety Bond to be affixed
with its corporate seal and to be signed by its duly authorized officer in
facsimile to become effective and binding upon Financial Guaranty by virtue of
the countersignature of its duly authorized representative.
/s/ [illegible]
PRESIDENT
EFFECTIVE DATE: AUTHORIZED REPRESENTATIVE
U.S. Bank Trust National Association, acknowledges that it has agreed to perform
the duties of Fiscal Agent under this Policy.
/s/ [illegible]
AUTHORIZED OFFICER
(ALABAMA POWER LOGO)