EXHIBIT 99
MANAGEMENT'S REPORT
Gulf Power Company 2001 Annual Report
The management of Gulf Power Company has prepared -- and is responsible for --
the financial statements and related information included in this report. These
statements were prepared in accordance with accounting principles generally
accepted in the United States and necessarily include amounts that are based on
the best estimates and judgments of management. Financial information throughout
this annual report is consistent with the financial statements.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that the accounting records
reflect only authorized transactions of the Company. Limitations exist in any
system of internal controls, however, based on a recognition that the cost of
the system should not exceed its benefits. The Company believes its system of
internal accounting controls maintains an appropriate cost/benefit relationship.
The Company's system of internal accounting controls is evaluated on an
ongoing basis by the Company's internal audit staff. The Company's independent
public accountants also consider certain elements of the internal control system
in order to determine their auditing procedures for the purpose of expressing an
opinion on the financial statements.
The audit committee of the board of directors, composed of five independent
directors, provides a broad overview of management's financial reporting and
control functions. Periodically, this committee meets with management, the
internal auditors, and the independent public accountants to ensure that these
groups are fulfilling their obligations and to discuss auditing, internal
controls, and financial reporting matters. The internal auditors and independent
public accountants have access to the members of the audit committee at any
time.
Management believes that its policies and procedures provide reasonable
assurance that the Company's operations are conducted according to a high
standard of business ethics.
In management's opinion, the financial statements present fairly, in all
material respects, the financial position, results of operations, and cash flows
of Gulf Power Company in conformity with accounting principles generally
accepted in the United States.
/s/ Travis J. Bowden
Travis J. Bowden
President
and Chief Executive Officer
/s/Ronnie R. Labrato
Ronnie R. Labrato
Vice President, Chief Financial Officer
and Comptroller
February 13, 2002
1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gulf Power Company:
We have audited the accompanying balance sheets and statements of capitalization
of Gulf Power Company (a Maine corporation and a wholly owned subsidiary of
Southern Company) as of December 31, 2001 and 2000, and the related statements
of income, common stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements (pages 13 - 28) referred to above
present fairly, in all material respects, the financial position of Gulf Power
Company as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
As explained in Note 1 to the financial statements, effective January 1,
2001, Gulf Power Company changed its method of accounting for derivative
instruments and hedging activities.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 13, 2002
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Gulf Power Company 2001 Annual Report
RESULTS OF OPERATIONS
Earnings
Gulf Power Company's 2001 net income after dividends on preferred stock was
$58.3 million, an increase of $6.5 million from the previous year. In 2000,
earnings were $51.8 million, down $1.9 million when compared to 1999. The
increase in earnings in 2001 was due primarily to an increase in Allowance for
Funds Used During Construction (AFUDC) and lower interest expense; the decrease
in 2000 was primarily a result of expenses related to the discontinuance of the
Company's appliance sales division, and higher interest expense.
Revenues
Operating revenues increased in 2001 when compared to 2000. The following table
summarizes the change in operating revenues for the past two years:
Increase (Decrease)
Amount From Prior Year
------------------------------------
2001 2001 2000
------------------------------------
(in thousands)
Retail --
Base Revenues $340,620 $4,517 $3,771
Regulatory cost
recovery and other 243,971 31,434 27,920
- -----------------------------------------------------------------
Total retail 584,591 35,951 31,691
- ------------------------------------------------------ ----------
Sales for resale--
Non-affiliates 82,252 15,362 4,536
Affiliates 27,256 (39,739) 885
- -----------------------------------------------------------------
Total sales for resale 109,508 (24,377) 5,421
Other operating
revenues 31,104 (690) 3,108
- -----------------------------------------------------------------
Total operating
revenues $725,203 $10,884 $40,220
=================================================================
Percent change 1.5% 6.0%
- ----------------------------------------------------------------
Retail revenues increased $36 million, or 6.6 percent in 2001, and $31.7
million or 6.1 percent in 2000, due primarily to the recovery of higher fuel and
purchased power costs. Retail base rate revenues increased $4.5 million due to
slightly higher energy sales and lower revenues subject to refund. Revenues
subject to refund were $1.5 million in 2001 compared to $6.9 million in 2000.
See Note 3 to the financial statements under "Retail Revenue Sharing Plan" for
further information.
"Regulatory cost recovery and other" includes: recovery provisions for fuel
expenses and the energy component of purchased power costs, energy conservation
costs, purchased power capacity costs, and environmental compliance costs.
Annually, the Company seeks recovery of projected costs plus any true-up amount
from prior periods. Approved rates are implemented each January. Therefore, the
recovery provisions generally equal the related expenses and have no material
effect on net income. See Notes 1 and 3 to the financial statements under
"Revenues and Regulatory Cost Recovery Clauses" and "Environmental Cost
Recovery," respectively, for further information.
Sales for resale were $109.5 million in 2001, a decrease of $24.4 million, or
18.2 percent, from 2000 primarily due to reduced energy sales for resale to
affiliates. Revenues from sales to utilities outside the service area under
long-term contracts consist of capacity and energy components. Capacity revenues
reflect the recovery of fixed costs and a return on investment under the
contracts. Energy is generally sold at variable cost. The capacity and energy
components under these long-term contracts were as follows:
2001 2000 1999
----------------------------------------
(in thousands)
Capacity $19,472 $20,270 $19,792
Energy 27,579 21,922 20,251
- -------------------------------------------------------------
Total $47,051 $42,192 $40,043
=============================================================
Capacity revenues remained relatively unchanged during 2001 and 2000.
Sales to affiliated companies vary from year to year depending on demand and
the availability and cost of generating resources at each company. These sales
have little impact on earnings.
Other operating revenues for 2000 increased due primarily to higher franchise
fees and higher revenues from the transmission of electricity to others.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
Energy Sales
Kilowatt-hour sales for 2001 and the percent changes by year were as follows:
KWH Percent Change
----------------------------------
2001 2001 2000
----------------------------------
(millions)
Residential 4,716 (1.5)% 7.1%
Commercial 3,418 1.2 4.9
Industrial 2,018 4.8 4.3
Other 21 10.5 0.0
-------------
Total retail 10,173 0.6 5.8
Sales for resale
Non-affiliates 2,093 22.8 9.2
Affiliates 963 (49.8) (23.7)
-------------
Total 13,229 (3.7) 0.7
=======================================================
Total retail energy sales increased in both 2001 and 2000 primarily due to an
increase in the total number of customers.
An increase in energy sales for resale to non-affiliates of 22.8 percent in
2001 when compared to 2000 is primarily related to unit power sales under
long-term contracts to other Florida utilities and bulk power sales under
short-term contracts to other non-affiliated utilities. Energy sales to
affiliated companies vary from year to year depending on demand and availability
and cost of generating resources at each company.
Expenses
Total operating expenses in 2001 increased $13.5 million, or 2.3 percent, over
the amount recorded in 2000 due primarily to higher purchased power expenses and
maintenance expenses. In 2000, total operating expenses increased $39.5 million,
or 7.1 percent, compared to 1999 due primarily to higher fuel and purchased
power expenses.
Fuel expenses in 2001, when compared to 2000, decreased $15.1 million, or 7.0
percent, due primarily to decreased generation, while average fuel costs
increased as noted below. In 2000, fuel expenses increased $6.7 million, or 3.2
percent, when compared to 1999. The increase in 2000 was a result of an increase
in average fuel costs.
The amount and sources of generation and the average cost of fuel per net
kilowatt-hour generated were as follows:
2001 2000 1999
-------------------------------
Total generation
(millions of kilowatt-hours) 11,423 12,866 13,095
Sources of generation
(percent)
Coal 99.0 98.2 97.4
Oil and gas 1.0 1.8 2.6
Average cost of fuel per net
kilowatt-hour generated
(cents)-- 1.76 1.68 1.60
- ---------------------------------------------------------------------
Purchased power expenses increased in 2001 by $23.8 million, or 28.8 percent,
over 2000 primarily due to an increase in purchased power from affiliate
companies. Purchased power expenses for 2000 increased over 1999 by $25.5
million, or 44.7 percent, due primarily to a higher demand for energy.
Purchases of energy from affiliates will vary from year to year depending on
demand and the availability and cost of generating resources at each company.
These purchases have little impact on earnings.
Depreciation and amortization expense increased $1.3 million, or 2.0 percent,
in 2001, and $2.3 million, or 3.5 percent, in 2000 due to an increase in
depreciable property and the amortization of a portion of a regulatory asset,
which was allowed in the current retail revenue sharing plan.
Other income, net increased in 2001 by $6.8 million compared to 2000 due
primarily to higher allowance for equity funds used during construction related
to the Company's new combined cycle unit. In 2000, other income, net decreased
$2.8 million due primarily to expenses related to the discontinuance of the
Company's appliance sales division. See Note 1 to the financial statements under
"Other Income" for further information.
Interest expense, net decreased $3.1 million, or 10.9 percent, in 2001 due
primarily to higher allowance for debt funds used during construction related to
the Company's new combined cycle unit, as well as lower interest rates on notes
payable and variable rate pollution control bonds. These decreases were
partially offset by the issuance of $60 million of senior notes in August 2001
and $75 million of senior notes in October 2001. In 2000, interest expense, net
4
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
increased $1.2 million, or 4.6 percent, due primarily to the issuance of $50
million of senior notes in August 1999.
Effects of Inflation
The Company is subject to rate regulation and income tax laws that are based on
the recovery of historical costs. Therefore, inflation creates an economic loss
because the Company is recovering its cost of investments in dollars that have
less purchasing power. While the inflation rate has been relatively low in
recent years, it continues to have an adverse effect on the Company because of
the large investment in utility plant with long economic lives. Conventional
accounting for historical cost does not recognize this economic loss nor the
partially offsetting gain that arises through financing facilities with
fixed-money obligations, such as long-term debt and preferred securities. Any
recognition of inflation by regulatory authorities is reflected in the rate of
return allowed.
Future Earnings Potential
General
The results of operations for the past three years are not necessarily
indicative of future earnings potential. The level of future earnings depends on
numerous factors. The major factor is the ability to achieve energy sales growth
while containing costs in a more competitive environment.
In accordance with Financial Accounting Standards Board (FASB) Statement No.
87, Employers' Accounting for Pensions, the Company recorded non-cash income of
approximately $5.9 million in 2001. Future pension income is dependent on
several factors including trust earnings and changes to the plan.
The Company is involved in various matters being litigated. See Note 3 to
the financial statements for information regarding material issues that could
possibly affect future earnings.
The Company currently operates as a vertically integrated utility providing
electricity to customers within its traditional service area located in
northwest Florida. Prices for electricity provided by the Company to retail
customers are set by the Florida Public Service Commission (FPSC).
Future earnings in the near term will depend upon growth in energy sales,
which is subject to a number of factors. Traditionally, these factors have
included the rate of economic growth in the Company's service area, weather,
competition, changes in contracts with neighboring utilities, the elasticity of
demand, and energy conservation practiced by the Company's customers. The
Company is actively pursuing additional earnings through unregulated new
products and services.
In early 1999, the FPSC staff and the Company became involved in discussions
primarily related to reducing the Company's authorized rate of return. On
October 1, 1999, the Office of Public Counsel, the Coalition for Equitable
Rates, the Florida Industrial Power Users Group, and the Company jointly filed a
petition to resolve the issues. The stipulation included a reduction to retail
base rates of $10 million annually and provides for revenues to be shared within
set ranges for 1999 through 2002. Customers receive two-thirds of any revenue
within the sharing range and the Company retains one-third. Any revenue above
this range is refunded to the customers. The stipulation also included
authorization for the Company, at its discretion, to accrue up to an additional
$5 million to the property insurance reserve and $1 million to amortize a
regulatory asset related to the corporate office. The Company also filed a
request to prospectively reduce its authorized return on equity (ROE) range from
11 to 13 percent to 10.5 to 12.5 percent in order to help ensure that the FPSC
would approve the stipulation. The FPSC approved both the stipulation and the
ROE request with an effective date of November 4, 1999.
On September 10, 2001, the Company filed a request with the FPSC for a base
rate increase of approximately $70 million, the majority of which is needed to
recover costs related to the Smith Unit 3 combined cycle facility currently
under construction and scheduled to be placed in service by June 2002. Hearings
are scheduled for February 25 through March 1, 2002 with a decision expected in
early May 2002 and new rates effective June 6, 2002.
For calendar year 2001, the Company's retail revenue range for sharing was
$358 million to $374 million. Actual retail revenues in 2001 were $360.3 million
and the Company recorded revenues subject to refund of $1.5 million. The
estimated refund with interest was reflected in customer billings in February
2002. For calendar year 2002, there are specified sharing ranges for each month
from the expected in-service date of Smith Unit 3 until the end of the year. The
5
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
sharing plan will expire at the earlier of the in-service date of Smith Unit 3
or December 31, 2002.
Compliance costs related to current and future environmental laws and
regulations could affect earnings if such costs are not fully recovered. The
Clean Air Act and other important environmental items are discussed later under
"Environmental Matters." Also, Florida legislation adopted in 1993 that provides
for recovery of prudent environmental compliance costs is discussed in Note 3 to
the financial statements under "Environmental Cost Recovery."
Industry Restructuring
The electric utility industry in the United States is continuing to evolve as
a result of regulatory and competitive factors. Among the primary agents of
change has been the Energy Policy Act of 1992 (Energy Act). The Energy Act
allows independent power producers (IPPs) to access a utility's transmission
network in order to sell electricity to other utilities. This enhances the
incentive for IPPs to build cogeneration plants for a utility's large industrial
and commercial customers and sell energy generation to other utilities. Also,
electricity sales for resale rates are being driven down by wholesale
transmission access and numerous potential new energy suppliers, including power
marketers and brokers.
Although the Energy Act does not permit retail customer access, it has been a
major catalyst for recent restructuring and consolidations taking place within
the utility industry. Numerous federal and state initiatives are in varying
stages to promote wholesale and retail competition. Among other things, these
initiatives allow customers to choose their electricity provider. Some states
have approved initiatives that result in a separation of the ownership and/or
operation of generating facilities from the ownership and/or operation of
transmission and distribution facilities. While various restructuring and
competition initiatives have been discussed in Florida, none have been enacted.
Enactment would require numerous issues to be resolved, including significant
ones relating to recovery of any stranded investments, full cost recovery of
energy produced, and other issues related to the energy crisis that occurred in
California. As a result of that crisis, many states have either discontinued or
delayed implementation of initiatives involving retail deregulation.
In 2000, Florida's Governor appointed a 17 member study commission to look at
the state's electric industry, studying issues ranging from current and future
reliability of electric and natural gas supply, electric industry retail and
wholesale competition, environmental impacts of energy supply, conservation, and
tax issues. A deadline of December 1, 2001 was set for the commission's final
report and recommendations to the Governor and the Legislature. During the
course of the study, the Stranded Investment Task Force Subcommittee recommended
a discretionary transfer approach regarding the transfer or sale of generation
assets by an investor owned utility (IOU). This would allow all new generation
to be competitively bid while allowing IOU's to transfer generation units to an
affiliate or sell generation units and share proceeds with both shareholders and
consumers. Merchants would also be allowed to compete in this restructured
wholesale market. This recommendation was approved during the final meeting of
the study commission on November 15, 2001 and has been incorporated into the
final report. The final report, entitled "Florida...Energy Wise" was presented
on December 11, 2001 to the Governor and the Legislature. Any recommendations
from the commission will have to be drafted and voted into law by the
Legislature. This is unlikely to occur in the upcoming 2002 legislative session.
The effects of any proposed changes cannot presently be determined, but could
have a material effect on the Company's financial condition and results of
operations.
Continuing to be a low-cost producer could provide opportunities to increase
market share and profitability in markets that evolve with changing regulation.
Conversely, if the Company does not remain a low-cost producer and provide
quality service, then energy sales growth could be limited, and this could
significantly erode earnings.
In December 1999, the Federal Energy Regulatory Commission (FERC) issued its
final rule on Regional Transmission Organizations (RTOs). The order encouraged
utilities owning transmission systems to form RTOs on a voluntary basis.
Southern Company has submitted a series of status reports informing the FERC of
progress toward the development of a Southeastern RTO. In these status reports,
Southern Company explained that it is developing a for profit RTO known as
SeTrans with a number of non-jurisdictional cooperative and public power
entities. Recently, Entergy Corporation and Cleco Power joined the SeTrans
development process. In January 2002, the sponsors of SeTrans held a public
6
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
meeting to form a Stakeholder Advisory Committee, which will participate in the
development of the SeTrans RTO. Southern Company continues to work with the
other sponsors to develop the SeTrans RTO. The creation of SeTrans is not
expected to have a material impact on the Company's financial statements. The
outcome of this matter cannot now be determined.
Accounting Policies
Critical Policy
Gulf Power Company's significant accounting policies are described in Note 1 to
the financial statements. The Company's most critical accounting policy involves
rate regulation. The Company is subject to the provisions of FASB Statement No.
71, Accounting for the Effects of Certain Types of Regulation. In the event that
a portion of the Company's operations is no longer subject to these provisions,
the Company would be required to write off related regulatory assets and
liabilities that are not specifically recoverable, and determine if any other
assets have been impaired. See Note 1 to the financial statements under
"Regulatory Assets and Liabilities" for additional information.
New Accounting Standards
Effective January 2001, the Company adopted FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. Statement No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This statement requires that certain derivative
instruments be recorded in the balance sheet as either an asset or liability
measured at fair value and that changes in the fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. The
impact on net income in 2001 was not material. (See Note 1 to the financial
statements under "Financial Instruments" for additional information). An
additional interpretation of Statement No. 133 will result in a change --
effective April 1, 2002 -- in accounting for certain contracts related to fuel
supplies that contain quantity options. These contracts will be accounted for as
derivatives and marked to market. However, due to the existence of specific
cost-based fuel recovery clauses for the Company, this change is not expected to
have a material impact on net income.
In June 2001, the FASB issued Statement No. 142, Goodwill and Other
Intangible Assets, which establishes new accounting and reporting standards for
acquired goodwill and other intangible assets and supersedes Accounting
Principles Board Opinion No. 17. Statement No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets -- but not
those acquired in a business combination -- should be accounted for upon
acquisition and on an ongoing basis. Goodwill and intangible assets that have
indefinite useful lives will not be amortized but rather will be tested at least
annually for impairment. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives, which are no longer limited to
40 years. The Company adopted Statement No. 142 in January 2002 with no material
impact on the financial statements.
Also in June 2001, the FASB issued Statement No. 143, Asset Retirement
Obligations, which establishes new accounting and reporting standards for legal
obligations associated with retiring assets, including decommissioning of
nuclear plants. The liability for an asset's future retirement must be recorded
in the period in which the liability is incurred. The cost must be capitalized
as part of the related long-lived asset and depreciated over the asset's useful
life. Changes in the liability resulting from the passage of time will be
recognized as operating expenses. Statement No. 143 must be adopted by January
1, 2003. The Company has not yet quantified the impact of adopting Statement No.
143 on its financial statements.
FINANCIAL CONDITION
Overview
During 2001, gross property additions were $274.7 million. Funds for the
Company's property additions were provided by operating activities and
additional financings, which were utilized to finance the construction of the
Company's new combined cycle unit. See the Statements of Cash Flows for further
details.
Credit Rating Risk
The Company does not have any credit agreements that would require material
changes in payment schedules or terminations as a result of a credit rating
downgrade.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
Exposure to Market Risks
Due to cost-based rate regulations, the Company has limited exposure to market
volatility in interest rates, commodity fuel prices, and prices of electricity.
To mitigate residual risks relative to movements in electricity prices, the
Company enters into fixed price contracts for the purchase and sale of
electricity through the wholesale electricity market and, to a lesser extent,
similar contracts for gas purchases. Realized gains and losses are recognized in
the income statement as incurred. At December 31, 2001, exposure from these
activities was not material. Fair value of changes in energy trading contracts
and year-end valuations are as follows:
Changes During the Year
- -------------------------------------------------------------------
Fair Value
- -------------------------------------------------------------------
(in thousands)
Contracts beginning of year $110
Contracts realized or settled (100)
New contracts at inception -
Changes in valuation techniques -
Current period changes (120)
- ----------------------------------------------------------------
Contracts end of year $(110)
================================================================
Source of Year-End Valuation Prices
- ----------------------------------------------------------------
Maturity
Total ---------
Fair Value Year 1 1-3 Years
- ----------------------------------------------------------------
(in thousands)
Actively quoted $(110) $(102) $(8)
External sources - - -
Models and other
methods - - -
- ----------------------------------------------------------------
Contracts end of year $(110) $(102) $(8)
================================================================
If the Company sustained a 100 basis point change in interest rates for all
variable rate long-term debt, the change would affect annualized interest
expense by approximately $0.61 million at December 31, 2001.
Financing Activities
In 2001, the Company sold $135 million of senior notes and $30 million of trust
preferred securities and used the proceeds to retire $30 million of first
mortgage bonds and to pay for construction of the Company's new combined cycle
unit. In 2000, there were no issuances or retirements of long-term debt. See the
Statements of Cash Flows for further details.
Composite financing rates for the years 1999 through 2001 as of year end were
as follows:
2001 2000 1999
-----------------------------
Composite interest rate on
long-term debt 5.6% 6.2% 6.0%
Composite rate on
trust preferred securities 7.2% 7.3% 7.3%
Composite preferred stock
dividend rate 5.1% 5.1% 5.1%
- -----------------------------------------------------------------
The composite interest rate on long-term debt decreased in 2001 due to lower
interest rates on variable rate pollution control bonds and lower rates on new
senior notes.
Capital Requirements for Construction
The Company's gross property additions, including those amounts related to
environmental compliance, are budgeted at $282 million for the three years
beginning in 2002 ($103 million in 2002, $72 million in 2003, and $107 million
in 2004). These amounts include $24.3 million in 2002 for the remaining cost of
a 574 megawatt combined cycle gas generating unit and related interconnections
to be located in the eastern portion of the Company's service area. The unit is
expected to have an in-service date of June 2002. The remaining property
additions budget is primarily for maintaining and upgrading transmission and
distribution facilities and generating plants. Actual construction costs may
vary from this estimate because of changes in such factors as the following:
business conditions; environmental regulations; load projections; the cost and
efficiency of construction labor, equipment, and materials; and the cost of
capital. In addition, there can be no assurance that costs related to capital
expenditures will be fully recovered.
Other Capital Requirements
The Company will continue to retire higher-cost debt and preferred securities
and replace these securities with lower-cost capital as market conditions and
terms of the instruments permit.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
Future note maturities, operating lease obligations, and purchase
commitments - discussed in notes 4 and 8 to the financial statements --
are as follows:
2002 2003 2004
- --------------------------------------------------------------
(in millions)
Bonds -
First mortgage $ - $ - $ -
Pollution control - - -
Notes - 61 51
Leases -
Capital - - -
Operating 2 2 2
- --------------------------------------------------------------
Purchase commitments
Fuel 140 109 112
Purchased power 2 1 1
- --------------------------------------------------------------
At the beginning of 2002, the Company had not used any of its available
credit arrangements. Credit arrangements are as follows:
Expires
-----------------------------
Total Unused 2002 2003 & beyond
- --------------------------------------------------------------
(in millions)
$103 $103 $103 $ -
- --------------------------------------------------------------
Environmental Matters
In November 1990, the Clean Air Act Amendments of 1990 (Clean Air Act) was
signed into law. Title IV of the Clean Air Act -- the acid rain compliance
provision of the law -- significantly affected the Company. Specific reductions
in sulfur dioxide and nitrogen oxide emissions from fossil-fired generating
plants were required in two phases. Phase I compliance began in 1995. Southern
Company achieved Phase I compliance at the affected plants by primarily
switching to low-sulfur coal and with some equipment upgrades. Construction
expenditures for Phase I nitrogen oxide and sulfur dioxide emissions compliance
totaled approximately $42 million for the Company. Phase II sulfur dioxide
compliance was required in 2000. Southern Company used emission allowances and
fuel switching to comply with Phase II requirements. Also, equipment to control
nitrogen oxide emissions was installed on additional system fossil-fired units
as necessary to meet Phase II limits and ozone non-attainment requirements for
metropolitan Atlanta through 2000. Phase II compliance did not have a material
impact on the Company.
A significant portion of costs related to the acid rain and ozone
non-attainment provisions of the Clean Air Act is expected to be recovered
through existing ratemaking provisions. However, there can be no assurance that
all Clean Air Act costs will be recovered.
In 1993, the Florida Legislature adopted legislation that allows a utility to
petition the FPSC for recovery of prudent environmental compliance costs that
are not being recovered through base rates or any other recovery mechanism. The
legislation is discussed in Note 3 to the financial statements under
"Environmental Cost Recovery." Substantially all of the costs for the Clean Air
Act and other new environmental legislation discussed below are expected to be
recovered through the Environmental Cost Recovery Clause.
In July 1997, the Environmental Protection Agency (EPA) revised the national
ambient air quality standards for ozone and particulate matter. This revision
made the standards significantly more stringent. In the subsequent litigation of
these standards, the U.S. Supreme Court found the EPA's implementation program
for the new ozone standard unlawful and remanded it to the EPA. In addition, the
Federal District of Columbia Circuit Court of Appeals is considering other legal
challenges to these standards. If the standards are eventually upheld,
implementation could be required by 2007 to 2010.
In September 1998, the EPA issued regional nitrogen oxide reduction rule to
the states for implementation. Compliance is required by May 31, 2004 for most
states, but for Georgia, further ratemaking is required and compliance may be
delayed until May 2005. The final rule affects 21 states, including Georgia, but
not Florida. See Note 5 to the financial statements under "Joint Ownership
Agreements" related to the Company's ownership interest in Georgia Power's Plant
Scherer Unit No. 3. The EPA is presently evaluating whether to bring an
additional 15 states, not including Florida, under this regional nitrogen oxide
rule.
In December 2000, the EPA completed its utility study for mercury and other
hazardous air pollutants (HAPS) and issued a determination that an emission
control program for mercury and, perhaps, other HAPS is warranted. The program
is to be developed over the next four years under the Maximum Achievable Control
Technology provisions of the Clean Air Act, and the regulations are scheduled to
be finalized by the end of 2004 with implementation to take place around 2007.
In January 2001, the EPA proposed guidance for the determination of Best
9
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
Available Retrofit Technology (BART) emission controls under the Regional Haze
Regulations. Installation of BART controls is expected to take place around
2010. Litigation of the Regional Haze Regulations, including the BART
provisions, is ongoing in the Federal District of Columbia Circuit Court of
Appeals. A court decision is expected in mid-2002.
Implementation of the final state rules for these initiatives could require
substantial further reductions in nitrogen oxide and sulfur dioxide and
reductions in mercury and other HAPS emissions from fossil-fired generating
facilities and other industries in these states. Additional compliance costs and
capital expenditures resulting from the implementation of these rules and
standards cannot be determined until the results of legal challenges are known,
and the states have adopted their final rules.
In October 1997, EPA issued regulations setting forth requirements for
Compliance Assurance Monitoring (CAM) in its state and federal operating permit
programs. These regulations were amended by EPA in March 2001 in response to a
court order resolving challenges to the rules brought by environmental groups
and industry. Generally, this rule affects the operation and maintenance of
electrostatic precipitators and could involve significant additional ongoing
expense.
The EPA and state environmental regulatory agencies are also reviewing and
evaluating various other matters including: control strategies to reduce
regional haze; limits on pollutant discharges to impaired waters; cooling water
intake restrictions; and hazardous waste disposal requirements. The impact of
any new standards will depend on the development and implementation of
applicable regulations.
On November 3, 1999, the EPA brought a civil action in the U.S. District
Court against Alabama Power, Georgia Power, and the system service company. The
complaint alleges violations of the prevention of significant deterioration and
new source review provisions of the Clean Air Act with respect to five
coal-fired generating facilities in Alabama and Georgia. The civil action
requests penalties and injunctive relief, including an order requiring the
installation of the best available control technology at the affected units. The
EPA concurrently issued to the integrated Southeast utilities a notice of
violation related to 10 generating facilities, including the five facilities
mentioned previously and the Company's Plants Crist and Scherer. For additional
information, see Note 5 to the financial statements under "Joint Ownership
Agreements" related to the Company's ownership interest in Georgia Power's Plant
Scherer Unit No. 3. In early 2000, the EPA filed a motion to amend its complaint
to add the violations alleged in its notice of violation, and to add the
Company, Mississippi Power, and Savannah Electric as defendants. The complaint
and notice of violation are similar to those brought against and issued to
several other electric utilities. These complaints and notices of violation
allege that the utilities had failed to secure necessary permits or install
additional pollution control equipment when performing maintenance and
construction at coal burning plants constructed or under construction prior to
1978. The U.S. District Court granted Alabama Power's motion to dismiss for lack
of jurisdiction in Georgia and granted the system service company's motion to
dismiss on the grounds that it neither owned nor operated the generating units
involved in the proceedings. The court directed the EPA to re-file its amended
complaint limiting claims to those brought against Georgia Power and Savannah
Electric. The EPA re-filed those claims as directed by the court. Also, the EPA
re-filed its claims against Alabama Power in U.S. District Court in Alabama. It
has not re-filed against the Company, Mississippi Power, or the system service
company. The Alabama Power, Georgia Power, and Savannah Electric cases have been
stayed since the spring of 2001, pending a ruling by the U.S. Court of Appeals
for the Eleventh Circuit in the appeal of a very similar New Source Review
enforcement action against the Tennessee Valley Authority (TVA). The TVA case
involves many of the same legal issues raised by the actions against Alabama
Power, Georgia Power, and Savannah Electric. Because the outcome of the TVA case
could have a significant adverse impact on Alabama Power and Georgia Power, both
companies are parties to that case as well. The U.S. District Court in Alabama
has indicated that it will revisit the issue of a continued stay in April 2002.
The U.S. District Court in Georgia is currently considering a motion by the EPA
to reopen the Georgia case. Georgia Power and Savannah Electric have opposed
that motion.
The Company believes that it has complied with applicable laws and the EPA's
regulations and interpretations in effect at the time the work in question took
place. The Clean Air Act authorizes civil penalties of up to $27,500 per day per
violation at each generating unit. Prior to January 30, 1997, the penalty was
$25,000 per day. An adverse outcome of this matter could require substantial
10
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
capital expenditures that cannot be determined at this time and possibly require
payment of substantial penalties. This could affect future results of
operations, cash flows, and possibly financial condition if such costs are not
recovered through regulated rates.
The Company must comply with other environmental laws and regulations that
cover the handling and disposal of hazardous waste. Under these various laws and
regulations, the Company could incur substantial costs to clean up properties.
The Company conducts studies to determine the extent of any required cleanup
costs and has recognized in the financial statements costs to clean up known
sites. For additional information, see Note 3 to the financial statements under
"Environmental Cost Recovery."
Several major pieces of environmental legislation are being considered for
reauthorization or amendment by Congress. These include: the Clean Air Act; the
Clean Water Act; the Comprehensive Environmental Response, Compensation and
Liability Act; the Resource Conservation and Recovery Act; the Toxic Substances
Control Act; and the Endangered Species Act. Changes to these laws could affect
many areas of the Company's operations. The full impact of any such changes
cannot be determined at this time.
Compliance with possible additional legislation related to global climate
change, electric and magnetic fields, and other environmental health concerns
could significantly affect the Company. The impact of new legislation -- if any
- -- will depend on the subsequent development and implementation of applicable
regulations. In addition, the potential exists for liability as the result of
lawsuits alleging damages caused by electric and magnetic fields.
Sources of Capital
At December 31, 2001, the Company had approximately $2.2 million of cash and
cash equivalents and $2.6 million of unused commercial paper backed by lines of
credit with banks to meet its short-term cash needs. See the Statements of Cash
Flows for details related to the Company's financing activities. See Note 8 to
the financial statements under "Bank Credit Arrangements" for additional
information.
The Company may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper at the request and for
the benefit of the Company and the other Southern Company operating companies.
At December 31, 2001, the Company had outstanding $37.4 million of commercial
paper.
The Company historically has relied on issuances of first mortgage bonds and
preferred stock, in addition to pollution control bonds issued for its benefit
by public authorities, to meet its long-term external financing requirements.
Recently, the Company's financings have consisted of unsecured debt and trust
preferred securities. The Company has no restrictions on the amounts of
unsecured indebtedness it may incur. However, in order to issue first mortgage
bonds or preferred stock, the Company is required to meet certain coverage
requirements specified in its mortgage indenture and corporate charter. The
Company's ability to satisfy all coverage requirements is such that it could
issue new first mortgage bonds and preferred stock to provide sufficient funds
for all anticipated requirements.
Cautionary Statement Regarding Forward-Looking Information
The Company's 2001 Annual Report contains forward looking and historical
information. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "could," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential" or
"continue" or the negative of these terms or other comparable terminology. The
Company cautions that there are various important factors that could cause
actual results to differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. These factors include the impact of recent and future federal
and state regulatory change, including legislative and regulatory initiatives
regarding deregulation and restructuring of the electric utility industry and
also changes in environmental and other laws and regulations to which the
Company is subject, as well as changes in application of existing laws and
regulations; current and future litigation, including the pending EPA civil
action; the effects, extent, and timing of the entry of additional competition
in the markets of the Company; the impact of fluctuations in commodity prices,
interest rates and customer demand; state and federal rate regulations;
political, legal, and economic conditions and developments in the United States;
the performance of projects undertaken by the non-traditional business and the
success of efforts to invest in and develop new opportunities; internal
11
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2001 Annual Report
restructuring or other restructuring options that may be pursued; potential
business strategies, including acquisitions or dispositions of assets or
businesses, which cannot be assured to be completed or beneficial to the Company
the effects of, and changes in, economic conditions in the Company's service
territory; the direct or indirect effects on the Company's business resulting
from the terrorist incident on September 11, 2001, or any similar such incidents
or responses to such incidents; the timing and acceptance of the Company's new
product and services offerings; financial market conditions and the results of
financing efforts; weather and other natural phenomena; the ability of the
Company to obtain additional generating capacity at competitive prices; and
other factors discussed elsewhere herein and in other reports (including Form
10-K) filed from time to time by the Company with the Securities and Exchange
Commission.
12
STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000, and 1999
Gulf Power Company 2001 Annual Report
- ------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating Revenues:
Retail sales $584,591 $548,640 $516,949
Sales for resale --
Non-affiliates 82,252 66,890 62,354
Affiliates 27,256 66,995 66,110
Other revenues 31,104 31,794 28,686
- ------------------------------------------------------------------------------------------------------------------
Total operating revenues 725,203 714,319 674,099
- ------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 200,633 215,744 209,031
Purchased power --
Non-affiliates 65,585 73,846 46,332
Affiliates 40,660 8,644 10,703
Other 117,394 117,146 114,670
Maintenance 60,193 56,281 57,830
Depreciation and amortization 68,218 66,873 64,589
Taxes other than income taxes 55,261 55,904 51,782
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 607,944 594,438 554,937
- ------------------------------------------------------------------------------------------------------------------
Operating Income 117,259 119,881 119,162
Other Income (Expense):
Interest income 1,258 1,137 1,771
Other, net 2,710 (4,126) (1,357)
- ------------------------------------------------------------------------------------------------------------------
Earnings Before Interest and Income Taxes 121,227 116,892 119,576
- ------------------------------------------------------------------------------------------------------------------
Interest and Other:
Interest expense, net 25,034 28,085 26,861
Distributions on preferred securities of subsidiary 6,477 6,200 6,200
- ------------------------------------------------------------------------------------------------------------------
Total interest charges and other, net 31,511 34,285 33,061
- ------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 89,716 82,607 86,515
Income taxes (Note 7) 31,260 30,530 32,631
- ------------------------------------------------------------------------------------------------------------------
Earnings Before Cumulative Effect of 58,456 52,077 53,884
Accounting Change
Cumulative effect of accounting change--
less income taxes of $42 thousand 68 - -
- ------------------------------------------------------------------------------------------------------------------
Net Income 58,524 52,077 53,884
Dividends on Preferred Stock 217 234 217
- ------------------------------------------------------------------------------------------------------------------
Net Income After Dividends on Preferred Stock $ 58,307 $ 51,843 $ 53,667
==================================================================================================================
The accompanying notes are an integral part of these statements.
13
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000, and 1999
Gulf Power Company 2001 Annual Report
- ------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating Activities:
Net income $ 58,524 $ 52,077 $ 53,884
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 72,320 69,915 68,721
Deferred income taxes, net 3,394 (12,516) (6,609)
Other, net (1,804) 10,686 3,735
Changes in certain current assets and liabilities --
Receivables, net 15,991 (20,212) (10,484)
Fossil fuel stock (30,887) 13,101 (5,656)
Materials and supplies 176 1,055 (2,063)
Accounts payable (14,492) 15,924 (2,023)
Provision for rate refund 1,530 7,203 -
Other (31,249) 12,521 7,030
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 73,503 149,754 106,535
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (274,668) (95,807) (69,798)
Other 5,290 (4,432) (8,856)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (269,378) (100,239) (78,654)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (decrease) in notes payable, net 44,311 (12,000) 23,500
Proceeds --
Other long-term debt 135,000 - 50,000
Preferred securities 30,000 - -
Capital contributions from parent company 72,484 12,222 2,294
Retirements --
First mortgage bonds (30,000) - -
Other long-term debt (862) (1,853) (27,074)
Preferred stock - - -
Payment of preferred stock dividends (217) (234) (271)
Payment of common stock dividends (53,275) (59,000) (61,300)
Other (3,703) (22) (246)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided from (used for) financing activities 193,738 (60,887) (13,097)
- ------------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents (2,137) (11,372) 14,784
Cash and Cash Equivalents at Beginning of Period 4,381 15,753 969
- ------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 2,244 $ 4,381 $ 15,753
========================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $30,813 $32,277 $27,670
Income taxes (net of refunds) 33,349 42,252 29,462
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
14
BALANCE SHEETS
At December 31, 2001 and 2000
Gulf Power Company 2001 Annual Report
- -------------------------------------------------------------------------------------------------------------
Assets 2001 2000
- -------------------------------------------------------------------------------------------------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 2,244 $ 4,381
Receivables --
Customer accounts receivable 64,113 69,820
Other accounts and notes receivable 4,316 2,179
Affiliated companies 2,689 15,026
Accumulated provision for uncollectible accounts (1,342) (1,302)
Fossil fuel stock, at average cost 47,655 16,768
Materials and supplies, at average cost 28,857 29,033
Regulatory clauses under recovery 24,912 2,112
Other 12,662 6,543
- -------------------------------------------------------------------------------------------------------------
Total current assets 186,106 144,560
- -------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment:
In service 1,951,512 1,892,023
Less accumulated provision for depreciation 912,581 867,260
- -------------------------------------------------------------------------------------------------------------
1,038,931 1,024,763
Construction work in progress 264,525 71,008
- -------------------------------------------------------------------------------------------------------------
Total property, plant, and equipment 1,303,456 1,095,771
- -------------------------------------------------------------------------------------------------------------
Other Property and Investments 7,049 4,510
- -------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes (Note 7) 16,766 15,963
Prepaid pension costs (Note 2) 26,364 20,058
Debt expense, being amortized 3,036 2,392
Premium on reacquired debt, being amortized 14,518 15,866
Other 12,222 12,944
- -------------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 72,906 67,223
- -------------------------------------------------------------------------------------------------------------
Total Assets $1,569,517 $1,312,064
=============================================================================================================
The accompanying notes are an integral part of these balance sheets.
15
BALANCE SHEETS
At December 31, 2001 and 2000
Gulf Power Company 2001 Annual Report
- --------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity 2001 2000
- --------------------------------------------------------------------------------------------------------------
(in thousands)
Current Liabilities:
Notes payable $ 87,311 $ 43,000
Accounts payable --
Affiliated 18,202 17,558
Other 38,308 38,153
Customer deposits 14,506 13,474
Taxes accrued --
Income taxes 8,162 3,864
Other 8,053 8,749
Interest accrued 8,305 8,324
Provision for rate refund 1,530 7,203
Vacation pay accrued 4,725 4,512
Regulatory clauses over recovery 3,719 6,848
Other 6,528 1,584
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 199,349 153,269
- --------------------------------------------------------------------------------------------------------------
Long-term debt (See accompanying statements) 467,784 365,993
- --------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes (Note 7) 161,968 155,074
Deferred credits related to income taxes (Note 7) 28,293 38,255
Accumulated deferred investment tax credits 24,056 25,792
Employee benefits provisions 37,892 31,075
Other 26,045 25,992
- --------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 278,254 276,188
- --------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes (See accompanying statements) 115,000 85,000
- --------------------------------------------------------------------------------------------------------------
Preferred stock (See accompanying statements) 4,236 4,236
- --------------------------------------------------------------------------------------------------------------
Common stockholder's equity (See accompanying statements) 504,894 427,378
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $1,569,517 $1,312,064
==============================================================================================================
The accompanying notes are an integral part of these balance sheets.
16
STATEMENTS OF CAPITALIZATION
At December 31, 2001 and 2000
Gulf Power Company 2001 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands) (percent of total)
Long Term Debt:
First mortgage bonds --
Maturity Interest Rates
--------- --------------
July 1, 2003 6.125% $ - $ 30,000
November 1, 2006 6.50% 25,000 25,000
January 1, 2026 6.875% 30,000 30,000
- -----------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 55,000 85,000
- -----------------------------------------------------------------------------------------------------------------------------
Long-term notes payable --
4.69% due August 1, 2003 60,000 -
7.05% due August 15, 2004 50,000 50,000
6.10% due September 30, 2016 75,000 -
7.50% due June 30, 2037 20,000 20,000
6.70% due June 30, 2038 47,211 48,073
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term notes payable 252,211 118,073
- -----------------------------------------------------------------------------------------------------------------------------
Other long-term debt --
Pollution control revenue bonds --
Collateralized:
5.25% to 6.30% due 2006-2026 108,700 108,700
Non-collateralized:
Variable rates (1.75% to 1.95% at 1/1/02)
due 2022-2024 60,930 60,930
- -----------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 169,630 169,630
- -----------------------------------------------------------------------------------------------------------------------------
Unamortized debt premium (discount), net (9,057) (6,710)
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $29.2 million) 467,784 365,993 42.9% 41.5%
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock:
$100 par value, 4.64% to 5.44% 4,236 4,236
- -----------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $0.2 million) 4,236 4,236 0.4% 0.5%
- -----------------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily
Redeemable Preferred Securities:
$25 liquidation value --
7.00% 45,000 45,000
7.38% 30,000 -
7.63% 40,000 40,000
- -----------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $8.4 million) 115,000 85,000 10.5% 9.6%
- -----------------------------------------------------------------------------------------------------------------------------
Common Stockholder's Equity:
Common stock, without par value --
Authorized and outstanding -
992,717 shares in 2001 and 2000 38,060 38,060
Paid-in capital 305,960 233,476
Premium on preferred stock 12 12
Retained earnings 160,862 155,830
- -----------------------------------------------------------------------------------------------------------------------------
Total common stockholder's equity 504,894 427,378 46.2% 48.4%
- -----------------------------------------------------------------------------------------------------------------------------
Total Capitalization $1,091,914 $882,607 100.0% 100.0%
=============================================================================================================================
The accompanying notes are an integral part of these statements.
17
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
For the Years Ended December 31, 2001, 2000, and 1999
Gulf Power Company 2001 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
Premium on
Common Paid-In Preferred Retained
Stock Capital Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at January 1, 1999 $38,060 $218,960 $12 $170,620 $427,652
Net income after dividends on preferred stock - - - 53,667 53,667
Capital contributions from parent company - 2,294 - - 2,294
Cash dividends on common stock - - - (51,300) (51,300)
Other - - - (10,000) (10,000)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 38,060 221,254 12 162,987 422,313
Net income after dividends on preferred stock - - - 51,843 51,843
Capital contributions from parent company - 12,222 - - 12,222
Cash dividends on common stock - - - (59,000) (59,000)
Balance at December 31, 2000 38,060 233,476 12 155,830 427,378
- -----------------------------------------------------------------------------------------------------------------------------
Net income after dividends on preferred stock - - - 58,307 58,307
Capital contributions from parent company - 72,484 - - 72,484
Cash dividends on common stock - - - (53,275) (53,275)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $38,060 $305,960 $12 $160,862 $504,894
=============================================================================================================================
The accompanying notes are an integral part of these statements.
18
NOTES TO FINANCIAL STATEMENTS
Gulf Power Company 2001 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Gulf Power Company (Company) is a wholly owned subsidiary of Southern Company,
which is the parent company of five operating companies, a system service
company (SCS), Southern Communications Services (Southern LINC), Southern
Nuclear Operating Company (Southern Nuclear), Southern Power Company (Southern
Power), and other direct and indirect subsidiaries. The operating companies --
Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah
Electric -- provide electric service in four southeastern states. Contracts
among the operating companies -- related to jointly owned generating facilities,
interconnecting transmission lines, and the exchange of electric power -- are
regulated by the Federal Energy Regulatory Commission (FERC) and/or the
Securities and Exchange Commission. SCS provides, at cost, specialized services
to Southern Company and subsidiary companies. Southern LINC provides digital
wireless communications services to the operating companies and also markets
these services to the public within the Southeast. Southern Nuclear provides
services to Southern Company's nuclear power plants. Southern Power was
established in 2001 to construct, own, and manage Southern Company's competitive
generation assets and sell electricity at market-based rates in the wholesale
market.
Southern Company is registered as a holding company under the Public Utility
Holding Company Act of 1935 (PUHCA). Both Southern Company and its subsidiaries
are subject to the regulatory provisions of the PUHCA. The Company is also
subject to regulation by the FERC and the Florida Public Service Commission
(FPSC). The Company follows accounting principles generally accepted in the
United States and complies with the accounting policies and practices prescribed
by the FPSC and the FERC. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires the
use of estimates, and the actual results may differ from those estimates.
Certain prior years' data presented in the financial statements have been
reclassified to conform with current year presentation.
Affiliate Transactions
The Company has an agreement with SCS under which the following services are
rendered to the Company at cost: general and design engineering, purchasing,
accounting and statistical, finance and treasury, tax, information resources,
marketing, auditing, insurance and pension administration, human resources,
systems and procedures, and other services with respect to business and
operations and power pool operations. Costs for these services amounted to $45
million, $44 million, and $43 million during 2001, 2000, and 1999, respectively.
Regulatory Assets and Liabilities
The Company is subject to the provisions of Financial Accounting Standards Board
(FASB) Statement No. 71, Accounting for the Effects of Certain Types of
Regulation. Regulatory assets represent probable future revenues to the Company
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are expected to be credited
to customers through the ratemaking process. Regulatory assets and (liabilities)
reflected in the Balance Sheets at December 31 relate to the following:
2001 2000
--------------------------
(in thousands)
Deferred income tax charges $ 16,766 $ 15,963
Deferred loss on reacquired
debt 14,518 15,866
Environmental remediation 7,163 7,638
Vacation pay 4,725 4,512
Accumulated provision for
rate refunds (1,530) (7,203)
Accumulated provision for
property damage (13,565) (8,731)
Deferred income tax credits (28,293) (38,255)
Other, net (1,443) (1,074)
- ------------------------------------------------------------------
Total $ (1,659) $(11,284)
==================================================================
In the event that a portion of the Company's operations is no longer subject
to the provisions of FASB Statement No. 71, the Company would be required to
write off related regulatory assets and liabilities that are not specifically
recoverable through regulated rates. In addition, the Company would be required
to determine any impairment to other assets, including plant, and write down the
assets, if impaired, to their fair value.
19
NOTES (continued)
Gulf Power Company 2001 Annual Report
Revenues and Regulatory Cost Recovery Clauses
The Company currently operates as a vertically integrated utility providing
electricity to retail customers within its service area located in northwest
Florida and to wholesale customers in the Southeast.
Revenues are recognized as services are rendered. Unbilled revenues are
accrued at the end of each fiscal period.
Fuel costs are expensed as the fuel is used. The Company's retail electric
rates include provisions to annually adjust billings for fluctuations in fuel
costs, the energy component of purchased power costs, and certain other costs.
The Company also has similar retail cost recovery clauses for energy
conservation costs, purchased power capacity costs, and environmental compliance
costs. Revenues are adjusted monthly for differences between recoverable costs
and amounts actually reflected in current rates.
The Company has a diversified base of customers and no single customer or
industry comprises 10 percent or more of revenues. For all periods presented,
uncollectible accounts averaged significantly less than 1 percent of revenues.
Depreciation and Amortization
Depreciation of the original cost of plant in service is provided primarily by
using composite straight-line rates, which approximated 3.7 percent in 2001 and
3.8 percent in both 2000, and 1999. When property subject to depreciation is
retired or otherwise disposed of in the normal course of business, its cost --
together with the cost of removal, less salvage -- is charged to the accumulated
provision for depreciation. Minor items of property included in the original
cost of the plant are retired when the related property unit is retired. Also,
the provision for depreciation expense includes an amount for the expected cost
of removal of facilities.
Other Income
Other income consists principally of interest and dividend income, Allowance for
Funds Used During Construction (AFUDC)-equity, and income or expenses on other
non-regulated activities. In 2000 and 1999, the non-regulated activities
included the results of the Company's merchandising operations, which were
discontinued in the latter part of 2000.
Income Taxes
The Company uses the liability method of accounting for income taxes and
provides deferred income taxes for all significant income tax temporary
differences. Investment tax credits utilized are deferred and amortized to
income over the average lives of the related property.
Property, Plant, and Equipment
Property, plant, and equipment is stated at original cost. Original cost
includes: materials; labor; minor items of property; appropriate administrative
and general costs; payroll-related costs such as taxes, pensions, and other
benefits; and the estimated cost of funds used during construction. The cost of
maintenance, repairs, and replacement of minor items of property is charged to
maintenance expense. The cost of replacements of property (exclusive of minor
items of property) is charged to utility plant.
Impairment of Long-Lived Assets and Intangibles
The Company evaluates long-lived assets for impairment when events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. The determination of whether an impairment has occurred is based on
an estimate of undiscounted future cash flows attributable to the assets, as
compared to the carrying value of the assets. If an impairment has occurred, the
amount of the impairment recognized is determined by estimating the fair value
of the assets and recording a provision for loss if the carrying value is
greater than the fair value. For assets identified as held for sale, the
carrying value is compared to the estimated fair value less the cost to sell in
order to determine if an impairment provision is required. Until the assets are
disposed of, their estimated fair value is re-evaluated when circumstances or
events change.
Cash and Cash Equivalents
Temporary cash investments are considered cash equivalents. Temporary cash
investments are securities with original maturities of 90 days or less.
Financial Instruments
Effective January 2001, the Company adopted FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended. The impact on
net income was immaterial.
20
NOTES (continued)
Gulf Power Company 2001 Annual Report
The Company uses derivative financial instruments to hedge exposures to
fluctuations in interest rates, and certain commodity prices. Gains and losses
on qualifying hedges are deferred and recognized either in income or as an
adjustment to the carrying amount of the hedged item when the transaction
occurs.
The Company is exposed to losses related to financial instruments in the
event of counterparties' nonperformance. The Company has established controls to
determine and monitor the creditworthiness of counterparties in order to
mitigate the Company's exposure to counterparty credit risk.
The Company and its affiliates, through SCS acting as their agent, enters
into commodity related forward and option contracts to limit exposure to
changing prices on certain fuel purchases and electricity purchases and sales.
Substantially all of the Company's bulk energy purchases and sales contracts
meet the definition of a derivative under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. In many cases, these fuel and
electricity contracts qualify for normal purchase and sale exceptions under
Statement No. 133 and are accounted for under the accrual method. Other
contracts qualify as cash flow hedges of anticipated transactions, resulting in
the deferral of related gains and losses, and are recorded in other
comprehensive income until the hedged transactions occur. Any ineffectiveness is
recognized currently in net income. Contracts that do not qualify for the normal
purchase and sale exception and that do not meet the hedge requirements are
marked to market through current period income.
Other financial instruments for which the carrying amount did not equal fair
value at December 31 were as follows:
Carrying Fair
Amount Value
---------------------------
(in thousands)
Long-term debt:
At December 31, 2001 $467,784 $474,911
At December 31, 2000 $365,993 $364,697
Capital trust preferred
securities:
At December 31, 2001 $115,000 $114,898
At December 31, 2000 $85,000 $80,988
- --------------------------------------------------------------
The fair values for long-term debt and preferred securities were based on
either closing market prices or closing prices of comparable instruments.
Materials and Supplies
Generally, materials and supplies include the cost of transmission,
distribution, and generating plant materials. Materials are charged to inventory
when purchased and then expensed or capitalized to plant, as appropriate, when
installed.
Provision for Injuries and Damages
The Company is subject to claims and suits arising in the ordinary course of
business. As permitted by regulatory authorities, the Company provides for the
uninsured costs of injuries and damages by charges to income amounting to $1.2
million annually. The expense of settling claims is charged to the provision to
the extent available. The accumulated provision of $1.3 million and $1.2 million
at December 31, 2001 and 2000, respectively, is included in other current
liabilities in the accompanying Balance Sheets.
Provision for Property Damage
The Company provides for the cost of repairing damages from major storms and
other uninsured property damages. This includes the full cost of major storms
and other damages to its transmission and distribution lines and the cost of
uninsured damages to its generation and other property. The expense of such
damages is charged to the provision account. At December 31, 2001 and 2000, the
accumulated provision for property damage was $13.6 million and $8.7 million,
respectively. The FPSC approved annual accrual to the accumulated provision for
property damage is $3.5 million, with a target level for the accumulated
provision account between $25.1 and $36.0 million. The FPSC has also given the
Company the flexibility to increase its annual accrual amount above $3.5 million
at the Company's discretion. The Company accrued $4.5 million in 2001, $3.5
million in 2000, and $5.5 million in 1999 to the accumulated provision for
property damage. The Company had a net credit of $(0.3) million to the provision
account in 2001 related to insurance proceeds that exceeded actual claims. In
2000 and 1999, the Company charged $0.3 million and $1.6 million, respectively,
to the provision account.
2. RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, non-contributory pension plan that
covers substantially all regular employees. The Company provides certain medical
care and life insurance benefits for retired employees. Substantially all
employees may become eligible for these benefits when they retire. Trusts are
21
NOTES (continued)
Gulf Power Company 2001 Annual Report
funded to the extent required by the Company's regulatory commissions. In late
2000, the Company adopted several pension and postretirement benefit plan
changes that had the effect of increasing benefits to both current and future
retirees. The measurement date for plan assets and obligations is September 30
for each year.
Pension Plan
Changes during the year in the projected benefit obligations and in the fair
value of plan assets were as follows:
Projected
Benefit Obligations
---------------------------
2001 2000
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $153,214 $146,106
Service cost 4,703 4,367
Interest cost 11,644 10,695
Benefits paid (8,105) (7,169)
Actuarial gain and
employee transfers, net (195) (785)
Amendments 7,997 -
Other (7) -
- ---------------------------------------------------------------
Balance at end of year $169,251 $153,214
===============================================================
Plan Assets
--------------------------
2001 2000
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $283,266 $241,485
Actual return on plan assets (40,841) 43,833
Benefits paid (7,758) (6,973)
Employee transfers (961) 4,921
- ---------------------------------------------------------------
Balance at end of year $233,706 $283,266
===============================================================
The accrued pension costs recognized in the Balance Sheets
were as follows:
2001 2000
- ---------------------------------------------------------------
(in thousands)
Funded status $ 64,455 $ 130,052
Unrecognized transition
obligation (2,832) (3,503)
Unrecognized prior
service cost 11,689 4,529
Unrecognized net gain (47,038) (111,092)
4th quarter cash flow
adjustment 90 72
---------------------------------------------------------------
Prepaid asset recognized
in the Balance Sheets $ 26,364 $20,058
===============================================================
Components of the pension plan's net periodic cost
were as follows:
2001 2000 1999
- -------------------------------------------------------------------
Service cost $ 4,703 $ 4,367 $ 4,556
Interest cost 11,644 10,695 9,729
Expected return on
plan assets (19,312) (17,504) (15,968)
Recognized net gain (3,072) (2,582) (234)
Net amortization 165 (235) (1,549)
- -------------------------------------------------------------------
Net pension income $ (5,872) $ (5,259) $ (3,466)
===================================================================
Postretirement Benefits
Changes during the year in the accumulated benefit obligations
and in the fair value of plan assets were as follows:
Accumulated
Benefit Obligations
---------------------------
2001 2000
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $50,025 $48,010
Service cost 983 896
Interest cost 3,886 3,515
Benefits paid (1,823) (1,462)
Amendments 3,412 -
- ---------------------------------------------------------------
Actuarial gain (2,146) (934)
- ---------------------------------------------------------------
Balance at end of year $54,337 $50,025
===============================================================
Plan Assets
---------------------------
2001 2000
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $13,388 $11,196
Actual return on plan assets (1,830) 2,079
Employer contributions 1,897 1,575
Benefits paid (1,823) (1,462)
- ---------------------------------------------------------------
Balance at end of year $11,632 $13,388
===============================================================
The accrued postretirement costs recognized in the Balance
Sheets were as follows:
2001 2000
- ----------------------------------------------------------------
(in thousands)
Funded status $(42,705) $(36,638)
Unrecognized transition
obligation 4,012 4,368
Unrecognized prior
service cost 5,695 2,582
Unrecognized net loss 1,235 496
Fourth quarter contributions 386 316
- ----------------------------------------------------------------
Accrued liability recognized
in the Balance Sheets $(31,377) $(28,876)
================================================================
22
NOTES (continued)
Gulf Power Company 2001 Annual Report
Components of the postretirement plan's net periodic cost were as follows:
2001 2000 1999
- -----------------------------------------------------------------
Service cost $ 983 $ 896 $ 1,087
Interest cost 3,886 3,515 3,261
Expected return on
plan assets (1,037) (901) (794)
Transition obligation 356 355 356
Prior service cost 299 159 159
Recognized net
(gain)/loss (18) 13 264
- -----------------------------------------------------------------
Net post-retirement cost $ 4,469 $ 4,037 $ 4,333
=================================================================
The weighted average rates assumed in the actuarial calculations for both the
pension plan and postretirement benefits plan were:
2001 2000
- ----------------------------------------------------------
Discount 7.50% 7.50%
Annual salary increase 5.00% 5.00%
Long-term return on plan
assets 8.50% 8.50%
- ----------------------------------------------------------
An additional assumption used in measuring the accumulated postretirement
benefit obligations was a weighted average medical care cost trend rate of 9.25
percent for 2001, decreasing gradually to 5.25 percent through the year 2010,
and remaining at that level thereafter.
An annual increase or decrease in the assumed medical care cost trend rate
of 1 percent would affect the accumulated benefit obligation and the service and
interest cost components at December 31, 2001 as follows (in thousands):
1 Percent 1 Percent
Increase Decrease
- ---------------------------------------------------------------
Benefit obligation $4,575 $3,985
Service and interest costs $410 $351
===============================================================
Employee Savings Plan
The Company also sponsors a 401(k) defined contribution plan covering
substantially all employees. The Company provides a 75 percent matching
contribution up to 6 percent of an employee's base salary. Total matching
contributions made to the plan for the years 2001, 2000, and 1999 were $2.3
million, $2.2 million, and $2.0 million, respectively.
3. CONTINGENCIES AND REGULATORY
MATTERS
General
The Company is subject to certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected to
have a material adverse effect on the Company's financial condition.
Environmental Cost Recovery
In 1993, the Florida Legislature adopted legislation for an Environmental Cost
Recovery Clause (ECRC), which allows a utility to petition the FPSC for recovery
of prudent environmental compliance costs that are not being recovered through
base rates or any other recovery mechanism. Such environmental costs include
operation and maintenance expense, emission allowance expense, depreciation, and
a return on invested capital.
In 1994, the FPSC approved the Company's initial petition under the ECRC for
recovery of environmental costs. During 2001, 2000, and 1999, the Company
recorded ECRC revenues of $10.0 million, $9.9 million, and $11.5 million,
respectively.
At December 31, 2001, the Company's liability for the estimated costs of
environmental remediation projects for known sites was $7.2 million. These
estimated costs are expected to be expended from 2002 through 2008. These
projects have been approved by the FPSC for recovery through the ECRC discussed
above. Therefore, the Company recorded $1.2 million in current assets and
current liabilities and $6.0 million in deferred assets and deferred liabilities
representing the future recoverability of these costs.
Environmental Litigation
On November 3, 1999, the Environmental Protection Agency (EPA) brought a civil
action in the U.S. District Court against Alabama Power, Georgia Power, and SCS.
The complaint alleges violations of the prevention of significant deterioration
and new source review provisions of the Clean Air Act with respect to five
coal-fired generating facilities in Alabama and Georgia. The civil action
23
NOTES (continued)
Gulf Power Company 2001 Annual Report
requests penalties and injunctive relief, including an order requiring the
installation of the best available control technology at the affected units. The
Clean Air Act authorizes civil penalties of up to $27,500 per day, per violation
at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per
day.
The EPA concurrently issued to the integrated Southeast utilities a notice of
violation related to 10 generating facilities, including the five facilities
mentioned previously and the Company's Plants Crist and Scherer. See Note 5
under "Joint Ownership Agreements" related to the Company's ownership interest
in Georgia Power's Plant Scherer Unit No. 3. In early 2000, the EPA filed a
motion to amend its complaint to add the violations alleged in its notice of
violation, and to add the Company, Mississippi Power, and Savannah Electric as
defendants. The complaint and notice of violation are similar to those brought
against and issued to several other electric utilities. These complaints and
notices of violation allege that the utilities had failed to secure necessary
permits or install additional pollution control equipment when performing
maintenance and construction at coal burning plants constructed or under
construction prior to 1978. On August 1, 2000, the U.S. District Court granted
Alabama Power's motion to dismiss for lack of jurisdiction in Georgia and
granted SCS's motion to dismiss on the grounds that it neither owned nor
operated the generating units involved in the proceedings. The court directed
the EPA to re-file its amended complaint limiting claims to those brought
against Georgia Power and Savannah Electric. The EPA re-filed those claims as
directed by the court. Also, the EPA re-filed its claims against Alabama Power
in U.S. District Court in Alabama. It has not re-filed against the Company,
Mississippi Power, or the system service company. The Alabama Power, Georgia
Power, and Savannah Electric cases have been stayed since the spring of 2001,
pending a ruling by the U.S. Court of Appeals for the Eleventh Circuit in the
appeal of a very similar New Source Review enforcement action against the
Tennessee Valley Authority (TVA). The TVA case involves many of the same legal
issues raised by the actions against Alabama Power, Georgia Power, and Savannah
Electric. Because the outcome of the TVA case could have a significant adverse
impact on Alabama Power and Georgia Power, both companies are parties to that
case as well. The U.S. District Court in Alabama has indicated that it will
revisit the issue of a continued stay in April 2002. The U.S. District Court in
Georgia is currently considering a motion by the EPA to reopen the Georgia case.
Georgia Power and Savannah Electric have opposed that motion.
The Company believes that it has complied with applicable laws and the EPA's
regulations and interpretations in effect at the time the work in question took
place.
An adverse outcome of this matter could require substantial capital
expenditures that cannot be determined at this time and possibly require payment
of substantial penalties. This could affect future results of operations, cash
flows, and possibly financial condition if such costs are not recovered through
regulated rates.
Retail Revenue Sharing Plan
In early 1999, the FPSC staff and the Company became involved in discussions
primarily related to reducing the Company's authorized rate of return. On
October 1, 1999, the Office of Public Counsel, the Coalition for Equitable
Rates, the Florida Industrial Power Users Group, and the Company jointly filed a
petition to resolve the issues. The stipulation included a reduction to retail
base rates of $10 million annually and provided for revenues to be shared within
set ranges for 1999 through 2002. Customers receive two-thirds of any revenue
within the sharing range and the Company retains one-third. Any revenue above
this range is refunded to the customers. The stipulation also included
authorization for the Company, at its discretion, to accrue up to an additional
$5 million to the property insurance reserve and $1 million to amortize a
regulatory asset related to the corporate office. The Company also filed a
request to prospectively reduce its authorized return on equity (ROE) range from
11 to 13 percent to 10.5 to 12.5 percent in order to help ensure that the FPSC
would approve the stipulation. The FPSC approved both the stipulation and the
ROE request with an effective date of November 4, 1999.
The Company's retail revenue range for sharing was $358 million to $374
million in calendar year 2001, and $352 million to $368 million in 2000, to be
shared between the Company and its retail customers on the one-third/two-thirds
basis. Actual retail revenues in 2001 were $360.3 million and $362.4 million in
2000. The Company recorded revenues subject to refund of $1.5 million in 2001
and $6.9 million in 2000. The estimated refund with interest was $0.03 million
in 2001 and $0.3 million in 2000 and was reflected in customer billings in
February 2002 and 2001 respectively. In addition to the refund, the Company
amortized $1 million of the regulatory assets related to the corporate office in
2001 and 2000, and accrued an additional $1.0 million to the property insurance
24
NOTES (continued)
Gulf Power Company 2001 Annual Report
reserve in 2001. For calendar year 2002, there are specified sharing ranges for
each month from the expected in-service date of Smith Unit 3 until the end of
the year. The sharing plan will expire at the earlier of the in-service date of
Smith Unit 3 or December 31, 2002.
Retail Rate Case
On September 10, 2001, the Company filed a request with the FPSC for a base rate
increase of approximately $70 million, the majority of which is needed to
recover costs related to the Smith Unit 3 combined cycle facility currently
under construction and scheduled to be placed in service by June 2002. Hearings
are scheduled for February 25 through March 1, 2002 with a decision expected in
early May 2002 and new rates effective June 6, 2002.
4. COMMITMENTS
Construction Program
The Company is engaged in a continuous construction program, the cost of which
is currently estimated to total $103 million in 2002, $72 million in 2003, and
$107 million in 2004. The construction program is subject to periodic review and
revision, and actual construction costs may vary from the above estimates
because of numerous factors. These factors include changes in business
conditions; revised load growth estimates; changes in environmental regulations;
increasing costs of labor, equipment, and materials; and cost of capital. At
December 31, 2001, significant purchase commitments were outstanding in
connection with the construction program. The Company has budgeted $24.3 million
in 2002 as the remaining cost of a 574 megawatt combined cycle gas generating
unit to be located in the eastern portion of its service area. The unit is
expected to have an in-service date of June 2002. The Company's remaining
construction program is related to maintaining and upgrading the transmission,
distribution, and generating facilities.
Fuel Commitments
To supply a portion of the fuel requirements of its generating plants, the
Company has entered into contract commitments for the procurement of fuel. In
some cases, these contracts contain provisions for price escalations, minimum
purchase levels, and other financial commitments. Total estimated obligations at
December 31, 2001 were as follows:
Year Fuel
--------- ----------------
(in millions)
2002 $140
2003 109
2004 112
2005 113
2006 115
2007-2025 398
----------------------------------------------------------
Total commitments $987
==========================================================
In addition, SCS acts as agent for the five operating companies and Southern
Power with regard to natural gas purchases. Natural gas purchases (in dollars)
are based on various indices at the actual time of delivery; therefore, only the
volume commitments are firm. The Company's committed volumes are allocated based
on usage projections as of December 31 as follows:
Year Natural Gas
--------- ----------------
(MMBtu)
2002 14,194,988
2003 28,377,592
2004 15,071,438
2005 6,913,093
2006 4,187,658
2007 and thereafter 1,676,250
------------------------------------------------------
Total commitments 70,421,019
======================================================
Additional commitments for fuel will be required in the future to supply the
Company's fuel needs.
Lease Agreements
In 1989, the Company and Mississippi Power jointly entered into a twenty-two
year operating lease agreement for the use of 495 aluminum railcars. In 1994, a
second lease agreement for the use of 250 additional aluminum railcars was
entered into for twenty-two years. Both of these leases are for the
transportation of coal to Plant Daniel. At the end of each lease term, the
Company has the option to purchase the 745 railcars at the greater of lease
termination value or fair market value, or to renew the leases at the end of the
lease term.
25
NOTES (continued)
Gulf Power Company 2001 Annual Report
The Company, as a joint owner of Plant Daniel, is responsible for one half of
the lease costs. The lease costs are charged to fuel inventory and are allocated
to fuel expense as the fuel is used. The Company's share of the lease costs
charged to fuel inventories was $1.9 million in 2001 and $2.4 million in 2000.
The annual amounts for 2002 through 2006 are expected to be $1.9 million, $1.9
million, $1.9 million, $2.0 million, and $2.0 million, respectively, and after
2006 are expected to total $11.7 million.
5. JOINT OWNERSHIP AGREEMENTS
The Company and Mississippi Power jointly own Plant Daniel Unit No. 1 and Unit
No. 2. Plant Daniel is a generating plant located in Jackson County,
Mississippi. In accordance with the operating agreement, Mississippi Power
acts as the Company's agent with respect to the construction, operation, and
maintenance of these units.
The Company and Georgia Power jointly own Plant Scherer Unit No. 3. Plant
Scherer is a generating plant located near Forsyth, Georgia. In accordance with
the operating agreement, Georgia Power acts as the Company's agent with respect
to the construction, operation, and maintenance of the unit.
The Company's pro rata share of expenses related to both plants is included
in the corresponding operating expense accounts in the Statements of Income.
At December 31, 2001, the Company's percentage ownership and its investment
in these jointly owned facilities were as follows:
Plant Plant
Scherer Daniel Unit
Unit No. 3 Nos. 1 & 2
(coal-fired) (coal-fired)
-----------------------------
(in thousands)
Plant In Service $184,901(1) $228,278
Accumulated Depreciation $73,684 $120,646
Construction Work in Progress $1,556 $6,174
Nameplate Capacity (2)
(megawatts) 205 500
Ownership 25% 50%
- ------------------------------------------------------------------
(1) Includes net plant acquisition adjustment.
(2) Total megawatt nameplate capacity:
Plant Scherer Unit No. 3: 818
Plant Daniel Unit Nos. 1&2: 1,000
6. LONG-TERM POWER SALES AGREEMENTS
The Company and the other operating affiliates have long-term contractual
agreements for the sale of capacity to certain non-affiliated utilities located
outside the system's service area. The unit power sales agreements are firm and
pertain to capacity related to specific generating units. Because the energy is
generally sold at cost under these agreements, profitability is primarily
affected by revenues from capacity sales. The capacity revenues from these sales
were $19.5 million in 2001, $20.3 million in 2000, and $19.8 million in 1999.
Unit power from specific generating plants of Southern Company is currently
being sold to Florida Power Corporation (FPC), Florida Power & Light Company
(FP&L), and Jacksonville Electric Authority (JEA). Under these agreements, 210
megawatts of net dependable capacity were sold by the Company during 2001. Sales
will remain close to that level, unless reduced by FP&L, FPC, and JEA with a
minimum of three years notice, until the expiration of the contracts in 2010.
7. INCOME TAXES
At December 31, 2001, the tax-related regulatory assets to be recovered from
customers were $16.8 million. These assets are attributable to tax benefits
flowed through to customers in prior years and to taxes applicable to
capitalized allowance for funds used during construction. At December 31, 2001,
the tax-related regulatory liabilities to be credited to customers were $28.3
million. These liabilities are attributable to deferred taxes previously
recognized at rates higher than current enacted tax law and to unamortized
investment tax credits.
Details of the federal and state income tax provisions are as follows:
2001 2000 1999
------------------------------------
(in thousands)
Total provision for income taxes:
Federal--
Current $24,207 $37,250 $33,973
Deferred 2,568 (11,159) (6,107)
26,775 26,091 27,866
- --------------------------------------------------------------------
State--
Current 3,701 5,796 5,267
Deferred 826 (1,357) (502)
4,527 4,439 4,765
- --------------------------------------------------------------------
Total $31,302 $30,530 $32,631
====================================================================
26
NOTES (continued)
Gulf Power Company 2001 Annual Report
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities, are as follows:
2001 2000
---------------------------
(in thousands)
Deferred tax liabilities:
Accelerated depreciation $179,071 $172,646
Other 27,328 14,262
- ---------------------------------------------------------------------
Total 206,399 186,908
- ---------------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 9,009 8,703
Postretirement benefits 9,379 9,205
Other 17,881 14,742
- ---------------------------------------------------------------------
Total 36,269 32,650
- ---------------------------------------------------------------------
Net deferred tax liabilities 170,130 154,258
Less current portion, net (8,162) (816)
- ---------------------------------------------------------------------
Accumulated deferred income
taxes in the Balance Sheets $161,968 $155,074
=====================================================================
Deferred investment tax credits are amortized over the lives of the related
property with such amortization normally applied as a credit to reduce
depreciation and amortization in the Statements of Income. Credits amortized in
this manner amounted to $1.7 million in 2001 and $1.9 million in each of 2000
and 1999. At December 31, 2001, all investment tax credits available to reduce
federal income taxes payable had been utilized.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
2001 2000 1999
----------------------------
Federal statutory rate 35% 35% 35%
State income tax,
net of federal deduction 4 4 4
Non-deductible book
depreciation 1 1 1
Difference in prior years'
deferred and current tax rate (2) (2) (2)
Other, net (3) (1) -
- ----------------------------------------------------------------
Effective income tax rate 35% 37% 38%
================================================================
The Company and the other subsidiaries of Southern Company file a
consolidated federal tax return. Under a joint consolidated income tax
agreement, each subsidiary's current and deferred tax expense is computed on a
stand-alone basis. In accordance with Internal Revenue Service regulations, each
company is jointly and severally liable for the tax liability.
8. CAPITALIZATION
Preferred Securities
In January 1997, Gulf Power Capital Trust I (Trust I), of which the Company owns
all of the common securities, issued $40 million of 7.625 percent mandatorily
redeemable preferred securities. Substantially all of the assets of Trust I are
$41 million aggregate principal amount of the Company's 7.625 percent junior
subordinated notes due December 31, 2036.
In January 1998, Gulf Power Capital Trust II (Trust II), of which the Company
owns all of the common securities, issued $45 million of 7.0 percent mandatorily
redeemable preferred securities. Substantially all of the assets of Trust II are
$46 million aggregate principal amount of the Company's 7.0 percent junior
subordinated notes due December 31, 2037.
In November 2001, Gulf Power Capital Trust III (Trust III), of which the
Company owns all of the common securities, issued $30 million of 7.375 percent
mandatorily redeemable preferred securities. Substantially all of the assets of
Trust III are $31 million aggregate principal amount of the Company's 7.375
percent junior subordinated notes due September 30, 2041.
The Company considers that the mechanisms and obligations relating to the
preferred securities, taken together, constitute a full and unconditional
guarantee by the Company of payment obligations with respect to the preferred
securities of Trust I, Trust II, and Trust III. Trust I, Trust II, and Trust III
are subsidiaries of the Company, and accordingly are consolidated in the
Company's financial statements.
Securities Due Within One Year
At December 31, 2001, the Company had an improvement fund requirement of
$550,000. The first mortgage bond improvement fund requirement amounts to 1
percent of each outstanding series of bonds authenticated under the indenture
prior to January 1 of each year, other than those issued to collateralize
pollution control revenue bond obligations. The requirement may be satisfied by
depositing cash, reacquiring bonds, or by pledging additional property equal to
1 and 2/3 times the requirement.
The sinking fund requirements of first mortgage bonds were satisfied by
certifying property additions in 2001 and 2000. It is anticipated that the 2002
27
NOTES (continued)
Gulf Power Company 2001 Annual Report
requirement will be satisfied by certifying property additions. Sinking fund
requirements and/or maturities through 2006 applicable to long-term debt are as
follows: none in 2002; $60.6 million in 2003; $50.6 million on 2004; none in
2005; and $37.6 million in 2006.
Dividend Restrictions
The Company's first mortgage bond indenture contains various common stock
dividend restrictions, which remain in effect as long as the bonds are
outstanding. At December 31, 2001, retained earnings of $127 million were
restricted against the payment of cash dividends on common stock under the terms
of the mortgage indenture.
Bank Credit Arrangements
At December 31, 2001, the Company had $41.5 million of lines of credit with
banks subject to renewal June 1 of each year, of which $41.5 million remained
unused. In addition, the Company has two unused committed lines of credit
totaling $61.9 million that were established for liquidity support of its
variable rate pollution control bonds. In connection with these credit lines,
the Company has agreed to pay commitment fees and/or to maintain compensating
balances with the banks. The compensating balances, which represent
substantially all of the cash of the Company except for daily working funds and
like items, are not legally restricted from withdrawal.
The Company borrows through commercial paper programs that have the liquidity
support of committed bank credit arrangements. In addition, the Company from
time to time borrows under uncommitted lines of credit with banks. The amount of
commercial paper outstanding at December 31, 2001 was $37.4 million.
In addition, the Company has bid-loan facilities with five major money center
banks that total $110 million, of which $50 million was committed at December
31, 2001.
Assets Subject to Lien
The Company's mortgage, which secures the first mortgage bonds issued by the
Company, constitutes a direct first lien on substantially all of the Company's
fixed property and franchises.
9. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 2001 and 2000 are as follows:
Net Income
After Dividends
Operating Operating on Preferred
Quarter Ended Revenues Income Stock
- --------------------------------------------------------------------
(in thousands)
March 2001 $165,029 $24,785 $10,196
June 2001 180,430 30,702 14,770
September 2001 226,616 45,504 26,657
December 2001 153,128 16,268 6,684
March 2000 $138,498 $16,007 $4,653
June 2000 182,120 30,505 12,927
September 2000 232,533 52,614 26,438
December 2000 161,168 20,755 7,825
- --------------------------------------------------------------------
The Company's business is influenced by seasonal weather conditions and the
timing of rate changes, among other factors.
28
SELECTED FINANCIAL AND OPERATING DATA 1997-2001
Gulf Power Company 2001 Annual Report
- ---------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands) $725,203 $714,319 $674,099 $650,518 $625,856
Net Income after Dividends
on Preferred Stock (in thousands) $58,307 $51,843 $53,667 $56,521 $57,610
Cash Dividends
on Common Stock (in thousands) $53,275 $59,000 $61,300 $57,200 $64,600
Return on Average Common Equity (percent) 12.51 12.20 12.63 13.20 13.33
Total Assets (in thousands) $1,569,517 $1,312,064 $1,308,495 $1,267,901 $1,265,612
Gross Property Additions (in thousands) $274,668 $95,807 $69,798 $69,731 $54,289
- ---------------------------------------------------------------------------------------------------------------------------------
Capitalization (in thousands):
Common stock equity $504,894 $427,378 $422,313 $427,652 $428,718
Preferred stock 4,236 4,236 4,236 4,236 13,691
Company obligated mandatorily
redeemable preferred securities 115,000 85,000 85,000 85,000 40,000
Long-term debt 467,784 365,993 367,449 317,341 296,993
- ---------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) $1,091,914 $882,607 $878,998 $834,229 $779,402
=================================================================================================================================
Capitalization Ratios (percent):
Common stock equity 46.2 48.4 48.0 51.3 55.0
Preferred stock 0.4 0.5 0.5 0.5 1.8
Company obligated mandatorily
redeemable preferred securities 10.5 9.6 9.7 10.2 5.1
Long-term debt 42.9 41.5 41.8 38.0 38.1
- ---------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0
=================================================================================================================================
Security Ratings:
First Mortgage Bonds -
Moody's A1 A1 A1 A1 A1
Standard and Poor's A+ A+ AA- AA- AA-
Fitch A+ AA- AA- AA- AA-
Preferred Stock -
Moody's Baa1 a2 a2 a2 a2
Standard and Poor's BBB+ BBB+ A- A A
Fitch A- A A A+ A+
Unsecured Long-Term Debt -
Moody's A2 A2 A2 A2 A2
Standard and Poor's A A A A A
Fitch A A+ A+ A+ A+
=================================================================================================================================
Customers (year-end):
Residential 327,128 321,731 315,240 307,077 300,257
Commercial 48,654 47,666 47,728 46,370 44,589
Industrial 270 280 267 257 267
Other 468 442 316 268 264
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Total 376,520 370,119 363,551 353,972 345,377
=================================================================================================================================
Employees (year-end): 1,309 1,327 1,339 1,328 1,328
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29
SELECTED FINANCIAL AND OPERATING DATA 1997-2001 (continued)
Gulf Power Company 2001 Annual Report
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2001 2000 1999 1998 1997
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Operating Revenues (in thousands):
Residential $ 313,165 $302,210 $ 279,238 $ 279,621 $ 276,924
Commercial 188,759 177,047 167,305 163,207 163,751
Industrial 81,719 74,095 68,222 71,119 77,045
Other 948 (4,712) 2,184 2,113 2,077
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Total retail 584,591 548,640 516,949 516,060 519,797
Sales for resale - non-affiliates 82,252 66,890 62,354 61,893 63,697
Sales for resale - affiliates 27,256 66,995 66,110 42,642 16,760
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Total revenues from sales of electricity 694,099 682,525 645,413 620,595 600,254
Other revenues 31,104 31,794 28,686 29,923 25,602
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Total $725,203 $714,319 $674,099 $650,518 $625,856
================================================================================================================================
Kilowatt-Hour Sales (in thousands):
Residential 4,716,404 4,790,038 4,471,118 4,437,558 4,119,492
Commercial 3,417,427 3,379,449 3,222,532 3,111,933 2,897,887
Industrial 2,018,206 1,924,749 1,846,237 1,833,575 1,903,050
Other 21,208 18,730 19,296 18,952 18,101
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Total retail 10,173,245 10,112,966 9,559,183 9,402,018 8,938,530
Sales for resale - non-affiliates 2,093,203 1,705,486 1,561,972 1,341,990 1,531,179
Sales for resale - affiliates 962,892 1,916,526 2,511,983 1,758,150 848,135
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Total 13,229,340 13,734,978 13,633,138 12,502,158 11,317,844
================================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 6.64 6.31 6.25 6.30 6.72
Commercial 5.52 5.24 5.19 5.24 5.65
Industrial 4.05 3.85 3.70 3.88 4.05
Total retail 5.75 5.43 5.41 5.49 5.82
Sales for resale 3.58 3.70 3.15 3.37 3.38
Total sales 5.25 4.97 4.73 4.96 5.30
Residential Average Annual
Kilowatt-Hour Use Per Customer 14,497 14,992 14,318 14,577 13,894
Residential Average Annual
Revenue Per Customer $962.57 $945.87 $894.18 $918.56 $933.99
Plant Nameplate Capacity
Ratings (year-end) (megawatts) 2,188 2,188 2,188 2,188 2,174
Maximum Peak-Hour Demand (megawatts):
Winter 2,106 2,154 2,085 2,040 1,844
Summer 2,223 2,285 2,161 2,146 2,032
Annual Load Factor (percent) 57.5 55.4 55.2 55.3 55.5
Plant Availability Fossil-Steam (percent): 90.1 85.2 87.2 87.6 91.0
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Source of Energy Supply (percent):
Coal 81.2 87.8 89.8 89.2 87.1
Oil and gas 1.0 1.6 2.5 2.0 0.4
Purchased power -
From non-affiliates 6.5 7.6 5.9 5.5 3.5
From affiliates 11.3 3.0 1.8 3.3 9.0
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Total 100.0 100.0 100.0 100.0 100.0
================================================================================================================================
30