MANAGEMENT'S REPORT
Gulf Power Company 2000 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 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
Comptroller
and Chief Financial Officer
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, 2000 and 1999, 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, 2000. 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 12 - 26) referred to above
present fairly, in all material respects, the financial position of Gulf Power
Company as of December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 28, 2001
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Gulf Power Company 2000 Annual Report
RESULTS OF OPERATIONS
Earnings
Gulf Power Company's 2000 net income after dividends on preferred stock was
$51.8 million, a decrease of $1.9 million from the previous year. In 1999,
earnings were $53.7 million, down $2.8 million when compared to 1998. The
decrease in earnings in 2000, as well as 1999, was primarily a result of higher
expenses than in the prior year.
Revenues
Operating revenues increased in 2000 when compared to 1999. The following table
summarizes the change in operating revenues for the past two years:
Increase (Decrease)
Amount From Prior Year
-------------------------------------
2000 2000 1999
-------------------------------------
(in thousands)
Retail --
Base Revenues $336,103 $3,771 $2,469
Regulatory cost
recovery and other 226,059 45,631 1,173
- ------------------------------------------------------------------
Total retail 562,162 49,402 3,642
- ------------------------------------------------------------------
Sales for resale--
Non-affiliates 66,890 4,537 461
Affiliates 66,995 885 23,468
- ------------------------------------------------------------------
Total sales for resale 133,885 5,422 23,929
Other operating
revenues 18,272 (14,604) (3,990)
- ------------------------------------------------------------------
Total operating
revenues $714,319 $40,220 $23,581
==================================================================
Percent change 6.0% 3.6%
- ------------------------------------------------------------------
Retail revenues of $562.2 million in 2000 increased $49.4 million, or 9.6
percent, from the prior year due primarily to the recovery of higher fuel and
purchased power costs. Retail base rate revenues increased $3.8 million due to
increased customer growth and hotter than normal weather, offset by a $10
million permanent annual rate reduction and $6.9 million of revenues subject to
refund based upon the current retail revenue sharing plan (See Note 3 to the
financial statements under "Retail Revenue Sharing Plan" for further
information). Retail revenues for 1999 increased $3.6 million, or 0.7 percent,
when compared to 1998 due primarily to an increase in the number of retail
customers served by the Company.
The 2000 increase in regulatory cost recovery and other retail revenues over
1999 is primarily attributable to higher fuel and purchased power costs. The
1999 increase in regulatory cost recovery and other retail revenues over 1998 is
primarily attributable to the recovery of increased purchased power capacity
costs. "Regulatory cost recovery and other" includes the following: recovery
provisions for fuel expense and the energy component of purchased power costs;
energy conservation costs; purchased power capacity costs; and environmental
compliance costs. 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 $133.9 million in 2000, an increase of $5.4 million, or
4.2 percent, over 1999 primarily due to additional energy sales. 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:
2000 1999 1998
----------------------------------------
(in thousands)
Capacity $20,270 $19,792 $22,503
Energy 21,922 20,251 14,556
- -------------------------------------------------------------
Total $42,192 $40,043 $37,059
=============================================================
Capacity revenues increased slightly in 2000 due to the recovery of higher
operating expenses experienced during the year. Capacity revenues had been
declining in prior years due to the decreasing net investment related to these
sales. This downward trend accelerated during 1999 as a result of a reduction in
the authorized rate of return on the equity component of the investment.
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 decreased in 2000 and in 1999 due primarily to the
retail recovery clause adjustments for the difference between recoverable costs
and the amounts actually reflected in current rates. See Notes 1 and 3 to the
financial statements under "Revenues and Regulatory Cost Recovery Clauses" and
"Environmental Cost Recovery," respectively, for further discussion.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
Energy Sales
Kilowatt-hour sales for 2000 and the percent changes by year were as follows:
KWH Percent Change
----------------------------------
2000 2000 1999
----------------------------------
(millions)
Residential 4,790 7.1% 0.8%
Commercial 3,379 4.9 3.6
Industrial 1,925 4.3 0.7
Other 19 0.0 0.0
--------
Total retail 10,113 5.8 1.7
Sales for resale
Non-affiliates 1,705 9.2 16.4
Affiliates 1,917 (23.7) 42.9
--------
Total 13,735 0.7 9.0
=======================================================
In 2000, total retail energy sales increased when compared to 1999 due
primarily to an increase in the total number of customers and hotter than normal
weather. Total retail energy sales increased in 1999 when compared to 1998 due
to increases in the number of customers. See "Future Earnings Potential" for
information on the Company's initiatives to remain competitive and to meet
conservation goals set by the Florida Public Service Commission (FPSC).
An increase in energy sales for resale to non-affiliates of 9.2 percent in
2000 when compared to 1999 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 2000 increased $39.5 million, or 7.1 percent, over
the amount recorded in 1999 due primarily to higher fuel and purchased power
expenses. In 1999, total operating expenses increased $26.8 million, or 5.1
percent, compared to 1998 due primarily to higher fuel, purchased power, and
maintenance expenses offset by lower other operation expenses.
Fuel expenses in 2000, when compared to 1999, increased $6.7 million, or 3.2
percent, due primarily to an increase in average fuel costs. In 1999, fuel
expenses increased $11.5 million, or 5.9 percent, when compared to 1998. The
increases were the result of increased generation resulting from a higher demand
for energy.
The amount and sources of generation and the average cost of fuel per net
kilowatt-hour generated were as follows:
2000 1999 1998
-------------------------------
Total generation
(millions of kilowatt-hours) 12,866 13,095 11,986
Sources of generation
(percent)
Coal 98.2 97.4 98.0
Oil and gas 1.8 2.6 2.0
Average cost of fuel per net
kilowatt-hour generated
(cents)-- 1.68 1.60 1.69
- ---------------------------------------------------------------------
Purchased power expenses increased in 2000 by $25.5 million, or 44.7 percent,
over 1999 and purchased power expenses for 1999 increased over 1998 by $13.2
million, or 30.2 percent, due primarily to a higher demand for energy in both
years.
Depreciation and amortization expense increased $2.3 million, or 3.5 percent,
in 2000 when compared to 1999, 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. The $5.5 million, or 9.2 percent, increase
in 1999 compared to 1998 was due primarily to a reduction in the amortization of
gains from the 1998 sale of emission allowances.
Interest on long-term debt, which is included in "Interest expense",
increased $1.2 million, or 5.8 percent, in 2000 when compared to 1999 due
primarily to the issuance of $50 million of senior notes in August 1999. In 1999
interest on long-term debt increased $1.7 million, or 8.4 percent, when compared
to 1998 due primarily to the maturity of two first mortgage bond series in 1998
which were replaced by senior notes at a slightly higher interest rate, and 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
4
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
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
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 cost 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 $5.8 million in 2000. Pension income in 2001 is expected to be
less as a result of plan amendments. Future pension income is dependent on
several factors including trust earnings and changes to the plan.
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 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 weather, competition, changes in contracts with neighboring utilities,
energy conservation practiced by customers, the elasticity of demand, and the
rate of economic growth in the Company's service area. 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 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 is currently planning to seek additional rate
relief to recover costs related to the Smith Unit 3 combined cycle facility
currently under construction and scheduled to be placed in-service in June of
2002.
For calendar year 2000, the Company's retail revenue range for sharing was
$352 million to $368 million. Actual retail revenues in 2000 were $362.4 million
and the Company recorded revenues subject to refund of $6.9 million. The
estimated refund with interest was reflected in customer billings in February
2001. For calendar year 2001, the Company's retail revenue range for sharing is
$358 million to $374 million. 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.
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. The Company is aggressively working to maintain and
expand its share of wholesale sales in the southeastern power markets.
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
5
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
tax issues. The commission's final report and recommendations are due to the
Governor and legislature by December 1, 2001. The commission submitted an
interim report to the state legislature that involves introducing more
competition into the wholesale production of electricity in Florida. If approved
by the legislature, the proposal would require utilities to turn over generating
assets to an unregulated affiliate company over a 6-year transition period. The
proposal would allow out of state companies to build merchant facilities and to
bid on new generation needs. The effects of any proposed changes cannot
presently be determined, but could have a material effect on the Company's
financial statements.
Although the Energy Act does not permit retail customer access, it was a
major catalyst for the current restructuring and consolidation 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 current energy crisis in
California. As a result of this crisis, many states have either discontinued or
delayed implementation of initiatives involving retail deregulation. The
inability of a company to recover its investments, including the regulatory
assets described in Note 1 to the financial statements, could have a material
adverse effect on 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 1996, the FPSC approved a new optional Commercial/Industrial Service Rider
(CISR), which is applicable to the rate schedules for the Company's largest
existing and potential customers who are able to show they have viable
alternatives to purchasing the Company's energy services. The CISR, approved as
a pilot program, provides the flexibility needed to enable the Company to offer
its services in a more competitive manner to these customers. The publicity of
the CISR ruling, increased competitive pressures, and general awareness of
customer choice pilots and proposals across the country have stimulated interest
on the part of customers in custom tailored offerings. The Company has
participated in one-on-one discussions with many of these customers, and has
negotiated and executed two Contract Service Agreements within the CISR pilot
program. The pilot program was scheduled to end in 2000; however, on February 6,
2001 the FPSC approved the Company's request to remove the original 48 month
limitation and allow the program to continue.
Every five years the FPSC establishes numeric demand side management goals.
The Company proposed numeric goals for the ten-year period from 2000 to 2009.
The proposed goals consisted of the total, cost-effective winter and summer peak
demand (kilowatts) and annual energy (kilowatt-hour) savings reasonably
achievable from demand side management for the residential and
commercial/industrial classes. The Company submitted its 2001 Demand Side
Management Plan to the FPSC on December 29, 2000. The plan describes the
proposed programs the Company will employ to reach the numeric goals. The plan
relies heavily on innovative pricing and energy efficient construction.
On December 20, 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. After participating in regional conferences with customers and other
members of the public to discuss the formation of RTOs, utilities were required
to make a filing with the FERC. Southern Company and its integrated utility
subsidiaries, including the Company, filed on October 16, 2000, a proposal for
the creation of an RTO. The proposal is for the formation of a for-profit
company that would have control of the bulk power transmission system of the
Company and any other participating utilities. Participants would have the
option to either maintain their ownership or divest, sell, or lease their assets
to the proposed RTO. If the FERC accepts the proposal as filed, the creation of
6
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
an RTO is not expected to have a material impact on the Company's financial
statements. The outcome of this matter cannot now be determined.
The Energy Act amended the Public Utility Holding Company Act of 1935 (PUHCA)
to allow holding companies to form exempt wholesale generators to sell power
largely free of regulation under PUHCA. These entities are able to own and
operate power generating facilities and sell power to affiliates -- under
certain restrictions.
Southern Company is aggressively working to maintain and expand its share of
wholesale sales in the southeastern power markets. In January 2001, Southern
Company announced the formation of a new subsidiary -- Southern Power Company.
The new subsidiary will own, manage, and finance wholesale generating assets in
the Southeast. Southern Power will be the primary growth engine for Southern
Company's market-based energy business. Energy from its assets will be marketed
to wholesale customers under the Southern Company name.
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."
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.
Exposure to Market Risks
Due to cost-based rate regulation, the Company has limited exposure to market
volatility in interest rates 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. Realized gains and losses are recognized in the income
statements as incurred. At December 31, 2000, exposure from these activities was
not material.
New Accounting Standard
In June 2000, FASB issued Statement No. 138, an amendment of Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities.
Statement No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and for hedging activities. Statement
No. 133 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 Company may utilize financial instruments to reduce its exposure to
changes in interest rates depending on market conditions. The Company also
enters into commodity related forward contracts to limit exposure to changing
prices on certain fuel purchases and electricity purchases and sales.
Substantially all of these bulk energy purchases and sales meet the
definition of a derivative under Statement No. 133. In many cases, these
transactions meet the normal purchase and sale exception and the related
contracts will continue to be accounted for under the accrual method. Certain of
these instruments qualify as cash flow hedges resulting in the deferral of
related gains and losses in other comprehensive income until the hedged
transactions occur. Any ineffectiveness will be recognized currently in net
income. However, others will be required to be marked to market through current
period income.
The Company adopted Statement No. 133 effective January 1, 2001. The impact
on net income was immaterial. The application of the new rules is still evolving
and further guidance from FASB is expected, which could additionally impact the
Company's financial statements. Also, as wholesale energy markets mature, future
transactions could result in more volatility in net income and comprehensive
income.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
Financial Condition
Overview
The Company's financial condition continues to be very solid. During 2000, gross
property additions were $95.8 million. Funds for the property additions were
provided by operating activities. See the Statements of Cash Flows for further
details.
Financing Activities
In 2000, there were no issuances or retirements of long-term debt. In 1999, the
Company sold $50 million of senior notes and long-term bank notes totaling $27
million were retired. See the Statements of Cash Flows for further details.
Composite financing rates for the years 1998 through 2000 as of year end were
as follows:
2000 1999 1998
-----------------------------
Composite interest rate on
long-term debt 6.2% 6.0% 6.1%
Composite rate on
trust preferred securities 7.3% 7.3% 7.3%
Composite preferred stock
dividend rate 5.1% 5.1% 5.1%
- -----------------------------------------------------------------
The composite interest rate on long-term debt increased in 2000 due to higher
interest rates on variable rate pollution control bonds.
Capital Requirements for Construction
The Company's gross property additions, including those amounts related to
environmental compliance, are budgeted at $451 million for the three years
beginning in 2001 ($279 million in 2001, $96 million in 2002, and $76 million in
2003). These amounts include $199.2 million for the years 2001 and 2002 for the
estimated 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.
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. As a
result of a systemwide compliance strategy, some 50 generating units of Southern
Company were brought into compliance with Phase I requirements.
Southern Company achieved Phase I sulfur dioxide compliance at the affected
plants by switching to low-sulfur coal, which required some equipment upgrades.
Construction expenditures for Phase I nitrogen oxide and sulfur dioxide
emissions compliance totaled approximately $300 million for Southern Company,
including 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.
Compliance for Phase II and initial ozone non-attainment requirements increased
Southern Company's total construction expenditures through 2000 by approximately
$100 million. Phase II compliance did not have a material impact on Gulf Power.
A significant portion of costs related to the acid rain and ozone
nonattainment 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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
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 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 recently dismissed certain challenges but 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
will address other legal challenges to these standards in mid-2001. If the
standards are eventually upheld, implementation could be required by 2007 to
2010.
In September 1998, the EPA issued the final regional nitrogen oxide reduction
rule to the states for implementation. Compliance is required by May 31, 2004.
The final rule affects 21 states, including Georgia. 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 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 (MACT) provisions of the Clean Air Act. This determination is being
challenged in the courts. In January 2001, the EPA proposed guidance for the
determination of Best Available Retrofit Technology (BART) emission controls
under the Regional Haze Regulations. Installation of BART controls will likely
be required around 2010. Litigation of the BART rules is probable in the near
future.
Implementation of the final state rules for these initiatives could require
substantial further reductions in nitrogen oxide, sulfur dioxide, 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. Reviews by the new administration in Washington, D.C.
add to the uncertainties associated with BART guidance and the MACT
determination for mercury and other HAPS.
The EPA and state environmental regulatory agencies are also reviewing and
evaluating various other matters including: nitrogen oxide emission control
strategies for ozone non-attainment areas; additional controls for hazardous air
pollutant emissions; 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. 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 Gulf Power, 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 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
9
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
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.
On January 12, 2001, the EPA re-filed its claims against Alabama Power in
federal district court in Birmingham, Alabama. The EPA did not include the
system service company in the new complaint. Southern Company believes that its
integrated utilities 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 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, 2000, the Company had approximately $4.4 million of cash and
cash equivalents and $53.5 million of unused committed lines of credit with
banks to meet its short-term cash needs. Refer to the Statements of Cash Flows
for details related to the Company's financing activities. See Note 4 to the
financial statements under "Bank Credit Arrangements" for additional
information.
The Company historically has relied on issuances of first mortgage bonds and
preferred stock, in addition to pollution control revenue 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 2000 Annual Report contains forward looking and historical
information. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "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 extent and timing
of the entry of additional competition in the markets of the Company; potential
business strategies, including acquisitions or dispositions of assets or
10
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 2000 Annual Report
businesses, which cannot be assured to be completed or beneficial; internal
restructuring or other restructuring options, that may be pursued by the
registrants; state and federal rate regulation in the United States; political,
legal and economic conditions and developments in the United States; financial
market conditions and the results of financing efforts; the impact of
fluctuations in commodity prices, interest rates and customer demand; 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 SEC.
11
STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999, and 1998
Gulf Power Company 2000 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating Revenues:
Retail sales $562,162 $512,760 $509,118
Sales for resale --
Non-affiliates 66,890 62,354 61,893
Affiliates 66,995 66,110 42,642
Other revenues 18,272 32,875 36,865
- -----------------------------------------------------------------------------------------------------------------------------
Total operating revenues 714,319 674,099 650,518
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 215,744 209,031 197,462
Purchased power --
Non-affiliates 73,846 46,332 29,369
Affiliates 8,644 10,703 14,445
Other 117,146 114,670 119,011
Maintenance 56,281 57,830 57,286
Depreciation and amortization 66,873 64,589 59,129
Taxes other than income taxes 55,904 51,782 51,462
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 594,438 554,937 528,164
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 119,881 119,162 122,354
Other Income (Expense):
Interest income 1,137 1,771 931
Other, net (4,126) (1,357) (2,339)
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Interest and Income Taxes 116,892 119,576 120,946
- -----------------------------------------------------------------------------------------------------------------------------
Interest and Other:
Interest expense, net 28,085 26,861 25,556
Distributions on preferred securities of subsidiary 6,200 6,200 6,034
- -----------------------------------------------------------------------------------------------------------------------------
Total interest charges and other, net 34,285 33,061 31,590
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 82,607 86,515 89,356
Income taxes (Note 7) 30,530 32,631 32,199
- -----------------------------------------------------------------------------------------------------------------------------
Net Income 52,077 53,884 57,157
Dividends on Preferred Stock 234 217 636
- -----------------------------------------------------------------------------------------------------------------------------
Net Income After Dividends on Preferred Stock $ 51,843 $ 53,667 $ 56,521
=============================================================================================================================
The accompanying notes are an integral part of these statements.
12
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999, and 1998
Gulf Power Company 2000 Annual Report
- ----------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Operating Activities:
Net income $ 52,077 $ 53,884 $ 57,157
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 69,915 68,721 69,633
Deferred income taxes and investment tax credits, net (12,516) (6,609) (4,684)
Other, net 10,686 3,735 3,463
Changes in certain current assets and liabilities --
Receivables, net (20,212) (10,484) 11,308
Fossil fuel stock 13,101 (5,656) (4,917)
Materials and supplies 1,055 (2,063) 609
Accounts payable 15,924 (2,023) 823
Provision for rate refund 7,203 - -
Other 12,521 7,030 (18,471)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 149,754 106,535 114,921
- ----------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (95,807) (69,798) (69,731)
Other (4,432) (8,856) 5,990
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (100,239) (78,654) (63,741)
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (decrease) in notes payable, net (12,000) 23,500 (15,500)
Proceeds --
Other long-term debt - 50,000 50,000
Preferred securities - - 45,000
Capital contributions from parent company 12,222 2,294 522
Retirements --
First mortgage bonds - - (45,000)
Other long-term debt (1,853) (27,074) (8,326)
Preferred stock - - (9,455)
Payment of preferred stock dividends (234) (271) (792)
Payment of common stock dividends (59,000) (61,300) (67,200)
Other (22) (246) (4,167)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (60,887) (13,097) (54,918)
- ----------------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents (11,372) 14,784 (3,738)
Cash and Cash Equivalents at Beginning of Period 15,753 969 4,707
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,381 $ 15,753 $ 969
============================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $32,277 $27,670 $28,044
Income taxes (net of refunds) 42,252 29,462 38,782
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
13
BALANCE SHEETS
At December 31, 2000 and 1999
Gulf Power Company 2000 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------
Assets 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Current Assets:
Cash and cash equivalents $ 4,381 $ 15,753
Receivables --
Customer accounts receivable 69,820 55,108
Other accounts and notes receivable 2,179 4,325
Affiliated companies 15,026 7,104
Accumulated provision for uncollectible accounts (1,302) (1,026)
Fossil fuel stock, at average cost 16,768 29,869
Materials and supplies, at average cost 29,033 30,088
Regulatory clauses under recovery 2,112 11,611
Other 6,543 5,354
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 144,560 158,186
- ------------------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment:
In service 1,892,023 1,853,664
Less accumulated provision for depreciation 867,260 821,970
- ------------------------------------------------------------------------------------------------------------------------------
1,024,763 1,031,694
Construction work in progress 71,008 34,164
- ------------------------------------------------------------------------------------------------------------------------------
Total property, plant, and equipment 1,095,771 1,065,858
- ------------------------------------------------------------------------------------------------------------------------------
Other Property and Investments 4,510 1,481
- ------------------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes (Note 7) 15,963 25,264
Prepaid pension costs (Note 2) 23,491 17,734
Debt expense, being amortized 2,392 2,526
Premium on reacquired debt, being amortized 15,866 17,360
Other 12,943 20,086
- ------------------------------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 70,655 82,970
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,315,496 $1,308,495
==============================================================================================================================
The accompanying notes are an integral part of these balance sheets.
14
BALANCE SHEETS
At December 31, 2000 and 1999
Gulf Power Company 2000 Annual Report
- ----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Current Liabilities:
Notes payable $ 43,000 $ 55,000
Accounts payable --
Affiliated 17,558 14,878
Other 38,153 22,581
Customer deposits 13,474 12,778
Taxes accrued --
Income taxes 3,864 4,889
Other 8,749 7,707
Interest accrued 8,324 9,255
Provision for rate refund 7,203 -
Vacation pay accrued 4,512 4,199
Regulatory clauses over recovery 6,848 3,125
Other 1,584 1,836
- ----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 153,269 136,248
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt (See accompanying statements) 365,993 367,449
- ----------------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes (Note 7) 155,074 162,776
Deferred credits related to income taxes (Note 7) 38,255 49,693
Accumulated deferred investment tax credits 25,792 27,712
Employee benefits provisions 34,507 31,735
Other 25,992 21,333
- ----------------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 279,620 293,249
- ----------------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes (See accompanying statements) 85,000 85,000
- ----------------------------------------------------------------------------------------------------------------------------
Preferred stock (See accompanying statements) 4,236 4,236
- ----------------------------------------------------------------------------------------------------------------------------
Common stockholder's equity (See accompanying statements) 427,378 422,313
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $1,315,496 $1,308,495
============================================================================================================================
The accompanying notes are an integral part of these balance sheets.
15
STATEMENTS OF CAPITALIZATION
At December 31, 2000 and 1999
Gulf Power Company 2000 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) (percent of total)
Long Term Debt:
First mortgage bonds --
Maturity Interest Rates
-------- -------------
July 1, 2003 6.125% $ 30,000 $ 30,000
November 1, 2006 6.50% 25,000 25,000
January 1, 2026 6.875% 30,000 30,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 85,000 85,000
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term notes payable --
7.50% due June 30, 2037 20,000 20,000
6.70% due June 30, 2038 48,073 49,926
7.05% due August 15, 2004 50,000 50,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term notes payable 118,073 119,926
- ------------------------------------------------------------------------------------------------------------------------------------
Other long-term debt --
Pollution control revenue bonds --
Collateralized:
5.25% to 6.30% due 2006-2026 108,700 108,700
Variable rates (3.70% at 1/1/00)
due 2024 - 20,000
Non-collateralized:
Variable rates (5.10% to 5.30% at 1/1/01)
due 2022-2024 60,930 40,930
- ------------------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 169,630 169,630
- ------------------------------------------------------------------------------------------------------------------------------------
Unamortized debt premium (discount), net (6,710) (7,107)
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $23.2 million) 365,993 367,449 41.5% 41.8%
- ------------------------------------------------------------------------------------------------------------------------------------
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 0.5% 0.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily
Redeemable Preferred Securities:
$25 liquidation value --
7.00% 45,000 45,000
7.63% 40,000 40,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $6.2 million) 85,000 85,000 9.6% 9.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stockholder's Equity:
Common stock, without par value --
Authorized and outstanding -
992,717 shares in 2000 and 1999 38,060 38,060
Paid-in capital 233,476 221,254
Premium on preferred stock 12 12
Retained earnings 155,830 162,987
- ------------------------------------------------------------------------------------------------------------------------------------
Total common stockholder's equity 427,378 422,313 48.4% 48.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $882,607 $878,998 100.0% 100.0%
====================================================================================================================================
The accompanying notes are an integral part of these statements.
16
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
For the Years Ended December 31, 2000, 1999, and 1998
Gulf Power Company 2000 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
Premium on
Common Paid-In Preferred Retained
Stock Capital Stock Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at January 1, 1998 $38,060 $218,438 $12 $172,208 $428,718
Net income after dividends on preferred stock - - - 56,521 56,521
Capital contributions from parent company - 522 - - 522
Cash dividends on common stock - - - (57,200) (57,200)
Other - - - (909) (909)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 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 - - - (61,300) (61,300)
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
====================================================================================================================================
The accompanying notes are an integral part of these statements.
17
NOTES TO FINANCIAL STATEMENTS
Gulf Power Company 2000 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Gulf Power Company is a wholly owned subsidiary of Southern Company, which is
the parent company of five integrated Southeast utilities, Southern Company
Services (SCS), Southern Communications Services (Southern LINC), Southern
Company Energy Solutions, Mirant Corporation (Mirant) - formerly Southern
Energy, Inc., -- Southern Nuclear Operating Company (Southern Nuclear), and
other direct and indirect subsidiaries. The integrated Southeast utilities --
Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah
Electric -- provide electric service in four states. Gulf Power Company provides
electric service to the northwest panhandle of Florida. Contracts among the
integrated Southeast utilities -- 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 (SEC). The system service company
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 Company Energy Solutions develops new business opportunities
related to energy products and services. Southern Nuclear provides services to
Southern Company's nuclear power plants. Mirant acquires, develops, builds,
owns, and operates power production and delivery facilities and provides a broad
range of energy-related services to utilities and industrial companies in
selected countries around the world. Mirant businesses include independent power
projects, integrated utilities, a distribution company, and energy trading and
marketing businesses outside the southeastern United States.
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.
Related-Party 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 $44
million, $43 million, and $40 million during 2000, 1999, and 1998, 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:
2000 1999
--------------------------
(in thousands)
Deferred income tax charges $ 15,963 $ 25,264
Deferred loss on reacquired
debt 15,866 17,360
Environmental remediation 7,638 5,745
Vacation pay 4,512 4,199
Regulatory clauses under (over)
recovery, net (4,736) 8,486
Accumulated provision for
rate refunds (7,203) -
Accumulated provision for
property damage (8,731) (5,528)
Deferred income tax credits (38,255) (49,693)
Other, net (1,074) (1,255)
- ------------------------------------------------------------------
Total $ (16,020) $ 4,578
==================================================================
18
NOTES (continued)
Gulf Power Company 2000 Annual Report
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.
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 3.8 percent in 2000,
1999, and 1998. 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.
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. The Company is included
in the consolidated federal income tax return of Southern Company.
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.
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
The Company's 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, 2000 $365,993 $364,697
At December 31, 1999 $367,449 $349,791
Capital trust preferred
securities:
At December 31, 2000 $85,000 $80,988
At December 31, 1999 $85,000 $69,092
- --------------------------------------------------------------
The fair values for long-term debt and preferred securities were based on
either closing market prices or closing prices of comparable instruments.
19
NOTES (continued)
Gulf Power Company 2000 Annual Report
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 $1.2 million and $1.8 million
at December 31, 2000 and 1999, 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, 2000 and 1999, the
accumulated provision for property damage was $8.7 million and $5.5 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 $3.5 million in 2000, $5.5
million in 1999, and $6.5 million in 1998 to the accumulated provision for
property damage. The Company charged $0.3 million, $1.6 million, and $4.2
million against the provision account in 2000, 1999, and 1998 respectively.
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
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 effects of these changes will be to increase the Company's annual
pension and postretirement benefits costs by approximately $1.2 million and $0.6
million, respectively. 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
---------------------------
2000 1999
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $141,967 $143,012
Service cost 4,282 4,490
Interest cost 10,394 9,440
Benefits paid (6,973) (6,862)
Actuarial gain and
employee transfers, net (689) (8,113)
- ---------------------------------------------------------------
Balance at end of year $148,981 $141,967
===============================================================
Plan Assets
---------------------------
2000 1999
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $241,485 $212,934
Actual return on plan assets 43,833 35,971
Benefits paid (6,973) (6,862)
Employee transfers 4,921 (558)
- ---------------------------------------------------------------
Balance at end of year $283,266 $241,485
===============================================================
The accrued pension costs recognized in the Balance Sheets were as follows:
2000 1999
- ---------------------------------------------------------------
(in thousands)
Funded status $ 134,286 $ 99,518
Unrecognized transition
obligation (3,602) (4,323)
Unrecognized prior
service cost 4,121 4,495
Unrecognized net gain (111,314) (81,956)
- ---------------------------------------------------------------
Prepaid asset recognized
in the Balance Sheets $ 23,491 $ 17,734
===============================================================
20
NOTES (continued)
Gulf Power Company 2000 Annual Report
Components of the pension plan's net periodic cost were as follows:
2000 1999 1998
- -------------------------------------------------------------------
Service cost $ 4,282 $ 4,490 $ 4,107
Interest cost 10,394 9,440 9,572
Expected return on
plan assets (17,504) (15,968) (14,827)
Recognized net gain (2,582) (1,579) (1,891)
Net amortization (347) (347) (347)
- -------------------------------------------------------------------
Net pension income $ (5,757) $ (3,964) $ (3,386)
===================================================================
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
---------------------------
2000 1999
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $48,010 $49,303
Service cost 896 1,087
Interest cost 3,515 3,261
Benefits paid (1,462) (1,177)
Actuarial gain and
employee transfers, net (934) (4,464)
- ---------------------------------------------------------------
Balance at end of year $50,025 $48,010
===============================================================
Plan Assets
---------------------------
2000 1999
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $11,196 $ 9,603
Actual return on plan assets 2,079 1,525
Employer contributions 1,575 1,245
Benefits paid (1,462) (1,177)
- ---------------------------------------------------------------
Balance at end of year $13,388 $11,196
===============================================================
The accrued postretirement costs recognized in the Balance Sheets were as
follows:
2000 1999
- ---------------------------------------------------------------
(in thousands)
Funded status $(36,638) $(36,814)
Unrecognized transition
obligation 4,368 4,723
Unrecognized prior
service cost 2,582 2,741
Unrecognized net loss 496 2,620
Fourth quarter contributions 316 300
- ---------------------------------------------------------------
Accrued liability recognized
in the Balance Sheets $(28,876) $(26,430)
===============================================================
Components of the postretirement plan's net periodic cost were
as follows:
2000 1999 1998
- ----------------------------------------------------------------
Service cost $ 896 $1,087 $ 946
Interest cost 3,515 3,261 3,123
Expected return on
plan assets (901) (794) (717)
Transition obligation 355 356 356
Prior service cost 159 159 119
Recognized net loss 13 264 128
- ----------------------------------------------------------------
Net postretirement cost $4,037 $4,333 $3,955
================================================================
The weighted average rates assumed in the actuarial calculations for
both the pension plan and postretirement benefits were:
2000 1999
- --------------------------------------------------------
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 7.3
percent for 2000, decreasing gradually to 5.5 percent through the year 2005, and
remaining at that level thereafter.
21
NOTES (continued)
Gulf Power Company 2000 Annual Report
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, 2000 as follows (in thousands):
1 Percent 1 Percent
Increase Decrease
- ---------------------------------------------------------------
Benefit obligation $3,187 $2,874
Service and interest costs $278 $247
===============================================================
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 2000, 1999, and 1998 were $2.2
million, $2.0 million, and $2.0 million, respectively.
Work Force Reduction Programs
The Company recorded costs related to work force reduction programs of $0.6
million in 2000, $0.2 million in 1999, and $2.8 million in 1998. The Company has
also incurred its pro rata share for the costs of affiliated companies'
programs. The costs related to these programs were $1.2 million for 2000, $0.6
million for 1999, and $0.2 million for 1998. The Company has expensed all costs
related to these work force reduction programs.
3. CONTINGENCIES AND REGULATORY
MATTERS
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 all 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 2000, 1999, and 1998, the Company
recorded ECRC revenues of $9.9 million, $11.5 million, and $8.0 million,
respectively.
At December 31, 2000, the Company's liability for the estimated costs of
environmental remediation projects for known sites was $7.6 million. These
estimated costs are expected to be expended from 2001 through 2006. 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 $6.4 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
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 Gulf Power, 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 equipment when performing maintenance
and construction at coal burning plants constructed or under construction prior
to 1978. The Company believes that its integrated utilities 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
22
NOTES (continued)
Gulf Power Company 2000 Annual Report
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 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 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 is currently planning to seek
additional rate relief to recover costs related to the Smith Unit 3
combined cycle facility scheduled to be placed in-service in June of 2002.
For calendar year 2000, the Company's retail revenue range for sharing was
$352 million to $368 million to be shared between the Company and its retail
customers on the one-third/two-thirds basis. Actual retail revenues in 2000 were
$362.4 million and the Company recorded revenues subject to refund of $6.9
million. The estimated refund with interest of $0.3 million was reflected in
customer billings in February 2001. In addition to the refund the Company
amortized $1 million of the regulatory assets related to the corporate office.
For calendar year 2001, the Company's retail revenue range for sharing is $358
million to $374 million. 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.
4. FINANCING AND COMMITMENTS
Construction Program
The Company is engaged in a continuous construction program, the cost of which
is currently estimated to total $279 million in 2001, $96 million in 2002, and
$76 million in 2003. 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, 2000, significant purchase commitments were outstanding in
connection with the construction program. The Company has budgeted $199.2
million for the years 2001 and 2002 for the estimated 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.
Bank Credit Arrangements
At December 31, 2000, the Company had $61.5 million of lines of credit with
banks subject to renewal June 1 of each year, of which $53.5 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. In addition, the Company
has bid-loan facilities with seven major money center banks that total $130
million, of which $35 million was committed at December 31, 2000.
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.
23
NOTES (continued)
Gulf Power Company 2000 Annual Report
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, 2000 were as follows:
Year Fuel
--------- ----------------
(in millions)
2001 $139
2002 91
2003 90
2004 92
2005 93
2006-2024 473
-------------------------------------------------------------
Total commitments $978
=============================================================
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 renew the lease. In 1997, three additional lease
agreements for 120 cars each were entered into for three years, with a monthly
renewal option for up to an additional nine months.
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 $2.1 million in 2000 and $2.8 million in 1999.
The annual amounts for 2001 through 2005 are expected to be $1.9 million, $1.9
million, $1.9 million, $2.0 million, and $2.0 million, respectively, and after
2005 are expected to total $13.8 million.
5. JOINT OWNERSHIP AGREEMENTS
The Company and Mississippi Power jointly own Plant Daniel, a steam-electric
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 the plant.
The Company and Georgia Power jointly own Plant Scherer Unit No. 3. Plant
Scherer is a steam-electric 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, 2000, the Company's percentage ownership and its investment
in these jointly owned facilities were as follows:
Plant Scherer Plant
Unit No. 3 Daniel
(coal-fired) (coal-fired)
-----------------------------
(in thousands)
Plant In Service $185,778(1) $232,074
Accumulated Depreciation $70,207 $118,504
Construction Work in Progress $252 $2,006
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: 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 $20.3 million in 2000, $19.8 million in 1999, and $22.5 million in 1998.
24
NOTES (continued)
Gulf Power Company 2000 Annual Report
Capacity revenues increased slightly in 2000 due to the recovery of higher
operating expenses experienced during the year.
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, 209
megawatts of net dependable capacity were sold by the Company during 2000. Sales
will increase slightly to 210 megawatts per year in 2001 and remain close to
that level, unless reduced by FP&L, FPC, and JEA for the periods after 2001 with
a minimum of three years notice, until the expiration of the contracts in 2010.
7. INCOME TAXES
At December 31, 2000, the tax-related regulatory assets to be recovered from
customers were $16.0 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, 2000,
the tax-related regulatory liabilities to be credited to customers were $38.3
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:
2000 1999 1998
------------------------------------
(in thousands)
Total provision for income taxes:
Federal--
Current $37,250 $33,973 $31,746
Deferred (11,159) (6,107) (4,467)
- --------------------------------------------------------------------
26,091 27,866 27,279
- --------------------------------------------------------------------
State--
Current 5,796 5,267 5,137
Deferred (1,357) (502) (217)
- --------------------------------------------------------------------
4,439 4,765 4,920
- --------------------------------------------------------------------
Total $30,530 $32,631 $32,199
====================================================================
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:
2000 1999
---------------------------
(in thousands)
Deferred tax liabilities:
Accelerated depreciation $172,646 $168,662
Other 14,262 24,272
- ---------------------------------------------------------------------
Total 186,908 192,934
- ---------------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 8,703 9,293
Postretirement benefits 9,205 8,456
Other 14,742 12,526
- ---------------------------------------------------------------------
Total 32,650 30,275
- ---------------------------------------------------------------------
Net deferred tax liabilities 154,258 162,659
Less current portion, net (816) (117)
- ---------------------------------------------------------------------
Accumulated deferred income
taxes in the Balance Sheets $155,074 $162,776
=====================================================================
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 $1.9 million in 2000, 1999, and 1998. At December 31,
2000, 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:
2000 1999 1998
----------------------------
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 (1) - (2)
- ----------------------------------------------------------------
Effective income tax rate 37% 38% 36%
================================================================
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.
25
NOTES (continued)
Gulf Power Company 2000 Annual Report
8. COMPANY OBLIGATED MANDATORILY
REDEEMABLE 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.
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 and Trust II. Trust I and Trust II are subsidiaries of the
Company, and accordingly are consolidated in the Company's financial statements.
9. SECURITIES DUE WITHIN ONE YEAR
At December 31, 2000, the Company had an improvement fund requirement of
$850,000. 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.
10. COMMON STOCK 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, 2000, retained earnings of $127 million were
restricted against the payment of cash dividends on common stock under the terms
of the mortgage indenture.
11. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 2000 and 1999 are as follows:
Net Income
After Dividends
Operating Operating on Preferred
Quarter Ended Revenues Income Stock
- --------------------------------------------------------------------
(in thousands)
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
March 1999 $134,506 $15,665 $ 4,799
June 1999 166,815 29,253 13,226
September 1999 218,264 54,429 28,582
December 1989 154,514 19,815 7,060
- --------------------------------------------------------------------
The Company's business is influenced by seasonal weather conditions and the
timing of rate changes, among other factors.
26
SELECTED FINANCIAL AND OPERATING DATA 1996-2000
Gulf Power Company 2000 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands) $714,319 $674,099 $650,518 $625,856 $634,365
Net Income after Dividends
on Preferred Stock (in thousands) $51,843 $53,667 $56,521 $57,610 $57,845
Cash Dividends
on Common Stock (in thousands) $59,000 $61,300 $57,200 $64,600 $58,300
Return on Average Common Equity (percent) 12.20 12.63 13.20 13.33 13.27
Total Assets (in thousands) $1,315,496 $1,308,495 $1,267,901 $1,265,612 $1,308,366
Gross Property Additions (in thousands) $95,807 $69,798 $69,731 $54,289 $61,386
- -----------------------------------------------------------------------------------------------------------------------------------
Capitalization (in thousands):
Common stock equity $427,378 $422,313 $427,652 $428,718 $435,758
Preferred stock 4,236 4,236 4,236 13,691 65,102
Company obligated mandatorily
redeemable preferred securities 85,000 85,000 85,000 40,000 -
Long-term debt 365,993 367,449 317,341 296,993 331,880
- -----------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) $882,607 $878,998 $834,229 $779,402 $832,740
===================================================================================================================================
Capitalization Ratios (percent):
Common stock equity 48.4 48.0 51.3 55.0 52.3
Preferred stock 0.5 0.5 0.5 1.8 7.8
Company obligated mandatorily
redeemable preferred securities 9.6 9.7 10.2 5.1 -
Long-term debt 41.5 41.8 38.0 38.1 39.9
- -----------------------------------------------------------------------------------------------------------------------------------
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+ AA- AA- AA- A+
Fitch AA-* AA- AA- AA- AA-
Preferred Stock -
Moody's a2 a2 a2 a2 a2
Standard and Poor's BBB+ A- A A A
Fitch A* A A+ A+ A+
Unsecured Long-Term Debt -
Moody's A2 A2 A2 A2 -
Standard and Poor's A A A A -
Fitch A+* A+ A+ A+ -
===================================================================================================================================
Customers (year-end):
Residential 321,731 315,240 307,077 300,257 291,196
Commercial 47,666 47,728 46,370 44,589 43,196
Industrial 280 267 257 267 278
Other 442 316 268 264 162
- -----------------------------------------------------------------------------------------------------------------------------------
Total 370,119 363,551 353,972 345,377 334,832
===================================================================================================================================
Employees (year-end): 1,327 1,339 1,328 1,328 1,384
- -----------------------------------------------------------------------------------------------------------------------------------
*Effective 1/22/01 the Fitch Security Ratings for First Mortgage Bonds,
Preferred Stock, and Unsecured Long-Term Debt are A+, A-, and A respectively.
27
SELECTED FINANCIAL AND OPERATING DATA 1996-2000 (continued)
Gulf Power Company 2000 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands):
Residential $ 308,728 $277,311 $ 276,208 $ 277,609 $ 285,498
Commercial 181,584 165,871 160,960 164,435 164,181
Industrial 76,539 67,404 69,850 77,492 78,994
Other (4,689) 2,174 2,100 2,083 2,056
- ------------------------------------------------------------------------------------------------------------------------------
Total retail 562,162 512,760 509,118 521,619 530,729
Sales for resale - non-affiliates 66,890 62,354 61,893 63,697 63,201
Sales for resale - affiliates 66,995 66,110 42,642 16,760 17,762
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 696,047 641,224 613,653 602,076 611,692
Other revenues 18,272 32,875 36,865 23,780 22,673
- ------------------------------------------------------------------------------------------------------------------------------
Total $714,319 $674,099 $650,518 $625,856 $634,365
==============================================================================================================================
Kilowatt-Hour Sales (in thousands):
Residential 4,790,038 4,471,118 4,437,558 4,119,492 4,159,924
Commercial 3,379,449 3,222,532 3,111,933 2,897,887 2,808,634
Industrial 1,924,749 1,846,237 1,833,575 1,903,050 1,808,086
Other 18,730 19,296 18,952 18,101 17,815
- ------------------------------------------------------------------------------------------------------------------------------
Total retail 0,112,966 9,559,183 9,402,018 8,938,530 8,794,459
Sales for resale - non-affiliates 1,705,486 1,561,972 1,341,990 1,531,179 1,534,097
Sales for resale - affiliates 1,916,526 2,511,983 1,758,150 848,135 709,647
- ------------------------------------------------------------------------------------------------------------------------------
Total 3,734,978 13,633,138 12,502,158 11,317,844 11,038,203
==============================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 6.45 6.20 6.22 6.74 6.86
Commercial 5.37 5.15 5.17 5.67 5.85
Industrial 3.98 3.65 3.81 4.07 4.37
Total retail 5.56 5.36 5.41 5.84 6.03
Sales for resale 3.70 3.15 3.37 3.38 3.61
Total sales 5.07 4.70 4.91 5.32 5.54
Residential Average Annual
Kilowatt-Hour Use Per Customer 14,992 14,318 14,577 13,894 14,457
Residential Average Annual
Revenue Per Customer $966.26 $888.01 $907.35 $936.30 $992.17
Plant Nameplate Capacity
Ratings (year-end) (megawatts) 2,188 2,188 2,188 2,174 2,174
Maximum Peak-Hour Demand (megawatts):
Winter 2,154 2,085 2,040 1,844 2,136
Summer 2,285 2,161 2,146 2,032 1,961
Annual Load Factor (percent) 55.4 55.2 55.3 55.5 51.4
Plant Availability Fossil-Steam (percent): 85.2 87.2 87.6 91.0 91.8
- ------------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 87.8 89.8 89.2 87.1 87.8
Oil and gas 1.6 2.5 2.0 0.4 0.5
Purchased power -
From non-affiliates 7.6 5.9 5.5 3.5 2.7
From affiliates 3.0 1.8 3.3 9.0 9.0
- ------------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0 100.0
==============================================================================================================================
28