-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M7Zs0gwhlfTx/3HesziXlx8iXNgxJ5DWE62fKXDyhwoWbqX35IqxNE9pZjVGXTWI 552Nex3DuzqAsDrja3KVDw== 0000044545-00-000003.txt : 20000307 0000044545-00-000003.hdr.sgml : 20000307 ACCESSION NUMBER: 0000044545-00-000003 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000216 ITEM INFORMATION: FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF POWER CO CENTRAL INDEX KEY: 0000044545 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590276810 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-02429 FILM NUMBER: 559738 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 BUSINESS PHONE: 8504446111 MAIL ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) February 16, 2000 ----------------------------- GULF POWER COMPANY - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Maine 0-2429 59-0276810 - ------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) One Energy Place, Pensacola, Florida 32520 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (850) 444-6111 -------------------------- N/A - ------------------------------------------------------------------------------ (Former name or former address, if changed since last report.) Item 7. Financial Statements and Exhibits. (c) Exhibits. 23 - Consent of Arthur Andersen LLP. 27 - Financial Data Schedule. 99 - Audited Financial Statements of Gulf Power Company as of December 31, 1999. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GULF POWER COMPANY By /s/Wayne Boston Wayne Boston Assistant Secretary Date: March 2, 2000 EX-23 2 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 Arthur Andersen LLP Suite 2500 133 Peachtree Street, NE Atlanta, GA 30303-1816 404-658-1776 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 16, 2000 on the financial statements of Gulf Power Company, included in this Form 8-K, into Gulf Power Company's previously filed Registration Statement File Nos. 33-50165 and 333-42033. /s/Arthur Andersen LLP Atlanta, Georgia February 28, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the financial statements filed as Exhibit 99 and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 12-MOS Dec-31-1999 Dec-31-1999 PER-BOOK 1,065,858 1,481 158,186 82,970 0 1,308,495 38,060 221,266 162,987 422,313 85,000 4,236 247,523 55,000 119,926 0 0 0 0 0 374,497 1,308,495 674,099 32,631 554,937 554,937 119,162 414 86,945 33,061 53,884 217 53,667 61,300 0 106,535 0 0
EX-99 4 AUDITED FINANCIAL STATEMENTS MANAGEMENT'S REPORT Gulf Power Company 1999 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 generally accepted accounting principles appropriate in the circumstances 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 books and 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 directors who are not employees, 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 generally accepted accounting principles. /s/Travis J. Bowden Travis J. Bowden President and Chief Executive Officer /s/Arlan E. Scarbrough Arlan E. Scarbrough Chief Financial Officer February 16, 2000 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, 1999 and 1998, 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, 1999. 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 11-26) referred to above present fairly, in all material respects, the financial position of Gulf Power Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/Arthur Andersen LLP Atlanta, Georgia February 16, 2000 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Gulf Power Company 1999 Annual Report RESULTS OF OPERATIONS Earnings Gulf Power Company's 1999 net income after dividends on preferred stock was $53.7 million, a decrease of $2.8 million from the previous year. In 1998, earnings were $56.5 million, down $1.1 million when compared to 1997. The decrease in earnings in 1999, as well as 1998, was primarily a result of higher expenses than in the prior year. Revenues Operating revenues increased in 1999 and 1998 when compared to 1998 and 1997, respectively. The following table summarizes the factors impacting operating revenues for the past three years: Increase (Decrease) From Prior Year --------------------------------------- 1999 1998 1997 --------------------------------------- (in thousands) Retail -- Growth and price change $10,348 $15,021 $ 4,005 Weather (7,879) 6,656 (5,277) Regulatory cost recovery and other 1,173 (34,179) (7,837) - -------------------------------------------------------------------- Total retail 3,642 (12,502) (9,109) - -------------------------------------------------------------------- Sales for resale-- Non-affiliates 461 (1,804) 496 Affiliates 23,468 25,882 (1,002) - -------------------------------------------------------------------- Total sales for resale 23,929 24,078 (506) Other operating revenues (3,990) 13,086 1,106 - -------------------------------------------------------------------- Total operating revenues $23,581 $24,662 $(8,509) ==================================================================== Percent change 3.6% 3.9% (1.3)% - -------------------------------------------------------------------- Retail revenues of $512.8 million in 1999 increased $3.6 million, or 0.7 percent, from the prior year due primarily to an increase in the number of retail customers served by the Company. Retail revenues for 1998 decreased $12.5 million, or 2.4 percent, when compared to 1997 due primarily to the recovery of lower fuel costs. The price per ton of coal, which is the Company's primary fuel source, was lower in 1998 as the costs related to prior year coal contract renegotiations were fully amortized and a major coal contract price was reduced. See Note 5 to the financial statements under "Fuel Committments" for further information. 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. The 1998 decrease in regulatory cost recovery and other retail revenues over 1997 is primarily attributable to decreased fuel costs as mentioned previously. Regulatory cost recovery and other includes 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 $128.5 million in 1999, an increase of $24 million, or 23 percent, over 1998 primarily due to additional energy sales to affiliated companies, which is discussed below. 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: 1999 1998 1997 ---------------------------------------- (in thousands) Capacity $19,792 $22,503 $24,899 Energy 20,251 14,556 18,160 - ------------------------------------------------------------- Total $40,043 $37,059 $43,059 ============================================================= Declining capacity revenues are due primarily to the decline in net plant investment related to these sales. In addition, the decline in 1999 reflects 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 1999 and increased in 1998 due primarily to adjustments to reflect differences between recoverable costs and 3 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report 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. Energy Sales Kilowatt-hour sales for 1999 and the percent changes by year were as follows: KWH Percent Change ------------- ------------------------------- 1999 1999 1998 1997 ------------- ------------------------------- (millions) Residential 4,471 0.8% 7.7% (1.0)% Commercial 3,223 3.6 7.4 3.2 Industrial 1,846 0.7 (3.7) 5.3 Other 19 0.0 4.7 1.6 ------------- Total retail 9,559 1.7 5.2 1.6 Sales for resale Non-affiliates 1,562 16.4 (12.4) (0.2) Affiliates 2,512 42.9 107.3 19.5 ------------- Total 13,633 9.0 10.5 2.5 ================================================================== In 1999, total retail energy sales increased due to increases from 1998 in the number of residential, commercial and industrial customers. Total energy sales increased in 1998 when compared to 1997 due to higher temperatures when compared to the milder-than-normal temperatures in 1997 and due to increases in the number of residential and commercial customers. The decrease in industrial energy sales in 1998 when compared to 1997 primarily reflects the shut down of a major industrial customer's plant site and temporary production delays of other industrial 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 16.4 percent in 1999 when compared 1998 and a decrease of 12.4 percent in 1998 when compared to 1997 are 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 as mentioned previously. Expenses Total operating expenses in 1999 increased $26.8 million, or 5.1 percent, over the amount recorded in 1998 due primarily to higher fuel and purchased power expenses, offset by lower other operation expenses. In 1998, total operating expenses increased $26.5 million, or 5.3 percent, from 1997. The increase was due primarily to higher fuel, purchased power, and maintenance expenses offset by lower other operation expenses. Fuel expenses in 1999, when compared to 1998, increased $11.5 million, or 5.9 percent. In 1998, fuel expenses increased $16.6 million, or 9.2 percent, when compared to 1997. The increases were the result of increased generation resulting from a higher demand for energy, while average fuel costs decreased as noted below. Purchased power expenses increased in 1999 by $13.2 million, or 30.2 percent, over 1998 and purchased power expenses for 1998 increased over 1997 by $6.9 million, or 18.8 percent, due to a higher demand for energy in both years. The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated were as follows: 1999 1998 1997 ------------------------------- Total generation (millions of kilowatt-hours) 13,095 11,986 10,435 Sources of generation (percent) Coal 97.4 98.0 99.6 Oil and gas 2.6 2.0 0.4 Average cost of fuel per net kilowatt-hour generated (cents)-- 1.60 1.69 1.99 - --------------------------------------------------------------------- Other operation expenses decreased $4.3 million, or 3.6 percent, in 1999 from the 1998 level and $7.3 million, or 5.7 percent, in 1998 from the 1997 level due to a decrease in the amortization costs of prior year payments related to renegotiations of coal supply contracts. The 1998 decrease was partially offset by higher implementation costs of a new customer accounting system, increased costs related to the Year 2000 program and an increase in the accrual to the accumulated provision for property damage. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report Depreciation and amortization expense increased $5.5 million, or 9.2 percent, in 1999 when compared to 1998 due primarily to a reduction in the amortization of gains from the 1998 sale of emission allowances. Maintenance expenses in 1998 increased by $9.3 million, or 19.4 percent, over 1997 due primarily to scheduled maintenance at Plant Crist and Plant Smith and increased transmission and distribution maintenance. Interest on long-term debt in 1999 increased $1.7 million, or 8.4 percent, when compared to 1998 due primarily to two first mortgage bonds maturing in 1998 and being replaced by senior notes at a slightly higher interest rate, and the issuance of $50 million of senior notes in August 1999. In 1998, interest on long-term debt decreased $2.0 million, or 9.1 percent, from 1997 mostly due to a decrease in interest expense on pollution control bonds refinanced in 1997 and two long-term bank notes that matured in 1998. This decrease was partially offset by an increase in interest due to the replacement in 1998 of the two maturing first mortgage bonds with senior notes at a slightly higher interest rate. Effects of Inflation The Company is subject to rate regulation and income tax laws that are based on the recovery of historical costs. Therefore, inflation creates an economic loss because the Company is recovering its cost of investments in dollars that have less purchasing power. While the inflation rate has been relatively low in recent years, it continues to have an adverse effect on the Company because of the large investment in utility plant with long economic lives. Conventional accounting for historical cost does not recognize this economic loss nor the partially offsetting gain that arises through financing facilities with fixed-money obligations, such as long-term debt and preferred securities. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed. Future Earnings Potential 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 ranging from energy sales growth to a potentially less regulated and more competitive environment. Gulf Power 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 serious 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 would receive two-thirds of any revenue within the ranges and the Company would retain one-third. For calendar year 2000, the Company's retail base rate revenues in excess of $352 million up to $368 million will be shared between the Company and its retail customers on the one-third/two-thirds basis. Retail base rate revenues above $368 million for calendar year 2000 will be refunded to the Company's customers. These set ranges increase gradually until the expiration of the plan. The Sharing Plan will be in place until the earlier of the in-service date of Smith Unit 3 or December 31, 2002. The parties could not agree on the appropriate Return on Equity (ROE). Consequently, the Company 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. Both the stipulation and the ROE request were approved by the Commission on October 5, 1999, with an effective date of November 4, 1999. The electric utility industry in the United States is currently undergoing a period of dramatic change 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 Company is positioning the business to meet the challenge of this major change in the traditional practice of selling electricity. The Energy Act allows independent power producers (IPPs) to access the Company's 5 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report transmission network in order to sell electricity to other utilities. This enhances the incentive for IPPs to build cogeneration plants for industrial and commercial customers and sell energy generation to other utilities. The Company has and will continue to evaluate opportunities to partner and participate in profitable cogeneration projects. In 1998, partnering with one of the Company's largest industrial customers, construction was completed on 15 megawatts of Company-owned cogeneration on the customer's plant site. 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. 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. As these initiatives materialize, the structure of the utility industry continues to change. 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 or are being discussed in Florida, none have been enacted to date. Enactment would require numerous issues to be resolved, including significant ones relating to transmission pricing and recovery of any stranded investments. The inability of the 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 operation. The Company is attempting to minimize or reduce its cost exposure. 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, the Company's 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 ends in September of 2000 and the company is currently reviewing its options. 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 2000 Demand Side Management Plan to the FPSC on December 29, 1999. The plan describes the Company's proposed programs it will employ to reach the numeric goals. The plan relies heavily on innovative pricing and energy efficient construction. The FPSC is expected to issue its final order on the Company's 2000 Demand Side Management Plan in mid-April 2000. On December 20, 1999, the Federal Energy Regulatory Commission (FERC) issued its final rule on Regional Transmission Organizations (RTOs). The order encourages utilities owning transmission systems to form RTOs on a voluntary basis. To facilitate the development of RTOs, the FERC will convene regional conferences for utilities, customers, and other members of the public to discuss the formation of RTOs. In addition to participating in the regional conferences, utilities owning transmission systems, including Southern Company, are required to make a filing by October 15, 2000. The filing must contain either a proposal for RTO participation or a description of the efforts made to participate in an RTO, the reasons for non-participation, any obstacles to participation, and any 6 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report plans for further work toward participation. The RTOs that are proposed in the filings should be operational by December 15, 2001. Southern Company is evaluating this issue and formulating its response. The outcome of this matter cannot now be determined. 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 Financial Accounting Standards Board (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, 1999, exposure from these activities was not material to the Company's financial position, results of operations, or cash flows. Also, based on the Company's overall interest rate exposure at December 31, 1999, a near-term 100 basis point change in interest rates would not materially affect the Company's financial statements. New Accounting Standards The FASB has issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which must be adopted by January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments - including certain derivative instruments embedded in other contracts - and for hedging activities. Adoption of this statement is not expected to have a material impact on the Company's financial statements. Year 2000 Challenge The work undertaken by the Company to ensure that all critical computer systems and other date sensitive devices would function correctly in the Year 2000 was successful. There were no material incidents reported and no disruption of electric service within the service area of the Company. There were no reports of significant events regarding third parties that impacted revenues or expenses. The Company's original projected total costs for Year 2000 readiness were approximately $5 million. Final projected costs were also $5 million with no material costs remaining to be spent in 2000. From its inception through December 31, 1999, the Year 2000 program costs, recognized primarily as expense, amounted to $5 million, of which $2 million was recorded in 1999. FINANCIAL CONDITION Overview The Company's financial condition continues to be very solid. During 1999, gross property additions were $69.8 million. Funds for the property additions were provided by operating activities. See the Statements of Cash Flows for further details. Financing Activities In 1999, the Company sold $50 million of senior notes and long-term bank notes totaling $27 million were retired. The remaining proceeds from this issuance were used to reduce short-term borrowing requirements. See the Statements of Cash Flows for further details. Composite financing rates for the years 1997 through 1999 as of year end were as follows: 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report 1999 1998 1997 ----------------------------- Composite interest rate on long-term debt 6.0% 6.1% 5.9% Composite rate on trust preferred securities 7.3% 7.3% 7.6% Composite preferred stock dividend rate 5.1% 5.1% 6.1% - ----------------------------------------------------------------- The composite interest rate on long-term debt decreased in 1999 primarily due to lower 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 $428 million for the three years beginning in 2000 ($106 million in 2000, $232 million in 2001, and $90 million in 2002). These amounts include $198.8 million for the years 2000 through 2002 for the estimated cost of a 574 megawatt combined cycle gas 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 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: 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 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 are required in two phases. Phase I compliance began in 1995 and initially affected 28 generating units of Southern Company. As a result of Southern Company's compliance strategy, an additional 22 generating units were brought into compliance with Phase I requirements. Phase II compliance is required in 2000, and all fossil-fired generating plants will be affected. 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 compliance totaled approximately $300 million for Southern Company, including approximately $42 million for Gulf Power. For Phase II sulfur dioxide compliance, Southern Company currently uses emission allowances and increased fuel switching. Also, equipment to control nitrogen oxide emissions was installed on additional system fossil-fired units as required to meet Phase II limits and ozone non-attainment requirements. Compliance for Phase II and initial ozone non-attainment requirements increased total estimated construction expenditures by approximately $105 million. Phase II compliance is not expected to have a material impact on Gulf Power. Following adoption of legislation in April of 1992 allowing electric utilities in Florida to seek FPSC approval of their Clean Air Act Compliance Plans, Gulf Power filed its petition for approval. The FPSC approved the Company's plan for Phase I compliance, deferring until a later date approval of its Phase II Plan. In 1993, the Florida Legislature adopted legislation that allows a utility to petition the FPSC for recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. The legislation is discussed in Note 3 to the financial statements under "Environmental Cost Recovery." Substantially all of the costs for the Clean Air Act and other new environmental legislation discussed below are expected to be recovered through the Environmental Cost Recovery Clause. In July 1997, the Environmental Protection Agency (EPA) revised the national ambient air quality standards for ozone and particulate matter. This revision makes the standards significantly more stringent. In September 1998, the EPA issued the final regional nitrogen oxide reduction rule to the states for implementation. The final rule affects 22 states, including Alabama and Georgia. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report See Note 6 to the financial statements under "Joint Ownership Agreements" related to the Company's ownership interest in Georgia Power's Plant Scherer Unit No. 3. The EPA's July 1997 standards and the September 1998 rule are being challenged in the courts by several states and industry groups. Implementation of the final state rules for these three initiatives could require substantial further reductions in nitrogen oxide and sulfur dioxide 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. The EPA and state environmental regulatory agencies are 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 6 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. 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. Gulf Power 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. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1999 Annual Report Sources of Capital At December 31, 1999, the Company had approximately $15.8 million of cash and cash equivalents and $41.5 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 5 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. In this regard, the Company sought and obtained stockholder approval in 1997 to amend its corporate charter eliminating restrictions on the amounts of unsecured indebtedness it may incur. If the Company chooses to issue first mortgage bonds or preferred stock, it 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 1999 Annual Report contains forward-looking and historical information. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking information. Accordingly, there can be no assurance that such indicated results will be realized. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry; the extent and timing of the entry of additional competition in the Company's markets; potential business strategies -- including acquisitions or dispositions of assets or internal restructuring -- that may be pursued by the company; state and federal rate regulation; changes in or application of environmental and other laws and regulations to which the company is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; and other factors discussed in the reports -- including Form 10-K -- filed from time to time by the Company with the Securities and Exchange Commission. 10
STATEMENTS OF INCOME For the Years Ended December 31, 1999, 1998, and 1997 Gulf Power Company 1999 Annual Report - ----------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues: Retail sales $512,760 $509,118 $521,619 Sales for resale -- Non-affiliates 62,354 61,893 63,697 Affiliates 66,110 42,642 16,760 Other revenues 32,875 36,865 23,780 - ----------------------------------------------------------------------------------------------------------- Total operating revenues 674,099 650,518 625,856 - ----------------------------------------------------------------------------------------------------------- Operating Expenses: Operation -- Fuel 209,031 197,462 180,843 Purchased power -- Non-affiliates 46,332 29,369 11,938 Affiliates 10,703 14,445 24,955 Other 114,670 119,011 126,266 Maintenance 57,830 57,286 47,988 Depreciation and amortization 64,589 59,129 57,874 Taxes other than income taxes 51,782 51,462 51,775 - ----------------------------------------------------------------------------------------------------------- Total operating expenses 554,937 528,164 501,639 - ----------------------------------------------------------------------------------------------------------- Operating Income 119,162 122,354 124,217 Other Income (Expense): Interest income 1,771 931 1,203 Other, net (1,357) (2,339) (992) - ----------------------------------------------------------------------------------------------------------- Earnings Before Interest and Income Taxes 119,576 120,946 124,428 - ----------------------------------------------------------------------------------------------------------- Interest Charges and Other: Interest on long-term debt 21,375 19,718 21,699 Interest on notes payable 2,371 1,190 891 Amortization of debt discount, premium and expense, net 1,989 2,100 2,281 Other interest charges 1,126 2,548 2,076 Distributions on preferred securities of subsidiary 6,200 6,034 2,804 - ----------------------------------------------------------------------------------------------------------- Total interest charges and other, net 33,061 31,590 29,751 - ----------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes 86,515 89,356 94,677 Income taxes (Note 8) 32,631 32,199 33,450 - ----------------------------------------------------------------------------------------------------------- Net Income 53,884 57,157 61,227 Dividends on Preferred Stock 217 636 3,617 - ----------------------------------------------------------------------------------------------------------- Net Income After Dividends on Preferred Stock $ 53,667 $ 56,521 $ 57,610 =========================================================================================================== The accompanying notes are an integral part of these statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998, and 1997 Gulf Power Company 1999 Annual Report - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 53,884 $ 57,157 $ 61,227 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 68,721 69,633 72,860 Deferred income taxes and investment tax credits, net (6,609) (4,684) (7,047) Other, net 3,735 3,463 4,831 Changes in certain current assets and liabilities -- Receivables, net (10,484) 11,308 (692) Fossil fuel stock (5,656) (4,917) 9,056 Materials and supplies (2,063) 609 1,618 Accounts payable (2,023) 823 1,398 Other 7,030 (18,471) 22,296 - -------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 106,535 114,921 165,547 - -------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (69,798) (69,731) (54,289) Other (8,856) 5,990 509 - -------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (78,654) (63,741) (53,780) - -------------------------------------------------------------------------------------------------------------------------- Financing Activities: Increase (decrease) in notes payable, net 23,500 (15,500) 22,000 Proceeds -- Other long-term debt 50,000 50,000 60,930 Preferred securities - 45,000 40,000 Capital contributions from parent company 2,294 522 - Retirements -- First mortgage bonds - (45,000) (25,000) Other long-term debt (27,074) (8,326) (56,902) Preferred stock - (9,455) (75,911) Payment of preferred stock dividends (271) (792) (5,370) Payment of common stock dividends (61,300) (67,200) (64,600) Other (246) (4,167) (3,014) - -------------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (13,097) (54,918) (107,867) - -------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents 14,784 (3,738) 3,900 Cash and Cash Equivalents at Beginning of Period 969 4,707 807 - -------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 15,753 $ 969 $ 4,707 ========================================================================================================================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $27,670 $28,044 $26,558 Income taxes (net of refunds) 29,462 38,782 36,010 - -------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements.
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BALANCE SHEETS At December 31, 1999 and 1998 Gulf Power Company 1999 Annual Report - --------------------------------------------------------------------------------------------------------------------- Assets 1999 1998 - --------------------------------------------------------------------------------------------------------------------- (in thousands) Current Assets: Cash and cash equivalents $ 15,753 $ 969 Receivables -- Customer accounts receivable 55,108 49,067 Other accounts and notes receivable 4,325 3,514 Affiliated companies 7,104 3,442 Accumulated provision for uncollectible accounts (1,026) (996) Fossil fuel stock, at average cost 29,869 24,213 Materials and supplies, at average cost (Note 1) 30,088 28,025 Regulatory clauses under recovery (Note 1) 11,611 9,737 Other 5,354 9,725 - --------------------------------------------------------------------------------------------------------------------- Total current assets 158,186 127,696 - --------------------------------------------------------------------------------------------------------------------- Property, Plant, and Equipment: In service (Notes 1 and 6) 1,853,664 1,809,901 Less accumulated provision for depreciation 821,970 784,111 - --------------------------------------------------------------------------------------------------------------------- 1,031,694 1,025,790 Construction work in progress 34,164 34,863 - --------------------------------------------------------------------------------------------------------------------- Total property, plant, and equipment 1,065,858 1,060,653 - --------------------------------------------------------------------------------------------------------------------- Other Property and Investments 1,481 588 - --------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes (Note 8) 25,264 25,308 Prepaid pension costs (Note 2) 17,734 13,770 Debt expense, being amortized 2,526 2,565 Premium on reacquired debt, being amortized 17,360 18,883 Other 20,086 18,438 - --------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 82,970 78,964 - --------------------------------------------------------------------------------------------------------------------- Total Assets $1,308,495 $1,267,901 ===================================================================================================================== The accompanying notes are an integral part of these balance sheets.
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BALANCE SHEETS At December 31, 1999 and 1998 Gulf Power Company 1999 Annual Report - ---------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- (in thousands) Current Liabilities: Securities due within one year (Note 10) $ - $ 27,000 Notes payable 55,000 31,500 Accounts payable -- Affiliated 14,878 19,756 Other 22,581 23,697 Customer deposits 12,778 12,560 Taxes accrued -- Income taxes 4,889 - Other 7,707 7,432 Interest accrued 9,255 5,184 Vacation pay accrued 4,199 4,035 Other 4,961 10,051 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 136,248 141,215 - ---------------------------------------------------------------------------------------------------------------------- Long-term debt (See accompanying statements) 367,449 317,341 - ---------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes (Note 8) 162,776 166,118 Deferred credits related to income taxes (Note 8) 49,693 52,465 Accumulated deferred investment tax credits 27,712 29,632 Employee benefits provisions 31,735 28,594 Other 21,333 15,648 - ---------------------------------------------------------------------------------------------------------------------- Total deferred credits and other liabilities 293,249 292,457 - ---------------------------------------------------------------------------------------------------------------------- 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) 422,313 427,652 - ---------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $1,308,495 $1,267,901 ====================================================================================================================== The accompanying notes are an integral part of these balance sheets.
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STATEMENTS OF CAPITALIZATION At December 31, 1999 and 1998 Gulf Power Company 1999 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ (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 -- 7.05% due August 15, 2004 50,000 - 7.50% due June 30, 2037 20,000 20,000 6.70% due June 30, 2038 49,926 50,000 Adjustable rate (5.72% at 1/1/99) due November 20, 1999 - 27,000 - ------------------------------------------------------------------------------------------------------------------------------ Total long-term notes payable 119,926 97,000 - ------------------------------------------------------------------------------------------------------------------------------ Other long-term debt -- Pollution control revenue bonds -- Collateralized with first mortgage bonds: 5.25% to 6.30% due 2006-2026 108,700 108,700 Variable rate (3.70% at 1/1/00) due 2024 20,000 20,000 Collateralized with other property: Variable rate (3.75% at 1/1/00) due 2022 40,930 40,930 - ------------------------------------------------------------------------------------------------------------------------------ Total other long-term debt 169,630 169,630 - ------------------------------------------------------------------------------------------------------------------------------ Unamortized debt premium (discount), net (7,107) (7,289) - ------------------------------------------------------------------------------------------------------------------------------ Total long-term debt (annual interest requirement -- $22.5 million) 367,449 344,341 Less amount due within one year (Note 10) - 27,000 - ------------------------------------------------------------------------------------------------------------------------------ Long-term debt excluding amount due within one year 367,449 317,341 41.8% 38.0% - ------------------------------------------------------------------------------------------------------------------------------ Company Obligated Mandatorily Redeemable Preferred Securities: (Note 9) $25 liquidation value -- 7.00% 45,000 45,000 7.625% 40,000 40,000 - ------------------------------------------------------------------------------------------------------------------------------ Total (annual distribution requirement -- $6.2 million) 85,000 85,000 9.7 10.2 - ------------------------------------------------------------------------------------------------------------------------------ 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 Less amount due within one year - - - ------------------------------------------------------------------------------------------------------------------------------ Total excluding amount due within one year 4,236 4,236 0.5 0.5 - ------------------------------------------------------------------------------------------------------------------------------ Common Stockholder's Equity: Common stock, without par value -- Authorized and Outstanding - 992,717 shares in 1999 and 1998 38,060 38,060 Paid-in capital 221,254 218,960 Premium on preferred stock 12 12 Retained earnings (Note 11) 162,987 170,620 - ------------------------------------------------------------------------------------------------------------------------------ Total common stockholder's equity 422,313 427,652 48.0 51.3 - ------------------------------------------------------------------------------------------------------------------------------ Total Capitalization $878,998 $834,229 100.0% 100.0% ============================================================================================================================== The accompanying notes are an integral part of these statements.
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STATEMENTS OF COMMON STOCKHOLDER'S EQUITY For the Years Ended December 31, 1999, 1998, and 1997 Gulf Power Company 1999 Annual Report - ----------------------------------------------------------------------------------------------------------------------------- Premium on Common Paid-In Preferred Retained Stock Capital Stock Earnings Total - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at January 1, 1997 $38,060 $218,437 $81 $179,180 $435,758 Net income after dividends on preferred stock - - - 57,610 57,610 Cash dividends on common stock - - - (64,600) (64,600) Other - 1 (69) 18 (50) - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 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 ============================================================================================================================= The accompanying notes are an integral part of these statements.
16 NOTES TO FINANCIAL STATEMENTS Gulf Power Company 1999 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, a system service company, Southern Communications Services (Southern LINC), Southern Company Energy Solutions, Southern Energy, Inc. (Southern Energy), 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. Southern Energy 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. Southern Energy 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 generally accepted accounting principles and complies with the accounting policies and practices prescribed by the FPSC and the FERC. The preparation of financial statements in conformity with generally accepted accounting principles 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 Southern Company Services, Inc. (a wholly owned subsidiary of Southern Company) 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, human resources, systems and procedures, and other services with respect to business and operations and power pool operations. Costs for these services amounted to $43 million, $40 million, and $36 million during 1999, 1998, and 1997, 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: 17 NOTES TO FINANCIAL STATEMENTS Gulf Power Company 1999 Annual Report 1999 1998 -------------------------- (in thousands) Deferred income tax debits $25,264 $ 25,308 Deferred loss on reacquired debt 17,360 18,883 Environmental remediation 5,745 7,076 Vacation pay 4,199 4,035 Regulatory clauses under (over) recovery, net 8,486 3,700 Accumulated provision for property damage (5,528) (1,605) Deferred income tax credits (49,693) (52,465) Other, net (1,255) (480) - ------------------------------------------------------------------ Total $ 4,578 $ 4,452 ================================================================== 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. The Company accrues revenues for service rendered but unbilled at the end of each fiscal period. 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. Fuel costs are expensed as the fuel is used. The Company's retail electric rates include provisions to periodically 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. 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 1999 and 1998 and 3.6 percent in 1997. The increase in 1998 is attributable to new depreciation rates, which were approved by the FPSC in 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. 18 NOTES (continued) Gulf Power Company 1999 Annual Report 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, 1999 $367,449 $349,791 At December 31, 1998 $344,341 $357,100 Capital trust preferred securities: At December 31, 1999 $85,000 $69,092 At December 31, 1998 $85,000 $89,400 - -------------------------------------------------------------- The fair values for long-term debt and preferred securities were based on either closing market prices or closing prices of comparable instruments. Materials and Supplies Generally, materials and supplies include the cost of transmission, distribution, and generating plant materials. Materials are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed. Provision for Injuries and Damages The Company is subject to claims and suits arising in the ordinary course of business. As permitted by regulatory authorities, the Company provides for the uninsured costs of injuries and damages by charges to income amounting to $1.2 million annually. The expense of settling claims is charged to the provision to the extent available. The accumulated provision of $1.8 million and $1.3 million at December 31, 1999 and 1998, 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 storm 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, 1999 and 1998, the accumulated provision for property damage was $5.5 million and $1.6 million, respectively. In 1995, the FPSC approved the Company's request to increase the amount of its annual accrual to the accumulated provision for property damage account from $1.2 million to $3.5 million and approved 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, when the Company believes it is in a position to do so. The Company accrued $5.5 million in 1999 and $6.5 million in 1998 to the accumulated provision for property damage. The Company charged $1.6 million to the provision account in 1999. Charges to the provision account during 1998 totaled $4.2 million, which included $3.4 million related to Hurricane Georges. 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. 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 --------------------------- 1999 1998 - --------------------------------------------------------------- (in thousands) Balance at beginning of year $143,012 $130,794 Service cost 4,490 4,107 Interest cost 9,440 9,572 Benefits paid (6,862) (6,663) Actuarial loss (gain) and employee transfers (8,113) 5,202 - --------------------------------------------------------------- Balance at end of year $141,967 $143,012 =============================================================== 19 NOTES (continued) Gulf Power Company 1999 Annual Report Plan Assets --------------------------- 1999 1998 - --------------------------------------------------------------- (in thousands) Balance at beginning of year $212,934 $222,196 Actual return on plan assets 35,971 1,310 Benefits paid (6,862) (6,663) Employee transfers (558) (3,909) - --------------------------------------------------------------- Balance at end of year $241,485 $212,934 =============================================================== The accrued pension costs recognized in the Balance Sheets were as follows: 1999 1998 - --------------------------------------------------------------- (in thousands) Funded status $99,518 $ 69,922 Unrecognized transition obligation (4,323) (5,043) Unrecognized prior service cost 4,495 4,869 Unrecognized net gain (81,956) (55,978) - --------------------------------------------------------------- Prepaid asset recognized in the Balance Sheets $17,734 $13,770 =============================================================== Components of the pension plan's net periodic cost were as follows: 1999 1998 1997 - ----------------------------------------------------------------- Service cost $4,490 $ 4,107 $ 3,897 Interest cost 9,440 9,572 9,301 Expected return on plan assets (15,968) (14,827) (13,675) Recognized net gain (1,579) (1,891) (1,656) Net amortization (347) (347) (347) - ----------------------------------------------------------------- Net pension income $(3,964) $(3,386) $ (2,480) ================================================================= 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 --------------------------- 1999 1998 - --------------------------------------------------------------- (in thousands) Balance at beginning of year $49,303 $39,669 Service cost 1,087 946 Interest cost 3,261 3,123 Benefits paid (1,177) (1,068) Actuarial (loss) gain and employee transfers (4,464) 3,614 Amendments - 3,019 - --------------------------------------------------------------- Balance at end of year $48,010 $49,303 =============================================================== Plan Assets --------------------------- 1999 1998 - --------------------------------------------------------------- (in thousands) Balance at beginning of year $9,603 $9,455 Actual return on plan assets 1,525 54 Employer contributions 1,245 1,162 Benefits paid (1,177) (1,068) - --------------------------------------------------------------- Balance at end of year $11,196 $9,603 =============================================================== The accrued postretirement costs recognized in the Balance Sheets were as follows: 1999 1998 - --------------------------------------------------------------- (in thousands) Funded status $(36,814) $(39,700) Unrecognized transition obligation 4,723 5,079 Unrecognized prior service cost 2,741 2,900 Unrecognized net loss 2,620 8,187 Fourth quarter contributions 300 - - --------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $(26,430) $(23,534) =============================================================== 20 NOTES (continued) Gulf Power Company 1999 Annual Report Components of the postretirement plan's net periodic cost were as follows: 1999 1998 1997 - --------------------------------------------------------------- Service cost $1,087 $ 946 $ 896 Interest cost 3,261 3,123 2,845 Expected return on plan assets (794) (717) (641) Transition obligation 356 356 356 Prior service cost 159 119 - Recognized net loss 264 128 184 - --------------------------------------------------------------- Net postretirement cost $4,333 $3,955 $3,640 =============================================================== The weighted average rates assumed in the actuarial calculations for both the pension plan and postretirement benefits were: 1999 1998 - -------------------------------------------------------- Discount 7.50% 6.75% Annual salary increase 5.00% 4.25% 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 7.74 percent for 1999, decreasing gradually to 5.5 percent through the year 2005, and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would affect the accumulated benefit obligation and the service and interest cost components at December 31, 1999 as follows (in thousands): 1 Percent 1 Percent Increase Decrease - --------------------------------------------------------------- Benefit obligation $3,627 $(3,086) Service and interest costs $320 $(269) =============================================================== Work Force Reduction Programs The Company recorded costs related to work force reduction programs of $0.2 million in 1999, $2.8 million in 1998, and $1.4 million in 1997. The Company has also incurred its pro rata share for the costs of affiliated companies' programs. The costs related to these programs were $0.6 million for 1999, $0.2 million for 1998, and $1.3 million for 1997. The Company has expensed all costs related to these work force reduction programs. 3. CONTINGENCIES AND REGULATORY MATTERS Environmental Cost Recovery In April 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 January 1994, the FPSC approved the Company's initial petition under the ECRC for recovery of environmental costs. Initially, recovery under the ECRC was determined semi-annually. The FPSC approved annual recovery periods beginning with the October 1996 through September 1997 period. As of January 1999, the annual recovery period is on a calendar-year basis as approved by the FPSC in May 1998. Recovery includes a true-up of the prior period and a projection of the ensuing period. During 1999 and 1998, the Company recorded ECRC revenues of $11.6 million and $8.0 million, respectively. At December 31, 1999, the Company's liability for the estimated costs of environmental remediation projects for known sites was $5.7 million. These estimated costs are expected to be expended from 2000 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 $4.5 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 the system service company. The complaint alleges violations of the prevention of significant deterioration and new source review provisions of the Clean Air Act 21 NOTES (continued) Gulf Power Company 1999 Annual Report 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 6 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. 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. 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. 4. CONSTRUCTION PROGRAM The Company is engaged in a continuous construction program, the cost of which is currently estimated to total $106 million in 2000, $232 million in 2001, and $90 million in 2002. 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, 1999, significant purchase commitments were outstanding in connection with the construction program. The Company has budgeted $198.8 million for the years 2000 through 2002 for the estimated cost of a 574 megawatt combined cycle gas 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 will continue its construction program related to transmission and distribution facilities and the upgrading and extension of the useful lives of generating plants. See Management's Discussion and Analysis under "Environmental Matters" for information on the impact of the Clean Air Act Amendments of 1990 and other environmental matters. 5. FINANCING AND COMMITMENTS General Current projections indicate that funds required for construction and other purposes, including compliance with environmental regulations, will be derived from operations; the sale of additional long-term unsecured debt, pollution control bonds, and preferred securities; bank notes; and capital contributions from Southern Company. In addition, the Company may issue additional long-term debt and preferred securities primarily for debt maturities and redemptions of higher-cost securities. Bank Credit Arrangements At December 31, 1999, the Company had $41.5 million of lines of credit with banks subject to renewal June 1 of each year, all of which 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 $50 million was committed at December 31, 1999. 22 NOTES (continued) Gulf Power Company 1999 Annual Report 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. Fuel Commitments To supply a portion of the fuel requirements of its generating plants, the Company has entered into long-term commitments for the procurement of fuel. In most cases, these contracts contain provisions for price escalations, minimum purchase levels, and other financial commitments. Total estimated long-term obligations at December 31, 1999 were as follows: Year Fuel --------- ---------------- (in millions) 2000 $89 2001 70 2002 86 2003 90 2004 91 2005 - 2026 508 ---------------------------------------------------------- Total commitments $934 ========================================================== In 1988, the Company made an advance payment of $60 million to a coal supplier under an arrangement to lower the cost of future coal purchased under an existing contract. This payment was fully amortized to expense on a per ton basis as of March 1998. In December 1995, the Company made another payment of $22 million to the same coal supplier under an arrangement to lower the cost of future coal and/or to suspend the purchase of coal under an existing contract for 25 months. This payment was fully amortized to expense on a per ton basis as of March 1998. The amortization expense of these contract renegotiations was recovered through the fuel cost recovery clause discussed under "Revenues and Regulatory Cost Recovery Clauses" in Note 1. 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 $2.8 million in 1999 and $2.8 million in 1998. The annual amounts for 2000 through 2004 are expected to be $2.1 million, $1.7 million, $1.7 million, $1.7 million, and $1.8 million, respectively, and after 2004 are expected to total $14.4 million. 6. 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 an 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 an 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. 23 NOTES (continued) Gulf Power Company 1999 Annual Report At December 31, 1999, 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 $185,714(1) $231,041 Accumulated Depreciation $66,193 $113,687 Construction Work in Progress $276 $2,621 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 7. LONG-TERM POWER SALES AGREEMENTS The Company and the other operating affiliates have long-term contractual agreements for the sale of capacity and energy to certain non-affiliated utilities located outside the system's service area. The unit power sales agreements are firm and pertain to capacity related to specific generating units. Because the energy is generally sold at cost under these agreements, profitability is primarily affected by revenues from capacity sales. The capacity revenues from these sales were $19.8 million in 1999, $22.5 million in 1998, and $24.9 million in 1997. Declining capacity revenues are due primarily to the decline in net plant investment related to these sales. In addition, the decline in 1999 reflects a reduction in the authorized rate of return on the equity component of the investment. Unit power from specific generating plants of Southern Company is currently being sold to Florida Power Corporation (FPC), Florida Power & Light Company (FP&L), Jacksonville Electric Authority (JEA), and the City of Tallahassee, Florida. Under these agreements, 214 megawatts of net dependable capacity were sold by the Company during 1999. Sales will decrease to 209 megawatts per year in 2000 and remain at that level -- unless reduced by FP&L, FPC, and JEA for the periods after 2000 with a minimum of three years notice -- until the expiration of the contracts in 2010. Capacity and energy sales to FP&L, the Company's largest single customer, provided revenues of $24.3 million in 1999, $22.3 million in 1998, and $25.4 million in 1997, or 3.6 percent, 3.4 percent, and 4.1 percent of operating revenues, respectively. 8. INCOME TAXES At December 31, 1999, the tax-related regulatory assets to be recovered from customers were $25.3 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, 1999, the tax-related regulatory liabilities to be credited to customers were $49.7 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: 1999 1998 1997 ------------------------------------ (in thousands) Total provision for income taxes: Federal-- Current $33,973 $31,746 $34,522 Deferred --current year 16,776 18,485 19,297 --reversal of prior years (22,883) (22,952) (25,778) - -------------------------------------------------------------------- 27,866 27,279 28,041 - -------------------------------------------------------------------- State-- Current 5,267 5,137 5,975 Deferred --current year 2,474 2,745 2,868 --reversal of prior years (2,976) (2,962) (3,434) - -------------------------------------------------------------------- 4,765 4,920 5,409 - -------------------------------------------------------------------- Total $32,631 $32,199 $33,450 ==================================================================== 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: 24 NOTES (continued) Gulf Power Company 1999 Annual Report 1999 1998 -------------------------- (in thousands) Deferred tax liabilities: Accelerated depreciation $168,662 $155,833 Property basis differences 6,000 20,330 Other 18,272 17,645 - --------------------------------------------------------------------- Total 192,934 193,808 - --------------------------------------------------------------------- Deferred tax assets: Federal effect of state deferred taxes 9,293 9,509 Postretirement benefits 8,456 7,644 Other 12,526 10,702 - --------------------------------------------------------------------- Total 30,275 27,855 - --------------------------------------------------------------------- Net deferred tax liabilities 162,659 165,953 Less current portion, net (117) (165) - --------------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $162,776 $166,118 ===================================================================== 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 1999, $1.9 million in 1998, and $2.2 million in 1997. At December 31, 1999, 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: 1999 1998 1997 ---------------------------- 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) (1) Other, net - (2) (4) - ---------------------------------------------------------------- Effective income tax rate 38% 36% 35% ================================================================ 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. 9. 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. 10. SECURITIES DUE WITHIN ONE YEAR A summary of the improvement fund requirement and scheduled maturities and redemptions of long-term debt due within one year at December 31 is as follows: 1999 1998 ---------------------- (in thousands) Bond improvement fund requirement $850 $ 850 Less portion to be satisfied by certifying property additions 850 850 - ----------------------------------------------------------------- Cash requirement - - Maturities of first mortgage bonds - - Current portion of other long-term debt - 27,000 - ----------------------------------------------------------------- Total $ - $27,000 ================================================================= 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 25 NOTES (continued) Gulf Power Company 1999 Annual Report cash, reacquiring bonds, or by pledging additional property equal to 1 and 2/3 times the requirement. 11. 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, 1999, retained earnings of $127 million were restricted against the payment of cash dividends on common stock under the terms of the mortgage indenture. 12. QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data for 1999 and 1998 are as follows: Net Income After Dividends Operating Operating on Preferred Quarter Ended Revenues Income Stock - -------------------------------------------------------------------- (in thousands) 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 1999 154,514 19,815 7,060 March 1998 $140,950 $19,387 $ 6,853 June 1998 177,130 33,232 13,364 September 1998 199,377 49,837 26,989 December 1998 133,061 19,898 9,315 - -------------------------------------------------------------------- The Company's business is influenced by seasonal weather conditions and the timing of rate changes, among other factors. 26
ELECTED FINANCIAL AND OPERATING DATA 1995-1999 Gulf Power Company 1999 Annual Report - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) 674,099 $650,518 $625,856 $634,365 $619,077 Net Income after Dividends on Preferred Stock (in thousands) $53,667 $56,521 $57,610 $57,845 $57,154 Cash Dividends on Common Stock (in thousands) $61,300 $57,200 $64,600 $58,300 $46,400 Return on Average Common Equity (percent) 12.63 13.20 13.33 13.27 13.27 Total Assets (in thousands) 308,495 $1,267,901 $1,265,612 $1,308,366 $1,341,859 Gross Property Additions (in thousands) $69,798 $69,731 $54,289 $61,386 $63,113 - ------------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity 422,313 $427,652 $428,718 $435,758 $436,242 Preferred stock 4,236 4,236 13,691 65,102 89,602 Company obligated mandatorily redeemable preferred securities 85,000 85,000 40,000 - - Long-term debt 367,449 317,341 296,993 331,880 323,376 - ------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 878,998 $834,229 $779,402 $832,740 $849,220 =============================================================================================================================== Capitalization Ratios (percent): Common stock equity 48.0 51.3 55.0 52.3 51.4 Preferred stock 0.5 0.5 1.8 7.8 10.5 Company obligated mandatorily redeemable preferred securities 9.7 10.2 5.1 - - Long-term debt 41.8 38.0 38.1 39.9 38.1 - ------------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0 =============================================================================================================================== Security Ratings: First Mortgage Bonds - Moody's A1 A1 A1 A1 A1 Standard and Poor's AA- AA- AA- A+ A+ Duff & Phelps AA- AA- AA- AA- A+ Preferred Stock - Moody's a2 a2 a2 a2 a2 Standard and Poor's A- A A A A Duff & Phelps A A+ A+ A+ A Unsecured Long-Term Debt - Moody's A2 A2 A2 - - Standard and Poor's A A A - - Duff & Phelps A+ A+ A+ - - =============================================================================================================================== Customers (year-end): Residential 315,240 307,077 300,257 291,196 283,421 Commercial 47,728 46,370 44,589 43,196 41,281 Industrial 267 257 267 278 278 Other 319 268 264 162 134 - ------------------------------------------------------------------------------------------------------------------------------- Total 363,554 353,972 345,377 334,832 325,114 =============================================================================================================================== Employees (year-end): 1,339 1,328 1,328 1,384 1,501 - -------------------------------------------------------------------------------------------------------------------------------
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SELECTED FINANCIAL AND OPERATING DATA 1995-1999 (continued) Gulf Power Company 1999 Annual Report - ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands): Residential $ 277,311 $276,208 $ 277,609 $ 285,498 $ 276,155 Commercial 165,871 160,960 164,435 164,181 159,260 Industrial 67,404 69,850 77,492 78,994 81,606 Other 2,174 2,100 2,083 2,056 1,993 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 512,760 509,118 521,619 530,729 519,014 Sales for resale - non-affiliates 62,354 61,893 63,697 63,201 60,413 Sales for resale - affiliates 66,110 42,642 16,760 17,762 18,619 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues from sales of electricity 641,224 613,653 602,076 611,692 598,046 Other revenues 32,875 36,865 23,780 22,673 21,031 - ------------------------------------------------------------------------------------------------------------------------------ Total $674,099 $650,518 $625,856 $634,365 $619,077 ============================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 4,471,118 4,437,558 4,119,492 4,159,924 4,014,142 Commercial 3,222,532 3,111,933 2,897,887 2,808,634 2,708,243 Industrial 1,846,237 1,833,575 1,903,050 1,808,086 1,794,754 Other 19,296 18,952 18,101 17,815 17,345 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 9,559,183 9,402,018 8,938,530 8,794,459 8,534,484 Sales for resale - non-affiliates 1,561,972 1,341,990 1,531,179 1,534,097 1,396,474 Sales for resale - affiliates 2,511,983 1,758,150 848,135 709,647 759,341 - ------------------------------------------------------------------------------------------------------------------------------ Total 13,633,138 12,502,158 11,317,844 11,038,203 10,690,299 ============================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 6.20 6.22 6.74 6.86 6.88 Commercial 5.15 5.17 5.67 5.85 5.88 Industrial 3.65 3.81 4.07 4.37 4.55 Total retail 5.36 5.41 5.84 6.03 6.08 Sales for resale 3.15 3.37 3.38 3.61 3.67 Total sales 4.70 4.91 5.32 5.54 5.59 Residential Average Annual Kilowatt-Hour Use Per Customer 14,318 14,577 13,894 14,457 14,148 Residential Average Annual Revenue Per Customer $888.01 $907.35 $936.30 $992.17 $973.35 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,188 2,188 2,174 2,174 2,174 Maximum Peak-Hour Demand (megawatts): Winter 2,085 2,040 1,844 2,136 1,732 Summer 2,161 2,146 2,032 1,961 2,040 Annual Load Factor (percent) 55.2 55.3 55.5 51.4 53.0 Plant Availability Fossil-Steam (percent): 87.2 87.6 91.0 91.8 84.0 - ------------------------------------------------------------------------------------------------------------------------------ Source of Energy Supply (percent): Coal 89.8 89.2 87.1 87.8 86.8 Oil and gas 2.5 2.0 0.4 0.5 0.4 Purchased power - From non-affiliates 5.9 5.5 3.5 2.7 4.0 From affiliates 1.8 3.3 9.0 9.0 8.8 - ------------------------------------------------------------------------------------------------------------------------------ Total 100.0 100.0 100.0 100.0 100.0 ==============================================================================================================================
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