-----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, JDRS+ZW4Fr6F28c5uqvCqpInrdoHN3cARgcAGi72/AkWjeZp2ySSiGd9kOVDIlf1 JXI6VV3UV7HbfeNp3dDT/A== 0000044545-98-000008.txt : 19980305 0000044545-98-000008.hdr.sgml : 19980305 ACCESSION NUMBER: 0000044545-98-000008 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980211 ITEM INFORMATION: FILED AS OF DATE: 19980304 SROS: NYSE 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: 98557446 BUSINESS ADDRESS: STREET 1: 500 BAYFRONT PKWY CITY: PENSACOLA STATE: FL ZIP: 32501 BUSINESS PHONE: 9044446111 MAIL ADDRESS: STREET 1: 500 BAYFRONT PARKWAY CITY: PENSACOLA STATE: FL ZIP: 32501 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 11, 1998 --------------------------- 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.) 500 Bayfront Parkway, Pensacola, Florida 32501 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (904) 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, 1997. 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 4, 1998 EX-23 2 ARTHUR ANDERSEN CONSENT Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 11, 1998 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 26, 1998 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 entirity by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 1,055,507 622 137,964 71,519 0 1,265,612 38,060 218,450 172,208 428,718 40,000 13,691 294,993 47,000 47,000 0 53,327 0 0 0 385,883 1,265,612 625,856 35,034 501,639 536,673 89,183 1,795 90,978 29,751 61,227 3,617 57,610 64,600 20,771 165,547 0 0
EX-99 4 AUDITED FINANCIAL STATEMENTS MANAGEMENT'S REPORT Gulf Power Company 1997 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 11, 1998 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of 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, 1997 and 1996, and the related statements of income, retained earnings, paid-in capital, and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. 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 11-27) referred to above present fairly, in all material respects, the financial position of Gulf Power Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP Atlanta, Georgia February 11, 1998 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Gulf Power Company 1997 Annual Report RESULTS OF OPERATIONS Earnings Gulf Power Company's 1997 net income after dividends on preferred stock was $57.6 million, a decrease of $0.2 million over the prior year. This change is primarily attributable to lower residential revenues as a result of milder than normal weather. In 1996, earnings were $57.8 million, representing an increase of $0.6 million compared to the prior year. Earnings in 1996 were affected primarily by higher retail revenues. The return on average common equity was 13.33 percent for 1997 and 13.27 percent for 1996. Revenues Operating revenues decreased in 1997 and increased in 1996 as a result of the following factors: Increase (Decrease) From Prior Year ------------------------------------- 1997 1996 1995 ------------------------------------- (in thousands) Retail -- Sales growth $ 4,004 $ 7,123 $ 3,647 Weather (5,277) (1,057) 9,749 Regulatory cost recovery and other (7,837) 5,649 22,502 - ---------------------------------------------------------------- Total retail (9,110) 11,715 35,898 - ---------------------------------------------------------------- Sales for resale-- Non-affiliates 496 2,788 (5,698) Affiliates (1,002) (857) 1,266 - ---------------------------------------------------------------- Total sales for resale (506) 1,931 (4,432) Other operating revenues 1,107 1,642 8,798 - ---------------------------------------------------------------- Total operating revenues $(8,509) $15,288 $40,264 ================================================================ Percent change (1.3)% 2.5% 7.0% - ---------------------------------------------------------------- Retail revenues of $521 million in 1997 decreased $9.1 million or 1.7 percent from last year, compared with an increase of 2.3 percent in 1996 and 7.4 percent in 1995. The 1997 reduction was due primarily to a decrease in residential revenues as a result of mild weather and recovery of lower purchased power capacity costs. The decrease in regulatory cost recovery and other retail revenues is primarily attributable to the recovery of decreased purchased power capacity costs from affiliated companies. 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 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 $80.5 million in 1997, decreasing $0.5 million or 0.6 percent from 1996. 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: 1997 1996 1995 ---------------------------------------- (in thousands) Capacity $24,899 $25,400 $25,870 Energy 18,160 19,804 18,598 - ------------------------------------------------------------ Total $43,059 $45,204 $44,468 ============================================================ Capacity revenues decreased slightly in 1997 and 1996, primarily reflecting the decline in net plant investment related to these sales. 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. The increase in other operating revenues in 1997 is primarily attributable to adjustments to reflect differences between recoverable costs and the amounts actually reflected in current rates. The increase in other operating revenues for 1996 was primarily due to increased amounts collected to recover newly-imposed county franchise fees. These fees are included in taxes other than income taxes and have no impact on earnings. See Notes 1 and 3 to the financial statements under "Revenues and Regulatory Cost Recovery Clauses" and 3 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report "Environmental Cost Recovery," respectively, for further discussion. Kilowatt-hour sales for 1997 and percent changes in sales since 1995 are reported below. KWH Percent Change ------------ --------------------------- 1997 1997 1996 1995 ------------ --------------------------- (millions) Residential 4,119 (1.0)% 3.6% 7.0% Commercial 2,898 3.2 3.7 6.3 Industrial 1,903 5.3 0.7 (2.8) Other 18 1.6 2.7 (0.1) ------------ Total retail 8,939 1.6 3.0 4.5 Sales for resale Non-affiliates 1,531 (0.2) 9.9 (1.6) Affiliates 848 19.5 (6.5) (13.1) ------------ Total 11,318 2.5 3.3 2.2 ================================================================== Retail sales growth was lower in 1997 than in the past two years. Although the total number of residential customers served increased by more than 9,000 or 3.1% during the year, residential energy sales declined as a result of milder weather in 1997, compared with more normal weather in 1996. The increase in energy sales to the industrial class is primarily the result of the Real-Time-Pricing program. The price structure of this program has encouraged participating industrial customers to lower their peak demand requirements and increase their purchases of energy during off-peak periods. 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). In 1997, energy sales for resale to non-affiliates were essentially unchanged, decreasing 0.2 percent, and are predominantly 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 In 1997, total operating expenses decreased $3.9 million or 0.7 percent from 1996 primarily due to lower fuel and purchased power expenses and maintenance expenses, offset by higher other operation expenses and depreciation and amortization expenses. Total operating expenses for 1996 increased $12.7 million or 2.4 percent from 1995. The increase is due to higher purchased power expenses, other operation expenses, depreciation expenses, and taxes. In 1997, fuel and purchased power expenses decreased $10.1 million or 4.4 percent from 1996 reflecting the decrease in fuel and purchased power costs due to slightly lower fuel costs and increased generation. Fuel and purchased power expenses for 1996 increased $4 million or 1.8 percent from 1995. The change reflected the increase in purchased power from affiliated companies due to scheduled maintenance outages at Plant Crist and Plant Daniel during the first half of 1996. This increase was partially offset by a slight decrease in fuel expense reflecting a lower cost of fuel. The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated were as follows: 1997 1996 1995 ---------------------------- Total generation (millions of kilowatt-hours) 10,435 10,214 9,828 Sources of generation (percent) Coal 99.6 99.4 99.5 Oil and gas 0.4 0.6 0.5 Average cost of fuel per net kilowatt-hour generated (cents) Coal 1.97 1.99 2.08 Oil and gas 5.59 6.41 3.56 Total 1.99 2.02 2.09 - ----------------------------------------------------------------- Other operation expenses increased $11.1 million or 9.6% in 1997. The increase was primarily attributable to higher costs related to the amortization of prior year buyout and renegotiation of coal supply contracts. Other contributing factors were implementation costs related to a new customer accounting system and increased production and distribution costs related to 1997 work force reduction programs. In 1996, other operation expenses increased $1.8 million or 1.5 percent from the 1995 level. The increase was primarily attributable to an increase in administrative and general expenses including costs associated with the approved increase in the Company's annual accrual to 4 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report the accumulated provision for property damage to amortize deferred storm charges and restore the account balance to a reasonable level. See Note 2 to the financial statements under "Workforce Reduction Programs" for further discussion. Maintenance expenses decreased $3.1 million or 6.0 percent in 1997 and decreased $0.9 million or 1.7 percent in 1996. The decreases were primarily due to a decrease in scheduled maintenance of production facilities. Depreciation and amortization expenses increased $1.2 million or 2.2 percent in 1997 and increased $1.5 million or 2.8 percent in 1996. Both years increases were primarily due to an increase in depreciation expenses as a result of an increase in the average investment in distribution property required to serve the additional customers in the Company's service area. Federal and state income taxes decreased $2.8 million or 7.4 percent in 1997 primarily due to a decrease in taxable income. Interest expense in 1997 decreased $0.9 million or 3.0 percent from the prior year. The decrease is attributable to retirements and refinancings of long-term debt and reduced interest on notes payable, partially offset by the increase related to distributions on preferred securities of a subsidiary trust. In 1996, interest expense increased $0.9 million or 3.2 percent over the prior year. The increase was attributable to the issuance of $30 million of new first mortgage bonds in January 1996. The increase in interest on long-term debt was partially offset by a decrease in interest on notes payable as a result of a lower average amount of short-term notes outstanding. 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 long-lived utility plant. 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 stock. 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 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. The electric utility industry in the United States is currently undergoing a period of 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 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 1997, partnering with one of the Company's largest industrial customers, 15 megawatts of Company-owned cogeneration is being constructed 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. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report 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 to promote wholesale and retail competition are at varying stages. Among other things, these initiatives allow customers to choose their electricity provider. As the initiatives materialize, the structure of the utility industry could radically 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 the financial condition of the Company. The Company is attempting to minimize or reduce its cost exposure. Continuing to be a low-cost producer could provide significant opportunities to increase market share and profitability in markets that evolve with changing regulation. Conversely, unless the Company remains a low-cost producer and provides quality service, the Company's retail energy sales growth could be limited, and this could significantly erode earnings. The FPSC set conservation goals and approved programs to accomplish the goals beginning in 1995. The goals require conservation programs which reduce 154 megawatts of summer peak demand and 65 million KWH of sales by the year 2004. The Company can experience net growth as long as the filed programs achieve the intended reductions in peak demand and KWH sales. In response to these goals and seeking to remain competitive with other electric utilities, the Company has developed initiatives which emphasize price flexibility and competitive offering of energy efficiency products and services. These initiatives will enable customers to lower or alter their peak energy requirements. Besides promoting energy efficiency, another benefit of these initiatives could be the ability to defer the need to construct additional generating capacity. On September 3, 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. During 1997, the publicity of the CISR ruling, increased competitive pressures, and general awareness of customer choice pilots and proposals across the country has 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 in 1997. The Company is heavily dependent upon complex computer systems for all phases of its operations. The year 2000 issue--common to most corporations--concerns the inability of certain software and databases to properly recognize date sensitive information beginning related to the year 2000 and thereafter. This problem could result in a material disruption to the Company's operation, if not corrected. The Company has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. In 1997, resources were committed and implementation began to modify the affected information systems. Total costs related to the project for Southern Company are estimated to be approximately $85 million, of which $8 million was spent in 1997. The Company's total costs related to the project are estimated to be approximately $5 million, of which $0.5 million was spent in 1997. Most all remaining costs will be expensed in 1998. Implementation is currently on schedule and all costs are being expensed as incurred. The degree of success of this project cannot be determined at this time. However, management believes that the final outcome will not have a material adverse effect on the operations of the Company. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report 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, 1997, exposure from these activities was not material to the Company's financial position, results of operations, or cash flows. New Accounting Standards The FASB has issued Statement No. 130, Reporting Comprehensive Income, which will be effective in 1998. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners (comprehensive income). Comprehensive income is the total of net income and all other non-owner changes in equity. These rules will be adopted by the Company in 1998. The FASB has issued Statement No. 131, Disclosure about Segments of an Enterprise and Related Information. This statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Generally, financial information is required to be reported on the basis that it is used by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company adopted the new rules in 1997, which do not have a significant impact on the Company's financial reporting. However, this conclusion may change as industry restructuring and competitive factors influence the Company's operations. FINANCIAL CONDITION Overview The Company's financial condition continues to be very solid. During 1997, gross property additions were $54.3 million. Funds for the property additions were provided by internal sources. See the Statements of Cash Flows for further details. Financing Activities The Company continued to lower its financing costs by issuing new long term-notes and trust preferred securities and retiring higher-cost issues in 1997. The Company sold $40 million of trust preferred securities, $40.9 million of pollution control bonds, and $20 million of junior subordinated notes. Retirements, including maturities during 1997, totaled $25 million of first mortgage bonds, $40.9 million of pollution control bonds, $75.9 million of preferred stock, and $16 million of long-term bank notes. The refinancing of $40.9 million in pollution control bonds and $39.5 million in preferred stock will result in savings of over $2.6 million annually. See the Statements of Cash Flows for further details. Composite financing rates for the years 1995 through 1997 as of year end were as follows: 1997 1996 1995 ------------------------------ Composite interest rate on long-term debt 5.9% 6.1% 6.5% Composite preferred stock dividend rate 6.1% 6.4% 6.4% - ---------------------------------------------------------------- The decrease in the composite interest rate on long-term debt from 1995 to 1997 reflects the Company's efforts to refinance higher-cost debt. The decrease in the composite preferred stock dividend rate in 1997 was primarily due to a decrease in dividends on the Company's adjustable rate preferred stock, reflecting lower interest rates, and the retirement of higher coupon rate preferred stock. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report Capital Requirements for Construction The Company's gross property additions, including those amounts related to environmental compliance, are budgeted at $192 million for the three years beginning in 1998 ($68 million in 1998, $62 million in 1999, and $62 million in 2000). 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. The Company does not have any major generating plants under construction, however, significant construction related to maintaining and upgrading transmission and distribution facilities and generating plants will continue. Other Capital Requirements In addition to the funds needed for the construction program, approximately $80 million will be required by the end of 2000 in connection with maturities of long-term debt. Also, the Company will continue to retire higher-cost debt and preferred stock 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 could use emission allowances, increase fuel switching, and/or install flue gas desulfurization equipment at selected plants. Also, equipment to control nitrogen oxide emissions will be installed on additional system fossil-fired units as required to meet Phase II limits. Current compliance strategy for Phase II and ozone non-attainment could require total estimated construction expenditures for Southern Company of approximately $70 million, of which $55 million remains to be spent. 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. Also, in October 1997, the EPA issued a proposed regional ozone rule--if implemented--that could require substantial further reductions in NOx emissions from fossil-fueled generating facilities. Implementation of the standards and the proposed rule could result in significant additional compliance costs and capital expenditures that cannot be determined at this time. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report The EPA and state environmental regulatory agencies are reviewing and evaluating various other matters including: emission control strategies for ozone non-attainment areas; additional controls for hazardous air pollutant emissions; and hazardous waste disposal requirements. The impact of new standards will depend on the development and implementation of applicable regulations. 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. Sources of Capital At December 31, 1997, the Company had $4.7 million of cash and cash equivalents and $32.5 million of unused committed lines of credit with banks to meet its short-term cash needs. Refer to 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. In January 1998, Gulf Power Capital Trust II (Trust II), of which the Company owns all the common securities, issued $45 million of 7.0 percent mandatorily redeemable preferred securities. See Note 9 to the financial statements under "Company Obligated Mandatorily Redeemable Preferred Securities" for additional information. It is anticipated that the funds required for construction and other purposes, including compliance with environmental regulations, will be derived from operations; the sale of additional first mortgage bonds, long-term unsecured debt, pollution control bonds, and preferred securities; bank notes; and capital contributions from Southern Company. If the attractiveness of current short-term interest rates continues, the Company may maintain a higher level of short-term indebtedness than has historically been true. The Company is required to meet certain coverage requirements specified in its mortgage indenture and corporate charter to issue new first mortgage bonds and preferred stock. The Company's coverage ratios are sufficient to permit, at present interest and preferred dividend levels, any foreseeable security sales. In December 1997, the Company obtained stockholder approval to amend the corporate charter including the elimination of the restrictions on the amount of unsecured indebtedness allowed. The amount of securities which the Company will be permitted to issue in the future will depend upon market conditions and other factors prevailing at that time. Cautionary Statement Regarding Forward-Looking Information Gulf Power Company's 1997 Annual Report contains forward-looking statements in addition to 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 statements; 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 9 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Gulf Power Company 1997 Annual Report 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, 1997, 1996, and 1995 Gulf Power Company 1997 Annual Report
======================================================================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ (in thousands) Operating Revenues: Revenues $ 609,096 $ 616,603 $ 600,458 Revenues from affiliates 16,760 17,762 18,619 - ------------------------------------------------------------------------------------------------------------------------ Total operating revenues 625,856 634,365 619,077 - ------------------------------------------------------------------------------------------------------------------------ Operating Expenses: Operation- Fuel 180,843 184,500 185,274 Purchased power from non-affiliates 11,938 8,300 8,594 Purchased power from affiliates 24,955 35,076 29,966 Other 126,266 115,154 113,397 Maintenance 47,988 51,050 51,917 Depreciation and amortization 57,874 56,645 55,104 Taxes other than income taxes 51,775 52,027 49,598 Federal and state income taxes (Note 8) 35,034 37,821 34,065 - ------------------------------------------------------------------------------------------------------------------------ Total operating expenses 536,673 540,573 527,915 - ------------------------------------------------------------------------------------------------------------------------ Operating Income 89,183 93,792 91,162 Other Income (Expense): Interest income 1,203 1,921 2,877 Other, net (992) (1,678) (1,225) Income taxes applicable to other income 1,584 248 (121) - ------------------------------------------------------------------------------------------------------------------------ Income Before Interest Charges 90,978 94,283 92,693 - ------------------------------------------------------------------------------------------------------------------------ Interest Charges: Interest on long-term debt 21,699 24,691 23,294 Other interest charges 2,076 1,824 1,487 Interest on notes payable 891 2,071 2,931 Amortization of debt discount, premium, and expense, net 2,281 2,087 2,014 Distributions on preferred securities of subsidiary trust 2,804 - - - ------------------------------------------------------------------------------------------------------------------------ Net interest charges 29,751 30,673 29,726 - ------------------------------------------------------------------------------------------------------------------------ Net Income 61,227 63,610 62,967 Dividends on Preferred Stock 3,617 5,765 5,813 - ------------------------------------------------------------------------------------------------------------------------ Net Income After Dividends on Preferred Stock $ 57,610 $ 57,845 $ 57,154 ======================================================================================================================== The accompanying notes are an integral part of these statements.
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BALANCE SHEETS At December 31, 1997 and 1996 Gulf Power Company Annual Report ===================================================================================================================== ASSETS 1997 1996 - --------------------------------------------------------------------------------------------------------------------- (in thousands) Utility Plant: Plant in service (Notes 1 and 6) $1,762,244 $1,734,510 Less accumulated provision for depreciation 737,767 694,245 - --------------------------------------------------------------------------------------------------------------------- 1,024,477 1,040,265 Construction work in progress 31,030 23,465 - --------------------------------------------------------------------------------------------------------------------- Total 1,055,507 1,063,730 - --------------------------------------------------------------------------------------------------------------------- Other Property and Investments 622 652 - --------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 4,707 807 Receivables- Customer accounts receivable 63,691 67,727 Other accounts and notes receivable 2,744 3,098 Affiliated companies 7,329 1,821 Accumulated provision for uncollectible accounts (796) (789) Fossil fuel stock, at average cost 19,296 28,352 Materials and supplies, at average cost (Note 1) 28,634 30,252 Current portion of deferred coal contract costs (Note 5) 4,456 16,389 Regulatory clauses under recovery (Note 1) 1,675 4,144 Prepayments 2,171 1,268 Vacation pay deferred 4,057 4,055 - --------------------------------------------------------------------------------------------------------------------- Total 137,964 157,124 - --------------------------------------------------------------------------------------------------------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes (Note 8) 26,586 28,313 Debt expense and loss, being amortized 22,941 23,308 Deferred coal contract costs (Note 5) - 13,126 Prepaid pension costs (Note 2) 10,385 7,918 Deferred storm charges (Note 1) 703 3,275 Miscellaneous 10,904 10,920 - --------------------------------------------------------------------------------------------------------------------- Total 71,519 86,860 - --------------------------------------------------------------------------------------------------------------------- Total Assets $1,265,612 $1,308,366 ===================================================================================================================== The accompanying notes are an integral part of these statements.
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BALANCE SHEETS At December 31, 1997 and 1996 Gulf Power Company 1997 Annual Report ======================================================================================================================= CAPITALIZATION AND LIABILITIES 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- (in thousands) Capitalization (See accompanying statements): Common stock equity (Note 12) $ 428,718 $ 435,758 Preferred stock 13,691 65,102 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes (Note 9) 40,000 - Long-term debt 296,993 331,880 - ----------------------------------------------------------------------------------------------------------------------- Total 779,402 832,740 - ----------------------------------------------------------------------------------------------------------------------- Current Liabilities: Preferred stock due within one year (Note 11) - 24,500 Long-term debt due within one year (Note 11) 53,327 40,972 Notes payable 47,000 25,000 Accounts payable- Affiliated companies 14,334 10,274 Other 20,205 22,496 Customer deposits 13,778 13,464 Taxes accrued 8,258 8,342 Interest accrued 7,227 7,629 Regulatory clauses over recovery (Note 1) 5,062 5,884 Vacation pay accrued 4,057 4,055 Dividends declared 10,210 11,453 Miscellaneous 8,739 5,668 - ----------------------------------------------------------------------------------------------------------------------- Total 192,197 179,737 - ----------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes (Note 8) 166,302 163,857 Deferred credits related to income taxes (Note 8) 56,935 64,354 Accumulated deferred investment tax credits 31,552 33,760 Accumulated provision for postretirement benefits (Note 2) 20,491 18,339 Miscellaneous 18,733 15,579 - ----------------------------------------------------------------------------------------------------------------------- Total 294,013 295,889 - ----------------------------------------------------------------------------------------------------------------------- Commitments and Contingent Matters (Notes 1, 2, 3, 4, 5, and 7) Total Capitalization and Liabilities $1,265,612 $1,308,366 ======================================================================================================================= The accompanying notes are an integral part of these statements.
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STATEMENTS OF CAPITALIZATION At December 31, 1997 and 1996 Gulf Power Company 1997 Annual Report ================================================================================================================================= 1997 1996 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Common Stock Equity: Common stock, without par value -- Authorized and outstanding -- 992,717 shares in 1997 and 1996 $ 38,060 $ 38,060 Paid-in capital 218,438 218,438 Premium on preferred stock 12 81 Retained earnings (Note 12) 172,208 179,179 - --------------------------------------------------------------------------------------------------------------------------------- Total common stock equity 428,718 435,758 55.0% 52.3% - --------------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock: $10 par value -- Authorized -- 10,000,000 shares, Outstanding -- 377,989 shares at December 31, 1997 $25 stated capital -- 6.72% 8,661 20,000 7.00% - 14,500 7.30% - 15,000 Adjustable Rate -- at January 1, 1998: 4.67% 789 15,000 $100 par value -- Authorized -- 801,626 shares Outstanding -- 42,411 shares at December 31, 1997 4.64% 1,255 5,102 5.16% 1,357 5,000 5.44% 1,629 5,000 7.52% - 5,000 7.88% - 5,000 - --------------------------------------------------------------------------------------------------------------------------------- Total (annual dividend requirement -- $836,000) 13,691 89,602 - --------------------------------------------------------------------------------------------------------------------------------- Less amount due within one year (Note 11) - 24,500 - --------------------------------------------------------------------------------------------------------------------------------- Total excluding amount due within one year 13,691 65,102 1.8 7.8 - ---------------------------------------------------------------------------------------------------------------------------------
14
STATEMENTS OF CAPITALIZATION (continued) At December 31, 1997 and 1996 Gulf Power Company 1997 Annual Report ================================================================================================================================ 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Company Obligated Mandatorily Redeemable Preferred Securities (Note 9): $25 Liquidation Value--7.625% 40,000 - - -------------------------------------------------------------------------------------------------------------------------------- Total (annual distribution requirement--$3,050,000) 40,000 - 5.1 - - -------------------------------------------------------------------------------------------------------------------------------- Long-term Debt: First mortgage bonds -- Maturity Interest Rates August 1, 1997 5.875% - 25,000 April 1, 1998 5.55% 15,000 15,000 July 1, 1998 5.00% 30,000 30,000 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 130,000 155,000 Pollution control obligations (Note 10) 169,630 169,630 Other long-term debt (Note 10) 55,327 51,299 Unamortized debt premium (discount), net (4,637) (3,077) - -------------------------------------------------------------------------------------------------------------------------------- Total long-term debt (annual interest requirement -- $20,771,000) 350,320 372,852 Less amount due within one year (Note 11) 53,327 40,972 - -------------------------------------------------------------------------------------------------------------------------------- Long-term debt excluding amount due within one year 296,993 331,880 38.1 39.9 - -------------------------------------------------------------------------------------------------------------------------------- Total Capitalization $ 779,402 $ 832,740 100.0% 100.0% ================================================================================================================================ The accompanying notes are an integral part of these statements.
15
STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, 1997, 1996, and 1995 Gulf Power Company 1997 Annual Report ================================================================================================================================== 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at Beginning of Year $ 179,179 $ 179,663 $ 168,951 Net income after dividends on preferred stock 57,610 57,845 57,154 Dividends on common stock (64,600) (58,300) (46,400) Preferred stock transactions, net 19 (29) (42) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at End of Year (Note 11) $ 172,208 $ 179,179 $ 179,663 ================================================================================================================================== STATEMENTS OF PAID-IN CAPITAL For the Years Ended December 31, 1997, 1996, and 1995 Gulf Power Company 1997 Annual Report ================================================================================================================================== 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at Beginning of Year $ 218,438 $ 218,438 $ 218,380 Contributions to capital by parent company - - 58 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at End of Year $ 218,438 $ 218,438 $ 218,438 ================================================================================================================================== The accompanying notes are an integral part of these statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996, and 1995 Gulf Power Company 1997 Annual Report ================================================================================================================================= 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 61,227 $ 63,610 $ 62,967 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization 72,860 71,825 75,293 Deferred income taxes (7,047) 2,157 390 Accumulated provision for property damage 2,572 4,227 (19,024) Deferred costs of 1995 coal contract renegotiation 1,246 10,931 (12,177) Other, net (1,413) 1,123 1,191 Changes in certain current assets and liabilities -- Receivables, net (1,111) 736 (12,210) Inventories 10,674 12,957 (618) Payables 1,398 (7,078) 18,258 Taxes accrued 6,123 (441) (2,803) Current costs of 1995 coal contract renegotiation 14,778 (5,099) (9,859) Other 4,240 5,937 (1,457) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 165,547 160,885 99,951 - --------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (54,289) (61,386) (63,113) Other 509 (2,786) 4,401 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (53,780) (64,172) (58,712) - --------------------------------------------------------------------------------------------------------------------------------- Financing Activities and Capital Contributions: Proceeds: Preferred securities 40,000 - - First mortgage bonds - 55,000 - Pollution control bonds 40,930 33,275 - Other long-term debt 20,000 49,148 - Retirements: Preferred stock (75,911) - (1,000) First mortgage bonds (25,000) (50,930) (1,750) Pollution control bonds (40,930) (33,275) (125) Other long-term debt (15,972) (34,923) (13,314) Notes payable, net 22,000 (55,500) 27,000 Payment of preferred stock dividends (5,370) (5,749) (5,813) Payment of common stock dividends (64,600) (48,300) (46,400) Miscellaneous (3,014) (5,332) (59) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (107,867) (96,586) (41,461) - --------------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 3,900 127 (222) Cash and Cash Equivalents at Beginning of Year 807 680 902 - --------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 4,707 $ 807 $ 680 ================================================================================================================================= Supplemental Cash Flow Information: Cash paid during the year for -- Interest (net of amount capitalized) $26,558 $26,050 $26,161 Income taxes $36,010 $25,858 $38,537 - --------------------------------------------------------------------------------------------------------------------------------- ( ) Denotes use of cash. The accompanying notes are an integral part of these statements.
17 NOTES TO FINANCIAL STATEMENTS Gulf Power Company 1997 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 operating companies, a system service company, Southern Communications Services (Southern Communications), Southern Energy, Inc. (Southern Energy), Southern Nuclear Operating Company (Southern Nuclear), Southern Company Energy Solutions, and other direct and indirect subsidiaries. The operating companies (Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric) provide electric service in four southeastern states. Gulf Power Company provides electric service to the northwest panhandle of Florida. Contracts among the operating companies -- dealing with jointly owned generating facilities, interconnecting transmission lines, and the exchange of electric power -- are regulated by the Federal Energy Regulatory Commission (FERC) or the Securities and Exchange Commission. The system service company provides, at cost, specialized services to Southern Company and subsidiary companies. Southern Communications provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Worldwide, Southern Energy develops and manages electricity and other energy related projects, including domestic energy trading and marketing. Southern Nuclear provides services to Southern Company's nuclear power plants. Southern Company Energy Solutions develops new business opportunities related to energy products and services. 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. 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. 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: 1997 1996 ------------------------- (in thousands) Deferred income tax debits $ 26,586 $ 28,313 Deferred loss on reacquired debt 20,494 20,386 Environmental remediation 7,338 7,577 Current & deferred coal contract costs 4,456 29,515 Vacation pay 4,057 4,055 Deferred storm charges 703 3,275 Regulatory clauses over recovery, net (3,387) (1,740) Deferred income tax credits (56,935) (64,354) Other, net (629) (1,202) - ----------------------------------------------------------------- Total $ 2,683 $ 25,825 ================================================================= In the event that a portion of the Company's operations is no longer subject to the provisions of Statement No. 71, the Company would be required to write off related net 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. 18 NOTES (continued) Gulf Power Company 1997 Annual Report Revenues and Regulatory Cost Recovery Clauses 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. In 1997, uncollectible accounts continued to average significantly less than 1 percent of revenues. Fuel costs are expensed as the fuel is used. The Company's electric rates include provisions to periodically adjust billings for fluctuations in fuel, the energy component of purchased power costs, and certain other costs. The Company also has similar 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 depreciable utility plant in service is provided primarily by using composite straight-line rates, which approximated 3.6 percent in 1997, 1996, and 1995. 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 deferred 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. See Note 8 for further information related to income taxes. Allowance for Funds Used During Construction (AFUDC) AFUDC represents the estimated debt and equity costs of capital funds that are necessary to finance the construction of new facilities. While cash is not realized currently from such allowance, it increases the revenue requirement over the service life of the plant through a higher rate base and higher depreciation expense. AFUDC amounts for 1997, 1996, and 1995 were immaterial and are included in other, net and other interest charges in the Statements of Income. Utility Plant Utility plant 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 For purposes of the Statements of Cash Flows, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. Financial Instruments The Company's financial instruments for which the carrying amount did not equal fair value at December 31 were as follows: Carrying Fair Amount Value ---------------------------- (in thousands) Long-term debt At December 31, 1997 $350,320 $356,766 At December 31, 1996 $372,852 $373,394 Capital trust preferred securities: At December 31, 1997 $40,000 $40,800 At December 31, 1996 - - - ------------------------------------------------------------- 19 NOTES (continued) Gulf Power Company 1997 Annual Report 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 $1.4 million and $1.8 million at December 31, 1997 and 1996, respectively, is included in miscellaneous current liabilities in the accompanying Balance Sheets. Provision for Property Damage The Company is self-insured for the full cost of storm and other damages to its transmission and distribution property. At December 31, 1997, the accumulated provision for property damage had a negative balance of $0.7 million. The negative balance was reclassified to deferred storm charges in the accompanying Balance Sheets. In December 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 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, until the account balance reaches $12 million. The Company accrued $3.9 million in 1997 and $4.5 million in 1996 to the accumulated provision for property damage. The expense of repairing damages from major storms and other uninsured property damages is charged to the provision account. 2. RETIREMENT BENEFITS Pension Plan The Company has a defined benefit, trusteed, non-contributory pension plan that covers substantially all regular employees. Benefits are based on one of the following formulas: years of service and final average pay or years of service and a flat-dollar benefit. The Company uses the "entry age normal method with a frozen initial liability" actuarial method for funding purposes, subject to limitations under federal income tax regulations. Amounts funded to the pension trust fund are primarily invested in equity and fixed-income securities. FASB Statement No. 87, Employers' Accounting for Pension, requires use of the "projected unit credit" actuarial method for financial reporting purposes. Postretirement Benefits 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 deductible under federal income tax regulations or to the extent required by the Company's regulatory commissions. Amounts funded are primarily invested in equity and fixed-income securities. FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, requires that medical care and life insurance benefits for retired employees be accounted for on an accrual basis using a specified actuarial method, "benefit/years-of-service." 20 NOTES (continued) Gulf Power Company 1997 Annual Report Funded Status and Cost of Benefits The funded status of the plans and reconciliation to amounts reflected in the Balance Sheets at December 31 are as follows: Pension ------------------------- 1997 1996 ------------------------- (in thousands) Actuarial present value of benefit obligation: Vested benefits $ 97,180 $ 87,245 Non-vested benefits 3,886 5,101 - ------------------------------------------------------------- Accumulated benefit obligation 101,066 92,346 Additional amounts related to projected salary increases 29,728 31,121 - ------------------------------------------------------------- Projected benefit obligation 130,794 123,467 Less: Fair value of plan assets 222,196 191,152 Unrecognized net gain (80,497) (58,900) Unrecognized prior service cost 5,244 5,618 Unrecognized transition asset (5,764) (6,485) - ------------------------------------------------------------- Prepaid asset recognized in the Balance Sheets $ 10,385 $ 7,918 ============================================================= Postretirement Benefits --------------------------- 1997 1996 --------------------------- (in thousands) Actuarial present value of benefit obligation: Retirees and dependents $17,363 $10,478 Employees eligible to retire 4,537 5,484 Other employees 17,769 17,694 - ---------------------------------------------------------------- Accumulated benefit obligation 39,669 33,656 Less: Fair value of plan assets 9,813 7,996 Unrecognized net loss 3,930 1,531 Unrecognized transition obligation 5,435 5,790 - ---------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $20,491 $18,339 ================================================================ The weighted average rates assumed in the actuarial calculations were: 1997 1996 1995 ------------------------------ Discount 7.5% 7.8% 7.3% Annual salary increase 5.0% 5.3% 4.8% Long-term return on plan assets 8.5% 8.5% 8.5% - ----------------------------------------------------------------- An additional assumption used in measuring the accumulated postretirement benefit obligation was a weighted average medical care cost trend rate of 8.8 percent for 1997, decreasing gradually to 5.5 percent through the year 2005 and remaining at that level thereafter. An annual increase in the assumed medical care cost trend rate of 1 percent would increase the accumulated benefit obligation at December 31, 1997, by $3.2 million and the aggregate of the service and interest cost components of the net retiree cost by $278 thousand. Components of the plans' net costs are shown below: Pension ------------------------------------ 1997 1996 1995 ------------------------------------ (in thousands) Benefits earned during the year $ 3,897 $ 3,880 $ 3,867 Interest cost on projected benefit obligation 9,301 9,129 8,042 Actual (return) loss on plan assets (32,924) (21,021) (33,853) Net amortization and deferral 17,246 5,920 19,619 - ------------------------------------------------------------------ Net pension income $ (2,480) $ (2,092) $(2,325) ================================================================== Of the above net pension amounts, pension income of $1.8 million in 1997, $1.5 million in 1996, and $1.8 million in 1995 were recorded in operating expenses, and the remainder was recorded in construction and other accounts. 21 NOTES (continued) Gulf Power Company 1997 Annual Report Postretirement Benefits -------------------------------- 1997 1996 1995 -------------------------------- (in thousands) Benefits earned during the year $ 896 $ 939 $1,259 Interest cost on accumulated benefit obligation 2,845 2,330 2,520 Amortization of transition obligation 356 356 853 Actual (return) loss on plan assets (1,166) (797) (1,268) Net amortization and deferral 709 318 742 - ------------------------------------------------------------------- Net postretirement cost $3,640 $3,146 $4,106 =================================================================== Of the above net postretirement costs recorded, $2.7 million in 1997, $2.3 million in 1996, and $3.1 million in 1995 were charged to operating expenses, and the remainder was recorded in construction and other accounts. Work Force Reduction Programs The Company recorded costs related to work force reductions programs of $1.4 million in 1997, $1.2 million in 1996, and $7 million in 1995. The Company has also incurred its pro rata share for the costs of affiliated companies' programs. The costs related to these programs were $1.3 million for 1997, $2.1 million for 1996, and $1 million for 1995. The costs related to work force reductions have been expensed to operation expenses. 3. LITIGATION AND REGULATORY MATTERS FERC Reviews Equity Returns In May 1991, the FERC ordered that hearings be conducted concerning the reasonableness of the operating companies' wholesale rate schedules and contracts that have a return on common equity of 13.75 percent or greater. The contracts that could be affected by the hearings include substantially all of the transmission, unit power, long-term power and other similar contracts. In August 1992, a FERC administrative law judge issued an opinion that changes in rate schedules and contracts were not necessary and that the FERC staff failed to show how any changes were in the public interest. The FERC staff has filed exceptions to the administrative law judge's opinion, and the matter remains pending before the FERC. In August 1994, the FERC instituted another proceeding based on substantially the same issues as in the 1991 proceeding. In November 1995, a FERC administrative law judge issued an opinion that the FERC staff failed to meet its burden of proof, and therefore, no change in the equity return was necessary. The FERC staff has filed exceptions to the administrative law judge's opinion, and the matter remains pending before the FERC. If the rates of return on common equity recommended by the FERC staff were applied to all of the schedules and contracts involved in both proceedings, as well as certain other contracts that reference these proceedings in determining return on common equity, and if refunds were ordered, the amount of refunds could range up to approximately $194 million for Southern Company, including approximately $13 million for the Company at December 31, 1997. Although management believes that rates are not excessive and that refunds are not justified, the final outcome of this matter cannot now be determined. 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. Beginning with this initial period through September 1996, recovery under the ECRC was determined semi-annually. In August 1996, the FPSC approved annual recovery periods beginning with the October 1996 through September 1997 period. Recovery includes a true-up of the prior period and a projection of the ensuing period. During 1997 and 1996, the Company recorded ECRC revenues of $10.2 million and $11.0 million, respectively. At December 31, 1997, the Company's liability for the estimated costs of environmental remediation projects for known sites was $7.3 million. These estimated costs are expected to be expended during the period 1998 to 2002. 22 NOTES (continued) Gulf Power Company 1997 Annual Report These projects have been approved by the FPSC for recovery through the ECRC discussed above. Therefore, the Company recorded $1.7 million in current assets and current liabilities, and $5.6 million in deferred assets and liabilities representing the future recoverability of these costs. 4. CONSTRUCTION PROGRAM The Company is engaged in a continuous construction program, the cost of which is currently estimated to total $68 million in 1998, $62 million in 1999, and $62 million in 2000. 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, 1997, significant purchase commitments were outstanding in connection with the construction program. The Company does not have any major generating plants under construction, however, significant construction will continue 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 primarily from internal sources. Requirements not met from internal sources will be derived from the sale of additional first mortgage bonds, 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, 1997, the Company had $41.5 million of lines of credit with banks subject to renewal June 1 of each year, of which $32.5 million remained unused. In addition, the Company has two unused committed lines of credit totaling $61.9 million that were established for liquidity support of its variable rate pollution control bonds. In connection with these credit lines, the Company has agreed to pay commitment fees and/or to maintain compensating balances with the banks. The compensating balances, which represent substantially all of the cash of the Company except for daily working funds and like items, are not legally restricted from withdrawal. In addition, the Company has bid-loan facilities with ten major money center banks that total $180 million, of which $38 million was committed at December 31, 1997. 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, 1997, were as follows: Year Fuel ------- ---------------- (in millions) 1998 $82 1999 77 2000 70 2001 72 2002 74 2003 - 2007 408 -------------------------------------------------------- Total commitments $783 ========================================================= 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 amount is being amortized to expense on a per ton 23 NOTES (continued) Gulf Power Company 1997 Annual Report basis over a ten-year period. The remaining unamortized amount was $2.7 million at December 31, 1997. 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 amount is being amortized to expense on a per ton basis through the first quarter of 1998. The remaining unamortized amount was $1.8 million at December 31, 1997. The amortization expense of these contract buyouts and renegotiations is being 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. The Company has the option after three years from the date of the original contract on the second lease agreement to purchase the railcars at the greater of the termination value or the fair market value. Additionally, 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 $2.3 million in 1997 and $1.7 million in 1996. The annual amounts for 1998 through 2002 will be $2.8 million, $2.8 million, $2.1 million, $1.7 million, and $1.7 million respectively, and after 2002 will total $17.8 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. At December 31, 1997, 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 $185,723(1) $222,230 Accumulated Depreciation $58,219 $108,176 Construction Work in Progress $282 $231 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, revenues from capacity sales primarily affect profitability. The capacity 24 NOTES (continued) Gulf Power Company 1997 Annual Report revenues from these sales were $24.9 million in 1997, $25.4 million in 1996, and $25.9 million in 1995. 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, 211 megawatts of net dependable capacity were sold by the Company during 1997, and sales will remain at that level until the expiration of the contracts in 2010, unless reduced by FPC, FP&L and JEA after 2000. Capacity and energy sales to FP&L, the Company's largest single customer, provided revenues of $25.4 million in 1997, $27.2 million in 1996, and $25.4 million in 1995, or 4.1 percent, 4.3 percent, and 4.1 percent of operating revenues, respectively. 8. INCOME TAXES At December 31, 1997, the tax-related regulatory assets to be recovered from customers were $26.6 million. These assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized AFUDC. At December 31, 1997, the tax-related regulatory liabilities to be credited to customers were $56.9 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: 1997 1996 1995 ---------------------------------- (in thousands) Total provision for income taxes: Federal-- Currently payable $34,522 $31,022 $29,018 Deferred --current year 19,297 26,072 23,172 --reversal of prior years (25,778) (24,780) (23,116) - ------------------------------------------------------------------ 28,041 32,314 29,074 - ------------------------------------------------------------------ State-- Currently payable 5,975 4,394 4,778 Deferred --current year 2,868 3,904 3,313 --reversal of prior years (3,434) (3,039) (2,979) - ------------------------------------------------------------------ 5,409 5,259 5,112 - ------------------------------------------------------------------ Total 33,450 37,573 34,186 Less income taxes charged (credited) to other income (1,584) (248) 121 - ------------------------------------------------------------------ Total income taxes charged to operations $35,034 $37,821 $34,065 ================================================================== 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: 1997 1996 ----------- ----------- (in thousands) Deferred tax liabilities: Accelerated depreciation $156,328 $151,664 Property basis differences 19,220 21,028 Other 14,242 17,622 - ------------------------------------------------------------------- Total 189,790 190,314 - ------------------------------------------------------------------- Deferred tax assets: Federal effect of state deferred taxes 9,268 9,773 Postretirement benefits 6,976 5,767 Other 10,861 7,814 - ------------------------------------------------------------------- Total 27,105 23,354 - ------------------------------------------------------------------- Net deferred tax liabilities 162,685 166,960 Less current portion, net (3,617) 3,103 - ------------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $166,302 $163,857 =================================================================== Deferred investment tax credits are amortized over the life 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 25 NOTES (continued) Gulf Power Company 1997 Annual Report this manner amounted to $2.2 million in 1997 and $2.3 million in 1996 and 1995. At December 31, 1997, 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: 1997 1996 1995 --------- --------- --------- 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 (1) (1) (3) Other, net (4) (2) (2) - --------------------------------------------------------------- Effective income tax rate 35% 37% 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. Tax benefits from losses of the parent company are allocated to each subsidiary based on the ratio of taxable income to total consolidated taxable income. 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 also 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 Gulf Power Capital Trust I and Trust II. Gulf Power Capital Trust I and Trust II are subsidiaries of the Company, and accordingly are consolidated in the Company's financial statements. 10. POLLUTION CONTROL OBLIGATIONS AND OTHER LONG-TERM DEBT Details of pollution control obligations and other long-term debt at December 31 are as follows: 1997 1996 -------------------------- (in thousands) Obligations incurred in connection with the sale by public authorities of tax-exempt pollution control revenue bonds: Collateralized 5.25% due 2006 $12,075 $12,075 8.25% due 2017 - 32,000 6.75% due 2022 - 8,930 Variable Rate due 2022 Remarketable daily 40,930 - 5.70% due 2023 7,875 7,875 5.80% due 2023 32,550 32,550 6.20% due 2023 13,000 13,000 6.30% due 2024 22,000 22,000 Variable Rate due 2024 Remarketable daily 20,000 20,000 5.50% due 2026 21,200 21,200 - --------------------------------------------------------------- $169,630 $169,630 - --------------------------------------------------------------- Other long-term debt: 5.2125% due 1996-1998 5,754 16,823 6.44% due 1994-1998 2,573 7,476 Variable Rate due 1999 13,500 13,500 Variable Rate due 1999 13,500 13,500 7.5% Junior Subordinated Note due 2037 20,000 - - --------------------------------------------------------------- 55,327 51,299 - --------------------------------------------------------------- Total $224,957 $220,929 =============================================================== Pollution control obligations represent installment purchases of pollution control facilities financed by funds derived from sales by public authorities of revenue bonds. With respect to the collateralized pollution control revenue 26 NOTES (continued) Gulf Power Company 1997 Annual Report bonds, the Company has executed and delivered to trustees a like principal amount of first mortgage bonds, or in the case of the $40.9 million issue a deed of trust, as security for obligations under collateralized installment agreements. The principal and interest on the first mortgage bonds will be payable only in the event of default under the agreements. The estimated annual maturities of other long-term debt are as follows: $8.3 million in 1998 and $27 million in 1999. 11. SECURITIES DUE WITHIN ONE YEAR A summary of the improvement fund requirement and scheduled maturities and redemptions of long-term debt and preferred stock due within one year at December 31 is as follows: 1997 1996 ---------------------- (in thousands) Bond improvement fund requirement $ 1,300 $ 1,550 Less: Portion to be satisfied by certifying property additions 1,300 1,550 - --------------------------------------------------------------- Cash sinking fund requirement - - Maturities of first mortgage bonds 45,000 25,000 Current portion of other long-term debt (Note 10) 8,327 15,972 Redemption of preferred stock - 24,500 - --------------------------------------------------------------- Total $53,327 $65,472 =============================================================== The first mortgage bond improvement (sinking) 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 obligations. The requirement may be satisfied by depositing cash, reacquiring bonds, or by pledging additional property equal to 1 and 2/3 times the requirement. 12. 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, 1997, retained earnings of $127 million were restricted against the payment of cash dividends on common stock under the terms of the mortgage indenture. The Company's charter previously limited cash dividends on common stock to 50 percent of net income available for such stock during a prior period of 12 months if the capitalization ratio is below 20 percent and to 75 percent of such net income if such ratio is 20 percent or more but less than 25 percent. The capitalization ratio is defined as the ratio of common stock equity to total capitalization, including retained earnings, adjusted to reflect the payment of the proposed dividend. At December 31, 1997, the ratio was 50.4 percent. These restrictions were removed by a vote of preferred shareholders on December 10, 1997. 13. QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data for 1997 and 1996 are as follows: Net Income After Dividends Operating Operating on Preferred Quarter Ended Revenues Income Stock - ------------------------------------------------------------------ (in thousands) March 31, 1997 $141,374 $20,212 $10,740 June 30, 1997 145,292 19,153 10,386 Sept. 30, 1997 193,710 34,750 27,484 Dec. 31, 1997 145,480 15,068 9,000 March 31, 1996 $154,921 $20,201 $11,258 June 30, 1996 153,821 21,565 12,581 Sept. 30, 1996 179,619 32,568 23,721 Dec. 31, 1996 146,004 19,458 10,285 - ------------------------------------------------------------------ The Company's business is influenced by seasonal weather conditions and the timing of rate changes, among other factors. 27
SELECTED FINANCIAL AND OPERATING DATA Gulf Power Company 1997 Annual Report ================================================================================================================ 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $625,856 $634,365 $619,077 Net Income after Dividends on Preferred Stock (in thousands) $57,610 $57,845 $57,154 Dividends on Common Stock (in thousands) $64,600 $58,300 $46,400 Return on Average Common Equity (percent) 13.33 13.27 13.27 Total Assets (in thousands) 1,265,612 $1,308,366 $1,341,859 Gross Property Additions (in thousands) $54,289 $61,386 $63,113 - ---------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $428,718 $435,758 $436,242 Preferred stock 13,691 65,102 89,602 Preferred stock subject to mandatory redemption - - - Trust preferred securities 40,000 - - Long-term debt 296,993 331,880 323,376 - ---------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $779,402 $832,740 $849,220 - ---------------------------------------------------------------------------------------------------------------- Capitalization Ratios (percent): Common stock equity 55.0 52.3 51.4 Preferred stock 1.8 7.8 10.5 Trust preferred securities 5.1 Long-term debt 38.1 39.9 38.1 - ---------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 ================================================================================================================ First Mortgage Bonds (in thousands): Issued - 55,000 - Retired 25,000 50,930 1,750 Preferred Stock (in thousands): Issued - - - Retired 75,911 - 1,000 - ---------------------------------------------------------------------------------------------------------------- Security Ratings: First Mortgage Bonds - Moody's A1 A1 A1 Standard and Poor's A+ A+ A+ Duff & Phelps AA- AA- A+ Preferred Stock - Moody's a2 a2 a2 Standard and Poor's A A A Duff & Phelps A+ A+ A - ---------------------------------------------------------------------------------------------------------------- Customers (year-end): Residential 300,257 291,196 283,421 Commercial 44,589 43,196 41,281 Industrial 267 278 278 Other 264 162 134 - ---------------------------------------------------------------------------------------------------------------- Total 345,377 334,832 325,114 ================================================================================================================ Employees (year-end) 1,328 1,384 1,501
28
SELECTED FINANCIAL AND OPERATING DATA (continued) Gulf Power Company 1997 Annual Report ================================================================================================================== 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands) $578,813 $583,142 $570,902 Net Income after Dividends on Preferred Stock (in thousands) $55,229 $54,311 $54,090 Dividends on Common Stock (in thousands) $44,000 $41,800 $39,900 Return on Average Common Equity (percent) 13.15 13.29 13.62 Total Assets (in thousands) $1,315,542 $1,307,809 $1,062,699 Gross Property Additions (in thousands) $78,869 $78,562 $64,671 - ------------------------------------------------------------------------------------------------------------------ Capitalization (in thousands): Common stock equity $425,472 $414,196 $403,190 Preferred stock 89,602 89,602 74,662 Preferred stock subject to mandatory redemption - 1,000 2,000 Trust preferred securities - - - Long-term debt 356,393 369,259 382,047 - ------------------------------------------------------------------------------------------------------------------ Total (excluding amounts due within one year) $871,467 $874,057 $861,899 - ------------------------------------------------------------------------------------------------------------------ Capitalization Ratios (percent): Common stock equity 48.8 47.4 46.8 Preferred stock 10.3 10.4 8.9 Trust preferred securities Long-term debt 40.9 42.2 44.3 - ------------------------------------------------------------------------------------------------------------------ Total (excluding amounts due within one year) 100.0 100.0 100.0 ================================================================================================================== First Mortgage Bonds (in thousands): Issued - 75,000 25,000 Retired 48,856 88,809 117,693 Preferred Stock (in thousands): Issued - 35,000 29,500 Retired 1,000 21,060 15,500 - ------------------------------------------------------------------------------------------------------------------ Security Ratings: First Mortgage Bonds - Moody's A2 A2 A2 Standard and Poor's A A A Duff & Phelps A+ A+ A Preferred Stock - Moody's a2 a2 a2 Standard and Poor's A- A- A- Duff & Phelps A A A- - ------------------------------------------------------------------------------------------------------------------ Customers (year-end): Residential 280,859 274,194 267,591 Commercial 40,398 39,253 37,105 Industrial 283 274 270 Other 106 86 74 - ------------------------------------------------------------------------------------------------------------------ Total 321,646 313,807 305,040 ================================================================================================================== Employees (year-end) 1,540 1,565 1,613
29A
SELECTED FINANCIAL AND OPERATING DATA Gulf Power Company 1997 Annual Report ============================================================================================================================== 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands) $565,207 $567,825 $527,821 Net Income after Dividends on Preferred Stock (in thousands) $57,796 $38,714 $37,361 Dividends on Common Stock (in thousands) $38,000 $37,000 $37,200 Return on Average Common Equity (percent) 15.17 10.51 10.32 Total Assets (in thousands) $1,095,736 $1,084,579 $1,093,430 Gross Property Additions (in thousands) $64,323 $62,462 $70,726 - ------------------------------------------------------------------------------------------------------------------------------ Capitalization (in thousands): Common stock equity $390,981 $371,185 $365,471 Preferred stock 55,162 55,162 55,162 Preferred stock subject to mandatory redemption 7,500 9,250 11,000 Trust preferred securities - - - Long-term debt 434,648 475,284 484,608 - ------------------------------------------------------------------------------------------------------------------------------ Total (excluding amounts due within one year) $888,291 $910,881 $916,241 - ------------------------------------------------------------------------------------------------------------------------------ Capitalization Ratios (percent): Common stock equity 44.0 40.8 39.9 Preferred stock 7.1 7.1 7.2 Trust preferred securities Long-term debt 48.9 52.1 52.9 - ------------------------------------------------------------------------------------------------------------------------------ Total (excluding amounts due within one year) 100.0 100.0 100.0 ============================================================================================================================== First Mortgage Bonds (in thousands): Issued 50,000 - - Retired 32,807 6,455 9,344 Preferred Stock (in thousands): Issued - - - Retired 2,500 1,750 1,250 - ------------------------------------------------------------------------------------------------------------------------------ Security Ratings: First Mortgage Bonds - Moody's A2 A2 A1 Standard and Poor's A A A Duff & Phelps A A AA- Preferred Stock - Moody's a2 a2 a1 Standard and Poor's A- A- A- Duff & Phelps A- A- A+ - ------------------------------------------------------------------------------------------------------------------------------ Customers (year-end): Residential 261,210 256,111 251,341 Commercial 34,685 34,019 33,678 Industrial 264 252 240 Other 72 67 67 - ------------------------------------------------------------------------------------------------------------------------------ Total 296,231 290,449 285,326 ============================================================================================================================== Employees (year-end) 1,598 1,615 1,614
29B
SELECTED FINANCIAL AND OPERATING DATA Gulf Power Company 1997 Annual Report ============================================================================================================== 1988 1987 - -------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $550,827 $587,860 Net Income after Dividends on Preferred Stock (in thousands) $45,698 $42,217 Dividends on Common Stock (in thousands) $35,400 $34,200 Return on Average Common Equity (percent) 13.41 13.23 Total Assets (in thousands) $1,097,225 $1,051,182 Gross Property Additions (in thousands) $67,042 $97,511 - -------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $358,310 $323,012 Preferred stock 55,162 55,162 Preferred stock subject to mandatory redemption 12,750 14,000 Trust preferred securities - - Long-term debt 497,069 474,640 - -------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $923,291 $866,814 - -------------------------------------------------------------------------------------------------------------- Capitalization Ratios (percent): Common stock equity 38.8 37.2 Preferred stock 7.4 8.0 Trust preferred securities Long-term debt 53.8 54.8 - -------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 ============================================================================================================== First Mortgage Bonds (in thousands): Issued 35,000 - Retired 9,369 - Preferred Stock (in thousands): Issued - - Retired 1,750 2,500 - -------------------------------------------------------------------------------------------------------------- Security Ratings: First Mortgage Bonds - Moody's A1 A1 Standard and Poor's A A Duff & Phelps 4 4 Preferred Stock - Moody's a1 a1 Standard and Poor's A- A- Duff & Phelps 5 5 - -------------------------------------------------------------------------------------------------------------- Customers (year-end): Residential 246,450 241,138 Commercial 33,030 32,139 Industrial 206 206 Other 61 61 - -------------------------------------------------------------------------------------------------------------- Total 279,747 273,544 ============================================================================================================== Employees (year-end) 1,601 1,603
29C
SELECTED FINANCIAL AND OPERATING DATE (continued) Gulf Power Company 1997 Annual Report ============================================================================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands): Residential $277,609 $285,498 $276,155 Commercial 164,435 164,181 159,260 Industrial 77,492 78,994 81,606 Other 2,084 2,056 1,993 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 521,620 530,729 519,014 Sales for resale - non-affiliates 63,697 63,201 60,413 Sales for resale - affiliates 16,760 17,762 18,619 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues from sales of electricity 602,077 611,692 598,046 Other revenues 23,779 22,673 21,031 - ------------------------------------------------------------------------------------------------------------------------------ Total $625,856 $634,365 $619,077 ============================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 4,119,492 4,159,924 4,014,142 Commercial 2,897,887 2,808,634 2,708,243 Industrial 1,903,050 1,808,086 1,794,754 Other 18,101 17,815 17,345 - ------------------------------------------------------------------------------------------------------------------------------ Total retail 8,938,530 8,794,459 8,534,484 Sales for resale - non-affiliates 1,531,179 1,534,097 1,396,474 Sales for resale - affiliates 848,135 709,647 759,341 - ------------------------------------------------------------------------------------------------------------------------------ Total 11,317,844 11,038,203 10,690,299 ============================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 6.74 6.86 6.88 Commercial 5.67 5.85 5.88 Industrial 4.07 4.37 4.55 Total retail 5.84 6.03 6.08 Sales for resale 3.38 3.61 3.67 Total sales 5.32 5.54 5.59 Average Annual Kilowatt-Hour Use Per Residential Customer 13,894 14,457 14,148 Average Annual Revenue Per Residential Customer $936.30 $992.17 $973.35 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,174 2,174 2,174 Maximum Peak-Hour Demand - Net of SEPA (megawatts): Winter 1,844 2,136 1,732 Summer 2,032 1,961 2,040 Annual Load Factor (percent) 55.5 51.4 53.0 Plant Availability - Fossil-Steam (percent) 91.0 91.8 84.0 - ------------------------------------------------------------------------------------------------------------------------------ Source of Energy Supply (percent): Coal 87.1 87.8 86.8 Oil and gas 0.4 0.5 0.4 Purchased power - From non-affiliates 3.5 2.7 4.0 From affiliates 9.0 9.0 8.8 - ------------------------------------------------------------------------------------------------------------------------------ Total 100.0 100.0 100.0 ============================================================================================================================== Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,436 10,484 10,609 Cost of fuel per million BTU (cents) 190.75 192.22 196.62 Average cost of fuel per net kilowatt-hour generated (cents) 1.99 2.02 2.09 ============================================================================================================================== 30
SELECTED FINANCIAL AND OPERATING DATA (continued) Gulf Power Company 1997 Annual Report ======================================================================================================================== 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands): Residential $252,598 $244,967 $235,296 Commercial 146,394 137,308 133,071 Industrial 82,169 87,526 91,320 Other 1,955 1,882 1,784 - ------------------------------------------------------------------------------------------------------------------------ Total retail 483,116 471,683 461,471 Sales for resale - non-affiliates 66,111 72,209 70,078 Sales for resale - affiliates 17,353 23,166 24,075 - ------------------------------------------------------------------------------------------------------------------------ Total revenues from sales of electricity 566,580 567,058 555,624 Other revenues 12,233 16,084 15,278 - ------------------------------------------------------------------------------------------------------------------------ Total $578,813 $583,142 $570,902 ======================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 3,751,932 3,712,980 3,596,515 Commercial 2,548,846 2,433,382 2,369,236 Industrial 1,847,114 2,029,936 2,179,435 Other 17,354 16,944 16,649 - ------------------------------------------------------------------------------------------------------------------------ Total retail 8,165,246 8,193,242 8,161,835 Sales for resale - non-affiliates 1,418,977 1,460,105 1,430,908 Sales for resale - affiliates 874,050 1,029,787 1,208,771 - ------------------------------------------------------------------------------------------------------------------------ Total 10,458,273 10,683,134 10,801,514 ======================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 6.73 6.60 6.54 Commercial 5.74 5.64 5.62 Industrial 4.45 4.31 4.19 Total retail 5.92 5.76 5.65 Sales for resale 3.64 3.83 3.57 Total sales 5.42 5.31 5.14 Average Annual Kilowatt-Hour Use Per Residential Customer 13,486 13,671 13,553 Average Annual Revenue Per Residential Customer $907.92 $901.96 $886.66 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,174 2,174 2,174 Maximum Peak-Hour Demand - Net of SEPA (megawatts): Winter 1,801 1,571 1,533 Summer 1,795 1,898 1,828 Annual Load Factor (percent) 56.7 54.5 55.0 Plant Availability - Fossil-Steam (percent) 92.2 88.9 91.2 - ------------------------------------------------------------------------------------------------------------------------ Source of Energy Supply (percent): Coal 87.2 84.5 87.7 Oil and gas 0.2 0.5 0.1 Purchased power - From non-affiliates 2.8 1.5 0.8 From affiliates 9.8 13.5 11.4 - ------------------------------------------------------------------------------------------------------------------------ Total 100.0 100.0 100.0 ======================================================================================================================== Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,614 10,390 10,347 Cost of fuel per million BTU (cents) 189.55 197.37 200.30 Average cost of fuel per net kilowatt-hour generated (cents) 2.01 2.05 2.07 ========================================================================================================================
31A
SELECTED FINANCIAL AND OPERATING DATA (continued) Gulf Power Company 1997 Annual Report ================================================================================================================================ 1991 1990 1989 - -------------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $231,220 $217,843 $203,781 Commercial 130,691 124,066 118,897 Industrial 92,300 91,041 84,671 Other 1,860 1,805 1,586 - -------------------------------------------------------------------------------------------------------------------------------- Total retail 456,071 434,755 408,935 Sales for resale - non-affiliates 69,636 73,855 67,554 Sales for resale - affiliates 29,343 38,563 39,244 - -------------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 555,050 547,173 515,733 Other revenues 10,157 20,652 12,088 - -------------------------------------------------------------------------------------------------------------------------------- Total $565,207 $567,825 $527,821 ================================================================================================================================ Kilowatt-Hour Sales (in thousands): Residential 3,455,100 3,360,838 3,293,750 Commercial 2,272,690 2,217,568 2,169,497 Industrial 2,117,408 2,177,872 2,094,670 Other 17,118 18,866 17,209 - -------------------------------------------------------------------------------------------------------------------------------- Total retail 7,862,316 7,775,144 7,575,126 Sales for resale - non-affiliates 1,550,018 1,775,703 1,640,355 Sales for resale - affiliates 1,236,223 1,435,558 1,461,036 - -------------------------------------------------------------------------------------------------------------------------------- Total 10,648,557 10,986,405 10,676,517 ================================================================================================================================ Average Revenue Per Kilowatt-Hour (cents): Residential 6.69 6.48 6.19 Commercial 5.75 5.59 5.48 Industrial 4.36 4.18 4.04 Total retail 5.80 5.59 5.40 Sales for resale 3.55 3.50 3.44 Total sales 5.21 4.98 4.83 Average Annual Kilowatt-Hour Use Per Residential Customer 13,320 13,173 13,173 Average Annual Revenue Per Residential Customer $891.38 $853.86 $815.00 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,174 2,174 2,174 Maximum Peak-Hour Demand - Net of SEPA (megawatts): Winter 1,418 1,310 1,814 Summer 1,740 1,778 1,691 Annual Load Factor (percent) 57.0 55.2 52.6 Plant Availability - Fossil-Steam (percent) 92.2 89.2 89.1 - -------------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 82.0 69.8 78.3 Oil and gas 0.1 0.5 0.2 Purchased power - From non-affiliates 0.5 0.6 0.4 From affiliates 17.4 29.1 21.1 - -------------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 ================================================================================================================================ Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,636 10,765 10,621 Cost of fuel per million BTU (cents) 203.60 206.06 193.70 Average cost of fuel per net kilowatt-hour generated (cents) 2.17 2.22 2.06 ================================================================================================================================
31B
SELECTED FINANCIAL AND OPERATING DATA (continued) Gulf Power Company 1997 Annual Report =============================================================================================================== 1988 1987 - -------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $184,036 $199,701 Commercial 107,615 116,057 Industrial 72,634 80,295 Other 1,402 1,357 - -------------------------------------------------------------------------------------------------------------- Total retail 365,687 397,410 Sales for resale - non-affiliates 117,466 134,456 Sales for resale - affiliates 48,277 55,955 - -------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 531,430 587,821 Other revenues 19,397 39 - -------------------------------------------------------------------------------------------------------------- Total $550,827 $587,860 ============================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 3,154,541 3,055,041 Commercial 2,088,598 1,986,332 Industrial 1,968,091 1,839,931 Other 16,257 15,241 - -------------------------------------------------------------------------------------------------------------- Total retail 7,227,487 6,896,545 Sales for resale - non-affiliates 1,911,759 2,138,390 Sales for resale - affiliates 2,326,238 2,689,487 - -------------------------------------------------------------------------------------------------------------- Total 11,465,484 11,724,422 ============================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 5.83 6.54 Commercial 5.15 5.84 Industrial 3.69 4.36 Total retail 5.06 5.76 Sales for resale 3.91 3.94 Total sales 4.64 5.01 Average Annual Kilowatt-Hour Use Per Residential Customer 12,883 12,763 Average Annual Revenue Per Residential Customer $751.60 $834.31 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,174 2,174 Maximum Peak-Hour Demand - Net of SEPA (megawatts): Winter 1,395 1,354 Summer 1,613 1,617 Annual Load Factor (percent) 56.5 54.4 Plant Availability - Fossil-Steam (percent) 88.2 92.8 - -------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 93.2 93.5 Oil and gas 0.4 0.4 Purchased power - From non-affiliates 0.4 0.4 From affiliates 6.0 5.7 - -------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 ============================================================================================================== Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,461 10,512 Cost of fuel per million BTU (cents) 178.00 197.53 Average cost of fuel per net kilowatt-hour generated (cents) 1.86 2.08 ==============================================================================================================
31C -----END PRIVACY-ENHANCED MESSAGE-----