SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 16, 2000
-----------------------------
GULF POWER COMPANY
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maine 0-2429 59-0276810
- -------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
One Energy Place, Pensacola, Florida 32520
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (850) 444-6111
--------------------------
N/A
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule.
99 - Audited Financial Statements of Gulf Power
Company as of December 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GULF POWER COMPANY
By /s/Wayne Boston
Wayne Boston
Assistant Secretary
Date: March 2, 2000
Exhibit 23
Arthur Andersen LLP
Suite 2500
133 Peachtree Street, NE
Atlanta, GA 30303-1816
404-658-1776
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated February 16, 2000 on the financial statements of Gulf Power
Company, included in this Form 8-K, into Gulf Power Company's previously filed
Registration Statement File Nos. 33-50165 and 333-42033.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 28, 2000
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements filed as Exhibit 99 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000044545
<NAME> GULF POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Dec-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,065,858
<OTHER-PROPERTY-AND-INVEST> 1,481
<TOTAL-CURRENT-ASSETS> 158,186
<TOTAL-DEFERRED-CHARGES> 82,970
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,308,495
<COMMON> 38,060
<CAPITAL-SURPLUS-PAID-IN> 221,266
<RETAINED-EARNINGS> 162,987
<TOTAL-COMMON-STOCKHOLDERS-EQ> 422,313
85,000
4,236
<LONG-TERM-DEBT-NET> 247,523
<SHORT-TERM-NOTES> 55,000
<LONG-TERM-NOTES-PAYABLE> 119,926
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 374,497
<TOT-CAPITALIZATION-AND-LIAB> 1,308,495
<GROSS-OPERATING-REVENUE> 674,099
<INCOME-TAX-EXPENSE> 32,631
<OTHER-OPERATING-EXPENSES> 554,937
<TOTAL-OPERATING-EXPENSES> 554,937
<OPERATING-INCOME-LOSS> 119,162
<OTHER-INCOME-NET> 414
<INCOME-BEFORE-INTEREST-EXPEN> 86,945
<TOTAL-INTEREST-EXPENSE> 33,061
<NET-INCOME> 53,884
217
<EARNINGS-AVAILABLE-FOR-COMM> 53,667
<COMMON-STOCK-DIVIDENDS> 61,300
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 106,535
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
MANAGEMENT'S REPORT
Gulf Power Company 1999 Annual Report
The management of Gulf Power Company has prepared -- and is responsible for --
the financial statements and related information included in this report. These
statements were prepared in accordance with generally accepted accounting
principles appropriate in the circumstances and necessarily include amounts that
are based on the best estimates and judgments of management. Financial
information throughout this annual report is consistent with the financial
statements.
The Company maintains a system of internal accounting controls to provide
reasonable assurance that assets are safeguarded and that books and records
reflect only authorized transactions of the Company. Limitations exist in any
system of internal controls, however, based on a recognition that the cost of
the system should not exceed its benefits. The Company believes its system of
internal accounting controls maintains an appropriate cost/benefit relationship.
The Company's system of internal accounting controls is evaluated on an
ongoing basis by the Company's internal audit staff. The Company's independent
public accountants also consider certain elements of the internal control system
in order to determine their auditing procedures for the purpose of expressing an
opinion on the financial statements.
The audit committee of the board of directors, composed of directors who are
not employees, provides a broad overview of management's financial reporting and
control functions. Periodically, this committee meets with management, the
internal auditors, and the independent public accountants to ensure that these
groups are fulfilling their obligations and to discuss auditing, internal
controls, and financial reporting matters. The internal auditors and independent
public accountants have access to the members of the audit committee at any
time.
Management believes that its policies and procedures provide reasonable
assurance that the Company's operations are conducted according to a high
standard of business ethics.
In management's opinion, the financial statements present fairly, in all
material respects, the financial position, results of operations, and cash flows
of Gulf Power Company in conformity with generally accepted accounting
principles.
/s/Travis J. Bowden
Travis J. Bowden
President
and Chief Executive Officer
/s/Arlan E. Scarbrough
Arlan E. Scarbrough
Chief Financial Officer
February 16, 2000
1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gulf Power Company:
We have audited the accompanying balance sheets and statements of capitalization
of Gulf Power Company (a Maine corporation and a wholly owned subsidiary of
Southern Company) as of December 31, 1999 and 1998, and the related statements
of income, common stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements (pages 11-26) referred to above
present fairly, in all material respects, the financial position of Gulf Power
Company as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/Arthur Andersen LLP
Atlanta, Georgia
February 16, 2000
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Gulf Power Company 1999 Annual Report
RESULTS OF OPERATIONS
Earnings
Gulf Power Company's 1999 net income after dividends on preferred stock was
$53.7 million, a decrease of $2.8 million from the previous year. In 1998,
earnings were $56.5 million, down $1.1 million when compared to 1997. The
decrease in earnings in 1999, as well as 1998, was primarily a result of higher
expenses than in the prior year.
Revenues
Operating revenues increased in 1999 and 1998 when compared to 1998 and 1997,
respectively. The following table summarizes the factors impacting operating
revenues for the past three years:
Increase (Decrease)
From Prior Year
---------------------------------------
1999 1998 1997
---------------------------------------
(in thousands)
Retail --
Growth and
price change $10,348 $15,021 $ 4,005
Weather (7,879) 6,656 (5,277)
Regulatory cost
recovery and other 1,173 (34,179) (7,837)
- --------------------------------------------------------------------
Total retail 3,642 (12,502) (9,109)
- --------------------------------------------------------------------
Sales for resale--
Non-affiliates 461 (1,804) 496
Affiliates 23,468 25,882 (1,002)
- --------------------------------------------------------------------
Total sales for resale 23,929 24,078 (506)
Other operating
revenues (3,990) 13,086 1,106
- --------------------------------------------------------------------
Total operating
revenues $23,581 $24,662 $(8,509)
====================================================================
Percent change 3.6% 3.9% (1.3)%
- --------------------------------------------------------------------
Retail revenues of $512.8 million in 1999 increased $3.6 million, or 0.7
percent, from the prior year due primarily to an increase in the number of
retail customers served by the Company. Retail revenues for 1998 decreased $12.5
million, or 2.4 percent, when compared to 1997 due primarily to the recovery of
lower fuel costs. The price per ton of coal, which is the Company's primary fuel
source, was lower in 1998 as the costs related to prior year coal contract
renegotiations were fully amortized and a major coal contract price was reduced.
See Note 5 to the financial statements under "Fuel Committments" for further
information.
The 1999 increase in regulatory cost recovery and other retail revenues over
1998 is primarily attributable to the recovery of increased purchased power
capacity costs. The 1998 decrease in regulatory cost recovery and other retail
revenues over 1997 is primarily attributable to decreased fuel costs as
mentioned previously. Regulatory cost recovery and other includes recovery
provisions for fuel expense and the energy component of purchased power costs;
energy conservation costs; purchased power capacity costs; and environmental
compliance costs. The recovery provisions generally equal the related expenses
and have no material effect on net income. See Notes 1 and 3 to the financial
statements under "Revenues and Regulatory Cost Recovery Clauses" and
"Environmental Cost Recovery," respectively, for further information.
Sales for resale were $128.5 million in 1999, an increase of $24 million, or
23 percent, over 1998 primarily due to additional energy sales to affiliated
companies, which is discussed below. Revenues from sales to utilities outside
the service area under long-term contracts consist of capacity and energy
components. Capacity revenues reflect the recovery of fixed costs and a return
on investment under the contracts. Energy is generally sold at variable cost.
The capacity and energy components under these long-term contracts were as
follows:
1999 1998 1997
----------------------------------------
(in thousands)
Capacity $19,792 $22,503 $24,899
Energy 20,251 14,556 18,160
- -------------------------------------------------------------
Total $40,043 $37,059 $43,059
=============================================================
Declining capacity revenues are due primarily to the decline in net plant
investment related to these sales. In addition, the decline in 1999 reflects a
reduction in the authorized rate of return on the equity component of the
investment.
Sales to affiliated companies vary from year to year depending on demand and
the availability and cost of generating resources at each company. These sales
have little impact on earnings.
Other operating revenues decreased in 1999 and increased in 1998 due
primarily to adjustments to reflect differences between recoverable costs and
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
the amounts actually reflected in current rates. See Notes 1 and 3 to the
financial statements under "Revenues and Regulatory Cost Recovery Clauses" and
"Environmental Cost Recovery," respectively, for further discussion.
Energy Sales
Kilowatt-hour sales for 1999 and the percent changes by year were as follows:
KWH Percent Change
------------- -------------------------------
1999 1999 1998 1997
------------- -------------------------------
(millions)
Residential 4,471 0.8% 7.7% (1.0)%
Commercial 3,223 3.6 7.4 3.2
Industrial 1,846 0.7 (3.7) 5.3
Other 19 0.0 4.7 1.6
-------------
Total retail 9,559 1.7 5.2 1.6
Sales for resale
Non-affiliates 1,562 16.4 (12.4) (0.2)
Affiliates 2,512 42.9 107.3 19.5
-------------
Total 13,633 9.0 10.5 2.5
==================================================================
In 1999, total retail energy sales increased due to increases from 1998 in
the number of residential, commercial and industrial customers. Total energy
sales increased in 1998 when compared to 1997 due to higher temperatures when
compared to the milder-than-normal temperatures in 1997 and due to increases in
the number of residential and commercial customers. The decrease in industrial
energy sales in 1998 when compared to 1997 primarily reflects the shut down of a
major industrial customer's plant site and temporary production delays of other
industrial customers. See "Future Earnings Potential" for information on the
Company's initiatives to remain competitive and to meet conservation goals set
by the Florida Public Service Commission (FPSC).
An increase in energy sales for resale to non-affiliates of 16.4 percent in
1999 when compared 1998 and a decrease of 12.4 percent in 1998 when compared to
1997 are primarily related to unit power sales under long-term contracts to
other Florida utilities and bulk power sales under short-term contracts to other
non-affiliated utilities. Energy sales to affiliated companies vary from year to
year as mentioned previously.
Expenses
Total operating expenses in 1999 increased $26.8 million, or 5.1 percent, over
the amount recorded in 1998 due primarily to higher fuel and purchased power
expenses, offset by lower other operation expenses. In 1998, total operating
expenses increased $26.5 million, or 5.3 percent, from 1997. The increase was
due primarily to higher fuel, purchased power, and maintenance expenses offset
by lower other operation expenses.
Fuel expenses in 1999, when compared to 1998, increased $11.5 million, or 5.9
percent. In 1998, fuel expenses increased $16.6 million, or 9.2 percent, when
compared to 1997. The increases were the result of increased generation
resulting from a higher demand for energy, while average fuel costs decreased as
noted below.
Purchased power expenses increased in 1999 by $13.2 million, or 30.2 percent,
over 1998 and purchased power expenses for 1998 increased over 1997 by $6.9
million, or 18.8 percent, due to a higher demand for energy in both years.
The amount and sources of generation and the average cost of fuel per net
kilowatt-hour generated were as follows:
1999 1998 1997
-------------------------------
Total generation
(millions of kilowatt-hours) 13,095 11,986 10,435
Sources of generation
(percent)
Coal 97.4 98.0 99.6
Oil and gas 2.6 2.0 0.4
Average cost of fuel per net
kilowatt-hour generated
(cents)-- 1.60 1.69 1.99
- ---------------------------------------------------------------------
Other operation expenses decreased $4.3 million, or 3.6 percent, in 1999 from
the 1998 level and $7.3 million, or 5.7 percent, in 1998 from the 1997 level due
to a decrease in the amortization costs of prior year payments related to
renegotiations of coal supply contracts. The 1998 decrease was partially offset
by higher implementation costs of a new customer accounting system, increased
costs related to the Year 2000 program and an increase in the accrual to the
accumulated provision for property damage.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
Depreciation and amortization expense increased $5.5 million, or 9.2 percent,
in 1999 when compared to 1998 due primarily to a reduction in the amortization
of gains from the 1998 sale of emission allowances.
Maintenance expenses in 1998 increased by $9.3 million, or 19.4 percent, over
1997 due primarily to scheduled maintenance at Plant Crist and Plant Smith and
increased transmission and distribution maintenance.
Interest on long-term debt in 1999 increased $1.7 million, or 8.4 percent,
when compared to 1998 due primarily to two first mortgage bonds maturing in 1998
and being replaced by senior notes at a slightly higher interest rate, and the
issuance of $50 million of senior notes in August 1999. In 1998, interest on
long-term debt decreased $2.0 million, or 9.1 percent, from 1997 mostly due to a
decrease in interest expense on pollution control bonds refinanced in 1997 and
two long-term bank notes that matured in 1998. This decrease was partially
offset by an increase in interest due to the replacement in 1998 of the two
maturing first mortgage bonds with senior notes at a slightly higher interest
rate.
Effects of Inflation
The Company is subject to rate regulation and income tax laws that are based on
the recovery of historical costs. Therefore, inflation creates an economic loss
because the Company is recovering its cost of investments in dollars that have
less purchasing power. While the inflation rate has been relatively low in
recent years, it continues to have an adverse effect on the Company because of
the large investment in utility plant with long economic lives. Conventional
accounting for historical cost does not recognize this economic loss nor the
partially offsetting gain that arises through financing facilities with
fixed-money obligations, such as long-term debt and preferred securities. Any
recognition of inflation by regulatory authorities is reflected in the rate of
return allowed.
Future Earnings Potential
The results of operations for the past three years are not necessarily
indicative of future earnings potential. The level of future earnings depends on
numerous factors ranging from energy sales growth to a potentially less
regulated and more competitive environment.
Gulf Power currently operates as a vertically integrated utility providing
electricity to customers within its traditional service area located in
northwest Florida. Prices for electricity provided by the Company to retail
customers are set by the FPSC.
Future earnings in the near term will depend upon growth in energy sales,
which is subject to a number of factors. Traditionally, these factors have
included weather, competition, changes in contracts with neighboring utilities,
energy conservation practiced by customers, the elasticity of demand, and the
rate of economic growth in the Company's service area. In early 1999, the FPSC
Staff and the Company became involved in serious discussions primarily related
to reducing the Company's authorized rate of return. On October 1, 1999 the
Office of Public Counsel, the Coalition for Equitable Rates, the Florida
Industrial Power Users Group, and the Company jointly filed a petition to
resolve the issues. The stipulation included a reduction to retail base rates of
$10 million annually and provides for revenues to be shared within set ranges
for 1999 through 2002. Customers would receive two-thirds of any revenue within
the ranges and the Company would retain one-third. For calendar year 2000, the
Company's retail base rate revenues in excess of $352 million up to $368 million
will be shared between the Company and its retail customers on the
one-third/two-thirds basis. Retail base rate revenues above $368 million for
calendar year 2000 will be refunded to the Company's customers. These set ranges
increase gradually until the expiration of the plan. The Sharing Plan will be in
place until the earlier of the in-service date of Smith Unit 3 or December 31,
2002. The parties could not agree on the appropriate Return on Equity (ROE).
Consequently, the Company filed a request to prospectively reduce its authorized
ROE range from 11 to 13 percent to 10.5 to 12.5 percent in order to help ensure
that the FPSC would approve the stipulation. Both the stipulation and the ROE
request were approved by the Commission on October 5, 1999, with an effective
date of November 4, 1999.
The electric utility industry in the United States is currently undergoing a
period of dramatic change as a result of regulatory and competitive factors.
Among the primary agents of change has been the Energy Policy Act of 1992
(Energy Act). The Company is positioning the business to meet the challenge of
this major change in the traditional practice of selling electricity. The Energy
Act allows independent power producers (IPPs) to access the Company's
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
transmission network in order to sell electricity to other utilities. This
enhances the incentive for IPPs to build cogeneration plants for industrial and
commercial customers and sell energy generation to other utilities. The Company
has and will continue to evaluate opportunities to partner and participate in
profitable cogeneration projects. In 1998, partnering with one of the Company's
largest industrial customers, construction was completed on 15 megawatts of
Company-owned cogeneration on the customer's plant site. Also, electricity sales
for resale rates are being driven down by wholesale transmission access and
numerous potential new energy suppliers, including power marketers and brokers.
The Company is aggressively working to maintain and expand its share of
wholesale sales in the southeastern power markets.
Although the Energy Act does not permit retail customer access, it was a
major catalyst for the current restructuring and consolidation taking place
within the utility industry. Numerous federal and state initiatives are in
varying stages to promote wholesale and retail competition. Among other things,
these initiatives allow customers to choose their electricity provider. As these
initiatives materialize, the structure of the utility industry continues to
change. Some states have approved initiatives that result in a separation of the
ownership and/or operation of generating facilities from the ownership and/or
operation of transmission and distribution facilities. While various
restructuring and competition initiatives have been or are being discussed in
Florida, none have been enacted to date. Enactment would require numerous issues
to be resolved, including significant ones relating to transmission pricing and
recovery of any stranded investments. The inability of the Company to recover
its investments, including the regulatory assets described in Note 1 to the
financial statements, could have a material adverse effect on financial
condition and results of operation. The Company is attempting to minimize or
reduce its cost exposure.
Continuing to be a low-cost producer could provide opportunities to increase
market share and profitability in markets that evolve with changing regulation.
Conversely, if the Company does not remain a low-cost producer and provide
quality service, the Company's energy sales growth could be limited, and this
could significantly erode earnings.
In 1996, the FPSC approved a new optional Commercial/Industrial Service Rider
(CISR), which is applicable to the rate schedules for the Company's largest
existing and potential customers who are able to show they have viable
alternatives to purchasing the Company's energy services. The CISR, approved as
a pilot program, provides the flexibility needed to enable the Company to offer
its services in a more competitive manner to these customers. The publicity of
the CISR ruling, increased competitive pressures, and general awareness of
customer choice pilots and proposals across the country have stimulated interest
on the part of customers in custom tailored offerings. The Company has
participated in one-on-one discussions with many of these customers, and has
negotiated and executed two Contract Service Agreements within the CISR pilot
program. The pilot program ends in September of 2000 and the company is
currently reviewing its options.
Every five years the FPSC establishes numeric demand side management goals.
The Company proposed numeric goals for the ten-year period from 2000 to 2009.
The proposed goals consisted of the total, cost-effective winter and summer peak
demand (kilowatts) and annual energy (kilowatt-hour) savings reasonably
achievable from demand side management for the residential and
commercial/industrial classes. The Company submitted its 2000 Demand Side
Management Plan to the FPSC on December 29, 1999. The plan describes the
Company's proposed programs it will employ to reach the numeric goals. The plan
relies heavily on innovative pricing and energy efficient construction. The FPSC
is expected to issue its final order on the Company's 2000 Demand Side
Management Plan in mid-April 2000.
On December 20, 1999, the Federal Energy Regulatory Commission (FERC) issued
its final rule on Regional Transmission Organizations (RTOs). The order
encourages utilities owning transmission systems to form RTOs on a voluntary
basis. To facilitate the development of RTOs, the FERC will convene regional
conferences for utilities, customers, and other members of the public to discuss
the formation of RTOs. In addition to participating in the regional conferences,
utilities owning transmission systems, including Southern Company, are required
to make a filing by October 15, 2000. The filing must contain either a proposal
for RTO participation or a description of the efforts made to participate in an
RTO, the reasons for non-participation, any obstacles to participation, and any
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
plans for further work toward participation. The RTOs that are proposed in the
filings should be operational by December 15, 2001. Southern Company is
evaluating this issue and formulating its response. The outcome of this matter
cannot now be determined.
Compliance costs related to current and future environmental laws and
regulations could affect earnings if such costs are not fully recovered. The
Clean Air Act and other important environmental items are discussed later under
"Environmental Matters." Also, Florida legislation adopted in 1993 that provides
for recovery of prudent environmental compliance costs is discussed in Note 3 to
the financial statements under "Environmental Cost Recovery."
The Company is subject to the provisions of Financial Accounting Standards
Board (FASB) Statement No. 71, Accounting for the Effects of Certain Types of
Regulation. In the event that a portion of the Company's operations is no longer
subject to these provisions, the Company would be required to write off related
regulatory assets and liabilities that are not specifically recoverable, and
determine if any other assets have been impaired. See Note 1 to the financial
statements under "Regulatory Assets and Liabilities" for additional information.
Exposure to Market Risks
Due to cost-based rate regulation, the Company has limited exposure to market
volatility in interest rates and prices of electricity. To mitigate residual
risks relative to movements in electricity prices, the Company enters into fixed
price contracts for the purchase and sale of electricity through the wholesale
electricity market. Realized gains and losses are recognized in the income
statements as incurred. At December 31, 1999, exposure from these activities was
not material to the Company's financial position, results of operations, or cash
flows. Also, based on the Company's overall interest rate exposure at December
31, 1999, a near-term 100 basis point change in interest rates would not
materially affect the Company's financial statements.
New Accounting Standards
The FASB has issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which must be adopted by January 1, 2001. This statement
establishes accounting and reporting standards for derivative instruments -
including certain derivative instruments embedded in other contracts - and for
hedging activities. Adoption of this statement is not expected to have a
material impact on the Company's financial statements.
Year 2000 Challenge
The work undertaken by the Company to ensure that all critical computer systems
and other date sensitive devices would function correctly in the Year 2000 was
successful. There were no material incidents reported and no disruption of
electric service within the service area of the Company. There were no reports
of significant events regarding third parties that impacted revenues or
expenses.
The Company's original projected total costs for Year 2000 readiness were
approximately $5 million. Final projected costs were also $5 million with no
material costs remaining to be spent in 2000. From its inception through
December 31, 1999, the Year 2000 program costs, recognized primarily as expense,
amounted to $5 million, of which $2 million was recorded in 1999.
FINANCIAL CONDITION
Overview
The Company's financial condition continues to be very solid. During 1999, gross
property additions were $69.8 million. Funds for the property additions were
provided by operating activities. See the Statements of Cash Flows for further
details.
Financing Activities
In 1999, the Company sold $50 million of senior notes and long-term bank notes
totaling $27 million were retired. The remaining proceeds from this issuance
were used to reduce short-term borrowing requirements. See the Statements of
Cash Flows for further details.
Composite financing rates for the years 1997 through 1999 as of year end were
as follows:
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
1999 1998 1997
-----------------------------
Composite interest rate on
long-term debt 6.0% 6.1% 5.9%
Composite rate on
trust preferred securities 7.3% 7.3% 7.6%
Composite preferred stock
dividend rate 5.1% 5.1% 6.1%
- -----------------------------------------------------------------
The composite interest rate on long-term debt decreased in 1999 primarily due
to lower interest rates on variable rate pollution control bonds.
Capital Requirements for Construction
The Company's gross property additions, including those amounts related to
environmental compliance, are budgeted at $428 million for the three years
beginning in 2000 ($106 million in 2000, $232 million in 2001, and $90 million
in 2002). These amounts include $198.8 million for the years 2000 through 2002
for the estimated cost of a 574 megawatt combined cycle gas unit to be located
in the eastern portion of its service area. The unit is expected to have an
in-service date of June 2002. The remaining property additions budget is
primarily for maintaining and upgrading transmission and distribution facilities
and generating plants. Actual construction costs may vary from this estimate
because of changes in such factors as: business conditions; environmental
regulations; load projections; the cost and efficiency of construction labor,
equipment, and materials; and the cost of capital. In addition, there can be no
assurance that costs related to capital expenditures will be fully recovered.
Other Capital Requirements
The Company will continue to retire higher-cost debt and preferred securities
and replace these securities with lower-cost capital as market conditions and
terms of the instruments permit.
Environmental Matters
In November 1990, the Clean Air Act was signed into law. Title IV of the Clean
Air Act -- the acid rain compliance provision of the law -- significantly
affected the Company. Specific reductions in sulfur dioxide and nitrogen oxide
emissions from fossil-fired generating plants are required in two phases. Phase
I compliance began in 1995 and initially affected 28 generating units of
Southern Company. As a result of Southern Company's compliance strategy, an
additional 22 generating units were brought into compliance with Phase I
requirements. Phase II compliance is required in 2000, and all fossil-fired
generating plants will be affected.
Southern Company achieved Phase I sulfur dioxide compliance at the affected
plants by switching to low-sulfur coal, which required some equipment upgrades.
Construction expenditures for Phase I compliance totaled approximately $300
million for Southern Company, including approximately $42 million for Gulf
Power.
For Phase II sulfur dioxide compliance, Southern Company currently uses
emission allowances and increased fuel switching. Also, equipment to control
nitrogen oxide emissions was installed on additional system fossil-fired units
as required to meet Phase II limits and ozone non-attainment requirements.
Compliance for Phase II and initial ozone non-attainment requirements increased
total estimated construction expenditures by approximately $105 million. Phase
II compliance is not expected to have a material impact on Gulf Power.
Following adoption of legislation in April of 1992 allowing electric
utilities in Florida to seek FPSC approval of their Clean Air Act Compliance
Plans, Gulf Power filed its petition for approval. The FPSC approved the
Company's plan for Phase I compliance, deferring until a later date approval of
its Phase II Plan.
In 1993, the Florida Legislature adopted legislation that allows a utility to
petition the FPSC for recovery of prudent environmental compliance costs that
are not being recovered through base rates or any other recovery mechanism. The
legislation is discussed in Note 3 to the financial statements under
"Environmental Cost Recovery." Substantially all of the costs for the Clean Air
Act and other new environmental legislation discussed below are expected to be
recovered through the Environmental Cost Recovery Clause.
In July 1997, the Environmental Protection Agency (EPA) revised the national
ambient air quality standards for ozone and particulate matter. This revision
makes the standards significantly more stringent. In September 1998, the EPA
issued the final regional nitrogen oxide reduction rule to the states for
implementation. The final rule affects 22 states, including Alabama and Georgia.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
See Note 6 to the financial statements under "Joint Ownership Agreements"
related to the Company's ownership interest in Georgia Power's Plant Scherer
Unit No. 3. The EPA's July 1997 standards and the September 1998 rule are being
challenged in the courts by several states and industry groups. Implementation
of the final state rules for these three initiatives could require substantial
further reductions in nitrogen oxide and sulfur dioxide emissions from
fossil-fired generating facilities and other industries in these states.
Additional compliance costs and capital expenditures resulting from the
implementation of these rules and standards cannot be determined until the
results of legal challenges are known, and the states have adopted their final
rules.
The EPA and state environmental regulatory agencies are reviewing and
evaluating various other matters including: nitrogen oxide emission control
strategies for ozone non-attainment areas; additional controls for hazardous air
pollutant emissions; and hazardous waste disposal requirements. The impact of
any new standards will depend on the development and implementation of
applicable regulations.
On November 3, 1999, the EPA brought a civil action in the U.S. District
Court against Alabama Power, Georgia Power, and the system service company. The
complaint alleges violations of the prevention of significant deterioration and
new source review provisions of the Clean Air Act with respect to five
coal-fired generating facilities in Alabama and Georgia. The civil action
requests penalties and injunctive relief, including an order requiring the
installation of the best available control technology at the affected units. The
EPA concurrently issued to the integrated Southeast utilities a notice of
violation related to 10 generating facilities, including the five facilities
mentioned previously and the Company's Plants Crist and Scherer. See Note 6 to
the financial statements under "Joint Ownership Agreements" related to the
Company's ownership interest in Georgia Power's Plant Scherer Unit No. 3. In
early 2000, the EPA filed a motion to amend its complaint to add the violations
alleged in its notice of violation, and to add Gulf Power, Mississippi Power,
and Savannah Electric as defendants. The complaint and notice of violation are
similar to those brought against and issued to several other electric utilities.
These complaints and notices of violation allege that the utilities had failed
to secure necessary permits or install additional pollution equipment when
performing maintenance and construction at coal burning plants constructed or
under construction prior to 1978. Southern Company believes that its integrated
utilities complied with applicable laws and the EPA's regulations and
interpretations in effect at the time the work in question took place. The
Clean Air Act authorizes civil penalties of up to $27,500 per day per violation
at each generating unit. Prior to January 30, 1997, the penalty was $25,000 per
day. An adverse outcome of this matter could require substantial capital
expenditures that cannot be determined at this time and possibly require payment
of substantial penalties. This could affect future results of operations, cash
flows, and possibly financial condition if such costs are not recovered through
regulated rates.
Gulf Power must comply with other environmental laws and regulations that
cover the handling and disposal of hazardous waste. Under these various laws and
regulations, the Company could incur substantial costs to clean up properties.
The Company conducts studies to determine the extent of any required cleanup
costs and has recognized in the financial statements costs to clean up known
sites. For additional information, see Note 3 to the financial statements under
"Environmental Cost Recovery."
Several major pieces of environmental legislation are being considered for
reauthorization or amendment by Congress. These include: the Clean Air Act; the
Clean Water Act; the Comprehensive Environmental Response, Compensation and
Liability Act; the Resource Conservation and Recovery Act; the Toxic Substances
Control Act; and the Endangered Species Act. Changes to these laws could affect
many areas of the Company's operations. The full impact of any such changes
cannot be determined at this time.
Compliance with possible additional legislation related to global climate
change, electric and magnetic fields, and other environmental health concerns
could significantly affect the Company. The impact of new legislation -- if any
- -- will depend on the subsequent development and implementation of applicable
regulations. In addition, the potential exists for liability as the result of
lawsuits alleging damages caused by electric and magnetic fields.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Gulf Power Company 1999 Annual Report
Sources of Capital
At December 31, 1999, the Company had approximately $15.8 million of cash and
cash equivalents and $41.5 million of unused committed lines of credit with
banks to meet its short-term cash needs. Refer to the Statements of Cash Flows
for details related to the Company's financing activities. See Note 5 to the
financial statements under "Bank Credit Arrangements" for additional
information.
The Company historically has relied on issuances of first mortgage bonds and
preferred stock, in addition to pollution control revenue bonds issued for its
benefit by public authorities, to meet its long-term external financing
requirements. Recently, the Company's financings have consisted of unsecured
debt and trust preferred securities. In this regard, the Company sought and
obtained stockholder approval in 1997 to amend its corporate charter eliminating
restrictions on the amounts of unsecured indebtedness it may incur.
If the Company chooses to issue first mortgage bonds or preferred stock, it
is required to meet certain coverage requirements specified in its mortgage
indenture and corporate charter. The Company's ability to satisfy all coverage
requirements is such that it could issue new first mortgage bonds and preferred
stock to provide sufficient funds for all anticipated requirements.
Cautionary Statement Regarding Forward-Looking
Information
The Company's 1999 Annual Report contains forward-looking and historical
information. The Company cautions that there are various important factors that
could cause actual results to differ materially from those indicated in the
forward-looking information. Accordingly, there can be no assurance that such
indicated results will be realized. These factors include legislative and
regulatory initiatives regarding deregulation and restructuring of the electric
utility industry; the extent and timing of the entry of additional competition
in the Company's markets; potential business strategies -- including
acquisitions or dispositions of assets or internal restructuring -- that may be
pursued by the company; state and federal rate regulation; changes in or
application of environmental and other laws and regulations to which the company
is subject; political, legal and economic conditions and developments; financial
market conditions and the results of financing efforts; changes in commodity
prices and interest rates; weather and other natural phenomena; and other
factors discussed in the reports -- including Form 10-K -- filed from time to
time by the Company with the Securities and Exchange Commission.
10
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998, and 1997
Gulf Power Company 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating Revenues:
Retail sales $512,760 $509,118 $521,619
Sales for resale --
Non-affiliates 62,354 61,893 63,697
Affiliates 66,110 42,642 16,760
Other revenues 32,875 36,865 23,780
- -----------------------------------------------------------------------------------------------------------
Total operating revenues 674,099 650,518 625,856
- -----------------------------------------------------------------------------------------------------------
Operating Expenses:
Operation --
Fuel 209,031 197,462 180,843
Purchased power --
Non-affiliates 46,332 29,369 11,938
Affiliates 10,703 14,445 24,955
Other 114,670 119,011 126,266
Maintenance 57,830 57,286 47,988
Depreciation and amortization 64,589 59,129 57,874
Taxes other than income taxes 51,782 51,462 51,775
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 554,937 528,164 501,639
- -----------------------------------------------------------------------------------------------------------
Operating Income 119,162 122,354 124,217
Other Income (Expense):
Interest income 1,771 931 1,203
Other, net (1,357) (2,339) (992)
- -----------------------------------------------------------------------------------------------------------
Earnings Before Interest and Income Taxes 119,576 120,946 124,428
- -----------------------------------------------------------------------------------------------------------
Interest Charges and Other:
Interest on long-term debt 21,375 19,718 21,699
Interest on notes payable 2,371 1,190 891
Amortization of debt discount, premium and expense, net 1,989 2,100 2,281
Other interest charges 1,126 2,548 2,076
Distributions on preferred securities of subsidiary 6,200 6,034 2,804
- -----------------------------------------------------------------------------------------------------------
Total interest charges and other, net 33,061 31,590 29,751
- -----------------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 86,515 89,356 94,677
Income taxes (Note 8) 32,631 32,199 33,450
- -----------------------------------------------------------------------------------------------------------
Net Income 53,884 57,157 61,227
Dividends on Preferred Stock 217 636 3,617
- -----------------------------------------------------------------------------------------------------------
Net Income After Dividends on Preferred Stock $ 53,667 $ 56,521 $ 57,610
===========================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998, and 1997
Gulf Power Company 1999 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $ 53,884 $ 57,157 $ 61,227
Adjustments to reconcile net income
to net cash provided from operating activities --
Depreciation and amortization 68,721 69,633 72,860
Deferred income taxes and investment tax credits, net (6,609) (4,684) (7,047)
Other, net 3,735 3,463 4,831
Changes in certain current assets and liabilities --
Receivables, net (10,484) 11,308 (692)
Fossil fuel stock (5,656) (4,917) 9,056
Materials and supplies (2,063) 609 1,618
Accounts payable (2,023) 823 1,398
Other 7,030 (18,471) 22,296
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 106,535 114,921 165,547
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Gross property additions (69,798) (69,731) (54,289)
Other (8,856) 5,990 509
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (78,654) (63,741) (53,780)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase (decrease) in notes payable, net 23,500 (15,500) 22,000
Proceeds --
Other long-term debt 50,000 50,000 60,930
Preferred securities - 45,000 40,000
Capital contributions from parent company 2,294 522 -
Retirements --
First mortgage bonds - (45,000) (25,000)
Other long-term debt (27,074) (8,326) (56,902)
Preferred stock - (9,455) (75,911)
Payment of preferred stock dividends (271) (792) (5,370)
Payment of common stock dividends (61,300) (67,200) (64,600)
Other (246) (4,167) (3,014)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (13,097) (54,918) (107,867)
- --------------------------------------------------------------------------------------------------------------------------
Net Change in Cash and Cash Equivalents 14,784 (3,738) 3,900
Cash and Cash Equivalents at Beginning of Period 969 4,707 807
- --------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 15,753 $ 969 $ 4,707
==========================================================================================================================
Supplemental Cash Flow Information:
Cash paid during the period for --
Interest (net of amount capitalized) $27,670 $28,044 $26,558
Income taxes (net of refunds) 29,462 38,782 36,010
- --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
At December 31, 1999 and 1998
Gulf Power Company 1999 Annual Report
- ---------------------------------------------------------------------------------------------------------------------
Assets 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,753 $ 969
Receivables --
Customer accounts receivable 55,108 49,067
Other accounts and notes receivable 4,325 3,514
Affiliated companies 7,104 3,442
Accumulated provision for uncollectible accounts (1,026) (996)
Fossil fuel stock, at average cost 29,869 24,213
Materials and supplies, at average cost (Note 1) 30,088 28,025
Regulatory clauses under recovery (Note 1) 11,611 9,737
Other 5,354 9,725
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 158,186 127,696
- ---------------------------------------------------------------------------------------------------------------------
Property, Plant, and Equipment:
In service (Notes 1 and 6) 1,853,664 1,809,901
Less accumulated provision for depreciation 821,970 784,111
- ---------------------------------------------------------------------------------------------------------------------
1,031,694 1,025,790
Construction work in progress 34,164 34,863
- ---------------------------------------------------------------------------------------------------------------------
Total property, plant, and equipment 1,065,858 1,060,653
- ---------------------------------------------------------------------------------------------------------------------
Other Property and Investments 1,481 588
- ---------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Deferred charges related to income taxes (Note 8) 25,264 25,308
Prepaid pension costs (Note 2) 17,734 13,770
Debt expense, being amortized 2,526 2,565
Premium on reacquired debt, being amortized 17,360 18,883
Other 20,086 18,438
- ---------------------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 82,970 78,964
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $1,308,495 $1,267,901
=====================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
At December 31, 1999 and 1998
Gulf Power Company 1999 Annual Report
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Equity 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current Liabilities:
Securities due within one year (Note 10) $ - $ 27,000
Notes payable 55,000 31,500
Accounts payable --
Affiliated 14,878 19,756
Other 22,581 23,697
Customer deposits 12,778 12,560
Taxes accrued --
Income taxes 4,889 -
Other 7,707 7,432
Interest accrued 9,255 5,184
Vacation pay accrued 4,199 4,035
Other 4,961 10,051
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 136,248 141,215
- ----------------------------------------------------------------------------------------------------------------------
Long-term debt (See accompanying statements) 367,449 317,341
- ----------------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Accumulated deferred income taxes (Note 8) 162,776 166,118
Deferred credits related to income taxes (Note 8) 49,693 52,465
Accumulated deferred investment tax credits 27,712 29,632
Employee benefits provisions 31,735 28,594
Other 21,333 15,648
- ----------------------------------------------------------------------------------------------------------------------
Total deferred credits and other liabilities 293,249 292,457
- ----------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding company junior
subordinated notes (See accompanying statements) 85,000 85,000
- ----------------------------------------------------------------------------------------------------------------------
Preferred stock (See accompanying statements) 4,236 4,236
- ----------------------------------------------------------------------------------------------------------------------
Common stockholder's equity (See accompanying statements) 422,313 427,652
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $1,308,495 $1,267,901
======================================================================================================================
The accompanying notes are an integral part of these balance sheets.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CAPITALIZATION
At December 31, 1999 and 1998
Gulf Power Company 1999 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands) (percent of total)
Long-Term Debt:
First mortgage bonds --
Maturity Interest Rates
--------- -------------
<S> <C> <C> <C> <C> <C>
July 1, 2003 6.125% $ 30,000 $ 30,000
November 1, 2006 6.50% 25,000 25,000
January 1, 2026 6.875% 30,000 30,000
- ------------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 85,000 85,000
- ------------------------------------------------------------------------------------------------------------------------------
Long-term notes payable --
7.05% due August 15, 2004 50,000 -
7.50% due June 30, 2037 20,000 20,000
6.70% due June 30, 2038 49,926 50,000
Adjustable rate (5.72% at 1/1/99)
due November 20, 1999 - 27,000
- ------------------------------------------------------------------------------------------------------------------------------
Total long-term notes payable 119,926 97,000
- ------------------------------------------------------------------------------------------------------------------------------
Other long-term debt --
Pollution control revenue bonds --
Collateralized with first mortgage bonds:
5.25% to 6.30% due 2006-2026 108,700 108,700
Variable rate (3.70% at 1/1/00)
due 2024 20,000 20,000
Collateralized with other property:
Variable rate (3.75% at 1/1/00)
due 2022 40,930 40,930
- ------------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 169,630 169,630
- ------------------------------------------------------------------------------------------------------------------------------
Unamortized debt premium (discount), net (7,107) (7,289)
- ------------------------------------------------------------------------------------------------------------------------------
Total long-term debt (annual interest
requirement -- $22.5 million) 367,449 344,341
Less amount due within one year (Note 10) - 27,000
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt excluding amount due within one year 367,449 317,341 41.8% 38.0%
- ------------------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily
Redeemable Preferred Securities: (Note 9)
$25 liquidation value --
7.00% 45,000 45,000
7.625% 40,000 40,000
- ------------------------------------------------------------------------------------------------------------------------------
Total (annual distribution requirement -- $6.2 million) 85,000 85,000 9.7 10.2
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative Preferred Stock:
$100 par value
4.64% to 5.44% 4,236 4,236
- ------------------------------------------------------------------------------------------------------------------------------
Total (annual dividend requirement -- $0.2 million) 4,236 4,236
Less amount due within one year - -
- ------------------------------------------------------------------------------------------------------------------------------
Total excluding amount due within one year 4,236 4,236 0.5 0.5
- ------------------------------------------------------------------------------------------------------------------------------
Common Stockholder's Equity:
Common stock, without par value --
Authorized and Outstanding -
992,717 shares in 1999 and 1998 38,060 38,060
Paid-in capital 221,254 218,960
Premium on preferred stock 12 12
Retained earnings (Note 11) 162,987 170,620
- ------------------------------------------------------------------------------------------------------------------------------
Total common stockholder's equity 422,313 427,652 48.0 51.3
- ------------------------------------------------------------------------------------------------------------------------------
Total Capitalization $878,998 $834,229 100.0% 100.0%
==============================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
For the Years Ended December 31, 1999, 1998, and 1997
Gulf Power Company 1999 Annual Report
- -----------------------------------------------------------------------------------------------------------------------------
Premium on
Common Paid-In Preferred Retained
Stock Capital Stock Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $38,060 $218,437 $81 $179,180 $435,758
Net income after dividends on preferred stock - - - 57,610 57,610
Cash dividends on common stock - - - (64,600) (64,600)
Other - 1 (69) 18 (50)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 38,060 218,438 12 172,208 428,718
Net income after dividends on preferred stock - - - 56,521 56,521
Capital contributions from parent company - 522 - - 522
Cash dividends on common stock - - - (57,200) (57,200)
Other - - - (909) (909)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 38,060 218,960 12 170,620 427,652
Net income after dividends on preferred stock - - - 53,667 53,667
Capital contributions from parent company - 2,294 - - 2,294
Cash dividends on common stock - - - (61,300) (61,300)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $38,060 $221,254 $12 $162,987 $422,313
=============================================================================================================================
The accompanying notes are an integral part of these statements.
</TABLE>
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Gulf Power Company 1999 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
Gulf Power Company is a wholly owned subsidiary of Southern Company, which is
the parent company of five integrated Southeast utilities, a system service
company, Southern Communications Services (Southern LINC), Southern Company
Energy Solutions, Southern Energy, Inc. (Southern Energy), Southern Nuclear
Operating Company (Southern Nuclear), and other direct and indirect
subsidiaries. The integrated Southeast utilities -- Alabama Power, Georgia
Power, Gulf Power, Mississippi Power, and Savannah Electric -- provide electric
service in four states. Gulf Power Company provides electric service to the
northwest panhandle of Florida. Contracts among the integrated Southeast
utilities -- related to jointly owned generating facilities, interconnecting
transmission lines, and the exchange of electric power --are regulated by the
Federal Energy Regulatory Commission (FERC) and/or the Securities and Exchange
Commission (SEC). The system service company provides, at cost, specialized
services to Southern Company and subsidiary companies. Southern LINC provides
digital wireless communications services to the operating companies and also
markets these services to the public within the Southeast. Southern Company
Energy Solutions develops new business opportunities related to energy products
and services. Southern Nuclear provides services to Southern Company's nuclear
power plants. Southern Energy acquires, develops, builds, owns, and operates
power production and delivery facilities and provides a broad range of
energy-related services to utilities and industrial companies in selected
countries around the world. Southern Energy businesses include independent power
projects, integrated utilities, a distribution company, and energy trading and
marketing businesses outside the southeastern United States.
Southern Company is registered as a holding company under the Public Utility
Holding Company Act of 1935 (PUHCA). Both Southern Company and its subsidiaries
are subject to the regulatory provisions of the PUHCA. The Company is also
subject to regulation by the FERC and the Florida Public Service Commission
(FPSC). The Company follows generally accepted accounting principles and
complies with the accounting policies and practices prescribed by the FPSC and
the FERC. The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates, and the actual
results may differ from those estimates.
Certain prior years' data presented in the financial statements have been
reclassified to conform with current year presentation.
Related-Party Transactions
The Company has an agreement with Southern Company Services, Inc. (a wholly
owned subsidiary of Southern Company) under which the following services are
rendered to the company at cost: general and design engineering, purchasing,
accounting and statistical, finance and treasury, tax, information resources,
marketing, auditing, insurance and pension, human resources, systems and
procedures, and other services with respect to business and operations and power
pool operations. Costs for these services amounted to $43 million, $40 million,
and $36 million during 1999, 1998, and 1997, respectively.
Regulatory Assets and Liabilities
The Company is subject to the provisions of Financial Accounting Standards Board
(FASB) Statement No. 71, Accounting for the Effects of Certain Types of
Regulation. Regulatory assets represent probable future revenues to the Company
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are expected to be credited
to customers through the ratemaking process. Regulatory assets and (liabilities)
reflected in the Balance Sheets at December 31 relate to the following:
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Gulf Power Company 1999 Annual Report
1999 1998
--------------------------
(in thousands)
Deferred income tax debits $25,264 $ 25,308
Deferred loss on reacquired
debt 17,360 18,883
Environmental remediation 5,745 7,076
Vacation pay 4,199 4,035
Regulatory clauses under (over)
recovery, net 8,486 3,700
Accumulated provision for
property damage (5,528) (1,605)
Deferred income tax credits (49,693) (52,465)
Other, net (1,255) (480)
- ------------------------------------------------------------------
Total $ 4,578 $ 4,452
==================================================================
In the event that a portion of the Company's operations is no longer subject
to the provisions of FASB Statement No. 71, the Company would be required to
write off related regulatory assets and liabilities that are not specifically
recoverable through regulated rates. In addition, the Company would be required
to determine any impairment to other assets, including plant, and write down the
assets, if impaired, to their fair value.
Revenues and Regulatory Cost Recovery Clauses
The Company currently operates as a vertically integrated utility providing
electricity to retail customers within its service area located in northwest
Florida and to wholesale customers in the Southeast.
The Company accrues revenues for service rendered but unbilled at the end of
each fiscal period. The Company has a diversified base of customers and no
single customer or industry comprises 10 percent or more of revenues. For all
periods presented, uncollectible accounts averaged significantly less than 1
percent of revenues.
Fuel costs are expensed as the fuel is used. The Company's retail electric
rates include provisions to periodically adjust billings for fluctuations in
fuel costs, the energy component of purchased power costs, and certain other
costs. The Company also has similar retail cost recovery clauses for energy
conservation costs, purchased power capacity costs, and environmental compliance
costs. Revenues are adjusted monthly for differences between recoverable costs
and amounts actually reflected in current rates.
Depreciation and Amortization
Depreciation of the original cost of plant in service is provided primarily by
using composite straight-line rates, which approximated 3.8 percent in 1999 and
1998 and 3.6 percent in 1997. The increase in 1998 is attributable to new
depreciation rates, which were approved by the FPSC in 1998. When property
subject to depreciation is retired or otherwise disposed of in the normal course
of business, its cost -- together with the cost of removal, less salvage -- is
charged to the accumulated provision for depreciation. Minor items of property
included in the original cost of the plant are retired when the related property
unit is retired. Also, the provision for depreciation expense includes an amount
for the expected cost of removal of facilities.
Income Taxes
The Company uses the liability method of accounting for income taxes and
provides deferred income taxes for all significant income tax temporary
differences. Investment tax credits utilized are deferred and amortized to
income over the average lives of the related property. The Company is included
in the consolidated federal income tax return of Southern Company.
Property, Plant, and Equipment
Property, plant, and equipment is stated at original cost. Original cost
includes: materials; labor; minor items of property; appropriate administrative
and general costs; payroll-related costs such as taxes, pensions, and other
benefits; and the estimated cost of funds used during construction. The cost of
maintenance, repairs, and replacement of minor items of property is charged to
maintenance expense. The cost of replacements of property (exclusive of minor
items of property) is charged to utility plant.
Cash and Cash Equivalents
Temporary cash investments are considered cash equivalents. Temporary cash
investments are securities with original maturities of 90 days or less.
18
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
Financial Instruments
The Company's financial instruments for which the carrying amount did not equal
fair value at December 31 were as follows:
Carrying Fair
Amount Value
---------------------------
(in thousands)
Long-term debt:
At December 31, 1999 $367,449 $349,791
At December 31, 1998 $344,341 $357,100
Capital trust preferred
securities:
At December 31, 1999 $85,000 $69,092
At December 31, 1998 $85,000 $89,400
- --------------------------------------------------------------
The fair values for long-term debt and preferred securities were based on
either closing market prices or closing prices of comparable instruments.
Materials and Supplies
Generally, materials and supplies include the cost of transmission,
distribution, and generating plant materials. Materials are charged to inventory
when purchased and then expensed or capitalized to plant, as appropriate, when
installed.
Provision for Injuries and Damages
The Company is subject to claims and suits arising in the ordinary course of
business. As permitted by regulatory authorities, the Company provides for the
uninsured costs of injuries and damages by charges to income amounting to $1.2
million annually. The expense of settling claims is charged to the provision to
the extent available. The accumulated provision of $1.8 million and $1.3 million
at December 31, 1999 and 1998, respectively, is included in other current
liabilities in the accompanying Balance Sheets.
Provision for Property Damage
The Company provides for the cost of repairing damages from major storms and
other uninsured property damages. This includes the full cost of storm and other
damages to its transmission and distribution lines and the cost of uninsured
damages to its generation and other property. The expense of such damages is
charged to the provision account. At December 31, 1999 and 1998, the accumulated
provision for property damage was $5.5 million and $1.6 million, respectively.
In 1995, the FPSC approved the Company's request to increase the amount of its
annual accrual to the accumulated provision for property damage account from
$1.2 million to $3.5 million and approved a target level for the accumulated
provision account between $25.1 and $36.0 million. The FPSC has also given the
Company the flexibility to increase its annual accrual amount above $3.5
million, when the Company believes it is in a position to do so. The Company
accrued $5.5 million in 1999 and $6.5 million in 1998 to the accumulated
provision for property damage. The Company charged $1.6 million to the provision
account in 1999. Charges to the provision account during 1998 totaled $4.2
million, which included $3.4 million related to Hurricane Georges.
2. RETIREMENT BENEFITS
The Company has a defined benefit, trusteed, non-contributory pension plan that
covers substantially all regular employees. The Company provides certain medical
care and life insurance benefits for retired employees. Substantially all
employees may become eligible for these benefits when they retire. Trusts are
funded to the extent required by the Company's regulatory commissions. The
measurement date for plan assets and obligations is September 30 for each year.
Pension Plan
Changes during the year in the projected benefit obligations and in the fair
value of plan assets were as follows:
Projected
Benefit Obligations
---------------------------
1999 1998
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $143,012 $130,794
Service cost 4,490 4,107
Interest cost 9,440 9,572
Benefits paid (6,862) (6,663)
Actuarial loss (gain) and
employee transfers (8,113) 5,202
- ---------------------------------------------------------------
Balance at end of year $141,967 $143,012
===============================================================
19
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
Plan Assets
---------------------------
1999 1998
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $212,934 $222,196
Actual return on plan assets 35,971 1,310
Benefits paid (6,862) (6,663)
Employee transfers (558) (3,909)
- ---------------------------------------------------------------
Balance at end of year $241,485 $212,934
===============================================================
The accrued pension costs recognized in the Balance Sheets were as follows:
1999 1998
- ---------------------------------------------------------------
(in thousands)
Funded status $99,518 $ 69,922
Unrecognized transition
obligation (4,323) (5,043)
Unrecognized prior
service cost 4,495 4,869
Unrecognized net gain (81,956) (55,978)
- ---------------------------------------------------------------
Prepaid asset recognized
in the Balance Sheets $17,734 $13,770
===============================================================
Components of the pension plan's net periodic cost were as follows:
1999 1998 1997
- -----------------------------------------------------------------
Service cost $4,490 $ 4,107 $ 3,897
Interest cost 9,440 9,572 9,301
Expected return on
plan assets (15,968) (14,827) (13,675)
Recognized net gain (1,579) (1,891) (1,656)
Net amortization (347) (347) (347)
- -----------------------------------------------------------------
Net pension income $(3,964) $(3,386) $ (2,480)
=================================================================
Postretirement Benefits
Changes during the year in the accumulated benefit obligations and in the fair
value of plan assets were as follows:
Accumulated
Benefit Obligations
---------------------------
1999 1998
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $49,303 $39,669
Service cost 1,087 946
Interest cost 3,261 3,123
Benefits paid (1,177) (1,068)
Actuarial (loss) gain and
employee transfers (4,464) 3,614
Amendments - 3,019
- ---------------------------------------------------------------
Balance at end of year $48,010 $49,303
===============================================================
Plan Assets
---------------------------
1999 1998
- ---------------------------------------------------------------
(in thousands)
Balance at beginning of year $9,603 $9,455
Actual return on plan assets 1,525 54
Employer contributions 1,245 1,162
Benefits paid (1,177) (1,068)
- ---------------------------------------------------------------
Balance at end of year $11,196 $9,603
===============================================================
The accrued postretirement costs recognized in the Balance Sheets were as
follows:
1999 1998
- ---------------------------------------------------------------
(in thousands)
Funded status $(36,814) $(39,700)
Unrecognized transition
obligation 4,723 5,079
Unrecognized prior
service cost 2,741 2,900
Unrecognized net loss 2,620 8,187
Fourth quarter contributions 300 -
- ---------------------------------------------------------------
Accrued liability recognized
in the Balance Sheets $(26,430) $(23,534)
===============================================================
20
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
Components of the postretirement plan's net periodic cost were as follows:
1999 1998 1997
- ---------------------------------------------------------------
Service cost $1,087 $ 946 $ 896
Interest cost 3,261 3,123 2,845
Expected return on
plan assets (794) (717) (641)
Transition obligation 356 356 356
Prior service cost 159 119 -
Recognized net loss 264 128 184
- ---------------------------------------------------------------
Net postretirement cost $4,333 $3,955 $3,640
===============================================================
The weighted average rates assumed in the actuarial calculations for both the
pension plan and postretirement benefits were:
1999 1998
- --------------------------------------------------------
Discount 7.50% 6.75%
Annual salary increase 5.00% 4.25%
Long-term return on plan
assets 8.50% 8.50%
- --------------------------------------------------------
An additional assumption used in measuring the accumulated postretirement
benefit obligations was a weighted average medical care cost trend rate of 7.74
percent for 1999, decreasing gradually to 5.5 percent through the year 2005, and
remaining at that level thereafter. An annual increase or decrease in the
assumed medical care cost trend rate of 1 percent would affect the accumulated
benefit obligation and the service and interest cost components at December 31,
1999 as follows (in thousands):
1 Percent 1 Percent
Increase Decrease
- ---------------------------------------------------------------
Benefit obligation $3,627 $(3,086)
Service and interest costs $320 $(269)
===============================================================
Work Force Reduction Programs
The Company recorded costs related to work force reduction programs of $0.2
million in 1999, $2.8 million in 1998, and $1.4 million in 1997. The Company has
also incurred its pro rata share for the costs of affiliated companies'
programs. The costs related to these programs were $0.6 million for 1999, $0.2
million for 1998, and $1.3 million for 1997. The Company has expensed all costs
related to these work force reduction programs.
3. CONTINGENCIES AND REGULATORY
MATTERS
Environmental Cost Recovery
In April 1993, the Florida Legislature adopted legislation for an Environmental
Cost Recovery Clause (ECRC), which allows a utility to petition the FPSC for
recovery of all prudent environmental compliance costs that are not being
recovered through base rates or any other recovery mechanism. Such environmental
costs include operation and maintenance expense, emission allowance expense,
depreciation, and a return on invested capital.
In January 1994, the FPSC approved the Company's initial petition under the
ECRC for recovery of environmental costs. Initially, recovery under the ECRC was
determined semi-annually. The FPSC approved annual recovery periods beginning
with the October 1996 through September 1997 period. As of January 1999, the
annual recovery period is on a calendar-year basis as approved by the FPSC in
May 1998. Recovery includes a true-up of the prior period and a projection of
the ensuing period. During 1999 and 1998, the Company recorded ECRC revenues of
$11.6 million and $8.0 million, respectively.
At December 31, 1999, the Company's liability for the estimated costs of
environmental remediation projects for known sites was $5.7 million. These
estimated costs are expected to be expended from 2000 through 2006. These
projects have been approved by the FPSC for recovery through the ECRC discussed
above. Therefore, the Company recorded $1.2 million in current assets and
current liabilities and $4.5 million in deferred assets and deferred liabilities
representing the future recoverability of these costs.
Environmental Litigation
On November 3, 1999, the Environmental Protection Agency (EPA) brought a civil
action in the U.S. District Court against Alabama Power, Georgia Power, and the
system service company. The complaint alleges violations of the prevention of
significant deterioration and new source review provisions of the Clean Air Act
21
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
with respect to five coal-fired generating facilities in Alabama and Georgia.
The civil action requests penalties and injunctive relief, including an order
requiring the installation of the best available control technology at the
affected units. The Clean Air Act authorizes civil penalties of up to $27,500
per day, per violation at each generating unit. Prior to January 30, 1997, the
penalty was $25,000 per day.
The EPA concurrently issued to the integrated Southeast utilities a notice of
violation related to 10 generating facilities, including the five facilities
mentioned previously and the Company's Plants Crist and Scherer. See Note 6
under "Joint Ownership Agreements" related to the Company's ownership interest
in Georgia Power's Plant Scherer Unit No. 3. In early 2000, the EPA filed a
motion to amend its complaint to add the violations alleged in its notice of
violation, and to add Gulf Power, Mississippi Power, and Savannah Electric as
defendants. The complaint and notice of violation are similar to those brought
against and issued to several other electric utilities. These complaints and
notices of violation allege that the utilities had failed to secure necessary
permits or install additional pollution equipment when performing maintenance
and construction at coal burning plants constructed or under construction prior
to 1978. Southern Company believes that its integrated utilities complied with
applicable laws and the EPA's regulations and interpretations in effect at the
time the work in question took place.
An adverse outcome of this matter could require substantial capital
expenditures that cannot be determined at this time and possibly require payment
of substantial penalties. This could affect future results of operations, cash
flows, and possibly financial condition if such costs are not recovered through
regulated rates.
4. CONSTRUCTION PROGRAM
The Company is engaged in a continuous construction program, the cost of which
is currently estimated to total $106 million in 2000, $232 million in 2001, and
$90 million in 2002. The construction program is subject to periodic review and
revision, and actual construction costs may vary from the above estimates
because of numerous factors. These factors include changes in business
conditions; revised load growth estimates; changes in environmental regulations;
increasing costs of labor, equipment, and materials; and cost of capital. At
December 31, 1999, significant purchase commitments were outstanding in
connection with the construction program. The Company has budgeted $198.8
million for the years 2000 through 2002 for the estimated cost of a 574 megawatt
combined cycle gas unit to be located in the eastern portion of its service
area. The unit is expected to have an in-service date of June 2002. The Company
will continue its construction program related to transmission and distribution
facilities and the upgrading and extension of the useful lives of generating
plants.
See Management's Discussion and Analysis under "Environmental Matters" for
information on the impact of the Clean Air Act Amendments of 1990 and other
environmental matters.
5. FINANCING AND COMMITMENTS
General
Current projections indicate that funds required for construction and other
purposes, including compliance with environmental regulations, will be derived
from operations; the sale of additional long-term unsecured debt, pollution
control bonds, and preferred securities; bank notes; and capital contributions
from Southern Company. In addition, the Company may issue additional long-term
debt and preferred securities primarily for debt maturities and redemptions of
higher-cost securities.
Bank Credit Arrangements
At December 31, 1999, the Company had $41.5 million of lines of credit with
banks subject to renewal June 1 of each year, all of which remained unused. In
addition, the Company has two unused committed lines of credit totaling $61.9
million that were established for liquidity support of its variable rate
pollution control bonds. In connection with these credit lines, the Company has
agreed to pay commitment fees and/or to maintain compensating balances with the
banks. The compensating balances, which represent substantially all of the cash
of the Company except for daily working funds and like items, are not legally
restricted from withdrawal. In addition, the Company has bid-loan facilities
with seven major money center banks that total $130 million, of which $50
million was committed at December 31, 1999.
22
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
Assets Subject to Lien
The Company's mortgage, which secures the first mortgage bonds issued by the
Company, constitutes a direct first lien on substantially all of the Company's
fixed property and franchises.
Fuel Commitments
To supply a portion of the fuel requirements of its generating plants, the
Company has entered into long-term commitments for the procurement of fuel. In
most cases, these contracts contain provisions for price escalations, minimum
purchase levels, and other financial commitments. Total estimated long-term
obligations at December 31, 1999 were as follows:
Year Fuel
--------- ----------------
(in millions)
2000 $89
2001 70
2002 86
2003 90
2004 91
2005 - 2026 508
----------------------------------------------------------
Total commitments $934
==========================================================
In 1988, the Company made an advance payment of $60 million to a coal
supplier under an arrangement to lower the cost of future coal purchased under
an existing contract. This payment was fully amortized to expense on a per ton
basis as of March 1998.
In December 1995, the Company made another payment of $22 million to the same
coal supplier under an arrangement to lower the cost of future coal and/or to
suspend the purchase of coal under an existing contract for 25 months. This
payment was fully amortized to expense on a per ton basis as of March 1998.
The amortization expense of these contract renegotiations was recovered
through the fuel cost recovery clause discussed under "Revenues and Regulatory
Cost Recovery Clauses" in Note 1.
Lease Agreements
In 1989, the Company and Mississippi Power jointly entered into a twenty-two
year operating lease agreement for the use of 495 aluminum railcars. In 1994, a
second lease agreement for the use of 250 additional aluminum railcars was
entered into for twenty-two years. Both of these leases are for the
transportation of coal to Plant Daniel. At the end of each lease term, the
Company has the option to renew the lease. In 1997, three additional lease
agreements for 120 cars each were entered into for three years, with a monthly
renewal option for up to an additional nine months.
The Company, as a joint owner of Plant Daniel, is responsible for one half of
the lease costs. The lease costs are charged to fuel inventory and are allocated
to fuel expense as the fuel is used. The Company's share of the lease costs
charged to fuel inventories was $2.8 million in 1999 and $2.8 million in 1998.
The annual amounts for 2000 through 2004 are expected to be $2.1 million, $1.7
million, $1.7 million, $1.7 million, and $1.8 million, respectively, and after
2004 are expected to total $14.4 million.
6. JOINT OWNERSHIP AGREEMENTS
The Company and Mississippi Power jointly own Plant Daniel, a steam-electric
generating plant located in Jackson County, Mississippi. In accordance with an
operating agreement, Mississippi Power acts as the Company's agent with respect
to the construction, operation, and maintenance of the plant.
The Company and Georgia Power jointly own Plant Scherer Unit No. 3. Plant
Scherer is a steam-electric generating plant located near Forsyth, Georgia. In
accordance with an operating agreement, Georgia Power acts as the Company's
agent with respect to the construction, operation, and maintenance of the unit.
The Company's pro rata share of expenses related to both plants is included
in the corresponding operating expense accounts in the Statements of Income.
23
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
At December 31, 1999, the Company's percentage ownership and its investment
in these jointly owned facilities were as follows:
Plant Scherer Plant
Unit No. 3 Daniel
(coal-fired) (coal-fired)
-----------------------------
(in thousands)
Plant In Service $185,714(1) $231,041
Accumulated Depreciation $66,193 $113,687
Construction Work in Progress $276 $2,621
Nameplate Capacity (2)
(megawatts) 205 500
Ownership 25% 50%
- ------------------------------------------------------------------
(1) Includes net plant acquisition adjustment.
(2) Total megawatt nameplate capacity:
Plant Scherer Unit No. 3: 818
Plant Daniel: 1,000
7. LONG-TERM POWER SALES AGREEMENTS
The Company and the other operating affiliates have long-term contractual
agreements for the sale of capacity and energy to certain non-affiliated
utilities located outside the system's service area. The unit power sales
agreements are firm and pertain to capacity related to specific generating
units. Because the energy is generally sold at cost under these agreements,
profitability is primarily affected by revenues from capacity sales. The
capacity revenues from these sales were $19.8 million in 1999, $22.5 million in
1998, and $24.9 million in 1997. Declining capacity revenues are due primarily
to the decline in net plant investment related to these sales. In addition, the
decline in 1999 reflects a reduction in the authorized rate of return on the
equity component of the investment.
Unit power from specific generating plants of Southern Company is currently
being sold to Florida Power Corporation (FPC), Florida Power & Light Company
(FP&L), Jacksonville Electric Authority (JEA), and the City of Tallahassee,
Florida. Under these agreements, 214 megawatts of net dependable capacity were
sold by the Company during 1999. Sales will decrease to 209 megawatts per year
in 2000 and remain at that level -- unless reduced by FP&L, FPC, and JEA for the
periods after 2000 with a minimum of three years notice -- until the expiration
of the contracts in 2010.
Capacity and energy sales to FP&L, the Company's largest single customer,
provided revenues of $24.3 million in 1999, $22.3 million in 1998, and $25.4
million in 1997, or 3.6 percent, 3.4 percent, and 4.1 percent of operating
revenues, respectively.
8. INCOME TAXES
At December 31, 1999, the tax-related regulatory assets to be recovered from
customers were $25.3 million. These assets are attributable to tax benefits
flowed through to customers in prior years and to taxes applicable to
capitalized allowance for funds used during construction. At December 31, 1999,
the tax-related regulatory liabilities to be credited to customers were $49.7
million. These liabilities are attributable to deferred taxes previously
recognized at rates higher than current enacted tax law and to unamortized
investment tax credits.
Details of the federal and state income tax provisions are as follows:
1999 1998 1997
------------------------------------
(in thousands)
Total provision for income taxes:
Federal--
Current $33,973 $31,746 $34,522
Deferred --current year 16,776 18,485 19,297
--reversal of
prior years (22,883) (22,952) (25,778)
- --------------------------------------------------------------------
27,866 27,279 28,041
- --------------------------------------------------------------------
State--
Current 5,267 5,137 5,975
Deferred --current year 2,474 2,745 2,868
--reversal of
prior years (2,976) (2,962) (3,434)
- --------------------------------------------------------------------
4,765 4,920 5,409
- --------------------------------------------------------------------
Total $32,631 $32,199 $33,450
====================================================================
The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities, are as follows:
24
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
1999 1998
--------------------------
(in thousands)
Deferred tax liabilities:
Accelerated depreciation $168,662 $155,833
Property basis differences 6,000 20,330
Other 18,272 17,645
- ---------------------------------------------------------------------
Total 192,934 193,808
- ---------------------------------------------------------------------
Deferred tax assets:
Federal effect of state deferred taxes 9,293 9,509
Postretirement benefits 8,456 7,644
Other 12,526 10,702
- ---------------------------------------------------------------------
Total 30,275 27,855
- ---------------------------------------------------------------------
Net deferred tax liabilities 162,659 165,953
Less current portion, net (117) (165)
- ---------------------------------------------------------------------
Accumulated deferred income
taxes in the Balance Sheets $162,776 $166,118
=====================================================================
Deferred investment tax credits are amortized over the lives of the related
property with such amortization normally applied as a credit to reduce
depreciation and amortization in the Statements of Income. Credits amortized in
this manner amounted to $1.9 million in 1999, $1.9 million in 1998, and $2.2
million in 1997. At December 31, 1999, all investment tax credits available to
reduce federal income taxes payable had been utilized.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
1999 1998 1997
----------------------------
Federal statutory rate 35% 35% 35%
State income tax,
net of federal deduction 4 4 4
Non-deductible book
depreciation 1 1 1
Difference in prior years'
deferred and current tax rate (2) (2) (1)
Other, net - (2) (4)
- ----------------------------------------------------------------
Effective income tax rate 38% 36% 35%
================================================================
The Company and the other subsidiaries of Southern Company file a
consolidated federal tax return. Under a joint consolidated income tax
agreement, each subsidiary's current and deferred tax expense is computed on a
stand-alone basis.
9. COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
In January 1997, Gulf Power Capital Trust I (Trust I), of which the Company owns
all of the common securities, issued $40 million of 7.625 percent mandatorily
redeemable preferred securities. Substantially all of the assets of Trust I are
$41 million aggregate principal amount of the Company's 7.625 percent junior
subordinated notes due December 31, 2036.
In January 1998, Gulf Power Capital Trust II (Trust II), of which the Company
owns all of the common securities, issued $45 million of 7.0 percent mandatorily
redeemable preferred securities. Substantially all of the assets of Trust II are
$46 million aggregate principal amount of the Company's 7.0 percent junior
subordinated notes due December 31, 2037.
The Company considers that the mechanisms and obligations relating to the
preferred securities, taken together, constitute a full and unconditional
guarantee by the Company of payment obligations with respect to the preferred
securities of Trust I and Trust II. Trust I and Trust II are subsidiaries of the
Company, and accordingly are consolidated in the Company's financial statements.
10. SECURITIES DUE WITHIN ONE YEAR
A summary of the improvement fund requirement and scheduled maturities and
redemptions of long-term debt due within one year at December 31 is as follows:
1999 1998
----------------------
(in thousands)
Bond improvement fund requirement $850 $ 850
Less portion to be satisfied by
certifying property additions 850 850
- -----------------------------------------------------------------
Cash requirement - -
Maturities of first mortgage bonds - -
Current portion of other long-term
debt - 27,000
- -----------------------------------------------------------------
Total $ - $27,000
=================================================================
The first mortgage bond improvement fund requirement amounts to 1 percent of
each outstanding series of bonds authenticated under the indenture prior to
January 1 of each year, other than those issued to collateralize pollution
control revenue bond obligations. The requirement may be satisfied by depositing
25
<PAGE>
NOTES (continued)
Gulf Power Company 1999 Annual Report
cash, reacquiring bonds, or by pledging additional property equal to 1 and 2/3
times the requirement.
11. COMMON STOCK DIVIDEND
RESTRICTIONS
The Company's first mortgage bond indenture contains various common stock
dividend restrictions which remain in effect as long as the bonds are
outstanding. At December 31, 1999, retained earnings of $127 million were
restricted against the payment of cash dividends on common stock under the terms
of the mortgage indenture.
12. QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1999 and 1998 are as follows:
Net Income
After Dividends
Operating Operating on Preferred
Quarter Ended Revenues Income Stock
- --------------------------------------------------------------------
(in thousands)
March 1999 $134,506 $15,665 $ 4,799
June 1999 166,815 29,253 13,226
September 1999 218,264 54,429 28,582
December 1999 154,514 19,815 7,060
March 1998 $140,950 $19,387 $ 6,853
June 1998 177,130 33,232 13,364
September 1998 199,377 49,837 26,989
December 1998 133,061 19,898 9,315
- --------------------------------------------------------------------
The Company's business is influenced by seasonal weather conditions and the
timing of rate changes, among other factors.
26
<PAGE>
<TABLE>
<CAPTION>
ELECTED FINANCIAL AND OPERATING DATA 1995-1999
Gulf Power Company 1999 Annual Report
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues (in thousands) 674,099 $650,518 $625,856 $634,365 $619,077
Net Income after Dividends
on Preferred Stock (in thousands) $53,667 $56,521 $57,610 $57,845 $57,154
Cash Dividends
on Common Stock (in thousands) $61,300 $57,200 $64,600 $58,300 $46,400
Return on Average Common Equity (percent) 12.63 13.20 13.33 13.27 13.27
Total Assets (in thousands) 308,495 $1,267,901 $1,265,612 $1,308,366 $1,341,859
Gross Property Additions (in thousands) $69,798 $69,731 $54,289 $61,386 $63,113
- -------------------------------------------------------------------------------------------------------------------------------
Capitalization (in thousands):
Common stock equity 422,313 $427,652 $428,718 $435,758 $436,242
Preferred stock 4,236 4,236 13,691 65,102 89,602
Company obligated mandatorily
redeemable preferred securities 85,000 85,000 40,000 - -
Long-term debt 367,449 317,341 296,993 331,880 323,376
- -------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) 878,998 $834,229 $779,402 $832,740 $849,220
===============================================================================================================================
Capitalization Ratios (percent):
Common stock equity 48.0 51.3 55.0 52.3 51.4
Preferred stock 0.5 0.5 1.8 7.8 10.5
Company obligated mandatorily
redeemable preferred securities 9.7 10.2 5.1 - -
Long-term debt 41.8 38.0 38.1 39.9 38.1
- -------------------------------------------------------------------------------------------------------------------------------
Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 100.0
===============================================================================================================================
Security Ratings:
First Mortgage Bonds -
Moody's A1 A1 A1 A1 A1
Standard and Poor's AA- AA- AA- A+ A+
Duff & Phelps AA- AA- AA- AA- A+
Preferred Stock -
Moody's a2 a2 a2 a2 a2
Standard and Poor's A- A A A A
Duff & Phelps A A+ A+ A+ A
Unsecured Long-Term Debt -
Moody's A2 A2 A2 - -
Standard and Poor's A A A - -
Duff & Phelps A+ A+ A+ - -
===============================================================================================================================
Customers (year-end):
Residential 315,240 307,077 300,257 291,196 283,421
Commercial 47,728 46,370 44,589 43,196 41,281
Industrial 267 257 267 278 278
Other 319 268 264 162 134
- -------------------------------------------------------------------------------------------------------------------------------
Total 363,554 353,972 345,377 334,832 325,114
===============================================================================================================================
Employees (year-end): 1,339 1,328 1,328 1,384 1,501
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA 1995-1999 (continued)
Gulf Power Company 1999 Annual Report
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Operating Revenues (in thousands):
<S> <C> <C> <C> <C> <C>
Residential $ 277,311 $276,208 $ 277,609 $ 285,498 $ 276,155
Commercial 165,871 160,960 164,435 164,181 159,260
Industrial 67,404 69,850 77,492 78,994 81,606
Other 2,174 2,100 2,083 2,056 1,993
- ------------------------------------------------------------------------------------------------------------------------------
Total retail 512,760 509,118 521,619 530,729 519,014
Sales for resale - non-affiliates 62,354 61,893 63,697 63,201 60,413
Sales for resale - affiliates 66,110 42,642 16,760 17,762 18,619
- ------------------------------------------------------------------------------------------------------------------------------
Total revenues from sales of electricity 641,224 613,653 602,076 611,692 598,046
Other revenues 32,875 36,865 23,780 22,673 21,031
- ------------------------------------------------------------------------------------------------------------------------------
Total $674,099 $650,518 $625,856 $634,365 $619,077
==============================================================================================================================
Kilowatt-Hour Sales (in thousands):
Residential 4,471,118 4,437,558 4,119,492 4,159,924 4,014,142
Commercial 3,222,532 3,111,933 2,897,887 2,808,634 2,708,243
Industrial 1,846,237 1,833,575 1,903,050 1,808,086 1,794,754
Other 19,296 18,952 18,101 17,815 17,345
- ------------------------------------------------------------------------------------------------------------------------------
Total retail 9,559,183 9,402,018 8,938,530 8,794,459 8,534,484
Sales for resale - non-affiliates 1,561,972 1,341,990 1,531,179 1,534,097 1,396,474
Sales for resale - affiliates 2,511,983 1,758,150 848,135 709,647 759,341
- ------------------------------------------------------------------------------------------------------------------------------
Total 13,633,138 12,502,158 11,317,844 11,038,203 10,690,299
==============================================================================================================================
Average Revenue Per Kilowatt-Hour (cents):
Residential 6.20 6.22 6.74 6.86 6.88
Commercial 5.15 5.17 5.67 5.85 5.88
Industrial 3.65 3.81 4.07 4.37 4.55
Total retail 5.36 5.41 5.84 6.03 6.08
Sales for resale 3.15 3.37 3.38 3.61 3.67
Total sales 4.70 4.91 5.32 5.54 5.59
Residential Average Annual
Kilowatt-Hour Use Per Customer 14,318 14,577 13,894 14,457 14,148
Residential Average Annual
Revenue Per Customer $888.01 $907.35 $936.30 $992.17 $973.35
Plant Nameplate Capacity
Ratings (year-end) (megawatts) 2,188 2,188 2,174 2,174 2,174
Maximum Peak-Hour Demand (megawatts):
Winter 2,085 2,040 1,844 2,136 1,732
Summer 2,161 2,146 2,032 1,961 2,040
Annual Load Factor (percent) 55.2 55.3 55.5 51.4 53.0
Plant Availability Fossil-Steam (percent): 87.2 87.6 91.0 91.8 84.0
- ------------------------------------------------------------------------------------------------------------------------------
Source of Energy Supply (percent):
Coal 89.8 89.2 87.1 87.8 86.8
Oil and gas 2.5 2.0 0.4 0.5 0.4
Purchased power -
From non-affiliates 5.9 5.5 3.5 2.7 4.0
From affiliates 1.8 3.3 9.0 9.0 8.8
- ------------------------------------------------------------------------------------------------------------------------------
Total 100.0 100.0 100.0 100.0 100.0
==============================================================================================================================
</TABLE>
28
