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This excerpt taken from the SO 10-K filed Feb 27, 2007. ACCOUNTING
POLICIES
Application of Critical Accounting Policies and Estimates
The Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States.
Significant accounting policies are described in Note 1 to
the financial statements. In the application of these policies,
certain estimates are made that may have a material impact on
the Company’s results of operations and related
disclosures. Different assumptions and measurements could
produce estimates that are significantly different from those
recorded in the financial statements. Senior management has
reviewed and discussed critical accounting policies and
estimates described below with the Audit Committee of Southern
Company’s Board of Directors.
Electric
Utility Regulation
The Company is subject to retail regulation by the Florida PSC
and wholesale regulation by the FERC. These regulatory agencies
set the rates the Company is permitted to charge customers based
on allowable costs. As a result, the Company applies FASB
Statement No. 71, “Accounting for the Effects of
Certain Types of Regulation” (SFAS No. 71), which
requires the financial statements to reflect the effects of rate
regulation. Through the ratemaking process, the regulators may
require the inclusion of costs or revenues in periods different
than when they would be recognized by a non-regulated company.
This treatment may result in the deferral of expenses and the
recording of related regulatory assets based on anticipated
future recovery through rates or the deferral of gains or
creation of liabilities and the recording of related regulatory
liabilities. The application of SFAS No. 71 has a
further effect on the Company’s financial statements as a
result of the estimates of allowable costs used in the
ratemaking process. These estimates may differ from those
actually incurred by the Company; therefore, the accounting
estimates inherent in specific costs such as depreciation and
pension and postretirement benefits have less of a direct impact
on the Company’s results of operations than they would on a
non-regulated company.
As reflected in Note 1 to the financial statements,
significant regulatory assets and liabilities have been
recorded. Management reviews the ultimate recoverability of
these regulatory assets and liabilities based on applicable
regulatory guidelines and accounting principles generally
accepted in the United States. However, adverse legislative,
judicial, or regulatory actions could materially impact the
amounts of such regulatory assets and liabilities and could
adversely impact the Company’s financial statements.
Contingent
Obligations
The Company is subject to a number of federal and state laws and
regulations, as well as other factors and conditions that
potentially subject it to environmental, litigation, income tax,
and other risks. See FUTURE EARNINGS POTENTIAL herein and
Note 3 to the financial statements for more information
regarding certain of these contingencies. The Company
periodically evaluates its exposure to such risks and records
reserves for those matters where a loss is considered probable
and reasonably estimable in accordance with generally accepted
accounting principles. The adequacy of reserves can be
significantly affected by external events or conditions that can
be unpredictable; thus, the ultimate outcome of such matters
could materially affect the Company’s financial statements.
These events or conditions include the following:
Table of Contents
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued) Gulf Power Company 2006 Annual Report
Unbilled
Revenues
Revenues related to the sale of electricity are recorded when
electricity is delivered to customers. However, the
determination of KWH sales to individual customers is based on
the reading of their meters, which is performed on a systematic
basis throughout the month. At the end of each month, amounts of
electricity delivered to customers, but not yet metered and
billed, are estimated. Components of the unbilled revenue
estimates include total KWH territorial supply, total KWH
billed, estimated total electricity lost in delivery, and
customer usage. These components can fluctuate as a result of a
number of factors including weather, generation patterns, power
delivery volume and other operational constraints. These factors
can be unpredictable and can vary from historical trends. As a
result, the overall estimate of unbilled revenues could be
significantly affected, which could have a material impact on
the Company’s results of operations.
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