3F0503-05, 2002 Annual Financial Reports, Staying Focused Through Table 11

2002 Annual Financial Reports, Staying Focused Through Table 11

ML031631001
Person / Time
Site:	Crystal River
Issue date:	05/06/2002
From:	Progress Energy Carolinas
To:	Office of Nuclear Reactor Regulation
References
3F0503-05
Download: ML031631001 (139)

Text

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"While our business continues to change, we remain focused on those strategies and ideals that have allowed us_

to thrive-meeting the needs and expectations of our, customers ad deliveri-ng quality services from.one company,"

2GRU Annual Report 2001-02 "Fi na6nces. overcoming aweak economy, we turned-in a solid financial performance-in fiscal 2001-02. We

_;_-achieved cobined net revienues of $90,462,263., Our financialI strength was evident in our, debt coverage ratio of 2.65, Well above our miiu euirement.

Adthrough an innovativefo'rrula desi!gned t up port our commuiinit, we pro'vided nearly 37 percent of the itys Gneral Fund-dollars that elp pay or services such -as polic e'and fire lpr6t6ction.,-In 2002,-

66or transfer increaIsed by more than 5 percent to Inot$26 mlillion?'

Savings.

hanks to ongoing financial contro s,we

-were -abl e to pass along electric rate savings to our;7 residential and business customners. This m-arks the nint cective year,that our electric rates have remiained the same or,dec66sed.:Thb lower rates~

place Us in the lwer quartile among uitilities in North Central Florida, Keeping us competitive'with mharket rates of other Florida providers and helpingausdeliver.

the val'u'e our c ustomlners expect.- The ne w rates are the resut of two'b6k-to-back rate decreases,-,sav'ing the

_-average residential customer,$2.66 i month (ae on1,000 kilowatt hourspeir month). An "inverted~ra't;e" sructure". encourages our customers to conserve by

'charging les fr the first 750 kWh-of electict.6u

-Commercial customer alo had the opportu nity to see additional savings rom' electnic rate decreases ofred thiroughb our Business Partners long:tr ev 9ieagreement.

R ans. Our Double-A bon d ratfingsyth'Staindard

&Poor's Corporatio'n and Moody s Investors Service are among the highesti te n-ationsae nyb 26 of the 2,000 other public power utilities. 9~

Dereultin. We believe rsucrigof the

-stt's electric7indlustry is inevitale adeventually

- will offer customrers choices in the selection o an ctrc provie However Florida is taking it sowlY.

In the meantime, GRU has sufficient generation to meet the needs of our customers for years to come.

Changes. We continue to make changes that are in the best interest of our customers. A few years ago we became an owner of The Energy Authority (TEA),

a cooperative public power energy organization in Jacksonville, Florida, that conducts group selling and purchasing of electricity and natural gas. The com-bined resources of TEA's member utilities strengthen our ability to buy and sell electricity and gas in the larger regional and national wholesale marketplaces.

In May 2002, TEA assumed responsibility for our nat-ural gas purchasing, the sale and management of our unused pipeline entitlements and our financial trading on the commodity market. This is helping us derive the most value for our assets and offer more competi-tive prices for our customers. We also are working with other Florida electric utilities to form a regional transmission organization (RTO) that, by federal man-date, will eventually control the planning and opera-tion of Florida's electric transmission grid.

Revenue. Driving our revenue increase over the past year was our customer growth, spurred by a number of effective customer service initiatives.

Through our five utility services, we serve approxi-mately 85,000 customers. A new electric territorial agreement with Clay Electric Cooperative will bring about 1,100 new utility customers to GRU. The change will help eliminate duplication of power lines and other infrastructure, and bring in additional rev-enue. Subscribers to GRU.Net, our residential Internet access service, grew by 16 percent last year, and customers now can sign up for any of our utility serv-ices and pay their bills online by visiting our Web site (www.gru.com).

Expansion. To maintain our competitive advan-tage, we continue to improve and expand our facili-ties and technology. In 2002, we added two more water wells, expanded our water and wastewater pipelines and treatment facilities, completed con-struction of our new GRUCom telecommunications center, extended our fiber-optic network by 19 cable miles, laid 17 miles of new gas lines, and continued to boost our electric reliability with generating and distribution system upgrades.

Security. We remain vigilant about the security of our facilities. Working in concert with federal, state and local agencies and national security authorities, we have taken steps to further safeguard our commu-nity's utility infrastructure. We will continue to ensure the safety of our customers, employees and commu-nity, and the reliability of our services.

Focus. While our business continues to change, we remain focused on those strategies and ideals that have allowed us to thrive-meeting the needs and expectations of our customers and delivering a multi-tude of services from one company. We are "More than Energy.'" II Michael L. Kurtz, General Manager GRU Annual Report 2001-02 3

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Vegetation management refocuses to Some enterprising profit-centered program marketing has helped our vege-tation management program transforn from a core cost center into a profitable state-wide business operation.

Since the early 1990s, our vegetation management team has mainly used herbicides in place of tree-cutting and mowing for long-term vegetation control of GRU rights-of-way. The low-mainte-nance approach prevents unwanted plants and trees from growing into power lines while letting desirable native grasses and low-growing plants flourish. Program Manager Tracy Maxwell, our Vegetation Maintenance Manager, is marketing his team's special expertise to other municipal utilities and electric cooperatives throughout Florida. His department also generates revenue from the sale and replanting of timber on selected tracts of GRU property, and fees for forest management consultation. The vegetation man-agement program has generated more than $1 million since 1998 in timber sales and combined consulting fees.

"The cycle of planting and harvesting timber keeps the forest young and healthy for many wildlife species and provides a steady stream of revenue for GRU," Maxwell said. "Since the newly-planted trees mature so quickly, the forest will never run out of trees. It's a continuous, sustainable process that fits well with our business goals and environmental commitment."

GRU HELPS MAKE GAINESVILLE A GREEN CITY Along with its many scenic lakes lI and wetlands, our service area boasts the densest tree canopy of any community its size in the country-explaining Gainesville's designation as a Tree City USA community. Like our many environmentally-conscious cus-tomers, we believe that practicing conservation is practicing sustainabil-ity of our natural resources.

The National Arbor Day Foundation has named GRU a Tree Line USA Utility for the third straight year in recognition of quality tree care, tree planting and public education. And Relay magazine, a publication of the Florida MNlunicipal Electric Association, recently cited GRU's conservation and beautifica-tion efforts in helping to make Gainesville the "Greenest City in the South."

W e have many conservation and enironmental programs to keep our dynamic community "green" in the face of urban growth. Our vegetation management program has received the "Best Rights of WNray" ANvard from the national Project Habitat"' pro-gram, wvhich encourages utility com-panies to control vegetation grovth on their rights-of-way land in ways that protect vildlife habitat. The State of Florida recently designated the 1, I 00-acre voodlands surround-ing our Deerhaven Generating Station as a "Stewardship Forest,"

citing our exemplary management of natural resources. Each year, we give away more than 2,000 mid-sized trees and native shrubs to our cus-tomers during our "Tree-mendous Appreciation Day" event.

GAINESVILLE GOES GREEN WITH CONSTRUCTION 1iI We have been quick to adopt 9

greener energy practices, and we are committed to helping our cus-tomers do likewzise. WNre encourage green alternatives to energy con-sumption by offering solar and natu-ral gas rebates. Wlle also have teamed

%vith the University of Florida and local governments to form the Gainesville Green Building Coalition, vhich is helping the City of Gainesville to adopt green-building practices for its buildings and create green-construction incentive pro-grams for local builders and developers.

In 2003, we will start converting landfill-derived gas to "green electric-ity" for sale to GRU customers. The volume of methane gas produced from garbage degradation at the county's now-closed Southwest Landfill will generate enough elec-tricity in the first year to power about 2,000 homes.

Through our annual HomeFix Project, our employees take a hands-on approach to making Gainesville more conservation conscious, volun-teering to make household repairs and improve the energy efficiency of homes for qualified families. The program's primary mission is to help deserving families find ways to save money and live comfortably through energy-efficient practices.

HYDRONIC HEATING HELPS MAKE GAS A GREAT CHOICE Everyone benefits when we can tI deliver a senice that not only lowers our customers' energy costs, but also lessens the impact on the environment. That is why we aggres-6 GRU Annual Report 2001-02 I

WNe also work with the Alachua County Housing Authority to assist low-income persons wvith initial utili-iies deposits, and our new "Extend-a-Hand" program arranges for deferred payment of utilities bills for cus-tomers experiencing short-term finan-cial setbacks such as losing a job.

"The goal is to help our cus-tomers get to where they can pay their current charges every month without falling further behind," said Bob Bergdoll, GRU Director of Customer Operations.

N'e provide some services simply to make life easier for our customers. 11 sively promote the use of natural gas as a clean and affordable alternative to electricity for heating, cooling, cooking and other functions.

Mlany natural gas appliances are more energy-efficient than compara-ble electric appliances. Residential natural gas vater heating, for exam-ple, costs about half as much to oper-ate as electric water heating. A pri-mary advantage of using natural gas is its limited emissions.

Because we offer the lowest gas rates in the state, our customers have more incentive to use natural gas.

Virtually every new subdivision in our community is served by natural gas from GRU. Mlany homebuilders and apartment complexes are opting for technology called hydronic gas heat-ing-or "combo heating"-uhich uses a gas-fired water boiler and coils instead of a gas furnace for space and water heating. The smaller combo heaters require less space and have a simpler design than standard gas fur-nace units.

'AVe are building relationships with more apartment complex owvners and developers to promote natural gas as a new option for their energy needs," said Mlike Brow n, Senior Sales Representative for Gas larketing. "Using natural gas loners energy costs for property owners and their tenants, and lets us serve more customers in a concentrated space at less cost, improving the return on GRU's investment."

In 2002, we laid about 17 miles of new gas lines, increasing our natu-ral gas infrastructure to 601 miles.

To reduce operational expenses, we cross-train our gas service crews to lay underground electric cables at the same time they install new gas lines-work previously requiring two separate crews.

PROGRAMS EXTEND A HAND TO CUSTOMERS WITH SPECIAL NEEDS PjbOperating in a state vith the E highest proportion of elderly resi-dents in the country, we continually seek ways to meet the emergency utility needs of Gainesville's elderly and those in financial hardship.

Last spring we became involved in the Gatekeeper Program wvith the Aid-Florida Area Agency on Aging.

GRU meter readers and other field service employees are trained as "gatekeepers" to watch for signs of elderly residents in need-such as overgrown lavns, mail build-up or a confused homeowner-during their daily contact with customers. Meter readers also play the lead role in a program called FOCUS (Field Observation of Customer Utility Services), reporting any damage to outdoor pipes, utility lines and other gas, wvater or electric equipment they observe during their monthly house calls.

BUSINESS PARTNERS PROGRAM SERVES OUR LARGEST CUSTOMERS Through our Business Partners program, we fos-ter good relations by helping local businesses improve their profitability. Lower rates, in exchange for 1 0-year contracts, are a key offering. Today, more than 700 commercial Business Partners have signed agree-ments to purchase electricity exclusively from GRU for 10 years, representing approxi-mately 68 percent of GRU's commercial electric revenue.

Our Business Partners also appreciate our value-added services such as energy and water conservation surveys, high-efficiency lighting retrofits and rebates for gas cooling.

Our aim with Business Partners is to know the "special something" that drives our cus-tomers' buying decisions, and then work to meet their needs better than anyone else can.

GRU Annual Report 2001-02 7

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WE OWN AND OPERATE CORE FACILITIES L-1UEi~~~~~~~~~

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orfcltes fU s a provider of electric, natural gas, water, waste<<

water and tlecommunlcations services. owninpgor o0wn high-=aity core facilities is essential in-our mission to prvide More than Energy" to our cs-toners. We can hat-ourzfaciliti ted and maintained in-a way that meets community standards and goals, and ficilit ownership gives us extensive flexibility to meet changing conditions of the utility industry.

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F million 'tepowering' of its existing IITFlt 34; IQ

-10 :w_ equipment to eme-rge as our cleanest GRt3 has two power plants that make and most efficient power generator.

mo&,than enough electricity to meet The new generator produces five ourgustoiner demand even during tines more energy with half the air the. ottest days of FIlonids sumn-emissions of older steam units. The mer.

The 434-megawatt Deerbaven refurbisled plant, adorned with new Ge4trating Station was-the first fencing and landscaping, is the focal process water zero discIharge plant point of a major neighborhood in tlhe Southeast and is recogUzed improvement effort in down'town as oe of Florida's niost ecien t Gainesvile.

an&cononical power plants, Our Including our 1.4 percent owner-smaller Kelly Generating Station, -a ship in the nearby Crystal River defiUng landmark in the ciWs Power Plant, GRU has a total con-Dottown Historic District snce blued generating capacity of more 19r4, recently underwent a $42 than 621 megawatts. 'e have the capability to sell excess e

-eticitio other utilities in need, which imrprvea plant efficiency and helps us maintain low electric rates for customers.

Gainesville has one of the puest water supplies in the nation, andve take gat care to keep-the area't drinking water pure safe and avat able on demand for more than 60-,00 customers. Our lMurphreeWater Treatment Plant supplies drnldn water for more than 70 percent of Alachua County's population. To 8

RU Annual RePatt 2001-02 t'

lessen the impact of the region's per-sistent drought, GRU has added four new water production vells to the lurphree wellfield since 2000. N'e now have 13 water.vells in senice that can supply up to 44 million gal-lons per day, and ve wvill add tvo more vells by 2006 to meet increas-ing vater demands.

WN'e also installed a 20-inch water main, 1.7 miles long, in 2001 to improve water pressure in the rapidly groxving southvestern portion of our senice area. In 2002, we buried two miles of 36-inch pipe to increase vater pressure in Gainesville's A IN THE PAST TWO YEARS WE HAVE IMPROVED WATER PRESSURE TO THE EXPANDING WESTERN PORTION OF OUR SERVICE AREA. INCREASED WATER PRESSURE IMPROVES FIRE PROTECTION AND BETTER MEETS IRRIGATION DEMANDS.

expanding northwestern corridor.

GRU w%ill continue extending the pipeline westward in 2003.

Consening water is always a ital concern to GRU, and the new vells and system improvements, along with our customers' *illing observation of voluntary wvater conservation meas-ures, have helped us avoid mandatory watering restrictions during the past tvo unusually dry seasons. Our goal is to provide a plentiful, safe *vater supply to all GRU customers and future generations.

GRU Annual Report 2001-02 9

RECLAIMED WATER EXPANSIONl I MEANS A GREENER COMMUIY One way to reduce the demand for groundwater is to encourage innova-tive ways to reuse treated wastewater for irrigation and community beauti-fication. Reclaimed vater is treated to drinking standards at our state-of-the-art Kanapaha NVater Reclamation f -

as1 Facility in southwest Gainesville, one of only two plants in Florida permit-ted to return treated effluent directly into the aquifer. NlVc deliver more than two million gallons of reclaimed water a day to 400 residential cus-tomers and several large commercial and recreational users, mainly for lawn and park irrigation, golf courses I

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Gainesville's first public power plant irt 19f4, we.never envisioned it would still be a source of civic

pflde and redogn'ilt nearly 9(years later. That's the case, though,

,with our downtown Ke1-Generating Station, which earned the City Beautification Boards'2002 Gold Award for aesthetic and artistic

.appeal in the restoration and adaptive reuse category.

As part of Kelfy Generating-Station's repowering project completed

'last year, GRU hosted-public meetings to give neighbors a hand in the design and landscaping-of the-refurbished plant campus. Besides Improving airbomre emissions at the Kelly Plant, the effort resulted in several hundred thousand dollars worth of landscaping and an elegant, wrought-iron-fence with red-brick columns.

While the repowering.upgrades will help us meet Gainesville's

'future electicity needs, the community involvement helped us create

.an attractive generating, station that preserves the neighborhood's

-historical flavor and supports downtown revitalization.

and scenic water gardens.

A $13 million expansion of our reclaimed water system, started in early 2002, will increase the Kanapaha plant's daily capacity from 10 million gallons to 12.5 million.

Additional biological treatment basins and filters should be installed and operational by August 2003 to improve flow capacity.

"The Kanapaha plant is nearing its permitted capacity," said Kim Zoltek, GRU's Water and Vastewater Engineering Director. "These upgrades wiill improve system reliabil-ity and provide adequate wastewater treatment capacity to our customers through 2010. Ne are designing some novel modifications that could increase treatment capacity to 15 million gallons a day."

"THESE UPGRADES WILL IMPROVE SYSTEM RELIABILITY AND PROVIDE ADEQUATE WASTEWATER TREATMENT CAPACITY TO OUR CUSTOMERS THROUGH 2010."

GRU's other wastewater facility, the lain Street WVastewater Treatment Plant, treats about seven million gallons of effluent daily from customers living in east Gainesville.

RECLAIMED WATER WILL FLOW FROM MAlI STREET PLAr4 By fall of 2003, a new, 24-inch pipe should be in place as the backbone of a system that can deliver reclaimed water from the lain Street plant to Gainesville's eastside, including the City's public golf course and sports stadium. The expanded eastside line could be extended into neighbor-hoods for residential use in the future. About 40,000 gallons a day vvill be used to irrigate the proposed Depot Avenue stormwater park just south of downtown Gainesville, con-tributing to ambitious downtoin redevelopment and neighborhood improvement efforts. 1 1 0 GRU Annual Report 2001-02

how well do you know GRU?

1) Wthich GRU service provides several wireless telephone service providers with the use of our fiber-optic network and 11 communication towers?

a) GRU.Net b) Energy Supply c) GRUCom d) Energy Delivery

2) Which GRU plant recently underwent a "repow-ering" of its equipment by upgrading the generator to produce five times more energy with half the air emissions?

a) Kelly Generating Station b) lurphree Water Treatment Plant c) Deerhaven Generating Station d) Kanapaha Water Reclamation Facility

3) Since 2000, what has GRU added to improve its drinking water service?

a) Four new water production vells to lessen the impact of the drought b) A 20-inch water main, 1.7 miles long, to improve vater pressure c) Twvo miles of 36-inch pipe along 53rd Avenue to increase water pressure d) All of the above

4) How does the Kanapaha N'ater Reclamation Facility convert organic wastewater sludge into a ilow-grade fertilizer for local agricultural use?

a) Boil it for tvo days b) Treat it wvith bugs that feed on raw wastewater c) Filter it w%ith specialized filtration systems underground d) Closely monitor a seven-step treatment process

5) What benefits besides price discounts does GRU offer members of the Business Partner's program?

a) Energy and vater conservation surveys b) High-efficiency lighting retrofits and rebates for gas cooling c) Tips on insulation, landscaping and choice of energy sources d) All of the above

6) Which of the following is a GRU public recre-ational park and wildlife observatory with a birding trail, scenic ponds, streams and waterfalls supplied by reclaimed water?

a) Kanapaha Botanical Gardens b) Lake Wvauberg c) Chapman's Pond and Nature Trails d) None of the above

7) WThat have the GRU powerline undergrounding programs accomplished since 1985?

a) They converted the entire downtown district from overhead power lines to underground cables b) They helped reduce service interruptions c) They contributed to the aesthetics of the dow%n-tovn revitalization project d) All of the above

8) WThat is the name of the program that gives thou-sands of students and their families an opportunity to attend a multitude of Gator sport events?

a) Extend-A-Hand b) Game Day with the Gators c) Adopt-A-School d) Gator Jam

9) What is the name of the slogan for GRU's public information campaign designed to show how GRU supports police and fire protection and the conven-ience of our one-stop utility services?

a) GRU -

More than Energy-I b) GRU -

Energy and then Some-,

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Not Just an Energy Provider-'

d) GRU -

WVe do lore than Turn on the LightsT-,

10) In 2002, GRU added approximately 17 miles of i ______ _______ lines to transport this clean and affordable alternative to electricity for heating, cooling, cooking and other functions.

a) Neon Gas b) Propane Gas c) Natural Gas d) Hydrogen Gas

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WE ARE EARLY ADOPTERS OF BENEFICIAL TECHNOLOGIES Being alert to advances in technology means we are always giving our customers I

the most-up-to-date services As a publicly owned utility for more]

than a century, GRU is a leader in the utility industry. To remain a successful business in the future, we pursue beneficial technological advances that create a competitive advantage and further enhance our delivery of utility services to our customers. >

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apartment complexes go Wi reless GRUCom, our telecommunications arm, is giving Gainesville a head start on the next major innovation in Internet use-wireless access to the Web.

In the fall of 2002, tenants of The Courtyards apartment com-plex, located across from the University of Florida campus, were able to connect to the Web through our new wireless broadband Internet service. GRUCom signed a five-year contract with the parent company of the complex to install and maintain antennas, fiber-optic cables and radios at the complex. Students can connect to the Intemet anywhere in the building-their bedroom, dining room, balcony-or even outside by the pool without power cords or wires. After registering with GRUCom, tenants at The Courtyards logon using a laptop or handheld computer with a wireless Ethernet card. The wireless network at the 386-unit complex is GRU's first public application of mobile-computing technology.

GRUCom also will provide high-speed Internet access for Alachua County government's "Digital Downtown Project." l COMPUTERIZED 'MAPPING' IMPROVES GRU RESPONSE TO POWER OUTAGES People don't think much about their utility provider *when everything is working correctly. Flip a sitch and light instantly illuminates or dims at your whim. Click the TV remote and "WNTest WVing" fills the screen. Turn the thermostat down to 76 and Florida's summer heat is forgotten. And that is the way we like it.

To minimize outages and speed the restoration of power to our cus-tomers, we began a project to imple-ment a nev computerized Outage ilanagement System. The system will

-y reducing power]

outages and improv-ing how we respond to them, we want to make service interruptions the last thing on our Ltstomers' minds.

1 provide automated, real-time analysis and graphic mapping of outage prob-lems on our electric distribution net-work. The system also has comput-er-aided features for rerouting power, operations dispatch and maintenance scheduling.

"Vith our old system, we had to manually trace the outage upstream on our distribution netvork and dis-patch a truck and crev to the area.

This technology improves our speed and accuracy in pinpointing the out-age, assessing the cause and extent of the problem and dispatching our crews to restore pover Our operators also can relay that information to our customers much faster," said Patti Tuttle, GRU Electric Systems Control Technical Support Manager. "The Outage lanagement System is sched-uled to go live by early 2003."

By reducing power outages and improving how, wve respond to thepn, ve want to make senice interruptions the last thing on our customers' minds.

14 GRU Annual Report 2001-02

ON-SITE GENERATION POSITIONS GRU AS A FIRST-CHOICE PROVIDER As the future of Florida's changing electric industry unfolds, consumers are expecting greater reliability in their electric serice and new choices from their electric provider. Along w.ith ongoing improvements in our centralized distribution system, we are positioning ourselves as, the first-choice provider of on-site power gen-eration through the development of "distributed generation" units.

Instead of producing electricity solely at central plants, we can install small distributed generation units at or near the point of use-mainly, on-site at major businesses. Commercial customers who choose this option would pay GRU a monthly fee for the installation, operation and mainte-nance of the utility-owned generators.

"lany of our commercial cus-tomers with high reliability require-ments, such as hospitals, university facilities and 24-hour call centers, can benefit by choosing on-site power generation," said David Beaulieu, reducing capital improvements, increasing operating efficiencies and reducing distribution and transmission line losses.

"Many of our commercial customers with high reliability requirements, such as hospitals, university facilities and 24-hour call centers, can benefit by C hoosing on-site power generation,"

GRU Assistant General Mlanager for Energy Delivery "The power gener-ated by these smaller, localized units vould be fully integrated into GRU's electric system. Electricity is always available on-site and ve can redistrib-ute any excess power to other customers as needed."

The small-scale technology of dis-tributed generation can save both GRU and customers money by 71 I

"Distributed generation can increase power reliability and quality by minimizing the effects of veather and long-term service interruptions that sometimes affect centralized dis-tribution systems," Beaulieu said.

"Continued reliance upon GRU for all of their energy needs allows commer-cial customers to remain focused on their core business, without having to become energy experts themselves." l GRU Annual Report 2001-02 15 r-I

WE ARE NEIGHBORS SERVING NEIGHBORS Caring about the people we serve just makes good sei 1f a

RU and GRU employees are an for butterflies, birds, integral part of Gainesville and other wsildlife. Xle re(

Alachua County. Ne live and gallons of reclaimed play side by side wvith the cus-our neighboring Kan tomers we serve. Wle breathe Reclamation Facility the same air, drink the vater and park's scenic ponds,!

enjoy the same lush natural sur-falls and irrigation. A roundings that help make Gainesville different species of b "The Best Place to Live in America" charted at the park's (according to a 1996 Mloney

con1ti, llagazinie ranking). This shared per-spective inspires a menu of GRU senices and programs that reinforce Local scho4 community-xide goals, support a liv-able community and practice social wanted to c responsibility garden to s PASSIVE PARK FILTERS appreciatio 1.5 MILLION GALLONS OF Frii RECLAIMED WATER WNte have a knack for transforming lives on the essential operational activities into opportunities to improve the "livab-and provide ility" of our community The a warm saf Chapman's Pond and Nature Trails, a GRU-constructed, passive-recreation These kids park, is one of many reclaimed water projects that add to the beauty of to realize th Gainesville. The nature park and through l\\

wvildlife observatory, alvays open and t

a free to the public, is an inviting oasis from GRU.

ise L 3 turtles and cycle 1.5 million wvater a day from apaha WVater to supply the streams, water-lore than 150 irds have been birding trail, niied on page 20 16 GRU Annual Report 2001-02

Your suggestions are important to us.

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Thank you for reviewing the 2001-2002 GRU annual report.

In the next two to three weeks you will receive a letter requesting your input about our annual report on a short survey.

Please look for the letter and accompanying survey and take a few moments to give us your ideas.

Thank you for your assistance.

Mike Kurtz GRU General Manager i

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IT'S HARD TO SEE OUR WORK IN THE DOWNTOWN, BUT IT'S THERE The dowvntowin renaissance has another centerpiece-but you can't see it.

GRU has charged up redevelop-ment efforts by initiating one of the most aggressive powerline under-grounding programs in the state.

Since 1985, we have converted the entire downtown district from over-head pover lines to underground across

1. Producing electric-ity from landfill gas is an example of green

2. GRU's Gator Mascot.

3. GRU's Mini-program donates funds to Alachua County schools.

down

1. This project gave GRU's Kelly Plant five times the energy with half the emissions.

2.

_ City teaches children how to be smart around electricity.

3.

Gas is just one of GRU's many services.

cables, and are now converting sur-rounding neighborhoods.

lore than 660 of the 1,205 total circuit miles in our electric distribution system are now located underground. Cost-shar-ing alliances w ith government and private developers help pay for the infrastructure.

"1lore than half of our electric distribution lines are nov under-ground, including all of dontown.

I don't knov of any other utility that can make that claim," said Reid I

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I l I I I ILeniN (£) 'AiOaeS (z) '6uuaModai (t) UMOp 1uE!J9 (£) 'JozeS JOMOd (z) MJ6iaua (L) ssoJo e :SU3MSNV These "before and after" pictures show the dramatic change our electric facilities under-grounding program has brought to the appear-ance of downtown Gainesville. We have now undergrounded more than half of all electric facilities in our service territory.

Rivers, GRU's lanager of Energy Delivery Engineering. "Our under-grounding plan runs through 2035.

WVe are locating more lines under-ground in other neighborhoods and all new developments and along major gate-way roads. Underground lines cause fever service interrup-tions because they are less suscepti-ble to wveather damage, but their pri-mary advantage is aesthetics. WNe are trying to make GRU's presence as invisible as wve can." 11 GRU Annual Report 2001-02 21

WE PROVIDE CUSTOMER CONVENIENCE THROUGH A WIDE ARRAY OF SERVICES Electric is only one of our many services.

[ M et's play a quick game of word association: 'e say "utility" and you say...

(Buzz! Time's up.)

If you answered "electric-ity," you probably are not alone. But GRU, as a multi-service utility, pro-vides much more than competitively priced electricity To provide superior value, we also offer water, waste-water, natural gas and telecommuni-cations senices. Our customers tell us they appreciate the convenience of five utility services under one roof. -

They can address their needs for all these senices w ith just one phone call or WVeb site visit, and pay for all of them on one bill.

Xhile energy and water remain niir traditional rre utilities, the formation of our GRUCom telecommunications division in 1995 con-tinued our evolution as a diversified, multi-service utility. The divisi gro-.ith in just seven yea us provide new senices our value to our customers and com-munity, while enhancing our business success. GRU.Net, our residential Internet access senice, may be our best known telecom offering. In 2001-02, the number of GRU.Net subscribers increased by more than 16 percent-many of them tenants of student apartment complexes re-cently wvired for our high-speed Ethernet services. GRU.Net has quickly become the area's largest local Internet Service Provider. But we provide a number of other afford-able, high-quality telecommunica-tions services for local businesses, govemment agencies, schools and emergency senice groups.

To expand the area's communica-tion services, we lease antenna space on our 11 communication towers and two water towers to several wireless telephone senice providers. These same Aireless providers use the

-GRUCom fiber-optic network to transport calls from these cellular sites to their telephone switches.

In 2002, we increased our fiber-optic Metropolitan Area Netvork (MAN) in Alachua County from 171 cable miles to 191. GRUCom uses mmore ion's rapid irs is helping than_en that increase n

I n

the network to provide high-speed transmission of voice, data and video signals for advanced applications such as digital libraries, telemedicine, virtual laboratories and teleconfer-encing. GRUCom is teaming with the Florida Department of Transportation (FDOT) to extend the fiber line an-other 4.5 miles along two state roads in Gainesville-13th Street and Southwest 34th Street. Vhile sharing the project costs, we are able to install the fiber on FDOT-ovned rights-of-ways, while the state agency can use our fiber line to control its traffic signals.

Our telecommunications tech-nology is bolstering our longtime support of education. GRUCom provides local fiber transport for the University of Florida's backbone Internet connections and for high-speed (10 megabits per second) con-nections to outlying university build-ings. We recently installed 100 megabit-speed digital circuits to pro-Nide faster Internet connections for ergy.

X 22 GRU Annual Report 2001-02 I

i

the Alachua County School Board, Santa Fe Community College in Gainesville and Central Florida Community College in Ocala.

GRUCom also links all Alachua County public schools to our fiber-optic network, and in 2002 we upgraded our bandwidth to 10-megabit speed, giving students faster access to the school board's networks and the Internet.

N\\hile the telecommunications industry has been hit by worries of increased competition, expensive netvork build-outs and changing technologies, GRUCom's revenue has managed steady growth. Over the past five years, earnings have increased at a compound average annual rate of 38 percent, with revenue last year approaching million.

"GRUCom vill succeed w other telecommunications coi nies fail due to our focus on t Gainesville community. We h, overextended ourselves on un tain product demands like the dot-coms. WVe have expanded services slowly, deliberately ar a financially sound manner.

GRUCom operates very const tively," said GRUCom Directc Hoffman. -The collapse of so large companies only solidifie need for a local provider of te communications services that dedicated to providing the cor nity with state-of-the-art servi a reasonable cost." 11 l

u kp unWlri I 2 'E.

0 [En NOW CUSTOMERS CAN CONDUCT THEIR BUSINESS ONLINE-EVEN AT MIDNIGHT IN THEIR PJsl

~ ast year, we asked our cus-tomers how they would like to do their business on the Web.

The result: our new and improved Web site that puts their GRU trans-actions at their finger tips, 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day.

Customers now can visit the site at www.gru.com and find out every-thing they need to know about their account. They can check their elec-tric, gas and water consumption his-tory, request conservation surveys or emergency repairs, sign up for elec-tronic bill payment and tap into an array of services and information about their utilities and GRU. The lat-est Web features also let customers start, stop and move utility services and make payments online.

Businesses can logon and sign up to become GRU vendors, get information about our corporate recycling programs, check the status of bids they submitted or peruse the benefits of our Business Partner

$7 program.

"Many customers do business vhile with us npa-over the he phone or aven't by mail.

cer-Our new our Web site id in takes con-venience erva-one step ir Ed further," said Kathy Viehe, GRU many Director of Marketing and s the Communications. "It's a valuable tool le-is for building customer loyalty and nmu-positioning the GRU brand as differ-ces at ent and better, which is vital in today's competitive marketplace." l GRU Annual Report 2001-02 23 I

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98 99 DO 01 02 98 99 00 01 02 "G1U has added four new water production wells to the Murphree welifield since 2000. We now have 15 water wells in service that can supply up to 44 million gallons per day, and we will add two more wells by 2006 to meet increasing water demands."

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'hae tIon ngCanacon1ro sAve vere able to pass along electric rate savings to our residential and business customers. This marks the ninth con-secutive year that our electric rates have remained the same or decreased:'

Electric Total Customers (thousands of customers) 02 01 00 99 98 73,522 8,754 82,276 71,975 8,574 80,549 69,837 8,313 78,150 68,130 8,048 76,178 66,317 7,852 74,169 NATURAL GAS (total customers) statistics 2001/2002 Energy Supply Deerhaven Generating Station Net Capability.......................... 433 megawatts (MW)

Kelly Generating Station Net Capability..............................

177 MW Share Ownership of Crystal River 3.....

.... Net Capability 11 MW Combined System...........

.......... Net Capability 621 MW Energy Delivery-Electric System Service Area..............................

128 sq. miles Transmission.............................. 240.4 circuit miles Distribution Overhead (48%)......................... 606 circuit miles Underground (520/)....................... 663 circuit miles Total..............................

1,269 circuit miles Distribution Substations...................... 8 (138 kV/I2kV)

Energy Delivery-Natural Gas System Service Area..............................

84 sq. miles Distribution Mains.............................. 601 miles Delivery Points............

5 Water System Walter E. Murphree Water Treatment Plant Treatment Capacity.........

44 million gallons/day (MGD), peak day Storage Capacity.................. 20.3 million gallons (MG)

Supply Wells.................

15 Water Service Area..................

118 sq. miles Distribution Mains.................

984 miles Wastewater System Kanapaha Water Reclamation Facility Treatment Capacity.

0 MGD, Avg. Annual Daily Flow (AADF)

Main Street Wastewater Treatment Plant Treatment Capacity.7.5 MGD, AADF Combined Treatment Capacity.

17.5 MGD, AADF Collection Service Area

.5 sq. miles Gravity Mains.546 miles Force Mains.125 miles Lift Stations.146 communications Miles of Fiber Optic Cable.................

191 miles On-net Locations.................

210 Maximum Bandwidth............... OC-48 (2.5 gigabits/second) 28.81 e -

thousands of cso rs NATURAL GAS (total sales) 19.7 PF17 "Using natural gas lowers energy costs for property owners and their tenants, and lets us serve more customers in a concentrated space at less cost, improving the return on GRU's investment."

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WE LISTEN TO EACH OTHER THEN ACT TOGETHER If two heads are better than one, then three, four, five, six are even better Employee teams yield Lunique.solutions Small employee work teams are being used throughout the organization to improve the way we conduct our business. Each team has members and group leaders from a variety of job levels and departments.

One work team called the Review Crew, for instance, created a focus group composed of local developers, builders and engineers to help us streamline the processes they follow in securing GRU utility connections.

The effort not only yielded more cus-tomer-friendly processes, but also improved our relationships wvith sev-eral major commercial customers.

Another group called the Safe Team developed a plan to tighten security in our main Administration Building, which led to a security-conscious redesign of our lobby and customer service area.

L here is a lot of talk among our employees these days about... well, everything we do at GRU.

, And we are turning their opinions and recom-mendations into action.

"At GRU, we encourage critical thinking and like to take advantage of the diverse perspectives and experiences of employees. Once we create consen-sus, though, we act together with the support of the organization and for the good of our customers,"

said GRU General Manager Mike Kurtz. "It sounds cliched, but we are a team."

In fact, we are many teams.

26 GRU Annual Report 2001-02 PI, I

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"The improvements resulting from these employee work teams really influence how we do our work," said Sandy Barnard, GRU Organizational Development Mlanager. She cited the recent con-solidation of utility line location I Ve also use a team approach to iron out some of our most critical business and employee relations issues. A group of GRU management and union representatives formed the Interest-Based Bargaining (IBB)

Team in 1998 to encourage coopera-

"We have developed a number of prograriis and initiatives to help us improve the diversity of our workforce, increase outreach efforts in the community and work more with small and disadvantaged local businesses."

I crews and the cross-training of gas crevs in electric line placement as two key vork-team innovations. "The work teams are improving our effi-ciency and value to our customers."

tion and open communication in labor-management negotiations on important workforce issues. The team follows a problem-solving process called "mutual gains bargaining,"

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emphasizing common interests rather than differences in negotiations. The process has enabled the city to imple-ment contract changes that mutually benefit customers' and employees' needs.

The IBB team has spun off 16 "sub-teams" to address specific labor-management issues-such as pen-sions, paid time off and training-and report back to the main team with recommendations.

Diverse workplace

-_offers many-benefits Having a workforce that reflects the diverse nature of our community lets us respond effectively to the unique needs of all customers.

"Diversity is an issue of strategic importance as we move to a more competitive environment," Kurtz said.

"Wkre have developed a number of programs and initiatives to help us improve the diversity of our work-force, increase outreach efforts in the community and vork more

%ith small and disadvantaged local businesses."

Wre chartered a Diversity Team in 2001 to devise strategies for increas-ing our pool of applicants and to help us manage diversity successfully The 12-member team, representing multi-ple GRU departments and job levels, has worked vith consultants to conduct internal surveys and focus groups to generate a better under-standing of what it's like for employ-ees of varying backgrounds to work at GRU. Benchmark studies of diversity programs at other utilities were con-ducted and in early 2003 the team will recommend ways to build on the similarities and differences of our employees to create a competitive advantage for GRU.

"XVe have made a formal commit-ment to be a progressive, well-respected local employer, offering a workplace that encourages the best from each of us. We are a team and we wvill continue to expand and improve our diversity efforts,"

Kurtz said.

1 GRU Annual Report 2001-02 27

Natural Gas is the most cost-effective energy source for your home. You will save money when you cook, do your laundry, and heat your home and water. It's the number one cooking choice of professional chefs and Natural Gas can cost 50% less to cook with than electric.

Natural Gas is abundant and the cleanest burning fossil fuel, making it an environmentally friendly choice. And right now, GRU's rates are the lowest in the state. Cost-effective, environ-mentally friendly, and the lowest rates in the state - GRU's Natural Gas is the natural way to go. Call 334-3400 ext. 1464 for availability in your area. The time is right for Natural Gas.

GRU has the lowest gas ra-tes in the state.

After all, who has money to burn?

than EnerSM Mfore than Energy'

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Management's Discussion and Analysis September 30, 2002 and 2001 Management's Discussion and Analysis The City of Gainesville, Florida owns and operates a com-bined utility system doing business as Gainesville Regional Utilities (GRU) which provides five separate utility functions.

The utility functions consist of an electric generation, transmis-sion and distribution system (Electric System), vater production and distribution system (ater System), a wvasteivater collection and treatment system (astewater System), a natural gas distri-bution system (Gas System) and a telecommunication system (GRUCom). Each of these systems is accounted for internally as a separate enterprise fund but reported as a combined utility system for external financial reporting purposes.

Ve offer readers of GRU's financial statements this management discussion and analysis of GRU's financial state-ments for the fiscal year ended September 30, 2002. It should be read in conjunction isith the financial statements that follow this section.

Required Financial Statements During the 2002 fiscal year, GRU adopted Government Accounting Standards Board (GASB) Statement No. 34 and related pronouncements. The implementation of these pro-nouncements had little effect on the financial statements except for the classification of net assets, modifications to certain note disclosures, and the inclusion of a Management's Discussion and Analysis (\\ID&A) section as required supplementary information.

Balantce Sheet. This statement includes all of GRU's assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to GRU's creditors (liabilities). It also provides the basis for com-puting rate of return, evaluating the capital structure of the System and assessing the liquidity and financial flexibility of GRU.

Statemttenst of lerenntes, Exejenses and Chantges ;n Net Assets. All of the current year's revenues and expenses are accounted for in this statement. This statement measures the success of the combined utility system's operations over the past year.

Statemeit of Casl Fltts. The primary purpose of this statement is to provide information about the combined utility system's cash receipts and cash payments during the reporting period. This statement reports cash receipts, cash payments, and net changes in cash resulting from operating, investing and financing activities.

Notes to Fitanicial Statetnteists. The notes provide addi-tional information that is essential to fully understanding the data provided in the financial statements. The notes to the finan-cial statements can be found on pages 41-50 of this report.

Financial Analysis of the Combined Utility System The Utilities' System net assets increased from last year by

$8.7 million. The table below focuses on the net assets.

Combined Utility System Net Assets (i tousands)

Current and other assets Capital assets, net Total assets Long-term debt outstanding Current and other liabilities Total liabilities Net assets:

Invested in capital assets, net of related debt Restricted Unrestricted Total net assets 2002

$ 428,616 656,058 1,084,674 404,422 267,938 672,360 252,236 164,092 (4,014)

$ 412,314 2001

$ 434,249 642,357 1,076,606 394,398 278,569 672,967 255,616 145,764 2,259

$ 403,639 32 GRU Annual Report 2001-02 I

Ii II I

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Management's Discussion and Analysis September 30, 2002 and 2001 Changes in net assets can be further explained using the fol-lowing condensed statement of revenues, expenses and changes in net assets.

[ Combined Utility System Changes in Net Assets (in thouisands)

Operating revenues Interest income Other income Total revenues Operating expenses Interest expense, net Total expenses Income before contributior and transfers 2002

$204,373 7,152 211,525 161,268 22,204 183,472 is 28,053 2001

$218,786 9,468 8

228,262 160,545 23,447 183,992 Major capital asset events during the current fiscal year included the following:

• The repowering of John R. Kelly Unit 8 to a combined-cycle unit. It began commercial operation in lay 2002. Asset value for this addition was $44.4 million.

• Electric substation improvements of $3.8 million.

• Replacement of three coal pulverizers on Deerhaven Unit 2 at a cost of $6.9 million.

The Utility's 2003 capital budget plans for investing approxi-mately $68 million in capital projects. These projects wiill be funded from a combination of cash reserves, operating revenue, and additional debt.

Lowg-Tenut Debt. At the end of the 2002 fiscal year, GRU had total long-term debt outstanding of $445.9 million, com-prised of revenue bonds and other long-term debt.

44,270 r-Outstanding Debt at September 30 --

(in thousatnds)

Capital contributions, net Operating transfer to City of Gainesville Change in net assets Net assets, beginning of year Net assets, end of year 6,317 (25,695) 8,675 403,639

$412,314 8,624 (24,356) 28,538 375,101

$403,639 Capital Asset and Debt Administration Capital Assets. The Utility's investment in capital assets as of September 30, 2002, amounts to $656.1 million (net of accu-mulated depreciation). This investment in capital assets includes land, generation, transmission and distribution systems, buildings and fxed equipment, and fumiture, fixtures and equipment. The total increase in the investment in capital assets (net of accumu-lated depreciation) for the current fiscal year was 2.1 %.

The following table summarizes the System's capital assets, net of accumulated depreciation and changes for the year ended September 30, 2002.

-Combined Utilities System Capital Assets (net of accumulated depreciation)

(in thousands) 2002 Generation

$175,021 Transmission, distribution & collection 326,095 Treatment 49,128 General plant 31,549 Plant held for future use 6,054 Plant unclassified 6,154 Construction wvork in progress 62,058 Total net utility plant

$656,059 2001

$128,947 293,597 49,501 25,442 6,054 62,143 76,672

$642,356 Senior Lien revenue bonds Subordinated revenue bonds Tax-exempt Commercial Paper Taxable Commercial Paper Total 2002

$293,750 77,300 56,262 18,549

$445,861 2001

$341,380 78,440 17,093

$436,913 On July 20, 2002, the City issued Subordinated Utilities System Revenue Bonds, Series 2002A and 2002B in the amounts of $37,300,000 and $40,000,000 respectively. The proceeds from the Series 2002A Bonds were used to refund a portion

($36,645,000) of the 1992B Bonds. Of the 2002B Series Bonds,

$20 million was used to pay principal of Series C Tax-exempt Commercial Paper Notes and $20 million was issued to fund the Costs of Acquisition and Construction of the utility system. The 2002A and 2002B Series Subordinated Bonds were issued as multi-modal variable interest-rate Bonds, initially issued as vari-able-rate auction notes. As such, interest rates are reset by an auction process each 35 days based on market rates. Payment of principal and interest of the 2002A and 2002B Series Subordinated Bonds when due are insured by a municipal bond insurance policy issued by Financial Security Assurance. While in the variable auction-rate mode, the Bonds may be redeemed at the option of the City in whole or in part on any interest payment date immediately folloving the end of an auction period wvithout premium.

GRU Annual Report 2001-02 33

Management's Discussion and Analysis September 30, 2002 and 2001 The System maintains an AA rating from Standard & Poor's Corporation and an AA3 from MIoody's Investors Serice for its revenue bonds and an A-I + and P-I rating for its commercial paper. These ratings have not changed during the reporting period.

Additional information on long-term debt can be found in Note 4 on pages 45-47 of this report.

Fita,ncial Igliliglts. The most significant changes in GRU's financial condition are summarized below:

• Operating revenue decreased $14.4 million, or approximately 6.6%, but was mostly offset by a corresponding decrease in operation and maintenance expense of $12.9 million, or approximately 11.0%. The primary reason for the drop in both areas is due to a significant decrease in fuel costs. Additionally, milder weather reduced energy requirements in fiscal 2002.

• Administration and general expense increased $5.2 million, or approximately 28.0%, due primarily to property insurance increases and routine increases in personal senice and other costs.

• Depreciation and amortization expense increased $8.3 million, or approximately 25.1%. This was due to a combination of reasons: the implementation of GASB 34 eliminated the recog-

- nition of contributed plant amortization as an offset to depreci-ation; the decision by GRU to directly expense cost of removal; and a significant increase in additions to plant assets, all con-tributed to the increase realized in depreciation and amortiza-tion expense.

• Net capital contributions from developers and connection fees decreased $2.3 million, or approximately 26.8%. In October 2001, a surcharge on connection fees was implemented. In anticipation of this change, several builders pre-paid their fees prior to the surcharge implementation, thus inflating the fig-ures for fiscal 2001 and adversely affecting the totals for fiscal 2002.

• Gross utility plant in service increased $90.3 million, or approximately 10.7%, as shovn on the balance sheet.

• Net utility plant increased $13.7 million, or approximately 2.1%, as summarized under 'Capital Assets," on page 44.

• Long-term debt increased $8.9 million, or approximately 2.0%,

because of debt issued for capital projects during the year net of principal payments, as reflected under "Long-Term Debt" on page 45.

• The number of customers for electric, water, wastewater and gas senices increased 2.1%, 2.5%c, 2.2% and-2.2%, respectively in fiscal 2002.

Currently Known Facts or Conditions that May Have a Significant Effect on GRU's Financial Condition or Results of Operations The primary factors affecting the utility industry include environmental regulations, restructuring of the wsholesale and retail energy markets, and the formation of independent bulk power transmission systems.

Utilities, and particularly electric utilities, are subject to increasing federal, state and local statutory and regulatory requirements Nvith respect to the siting and licensing of facilities, safety and security, air and wvater quality, land use and other envi-ronmental factors. The industry is subject to claims asserting health effects from electric and magnetic fields associated wvith power lines, home appliances and other sources.

The business, affairs and financial condition of GRU could be affected by the efforts now taking place on both the federal and state levels to restructure the electric utility industry. The goal of this restructuring effort is to change from a traditionally monopolistic industry to one in which there is open competition among electric suppliers on both the wholesale and retail levels.

Changes in federal lav and regulations dealing wvith trans-mission access have already improved competition at the whole-sale level, which wholesale competition is expected to increase retail competition. Past legislation seeks (or sought) to complete this restructuring by providing for competition at the retail level.

No state legislation is pending or proposed at this time for retail competition in Florida. Any such restructuring of the Florida retail electric utility industry is expected to affect the System.

On June 1, 2002, and again on October 1, 2002, GRU decreased its retail electric rates by an average of 4.25% and 1.78%, respectively. Such decreases may affect the financial condition and results of operations.

Requests for Information This financial report is designed to provide a general overview of the Utility System's finances for all those with an interest in the System's finances. Questions concerning any of the informa-tion provided in this report or requests for additional financial information should be addressed to the Finance Director, City of Gainesville Regional Utilities, P.O. Box 147117, StationA-105, Gainesville, FL 32614-7117.

34 GRU Annual Report 2001-02

Financial Statements Gainesville Regional Utilities Years ended September 30, 2002 and 2001 Report of Independent Certified Public Accountants The Honorable M1ayor and Mlembers of the City Commission City of Gainesville WN'e have audited the accompanying balance sheets of Gainesville Regional Utilities (a department of the City of Gainesville, Florida) as of September 30, 2002 and 2001 and the related statements of revenues, expenses and changes in net assets, and cash flowvs for the years then ended. These financial statements are the responsibility of the Gainesville Regional Utilities' management. Our responsibility is to express an opinion on these financial statements based on our audits.

WN'e conducted our audits in accordance wvith auditing stan-dards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of 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, eidence 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. XWe believe that our audits provide a rea-sonable basis for our opinion.

As discussed in Note I, the financial statements present only Gainesville Regional Utilities (the Combined Utility Fund of the City of Gainesville, Florida) and are not intended to present fairly the financial position of the City of Gainesville, Florida, and its changes in its financial position and cash flows of its proprietary fund types in conformity nith accounting principles generally accepted in the United States.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gainesville Regional Utilities, as of September 30, 2002 and 2001 and its changes in its financial position and cash floxs for the years then ended in conformity wsith accounting principles generally accepted in the United States.

As discussed in Note I to the financial statements, effective October 1, 2001, Gainesville Regional Utilities adopted Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements -

and lanagement's Discussion and Analysis -

for State and Local Governments, GASB Statement No. 37, Basic Financial Statements - and Management's Discussion and Analysis - for State and Local Governments: Omnibus, and GASB Statement No. 38, Certain Financial Statement Note Disclosures In accordance Xith Govemment Auditing Standards, we have also issued our report dated October 25, 2002 on our considera-tion of the Gainesville Regional Utilities' internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations and contracts. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunc-tion with this report in considering the results of our audits.

Management's Discussion and Analysis, as listed in the table of contents, is not a required part of the basic financial state-ments but is supplementary information required by the GASB.

WN'e have applied certain limited procedures, which consisted prin-cipally of inquiries of management regarding the methods of measurement and presentation of this required supplementary information. However, we did not audit the information and express no opinion on it.

Our audit was conducted for the purpose of forming an opin-ion on the basic financial statements taken as a whole. Financial statements for the years ended September 30, 2000, 1999, and 1998, were audited by other auditors. The supplementary infor-mation included in the accompanying schedules is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information, except for that per-taining to the years ended September 30, 2000, 1999, and 1998, on which we express no opinion, has been subjected to the audit-ing procedures applied in the audit of the basic financial state-ments and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

f 4t LP Ernst & Young LLP Orlando, Florida October 25, 2002 GRU Annual Report 2001-02 35

Balance Sheets.

September 30, 2002 and 2001 Assets Current assets:

Cash and cash equivalents Investments Accounts receivable, net of allowance for uncollectible accounts of $805,126 in 2002 and $817,271 in 2001 Prepaid rent -

lease/leaseback Fuels contracts Deferred charges Inventories:

Fuel iNlaterials and supplies Total current assets 5,223,597 514,235 13,098,294 591,503 25,035,819 10,686,909 82,950 3,514,523 28,501,246 10,686,909 4,036,700 2,302,573 10,782,212 7,474,597 63,314,842 5,033,235

- 5,683,156 69,933,616 Restricted assets:

Utility deposits -

cash and investments Debt service fund - cash and investments Rate stabilization fund -

cash and investments Construction fund -

cash and investments Utility plant improvement fund -

cash and investments Investment in The Energy Authority Decommissioning reserve -

cash and investments Total restricted assets Prepaid rent-leaseAleaseback Other noncurrent assets Capital assets:

Utility plant in service Plant unclassified Less: accumulated depreciation and amortization Plant held for future use Construction in progress Net capital assets Total assets 936,948,021 6,153,812 355,155,899 587,945,934 6,053,926 62,058,407 656,058,267

$1,084,674,003 846,624,546 62,142,574 349,136,049 559,631,071 6,053,926 76,671,811 642,356,808

$1,076,605,970 36 ORU Annual Report 2001-02 2002 2001 3,728,281 59,897,416 76,852,195 8,803,549 28,634,776 3,101,508 4,634,322 185,652,047 3,834,840 60,300,303 78,403,138 15,588,915 11,414,948 1,713,794 3,919,974 175,175,912 162,084,786 17,564,061 172,771,695 16,367,939

Balance Sheets September 30, 2002 and 2001 2002 2001 Liabilities and net assets Current liabilities:

Fuel payable Accounts payable and accrued liabilities Operating lease -

leaseAeaseback Deferred credits Due to other funds Total current liabilities Payable from restricted assets:

Utility deposits Construction fund -

accounts payable and accrued liabilities Revenue bonds payable -

principal Accrued interest payable Total payable from restricted assets Long-term debt:

Utilities system revenue bonds Subordinated utilities system revenue bonds Commercial paper notes Less: unamortized loss on refinancing Less: unamortized bond discount Total long-term debt 6,554,687 4,938,009 12,461,916 2,480,066 3,242,918 29,677,596 3,635,718 1,002,854 11,520,000 8,118,211 24,276,783 282,230,000 77,300,000 74,811,000 26,778,452 3,140,827 404,421,721 5,177,520 6,606,712 12,461,916 2,888,601 1,919,616 29,054,365 3,693,090 394,041 10,985,000 9,735,802 24,807,933 330,395,000 95,533,000 27,573,145 3,956,634 394,398,221 Operating lease -

leaseAeaseback Other noncurrent liabilities Total liabilities Net assets:

Invested in capital assets, net of related debt Restricted Unrestricted Total net assets Total liabilities and net assets 252,236,347 164,091,715 (4,014,181) 412,313,881

$1,084,674,003 255,616,297 145,764,064 2,258,863 403,639,224 S1,076,605,970 See accompanying totes.

GRU Annual Report 2001-02 37 188,991,041 201,452,957 24,992,981 672,360,122 23,253,270 672,966,746

Statements of Revenues, Expenses and Changes in Net Assets Years ended September 30, 2002 and 2001 Operating revenue:

Sales and service charges Other operating revenue Total operating revenue Operating expenses:

Operation and maintenance Administrative and general Depreciation and amortization Total operating expenses Operating income Non-operating income (expense):

Interest income Interest expense, net of AFUDC Gain (loss) on sale of investments Total non-operating expense Income before contributions and transfers Capital contributions:

Contributions from developers Reduction of plant costs recovered through contributions Net capital contributions Operating transfer to City of Gainesville General Fund Change in net assets Net assets - beginning of year Net assets - end of year See accnmpattyting nootes.

38 GRU Annual Report 2001-02 2002

$198,930,821 5,441,628 204,372,449 2001

$213,052,430 5,733,430 218,785,860 104,155,618 23,798,182 33,313,926 161,267,726 117,017,122 18,559,361 24,968,461 160,544,944 43,104,723 58,240,916 7,152,355 (22,204,413)

(154)

(15,052,212) 9,467,613 (23,447,313) 8,480 (13,971,220) 28,052,511 44,269,696 7,351,642 (1,034,708) 6,316,934 9,455,351 (831,330) 8,624,021 (25,694,788)

(24,356,267) 8,674,657 403,639,224

$412,313,881 28,537,450 375,101,774

$403,639,224

Cash flows from operating activities:

Cash received from customers Cash payments to suppliers for goods and services Cash payments to employees for senices Cash payments for operating transactions ith other funds Other operating receipts Net cash provided by operating activities Cash flows from noneapital financing activities:

Transfers to other funds Net cash used in noncapital financing activities Cash flovs from capital and related financing activities:

Principal repayments on long-term debt Interest paid on long-term debt Other receipts Acquisition and construction of fixed assets (including allowance for funds used during construction)

Proceeds from new debt and commercial paper Cash received for connection charges Net cash used in capital and related financing activities Cash floNvs from investing activities:

Interest received Purchase of investments Investment in The Energy Authority Distributions from The EnergyAuthority Proceeds from investment maturities Net cash provided by investing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Contitnuted o usext page.

GRU Annual Report 2001-02 39 Statement of Cash Flows Years ended September 30, 2002 and 2001 2002 2001

$202,196,051 (91,046,800)

(36,930,494)

(5,295,612) 3,667,425 72,590,570 (25,694,788)

(25,694,788)

$218,177,692 (105,641,968)

(26,963,650)

(4,065,367) 3,959,226 85,465,933 (24,356,267)

(24,356,267)

(70,352,000)

(23,006,198) 178,634 (14,778,000)

(23,362,846) 76,576 (42,324,379) 79,300,000 1,789,383 (54,414,560)

(56,492,215) 25,012,000 3,920,786 (65,623,699) 8,816,629 (489,101,705)

(1,131,925) 663,041 517,486,938 36,732,978 7,332,843 (513,042,624)

(1,181,877) 868,930 514,492,242 8,469,514 3,955,481 4,347,856 8,303,337 29,214,200 8,303,337

$ 37,517,537

Statement of Cash Flows, continued Years ended September 30, 2002 and 2001 2002 2001 Reconciliation of operating income to net cash provided by operating activities:

Operating income

$43,104,723

$58,240,911 Adjustments to reconcile operating income to net cash provided by operating activities:

Depreciation and amortization 31,539,723 23,194,259 Receivables 3,322,596 4,636,047 Prepaid expenses 3,954,165 (1,753,315)

Inventories (7,540,413)

(1,869,791)

Deferred charges 6,378,090 11,617,559 Accounts payable and accrued liabilities 317,277 (7,324,586)

Due to other funds 1,323,302 (1,324,464)

Utility deposits (57,372)

(238,778)

Other liabilities and deferred credits (9,751,521) 288,091 Net cash provided by operating actisities

$72,590,570

$85,465,933 Noncash, investing, capital and financing activities:

Utility plant contributed by developers in aid of construction vas $5,562,000 and $4,703,000 in 2002 and 2001, respectively See accompanyting ntotes.

40 GRU Annual Report 2001-02

Notes to Financial Statements September 30, 2002 and 2001

1. Summary of Significant Accounting Policies Organization Gainesville Regional Utilities (GRU) is a combined municipal utility system operating electric, natural gas, water, wastewater, and telecommunications (GRUCom) utilities. GRU consists of the combined Utility Funds of the City of Gainesville, Florida (City). GRU is a unit of the City and, accordingly, the financial statements of GRU are included in the annual financial reports of the City.

Basis of Accounting The financial statements are presented on the accrual basis of accounting. Under this basis, revenues are recognized in the period earned and expenses are recognized in the period incurred.

GRU applies all applicable Financial Accounting Standards Board (FASB) pronouncements issued on or before November 30, 1989, in accounting for and reporting its operations. In accordance uith government accounting standards, GRU has elected not to apply FASB pronouncements issued after that date. In accordance wvith the Utilities System Revenue Bond Resolution (Bond Resolution),

rates are designed to cover operating and maintenance expense, debt sen-ice and other revenue requirements, which exclude depreciation expense and other noncash expense items. This method of rate setting results in costs being included in the determination of rates in different periods than when these costs are recognized for financial statement purposes. The effect of these differences is recognized in the determination of net income in the period that they occur, in accordance with GRU's accounting policies. GRU has adopted the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and substantially all provisions of the National Association of Regulatory Utility Commissioners (NARUC). Rates are approved annually by the City Commission.

Accounting Changes During the 2002 fiscal year, GRU adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements -

and ltianageyitett's Discussion and Analysis -for State and Local Gorernwents (Statement 34); GASB Statement No. 37, Basic Financial Statements -

and lanagements Discussion andAnalysis -

for State and Local Governlments: Omnibus (Statement 37); and GASB Statement No. 38, Certain Financial Statement Disclosures (Statement 38). Statements 34, 37 and 38 established standards for extemal financial reporting and disclosure for all state and local government entities, which for GRU includes a balance sheet, a statement of revenues, expenses and changes in net assets and a statement of cash flows. The most significant change related to the implementation of Statement 34 for GRU is the requirement that net assets be classified into three components

-invested in capital assets, net of related debt; restricted; and unrestricted, on a retroactive basis. Previousl; GRU's net assets

-were reported as fund equity, as either retained earnings or contributions in aid of construction. These classifications are defined as follows:

Invested in capital assets, set of related debt. This component of net assets consists of capital assets, net of accumu-lated depreciation and reduced by the outstanding balances of any bonds, or other long-term borronings that are attributable to the acquisition, construction, or improvement of those assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds is not included in the calculation of invested in capital assets, net of related debt. Rather, that portion of the debt is included in the same net assets component as the unspent proceeds.

Restricted. This component of net assets consists of net assets subject to external constraints on their use imposed by creditors (such as through debt covenants), contributors, or laws or regulations of other governments or constraints imposed by law through constitutional provisions or enabling legislation.

Unrestricted net assets. This component of net assets consists of net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt."

The adoption of Statements 34, 37, and 38 had no effect on the financial statements except for the classification of net assets, changes in financial statement presentation and modification of certain financial statement note disclosures.

Use of Estimates The preparation of financial statements in conformity nvith accounting principles generally accepted in the United States requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenue and expenses during the report-ing period. Actual results could differ from those estimates.

Reclassifications Certain amounts for the prior year have been reclassified to conform wvith current year presentation.

Investments GRU follows the provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for Extemal Investment Pools. Statement No. 31 requires govem-ment entities to report investments at fair value in the balance sheet. All short-term commercial paper w*ith maturities less than one year have been reported at cost which approximates fair value.

Risk Management I Futures & Options Contracts GRU conducts a risk management program with the intent of reducing the impact of fuel price spikes for its customers. The program utilizes futures and options contracts that are traded on the New York lercantile Exchange (NYIMlEX) so that prices may GRU Annual Report 2001-02 41

Notes to Financial Statements September 30, 2002 and 2001 be fLxed for given volumes of gas that the utility intends to con-sume during a given production month. Through the use of an internal oversight group, consultation from reputable risk man-agement sources, and close monitoring of the market on a daily basis, GRU makes every effort to take reasonable steps to stabilize fuel costs for customers when possible and lessen their risk in general.

As a result of risk management activity GRU had, on September 30, 2002 and 2001, deposits of $1,600,000 and

$1,900,000, respectively, with brokers for margin accounts. GRU reported $82,950 for options and approximately $4,000,000 in futures contracts in the fuel contracts account at September 30, 2002 and 2001, respectively. At contract maturity date, gains or losses on hedging transactions are recognized into operation and maintenance expense. On September 30, 2002, $104,500 was held in deferred gains, inclusive of options, from outstanding contracts. On September 30, 2001 there was $1,500,000 in deferred losses from outstanding contracts.

Inventories Inventories are stated at cost using the weighted average unit cost method for materials, and the last-in, first-out (LIFO) method for fuel. Obsolete and unusable items are reduced to estimated salvage values. The cost of fuel used for electric gener-ation is charged to expense as consumed.

Capital Assets Property and equipment are recorded at cost; MNlaintenance and repairs are charged to operating expense as incurred. The average cost of depreciable plant retired is eliminated from the plant accounts and charged to accumulated depreciation.

Associated cost of removal is charged to depreciation expense.

Plant unclassified includes property and equipment of capital projects placed into senvice that have not been classified in the related asset category wvithin utility plant in service.

Depreciation and Nuclear Generating Plant Decommissioning Depreciation of utility plant is computed using the straight-line method over estimated senice lives ranging from 6 to 50 years. Depreciation was equivalent to 3.4% and 3.2% of average depreciable property for 2002 and 2001, respectively. Deprec-iation expense includes a provision for decommissioning costs related to the jointly-owvned nuclear power plant (see Note 6).

Amortization of Nuclear Fuel The cost of nuclear fuel, including estimated disposal cost, is amortized to fuel expense based on the quantity of heat produced for the generation of electric energy in relation to the quantity of heat expected to be produced over the life of the nuclear fuel core. These costs are charged to customers through the fuel adjustment clause.

Revenue Recognition Revenue is recorded as earned. GRU accrues for senices rendered but unbilled, which amounted to approximately

$9,200,000 and $8,400,000 for 2002 and 2001, respectively.

Fuel adjustment revenue is recognized based on the actual fuel costs. Amounts charged to customers for fuel are based on estimated costs, which are adjusted for any differences between the actual and estimated costs once actual fuel costs are known.

If the amount recovered through rates exceeds actual fuel costs, GRU records deferred fuel as a liability. If the amount recovered through rates is less than the actual fuel costs, GRU records deferred fuel as an asset, for amounts to be collected through future rates. As of September 30, 2002 and 2001, deferred fuel charges were $1,716,000 and $(143,400), respectively. The fuel charges are reported as either part of current deferred charges or current deferred credits on the balance sheets.

Transactions with the City of Gainesville As an enterprise fund of the City of Gainesville, transactions occur between GRU and the City's governmental funds through-out the year in the ordinary course of operations. Below is a sum-mary of significant transactions:

Aditinistrati'e Services. GRU is billed monthly for vari-ous administrative and insurance senices provided by the City's governmental functions.-

Nloysivietered anid lletered Sertice Ctarges. GRU bills the City's governmental funds on a monthly basis for all non-metered, metered and other administrative senices.

Trantsfers to the Genteral Fum1tL GRU pays an annual transfer to the General Fund based on a City Commission approved formula. See Note 11 for details.

Funds in Accordance with Bond Resolutions Certain restricted funds of GRU are administered in accordance xith bond resolutions. These funds are as follows:

• Debt Senice Fund

• Subordinated Indebtedness Fund

• Rate Stabilization Fund

• Construction Fund a Utility Plant Improvement Fund The Debt Service Fund accounts for funds accumulated to provide payment of principal and interest on or redeem outstand-ing debt.

The Subordinated Indebtedness Fund, grouped in the Debt Senice Fund for financial reporting purposes, accounts for funds accumulated to pay principal and interest on subordinated indebtedness.

The Rate Stabilization Fund accounts for funds accumulated to stabilize rates over future periods through the transfer of funds to and from operations as necessary and to provide operating reserves for the Utility.

The Construction Fund accounts for funds accumulated for the cost of acquisition and construction of the system.

42 GRU Annual Report 2001-02

Notes to Financial Statements September 30, 2002 and 2001 The Utility Plant Improvement Fund accounts for funds used to pay for certain capital projects or debt service, the purchase or redemption of bonds, or otherise provide for the repayment of bonds.

Vhen both restricted and unrestricted resources are available for use, it is GRU's policy to use restricted resources first, then unrestricted resources as they are needed.

Operating, Non-Operating Revenues GRU has defined operating revenue as that revenue which is derived from customer sales or service while non-operating rev-enues include interest on investments and any gain from the sale of such investments.

Allowance for Funds Used During Construction (AFUDC)

An allowance for interest on borrowed funds used during construction of $0 and $882,000 in 2002 and 2001, respectively, is included in construction in progress and as a reduction of interest expense. These amounts are computed by applying the effective interest rate on the funds borrowed to finance the proj-ects to the monthly balance of projects under construction. The effective interest rate was approximately 5.52%.

Contributions in Aid of Construction During the year ended September 30, 2001, GRU imple-mented the applicable provisions of GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, which requires governments to recognize capital contributions as revenues instead of contributed capital. In previ-ous periods, such capital contributions vere recognized as addi-tions to net assets (equity) for GRU's water and wastewater divi-sions. Contributions to the electric and gas divisions are also reported as capital contribution revenues; however, such amounts are also expensed in the same period consistent wvith the require-ments of the FERC Uniform System of Accounts.

Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equiva-lents include cash on hand, bank demand accounts, and overnight repurchase agreements.

2. Rates and Regulation GRU's rates are established in accordance with the Utilities System Bond Resolution and the Utilities System Subordinated Bond Resolution as adopted and amended. Under these docu-ments, rates are set to recover Operation and Alaintenance Expenses, Debt Service, Utility Plant Improvement Fund contri-butions and costs for any other lawful purpose such as the General Fund Transfer.

Each year during the budgeting process, and at any other time necessary, the City Commission approves rate changes and other changes to GRU's charge rates.

GRU's cost of fuel for the electric and natural gas systems is passed directly through to its customers. Each month, GRU staff estimates the cost of fuel and consumption for both the electric and natural gas systems. These estimates are combined ivith a true-up for actual costs from previous months into a current-month electric fuel adjustment and natural gas purchased gas adjustment. Amounts overbilled or underbilled are passed along to customers and are either accrued or deferred at year-end.

The Florida Public Service Commission does not regulate rate levels in any of GRU's utilities. They do, however, have juris-diction over rate structure for the electric system.

Currently GRU prepares its financial statements in accor-dance with Statement of Financial Accounting Standards (SFAS)

No. 71, and records various regulatory assets and liabilities. For a company to report under SFAS No. 71, the company's rates must be designed to recover its costs of providing services, and the company must be able to collect those rates from customers. If it were determined, whether due to competition or regulatory action, that these standards no longer applied, GRU could be required to vrite off its regulatory assets and liabilities.

Management believes that GRU currently meets the criteria for continued application of SFAS No. 71, but will continue to evalu-ate significant changes in the regulatory and competitive environ-ment to assess continuing applicability of the criteria.

Unamortized Loss on Refinancing Losses resulting from the refinancing of bonds are deferred and amortized over the remaining life of the old debt or the life of the new debt, whichever is shorter.

GRU Annual Report 2001-02 43

Notes to Financial Statements September 30, 2002 and 200t

3. Capital Assets and Changes in Accumulated Depreciation A summary of capital assets, changes in accumulated depreciation and related depreciation provisions expressed as a percentage of average depreciable plant follows:

-Transmission, Distribution Treatment Generation and Collection Capital assets, October 1, 2001 Capital additions Sales, retirements Capital assets, September 30, 2002 Accumulated depreciation, October 1, 2001 Depreciation expense Retirements Accumulated depreciation, September 30, 2002 Average depreciation rate Capital assets, October 1, 2000 Capital additions Sales, retirements Capital assets, September 30, 2001 Accumulated depreciation, October 1, 2000 Depreciation expense Retirements/adjustments Accumulated depreciation, September 30, 2001 Average depreciation rate General Unclassified

$ 81,371,071

$ 288,946,495

$ 422,147,317

$ 54,159,664 2,245,159 56,623,471 45,514,094 11,029,223 (290,456)

(12,558,273)

(5,375,644)

(6,864,099)

$ 62,142,573 58,004,920 (113,993,682)

Combined

$ 908,767,120 173,416,867 (139,082.154)

$ 83,325,774

$ 333,011,693

$ 462,285,767

$ 58,324,788

$ 6,153,811

$ 943,101,833

$(31,870,077). $(160,001,587) $(128,547,379)

$(28,717,006) n/a

$(349,136,049)

(2,618,974)

(10,501,563)

(12,894,877)

(4,918,757) n/a (30,934,171) 290,456 12,513,508 5,251,265 6,859,092 n/a 24,914,321

$(34,198,595) $(157,989,642) $(136,190,991)

$(26,776,671) n/a

$(355,155,899) 3.146%

3.349%

2.873%

8.746%.

n/a 3.439%

Transmission, Distribution Treatment Generation and Collection General Unclassified Combined

$ 75,577,140

$ 288,770,851

$ 398,371,724

$ 48,723,114

$20,297,601

$ 831,740,430 5,793,931 407,094 25,104,085 5,436,550 77,012,112 113,753,772 (231,450)

(1,328,492)

(35,167,140)

(36,727,082)

$ 81,371,071

$ 288,946,495

$ 422,147,317

$ 54,159,664

$62,142,573

$ 908,767,120

$(29,767,127) $(151,884,238) $(118,492,726)

$(24,482,463) n/a $(324,626,554)

(2,352,090)

(8,366,037)

(11,724,429)

(4,161,770) n/a (26,604,326) 249,140 248,688 1,669,776 (72,773) n/a 2,094,831

$(31,870,077) $(160,001,587) $(128,547,379)

$(28,717,006) n/a $(349,136,049) 2.997%

2.856%

2.817%

8.090%

n/a 3.179%

44 GRU Annual Report 2001-02

Notes to Financial Statements September 30, 2002 and 2001

4. Long-Term Debt Long-term debt outstanding at September 30, 2002 and 2001, consisted of the folloiving:

2002 Utilities System Revenue Bonds:

Series 1983 (1983 Bonds) -

interest payable semi-annually to October 1, 2014 at a rate of 6.0%

1992 Series A (1992 A Bonds) - interest payable semi-annually to October 1, 2002 at various rates between 6.0% and 6.1%

1992 Series B (1992 B Bonds) -interest payable semi-annually to October 1, 2013 at various rates between 6.1% and 7.5%

1993 Series A (1993 A Bonds) -

interest payable semi-annually to October 1, 2006 at various rates between 5.0% and 5.3%

1993 Series B (1993 B Bonds) -

interest payable semi-annually to October 1, 2013 at various rates between 5.0% and 5.5%

1996 Utilities System Revenue Bonds -

1996 Series A (1996 Series A) - interest payable semi-annually to October 1, 2026 at rates between 4.2% and 5.75%

2002 Utilities System Subordinated Utilities System Revenue Bonds - 2002A (2002 Series A) interest at variable rates 2002 Utilities System Subordinated Utilities System Revenue Bonds - 2002B (2002 Series B) interest at variable rates Utilities System Commercial Paper Notes, Series C (C Notes):

Interest at variable market rates Utilities System Taxable Commercial Paper Notes, Series D (D Notes):

Interest at variable market rates Less current portion of long-term debt Less unamortized loss on refinancing Less unamortized bond discount Total long-term debt

$ 4,675,000 1,555,000 24,960,000 17,795,000 110,280,000 134,485,000 2001

$ 4,675,000 3,025,000 61,920,000 21,585,000 114,085,000 136,090,000 37,300,000 40,000,000 56,262,000 18,549,000 445,861,000 (11,520,000)

(26,778,452)

(3,140,827)

$404,421,721 78,440,000 17,093,000 436,913,000 (10,985,000)

(27,573,145)

(3,956,634)

$394,398,221 The 1983 Bonds mature on October 1, 2014. Those Bonds are subject to redemption at the option of the City as a whole at any time or in part on any interest payment date, at a redemption price of 100% plus accrued interest to the date of redemption.

The 1992 A Bonds mature October 1, 2001 and 2002.

The 1992 B Bonds mature at various dates from October 1, 2001 to October 1, 2017. Those Bonds maturing on or after October 1, 2003 to October 1, 2007, amounting to $14.3 million are subject to redemption at the option of the City on and after October 1, 2002, as a whole at any time or in part on-any interest payment date, at a redemption price of 102% in 2002, 101% in 2003 and 100% thereafter. The 1992 B Bonds maturing on October 1, 2017, amounting to $22.3 million, are subject to redemption at the option of the City on and after October 1, 2002, as a whole at any time or in part on any interest payment date, at a redemption price of 100%.

The 1993 A and B Bonds mature at various dates through October 1, 2013. Those Bonds maturing on or after October 1, 2004, amounting to $113.9 million, are subject to redemption at the option of the City on and after October 1, 2003, as a vhole at any time or in part on any interest payment date, at a redemp-tion price of 102% in 2003, 101% in 2004 and 100% thereafter.

The 1996 A Bonds mature at various dates through October 1, 2026. Those Bonds maturing on or after October 1, 2010 are subject to redemption at the option of the City on or after October 1, 2006 as a whole or in part at any time at a redemp-tion price of 102% in 2006, 101% in 2007, and 100% thereafter.

On July 20, 2002, the City issued Subordinated Utilities System Revenue Bonds, Series 2002A and 2002B in the amounts of $37,300,000 and $40,000,000 respectively. The proceeds from the Series 2002A Bonds -were used to refund a portion ($36,645,000) of the 1992B Bonds in order to reduce its total debt service payments over the next 16 years by

$4,851,869 and io obtain an economic gain of $3,378,053.

GRU Annual Report 2001-02 45

Notes to Financial Statements September 30, 2002 and 2001 Of the 2002B Series Bonds, $20 million vas used to pay princi-pal of Series C Tax-exempt Commercial Paper Notes and $20 million was issued to fund the Costs of Acquisition and Construction of the utility system The 2002A and 2002B Series Subordinated Bonds were issued as multi-modal variable inter-est-rate Bonds, initially issued as variable-rate auction notes. As such, interest rates are reset by an auction process each 35 days based on market rates. Payment of principal and interest of the 2002A and 2002B Series Subordinated Bonds when due are insured by a municipal bond insurance policy issued by the Financial Security Assurance Inc. Vhile in the variable auction-rate mode, the Bonds may be redeemed at the option of the City in vhole or in part on any interest payment date immediately folloving the end of an auction period wvithout premium.

Utilities System Commercial Paper Notes, Series C Notes (tax-exempt) in a principal amount not to exceed $85 million may be issued to refinance maturing Series C Notes or provide for other costs. Liquidity support for the Series C Notes is pro-vided under a long-term credit agreement dated as of March I, 2000 wvith Bayerische Landesbank Girozentrale. The obligation of the bank may be substituted by another bank w hich meets certain credit standards and wvhich is approved by GRU and the Agent. Under the terms of the agreement, GRU may borrow up to $85 million wvith same day availability ending on the termina-tion date, as defined in the agreement. Series C Notes of $2.7 million and $4.6 million vere redeemed during 2002 and 2001, respectively.

In June 2000, a Utilities System Commercial Paper Note Program, Series D (taxable) wvas established in a principal amount not to exceed $25 million. Liquidity support for the Period ending October 1 2002 2003 2004 2005 2006 2007 2008-2012 2013-2017 2018-2022 2023-2027 2028-2032 Total Principal

$ 11,520,000 15,377,440 15,357,440 14,907,440 15,487,440 20,287,440 130,647,200 98,597,200 54,777,200 34,902,200 34,000,000

$445,861,000 Series D Notes is provided under a long-term credit agreement dated June 1, 2000 wvith SunTrust Bank. The obligation of the bank may be substituted by another bank that meets certain credit standards and is approved by GRU. Under the terms of the agreement, GRU may borrow up to $25 million *with same day availability ending on the termination date, as defined in the agreement.

On July 3, 2002 the City of Gainesville d/b/a Gainesville Regional Utilities (GRU) started an interest rate swap wvith lerrill Lynch Capital Services (the Counterparty) in a notional amount of $37.3 million which amortizes down over time.

Under the terms of the swap agreement, GRU will pay the Counterparty a fLxed annual interest rate of 4.10% payable on April I and October I of each year, beginning October 2, 2002 and will receive a variable rate payment each month beginning August 1, 2002. The variable-rate wvill be equal to the Bond MarketAssociation (BIA) Municipal Swvap Index. The Counterparty has the right, but not the obligation, to terminate the swap if the BMA Nunicipal Swap Index exceeds 7% for any immediate preceding rolling consecutive 180 calendar day period.

As of September 30, 2002, the termination value of the sap, if exercised, vould have resulted in a payment to the Counterparty of approximately $3.7 million.

GRU is required to make monthly deposits into separate accounts for an amount equal to the required share of principal and interest becoming payable for the revenue bonds on the payment dates of April I and October 1.

The following table lists the Debt Service requirements (principal and interest) on long-term debt outstanding at September 30, 2002:

Interest Total Debt Senice Requirements )

$ 17,792,587 17,597,928 17,055,130 16,457,709 15,884,532 15,280,940 59,224,913 28,193,188 14,420,918 5,322,613 1,518,875

$208,749,333

$ 29,312,587 32,975,368 32,412,570 31,365,149 31,371,972 35,568,380 189,872,113 126,790,388 69,198,118 40,224,813 35,518,875

$654,610,333 I) Interest rates on variable-rate long-term debt were valued, in accordance with GASB Statement 38 to be equal to 1.4% for the 2002A and 2002B Series Subordinated Bonds, 1.35% for Series C Tax-exempt Commercial Paper and 193% for Series D Taxable Commercial Paper.

46 GRU Annual Report 2001-02.

6

Notes to Financial Statements September 30, 2002 and 2001 The table below shows the changes in net long-term debt balances that occurred during the years ended September 30, 2002 and 2001.

Long-term debt outstanding at September 30 Changes in long-term debt:

2002A Series Subordinated Bonds issued 2002B Series Subordinated Bonds issued 1992B Series Bonds refunded Fixed rate debt redeemed Tax-exempt Commercial Paper (TECP) issued 20(

$394,398,2.

37,300,01 40,000,01 (36,645,01 (11,520,01 TECP redeemed as part of Series 2002B issuance (20,000,01 TECP redeemed during the year (2,178,01 Taxable CP issued 2,000,01 Taxable CP redeemed (544,01 Change in unamortized loss/bond discount 1.610,51 Long-term debt outstanding at September 30 Current portion of long-term debt

$404,421,7;

$ 11,520,01

5. Deposits and Investments Deposits are held in a qualified public depository institution insured by the Federal Depository Insurance Corporation and

)2 2001 as required by the Bond Resolution in a bank, savings and loan association or trust company of the United States or a national 21

$382,733,076 banking association having capital stock, surplus and undivided earnings aggregating at least $10 million.

In accordance wvith state laws and the Bond Resolution,

°° GRU is authorized to invest in obligations which are uncondi-tionally guaranteed by the United States of America or its agen-

°O cies or instrumentalities, repurchase agreement obligations JO) unconditionally guaranteed by the United States of America or J0)

(10,985,000) its agencies, corporate indebtedness, direct and general obliga-tions of any state of the United States of America or of any 20,000,000 agency, instrumentality or local governmental unit of any such state (provided such obligations are rated by a nationally recog-

0) nized bond rating agency in either of its two highest rating cate-JO)

(4,588,000) gories), public housing bonds, and certain certificates of deposit.

0 5,012,000 Investments in corporate indebtedness must be rated in the high-

0) est rating category of a nationally recognized rating agency and in one of the two highest rating categories of at least one other 00 2,226,145 nationally recognized rating agency.

Investments are categorized in the followiing table in accor-

'21 $394,398,221 dance w%ith GASB Statement No. 3. All of GRU's investments fall under category I, which include investments that are insured or 00

$ 10,985,000 registered or held by the Utility or its agent in GRU's name.

Fair (Carrying Amount) V%alue Under the terms of the Bond Resolution relating to the sale of the Utilities System Revenue Bonds, payment of the prin-cipal and interest is secured by an irrevocable lien on GRU's net revenue (exclusive of any funds which may be established pur-suant to the Bond Resolution for decommissioning and certain other specified purposes), including any investments and income thereof.

The Bond Resolution contains certain restrictions and com-mitments, including GRU's covenant to establish and maintain rates and other charges to produce revenue sufficient to pay oper-ation and maintenance expenses, amounts required for deposit in.

the debt service fund, and amounts required for deposit into the utility plant improvement fund.

September 30, 2002 U.S. govemment securities U.S. govemment bonds Corporate securities Total September 30, 2001 U.S. govemment securities

- U.S. govemment bonds Corporate securities Total

$ 88,518,585 24,250,061 31,674,331

$144,442,977

$ 72,940,400 22,820,261 82,912,812

$178,673,473 GRU Annual Report 2001-02 47

Notes to Financial Statements September 30, 2002 and 2001 Cash and investments are contained in the folloning balance sheet accounts as of September 30:

Restricted assets Current assets:

Cash and cash equivalents Investments Total cash and investments Less cash and cash equivalents Less accrued interest receivable Total investments 2002 2001

$185,652,047

$175,175,912 5,223,597 514,235 191,389,879 (37,517,537)

(9,429,365)

$144,442,977 13,098,294 591,503 188,865,709 (8,303,337)

(1,888,899)

$178,673,473 Restricted net assets:

Total restricted assets Unspent debt proceeds Payable from restricted assets Restricted net assets 2002

$185,652,047 (8,803,549)

(12,756,783)

$164,091,715 2001

$175,175,912 (15,588,915)

(13,822,933)

$145,764,064 Net assets are restricted as follows:

2002 Debt covenants:

Debt service Rate stabilization Utility plant improvement Total restricted pursuant to

6. Jointly-Owned Electric Plant debt covenants 2001

$ 50,868,914

$ 50,312,210 76,852,195 78,403,138 28,634,776 11,414,948 156,355,885 140,130,296 GRU-oned resources for supplying electric power and ener-gy requirements include its 1.4079% undivided ownership inter-est in the Crystal River Unit 3 (CR3) nuclear power plant operat-ed by Florida Power Corporation. GRU's net investment in CR3 at September 30, 2002 and 2001 is $7,376,685 and $7,809,772 respectively. CR3 operation and maintenance costs, n-hich repre-sent GRU's part of expenses attributable to operation of CR3, are recorded in accordance with the instructions as set forth in the FERC uniform system of accounts. Payments are made to Florida Pover Corporation in accordance with the CR3 partici-pation agreement.

GRU, as a part of this participation agreement, is responsible for its share of future decommissioning costs. Decommissioning costs are funded and expensed annually and are recovered through rates charged to customers. The most recent decommis-sioning cost estimates provided by Florida Power Corporation in March 2002, estimated GRU's share of total future decommis-sioning costs to be $7,100,000. At September 30, 2002, GRU has funded $4,634,000 of this cost.

7. Restricted Net Assets Certain assets are restricted by bond resolution and other external requirements. Following is a summary of the computa-tion of restricted net assets at September 30, 2002 and 2001, and the restricted purposes of the net asset balances:

Other restrictions:

Investment in The Energy Authority"I 3,101,508 Nuclear decomissioning reserve 4,634,322 Total other restrictions 7,735,830 Restricted net assets

"' Includes trade guarantee deposii 1,713,794 3,919,974 5,633,768

$164,091,715

$145,764,064

8. Retirement Plans The City sponsors and administers one defined benefit pen-sion plan and two defined contribution plans (collectively; the Plans) that include GRU and other City employees. The Plans do not make separate measurements of assets and pension benefit obligations for individual units of the City. Such information is presented in the City of Gainesville, Florida, September 30, 2002, Comprehensive Annual Financial Report.

The General Employees Pension Plan (Employees Plan), a contributory defined benefit pension plan, covers all employees of GRU, except certain limited personnel who elect to participate only in a defined contribution plan.

The City accounts for and funds the costs of the Employee Plan as they accrue. Such costs are based on contribution rates determined by the most recent actuarial valuation. The total con-tributions by GRU, including amortization of prior service costs, wras $ 1,800,000 for the years ended September 30, 2002 and 2001.

Certain limited employees are eligible to participate in defined contribution plans managed by outside fiscal agents for the City. Under the first plan, the City contributes a percentage of an employee's annual salary and employees contribute a speci-fied percentage. All employees have the option to participate in 48 GRU Annual Report 2001-02

Notes to Financial Statements September 30, 2002 and 2001 the second defined contribution plan. The total defined contribu-tion cost for GRU for the years ended September 30, 2002 and 2001, vas $357,000 and $352,000, respectively.

9. Postretirement Benefits In addition to providing pension benefits, the City provides certain health care insurance benefits for retired employees of the City and GRU. The City also permits retirees to participate in the life insurance program.

lost permanent full and part-time employees who are eligible for normal, early retirement, or dis-ability are eligible for these benefits. Individual benefits are the same for all employees, but the cost to the City may vary.

Contributions by the City to fund these benefits are neither man-dated nor guaranteed. Funds are appropriated annually to fund the actuarially determined costs of the health insurance program and to cover the costs of other programs. The City recognizes the cost of these benefits on a monthly basis by contributing a per-centage of active payroll costs. The cost of providing these bene-fits for the GRU retirees for the fiscal years ended September 30, 2002 and 2001 was $1,167,000 and $820,000, respectively.

10. Disaggregation of Receivables and Payables Receivables Net accounts receivable as of September 30, 2002 represent 83.4% from customers for billed and unbilled utility senices, and 16.6% from other receivables. There are no receivables expected to take longer than one year to collect.

Payables As of September 30, 2002, payable balances are 41.6% relat-ed to fuels payable, 7.8% to standard operating payables, 11.0% to accrued wages payable, 20.6% to intergovernmental payables and 19.0% to other payables.

11. Transfers to General Fund GRU makes transfers to the City's general government based on a formula that ties the transfer directly to the financial per-formance of the system. The transfer to the general fund may be made only to the extent such moneys are not necessary to pay operating and maintenance expenses and to pay debt service on the outstanding bonds and subordinated debt or to make other necessary transfers under the Bond Resolution. The formula-based fund transfer to the general fund for the years ended September 30, 2002 and 2001 was $25,694,788 and

$24,356,267, respectively.

12. Deferred Charges Deferred charges are presented on the balance sheets under current assets and as other noncurrent assets.

The largest deferred charge is for estimated environmental costs of $10,100,000 for both 2002 and 2001. See Note 13 for details on this item.

Also included in deferred charges is unamortized bond issuance costs of approximately $3,310,000 and $3,054,000, respectively, at September 30, 2002 and 2001. These costs are being amortized straight-line over the life of the bonds, vhich approximates the effective interest method.

Other significant deferred charges include acquisition costs of $2,705,000 and $3,104,000 and fuel adjustment true-up of

$1,716,000 and $(143,400) in 2002 and 2001, respectively.

Remaining smaller items make up the balance of the deferred charges -$3,242,000 and $2,413,000, for 2002 and 2001, respectively.

13. Environmental Uabilities GRU is subject to numerous federal, state and local environ-mental regulations. Under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," GRU has been named as a potentially responsible party at two hazardous waste sites. In addition, in January 1990, GRU purchased the natural gas distribution assets of a company and pursuant to the related purchase agreement, assumed responsibility for the investigation and remediation of environ-mental impacts related to the operation of the former manufac-tured gas plant. Based upon GRU's analysis of the cost to clean up these sites and other identified environmental contingencies, GRU has accrued a liability of $10,100,000 as of September 30, 2002 and 2001. Because GRU believes it is probable that it wsill recover the costs of enironmental clean-up through future cus-tomer rates, a regulatory asset of equal amount has been reflected as a deferred charge in the accompanying balance sheet.

Although uncertainties associated wvith environmental assessment and remediation activities remain, GRU believes that the current provision for such costs is adequate and additional costs, if any, will not have a material adverse effect on GRU's financial posi-tion, results of operations or liquidity.

14. LeaselLeaseback On December 10, 1998, GRU entered into a lease/leaseback transaction for all of the Deerhaven Unit I and a substantial por-tion of the Deerhaven Unit 2 generating facilities. Under the terms of the transaction, GRU entered into a 38-year lease and simultaneously a 20-year leaseback. At the end of the leaseback period term, GRU has an option to buy out the remainder of the GRU Annual Report 2001-02 49

Notes to Financial Statements September 30, 2002 and 2001 lease for a fixed purchase option amount.

Under the terms of the transaction, GRU continues to oivn, operate, maintain and staff the facilities.

The proceeds received by GRU from this transaction were approximately $249 million. From these proceeds, GRU deposited

$142 million as a payment undertaking agreement and a second deposit of $72 million in the form of a collateralized Guaranteed Investment Contract (GIC), both *vith anAAA rated insurance company. The deposit instruments %i-ll mature in amounts suffi-cient to meet the annual payment obligations under the leaseback including the end of term fixed purchase option if elected by GRU.

The net benefit of this transaction, after payment of transac-tion expenses, wvas approximately $35 million and resulted in a deferred gain, which is being amortized as income on a straight-line basis over the leaseback period of 20 years.

Amortization of the net benefit vas $1,775,000 in both 2002 and 2001, and was reported as a component of other operating revenue.

15. Investment in the Energy Authority In lay 2000, GRU became an equity member of The Energy Authority (TEA), a power marketing joint venture. In lay 2002, TEA began trading natural gas on behalf of GRU. As of September 30, 2002, this joint venture was comprised of six municipal utilities across the nation, all of w hich are participating in the electric marketing and five of which participate in the gas program. GRU's ownership interest was 7. 1% in the electric ven-ture and 7.7% in the gas venture, and it accounted for this invest-ment using equity accounting. To become a member, GRU paid an initial capital contribution of $1,000,000 and a membership fee of $867,360. The membership fee was amortized over 24 months and, consequently, eliminated at September 30, 2002.

GRU has reflected the capital contribution as an investment in TEA. The investment balance has been adjusted for GRU's subse-quent share of TEA's net income or loss. In calculating GRU's share of net income or loss, profit on transactions between GRU and TEA have been eliminated. Such transactions primarily relate to purchases and sales of electricity bet-ween GRU and TEA. GRU had purchase transactions with TEA of $10,788,725 and $13,314,645 and sales transactions of $3,016,744 and

$7,858,052 in fiscal years 2002 and 2001, respectively. TEA's profit on these transactions has been reflected as a reduction to GRU's reported revenue or expense. As of September 30, 2002, GRU's investment in TEA was $1,773,936. Additionally, in accor-dance with the membership agreement between GRU and its joint venture members, GRU has provided TEA wvith guarantees of

$9,600,000 to secure pover marketing transactions. Of this amount, $8,600,000 is represented by a trade guarantee wvith the balance through a TEA letter-of-credit supported by a cash deposit of $428,571. GRU has also provided guarantees of $13,800,000 to secure natural gas purchases. Of this amount, $11,000,000 is represented by a trade guarantee X ith the balance through a TEA letter-of-credit supported by a cash deposit of $899,000.

The follow ing is a summary of the unaudited financial infor-mation of TEA for the twelve month periods ended September 30, 2002 and 2001:

2002 Condensed statement of operations:

Total revenue

$419,159,000 Total cost of sales and expenses (358,160,000)

Operating income

$ 60,999,000 Net revenue Condensed balance sheet:

Assets:

Current assets Noncurrent assets Total assets Equity and liabilities:

Current liabilities Noncurrent liabilities lembers' capital Total equity and liabilities

$ 61,460,000

$ 98,918,000 12,343,000

$111,261,000

$ 76,786,000 10,704,000 23,771,000

$111,261,000 2001

$542,249,000 (425,277,000)

$116,972,000

$118,076,000

$ 81,757,000 11,730,000

$ 93,487,000

$ 57,874,000 10,000,000 25,613,000

$ 93,487,000 TEA issues separate audited financial statements on a calendar-year basis.

16. Risk Management GRU is exposed to various risks of loss related to theft of, dam-age to, and destruction of assets, errors and omissions, injuries to employees, and natural disasters and insures against these losses.

GRU purchases plant and machinery insurance from a commer-cial carrier. The City is self-insured for Nvorkers' compensation, auto, and general liability. Settlements have not exceeded insur-ance coverage for each of the last three years. These risks are accounted for under the City of Gainesville's General Insurance Fund. GRU reimburses the City for premiums and claims paid on its behalf, recording the appropriate expense. However, GRU does maintain its own insurance reserve, for the self-insured por-tion, in the amount of $3,152,000, based on an actuarially com-puted liability. This reserve is recorded as a deferred credit, and has been fully amortized. Changes in the claims liability for the last tvo years are as follovs:

Beginning Fiscal Year Balance Claims Payments 2000-2001

$3,152,000

$542,000 2001-2002 3,152,000 970,000 Ending Balance

$542,000

$3,152,000 970,000 3,152,000 50 GRU Annual Report 2001-02

Schedules of Combined Net Revenues in Accordance with Bond Resolution Years Ended September 30, 2002, 2001, 2000, 1999 and 1998 2002 Revenue Electric fund:

Sales of electricity Lease/leaseback revenue Other electric revenue Transfers to rate stabilization Interest income Total electric fund revenue Gas fund:

Gas sales Other gas revenue (expenses)

Transfers (to) from rate stabilization Interest income Total gas fund revenue XVater fund:

Sales of water Other water revenue Transfers from (to) rate stabilization Interest income Total water fund revenue 13,350,022 785,894 3,400,560 696,999 18,233,475 Wlrastewater fund:

Wastewater billing Other vastewater revenue Transfers from rate stabilization Interest income Total wastewater fund revenue 12,879,286 12,356,275 12,183,647 11,520,726 1,763,409 2,084,675 1,775,024 1,539,268 1,083,493 1,265,816 16,992,004 43,359 1,280,250 15,764,559 (435,500) 1,264,766 14,787,937 (301,322) 1,169,324 13,927,996 16,038,915 15,696,526 15,363,519 15,115,652 14,155,134 1,218,747 2,413,499 1,967,796 2,370,807 1,924,334 5,089,796 1,019,672 23,367,130 1,893,022 1,732,733 21,735,780 1,672,756 1,915,226 20,919,297 468,024 1,854,421 19,808,904 592,711 1,892,685 18,564,864 GRUCom fund:

Sales to customers Other GRUCom revenue Transfers (to) from rate stabilization

- Interest income Total GRUCom fund revenue Total revenue 5,833,892 1,109,383 (435,905) 21,187 6,528,557

$218,416,063 4,167,542

'2,001,610 1,226,409 983,291 1,303,706 1,058,495 (138,900) 183,160 5,195,093

$226,589,270 27,341 3,332,657

$198,326,204 8,410 2,293,314

$431,428,628 52 GRU Annual Report 2001-02 2000 1999

$147,794,301 2,313,536 (267,583) 4,873,647 154,713,901 2001

$159,398,907 2,731,147 (6,311,744) 5,712,572 161,530,882 21,638,160 (11,333)

(953,843) 462,527 21,135,511

$142,078,330 2,433,111 (6,790,929) 5,106,585 142,827,097 15,275,788 (95,558)

(180,744) 483,108 15,482,594 1998

$132,144,457 2,715,250 (6,440,936) 6,705,946 135,124,717 14,421,979 3,485 (262,546) 560,866 14,723,784

$135,625,527 249,220,553 2,419,798 (12,199,403) 6,405,429 381,471,904 12,309,930 (5,839) 306,100 456,378 13,066,569 15,913,737 29,208 (683,493) 313,548 15,573,000 556,127 729,419 62,000 85,562 1,433,108

$183,774,469

Schedules of Combined Net Revenues in Accordance with Bond Resolution, continued Years Ended September 30, 2002, 2001, 2000, 1999 and 1998 2002 Operation, maintenance and administrative expense Electric fund:

Fuel expense

$ 60,010,484 Operation and maintenance 23,739,551 Administrative and general 12,305,262 Total electric fund expense 96,055,297 Gas fund:

Fuel expense Operation and maintenance Administrative and general Total gas fund expense XWater fund:

Operation and maintenance Administrative and general Total water fund expense Wastewater fund:

Operation and maintenance Administrative and general Total wastevater fund expense 7,926,883 572,690 2,871,282 11,370,855 4,361,166 3,447,597 7,808,763 5,167,674 3,933,172 9,100,846 GRUCom fund:

Operation and maintenance Administrative and general Total GRUCom fund expense Total operation, maintenance and administrative expense Net revenue in accordance isith bond resolution Electric Gas XWater WVastewater GRUCom Total net revenue in accordance

• ith bond resolution Aggregate bond debt service 2,377,170 1,240,869 3,618,039 2,033,441 742,638 2,776,079 1,419,468 453,264 1,872,732 655,707 650,379 1,306,086 127,953,800 136,304,479 113,860,710 100,273,410 58,658,604 4,202,145 10,424,712 14,266,284 2,910,518

$ 90,462,263

$ 29,312,587 60,343,203 4,164,757 9,890,970 13,466,847 2,419,014

$ 90,284,791

$ 29,765,188 57,370,267 3,852,612 9,131,089 12,651,601 1,459,925 306,309,481 3,788,097 8,423,421 11,646,991 987,228

$ 84,465,494

$331,155,218

$ 29,458,515

$ 29,899,917 Aggregate debt service coverage ratio Total debt senice

$ 34,097,931

$ 37,677,047

$ 34,904,989

$ 33,891,908 Total debt service coverage ratio GRU Annual Report 2001-02 53 2001 2000 1999

$ 67,450,729 23,256,589 10,480,361 101,187,679 13,658,209 483,139 2,829,406 16,970,754 4,693,510 2,407,524 7,101,034 5,441,505 2,827,428 8,268,933

$ 53,477,676 22,541,187 9,437,967 85,456,830 7,723,731 729,547 3,176,704 11,629,982 4,142,401 2,491,069 6,633,470 5,239,109 3,028,587 8,267,696 1998

$ 45,762,356 19,426,427 11,806,671 76,995,454 7,502,765 573,941 2,942,988 11,019,694 3,605,347 2,626,502 6,231,849 4,711,541 3,384,955 8,096,496

$ 44,564,775 19,121,149 11,476,499 75,162,423 5,800,620 542,303 2,935,549 9,278,472 3,630,657 2,733,859 6,364,516 4,628,489 3,533,424 8,161,913 542,847 615,089 1,157,936 103,501,429 58,129,263 3,704,090 7,696,147 10,468,368 275,172

$ 80,273,040

$ 30,782,845 3.09 3.03 2.87 11.08 2.65 2.61 2.40

$ 39,470,246 2.42 9.77 2.03

Schedules of Net Revenues in Accordance with Bond Resolution -

Electric Utility Fund Years ended September 30, 2002 and 2001 Revenue Sales of electricitr Residential sales General serice and large power Fuel adjustment Street and traffic lighting Utility surcharge Sales for resale Interchange sales Total sales of electricity Other electric revenue:

Leaseleaseback revenue Service charges Pole rentals liscellaneous Total other electric revenue Transfers to rate stabilization Interest income Total revenue Operation, maintenance and administrative expense Operation and maintenance:

Fuel expense:

Retail and purchased power Interchange Total fuel expense Power production Transmission Distribution Total operation and maintenance Administrative and general:

Customer accounts Administrative and general Total administrative and general Total operation, maintenance and administrative expense Net revenue in accordance ith bond resolution Retail Interchange Total net revenue in accordance %vith bond resolution 54 GRU Annual Report 2001-02 2002 2001

$ 45,762,959 38,066,683 38,816,221 3,225,361 3,298,492 6,488,731 12,135,854 147,794,301 1,852,642 233,512 227,382 2,313,536

$ 45,603,957 38,592,002 45,036,029 2,992,449 3,329,588 6,398,410 17,446,472 159,398,907 1,880,543 724,269 126,335 2,731,147 (267,583) 4,873,647 154,713,901 (6,311,744) 5,712,572 161,530,882 53,150,252 6,860,232 60,010,484 58,455,729 8,995,000 67,450,729 16,255,106 679,283 6,805,162 83,750,035 16,728,037 483,463 6,045,089 90,707,318 3,568,688 6,911,673 10,480,361 101,187,679 51,891,731 8,451,472 S 60,343,203 3,223,206 9,082,056 12,305,262 96,055,297 53,382,982 5,275,622

$ 58,658,604

Schedules of Net Revenues in Accordance with Bond Resolution -

Gas Utility Fund Years ended September 30, 2002 and 2001 2002 2001 Revenue Sales of gas:

Residential

$ 8,429,717

$11,697,095 Interruptible/commercial 6,818,280 9,300,554 Other sales 665,740 640,511 Total sales of gas 15,913,737 21,638,160 Other gas revenue (expense) 29,208 (11,333)

Transfers to rate stabilization (683,493)

(953,843)

Interest income 313,548 462,527 Total revenue 15,573,000 21,135,511 Operation, maintenance and administrative expense Operation and maintenance:

Fuel expense 7,926,883 13,658,209 Operation and maintenance 572,690 483,139 Total operation and maintenance 8,499,573 14,141,348 Administrative and general:

Customer accounts 1,695,536 1,791,699 Administrative and general 1,175,746 1,037,707 Total administrative and general 2,871,282 2,829,406 Total operation, maintenance and administrative expense 11,370,855 16,970,754 Total net revenue in accordance nith bond resolution

$ 4,202,145

$ 4,164,757 GRU Annual Report 2001-02 55

Schedules of Net Revenues in Accordance with Bond Resolution -

Water Utility Fund Years ended September 30, 2002 and 2001 2002 2001 Revenue Sales of water:

General customers

$10,408,448

$10,139,709 University of Florida 616,061 617,090 Fire protection 1,060,038 995,232 Generating stations 34,669 27,560 Utility surcharge 1,230,766 1,099,695 Total sales of water 13,349,982 12,879,286 Other vater revenue:

Connection charges 785,894 1,754,281 Nliscellaneous 40 9,128 Total other *vater revenue 785,934 1,763,409 Transfers from rate stabilization 3,400,560 1,083,493 Interest income 696,999 1,265,816 Total revenue 18,233,475 16,992,004 Operation, maintenance and administrative expense Operation and maintenance:

Source of supply 9,745 9,927 Pumping 951,658 1,273,748 Water treatment 2,063,739 2,106,277 Transmission and distribution 1,336,024 1,303,558 Total operation and maintenance 4,361,166 4,693,510 Administrative and general:

Customer accounts 1,020,930 945,956 Administrative and general 2,426,667 1,461,568 Total administrative and general 3,447,597 2,407,524 Total operation, maintenance and administrative expense 7,808,763 7,101,034 Total net revenue in accordance uvith bond resolution

$10,424,712 S 9,890,970 56 GRU Annual Report 2001-02

Schedules of Net Revenues in Accordance with Bond Resolution -Wastewater Utility Fund Years ended September 30, 2002 and 2001 2002 2001 Revenue XWastewater billings:

Billings

$14,576,585

$14,362,202 Utility surcharge 1,462,330 1,334,324 Total wastewater billings 16,038,915 15,696,526 Other wastewater revenue:

Connection charges 1,003,489 2,166,506 Miscellaneous 215,258 246,993 Total other wastewater revenue 1,218,747 2,413,499 Transfers from rate stabilization 5,089,796 1,893,022 Interest income 1,019,672 1,732,733 Total revenue 23,367,130 21,735,780 Operation, maintenance and administrative expense Operation and maintenance:

Collection 1,357,624 1,213,281 Treatment and pumping 3,810,050 4,228,224 Total operation and maintenance 5,167,674 5,441,505 Administrative and general:

Customer accounts 823,015 845,644 Administrative and general 3,110,157 1,981,784 Total administrative and general 3,933,172 2,827,428 Total operation, maintenance and administrative expense 9,100,846 8,268,933 Total net revenue in accordance xvith bond resolution

$14,266,284

$13,466,847 GRU Annual Report 2001-02 57

Schedules of Net Revenues in Accordance with Bond Resolution -

GRUCom Utility Fund Years ended September 30, 2002 and 2001 2002 2001 Revenue Sales to customers

$5,833,892

$4,167,542 Other GRUCom revenue 1,109,383 983,291 Transfers to Rate Stabilization (435,905)

(138,900)

Interest income 21,187 183,160 Total revenue 6,528,557 5,195,093 Operation, maintenance and administrative expense Operation and maintenance 2,377,170 2,033,441 Total operation and maintenance 2,377,170 2,033,441 Administrative and general:

Customer accounts 131,124 224,232 Administrative and general 1,109,745 518,406 Total administrative and general 1,240,869 742,638 Total operation, maintenance and administrative expense 3,618,039 2,776,079 Total net revenue in accordance Nsith bond resolution

$2,910,518

$2,419,014 58 GRU Annual Report 2001-02

Notes to Schedules of Net Revenues in Accordance with Bond Resolution September 30, 2002 "Net revenue in accordance wvith bond resolution" differs from "Net income," which is determined in accordance nith generally accepted accounting principles. Following are the more significant differences:

• Interest income does not include interest earned on construction funds.

• Operation and maintenance expense do not include depreciation, amortization or interest expense.

• Other water and wastewater revenue include fees for connection, installation, and backflow prevention.

• Transfers to the general fund are excluded.

• Other revenue includes transfers (to) from the rate stabilization fund.

• Revenue from leaseAeaseback transaction is excluded (see Note 14).

GRU Annual Report 2001-02 59

Combining Balance Sheet September 30, 2002 NNTater Wastewater GRUCom Combined Assets Current assets:

Cash and cash equivalents Investments Accounts receivable, net Prepaid rent -

LILO Fuels contracts Deferred charges Inventories:

Fuel Materials and inventories Total current assets Restricted assets:

Utility deposits -

cash and investments Debt service fund -

cash and investments Rate stabilization fund -

cash and investments Construction fund -

cash and investments Utility plant improvement fund -

cash and investments Investment in The Energy Authority Decommission reserve-cash and investments Total restricted assets Prepaid rent -

LILO Other noncurrent assets Capital assets:

Utility plant in service Plant unclassified Less: accumulated depreciation and amortization Plant held for future use Construction in progress Net capital assets Total assets 3,728,281 42,430,173 3,728,281 2,733,555 6,161,315 7,627,944 53,459,299 3,975,536 8,435,830 10,839,982 763,664 4,752,398 582,483 2,802,195 13,979,741 2,703,620 1,929,366 9,672,034 2,187,681 913,827 944,429 59,897,416 141,548 76,852,195 (97,191) 8,803,549 350,015 28,634,776 3,101,508 4,634,322 4,634,322 121,183,161 15,078,936 17,108,994 30,942,155 1,338,801 185,652,047 162,084,786 162,084,786 6,925,688 9,703,753 321,382 487,777 125,461 17,564,061 592,827,659 38,332,550 123,303,302 160,656,985 21,827,525 936,948,021 3,717,527 596,744 1,248,121 577,301 14,119 6,153,812 228,671,453 18,225,256 43,363,769 58,432,036 6,463,385 355,155,899 367,873,733 20,704,038 81,187,654 102,802,250 15,378,259 587,945,934 6,053,926 6,053,926 27,151,955 789,560 10,982,611 16,934,647 6,199,634 62,058,407 401,079,614 21,493,598 92,170,265 119,736,897 21,577,893 656,058,267

$748,155,405

$49,037,274

$108,863,390

$153,973,920

$24,644,014 $1,084,674,003 60 GRU Annual Report 2001-02 Electric Gas

$ 6,676,491 514,235 19,864,872 10,686,909 82,950 2,844,041 10,782,212 5,430,446 56,882,156 873,340 1,207,188 284,526 395,933 2,760,987

$ (2,847,014) 1,360,602 80,539 668,622 (737,251) 861,696 1,789,641 155,754 2,807,091

$ (340,916) $

813,516 149,663 979,596 1,601,859 5,223,597 514,235 25,035,819 10,686,909 82,950 3,514,523 10,782,212 7,474,597 63,314,842

Combining Balance Sheet September 30, 2002 Electric Liabilities and net assets Current liabilities:

Fuels payable Accounts payable and accrued liabilities Operating lease -

LILO Deferred charges Due (from) to other funds Total current liabilities Payable from restricted assets:

Utility deposits Construction fund -

accounts payable and accrued liabilities Revenue bonds payable

- principal Accrued interest payable Total payable from restricted assets Long-term debt:

Utilities system revenue bonds Subordinated utilities system revenue bonds Commercial paper notes Less: Unamortized loss on refunding Less: Unamortized bond discount Total long-term debt Operating lease -

LILO Other noncurrent liabilities Total liabilities Net assets:

Invested in capital assets, net of related debt Restricted Unrestricted Total net assets Gas

$ 6,187,829 366,858 3,389,629 12,461,916 675,047 (1,049,208) 284,685 1,774,870 976,884 NN'ater Wastewater 537,916 14,685 803,840 631,127 15,464 2,266,791 GRUCom Combined 6,554,687 94,652 244,611 4,938,009 12,461,916 2,480,066 3,242,918 21,665,213 3,403,297 1,356,441 2,913,382 339,263 29,677,596 3,635,718 3,635,718 370,902 62,090 267,270 138,759 163,833 1,002,854 8,089,278 338,882 1,287,115 1,804,725 11,520,000 4,985,187 521,008 1,147,733 1,464,283 8,118,211 17,081,085 921,980 2,702,118 3,407,767 163,833 24,276,783 176,976,794 16,271,744 41,178,061 47,803,401 282,230,000 37,022,510 14,384,680 7,650,950 18,241,860 77,300,000 27,305,705 3,040,401 7,338,230 12,569,864 24,556,800 74,811,000 19,074,994 1,187,915 3,209,665 3,305,878 26,778,452 2,103,706 161,824 379,581 495,716 3,140,827 220,126,309 32,347,086 52,577,995 74,813,531 24,556,800 404,421,721 188,991,041 188,991,041 14,968,907 8,065,072 802,392 1,146,118 10,492 24,992,981 462,832,555 44,737,435 57,438,946 82,280,798 25,070,388 672,360,122 175,722,944 (6,133,891) 39,239,976 46,458,881 (3,051,563) 252,236,347 111,427,690 9,743,440 15,111,508 26,536,918 1,272,159 164,091,715 (1,827,784) 690,290 (2,927,040)

(1,302,677) 1,353,030 (4,014,181) 285,322,850 4,299,839 51,424,444 71,693,122 (426,374) 412,313,881 Total liabilities and net assets

$748,155,405

$49,037,274

$108,863,390

$153,973,920 S24,644,014 $1,084,674,003 GRU Annual Report 2001-02 61

Combining Statement of Revenue and Expenses and Changes in Net Assets Year ended September 30, 2002 Water Wastewater GRUCom Combined Operating revenue:

Sales and service charges Other operating revenue Total operating revenue Operating expenses:

Operation and maintenance Administrative and general Depreciation and amortization Total operating expenses Operating income Non-operating income (expense):

Interest income Interest expense Loss on sale of investments Total non-operating income (expense)

Income before contributions and transfers Capital contributions:

Contributions from developers Reduction of plant cost recovered from contributions Net capital contributions Operating transfer to City of Gainesville general fund Change in net assets Net assets -

beginning of year Net assets -

end of year

$147,794,295

$15,913,737 4,087,739 29,207 151,882,034 15,942,944

$13,349,982 40 13,350,022

$16,038,915 215,258 16,254,173

$5,833,892 1,109,384 6,943,276

$198,930,821 5,441,628 204,372,449 83,750,035 8,499,574 4,361,166 5,167,673 2,377,170 104,155,618 12,305,262 2,871,282 3,447,597 3,933,172 1,240,869 23,798,182 22,244,738 1,362,188 3,205,188 4,107,399 2,394,413 33,313,926 118,300,035 12,733,044 11,013,951 13,208,244 6,012,452 161,267,726 33,581,999 3,209,900 2,336,071 3,045,929 930,824 43,104,723 5,087,083 313,548 696,999 1,019,672 35,053 7,152,355 (13,056,528)

(1,629,093)

(2,913,910)

(4,043,013)

(561,869)

(22,204,413)

(154)

(154)

(7,969,599)

(1,315,545)

(2,216,911)

(3,023,341)

(526,816)

(15,052,212) 25,612,400 1,894,355 119,160 22,588 404,008 28,052,511 1,034,708 2,616,484 3,700,450 7,351,642 (1,034,708)

(1,034,708) 2,616,484 3,700,450 6,316,934 (16,650,970)

(1,136,670)

(3,299,133)

(4,327,854)

(280,161)

(25,694,788) 8,961,430 757,685 (563,489)

-(604,816) 123,847 8,674,657 276,361,420 3,542,154 51,987,933 72,297,938 (550,221) 403,639,224

$285,322,850

$ 4,299,839

$51,424,444

$71,693,122

$ (426,374)

$412,313,881 62 GRU Annual Report 2001-02 Electric Gas 4

I1I

Schedule of Utility Plant Properties -

Combined Utility Fund September 30, 2002 Utility Plant Properties Balance September 30, 2001 Plant in service Electric utility fund:

Production plant

$282,277,980 Nuclear fuel 6,668,515 Transmission and distribution plant 190,702,020 General and common plant 41,815,890 Plant unclassified 57,178,103 Total electric utility fund 578,642,508 Additions

$ 55,967,176 656,294 27,692,406 8,694,629 38,299,397 131,309,902 Sales, Retirements and Transfers

$ (12,558,273)

(4,432,060)

(4,656,918)

(91,759,973)

(113,407,224)

Balance September 30, 2002

$325,686,883 7,324,809 213,962,366 45,853,601 3,717,527 596,545,186 Gas utility fund:

Distribution plant General plant Plant acquisition adjustment

• Plant unclassified Total gas utility fund Water utility fund:

Supply, pumping and treatment plant Transmission and distribution plant General plant Plant unclassified Total w^ater utility fund Wastewater utility fund:

Pumping and treatment plant Collection plant Reclaimed water plant General plant Plant unclassified Total wastewater utility fund GRUCom utility fund:

Distribution plant General plant Plant unclassified Total GRUCom utility fund Total plant in senice Plant held for future use -

electric Construction in progress j

Electric utility fund Gas utility fund Water utility fund Wastevater utility fund GRUCom utility fund Total construction in progress 17,493,093 484,170 370,255 18,347,518

$908,763,269

$ 6,053,926

$ 47,332,662 2,085,404 9,749,422 11,756,609 5,747,714

$ 76,671,811 4,286,906 154,384 4,066,036 8,507,326

$173,420,718

$ 20,230,330 1,613,019 7,541,381 11,691,581 4,517,958

$ 45,594,269 (589,186)

(1,842)

(4,422,172)

(5,013,200)

$(139,082,154)

$ (40,411,037)

(2,908,864)

(6,308,193)

(6,513,543)

(4,066,036)

$ (60,207,673)

GRU Annual Report 2001-02 63 (105,718)

(385,303)

(3,038,779)

(3,529,800) 32,026,979 1,654,936 4,650,635 596,744 38,929,294 29,310,589 1,736,519 4,650,635 728,735 36,426,478 20,559,720 92,881,390 4,192,605 1,932,938 119,566,653 60,811,351 84,986,230 2,119,509 5,930,480 1,932,542 155,780,112 2,822,108 303,720 2,906,788 6,032,616 779,169 5,147,423 1,034,111 6,219,157 13,179,860 1,465,538 5,269,102 300,452 842,379 6,513,543 14,391,014 (205,095)

(202,015)

(884,005)

(6,903,974)

(8,195,089)

(85,360)

(46,667)

(936,030)

(7,868,784)

(8,936,841) 21,133,794 97,826,798 4,342,711 1,248,121 124,551,424 62,191,529 90,208,665 2,419,961 5,836,829 577,301 161,234,285 21,190,813 636,712 14,119 21,841,644

$943,101,833

$ 6,053,926

$ 27,151,955 789,559 10,982,610 16,934,647 6,199,636

$ 62,058,407

Schedule of Accumulated Depreciation and Amortization -

Combined Utility Fund September 30, 2002 Electric utility fund:

Production plant Nuclear fuel Transmission and distribution plant General and common plant Total electric utility fund Balance September 30, 2001

$153,832,262 6,169,325 51,318,244 19,338,491 230,658,322 Additions

$10,181,305 320,255 5,458,641 3,594,911 19,555,112 Sales, Retirements and Transfers

$(12,513,509)

(4,371,554)

(4,656,918)

(21,541,981)

Balance September 30, 2002

$151,500,058 6,489,580 52,405,331

'A -

18,276,484 228,671,453 Gas utility fund:

Distribution plant General plant Plant acquisition adjustment Total gas utility fund Water utility fund:

Supply, pumping and treatment plant Transmission and distribution plant General plant Total water utility fund Wastewater utility fund:

Pumping and treatment plant Collection plant Reclaimed water plant General plant Total wastewater utility fund GRUCom utility fund:

Distribution plant General plant Total GRUCom utility fund Total 64 GRU Annual Report 2001-02 12,693,024 1,072,525 3,496,831 17,262,380 8,419,313 29,565,973 3,359,365 41,344,651 23,450,764 26,667,130 260,814 4,811,737 55,190,445 4,545,362 134,888 4,680,250

$349,136,048 915,695 187,055

.346,140 1,448,890 733,127 2,104,811 421,756 3,259,694 1,885,848 1,727,474 42,979 640,011 4,296,312 2,299,139 75,024 2,374,163

$30,934,171 (105,718)

(380,296)

(486,014)

(205,095)

(151,476)

(884,005)

(1,240,576)

(85,361)

(33,330)

(936,030)

(1,054,721)

(589,186)

(1,842)

(591,028)

$(24,914,320) 13,503,001 879,284 3,842,971 18,225,256 8,947,345 31,519,308 2,897,116 43,363,769 25,251,251 28,361,274 303,793 4,515,718 58,432,036 6,255,315 208,070 6,463,385

$355,155,899 l,

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Table of Contents Introductory Section:

Title Page..........................................................................

i Principal Officials.........................................................................

v Table of Contents.........................................................................

vii Letter of Transmittal.........................................................................

A-1 Certificate of Achievement for Excellence in Financial Reporting..................

.......................... A-7 Organizational Chart.........................................................................

A-9

• Financial Section:

Management's Discussion and Analysis.........................................................................

B-3 Report of Independent Certified Public Accountants...............................................................

B-9 Financial Statements:

Balance Sheets..........................................................

B-14 Statements of Revenues, Expenses & Changes in Net Assets...................

.................. B-16 Statements of Cash Flows..........................................................

B-17 Notes to Financial Statements..........................................................

B-18 Required Supplementary Information..........................................................

B-35 Other Supplemental Data:

Combining Financial Statements:

Balance Sheets...........................................

C-3 Statements of Revenues, Expenses & Changes in Net Assets........................................ C-5 Statements of Cash Flows...........................................

C-6

• Statistical Sections:

Table I - Operating Revenues by Source/Operating Expenses by Department.............

............ D-3 Table 2 - Ten Highest Meter Locations.......................................................

D4 Table 3 - Insurance.......................................................

D-5 Table 4-Revenue Bond Coverage.......................................................

D-6 Table 5 - Population....................................................

D-7 Table 6 - Climate.......................................................

D-9 Table 7-Public School Enrollment....................................................... D-9 Table 8 - Median Household Effective Buying Income.......................................................

D-10 Table 9-Metro Orlando Education Profile.......................................................

D-1 1 Table 10-Property Tax Table.......................................................

D-12 Table 11 - Employment Grovth & Unemployment Rates....................................................... D-13 vii

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BOARD OF DIRECTORS ISSIMMEE James C. Welsh, President & General Manager CEO Larry W. Walter, Chairman AUTHORITY Don Shearer, Vice Chairman 1701 W. Carroll Street Domingo Toro, Secretary Kissimmee, Florida 34742-3219 Nancy Gemskie, Assistant Secretary 407-933-7777 Bill Hart, Director De b

18 2002 FAX 407-933-2655 George A. Gant, MayorlEx-Officio Director ecember Board of Directors Kissimmee Utility Authority The Comprehensive Annual Financial Report of the Kissimmee Utility Authority (KUA), for the fiscal year ended September 30, 2002, is submitted herewith pursuant to Section 10 of the KUA Charter, Florida Statutes Chapter 166.241(1) and Chapter 10.550 of the Rules of the Auditor General of the State of Florida.

Responsibility for the accuracy of the data and the completeness and fairness of the presentation, including all disclosures, rests with the KUA. This Comprehensive Annual Financial Report was prepared by the staff of the KUA's Department of Finance. We believe the data, as presented, is accurate in all material respects; that it is presented in a manner designed to fairly set forth the financial position, changes in financial position, and cash flows of the KUA; and that all disclosures necessary to enable the readers to gain the maximum understanding of the KUA's financial activity have been included.

The KUA's financial statements have been audited by Ernst & Young LLP, a firm of licensed certified public accountants. The goal of the independent audit was to provide reasonable assurance that the financial statements of the KUA for the fiscal year ended September 30, 2002, are free of material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the Authority's financial statements for the fiscal year ended September 30, 2002, are fairly presented in conformity with accounting principles generally accepted in the United States (GAAP). The independent certified public accountant's report is presented in the financial section of this report.

GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of Management's Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The MD&A can be found inimediately preceding the report of the independent certified public accountants.

The Comprehensive Annual Financial Report is presented in four sections: Introductory, Financial, Other Supplemental Data, and Statistical Sections. The Introductory Section includes the letter of transmittal and other such material as may be useful in understanding the reporting entity. The Financial Section includes Management's Discussion and Analysis, the Independent Certified Public Accountant's Report, Financial Statements with accompanying notes, and supplementary information. The Other Supplemental Data Section contains combining financial statements for KUA's two segments. The Statistical Section includes selected financial, operational, and demographic information, generally presented on a multi-year basis.

THE REPORTING UNIT In 1983, the City Commission of the City of Kissimmee established a Utility Study Committee. The report of this conmittee recommended establishing a separate authority. In February 1985, the City Commission adopted Ordinance

1. 1285 establishing the KUA, subject to approval by a majority of qualified voters. In March 1985, the voters of Kissimmee did approve establishing the KUA effective October 1, 1985. The KUA Charter (Ordinance #1285) states Serving the Kissimmee Area Since 1901 A - I

that the KUA shall be responsible for the development, production, purchase and distribution of all electricity and such other utility services as may be designated by resolution of the City Commission. The KUA currently provides electric services in an 85 square mile service territory in the Kissimmee area. All of the service territory is within Osceola County. This report includes all funds of the KUA. This report does not include the financial activities of the City of Kissimmee. Reference should be made to their report published separately.

Management of the KUA is responsible for establishing and maintaining a system of intemal controls designed to ensure that the assets of the KUA are protected from loss, theft or misuse and to ensure that adequate accounting data is compiled to allow for the preparation of financial statements in conformity with accounting principles generally accepted in the United States. The KUA's accounting controls are designed to provide reasonable, but not absolute, assurance regarding:

1. The safeguarding of assets against loss from unauthorized use or disposition; and

2.

The reliability of financial records for preparing financial statements and maintaining accountability for assets.

The concept of reasonable assurance recognizes that:

1. The costs of a control should not exceed the benefits likely to be derived; and

2.

The evaluation of costs and benefits requires estimates and judgments by management.

All internal control evaluations occur within the above framework. We believe that the KUA's internal accounting controls adequately safeguard assets and provide reasonable assurance of proper recording of financial transactions.

ECONOMIC CONDITION AND OUTLOOK The KUA service territory is located approximately 18 miles south of Orlando and 7 miles east of Walt Disney World.

This area is one of the fastest growing areas in the State of Florida. The area's rapid population growth has continued this past year, but at a somewhat lower level than in recent years. This trend is expected to continue. Customer growth is expected to increase from approximately 51,600 in 2002 to approximately 65,400 by the year 2012. Sales are expected to increase from approximately 1,117,000 MWh in 2002 to approximately 1,720,000 MWh by the year 2012.

As we look to the future, it seems possible that some form of increased competition may become a reality in spite of the problems experienced in other markets. We believe that competition will first occur in the states with the highest utility rates. Since Florida has low to moderate utility rates, we believe KUA is insulated from the effects of competition, at least in the near future.

Effective October 1, 1998, KUA began providing dial-up and commercial internet services (KUA.net). Services include personal and business connections including e-mail and web hosting. On August 13, 2002 KUA.net inked a deal with American Cablevision Services, Inc. to provide high-speed intemet services to Solivita, one of Florida's fastest-growing retirement communities. KUA.net will use a wireless and cable-based infrastructure to bring high-speed connectivity to the 3,300-acre development located in northeast Polk County. Solivita is owned by Avatar Holdings, Inc. and is part of the overall Poinciana community that is comprised of some 47,000 acres that straddle the Osceola-Polk county line.

The KUA.net member base at September 30,2002 was 3,124 customers. We believe this service to our utility customers and customers outside our service territory will enhance our ability to compete in a deregulated market place. Our efforts to brand KUA as the energy service provider of choice will continue as we explore other business opportunities.

MAJOR INITIATIVES All-Requirements Project As a result of the KUA Board's unanimous vote on April 10,2002, KUA will participate in the Florida Municipal Power Agency's (FMPA) All-Requirements Project (ARP) effective October 1, 2002. This means that KUA has agreed to purchase its total bulk power requirements, in excess of certain excluded resources, from the ARP. Also, KUA makes its A-2

generating or purchased capacity resources available to the ARP and receives capacity credits from the ARP. The principal benefits of ARP include:

Lower operating costs through utilization of the most efficient generation available Future generation will be planned for the collective systems, as needed, by FMPA Economies of scale in operating, planning and financing Lower risk with more units and more cities working together Decreased financial risk resulting from certainty of capacity credits as opposed to the uncertainty of the wholesale market for KUA's short term excess capacity.

Joining FMPA's ARP will be operationally transparent to KUA and its customers. It will not change the local operation of KUA, except there will be more connunication and coordination between KUA and FMPA. KUA will still make all the decisions about the operation of its power plants, including personnel, rates and operations. Each system in the ARP has the final say when it comes to running a unit, repairing a unit and/or retiring it.

The other 14 cities in the ARP are: Bushnell, Clewiston, Fort Meade,.Fort Pierce, Green Cove Springs, Havana, Jacksonville Beach, Key West, Lake Worth, Leesburg, Newberry, Ocala, Starke, and Vero Beach.

As a member of the ARP, KUA will also benefit from a reliability agreement reached between the ARP and several other Florida municipalities. This agreement allows ARP members access to power from other municipals' units at cost if ARP generating units experience unscheduled outages.

Telecommunications To ensure that our utility can continue to compete in an ever changing industry, we continue to look at new areas to develop, such as telecommunications. The KUA continues to expand its internal fiber-optic cable system to accommodate the growing needs of KUA customers. The KUA has installed 1,795.5 fiber circuit miles (65.4 miles) of fiber-optic cable on its electric transmission system and is working to install more circuits throughout the service area.

LONG TERM CAPITAL PLANNING Over the next ten years, the KUA has identified major projects that will help meet the needs of projected customer and energy sales growth. The key project during the ten-year planning period is the development of the Stanton Energy Center A. On August 21, 2000, the KUA Board of Directors approved an agreement under which KUA, FMPA and Orlando Utilities Commission (OUC) would build a 620 MW combined cycle unit to be constructed by Southem Company Services, Inc., at OUC's Stanton Energy Center Site. KUA's share of this unit will be 3.5% (approximately 22 MW) at an estimated cost of $10 million. The unit is currently scheduled for commercial operation in October of 2003.

ANNUAL BUDGET The KUA is required by Charter to adopt an annual budget. The KUA follows these procedures in establishing the annual budget:

I.

The President & General Manager submits to the Board of Directors a proposed operating and capital budget for the ensuing fiscal year. The operating budget includes proposed sources and the uses of funds to finance them.

2. During several workshops, which are open to the public, the staff and Board of Directors discuss and revise the submitted budget. A public hearing is conducted to obtain ratepayer comments.

3. The budget is approved by the Board of Directors and becomes the basis for operations for the ensuing fiscal year.

Budgetary control is provided by monthly revenue, expense and financial analysis reports. These interim reports are provided to the Board of Directors for review before a formal verbal presentation of financial activity at each monthly Board meeting.

A-3

CASH MANAGEMENT The KUA has a banking service agreement with a local depository bank that provides that all funds will earn interest through overnight repurchase agreements.

The KUA also participates in the State of Florida State Board of Administration's program for pooled investment of local government surplus funds. During FY 2002, the KUA maintained investments for certain restricted and designated funds in accordance with established policies and procedures. The cash management program involves a theory of keeping principal and earnings free from unreasonable risk, maintaining reasonable liquidity to meet maturing obligations and maximizing returns through the use of competitive rate comparisons from various investment sources.

RISK MIANAGEMENT During the current fiscal year the KUA has continued to accumulate resources in the Co-Insurance Fund. The amount transferred into this fund was approximately $300,000 and $3,500,000 in fiscal years 2002 and 2001, respectively. The accumulated fund was approximately $11,800,000 and $11,600,000 at September 30, 2002 and 2001, respectively.

Management is continuing to review the Insurance Program to determine the appropriate amount of risk in terms of higher deductibles that can be assumed by the KUA. In addition, various risk control techniques including employee accident prevention training have been continued during the year to minimize accident related losses.

DEBT MANAGEMENT At September 30,2002, the KUA had outstanding revenue bonds in the amount of $202,930,000 and commercial paper notes of $70,000,000. Interest rates range from 3.5% to 5.5% on the bonds. Commercial paper variable rates averaged 1.76%. The KUA maintains an A and A2 underlying rating from Fitch and Moody's respectively for outstanding bond issues. Debt service schedules extend to 2018, with principal payments due October of each year. The principal for the bonds due October, 2002, was $7,190,000.

PENSION BENEFITS The KUA sponsors a single-employerdefined benefit pension plan for its employees. Each year, an independent actuary engaged by the pension plan board of directors calculates the amount of the annual contribution that the KUA must make to the pension plan to ensure that the plan will be able to fully meet its obligations to retired employees on a timely basis.

As a matter of policy, the KUA fully funds each year's annual required contribution to the pension plan as determined by the actuary. As a result of the KUA's conservative funding policy, the KUA has succeeded as of September 30, 2002 in funding 97 percent of the present value of the projected benefits eamed by employees. The remaining unfunded amount is being systematically funded over 27 years as part of the annual required contribution calculated by the actuary.

FUTURE PROSPECTS Demand for electric power from the system has steadily increased in recent years and is projected to continue to increase as the Kissimmee area grows. In response to this growth, the KUA will continue its fiscal policy and complete the generation and transmission improvements needed throughout the system. The KUA is carefully watching the growth of the surrounding community and is methodically building its system resources to a level adequate to serve the area for many years to come. The KUA also is carefully watching the developments of increased competition currently being discussed in the electric utility industry to take advantage of opportunities that might develop in the future.

KUA is involved in numerous community-based enrichment programs, and the spirit of volunteerism is strongly felt by our employees. As the electric utility industry becomes more competitive, we realize that continued success depends on delivering service that exceeds customer expectations at competitive prices. At the same time, it means that we must continue our active involvement in the community. We are proud of Kissimmee's growth and vitality, and will use our energy to help keep our community and utility strong in the years ahead.

A-4

AWARDS The Government Finance Officers Association (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the KUA for its Comprehensive Annual Financial Report for the fiscal year ended September 30, 2001. The Certificate of Achievement is a prestigious national award recognizing conformance with the highest standards for preparation of state and local government financial reports.

In order to be awarded this Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report, whose contents conform to program standards. Such comprehensive annual financial report must satisfy both generally accepted accounting principles and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. The KUA has received a Certificate of Achievement for the last fifteen consecutive years. We believe our current report continues to conform to the Certificate of Achievement program requirements, and we are submitting it to GFOA.

In addition, the KUA also received the GFOA's Award for Distinguished Budget Presentation for its annual budget for the fiscal year beginning October 1, 2001. To qualify for the Distinguished Budget Presentation Award, the KUA's budget document was judged to be proficient in several categories including policy documentation, financial planning and organization.

ACKNOWLEDGMENTS The preparation of the Comprehensive Annual Financial Report on a timely basis was made possible by the dedicated service of the entire staff of the Finance Department. Each member of the Department has our sincere appreciation for the contributions made in the preparation of this report.

In closing, without the leadership and support of the Board of Directors of the KUA, preparation of this report would not have been possible.

espectfully submitted, es C. Welsh Joseph Hostetler President & General Manager Vice President Finance & Risk Management A-5

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A-6

Certificate of Achievement for Excellence in Financial Reporting Presented to Kissimmee Utility Authority, Florida For its Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2001 A Certificate of Achievement for Excellence In Financial Reporting Is presented by the Government Finance Officers Association of the Unlted States and Canada to government units and public employee retirement systems whose comprehensive annual financial reports (CAFRs) achieve the highest standards In government accounting and financial reporting.

President Executive Director A-7

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A-8

Kissimmee Utility Authority Organizational Chart FY 2002

[11 Reports to President &

General Manager and budgeted under a different department.

(21 Attorney is maintained on a contract basis.

,I.......................I Intemal Audit 2 111 Corporate 2

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General Manager I

Executive Secretary I

Power Supply 4

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Marketing a

inWI &. Risk adagement Human Resources A-9

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Management's Discussion and Analysis This section of KUA's annual financial report presents the analysis of the KUA's financial performance during the Fiscal Year that ended on September 30, 2002. Please read it in conjunction with the financial statements, which follow this section.

Financial Highlights The assets of the KUA exceeded its liabilities at September 30, 2002 by $140.4 million (net assets).

Of this amount, $122.6 million (unrestricted net assets) may be used to meet ongoing obligations to rate payers and creditors.

The KUA's net assets increased by $2.7 million or 2 percent.

The KUA's net utility plant increased by $4.1 million or 2 percent.

During the year, the KUA's operating revenues from metered sales decreased to $88.9 million or 6 percent and operating revenues from sales to other utilities increased to $20.7 million or 220 percent, while operating expenses increased to $100.8 million or 5 percent.

The KUA's total debt outstanding decreased by $5.5 million during the current fiscal year. This resulted from principal paid in the amount of $6.6 million offset by an increase due to the refunding of Series 1991, 1993, and 1993A.

Capital contributions to the KUA increased to $1.7 million.

Required Financial Statements The KUA maintains accounts on an accrual basis in accordance with accounting principles generally accepted in the United States. The accounts are substantially in conformity with accounting principles and methods prescribed by the Federal Energy Regulatory Commission (FERC) and other regulatory authorities. The financial statements of the KUA offer short and long-term financial information about its activities.

The Balance Sheet includes all of the KUA's assets and liabilities and provides information about the nature and amounts of investments in resources (assets) and the obligations to-KUA creditors (liabilities). It also provides the basis for computing rate of return, evaluating the capital structure of the KUA and assessing the liquidity and financial flexibility of the KUA.

All of the current year's revenues and expenses are accounted for in the Statement of Revenues, Expenses, and Changes in Net Assets. This statement measures the success of the KUA's operations over the past year and can be used to determine whether the KUA has successfully recovered all of its costs.

The other required financial statement is the Statement of Cash Flows. The primary purpose of this statement is to provide information about the KUA's cash receipts and cash payments during the reporting period. This statement reports cash receipts, cash payments, and net changes in cash resulting from operations, investing and financing activities; and provides answers to such questions as "where did the cash come from?", "what was cash used for?",

and "what was the change in cash balance during the reporting period?".

Financial Analysis of the KUA One of the most important questions asked about KUA's finances is, "Is the KUA better off or worse off as a result of the year's activities?". The Balance Sheet and the Statement of Revenues, Expenses and Changes in Net Assets report information about the KUA's activities in a way that will help answer this question.: These two statements report the net assets of the KUA, and changes in them. You can think of the KUA's net assets - the difference between assets and liabilities - as one way to measure financial health or financial position. Over time, increases or decreases in the KUA's net assets are one indicator of Whether its financial health is improving or deteriorating.

However, you will need to consider other non-financial factors such as changes in economic conditions, customer growth, and legislative mandates.

The KUA's total net assets increased from last year by $2,713,629. The following analysis focuses on the KUA's net assets (Table 1) and changes in net assets (Table 2) during the year.

B-3

Table I -Net Assets Capital assets Current and other assets Total assets Long-term debt outstanding Current and other liabilities Total liabilities Net Assets:

Invested in capital assets, net of related debt Restricted Unrestricted Total net assets 9/30/02

$240,409,298 196,482,961 436,892,259 251,110,363 45,369,094 296.479.457 9/30/01

$236,339,707 201,747,151 438,086,858 257,157,334 43,230,351 300.387.685 Increase (Decrease)

$4,069,591 2

(5,264,190)

(3)

(1,194,599)

(1)

(6,046,971)

(2) 2,138,743 5

(3.908.228)

(1)

(15,383,459)

(20,255,995) 4,872,536 24 33,237,508 28,653,852 4,583,656 16 122,558,753 129,301,316 (6,742,563)

(5) 140,412,802 137,699,173 2,713,629 2

Capital assets increased primarily as a result of the capitalization of utility plant. Current and other assets decreased due to the decrease in Cash and cash equivalents, investments and interest receivable of approximately $5.5 million.

Total liabilities decreased by approximately $3.9 million, largely due to the payment of revenue bond principal in the amount of $6.6 million offset by increases in other liabilities of $2.1 million.

The first portion of net assets reflects the KUA's investment in capital assets (e.g. plant, property and equipment net of accumulated depreciation), less any related debt used to acquire those assets that are still outstanding. The KUA uses these capital assets to provide electricity and other services to rate payers. It should be noted that the resources needed to repay the related debt must be provided primarily from future operating revenues, since the capital assets themselves cannot be used to liquidate these liabilities. This amount increased primarily as a result of capitalization of utility plant net of debt repayments during the fiscal year. The ending balance reflects the amount that debt exceeds related assets and is attributed to timing differences between the repayment of debt and the depreciation of those assets.

An additional portion of the KUA's net assets ($33.2 million) represents resources that are subject to external restrictions on how they may be used. The remaining balance of unrestricted net assets ($122.6 million) may be used to meet the government's ongoing obligations to rate payers and creditors.

This balance included approximately $68 million in assets designated by the Board of Directors for a specific purpose.

Changes in the KUA's net assets can be determined by reviewing the following condensed Statement of Revenues, Expenses, and Changes in Net Assets for the year.

Table 2 - Statementt of Revenues, Expenses, and Clanges in Net Assets Metered Sales Sales to Other Utilities Other Operating Revenues Total Operating Revenues Power Generation Purchased Power Transmission & Distribution Administrative & General Intergovernmental Transfers Depreciation & Amortization Total Operating Expense Operating Income Non Operating Revenue (Expenses)

Capital Contributions Change in Net Assets Net Assets - Beginning of Year Net Assets - End of Year 9/30/02

$88,914,602 20,719,571 3,323,734 112,957,907 46,323,881 18,977,880 5,871,529 9,491,342 6,990,571 13,169,601 100,824,804 12,133,103 (11,089,556) 1,670,082 2,713,629 137,699,173 140,412,802 9/30/01

$94,760,118 6,482,289 3,490,046 104,732,453 29,001,610 32,261,266 4,688,754 11,280,709 6,804,053 11,612,111 95,648,503 9,083,950 (6,942,648) 935,128 3,076,430 134,622,743 137,699,173 Increase (Decrease)

(5,845,516)

(6) 14,237,282 220 (166,312)

(5) 8,225,454 8

17,322,271 60 (13,283,386)

(41) 1,182,775 25 (1,789,367)

(16) 186,518 3

1,557,490 13 5,176,301 5

3,049,153 34 (4,146,908)

(60) 734,954 79 (362,801)

(12) 3,076,430 2

2,713,629 2

B-4

Year-to-date MWh sales in FY 2002 were approximately 1,119,000 compared to FY 2001 sales of 1,097,000, or a 2% increase. Sales to metered customers increased from $78.9 million to $81.6 million or 3.4%. The increase in sales resulted from an increase in the number of customers of 3.6% from 47,642 to 49,359 offset by demand and customer charges that do not vary directly with MWh sales. However, a decrease in the power cost adjustment resulted in lower total metered sales revenue of 6%. An increase'in sales to other utilities of $14.2 million offset by the decrease in metered sales revenue resulted in an increase in total operating revenues of $8.2 million or 8%.

MWh sales to other utilities increased from $6.5 million to $20.7 million during the year. Sales to other utilities resulted from KUA's participation in the Florida Municipal Power Pool and from direct sales to Aquila Energy.

These sales were possible due to additional capacity from Cane Island Unit 3 generation.

Total operating expenses were higher than the previous year, primarily due to higher fuel and depreciation expense.

Higher fuel expense was a result of elevated gas prices and costs associated with increased MWh sales to other utilities as well as'increased sales to metered customers.

Additional depreciation expense resulted from the additions to utility-plant which was predominantly the addition of Cane Island 3 steam turbine unit. Purchased power costs decreased due to the increase in generation made available by the addition of Cane Island Unit 3 steam turbine and the Cane Island combustion turbine at the end of the previous year.

Administrative and general expenses decreased primarily from lower insurance expense resulting from a $3 million transfer to the self-insurance fund during Fiscal Year 2001, offset by increased departmental expenses and lower capitalization of operating expenses as overheads.

We are required to record the fair value of our investment portfolio and recognize any corresponding increase or decrease in the fair value of investments in the income statement. For Fiscal Year 2002, our "paper loss" was

$432,533 compared to a "paper gain" for Fiscal Year 2001 of $2,995,642. Nonoperating revenues decreased primarily as a result of this recognition of decrease in fair value, and also due to a decrease in interest income from lower cash balances to invest at lower market interest rates.

Rates In December 1974, the City commission adopted an ordinance permitting the City (and now the KUA) to pass on directly to the customer incremental fuel cost increases on a monthly basis. This Cost of Power Adjustment (COPA) has eliminated the regulatory delay that has been a problem for many other utilities. Additionally, in June 1983, the City Commission modified the COPA Ordinance to allow the System to project the billed COPA to a levelized rate for the fiscal year. The negative or positive COPA account balance was used in calculating the projected COPA rate for the next fiscal year. In July 1991 the Board of Directors approved a COPA Resolution that allows automatic monthly adjustments to the COPA rate based on a weighted average using the prior month, estimated current month and following monthly costs. In May 1994 the Board of Directors approved a resolution permitting the KUA to pass on directly to the customer conservation costs on a monthly basis similar to the COPA mechanism. This Energy Conservation Cost Recovery (ECCR) rate is adjusted semiannually to reflect changes in conservation costs. The COPA and ECCR rates have been combined and are presented on the customer's bill as Cost of Power and Conservation Adjustment (COPCA).

In addition to the COPCA, the KUA has from time to time changed base rates as necessary to assure proper operation of the System. Base rate increases of 7%, 6.2%, and 2% were approved in Fiscal Years 1983, 1984, and 1985, respectively.

In Fiscal Year 1985, the KUA implemented a program of rate stabilization in an effort to prevent uneven increases in total electric charges to its customers.

In Fiscal Year 1987 an effective decrease in the overall base rates of 1% was implemented, while in Fiscal Year 1988 a 4.1% decrease was approved by the KUA's Board of Directors affecting the commercial classes only. In Fiscal Year 1990 the Florida Gross Receipts Tax of.5% was removed from the base rate and shown separately on customer bills as required by the State of Florida., This effectively reduced the base rate. An approximate 15% rate decrease was implemented in Fiscal Year 1992 to become more competitive with'neighboring utilities and promote growth within our service territory. Effective October 1, 1997 a 2.5% rate decrease was put into effect. Effective October 1, 1999, 2000, and 2001, three consecutive annual rate increases of 1.45% each year was approved by the Board of Directors in order to ensure the long-term financial stability of KUA.

.B-5

The KUA additionally maintains a computerized cost of service study which is updated biannually with:

a.

Past years' audited amounts to survey the adequacy of each rate and rate structure; and

b.

The current years' budgeted amounts to predict the need for a rate change.

Customer rates and rate structures are intended to follow guidelines of the Florida Public Service Commission and, as such, should be "fair, just and reasonable". It is also intended that they are competitive with neighboring utilities and equitable between rate classes.

During FY 1997, a Deregulation/Rate Stabilization Fund was created, allowing KUA the flexibility to implement sustainable competitive rate decreases in the event the electric utility industry becomes deregulated in Florida. This fund has been built-up using excess net assets resulting in balances of $ 18,990,827 and $21,494,007 for Fiscal Years 2001 and 2002, respectively. The balance in this fund will vary over time, depending on fluctuations in expenses and/or revenues. Electric sales tend to vary with customer growth and weather conditions.

Capital Assets and Debt Management Capital assets.

The following table summarizes KUA's capital assets, net of accumulated depreciation, and changes therein for the years ended September 30, 2002 and September 30, 2001:

Table 3 -Capital Assets, Net ofAccunulated Depreciation 9/30/02 09/30/01 Increase Utility Plant Balance Balance (Decrease)

Nuclear Production

$ 715,526

$ 1,059,978

$(344,452)

Steam Production 120,343,981 61,196,643 59,147,338 Other Production 21,734,851 60,358,770 (38,623,919)

Transmission Plant 27,405,123 26,175,846 1,229,277 Distribution Plant 35,075,197 33,198,259 1,876,938 General 7,153,649 7,720,711 (567,062)

Construction in Progress 27,700,524 46,200,753 (18,500,229)

Nuclear Fuel Inventory 280,447 428,747 (148,300)

Total

$240,409,298

$236,339,707

$4,069,591 Expansion of the generation, transmission and distribution system (net of accumulated depreciation) during FY 2002 included construction of Cane Island Unit 3 and Substation at the Cane Island Power Park and the Employee Substation located on Boggy Creek Road. Approximately $36 million was reclassified from other production to steam production to accurately reflect the proper FERC asset category.

At the end of FY 2002, the KUA had $349 million invested in a broad range of capital assets primarily power plants and electric transmission and distribution systems. This amount represents an increase of over $35 million, or 11%

over last year.

Long-Term Debt. At the end of the current fiscal year, the KUA had total debt outstanding of $280,120,000. Of this amount, $210.1 million is improvements and refunding revenue bonds and $70 million is commercial paper.

2002 2001 Revenue Bonds

$210,120,000

$215,600,000 Commercial Paper 70,000,000 70.000,000 Total The KUA's total debt decreased by $5.5 million (2.6 percent) during the current fiscal year. The key factor in this decrease was principal payments of $6.6 million offset by an increase due to the refunding of Series 1991, 1993, and 1993A. During the current fiscal year, the KUA refinanced some of its existing debt to take advantage of favorable interest rates. The KUA issued Electric System Refunding Revenue Bonds Series 2001A and 2001B to refinance B-6

previously outstanding bonds. The result was a net present value savings of $3 million. The KUA maintains an A and A2 underlying rating from Fitch and Moody's respectively for outstanding bond issues.

The KUA attempts to minimize external financing needs through internal generation of capital funds. The purpose of this financial policy is to establish and maintain a debt-to-equity ratio and a coverage ratio that would minimize the impact of future debt issues for generation and transmission plants. The current fiscal policy includes the following guidelines:

1.

Bond proceeds should fund all generation (capacity) and transmission projects;

2.

Current earnings (cash provided from operations) should be adequate to fund operating and maintenance expenses, debt service related costs (excluding capitalized interest) and year to year capital needs generally less than $ 100,000;

3.

The Reserve for Future Capital Outlay funds should be used for all other purposes as approved by the Board of Directors;

4.

Maintain a minimum level of $5,000,000 in Reserve for Future Capital Outlay, indexed each year by the increase in KWh sales beginning in FY 1997 (current minimum level is $6,100,000);

5.

Maintain a minimum of two months of fixed Operating & Maintenance Expenses (excluding Depreciation, Costs Recoverable from Future Revenues and debt service related costs) in unrestricted operating cash and cash equivalents and longer-term invested working capital funds;

6.

Maintain a minimum of 1.5 debt service coverage as defined in the bond resolution; and

7.

Build an insurance fund adequate to fund reconstruction expenditures for our transmission and distribution system in the event of the most likely level of storm that would occur in the Central Florida area.

The principal, premium if any, and interest on all outstanding Bonds are payable solely from the Net Revenues derived by the KUA from the operation of the System. These obligations do not constitute liens upon the System or on any other property of the KUA or the City of Kissimmee, but are a lien only on the Net Revenues and special funds created by the Bond Resolution and in the manner provided therein.

The income available for debt service was $36,502,572 and $33,148,216 for Fiscal Years 2002 and 2001 respectively. The debt service requirements for Fiscal Years 2002 and 2001 were $18,381,441 and $17,863,738, respectively. Debt service coverage was l.99x and 1.86x for Fiscal Years 2002 and 2001, respectively.

Economic Factors and Next Year's Budget and Rates The growth for the KUA service territory continues to be projected above the national average.

Growth in customers and energy sales for Fiscal Year 2003 is forecasted to be approximately 3.3% and 6% respectively.

Change in Net Assets is projected to be approximately $503,000 for FY 2003. There is no rate increase planned for the upcoming year.

Looking forward, KUA anticipates that financial risk has been hedged somewhat as a result ofjoining FMPA's All Requirements Project. The receipt of capacity credits will partially offset the cost to operate and finance KUA's generation units and also reduce the cost of purchase power to our customers through the cost of power allowance mechanism.

Contacting the KUA's Financial Management This financial report is designed to provide the KUA's rate payers and creditors with a general overview of the KUA's finances and to demonstrate the KUA's accountability for the money it receives. Those interested in more detailed information may refer to the notes to the financial statements. If you have questions about this report or need additional information, contact the Finance & Risk Management Department at Kissimmee Utility Authority, 1701 W. Carroll Street, Kissimmee, Florida, 34741.

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B-8

MI JJERNST&YOUNG Ernst & Young wt N Phone: (407) 872-6600 Suite 1700 www.ey.com 390 North Orange Avenue Orlando, Florida 32801-1671 Report of Independent Certified Public Accountants Board of Directors Kissimmee Utility Authority We have audited the accompanying balance sheets of Kissimmee Utility Authority (the Authority) as of September 30, 2002 and 2001 and the related statements of revenues, expenses and changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the Authority'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 and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of 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 referred to above present fairly, in all material respects, the financial position of Kissimmee Utility Authority, as of September 30, 2002 and 2001 and its changes in its financial position and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, effective October 1, 2001, the Authority adopted Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements -

and Management's Discussion and Analysis -for State and Local Governments, GASB Statement No. 37, Basic Financial Statements - and Management's Discuission and Analysis -for State and Local Governments: Omnibus, and GASB Statement No. 38, Certain Financial Statement Note Disclosures.

In accordance with Government Auditing Standards, we have also issued our report dated November 22, 2002 on our consideration of the Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations and contracts. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

The schedule of funding progress and management's discussion and analysis as listed in the table of contents are not a required part of the basic financial statements but is supplementary information required by the GASB. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this required supplementary information. However, we did not audit the information and express no opinion on it.

0212-0372543 Ernst & Young LLP iS a member of Ernst & Young International, Ltd.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying other supplemental data listed in the table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them.

November 22, 2002 0212-a372543 2

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B - 13

KISSIMMEE UTILITY AUTHORITY BALANCE SHEETS SEPTEMBER 30, CURRENT ASSETS Cash and cash equivalents Investments Interest receivable Accounts receivable Less: allowance for doubtful accounts Inventory Deferred Cost of Power Adjustment Other Current Assets TOTAL CURRENT ASSETS RESTRICTED ASSETS Cash and cash equivalents Investments Interest receivable TOTAL RESTRICTED ASSETS OTHER ASSETS Unamortized Bond Costs Costs to be Recovered from Future Revenue Other

$46,688,136

$49,343,297 35,265,337 37,455,360 419,354 250,058 12,927,210 14,155,655 (320,001)

(243,298) 7,108,993 5,007,530 256,401 743,167 1,090,691 103,088,597 107,059,293 34,579,200 35,201,688 10,648,259 10,951,428 200,409 101,575 45,427,868 46,254,691 2,507,606 2,618,591 44,761,344 45,076,887 697,546 737,689 47,966,496 48,433,167 349,402,585 314,248,999 (136,974,258)

(124,538,792) 212,428,327 189,710,207 27,700,524 46,200,753 280,447 428,747 240,409,298 236,339,707

$436,892,259

$438,086,858 TOTAL OTHER ASSETS UTILITY PLANT Property, plant and equipment Less: Accumulated depreciation Construction in progress Inventory - nuclear fuel TOTAL UTILITY PLANT TOTAL ASSETS The accompanying notes are an integral part of these financial statements B-14 ASSETS 2002 2001

LIABILITIES AND NET ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable Due to other governments Deferred cost of power adjustment Energy conservation cost recovery Other accrued liabilities TOTAL CURRENT LIABILITIES LIABILITIES PAYABLE FROM RESTRICTED ASSETS Current portion of revenue bonds Accrued interest payable-revenue bonds Advances for construction Customer deposits Accounts payable from construction funds Other TOTAL LIABILITIES PAYABLE FROM RESTRICTED ASSETS LONG-TERM DEBT Revenue bonds payable Commercial paper notes Unamortized bond premium Less: unamortized loss on reacquired debt Less: unamortized bond discount TOTAL LONG-TERM DEBT OTHER LONG-TERM LIABILITIES

- Co-insurance fund Accrued compensated absences Maintenance reserve fund CR3 special assessment TOTAL OTHER LONG-TERM LIABILITIES TOTAL LIABILITIES NET ASSETS Invested in capital assets, net of related debt Restricted Unrestricted TOTAL NET ASSETS COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 10 & 11)

TOTAL LIABILITIES AND NET ASSETS 2002 2001

$8,761,504

$6,485,167 1,309,027 918,415 1,007,823 282,930 199,562 991,859 727,354 11,345,320 9,338,321 7,190,000 6,595,000 5,260,942 5,935,728 1,881,259 2,161,322 3,548,159 3,290,108 175,640 1,500,000 1,500,000 19,380,360 19,657,798 202,930,000 209,005,000 70,000,000 70,000,000 2,810,121 (22,542,330)

(18,441,844)

(2,087,428)

(3,405,822) 251,110,363 257,157,334 11,819,612 11,628,836 1,589,051 1,376,247 1,213,343 1,194,685 21,408 34,464 14,643,414 14,234,232 296,479,457 300,387,685 (15,383,459)

(20,255,995) 33,237,508 28,653,852 122,558,753 129,301,316 140,412,802 137,699,173

$436,892,259

$438,086,858 The accompanying notes are an integral part of these financial statements B-15

KISSUIMEE UTILITY AUTHORITY STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS For the Years Ended September 30, OPERATING REVENUES Metered sales Sales to other utilities Other operating revenues TOTAL OPERATING REVENUES OPERATING EXPENSES Power Generation Purchased Power Transmission/Distribution Administrative and general Intergovernmental transfers Depreciation and amortization TOTAL OPERATING EXPENSES OPERATING INCOME NONOPERATING REVENUES (EXPENSES)

Investment income Interest expense Other Plant costs recovered through capital contributions Costs to be recovered from future revenue TOTAL NONOPERATING REVENUES (EXPENSES)

INCOME BEFORE CAPITAL CONTRIBUTIONS Capital contributions CHANGE IN NET ASSETS NET ASSETS - BEGINNING OF YEAR NET ASSETS - END OF YEAR The accompanying notes are an integral part of these financial statements B - 16 2002

$88,914,602 20,719,571 3,323,734 112,957,907 46,323,881 18,977,880 5,871,529 9,491,342 6,990,571 13,169,601 100,824,804 12,133,103 2001

$94,760,118 6,482,289 3,490,046 104,732,453 29,001,610 32,261,266

- 4,688,754 11,280,709 6,804,053 11,612,111 95,648,503 9,083,950 8,782,983 (11,435,440)

(2,056,159)

(935,128)

(1,298,904)

(6,942,648) 2,141,302 935,128 3,076,430 134,622,743

$137,699,173 4,050,444 (11,255,511)

(1,898,864)

(1,670,082)

(315,543)

(11,089,556) 1,043,547 1,670,082 2,713,629 137,699,173

$140,412,802

KISSINMIEE UTILITY AUTHORITY STATENENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 CASH FLOWS FRONI OPERATING ACTIVITIES Receipts from Customers Receipts from Sales to Other Utilities Receipts from Other Sources

$89,038,894

- 20,719,571 3,323,734 TOTAL CASH PROVIDED Payments to suppliers for goods and services Payments for employees for services Payments for benefits on behalf of employees TOTAL CASH USED NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FRONI CAPITAL AND RELATED FINANCING ACTIVITIES:

Acquisition of capital assets and nuclear fuel Advances for construction & advances from co-owners Proceeds from debt issue Payment to defease debt Debt Issuance Costs Principal paid on long-term debt Interest paid on long-term debt Other debt costs 113,082,199 (71,406,707)

(12,595,900)

(3,028,276)

(87,030,883) 26,051,316 (24,840,394) 8,342,067 75,520,000 (74,405,000)

(1,537,448)

(6,595,000)

(11,866,227)

(222,469)

NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROI INVESTING ACTIVITIES Purchase of investment securities Proceeds from rnaturities of investment securities Interest on investments NET CASH PROVIDED BY INVESTING ACTIVITIES NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALEN'TS AT END OF YEAR (35,604,471)

(52,100,000) 54,480,921 3,894,585 6,275,506 (3,277,649) 84,544,985

$81,267,336

$94,299,269 6,482,289 3,490,046 104,271,604 (77,089,777)

(10,988,840)

(2,896,377)

(90,974,993) 13,296,611 (74,878,178) 30,914,686 73,985,399 (41,120,000)

(13,566,597)

(275,097)

(24,939,787)

(23,400,000) 90,753,552 7,823,848 75,177,400 63,534,224 21,010,761

$84,544,985 RECONCILIATION OF OPERATING INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Operating Income Adjustments to reconcile operating income to net cash provided by operating activities:

Depreciation Net amortization (Increase) decrease in accounts receivable, net (Increase) decrease in other assets (Increase) decrease in inventory (Increase) decrease in deferred cost of power adjustment (Increase) decrease in energy conservation eost recovery Increase (decrease) in accounts payable Increase (decrease) in due to other govemments Increase (decrease) in customer deposits Increase (decrease) in other accrued liabilities Increase (decrease) in other designated liabilities S12,133,103 13,420,366 (250,765) 1,305,148 346,969 (2,101,463)

(1,264,224) 83,368 1,107,412 390,612 194,047 477,309 209,434

$26,051,316 NONCASH INVESTING, CAPITAL, AND FINANCING ACTIVITIES:

(Decrease) increase in fair value of investments

$9,083,950 11,850,469 (238,358)

(2,518,338) 1,571,928 643,094 1,994,275 63,214 (12,562,027)

(307,759)

(103,852) 155,549 3,664,466

$13,296,611

($432,533)

$2,995,642 Tbe accompanying notes are an Integral part of these financial statements B-17

KISSIMMEE UTILITYAUTHORITY JVOTES TO THE FINANCIAL STA TEMENTS YEARS ENDED SEPTEiBER 30, 2002 AND 2001 Note 1 - Siuninary of Sign ificant Accounting Policies:

Entitv Definition: The accompanying financial statements present the financial position, changes in financial position and cash flows of the Kissimmee Utility Authority (KUA) in accordance with Governmental Accounting Standards Board Statement (GASB) No. 14, "The Financial Reporting Entity." The reporting entity for the KUA includes all functions in which the KUA exercises financial accountability. Financial accountability is defined as appointment of a voting majority of the component unit's board, and either a) the ability to impose will by the primary government, or b) the possibility that the component unit will provide a financial benefit to or impose a financial burden on the primary government. As a result of applying the above reporting entity criteria, no other component units exist in which the KUA has any financial accountability which would require inclusion in the KUA's financial statements.

Description of Business: The KUA is a municipal electric utility authority created effective October 1, 1985 by the City of Kissimmee Ordinance No. 1285 adopted on February 19, 1985 and ratified by the voters on March 26, 1985. The KUA serves customers in Kissimmee and the surrounding area. The KUA Board (Board) has 6 members. The Mayor of the City of Kissimmee is a non-voting Ex-Officio member. The 5 voting members are nominated by the Board and ratified by the City Commission. The KUA has exclusive jurisdiction, control and management of the electric utility. Under the definition of GASB No. 14, the KUA is properly excluded from the City of Kissimmee's financial statements.

KUA also offers intemet access to the residents of Osceola and surrounding counties. The service, KUA.net, features high-speed internet access, e-mail, personal web pages, 24-hour help desk, free internet classes, and convenient billing options. By offering internet services, KUA continues to expand its involvement in the community.

Re2ulation: According to existing laws of the State of Florida, the five voting members of the KUA act as the regulatory authority for the establishment of electric rates. The Florida Public Service Commission (FPSC) has authority to regulate the electric "rate structures" of municipal utilities in Florida. It is believed that "rate structures" are clearly distinguishable from the total amount of revenues which a particular utility may receive from rates, and that distinction has thus far been carefully made by the FPSC.

As noted above, the FPSC has jurisdiction to regulate electric "rate structures" of municipal utilities. In addition, the Florida Energy Efficiency and Conservation Act has given the FPSC exclusive authority to approve the construction of new power plants under the Florida Electrical Power Plant Siting Act. The FPSC also exercises jurisdiction under the National Energy Act, including electric use conservation programs.

Operations of the KUA are subject to environmental regulations by federal, state and local authorities and to zoning regulations by local authorities. Federal and state standards and procedures that govern control of the environment can change. These changes can arise from continuing legislative, regulatory andjudicial action respecting the standards and procedures. Therefore, there is no assurance that the units in operation, under construction, or contemplated will always remain subject to the regulations currently in effect or will always be in compliance with future regulations.

An inability to comply with environmental standards or deadlines could result in reduced operating levels or complete shutdown of individual electric generating units not in compliance. Furthermore, compliance with environmental standards or deadlines may substantially increase capital and operating costs.

Basis of Accountin2: The KUA consists of a single Enterprise Fund including the electric utility and the Internet Service Provider (ISP) segments. The KUA maintains its accounts on the accrual basis in accordance with accounting principles generally accepted in the United States. The accounts are substantially in conformity with accounting principles and methods prescribed by the Federal Energy Regulatory Commission and other regulatory authorities.

The accounting and reporting policies of the KUA conforn with the accounting rules prescribed by the GASB. The KUA has elected under GASB No. 20, "Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That B-18 I

KISSIMmEE UTILITYA UTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARS EADED SEPTEMBER 30, 2002AND 2001 Use Proprietary Fund 'Accounting," to apply all applicable GASB pronouncements, as well as all applicable Financial Accounting Standards Board (FASB) Statements and Interpretations issued on or before November 30, 1989, except for'those that conflict with or contradict GASB pronouncements.

The KUA adopted the provisions ofGASB StatementNo. 34, "BasicFinancialStatements-andManagement'sDiscussion and Analysis -for State and Local Governments ", GASB Statement No. 37, "Basic Financial Statements - and Management's Discussion and Analysis -for State and Local Governments: Omnibus", and GASB Statement No. 38, "Certain Financial Statenent Note Disclosures ", during the year ended September 30, 2002. Statement 34 establishes standards for external financial reporting for all state and local governmental entities which includes a management's discussion and analysis section, a Balance Sheet, a Statement of Revenues, Expenses, and Changes in Net Assets and a Statement of Cash Flows. It requires the classification of Net Assets into three components -Invested in Capital Assets, net of related debt; Restricted; and Unrestricted.

Statement 38 primarily clarifies the disclosures concerning debt service requirements and lease obligations.

The adoption of Statement 34 had little effect on the basic financial statements except for the classification of net assets, the reflection of capital contributions as a change in net assets, presentation of the Statement of Cash Flows using the direct method, and the inclusion of a Management's Discussion and Analysis (MD&A) section providing an analysis ofthe Authority's overall financial position and changes in position. Statement 34 also requires that metered sales revenues be reported net of any bad debt allowance. The amount of allowance for Fiscal Years 2002 and 2001 was $592,000 and $538,000, respectively.

'The adoption ofStatement 38 had no effect on the basic financial statements. The additional debt service disclosure requirements have been integrated as required.

Budget: The KUA is required by charter to adopt an annual budget (budget). The budget is adopted on a basis consistent with generally accepted accounting principles.

The KUA follows these procedures in establishing the budget:

1. The President and General Manager submits to the Board of Directors a proposed operating budget for the ensuing fiscal year. The operating budget includes proposed uses and the sources of funds to finance them.

2. During several workshops, which are open to the public, the staff and Board of Directors discuss and revise the submitted budget. A public hearing is conducted to obtain ratepayer comments.

3. The budget is approved by the Board of Directors and becomes the basis for operations for the ensuing fiscal year.

The President and General Manager is authorized to approve all budget transfers and all interdepartmental transfers are reported to the Board of Directors monthly. Budget amendments which increase the adopted budget are approved by the Board of Directors. Both budget transfers and budget amendments were made during the fiscal year. Operating budgets lapse at year end Capital projects are budgeted for the project life rather than for the current fiscal year. The unexpended portion of project budgets do not lapse until the conclusion of the project.

Costs to be Recovered from Future Revenue: The KUA's electric rates are established based upon debt service and cash operating requirements. Depreciation, unrealized gains or losses on investments, and other non cash items are not considered in the cost of service calculation. This results in timing differences between when costs are included in the ratemaking process versus when costs are incurred. Costs to be recovered from future revenue consist principally of the difference between depreciation and the amortization of the gain and loss on bond refunding and the debt principal requirements included in the determination of rates and changes in the fair value of investments. The recognition in income of outstanding amounts associated with costs to be recovered from future revenue will coincide with the inclusion ofthese amounts in rates charged to customers. This method was adopted in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" in order to reflect the economics of regulation in the determination of reinvested earnings.

B - 19

KISSIMmEE UTILITYAUTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARSENDED SEPTEMBER 30,2002 AND 2001 Operating Revenues and Expenses: Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with principal ongoing operations. The principal operating revenue of the KUA is charges to customers for sales and services. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as nonoperating revenues and expenses. The KUA accrues base revenue for services rendered but unbilled to provide a closer matching of revenues and expenses.

Utility Plant: Property, plant and equipment are stated at cost when purchased or constructed. Depreciation is provided using the straight-line method. The estimated useful lives of the various classes of depreciable property, plant and equipment are as follows:

Production 12 1/3 to 33 1/3 years Transmission 29 2/5 to 50 years Distribution 22 1/4 to 32 14 years General 6 2/3 to 33 1/3 years The cost of maintenance and repairs, including renewal of minor items of property, is charged to operating expense as incurred.

The cost of replacement of depreciable property units, as distinguished from minor items, is charged to utility plant. The cost of units replaced or retired, including cost of removal, net of any salvage value, is charged to accumulated depreciation.

Nuclear Fuel: Amortization of nuclear fuel is based on cost, which is prorated by fuel assembly batch in accordance with the thermal energy that each assembly produces. The KUA is currently paying I mill per KWh for residual future disposal costs in addition to estimated labor and waste burial costs.

rnventory: Inventory is stated at weighted average cost.

Unamortized Bond Costs: Unamortized bond discounts and issuance costs on long-term debt are amortized over the life of the issue on a straight-line basis. The KUA considered the effective interest method of amortizing bond discounts and determined that no material difference results from the continued use of the straight-line method.

Unamortized Loss of Reacquired Debt: Unamortized gains or losses on refunded debt are amortized to income over the life of the new debt consistent with the methods used for setting rates. Unamortized gains and losses on bond refundings have been netted for financial statement purposes.

Net Assets: Equity is classified as net assets and displayed in three components:

Invested in capital assets, net of related debt - Consists of capital assets, net of accumulated depreciation and reduced by the outstanding balances of any long-term debt that is attributable to the acquisition, construction, or improvement of those capital assets. If there are significant unspent related debt proceeds at year-end, the portion of the debt attributable to the unspent proceeds is not included in the calculation of invested in capital assets, net of related debt.

Rather, that portion of the debt is included in the sane net assets component as the unspent proceeds.

Restricted - Consists of net assets with constraints placed in their use by revenue bond resolution or other external agreement.

Unrestricted All other net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt."

Reclassifications: Certain amounts presented for the prior year have been reclassified in order to be consistent with the current year's presentation.

Advances for Construction: The KUA receives funds from developers for electric line extensions and from co-owners of the Cane Island Units 1, 2, and 3. These funds are recorded as reductions to gross plant costs and amortized over the life of related B -20

KissIAMArEE UTILITY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2002 AND 2001 assets. However, for financial reporting purposes, such contributions are presented as capital contributions with a corresponding expense for contributed plant costs in the Statements of Revenues, Expenses and Changes in Net Assets.

Deferred Cost of Power Adiustment: Deferred cost of power adjustment represents the KUA's cost of power adjustment revenues collected, but for which costs have not been incurred or costs that have been incurred, but for which cost of power adjustment revenues have not been collected.

Ener2v Conservation Cost Recovery: Energy conservation cost recovery represents the KUA's energy conservation cost revenues collected, but for which costs have not been incurred or costs that have been incurred, but for which energy conservation cost recovery revenues have not been collected.

Payments to the Citv ofKissimmee: By charterthe KUA is required topayto the City of Kissimmee a minimum of$6.24per 1,000 KWh. This payment is treated as an operating and maintenance expense in the Statements of Revenues, Expenses and Changes in Net Assets. The total amount paid to the City of Kissimmee was approximately $6,969,600 and $6,792,200 for the years ended September 30, 2002 and 2001, respectively. The amount owed to the City of Kissimmee was approximately

$1,154,400 and $835,000 for the years ended September 30, 2002 and 2001, respectively.

The KUA collects Osceola County Public Service tax revenies on behalf of Osceola County from customers who live outside the City of Kissimmee. In accordance with an Interlocal Agreement between Osceola County and the KUA, twenty-five percent of these revenues collected are transferred to the City of Kissimmee for Parks and Recreation use. The total amount transferred to the City of Kissimmee was approximately $590,700 and $566,500 for the years ended September 30, 2002 and 2001, respectively. The amount owed to the City ofKissimmee was approximately $57,900 and $50,600 at September 30,2002 and 2001, respectively.

The KUA collects revenues on behalf of the City of Kissimmee for City of Kissimmee utility services including water, sewer, solid waste and utility taxes. The amount paid to the City of Kissimmee by the KUA for utility service revenues collected was approximately $29,500,000 and $29,596,300 fortheyears ended September30,2002 and2001,respectively. The amountowed to the City of Kissimmee was approximately $131,000 and $82,400 at September 30, 2002 and 2001, respectively.

The KUA pays the City of Kissimmee for miscellaneous fees that are operating expenses for the KUA. The amount paid to the City of Kissimmee was approximately $297,900 and $161,500 for the years ended September 30, 2002 and 2001, respectively.

The KUA performs certain customer related services for the City of Kissimmee for which the City of Kissimmee paid the KUA approximately $841,000 and $772,600 for the years ended September 30,2002 and 2001, respectively. The amount owed by the City of Kissimmee to the KUA was approximately $73,000 and $66,400 at September 30, 2002 and 2001, respectively. As of September 30, 2002 and 2001, the City of Kissimmee also owed the KUA $511,100 and $797,700, respectively, which represents the remaining balance of funds KUA loaned to the City at 0% interest rate related to a customer overbilling and overpayment in prior years. The amounts paid by the City ofKissimmee to the KUA was approximately $286,500 and $286,500 for the years ended September 30, 2002 and 2001, respectively.

Cash and Cash Enuivalents:. Cash and cash equivalents include short-term, highly liquid investments that are both readily convertible to known amounts of cash and whose original maturity is three months or less. These consist of repurchase agreements, the State Board of Administration Pool and the carrying amount of the KUA's deposits with financial institutions.

Investments: Investments are recorded at fair value. Fair value is determined based on quoted market prices. The Local Government Investment Pool operated by the Florida State Board of Administration is a 2a-7-like pool; therefore, it is not presented at fair value but at its actual pooled share price. Because KUA's financial statements are prepared under a regulatory basis of accounting pursuant to the provisions of Statement of Financial Accounting Standards No.71, whereby certain income and expense amounts are deferred and not included in the determination of net income until such costs are recoverable, the net change to the investments carrying value is included in interest revenue and costs to be recovered from future revenues with no B-21

KISSIMmAEE UTILITYAUTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED SEPTEIBER 30,2002 AND 2001 impact on net assets.

Compensated Absences: In accordance with GASB No. 16, "Accounting for Compensated Absences," the KUA accrues a liability for employees' rights to receive compensation for future absences when certain conditions are met.

The KUA has not normally, nor is it legally required to, accumulate expendable available financial resources to liquidate this obligation. Accordingly, the liability for compensated absences is included in Other Long-term Liabilities in the accompanying Balance Sheets.

iVote 2 - Cast, Casl Equivalents, Inivestments and Interest Receivable Florida Statutes, the KUA Charter and the KUA Investment Policy authorize the investment of excess funds in time deposits or savings accounts of financial institutions approved by the State Treasurer, obligations of United States Govemment agencies, certain instruments guaranteed by the U.S. Government, the State Board of Administration (SBA) Pool, bankers' acceptances, and commercial paper. Revenue Bond Covenants also restrict the type and maturities of investments in the required trust funds (see Note 9).

Investments must be in the KUA's name and represented by bank safekeeping receipts which enumerate the various securities held, except for the Crystal River Unit No. 3 Decommissioning Reserve and Florida Gas Utility (FGU) Collateral Funds, which are held in trust, and are not in the name of KUA.

The Statutes also require depositories of public funds to provide collateral each month at least equal to 50 percent ofthe average daily balance of all public deposits in excess of deposit insurance. Any loss not covered by the pledged securities and deposit insurance would be assessed by the State Treasurer and paid by other qualified public depositories.

The components of the KUA's total cash, cash equivalents, investments and interest receivable at their respective carrying amounts at September 30, 2002 and 2001 are as follows:

Current Restricted Total 2002 Cash & Cash Equivalents

$46,688,136

$34,579,200

$ 81,267,336 Investments 35,265,337 10,648,259 45,913,596 Interest Receivable 419,354 200,409 619,763 TOTALS

$82,372,827

$45,427,868

$127,800,695 2001 Cash & Cash Equivalents

$49,343,297

$35,201,688

$ 84,544,985 Investments 37,455,360 10,951,428 48,406,788 Interest Receivable 250,058 101,575 351,633 TOTALS

$87,048,715

$46,254,691

$133,303,406 The level of credit risk assigned to investments are defined and summarized as follows:

Category 1 - Insured or registered, with securities held by the KUA or its agent in the KUA's name.

Category 2 - Uninsured and unregistered, with securities held by the counterparty's trust department or agent in the KUA's name.

Category 3 - Uninsured and unregistered, with securities held by the counterparty's trust department or agent but not in the KUA's name.

B-22 I

KISSIMMEE UTILITY AUTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED SEPTEABER 30,2002 AND 2001 Category of Risk (000's)

Total Fair 1

2 3

Value 2002 U.S. Government Securities

$ 221

$ 221 U.S. Instrumental Securities 39,928 3,500 2,265 45,693 Total Investments

$39,928

$3,721

$2,265

$45,914 2001 U.S. Governrent Secirities

$1,123

$1,123 U.S. Instrumental Securities 45,358 1,926 47,284 Total Investments

$45,358

$1,123

$1,926

$48,407 GASB No. 31, "Accounting and Financial Reporting for certain investments and External Investment Pools", requires that investments are recorded at fair value. The effect of adjusting the investments to fair value at September 30, 2002 and 2001 was a (decrease) increase to the investments carrying value of approximately $(532,500) and $2,996,000, respectively.

The balance in the SBA was approximately $54,121,000 and $84,620,000 at September 30,2002 and 2001 respectively, and is collateralized in accordance with Florida Statutes. All investments are delivered to the SBA's custody bank and held for the SBA's account according to their instructions. The KUA's SBA funds are invested in the SBA's Local Government Surplus Funds Investment Pool Trust Fund.

As of September 30, 2002, the Local Government Surplus Funds Investment Pool Trust Fund contained certain floating and variable rate notes, which could be classified as "derivative" investments under GASB Technical Bulletin No. 94-1.

Per GASB Technical Bulletin No. 94-1, derivatives are generally defined as contracts whose value depend on, or derive from, the value of an underlying asset, reference rate or index. Floating and variable rate notes were the only investments traded which could be classified as "derivative" investments.

Floating and variable rate notes are debt instruments with a variable interest rate generally tied to prevailing short-term interest rates. During the reporting period October 1, 2001 through September 30, 2002, all floating and variable rate notes owned by the Local Government Surplus Funds Investment Pool Trust Fund were index based floaters set off the fixed prime rate and/or one and three month LIBOR rates. These notes were purchased to add relative value to the portfolio. Generally, floating and variable rate instruments are priced at par close to reset dates. The investment in floaters represented approximately.72% and 1.04% of the total Pool investments for the years ended September 30,2002 and 2001, respectively. Therefore, KUA's exposure to these floaters is approximately $390,000 and $880,000 for the years ended September 30, 2002 and 2001, respectively.

Repurchase agreements result entirely from a banking services agreement requiring ovemight repurchase agreements of securities guaranteed by the United States Government. The value of repurchase agreements held with the KUA's depository bank was approximately $241,000 and $155,000 at September 30, 2002 and 2001, respectively. Repurchase agreements are held in the name of the KUA's depository bank. The maximum repurchase agreement was $4,833,000 and $35,114,000 during 2002 and 2001, respectively.

At September 30,2002 and 2001 the carrying amount of the KUA's deposits with financial institutions was $550,000 and

$0 foreachyearrespectively, andthebankbalancewas approximately$331,000 and $333,000,respectively. Allbank balances are fully insured in accordance with Florida Statute 280, which established the multiple financial institution collateral pool.

Note 3-Current Cash and Investments Certain designations of current cash, investments, and interest receivable are made in the financial records during the fiscal year to identify a portion of cash, cash equivalents, investments and interest receivable intended to be used for B-23

KISsiMMEE UTILITYA UTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED SEPTEIBER 30,2002 AND 2001 specific purposes in a future period. Current cash and cash equivalents, investments and interest receivable at September 30, 2002 and 2001 included the following:

Current Assets Undesignated Designated for.

Capital Improvements Co-Insurance Decommissioning Combined Cycle Maintenance EPPIC Excess Liability Good Neighbor Funds Deregulation/Rate Stabilization Total 2002 2001

$14,227,185

$13,846,444 29,405,093 37,268,591 11,819,612 11,628,836 519,488 499,139 4,814,991 4,727,749 82,604 81,057 9,847 6,072 21,494,007 18,990,827

$82,372,827

$87,048,715 Note 4 -Restricted Cash and Investmenits Restrictions are made in accordance with bond resolutions, contracts with developers and the Florida Municipal Power Agency (FMPA), agreements with customers, and in accordance with Nuclear Regulatory Commission (NRC) rules and regulations. Restricted assets, which consist of cash, cash equivalents, investments and interest receivable at September 30, 2002 and 2001 included the following:

Restricted Assets Debt Service Reserve Sinking Fund Construction Fund Renewal, Replacement & Improvement Advances for Construction Customer Deposits Crystal River Unit #3 Decommissioning FGU Collateral Funds Total 2002 2001

$20,271,150

$20,271,150 12,450,942 12,530,727 4,538,041 1,500,000 1,500,000 1,881,259 2,161,322 3,548,159 3,290,108 2,276,358 1,963,343 3,500,000

$45,427,868

$46,254.691 Note S - Utility Plant Utility plant activity for the years ended September 30, 2002 and 2001 was as follows:

Utility Plant Nuclear Production Steam Production Other Production Transmission Plant Distribution Plant General Subtotal Less: Accumulated Depreciation Total 10/01/01 Deletions &

9/30/02 Balance Additions Reclassifications Balance

$ 6,058,012 155,979

$ 6,213,991 80,464,459 63,535,907 (463,680) 143,536,686 104,272,549 231,029 (35,910,482) 68,593,096 40,797,530 2,597,623 43,395,153 60,257,544 9,385,597 (5,278,760) 64,364,381 22,398,905 1,114,805 (214,432) 23,299,278 314,248,999 77,020,940 (41,867,354) 349,402,585 (124,538,792)

(13,201,943) 766,477 (136,974,258)

$189,710,207

$63,818,997

$(41,100,877)

$212,428,327 B-24 I

KISSIMmEE UTILITY AUTHORITY NOTES TO THE FNAACIAL STATEMENTS YEARSENDED SEPTEMBER 30,2002AND 2001.

10/01/00 Deletions &

9/30101 Utility Plant Balance Additions Reclassifications Balance Nuclear Production

$ 6,006,416 51,596

$ 6,058,012 Steam Production 73,366,474 7,257,275 (159,290) 80,464,459 OtherProduction 68,090,837 36,187,723 (6,011) 104,272,549 Transmission Plant 40,329,076 470,001 (1,547) 40,797,530 Distribution Plant 58,080,253 5,389,669 (3,212,377) 60,257,545 General 20,147,775 2,576,572 (325,443) 22,398,904 Subtotal 266,020,831 51,932,836 (3,704,668) 314,248,999 Less: Accumulated Depreciation (113,674,132)

(11,608,402) 743,742 (124,538,792)

Total

$152,346,699

$40,324,434

$(2,960,926)

$189,710,207 Depreciation expense for Utility Plant totaled approximately $13,420,000 and $11,850,000 for years ended September 30, 2002 and 2001, respectively.

Note 6 - Construction Project Interest Cost The KUA entered into FMPA's variable rate Pooled Loan Program to fund the initial construction of Cane Island Unit 3, and subsequently refunded the Pooled Loan by issuing Series A Commercial Paper. Construction of Unit 3 was basically completed during 2001. In accordance with SFAS No. 71, the KUA capitalized approximately $0 and $2,459,000 in interest costs for the year ended September 30, 2002 and 2001, respectively.

The KUA capitalizes, as part of construction costs, interest earnings on monies held in the construction fund. Recognition of this item as a contribution to the utility plant is consistent with the current accounting adopted under SFAS No. 71 (see Note 1). The KUA capitalized interest income of approximately $0 and $1,093,000 in 2002 and 2001; respectively.

Note 7 - Participation and Power Stpply Agreements A. FIPA AII-Reciuirements Power Supply Proiect: As a resultofjoiningthe ARP, effective October. 1,2002, KUAwill assign to FMPA, as agent for the ARP, all of its rights, title and interest to all participation and power supply agreements, except those resources specifically excluded. FMPA will assume all payment obligations and other responsibilities and will be entitled to exercise all rights under these contracts. Excluded resources consist of KUA's entitlement shares and/or ownership in the St. Lucie Project and Crystal River No. 3 Nuclear Power Plant.

B. Cane Island Proiect (the Proiect): During 1992, the KUA entered into a Participation Agreement with the FMPA for the joint construction, ownership and operation of the KUA's Cane Island Project. The Project is located at Cane Island, 14 miles west of the KUA's existing service territory on 990 acres of land. The Project is owned and operated by the KUA. The agreement resulted in a 50 percent ownership in generating facilities constructed on this site beginning with the first unit, a 40.6 MW combustion turbine which began commercial operation on January 1, 1995. The second unit is approximately 120 MW and is a combined cycle unit which began commercial operation on June 1, 1995. The third unit is approximately 250 MW and is also a combined cycle unit. The combustion turbine portion of the unit began commercial operation in July 2001. The steam portion of the unit began commercial operation in January 2002.

B. Stanton Enerav Center Units (SEC 1 & 2): In 1984, the KUA entered into a Participation Agreement with Orlando Utilities Commission (OUC) to acquire a 4.8193% (20MW) undivided ownership interest in SEC I and to participate in the use of related common and extemal facilities. The KUA acquired its share of the SEC common facilities, related to its ownership of SEC 1. The capacity and energy of the KUA's ownership interest in SEC 1 is transmitted through OUC's transmission facilities to the KUA's transmission facilities. SEC I is part of the Stanton Energy Center, which involved B-25

KISsAIAEE UTILITYA UTHORITY NOTES TO THE FINANCIAL STA TEMENTS YEARSENDED SEPTEMBER 30,2002 AND 2001 the development of an approximately 3,200 acre plant site located approximately 20 miles northeast of the City of Kissimmee. In addition to SEC 1, the Stanton Energy Center is capable of accommodating two more units with a total capacity at the Stanton Energy Center of approximately 2000 MW. Each participant in the project financed their share of the cost independently and no liability exists for the debt service required by the other participants. Stanton Energy Center began commercial operations on July 1, 1987. The KUA does not exercise significant influence or control over operating or financial policies of OUC.

In 1991, the KUA entered into a Power Supply Acquisition Agreement with the FMPA. The KUA receives a 3.8314%

power entitlement, approximately 16.7 MW, in Stanton Energy Center Unit No. 2 (SEC 2). SEC 2 began commercial operation on June 1, 1996.

In 1995, the KUA entered into a Transfer Agreement with the City of Lake Worth for the transfer of all of the City of Lake Worth's share of the FMPA SEC 2 Project. The KUA acquired the City of Lake Worth's 1.9157% power entitlement share in SEC 2, approximately 8.3 MW.

Additionally, in 1995 the KUA entered into a Transfer Agreement with the City of Homestead for the transfer of 50% of the City of Homestead's Power Entitlement Share of the FMPA SEC I and the SEC 2 Projects. The KUA acquired a 1.8072% power entitlement share in SEC 1, approximately 7.9 MW and 1.9157% power entitlement share in SEC 2, approximately 8.3 MW. As a result of the City of Homestead's Power Entitlement Share Transfer Agreement of the FMPA SEC I Project, KUA was required to reimburse the City of Homestead for equity funds previously paid in the amount of approximately $829,300. The equity funds paid are recorded as other assets and are amortized over the remaining life of SEC 1.

In summary, the KUA has a total power entitlement share of 7.6628%, approximately 33.33 MW in SEC 2 and a total power entitlement share of 1.8072%, approximately 7.9 MW in SEC 1. Costs associated with these agreements are included in purchased power expenses.

C. Crystal River Unit No. 3 (CR3): In 1975, the KUA entered into a Participation Agreement with Florida Power Corporation (FPC) to purchase a.6754% undivided interest in their 806 net MW nuclear powered electric generating plant designated Crystal River Unit No.3. The KUA is billed for its share of operating and capital costs. Capital costs are included in Property, Plant and Equipment and operating costs are included as power generation expenses. The KUA's benefit in the Agreement is the added availability of capacity and energy of the facilities through its participation in future energy purchases and it does not otherwise maintain an ongoing financial interest or responsibility for the project. The KUA does not exercise significant influence or control over the operating or financial policies of FPC.

D. Indian River Combustion Turbine: In 1988, the KUA entered into a Participation Agreement with OUC to acquire a 12.2% (11.7 MW) undivided ownership interest in the Indian River Combustion Turbine and participate in the use of related common and extemal facilities. Each participant in the project financed their share of the cost independently and no liability exists for the debt service required by the other participants. The KUA does not exercise significant influence or control over the operating or financial policies of OUC.

E. St. Lucie Nuclear Power Plant: In 1981, the KUA entered into a Power Supply Acquisition Agreement with the FMPA in which the KUA receives approximately 7 MW of power from the St. Lucie nuclear power plant.

According to the participation agreements, each participant must provide its own financing and each participant's share of expenses for operations of the plants are included in the corresponding operating expenses of its own income statement. The amounts of utility plant in service for CR3 and Indian River do not include the cost of common and external facilities for which participants pay user charges to the operating entity. Accumulated depreciation on utility plant in service is determined by each participant based on their depreciation methods and rates relating to their share of each plant.

B-26

KiSSIMMEE UTILITYA UTHORITY NOTES TO THE FINANCIAL STA TEM'ENTS YEARS ENDED SEPTEMBER 30,2002 AND 2001 Following is a summary of the KUA's proportionate share of the non-operated jointly owned plants at September 30:

SEC 1 CR3 Indian River 2002 Utility Plant

$21,641,200

$6,213,991

$2,588,005 Less: Accumulated Depreciation (8,315,321)

(5,498,465)

(1,304,286)

NetUtilityPlant

$13,325,879

$ 715,526

$1,283,719 2001 Utility Plant

$21,597,293

$6,058,012

$2,588,005 Less: Accumulated Depreciation (7,756,714)

(4,998,034)

(1,211,475)

Net Utility Plant

$13,840,579

$1,059,978

$1,376,530 Note 8 - Penision Plan Description - The Kissimmee Utility Authority Pension Plan (the "Plan") is a single employer defined benefit pension plan. The Plan provides for pension, death and disability benefits. Participation in the Plan is required as a condition of employment. The Plan is subject to provisions of Chapter 112 of the State of Florida Statutes and the oversight of the Florida Division ofRetirement. The Plan is governed by a five member pension board. The Plan issues a publicly available financial report that includes financial statements and required supplementary information which may be obtained by writing to our offices at 1701 W. Carroll Street, Kissimmee, FL 34741 orby calling (407) 933-7777, ext. 1125.

Funding Policy-The KUA is obligated to fund all Plan costs based upon actuarial valuations. The KUA is authorized to establish benefit levels and to approve the actuarial assumptions used in the determination of contribution levels. The KUA's contribution rate for the year ended September 30,2002 was 10.6 percent of earnings. The Plan has been a non-contributory Plan since 1986.

Annual Pension Cost - For the years ended September 30,2002,2001, and 2000, respectively, the annual pension costs of S,100,225, $910,656, and $884,588 were equal to the KUA's required and actual contributions. The annual required contribution was determined as part of the October 1,2001 actuarial valuation using the Frozen Entry Age Method. The actuarial assumptions included (a) life expectancy was calculated using the 1983 Group Annuity Mortality Table; (b) 8%

investment rate of return (net of administrative expenses); and (c) projected salary increases of 6% per year, including an inflation component of 3%. The assumptions included post retirement benefits increases of 0%. The actuarial value of assets was determined using techniques that smooth the effects of short-term volatility in the market value ofinvestments over a four-year period. The unfunded actuarial accrued liability is being amortized as a level percentage ofprojected payroll on a closed basis. The remaining amortization period at October 1 2001 was 29 years.

Note 9 - Loig-Term Debt The Revenue Bond resolutions provide for:

1. Establishment and maintenance of various funds:

Revenue Fund records all operating revenues and expenses of the system; Sinking Fund records principal and interest requirements;:

Bond Amortization Fund records funds held for the retirement of term bonds; Reserve Fund records funds held for the maximum annual debt service requirement; Renewal, Replacement & Improvement Fund is to be used only for making improvements, extensions and replacements to the system; and B-27

KISSIMMEE UTILITYA THORITY NOTES TO THE FINANCL4L STA TEMENTS YEARS ENDED SEPTEMiBER 30, 2002 AND 2001 Construction Fund records the cost of major additions to the System financed by revenue bonds.

2. Restrictions on the use of cash from operations in order of priority:

Deposits are made to the Revenue Fund to meet current operations according to the Budget; Deposits to the Sinking Fund Account are required on or before the 25th day of each month equal to one-sixth (1/6) of the interest coming due on the next semi-annual interest payment date and one-twelfth (1/12) of the principal coming due on the next principal payment date; Deposits to the Bond Amortization Fund are required on or before the 25th of each month equal to one-sixth (1/6) of the amortization installment coming due on the next semi-annual payment date; Deposits to the Reserve Fund are to be made when required to maintain the Fund at the reserve requirements (maximum annual debt service); and Deposits to the Renewal, Replacement and Improvement Fund are required each month in an amount equal to one-twelfth (1/12) ofthe adoptedbudget forthat fund. The total annual deposit maynotbe less than 5% ofthe gross revenues for the preceding fiscal year after deducting 100% of the fuel expense and the energy component of purchased power expenses incurred in such preceding fiscal year. However, no such monthly deposit shall be required when the amount in such fund shall at least equal $1,500,000.

3.

Rate Covenant:

The KUA will at all times establish, fix, prescribe and collect rates and charges for the services and facilities furnished by the Electric System which, together with other income, are reasonably expected to yield annual Net Revenues in each fiscal year at least equal to 125% of the bond service requirement in the Bond Year which ends one day after such fiscal year. There was a change to the bond resolution reducing the required coverage by debt service of net revenues from 125% to 1 10%. This amendment was recommended in connection with the process of preparing for issuance of the Authority's Series 1999 bonds for the Cane Island Unit 3 project in order to provide the Authority additional flexibility to operate in a deregulated energy environment. These bond covenants will become effective only after a majority of the bond holders are under them.

4.

Early redemption:

The bond ordinance provides for early redemption of outstanding bonds, except original issue discount bonds, at call rates varying from 100% to 102% of the instruments' face value, dependent upon the call date. Original issue discount bonds may be redeemed early at call rates of 80% to 100% of the face value, dependent upon the call date.

5.

Investment restrictions:

Funds of the Sinking Fund, Bond Amortization Fund, Reserve Fund and Renewal, Replacement &

Improvement Fund are required to be continuously secured in the same manner as municipal deposits of funds are required to be secured by the Laws of the State of Florida; and Monies on deposit in the Sinking Fund and the Bond Amortization Fund shall be invested only in direct obligations of, or obligations on which the principal and interest are guaranteed by the United States of America and which do not permit redemption prior to maturity at the option of the KUA. Monies on deposit in the Revenue Fund, Reserve Fund and Renewal, Replacement & Improvement Fund may be invested as described above as well as in the following: obligations rating an "A" or better from Moody's Investors Service, Inc., bank time deposits represented by certificates of deposit and bankers acceptances, repurchase agreements, commercial paper which has the highest investment grade rating and shares of investment companies which invest principally in United States government securities.

B-28

KISSIMMEE UTILITYA UTHORITY NOTES TO THE FINANCIAL STA TEMENTS YEARSENDED SEPTEMBER 30, 2002 AND 2001 Long-term debt outstanding at September 30, 2002 and 2001 consisted of the following serial and term bonds, and outstanding commercial paper notes:

Final Original Description Maturity' Amount 2002 2001 Improvements & Refunding Revenue Bonds, Series 1991 5.55%-6.60%- 4/1; 10/1 10/01/08

$75,550,000

$10,710,000 Improvements & Refunding Revenue Bonds, Series 1993: 3.90%-5.50% - 4/2; 10/2 10/01/18 145,800,000 90,550,000 136,970,000 Refunding Revenue Bonds, Series 1993A 3.70%-

5.30%-4/1; 10/1 10/01/17 21,165,000 20,810,000 Refunding Revenue Bonds, Series 1997 3.85%-5% -4/2; 10/2 10101/12 56,180,000 44,050,000 47,110,000 Refunding Revenue Bonds, Series 2001A 3.50%4.70% -4/2; 10/2 10/01/17 31,020,000 31,020,000 Refunding Revenue Bonds, Series 2001B 4%-5% - 4/2; 10/2 10101/15 44,500,000 44,500,000 Commercial Paper Program, Series A Interest at various market rates 35,000,000 35,000,000 35,000,000 Commercial Paper Program, Series B Interest at various market rates 35,000,000 35,000,000 35,000,000 Total Amount Outstanding 280,120,000 285,600,000 Less: Current Portion (7,190,000)

(6,595,000)

Unamortized Bond Discount (2,087,428)

(3,405,822)

Unamortized Loss on Reacquired Debt (22,542,330)

(18,441,844)

Unamortized Bond Premium 2,810,121 Long Tenn Debt

$251,110,363

$257,157,334 The annual long-term debt service requirements at September 30, 2002 are as follows (excludes Series A and B Commercial Paper):

Interest Principal Total 2002

$ 10,087,344

$ 7,190,000

$ 17,277,344 2003 10,005,680 7,715,000 17,720,680 2004 9,667,035 8,045,000 17,712,035 2005 9,325,318 8,390,000 17,715,318 2006 8,949,728 8,765,000 17,714,728 2007-2011 37,927,726 55,800,000 93,727,726 2012-2016 21,959,306 76,940,000 98,899,306 2017-2018 2,953,815 37,275,000 40,228,815 Total

$110,875,952

$210,120,000

$320,995,952 B -29

KISSIMMEE UTILITYA UTHORiTY NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30,2002 AND 2001 KUA authorized the issuance of the Commercial Paper Notes pursuant to Resolution No. 00-04, adopted by the Board on October 25, 2000. The Notes were issued in two series, 2000A and 2000B, each for $35,000,000 to (i) finance the cost of the Cane Island Project (including repayment of amounts previously borrowed to provide financing therefore) and (ii) pay the costs of issuance of the Commercial Paper Notes. The aggregate principal amount of all Commercial Paper Notes outstanding at any one time shall not exceed the lesser of $100,000,000 or the amount of the Available Commitment under the Purchase Agreement (the current Available Commitnent is $80,000,000). During the year ended September 30, 2002, interest rates on the Commercial Paper ranged from 2.48% to 1.50% and averaged 1.76%.

The Commercial Paper Notes are secured by the Commercial Paper Purchase Agreement between KUA and The Bank of Nova Scotia, New York Agency. In the Purchase Agreement, the Bank has agreed, subject to certain conditions, to purchase Commercial Paper Notes which have not been sold by the Dealers so that moneys will be available in the CP Note Payment Fund to pay the maturing principal of outstanding Notes. The obligation of the Bank under the Purchase Agreement provides only for payment of maturing principal of Commercial Paper Notes; KUA is obligated to make provision for payment of interest on maturing Commercial Paper Notes from Subordinated Revenues.

The amount of the Bank's obligation under the Purchase Agreement is limited to $80 million, reduced by the amount of any outstanding Notes previously purchased by the Bank and subject to adjustment upward upon request of KUA and consent of the Bank or downward upon unilateral request by KUA, in either case in $1 million increments.

The duration of the Bank's obligation under the Commercial Paper Purchase Agreement is for 364 days, beginning on the date of issuance of the Commercial Paper Notes and terminating on the day prior to the first anniversary of the date of issuance subject to extension upon the request of KUA and consent of the Bank, for an additional period of 364 days or such other period agreeable to the Bank. KUA must request such an extension at least 60 days prior to the expiration of the Purchase Agreement (unless the Bank consents to a later request), and the Bank must notify the Issuing and Paying Agent within 30 days of receipt of the request whether the Bank consents to such extension and must deliver a written acknowledgement of the extension within 15 days of its consent to the Issuing and Paying Agent. As of September 30, 2002, all $70,000,000 of the Series A and B were outstanding.

On October 25,2001, the KUA issued $31,020,000 in Kissimnee Utility Authority Electric System Refunding Revenue Bonds, Series 2001A and $44,500,000 in Kissimmee Utility Authority Electric SystemRefunding Revenue Bonds, Series 2001 B. The bonds were issued to (1) refund all of the KUA's outstanding Electric System Improvements and Refunding Revenue Bonds, Series 1991, and all of its Electric System Refunding Revenue Bonds, Series 1993A and a portion of its Electric System Improvement and Refunding Revenue Bonds, Series 1993, in the total outstanding amount of

$74,405,000 and (ii) pay certain expenses related to the issuance and sale of the Series 2001 Bonds. The result of the refunding was a net present value savings of $3,099,342 or approximately 4.17% of the refunded bonds.

Long-term liability activity for the years ended September 30, 2002 and 2001 was as follows:

Revenue Bonds Commercial Deferred Long-Term Payable Paper Amounts Liabilities 10/01/01 Balance

$209,005,000

$70,000,000

$(21,847,666)

$257,157,334 Additions 75,520,000 (2,856,231) 72,663,769 Reductions (81,595,000) 2,884,260 (78,710,740) 9/30/02 Balance

$202,930,000

$70,000,000

$(21,819,637)

$251,110,363 Due within one year 7,190,000 1,487,414

$ 8,677,414 B-30 I

KISSIMMEE UTILiTY AUTHORITY NoTEs TO THE F1NANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30,2002 AND 2001 10/01/00 Balance Additions Reductions 9/30/01 Balance Due within one year Pooled Revenue Bonds Commercial Loan Deferred Long-Term Payable Paper Program Amounts Liabilities

$215,600,000

$31,014,601

$(23,234,116)

$223,380,485 70,000,000 3,985,399 73,985,399 (6,595,000)

(35,000,000) 1,386,450 (40,208,550)

$209,005,000

$70,000,000

$(21,847,666)

$257,157,334

$ 6,595,000 1,386,450

$ 7,981,450 The KUA refunds and defeases debt primarily as a means of reducing debt service, thereby postponing or reducing future electric rate adjustments. Outstanding serial bonds, which were refunded through the full cash defeasance method on January 4, 1978 and through the net cash defeasance method on February 25, 1982, January 25, 1983, December 31, 1985, April 1, 1987, December 18, 1991, June 16, 1993, September 30, 1993, August 27, 1997 and October 25,2001 are as follows at September 30, 2002:

Electric & Water Bond Issues 1975 Electric Revenue Bonds 1977 Series A 1979 1982 1982-A 1984 1985 1987 1991 1993 1993A Total 2002 575,000 9,665,000 1,465,000 35,970,000 48,060,000 23,650,000 28,915,000 42,855,000 68,225,000 44,215,000 20,745,000

$324,340,000

• Prior to 1977 the KUA, which was a department of the City of Kissimmee until October 1, 1985, combined their Electric & Water Bond Issues Since governmental obligations are held in escrow for the payment of principal and interest on these bonds, they are not liabilities to the KUA.

Arote 10 - Conitments and Conttitgent Liabilities The KUA has made certain commitments in connection with its continuing capital improvements program. The KUA estimates that capital expenditures for its ongoing business during 2003 will be approximately $16,955,000 and

$52,300,000 for years 2004 through 2007. This includes KUA's share of construction costs of the Stanton Energy Center A.

The KUA is involved in litigation arising during the normal course of its business. In the opinion of management, the resolution of these matters will not have a material effect on the financial position of the Authority.

The KUA has purchase agreements with utilities whereby the KUA must pay. capacity demand or reservation fees whether electricity or fuel is received from these utilities or not. The utilities involved and the approximate charges to be paid are as follows:

B-31

KISSIMAMEE UTILITY AUTHORITY NOTES TO THE FINANCIAL STA TEAENTS YEARS ENDED SEPTEMBER 30, 2002 AND 2001 Date Commitment Orlando Utilities Commission (OUC)

Schedule D 2003 S

744,943 SEC I NONE 197,805 Indian River NONE 113,032 Florida Power Corp.

NONE 76,145 FMPA (St. Lucie, SEC2)

NONE 11,024,092 Florida Gas Transmission (FGT) 2005

• 8,445,734 Florida Gas Utility (FGU) 2008 2,662,882 Stanton A PPA None 245,856 Ownership None 312,480 Gas None 1,566,383 Total

$25,389,352

• Extension Rights - Rights of First Refusal Several of the contracts are flexible and allow the KUA to contract more capacity for a short time if demand increases more sharply than anticipated, or if the KUA's generating resources become unavailable. In such an event, the minimum annual commitment would increase in proportion to the increased capacity purchased. The charges paid to OUC and FPC are recorded as purchased power while charges paid to FGT and FGU are recorded as power generation expenses.

The KUA owns a portion of Florida Power Corporation's nuclear power plant at Crystal River, Florida. This plant is scheduled to be decommissioned beginning in the year 2015 and ending 2022. The KUA will be liable for approximately

$3,733,000 in decommissioning costs in 2001 dollars. In June 1988, the Nuclear Regulatory Commission (NRC) required utilities to provide financial assurance that decommissioning funds would be sufficient and available when needed for NRC required decommissioning activities. On July 12, 1990 the KUA and the FMPA entered into an agreement whereby the FMPA would act as agent for the KUA and certain other CR3 participants to coordinate the administration of a trust fund. Contributions to this trust fund are not available to the KUA for any other purpose except the decommissioning of CR3. The KUA's carrying balance in this Trust at September 30, 2002 and 2001 including interest earnings was approximately $2,276,000 and $ 1,963,000, respectively. Future contributions will be made to this trust account as needed based on updated cost estimates and trust fund earnings.

As a result of its ownership interest in CR3 the KUA is subject to the Price Anderson Act which was enacted to provide financial protection for the public in the event of a nuclear power plant accident. The first layer of financial protection was the purchase of $200 million of public liability insurance from pools of commercial insurers. The second layer of financial protection is provided under an industry retrospective payment plan. Under that plan, owners are subject to an assessment of $90.74 million per incident with provision for payment of such assessment to be made over time as necessary to limit the payment in any one year to no more than $10 million per incident. The KUA is liable for its ownership interest of any assessment made against CR3 under this plan.

The KUA has recorded a liability at September 30,2002 and 2001 of approximately $34,000 and $47,000, respectively, of which approximately $21,000 and $34,000, respectively, is long-term and a related deferred charge for its estimated portion of the costs for the decommissioning and decontamination of the United States Department of Energy nuclear fuel enrichment facilities as provided for by the National Energy Policy Act of 1992 (Energy Act) for its.6754% share of Crystal River Unit No.3. The Energy Act states, among other things, that utilities with nuclear reactors will contribute an aggregate total of $150 million annually, based upon an assessment, for a period of fifteen years, up to a total of $2.25 billion (in 1992 dollars), for such decommissioning and decontamination costs. The Energy Act also provides that these costs are a "necessary and reasonable current cost of fuel and shall be fully recoverable in rates in all jurisdictions in the same manner as other fuel costs." The KUA intends to recover these deferred costs through the Cost of Power Adjustment clause.

B-32

KISSIMmAEE UTILITY AUTHORITY NOTES To THE FINANCIAL STA TEMENTS YEARS EADED SEPTEMBER 30, 2002 AND 2001 On November 30, 1993, a gas turbine was in the process of being delivered to the KUA's Cane Island site when it was struck by an Amtrak Train. At the time of the accident, delivery had not been made to the KUA nor had the unit been accepted by the KUA; title to the gas turbine had passed to the KUA, however General Electric retained the risk of loss until the turbine was accepted by the KUA. The National Transportation Safety Board determined that the probable cause of the accident was the failure of the transport company to notify the railroad (CSX) in advance of its intent to cross the railroad track and to ensure through CSX that it was safe to do so. A jury in U.S. Federal Court found that KUA was not responsible for the accident. That same jury found the following entities responsible for causing the accident and assigned the following percentages of fault: Roundtree Transport & Rigging, Inc. - 59%; CSX Transportation, Inc. - 33%; Amtrak-8%. A U.S. District Judge has ruled that an indemnification provision contained in a Private Road Grade Crossing Agreement between KUA and CSX is enforceable against KUA, with respect to this accident, and consequently KUA could be held responsible for both CSX and Amtrak's losses. KUA settled with substantially all remaining personal injury Plaintiffs for approximately $422,000. On December 1, 1999, KUA entered into an agreement with Amtrak and CSX to extinguish all claims of those entities accrued to date, with the exception of any liability they might have for claims of damage to the turbine, brought by American Home Assurance Company (American Home, the insurer ofthe turbine). That settlement was for $540,000 and also extinguished any liability KUA might have had for the claims of Roundtree. On December 3, 1999, the U.S. District Judge ruled that the damages of American Home were $4,516,640. On October 4, 2000 a U.S. District Judge ruled that KUA's liability related to the accident and due to the indemnification provision discussed above was approximately $425,911. This case is currently on appeal and is pending before the Florida Supreme Court. If the Court rules in favor of KUA with respect to sovereign immunity, KUA would have no liability for either damages of American Home or responsibility to indemnify CSX and Amtrak for their attomeys' fees and costs. In management's best estimate of this matter, it will not exceed the amount set aside in the co-insurance reserve fund.

On November 17, 2000 equipment needed for the construction of Cane Island Unit 3 was being delivered to the Cane Island site when it was struck by an Amtrak train. It is management's opinion that KUA has no direct responsibility related to this accident. It is not expected that KUA will have any financial exposure related to this accident.

The Florida Energy 2020 Commission had been tasked by the Governor to studyFlorida's energypolicy for the next two decades. Their final report, completed duringNovember 2001, identifies aplan to deregulate Florida's wholesale electric utility industry that would allow out-of-state power companies to enter into the Florida market. In 2004, another energy study commission is expected to be assembled to study potential retail deregulation. In an effort to prepare for this prospect, the KUA has entered into long-term contracts with many of its larger commercial customers.

Note 11 - Risk Maniagementt The KUA is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The KUA has established a Co-Insurance reserve to account for and finance its uninsured risks of loss for the transmission and distribution system as well as other uninsured losses. The reserve balance is approximately $11,820,000 and $11,629,000 for the years ended September 30, 2002 and 2001, respectively. The Co-Insurance reserve is the KUA's best estimate based upon available infornation and is increased by interest earnings each year. This reserve is reflected as a liability under Other Long-term Liabilities on the Balance Sheet.

Years Ended Beginning Claims/

Increase Ending September 30 Balance Payments In Reserve Balance 2002

$11,628,836

($121,221)

$ 311,997

$11,819,612 2001 8,231,416 (102,132) 3,499,552 11,628,836 B-33

KISSIMMEE UTILITYAUTHORITY NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED SEPTEAIBER 30,2002 AND 2001 The KUA purchases commercial insurance for all other risks of loss, including general liability, excess liability, workers compensation, property insurance, employee health, life and accident insurance. Settled claims have not exceeded the commercial coverage insurance in any of the past five fiscal years.

Note 12 - Restricted Net Assets Restricted net assets are comprised of the following at September 30, 2002 and 2001:

Debt Service:

Debt service and sinking funds Other:

Crystal River Unit #3 Decommissioning FGU Collateral requirements Total restricted net assets 2002 2001

$ 27,461,150

$ 26,690,509 2,276,358 1,963,343 3,500,000

$ 33,237,508

$ 28,653,852 B-34

Required Supplementary Information B-35

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B-36

Kissimmee Utility Authority Employees' Retirement Plan The following is a Schedule of Funding Progress for the Plan:

Actuarial Valuation Date 10/01/01 10/01/00 10/01/99 10/01/98 10/01/97 10/01/96 10/01/95 Actuarial Actuarial Value of Accrued Assets Liabilitv

$28,565,661

$29,407,089 27,476,780 28,292,829 24,543,409 24,543,409 21,310,000 21,310,000 37,242,142 37,242,142 30,720,860 30,720,860 26,061,527 26,061,527 Unfunded Actuarial Liability (UAL)

$841,428 816,049 Funded Ratio 97.14%

97.12%

100.0%

100.0%

100.0%

100.0%

100.0%

Annual Covered Pavroll

$10,349,488 9,622,892 9,338,568 9,077,176 19,037,030 18,082,940 17,301,380 UAL Ratio to Covered Payroll 8.13%

8.48%

B-37

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B-38

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C - 2

KISSIMMEE UTILITY AUTHORITY COMBINING BALANCE SHEETS SEPTEMBER 30, 2002 Electric System ISP ASSETS CURRENT ASSETS Cash and cash equivalents Investments Interest receivable Accounts receivable Less: allowance for doubtful accounts Inventory Deferred Cost of Power Adjustment Other Current Assets TOTAL CURRENT ASSETS S46,481,672 35,265,337 419,354 12,819,573 (315,111) 7,108,993 256,401 736,054

$206,464 107,637 (4,890) 7,113 102,772,273 316,324 103,088,597 RESTRICTED ASSETS Cash and cash equivalents Investments Interest receivable 34,579,200 10,648,259 200,409 45,427,868 TOTAL RESTRICTED ASSETS OTHER ASSETS Unamortized Bond Costs Costs to be Recovered from Future Revenue Other TOTAL OTHER ASSETS UTILITY PLANT Property, plant and equipment Less: Accumulated depreciation Construction in progress Inventory -nuclear fuel TOTAL UTILITY PLANT 2,507,606 44,761,344 697,546 47,966,496 349,052,884 (136,742,956) 212,309,928 27,687,069 280,447 34,579,200 10,648,259 200,409 45,427,868 2,507,606 44,761,344 697,546 47,966,496 349,402,585 (136,974,258) 212,428,327 27,700,524 280,447 240,409,298 349,701 (231,302) 118,399 13,455 240,277,444 131,854

$436,444,081 S448,178

$436,892,259 N1 K1~

C-3 EliminatILons ltotal Enterprise Funds S46,688,136 35,265,337 419,354 12,927,210 (320,001) 7,108,993 256,401 743,167 TOTAL ASSETS

Electric System ISP LIABILITIES AND NET ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable Due to other governments, Deferred cost of power adjustment Energy conservation cost recovery Other accrued Eabilities

$8,699,427 1,305,878

$62,077 3,149 282,930 979,335 12,524 TOTAL CURRENT LLABLIES 11,267,570 77,750 LIABILITIES PAYABLE FROM RESTRICTED ASSETS Current portion of revenue bonds Accrued interest payable-revenue bonds Advances for construction Customer deposits Accounts payable from construction funds Other TOTAL LIABIL[TIES PAYABLE FROM RESTRICTED ASSETS LONG-TERM DEBT Revenue bonds payable Commercial paper notes Unamortized bond premium Less: unamortized loss on reacquired debt Less: unamortized bond discount TOTAL LONG-TERM DEBT OTHER LONG-TERM LIABILITIES Co-insurance fund Accrued compensated absences Maintenance reserve fund CR3 special assessment TOTAL OTHER LONG-TERM LIABLITlES TOTAL LIABILITIES 7,190,000 5,260,942 1,881,259 3,548,159

• 7,190,000 5,260,942 1,881,259 3,548,159 1,500,000 1,500,000 19,380,360 19,380,360 202,930,000 202,930,000 70,000,000 70,000,000 2,S10,121 2,S10,121 (22,542,330)

(22,542,330)

(2,087,428)

(2,087,428) 251,110,363 251,110,363 11,819,612 1,579,736 9,315 1,213,343 21,408 11,819,612 1,589,051 1,213,343 21,408 14,634,099 9,315 14,643,414 296,392,392 87,065 296,479,457 NET ASSETS Invested in capital assets, net of related debt Restricted Unrestricted (15,383,459)

(15,383,459) 33,237,508 33,237,508 122,197,640 361,113 122,558,753 TOTAL NET ASSETS 140,051,689 361,113 140,412,802

).MMITMENTS AND CONTINGENT LIABILITIES (NOTES 10 & 11) i'OTAL LIABILITIES AND NET ASSETS

$436,444,081

$448,178

$436,892,259 C-4 Eliminations Total Enterprise Funds S

$8,761,504 1,309,027 282,930 991,859 11,345,320

KISSINMMEE UTILITY AUTHORITY COMBINING STATENENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS FOR THE YEARS ENDED SEPTEMBER 30, 2002 Electric System ISP OPERATING REVENUES Metered sales Sales to other utilities Other operating revenues

$88,914,602 S

S 20,719,571 2,402,537 921,197 112,036,710 921,197 TOTAL OPERATING REVENUES OPERATING EXPENSES Power Generation Purchased Power Transmission/Distribution Administrative and general Intergovemmental transfers Depreciation and amortization TOTAL OPERATING EXPENSES OPERATING INCOME NONOPERATING REVENUES (EXPENSES)

Investment income Interest expense Other Plant costs recovered through capital contributions Costs to be recovered from future revenue TOTAL NONOPERATING REVENUES (EXPENSES) 46,323,881 18,977,880 5,871,529 8,843,825 647,517 6,946,253 44,318 13,115,965 53,636 100,079,333 745,471 11,957,377 175,726 4,050,444 (11,255,51 1)

(1,898,864)

(1,670,082)

(315,543)

(11,089,556)

INCOME BEFORE CAPITAL CONTRIBUTIONS AND NON-OPERATING TRANSFERS 867,821 4,050,444 (11,255,511)

(1,898,864)

(1,670,082)

(315,543)

(I 1,089,556) 175,726 Capital contributions INCOME BEFORE NON-OPERATING TRANSFERS Non-operating transfers CHANGE IN NET ASSETS 1,670,082 2,537,903 175,726 (1,262,905) 1,262,905 1,274,998 NET ASSETS -BEGINNING OF YEAR 1,438,631 138,776,691 (1,077,518)

$140,051,689 S361,113 S

NET ASSETS -END OF YEAR C-5 Eliminations Total Enterprise Funds S88,914,602 20,719,571 3,323,734 112,957,907 46,323,881 18,977,880 5,871,529 9,491,342 6,990,571 13,169,601 100,824,804 12,133,103 1,043,547 1,670,082 2,713,629 2,713,629 137,699,173

$140,412,802

KISSIMMEE UTILITY AUTHORITY COMBINING STATEMENTS OF CASH FLOWS FOR TIE YEAR ENDED SEPTEIBER 30, 2002 CASH FLOWS FRONI OPERATING ACTIVITIES Receipts from Customers Receipts from Sales to Other Utilities Receipts from Other Sources Electric System

$89,038,894 20,719,571 2,363,587 ISP Eliminations S

960,147 Total Enterprise Funds

$89,038,894 20,719,571 3,323,734 TOTAL CASH PROVIDED 112.122,052 960,147 113,082,199 Payments to suppliers for goods and services Payments for employees for services Payments for benefits on behalf of employees TOTAL CASH USED NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FRONI CAPITAL AND RELATED FINANCING ACTIVITIES.

Acquisition of capital assets and nuclear fuel Advances for construction & advances from co-owners Proceeds from debt issue Payment to defease debt Debt Issuance Costs Principal paid on long-term debt Interest paid on long-term debt Other debt costs (71,051,019)

(12,314,840)

(2,970,562)

(86.336421)

(355,688)

(281,0&3)

(57,714)

(694,462) 25,785,631 265,685 (24,781,173) 8,342,067 75,520,000 (74,405,000)

(1,537.448)

(6,595.000)

(11,866,227)

(222,469)

(71,406,707)

(12,595.900)

(3,028,276)

(87,030,883) 26,051.316 (59,221)

(24,840,394) 8,342.067 75,520,000 (74,405.000)

(1,537,448)

(6,595,000)

(11,866,227)

(222,469)

NET CASH USED BY CAPITAL AND RELATED FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities Proceeds from maturities of investment securities Interest on investments NET CAShI PROVIDED BY INVESTING ACTIVITIES NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (35,545,250)

(59,221)

(35.604.471)

(52,100,000) 54,480,921 3,894,585 6,275,506 (3,484,113)

(52,100,000) 54,480,921 3,894585 6,275,506 (3,277,649) 206,464 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR RECONCILIATION OF OPERATING INCOXfE TO NET CASH PROVIDED BY OPERATING ACTIVrIES Operating Income Adjustments to reconcile operating income to net cash provided by operating activities:

Depreciation Net amortization (Increase) decrease in accounts receivable, net (Increase) decrease in other assets (Increase) decrease in inventory (Increase) decrease in deferred cost of power adjustment (Increase) decrease in energy conservation cost recovery Increase (decrease) in accounts payable Increase (decrease) in due to other governments Increase (decrease) in customer deposits Increase (decrease) in other accrued liabilities Increase (decrease) in other designated liabilities NONCASIH INVESTLNG, CAPITAL, AND FINANCING ACTIVTES:

(Decrease) increase in fair value of investments 84,544,985 84,544,985

$81,060,872 S206,464 S

$81,267,336

$11,957,377 13,366,730 (250,765) 1,266,198 347,786 (2,101,463)

(1,264,224) 83,368 1,091,393 408,441 194,047 477,309 209,434

$175,726 53,636 3S,950 (817) 16,019 (17,829)

$12,133,103 13,420,366 (250,765) 1,305,148 346,969 (2,101,463)

(1,264,224) 83,368 1,107,412 390,612 194,047 477,309 209,434

$25,785,631

$265,685 S

$26,051,316

($432,533)

S 5

(S432,533)

C-6

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Operating Revenues By Source/Operating Expenses By Department Last Ten Fiscal Years Iuuk It di I III 1?

M. I1

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Operating Revenues:

Sources Metered Sales to Customers Public Street & Highway Lighting Total Metered Sales Sales to Other Utilities Internet Service Provider Other Operating Revenues Total Other Operating Revernues Total Operating Revenues

$87,553,520

$93,394,256

$81,025,493

$73,573,885

$71,383,622

$70,685,120

$68,555,036

$63,373,453

$63,589,597

$59,444,764 1,361,082 1,365,862 1,206,148 1,045,437 978,668 944,425 871,184 800,373 742,127 669,534 88,914,602 94,760,118 82,231,641 74,619,322 72,362,290 71,629,545 69,426,220 64,173,826 64,331,724 60,114,298 20,719,571 6,482,289 4,984,050 2,601,298 2,854,796 781,822 287,145 199,849 370 934,141 975,637 890,268 497,159 2,389,593 2,514,409 2,117,276 2,010,169 2,115,368 2,113,939 2,479,929 2,474,172 1,366,280 1,143,854 3,323,734 3,490,046 3,007,544 2,507,328 2,115,368 2,113,939 2,479,929 2,474,172 1,366,280 1,143,854 5112,957,907 5104,732,453

$90,223,235

$79,727,948

$77,332,454 S74,525,306 572,193,295

$66,847,847

$65,698,004

$61,263,522 Operating Expenses:

Departments Nuclear Power Generation Other Power Generation Total Power Generation Purchased Power Transmission & Distribution (1)

Engineering & Operations (1)

Adrninistrative & General:

Information Technology Customer Service & Marketing Finance & Risk Management Central Scrvices (2)

Human Resources Executive Internet Service Provider (3)

Other Administrative & General Work Order Credits (5)

Total Administrative & General Intergovernmental Transfers (4)

Depreclation Total Operating Expenses

$1,195,887

$933,779

$1,215,403

$1,629,866

$1,457,032

$1,274,496

$1,184,984

$1,087,206

$1,248,097

$1,165,620 45,127,994 28,067,831 26,766,485 20,644,592 18,972,293 17,303,698 16,578,259 15,006,756 13,807,614 13,521,919 46,323,881 29,001,610 27,981,888 22,274,458 20,429,325 18,578,194 17,763,243 16,093,962 15,055,711 14,687,539 18,977,880 32,261,266 23,180,433 19,662,702 20,826,416 21,903,786 20,407,210 18,775,611 22,287,889 20,533,442 1,682,555 2,431,095 2,216,992 1,768,767 2,026,431 1,946,742 5,871,529 4,688,754 4,028,666 3,484,439 1,420,138 1,213,868 1,145,117 1,136,601 1,035,283 959,076 1,096,126 3,786,274 1,131,696 948,423 842,028 783,263 768,195 686,521 538,877 474,641 414,361 468,993 3,599,326 3,741,754 3,367,234 3,119,753 3,065,487 2,779,255 2,649,730 2,484,171 2,354,275 1,103,615 1,134,602 718,193 1,017,668 975,918 825,019 790,765 616,889 736,461 lI ll 1.

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)I,.UY JUJ,J'UI 1,163,453 974,753 807,562 712,998 671,502 628,451 702,577 565,334 383,054' 370,892 443,661 291,485 316,712 355,318 345,955 179,180 (51,323) 453,059 416,611 379,125 647,517 833,942 1,125,409 903,837 48,304 1,317,377 4,055,291 2,851,759 2,614,641 3,408,060 885,928 770,399 888,963 612,773 764,560 (94,762)

(526,126)

(440,592)

(563,713)

(478,992) 9,491,342 11,280,709 10,379,234 8,891,771 9,191,449 6,295,059 5,880,786 6,144,048 5,241,368 5,378,007 6,990,571 6,804,053 6,539,647 7,815,172 7,072,186 6,570,502 6,497,637 6,094,693 5,787,944 5,796,928 13,169,601 11,612,111 10,961,345 10,644,457 10,380,077 9,894,090 10,702,958 8,682,955 7,508,905 6,875,183

$100,824,804

$95,648,503

$83,071,213

$72,772,999

$71,002,146

$66,886,594

$64,613,943

$58,696,637

$58,943,531

$56,176,917 (1) These two departments were combined in FY 98.

(2) This department was combined with other departments in FY 98.

(3) This function began operations in late FY 98.

(4) Established by KUA at 6.24 mills per KWh of retail sales and 25% of surcharge revenues. In FY 2000 the decrease reflects KUA dropping the Surcharge (and associated transfer to COK) and implementing the Osceola County Tax.

(5) This department is new in FY 98.

TABLE 1 "I

hUUl hUUU IYYY lYrj Iy!/I I YYt 1i)4

-1 I "15

KISSIMMEE UTILITY AUTHORITY TABLE 2 TEN HIGHEST METER LOCATIONS Annual Percent of Consumption Total (MWH)

System

1. City of Kissimnee 46,360 4.14%

2.

Osceola County Schools 30,385 2.72%

3. Board of County Commission 20,998 1.88%

4. Wal-Mart Super Store 15,865 1.42%

5. Publix Super Markets - Store 0351 15,056 1.35%

6. Adventist Health Systerns 11,868 1.06%

7. Osceola Regional Medical Center 10,799 0.97%

8. First Continental Corporation 10,009 0.89%

9. Sprint 7,639 0.68%

10. Winn-Dixie Stores 7,627 0.68%

176,606 15.79%

SOURCE: Kissiimee UtilityAutlhority D-4

COMPANY National Union of Pittsburg Aegis Insurance Service, Inc.

Perferred Government Insurance Hartford Steam Boiler Hartford Steam Boiler Hartford Steam Boiler Florida Leaque of Cities Coregis Insurance Company Travelers Insurance The Hartford The Hartford Aegis Insurance Service, Inc.

Aegis Insurance Service, Inc.

United Healthcare Choice United Healthcare Choice Plus Delta Dental DeltaCare Phoenix Life KISSIMMEE UTILITY AUTHORITY TABLE 3 INSURANCE TYPE OF COVERAGE Dl General Liability Excess Liability Workers Compensation Primary Property Boiler & Maintenance Data Processing Auto Errors & Omissions Fiduciary Liability Public Official Fidelity Bond Crime Internet E&O Liability Public Official & Employee Practices HMO PPO PPO HMO Life & AD&D EDJAGG. MAXIMUM

$25,00012 Million

$500,000

$10,000

$ 1 00,000/Scheduled Scheduled/Scheduled Scheduled

$25,000

$25,000/10 Million I Million Maximum

$250,000 Maximum

$250,000 Maximum I Million 9 Million

$10 Co-Pay

$15 Co-Pay

$50 - 80/20 Various Co-Pays Scheduled by Salary SOURCE: Kissimmee UtiityAutlhorit D-5

KISSIMMEE UTILITY AUTHORITY TABLE 4 Revenue Bond Coverage Last Ten Fiscal Years Income Available for Debt Service

$36,502,572

$33,148,216

$31,289,533

$31,996,166

$28,358,123

$29,682,100

$29,859,866

$28,350,807

$24,218,492

$20,823,098 Debt Service Requirement Debt Service Coverage

$18,381,441

$17,863,738

$17,668,916

$17,669,225

$17,941,064

$10,484,964

$10,435,708

$8,812,408

$9,186,280

$10,482,367 1.99 1.86 1.77 1.81 1.58 2.83 2.86 3.22 2.64 1.99 D-6 Fiscal Year 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

KISSIMMEE UTILITY AUTHORITY TABLE 5 POPULATION 1970 1975 1980 1985 1990 1995 1998 1999 2000 2005

• 2010

• Lake 69,305 89,500 104,870 126,491 152,104 176,931 196,073 203,863 210,528 237,400 273,278 Orange 344,311 421,800 471,016 556,445 677,491 758,962 824,095 846,328 896,344 966,000 1,134,963 Osceola 25,267 37,100 49,287 77,412 107,728 136,627 148,712 157,376 172,493 189,300 232,817 Source: Economic Development Commission of Mid-Florida 2001 Florida Population Projections, 2000 Census

• Projections D-7

KISSIMMEE UTILITY AUTHORITY TABLE 6 CLIMATE Average Monthly Rainfall & Temperature Kissimmee, Florida October November December January February March April May June July August September Rain (Inches) 1.20 0.90 0.90 0.40 0.10 3.80 1.50 3.00 4.10 5.30 9.10 13.40 3.64 Temperature (Degree F) 72.3 64.1 59.6 53.3 67 65.2 69.9 75 79.7 81.1 80.9 78.2 70.5 SOURCE:: National WVeather Service D-8 MONTHLYA VERAGE

KISSIMMEE UTILITY AUTHORITY TABLE 7 PUBLIC SCHOOL ENROLLMENT Lake County Total Number of Schools (K-12)

Elementary Schools

• Elementary School Students Orange County 37 21 14,171 Middle/Junior High Schools

• Middle/Junior High School Students High Schools High School Students Tech Schools Tech School Students 9

6,992 7

8,097 1

3,856

• Includes special education, technical schools, detention centers, homebound.

SOURCE: Economic Development Commission of Mid-Florida County School Boards 2001 School Year Statistics D-9 Osceola County 147 39 102 73,909 26 34,878 19 42,195 21 17,826 10 9,001 7

10,139 4

48,200 1

2,237

KISSIMMEE UTILITY AUTHORITY TABLE 8 Median Household Effective Buying Income Median

$20,000 -

$35,000 -

$50,000 -

Household EBI 34,999 49,999 And Over Orlando

$33,720 26.3 18.7 29.3 Orange County 39,142 23.2 18.9 36.8 Lake County 28,040 29.6 17.3 20.5 Osceola County 33,490 27.8 20.3 27.1 Florida 34,937 23.6 17.3 32.6 United States 39,129 20.7 16.8 38.2 SOURCE: Sales & Marketing Management, 2001 Survey of Buying Power D-10

KISSIMMEE UTILITY AUTHORITY TABLE 9 Metro Orlando Education Profile Education Level Postgraduate College Graduate Some College High School Graduate Did Not Graduate High School Total Number of Adults Orange County 71,100 80,900 255,900 182,700 62,700 653,300 Lake Osceola County County 10,400 13,600 54,700 67,800 22,900 169,400 6,500 9,500 47,900 44,100 12,400 120,400 SOURCE: Economic Development Commission of Mid-Florida The Scarborough Report - 2001 D-1

KISSIMMEE UTILITY AUTHORITY TABLE 10 Property Tax Table Millage Rate Orange County Orlando 21.1878 Lake County Leesburg 20.3099 Osceola County Kissimmee 20.3578 St. Cloud 20.2415 SOURCE: Economic Development Commission of Mid-Florida Individual County Tax Collectors - 2001 D-12

KISSIMMEE UTILITY AUTHORITY TABLE 11 Employment Growth & Unemployment Rates County 1996 1997 1998 1999 2000 2001 2002*

Orange County Employment (in thousands) 515.4 539.6 568.4 593.8 593.8 608.7 654.6 Growth (in thousands) 25.7 24.2 28.9 25.4 15.0 21.3 24.5 Unemployment Rate (%)

3.9 3.4 3.1 3.0 3.7 4.5 4.0 Lake County Employment (in thousands) 55.3 58.1 60.6 63.3 64.9 67.4 69.5 Growth (in thousands) 3.3 2.7 2.5 2.7 1.7 2.5 2.1 Unemployment Rate (%)

4.8 4.1 3.4 2.6 3.9 5.9 4.8 Osceola County Employment (in thousands) 45.3 46.4 47.5 49.6 53.5 55.3 57.1 Growth (in thousands) 1.7 1.1 1.1 2.1 3.9 1.8 1.8 Unemployment Rate (%)

4.1 3.8 3.3 2.9 3.9 4.5

3.9 SOURCE

EconomicDevelopment Commission of Mid-Florida Fishkind & Associates, Inc - 2001 & 2002 Forecast D-13

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