0CAN048610, Arkansas Power & Light Co Annual Rept 1985
| ML20155D364 | |
| Person / Time | |
|---|---|
| Site: | Arkansas Nuclear  |
| Issue date: | 12/31/1985 |
| From: | Enos J, Maulden J ARKANSAS POWER & LIGHT CO. |
| To: | Harold Denton Office of Nuclear Reactor Regulation |
| References | |
| 0CAN048610, CAN48610, NUDOCS 8604170308 | |
| Download: ML20155D364 (38) | |
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Performance Highlights - IO 1985 1984 increase Revenues from operations (000) $1,364,786 $1,307,683 4 Operation and maintenance expenses (000) $ 904,753 $ 806,771 12 Allowance for funds used during i construction (000) $ 10,470 $ 24,327 (57) I Net income (000) $ 110,068 5 143,367 (23) Capitalization-end of year (000) l (investment required to provide service) $2,326,877 S2,257,973 3 l Construction expenditures (000) $ 172,013 $ 205.050 (16) i Total utility plant investment-end of year (000) $3,606,520 $3,440,991 5 Customers: Electric (end of year) 564,441 555,694 2 Gas (end of year) 61,577 65,687 (6) Energy sales to retail customers: Electric (millions of kilowatt-hours) 14,563 15.719 (7) Natural gas (millions of cubic feet) 9,376 12,053 (22) Employees (end of year) 5,299 5,311 - Peak demand (megawatts) 3,681 3.650 1 l Average use per customer (kilowatt-hours): 1 Residential 9,804 9,801 - Commercial 55,342 53,297 4 Average use per customer (mcf): Residential 86 98 (12) l Commercial 347 376 (8) i l Table of Contents - President's Message . 2 Market Focused, Financially Driven 4 ! President's Citation Award . 5 .r Board of Directors 6 's b E J j Management's Discussion and Analysis 10 . Financial Statements . 12
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4% y" J Notes to Financial Statements 16 ., 4.1 : s - J Officers, Company Directory, Service Area 31 Ten Years of Progress 32 s Associated Natural Gas Message and Listing 36 ' President Reagan honors the Company. See Page 5.
. 1 1
i PresidentSs Message - 1 Arkansas Power & Light Company successfully com-n- pleted the most pivotal year of its 72-year corporate 4 I life in 1985. The year was marked by the Arkansas settlement of ( the Grand Gulf 1 issue-an issue that presented the
.~' Company with the greatest public, regulatory, finan-cial, and political challenge it had ever faced.
i
; g' The year was also significant because it was the year in which our Company began positioning itself to I meet the new competitive environment that will domi-nate our industry in the coming years. i s -
Considering the fact that the Company was facing
, e r. possible insolvency by year end, our average return on
! common equity of 11.9% reflected a solid financial per-I formance. The quality of our earnings was evidenced by the reduction of non-cash Allowance for Funds Used During Construction which was only 9.5% of net ;
- income in 1985. l The first nine months of 1985 were dominated by interminable regulatory proceedings and public debate l conceming the Federal Energy Regulatory Com-j mission's proceedings regarding the allocation among the operating companies of the Middle South Utilities i System of Unit 1 of the Grand Gulf nuclear plant. In June, the FERC reached a decision allocating 36% of the unit to AP&L The Company's position is that it ;
i should not have been allocated any of Grand Gulf 1 l because of the 1981 Reallocation Agreement with the other operating companies of the Middle South Sys-tem. That position was not upheld by the FERC. The Arkansas Public Service Commission hearing on rates to reflect the FERC decision set off a fire storm of public, political, and regulatory debate. The issue was finally resolved in Arkansas in early Septem- ; j ber when the Arkansas A:tomey General,the PSC Staff, ! other intervenors and a group of our large industrial j customers, hammered out a phase-in agreement that i could be accepted by all parties. The Arkansas Settle- , ment Agreement was later approved by the Arkansas Public Service Commission. Although none of the par-ties to the proceedings, including ourselves, were completely happy with the settlement achieved, I believe that time will prove that the sacrifices made by l all parties resulted in the best possible solution to a highly emotional and controversial issue. As comprehended by the Arkansas Settlement Agreement, Arkansas retail rates increased
$81.3 million on September 9-$35.5 million to cover Grand Gulf 1's first-year phase-in plan cost, and S45.8 million to cover cost increases in other aspects of doing business. This represented about a 10% in-crease, with 4.5% attributable to Grand Gulf 1. (Full details of the Arkansas Settlement Agreement can be 2
1 found in Note 2 to the Financial Statements " Rate pleted in mid-year, further employee reductions can be Matters" on page 17.) made. And just as importantly, this study will insure our W3 currently are appealing the FERC allocation human resources are deployed where they are most decision as are all other Arkansas parties in the case. critically needed. Wa believe the Arkansas Settlement Agreement There is little doubt that events of recent years was important for several reasons. While it recovers forced us to place a preponderance of our attention on the cost for Grand Gulf 1, it does so without having to internal financial crisis. Oftentimes this resulted in the burden our customers with a massive, sudden rate customer's perception that our only concerns were incr;ase. Additionally, the Arkansas Settlement Agree- about ourselves. We recognize this and are recommit-ment called for the termination of a number of pending ting our Company to improving customer relations. We court proceedings tnus eliminating much expense and know full well that we can't survive long term unless time in court. And finally, the Arkansas Settlement we can earn the good will of our customers. Agreement removes the cloud of uncertainty that was I do not minimize the challenges ahead for our impacting the state's efforts in the area of economic Company. My confidence that we can meet those chal-development. lenges is grounded in large part in my knowledge of Wa still have Grand Gulf 1 proceedings remaining our employees. The Grand Gulf 1 controversy tested the before the Missouri Public Service Commission and in mettle of our employees, and they never let the level the Federal Courts. We expect those to be concluded of public debate, which was unprecedented, deter in the near future. them from meeting our service obligations. Hundreds Without a doubt, we are rapidly moving into a new of them took aggressive ioles in telling the Company era for electric utilities. One only has to examine what story. Their effective and loyal service is a key reason is happening in the area of competitive fuel supplies, for my confidence in the future. cogeneration, etc., to know that we can never return to I do not believe it overstates our situation to say we the days of business as usual. face a revolutionary change in our operating philosophy. At AP&L, we welcome the new era. Our coal and We must recognize that competition will determine the nuclear units give us a solid base of American energy future price of our product. All of our employees must sources to meet future needs well into the 21st Cen- understand this new competitive environment and their tury. stake in it. We must renew our dedication to our Com-We have an aggressive marketing effort under way, pany and our customers, pledging to do all we can to and as you'll see in the adjoining section of this report, help ensure the reliability of electric service at the it is geared to meet this new competitive market facing lowest price possible. electric utilities. Arkansas Power & Light Company will take advan-We also know that to stay competitive we have to tage of the opportunities that either evolve in the continue to take a hard and candid look at our own marketplace er those we create. In 1985, we demon-operations. We must hold down the price of our pro- strated our abilities to effectively and successfully duct. respond to very real threats to our corporate survival. Our goal at AP&L is simple-no more rate increases The determination, dedication and innovation we dis-for at least four years except those contained in the played during this period will greatly assist us in reach-Arkansas Settlement Agreement to cover Grand Gulf 1 ing our goals and objectives in 1986 and beyond. costs. I recognize how tough it is going to be to meet that goal. But we believe this is a time when we must
'v extend our corporate efforts to the utmost, and we y' / /((
must set goals that will require above average perfor-mance by every employee. I quite candidly don't know Jerry L. Maulden if w3 will achieve the goal or not; however, I have no President & Chief Executive Officer doubts about our commitment to trying. W3 cut expenditures by over $55 million in 1985 as compared to our budgeted level of spending, and we will climinate more than that in 1986. WJ are making progress in reducing our workforce. W3ve launched a new Workforce Analysis Program that will determine the number of employees we need for the future. I fully expect after this study is com-3 l
Market Focused, Financially Driven - Choices. Flexibility. Stability. These are the key words that best descnbe the thrust of the Company's new industrial marketing program which in its first full year of operation A began paying dividends in the form of increased customer optimism toward the future of electric energy in Arkansas.
- Five-year incentwe rate contracts-just one aspect of the a
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multi-faceted program-signed in the last six months of 1985 E will help generate more than 55 megawatts of new load, in-crease annual billings by $11.4 million and will add 1,671 W s employees to the Arkansas industrial work force. These results came from 56 incentue contracts signed by 45 industrial customers, most of which will become effectwo in D - t 1986. The incentive rate contracts were approved by the l Arkansas Public Service Commission in October 1985 and % ,, explained to the industrial community through a senes of pA 6 i well-attended seminars.
- The largest portion of the $11.4 million in additional 't revenues, S6.6 million, will come from the expansion of exist- ,#
l ing industrial facilities, an indication that the Company was 5 ' successful in helping economic growth within the state. The ,\- ! incentive rate contracts also proved attractive to new indus- \' , try, generating S2.6 million additional revenue, and encour- , j eged modernization of existing facilities to the tune of ' yy 52.2 million additional revenue. While there is no doubt that , '1 some of these industrial additions and expansions would . e ] 4
- have occurred anyway, the incentwe contracts were a factor.
l In essence, the incentNe rates are designed to give an
; industrial customer an "up front" price break for adding a certain amount of permanent electric load or temporary load.
l The price break declines at a pre-determined level annually -j over the five-year contract period so that at the end of the contract period the customer is paying the prevailing electric )- rate. The incentwes were designed to offer electncity at reduced rates during those times when the vanable cost of producing electricity is lowest. This type of incentwe rate , structure is appealing to those industries concerned with cash flow in the ea:iy years. MBQ empt yees are happy that #s planhs staymg m BlyfhpIIe ' New and expanded industry creates new jobs which, in turn, benefits commercial and residential electric energy sales. Also, a marketing program that helps strengthen the spects and those existing industnes that want to expand is a state's industrial base is healthy for residential customers five-year contract that would guarantee the industry a pre-because, otherwise, they would have to pick up a larger por- determined rate structure. This is designed to address the tion of the fixeo costs of the new base-load nuclear and coal problem of plant management's hesitancy to commit to new generating facilities. plant or needed expans:ons because of uncertainty over the The basic goal of the marketing program is to increase amount and timing of future rates. sales by making maximum use of existing base-load coal Because of flexibility in dealing with industrial customers, and nuclear units and their lower-cost energy. The large and the ability to provide them with the predictability and capital costs of these units are fixed, regardless of demand, stability they need. the marketing program is considered an so each increment of energy sold which is produced by one ideal complement to the state's economic development pro-of these units reduces the average fixed cost per unit. A key gram. The marketing strateg3, which evoised after much feature of this program is to benefit all AP&L customers, not stud /, is geared toward a total commitment to becoming a just those who receive the price incentives, by reducing the working partner with each industnal customer. The goalis to unit cost of electricity for all customers. understand the specific needs of a given industry so .vell Other marketing opportunities currently being explored for that Company representatives can use their electric energy possible consideration by the Commission include a cooper- expertise to zero in on specific problems and solve them. ative plan between the Company and industrial customers Customer choices. Flexibility Stability. The task is to with cogeneration possibilities. This would give the Com- blend these elements into a true working partnership be-pany an investment a!!ernatwe in the future to building large tween the Company and its customers to their mutual benefit. central station power plants beyond the Company's current The flexibility that permits custom-tailored marketing is planning horizon. due largely to the Comparr/s current load shape and to the One cf the options under study for both new industrial pro- fixed-cost nature of base-load generating units. Because the Company's nuclear and coal plants provide virtually all required capacity dunng normal times, the Company has energy to sell at any time In addition, dunng the spnng and 4 m i
late fall, low-cost, bare-load energy from those plants is While the industrial sector has received a lot of attention, available 24 hours a day. Finally, base-load energy is avail- the marketing effort remains a broad-based endeavor. Last able year-round to sell during certain hours of the day. year saw a 15 percent increase in heat pump sales for One good example of why the marketing program is being residential and commercial applicat:ons and renewed em-well received by state government is provided by NIBCO, a phasis on nightwatcher sales. The energy-efficient concepts Blytheville manufacturing concern that was seriously con- the Company pioneered with the all-electric "Ackan^,as sidering shutting down its Arkans:ts plant and moving its Energy idea Home" continue to be popular with consumers manufacturing operation overseas. One reason these jobs and there are now a total of 14,453 structures-homes, weren't permanently lost to overseas competition is the apartments and mobile homes-in the Company's service Company's willingness to work closely with the firm in area. I designing an incentrve rate contract to provide competitive The marketing program is in its infancy, but it is con-rates. It helped shift the scales in favor of Blytheville instead sidered an important step toward developing new business of an overseas location. opportunities in a changing utility marketplace. i AP&L Receives Prestigious , President's Citation Award for ! Private Sector Initiatives i i Arkansas Power & Light Company's dedication to "excep- ; tional community assistance" eamed it the 1985 President's Citation Award for Private Sector Initiatives. President Reagan presented a crystal medallion and certificate to AP&L Presi-dent Jerry L. Maulden at a ceremony in June in the White ,r House Rose Garden. e AP&L was the only electric utility and the only Arkansas business among 30 businesses and organizations chosen nationally to receive the prestigious award. In praising the recipients for the commitment they have . shown to their communities, President Reagan said,"Only I by working together and finding some private solutions to public problems can we restore the strong balance needed for the future health of our nation. Our country is great I." because it is built on principles of self-reliance, opportunity, innovation and compassion for others." - AP&L was honored for its Minority Business Development Program and its Helping Hands Programs, specifically Pro-ject Deserve and Project Conserve. The Minority Business Development Program helped the Company increase its transactions with minonty enterprises from $200,000 in 1983 , to about $5 million in 1985. Project Deserve, which operates in conjunction with the American Red Cross, helps the elderly d and handicapped pay their electric bills and make emergency ; ( repairs to heating and cooling equipment. More than
- S625,000 has been contributed by AP&L customers, employees and stockholders to this program since its incep-j i I
tion in 1982. Project Conserve has assisted in the weather-ization of more than 1,3?O homes of low-income persons to . reduce their energy costs; the program also includes the Company's support of the Watershed self-improvement ., organization to College Station, a low-income community in Q Central Arkansas. y These and other community service activities are designed - _ #4 to help AP&L tulfsflits obi _ective of " Helping Build Arkansas President Reagan presents award to Jerry L. Maulden (left). and Southeast Missouri. 5
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s j John A. Cooper, Jr. Cathy Cunningham John J Flake M.L Gernert The president of Cooper Com- An actnre t>usiness woman. w.tn a A re.d estate votessennx th.s Fhesidert of Arkansas Eastman munMes,InC the fif771 head @iarttared deep appreciat on of Helen.n s has- ! ."'e ik k na%e is t haamar 4 ttw Comp try at Datesde Na is a ciern-at Benton% 4lle that peOneered ttv Cork tonC past, she is noted for using her t card o' Fl.4 e & Compar, a m U ut engr wf wth tw w ope _e Cept Of "gr Ajuated retirement he e, pen.se in , eat estat,. s,.ct r:t,, s . ,.ite d w rv.,ntfem wno+,run ,n retirusact1 1,,3 . . ,,1. t. str i. ii has vaned tos, ness ir4 rests but and insurance to convert negwted inns far a wo. rango of person.d rTianagemr y,J ,erws en many tth es speck 1l pode in his inv0Ne- historic structures ento atiractw enns entef ests intiuding the A/h ins.n c f ate and 1.ral orpWaN ms 1. vnted ment in programs IO tietter the CNiC and IUsiness O ',Ces IP* Vet) saving t f 4eDe't Jr( Ihe.itre .Whl itV Creater 10 er jekyrart deveOpeneMit
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Company 3 e il f,/ r a. , i ' I Lawrence B acueil Attorney . Pune Blutt. Arkansas Richard C Butler ' Past Chairman of the Boards , s of Commercoat NanonalBank and Peoples Savings & Loaa Edwin Lupberger Jerry L. Maulden Raymond P. Miller, Sr., M.D. A s SOCla ban TNs Cottm Ptint m'w $s a sput Ottle Rock. Arkansas The ch.inman president and d, rec. ecng noted W his sorw o ,n for cf %3 die Sou h 11J.tws Inc t or ? irnt;W n . dm,ot M to A minsas o,f in ote,n.d rnen tione sno n .imN in LC Carter ,3 a seasoned mgar om.ess,,,.g ..a,,, m,c wn .pn, nt tne p, rs,. y n,s pnwi,- n , t.,, ,s ,, wyt Past Pre'udent ,n the ehtnc ut.hty intste, and is lent ruvi( h d e=&o? W A eA cbnK a' Dr* ssor at the Unn "" h of Arceland Foods. Renre 1 ,,3,,j ,ng,y , ;r his finanual eger. Armansas Power & L pu s ar, y pa Ar k ans.n ',e to A J P.b t t m. Stortgart Ar*ansas %, gg ,s cn,,,y n, ,n,, g ,a g,9 ,n,yms.gg ,n 4. ,,.3 ,g,,,W A r h v' p,. < of mi N e.dm i s in Eu toc Insu 'r s Finance Dy ,on wruna a far ,rnh .ano = >r ty be ,ens ed a h ,mr 'o i v i tN, tw George K Feeves *'""85""'"T*"'"' * " ' ' '"' V' ' ' #%" W'"""*"~ Partner. Ward & Reeves ud? ""d' f* 'ad of Tw -s - % , Caruthers< ale. Essoun Clotas :-A Amrm and tr e ta inonal Reeves E Ritchie fk d'! of D'% o ' d th" MAL P Past President and Chairman of the Bard Arkansas Power & bght Corrpay Ret red i LtHe Rock, Arkansas Woc.dson D. Walker Dr Marshall T Steel *y3, Past prendent ' 'k A nrW ' " tN . * ' -"W "t Hendns Conege. Rebred 5 ( , ,n W pi. , . A v r iA,fA a' t 't' + Pme Blott. Arkansas nx a ,, , ,nas a s v...d r e 8 ynno.1 a W c1 , .ncnn . in 1 s , v ,, 3 v,1 r, e o. t', . rung v. Cha rman of the Boyd and .
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Born rto a pereenng insurance A -t.vmer s fa'mer who has wmed An anorney farms kry me. ster in This New Mi jn1 %sse natrs.. famdy at Paragaold he is now a in esen, ascect of a y+-tosiness Nr te Ur,ted N4tnoast Church and A ore of Mss uri s most d s-ser.or uce prestdent of one cf t*e is pres +rt of Wnocx Farms Inc U S Senator 11977-79p in s 4vmort tny.isted aNorneys an 1.s tre s+mr world s lar<;est ir,su ranCO *rms f and WCe-cha , x, of niceiare r*ds nat se euets m ,-ary s+ ads and .s r,-,-r.4 ofene or ,o, n ct~ 3nd Mrsn & Ntlencan. Inc weh c",ces He is atso act va e CrWe cmc pro- aisa a iea1+ r m the sta'e s am!W a .r t er Act w .n sta'.4 Cm.crat c at Lee Acck The author of three or vs *hi'e sen,m on tv Loneh e cmser satw movemort and a N ts.s he has teen c.-ty at+cirrvy at bocks on t*,e cperat+on and manage- Court iFarrn Breaa S3.vd c.' for"ve rnenter of *be Arkansas %w MrJod sn e 1Me, arkt ero-ment ct ensurance agencies he +s Dvectors Game and Fe Coremsse.c sec ofog a+,rne e of New Mi.fr d also actwe in the state Demccat,c Ccurt, srve m2 Pae;
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Report of Management The management of Arkansas Power & Light Company has prepared and is responsible for the financial statements and related f!nant f al informauan included in this annual report The financial statements are based on generaly accepted accounting principles, consistenty apphed Financial informauan inchided elsewhere in this report is consistent with the fhiancial statementa
'Ib meet its raamn*1iMes with respect to financial information, management maintains and enforces a system of internal accounting contals which pmvides reasonable assurance, en a cost effective basis, as to the integrity, otdectivity and ra11ahntty of the f!nancal records and as to the protection of asseta This system includes communication through written policies and procedures, an organhManxi structure that provides for appmpriate division of raennnamy, the seledian and trainbg of quahfied personnel, a performance accountabitty program and a comprehens!ve internal audt program.
The Boatt of Directors pursues its responstility for repotted f!nantu! informanon thmugh its audtt mmm!!1ee, composed of outside directora The aud:t commluee meets periodcaly with management the internal audtors and the independent certfled public armmtants to discuss audting internal control and f!nanr%1 reporung maners and repcita thereon to the Board of D!metora The heiapantiant certfied public accountants have full and free accecs to meet with the audt mmmtfiaa at any ume without members of Company management being pmsent The independent certified pubbc accountants provide an objecuve assessment of the degree to which management meets its raamnality for fairness of f!nanrh1 reporting They regulary evaluate the system of internal accounung control and perform such tests and other procedures they deem necessary to reach and express an opinion of the fairness of the f!nancial statementa We believe that these policies and pmcedures provide reasonable assurance that our operanons are carried out wtth a high standard of business conduct kk JerryI Maulden President & Chief Execut2ve Officer Opinion of Independent Public Accountants Deloitte Haskins Sells 39m Floor One Shell Square New Orleans. Loumana 70139 Arkansas Power & Ilght Company: We have aramined the conso1Mitarl balance sheets of Arkanru Power & Ilght Company and its subsid;ary as of December 31,1985 and 1984 and the related consolidated statements of income and retained earnings and of changes in financial position for each of the three years in the period ended December 31,1985. Our eraminicons were made in accordance with generaEy accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, the above-mentioned consolidated financial statements present fairy the financial position of the Company and its subsidiary at December 31,1985 and 1984 and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31,1985, in conformity with ! generaRy accepted accounting principles applied on a consistent basis. IW $f March 14,1986 9
f Management'a Discussion cnd An^ lysis cf Financial Condition End R:sults cf Operati:ns Financial Condition The Company's financial condition was significantly the Company. (See Note 4 to the Financial Statements-affected during 1985 by the commercial operation of Midd e " Commitments and Contingencies.") South Energy's (MSE) Grand Gulf Nuclear Station Unit 1 The Company had shor1-term borrowing authonty on (Grand Gulf 1) and the Federal Energy Regulatory Com- December 31,1985 of 10% of capitalizaton, or $233.7 mission's (FERC) allocaton to the Company of 36% of the million. At December 31,1985 and 1984, the Company had capacity and energy of MSE's 90% ownership share. The no short-term debt outstanding (See Note 7 to the Financial FERC decision was strongly contested by the Company and Statements " Lines of Credit and Short Term Borrowings" its regulatory agencies. (See Note 4 to the Financial State- regarding lines of credit available to the Company.) ments " Commitments and Contingencies.") This resulted The Company's interest coverage ratio for first mortgage in an unstable regulatory and financial environment for the bonds (Bonds), which must be a minimum of 2.0 times the Company which affected its access to capital markets and annual mortgage interest requirement for issuance of addi-delayed recovery through rates of costs associated with the tional Bonds, was 2.85 at December 31,1985 as compared Company's allocation of Grand Gulf 1. However, in Septem- to 3.26 and 3.14 at December 31,1984 and 1983, respec-ber 1985, the Company received Arkansas Public Service tively. The decrease in the ratio at year end 1985 was Commission (APSC) approval for a comprehensive negote- primanly due to factors discussed below in Results of Oper-ated settlement agreement (Arkansas Settlement Agree- ations. While the December 31,1985 interest coverage ratio ment), including Grand Gulf 1 issues, which stabilized the of 2.85 would have permitted the Company to issue an Company's financial condition. In addition to Grand Gulf 1 additional S433.3 million Bonds, assuming an interest rate relief, the Company was permitted to increase its Arkansas of 12%, the Company could have issued only S333 3 million retail rates $45.8 million annually. (See Note 2 to the Finan- additiona! Bonds, based on available fundable property at cial Statements " Rate Matters" with respect to the terms that date, plus any Bonds issued for refunding purposes. of the Arkansas Settlement Agreement and pending litiga- The eamings ratio for preferred stock, which must be tion.) a minimum of 1.5 times the Company's annual interest Due to the obligations associated with the allocation of charges and preferred stock diMend requirement to allow Grand Gulf 1 capacity and energy cost, the Company, along the issuance of new pre erred stock, was 1.48 at December with the other System operating companies, did not declare 31,1985 as compared to 1.73 and 1.73 at year end 1984 common stock dividends for the third and fourth quarters of and 1983, respectNely. Based on the December 31,1985 1985 and first quarter of 1986. Dividends on preferred stock ratio of 1.48, the Company could issue no additional were declared and paid. (See Note 8 to the Financial preferred stock. Statements " Retained Eamings.") At December 31,1985, the Company had temporary cash investments of $145 2 millon, resulting primanly from the Liquidity and Capital Resources issuance of $120 million pollution control revenue bonds Liquidity and the Company's access to capital markets (PCRB) in December 1985. were very volatile dunng a portion of 1985 primanly due to in 1986,51.4 millon Bonds and $7.5 million preferred the uncertainty surrounding the effect of Grand Gulf 1 on stock will be retired pursuant to sinking fund requirements both the Company and the other System operating com- and $70 million Bonds and 50.7 million PCRB will mature. panies. The Company's liquidity position has stabilized due An additional 50 8 million PCRB are subject to redemption to the Arkansas Settlement Agreement which the Company at the opton of the holders of such PCRB at a redemption believes will, subject to certain contingenues referred to in price of 100% Overview below, allow it to maintain an acceptable financial Constructon expenditures (excluding AFDC and nuclear condition and to meet Grand Gulf 1 and other Company fuel) were $163 million, $181 million and $220 million in obligations. The Company's access to capital markets dur- 1985,1984 and 1983, respectively. Projected expenditures ing 1986, if required, may be adversely affected, however, (excluding AFDC and nuclear fuel) for 1986,1987 and 1988 by the results of MSE's pending review of the Grand Gulf are $132 million, $166 millon and $173 million, respectively. Nuclear Station, Unit 2 (Grand Gulf 2). Any allocation to the (See Note 4 to the Financial Statements ~ Commitments Company by the FERC of either capacity and energy or and Contingencies" as to the current status of the Com-abandonment cost associated with Grand Gulf 2 can be pany's nuclear fuel leases ) expected to be strongly resisted by state regulatory agen- Internally generated funds, after preferred and common cies and could result in increased capital requirements for stock dividends, amounted to 147%,58% and 63% of 1985, 1984 and 1983 constructon expenditures (excluding AFDC and nuclear fuel), respectrvely. However, common and pre-ferred stock dividends amounted to only $86 8 million in 1985 as compared to $145.4 millon and $132.1 million in 1984 and 1983, respectively. As previously discussed in Financial Condition, the reduction in 1985 dividends was due to the Company not declanng common stock dividends for the third and fourth quarters of 1985 10
Results of Operations Effects of inflation Net income for 1985 decreased 23.2%, or $33.3 million Despite the reduced level of inflation in 1985, its effect on from 1984. The primary factors influencing this decrease the Company's operations in recent years has been signifi-wers: (1) Grand Gulf 1 began commercial operation in July cant. (See Note 13 to the Financial Statements-without concurrent rates in g lace to recover associated " Effects of Inflation on Operations (Unaudited).") costs; (2) as a result of the System's review of its energy load growth projections and resultant capacity requirements, OveMew provisions for estimated losses were recorded in December The Company's financial position throughout 1985 was associated primarily with engineering and design costs and significantly affected by events relating to Grand Gulf 1. The cstimated liabilities assodated with certain planned future unit's commercial operation on July 1,1985 and the Com-fcisil generating facilities; and (3) the sale of a portion of pany's 36% allocated share of Grand Gulf 1 as ordered by th3 capacity and energy from the White Bluff generating the FERC could have had a devastating effect on the units under the Unit Power Purchase Agreement terminated Company's 1985 financial condition. However, the Arkansas without concurrent rates in place to recover associated Settlement Agreement approved in earfy September, which revenue losses. granted the Company a first year rate increase of approx-Despite the overall decrease in net income, the quality of imately $81.3 million, should permit the Company to main-income in 1985 improved significantly. Total AFDC for 1985, tain the financial stability necessary to enable it to meet its 1984 and 1983 was $10.5 million, $24.3 million and $27.8 obligations, including those related to Grand Gulf 1. (See , million, respectively. AFDC as a percent of net income for Note 2 to the Financial Statements
- Rate Matters.") l 1985,1984 and 1983 was 9.5%,16.9% and 21.9%, respec- Depending on the timing and regulatory treatment of cost tively. Based on current construction forecasts, AFDC as a associated with Grand Gulf 2, the Company's future finan-percent of net income is expected to remain low. cial condition could be affected. (See Note 4 to the Operating revenues for 1985 of $1,364.8 million increased Financial Statements " Commitments and Contingencies.")
$57.1 million,4.4%, and $158.6 million,13.2%, when com- The Arkansas Settlement Agreement includes provisions pared to 1984 and 1983, respectively. Electric revenues which, in accordance with current generally accepted ac-incrrased $69.2 million over 1984 of which $42.0 million can counting principles, allow the Company to defer costs for be attnbuted to revenues which the Company was permitted recovery in subsequent penods. The Financial Accounting to collect by surcharge as a result of an appeal by the Com- Standards Board has proposed amendments to Statement pany of an APSC rate order. (See Note 2 to the Financial of Financial Accounting Standards No. 71 (FASB 71) which Statements " Rate Matters.")in addition, $65.5 million of include proposed criteria for deferral of costs in connection the revenue increase was the result of increased sales to with rate phase-in plans. The Company's future financial other utilities. These increases in 1985 revenues were offset condition could be adversely affected if amounts being de-by decreased revenue from Reynolds Metals Company of ferred under the Arkansas Settlement Agreement would not $37.1 million (see Note 2 to the Financial Statements- meet deferral cnteria, if any, which might ultimately be " Rate Matters") and decreased sales to the Middle South included in any amendments to FASB 71. (See Note 4 to System power pool of $24.1 million. the Financial Statements " Commitments and Contingen-Operation expense in 1985 increased $102.1 million, cies.") 13.8%, and $129.5 million,18.2%, over 1984 and 1983, re-spectrvely. Purchased power expenses, which were essen-tially Grand Gulf 1 cost, accounted for $107.8 million of the incr;ase in 1985. Other operation expenses increased primarily due to the $52.7 million provision for estimated losses. Operation expense increases were offset by a de-crease of $54.6 million in fuel and fuel related expenses other than purchased power. Daferred purchased power cost / capacity retum amounted to $46.3 million, net of deferred taxes of $43.7 million. Miscellaneous income-net in 1985 increased $31.1 million and $34.0 million over 1984 and 1983, respectively, pn-marily due to regulatory treatment of the return on excess capacity provided by the Arkansas Settlement Agreement of $14.0 million and interest income associated with settle-ment of the Company's 1981 Arkansas Retail Rate Case of $13.7 million. 11
Arkansas Power & Light Company and Subsidi:ry C nsolidated Bal:nco Sheets l l December 31, l ASSETS 1985 1984 (in thousands) Utility Plant (Notes 4 and 5): Electric plant . . . . $3,438,401 $3,269,726 Gas plant . ... . . 39,873 38,182 Construction work in progress . .. . 92,563 105,762 Nuclear fuel . . .. .. . . 35,683 27,321 Total ... .. . .. 3,606,520 3,440,991 Less-accumulated depreciation and amortization . 860,226 766,537 Utility plant-net . . . 2,746,294 2,674,454 Other Property and investments: Investments in associated companies, at equity (Note 4) 41,330 39,716 Other, at cost (less accumc!sted depreciatiort) . 275 279 Total . . .
. 41,605 39,995 Current Assets:
Cash and special deposits . 11,964 12,967 Temporary investments, at cost which approximates market: Associateri companies (Note 7) . - 91,500 Other . . .. 145,242 3,925 Notes receivable-net . 1,946 1,939 Accounts receivable: Associated companies . .. 26,638 33,044 Customer (less allowance for doubtful accounts
-S2,179,000 in 1985 and 1984) (Note 2) . .
87,377 41,149 Other.. .. 10,032 13,003 Deferred fuel cost (4,051) (14,178) Fuelinventory, at average cost . 57,943 83,998 Materials and supplies, at average cost . . 36,290 42,245 Prepayments and other . 8,219 8,066 Total 381,600 317,658 Deferred Debits: Deferred purchased power cost (Notes 2 and 4). 76,016 - Other . 62,367 28,710 Total 138,383 28,710 Total S3,307,882 S3,060,817 See Notes to Consolidated FinancialStatements. 12 II mm
December 31, LIABILITIES 1985 1984 (in thousands) Cepitalization: Common stock, $12.50 par value: authorized 325,000,000 shares; issued and outstanding, 54,980,196 shares in 1985 and 1984 (Note 9) . $ 687,252 $ 687,252 Paid-in capital . . . . 7,512 7,053 Retained eamings (Note 8) . . 49,417 26.101 Total common shareholder's equity .. . 744,181 720,406 Preferred stock and premium, without sinking fund (Note 9) . 126,890 126,890 Preferred stock and premium, with sinking fund (Note 9) . 120,812 124,170 Long-term debt (Note 10) 1,334,994 1,286,507 Total .. . . . 2,326,877 2,257,973 Other Noncurrent Uabilities (Note 1) . 24,998 23,030 Current Liabilities: Currently maturing long-tern debt (Note 10) 72,870 21,210 k Accounts payable: Associated companies 42,478 2,649 Other. . . 83,509 90,928 Customer deposits . 8,295 7,519 Taxes accrued .. . .. 79,064 55,201 Accumulated deferred income taxes (Note 3) (2,009) (6.987) Interest accrued 48,516 45,185 Dividends declared (Note 8) 5,716 35,791 Nuclear refueling reserve 6,040 19,104 Co-owner advances (Note 1) . 36,868 54,729 Other . . . . 14,938 13,985 Total 396,285 339,314 Defsrred Credits and Other Liabilities: Accumulated deferred income taxes (Note 3) 304,121 260,309 Accumulated deferred investment tax credits (Note 3) . 172,452 160,067 Other . . 83,149 20,124 Total 559,722 440,500 Commitments and Contingencies (Notes 2,4 and 5) Total . $3,307,882 $3,060,817 , See Notes to Consolidated FinancialStatements. 13
Ark:nsas Power & Light Company end Subsidiary C:nsolidated Stat m:nta cf Incsmo cnd R:tained Ecrning2 Years ended December 31, STATEMENTS OF INCOME 1985 1984 1983 (in thousands) Operating Revenues (Notes 1,2 and 11): Electric $1,316,797 $1,247,597 S1,148,891 Natural gas . . 47,989 _ 60,086 57,254 Total . . 1,364,786 1,307,683 1,206,145 Operating Expenses: Operation: Fuel . . . . 328,088 338,429 322,658 Purchased power-net (Note 2) 241,805 133,964 166,126 Gas purchased for resale 35,816 44,894 44,150 235,358 221,679 178,610 Other (Note 11). . . Maintenance . 63,686 67,805 59,059 Depreciation . 109,686 97,451 92,621 Taxes other than income taxes . 37,603 34,818 32,813 95,955 126,457 98,831 income taxes (Note 3) Total . . 1,147,997 1,065,497 994,868 Operating income . 216,789 242,186 211,277 Other income and Deductions: Allowance for equity funds used during construction . 5,998 15,844 18,095 40,330 9,216 6,372 Miscellaneous-net (Note 2) (11,459) 1,988 8,085 Income taxes (Note 3) Total . 34,869 27,048 32,552 Interest Charges: Interest on long-term debt 138,752 126,974 119,466 Other interest-net of debt premium . 7,310 7,376 7,152 Allowance for borrowed funds used during construction (4,472) (8,483) (9,685) Total . . 141,590 125,867 116,933 N:;t income (Note 12). S 110,068 S 143,367 5 126,896 STATEMENTS OF RETAINED EARNINGS Retained Earnings-January 1 S 26,101 S 28,158 5 33,365 110,068 143,367 126,896 Add-Net income (Note 12) Total. 136,169 171,525 160,261 Deduct-Cash dividends: Preferred stock . 22,920 23,753 24,715 Common stock (Note 8) . 63,832 121,671 107,388 Total . 86,752 145,424 132,103 R;tained Earnings-December 31 (Note 8) $ 49,417 S 26,101 S 28,158 See Notes to Consolidated Financial Statements. 14
Ark;nsas Power & Light Company:nd SubsidLry Consolidated Stat:m:nts cf Ch:n~es in Fin:nzi:1 Po:iti:n Years ended December 31, 1985 1984 1983 (in thousands) Funds Provided By: Operations: Net income. . $110,068 $143,367 $126,896 Depreciation . . . . ... 109,686 97,451 92,621 Deferred income taxes and investment tax credit adjustments-net 61,748 34,583 78,127 Allowance for equity funds used during construction . (5,998) (15,844) (18,095) Provision for losses (Note 12) . 52,707 - - Total funds provided by operations . 328,211 259.557 279,549 Other. Allowance for equity funds used during construction . 5,998 15,844 18.095 Decrease in worWng capital * - 58,329 - Miscellaneous-net. - - 13.234 Total funds provided excluding financing transactions. 334,209 333.730 310,878 Financing transactions: Common stock. . - - 65,000 First mortgage bonds . - 100,000 25,000 Installment purchase transactions (Note 10). . 118,161 2,553 44,900 Long-term obligations-Department of Energy (Note 4). 4,773 8,509 49,400 Obligations under capitalleases. 3,023 4,164 - Total funds provided by financing . 125,957 115.226 184,300 Total funds provided. . _ . . $460,166 $448,956 $495,178 Funds Applied To: Utility plant additions: Construction expenditures for utility plant . . $172,013 $205,050 $247,449 Expenditures for nuclear fuel . 8,362 2,342 8,110 Capitalleases. 4,021 5,000 - Other-net . (2,870) (2,472) 932 Total gross additions (includes allowance for funds used during construction) . 181,526 209,920 256,491 Deferred purchased power cost / capacity return (Notes 2 and 3) 89,993 - - Other: Dividends declared on preferred stock . . . . . 22,920 23,753 24,715 Dividends declared on common stock (Note 8) . 63,832 121,671 107,388 increase in working capital * . . . . . . 13,792 - 11,778 Reserve for spent nuclear fuel disposal (Note 4) . - - 36,019 Miscellaneous-net. 14,519 9,673 - Total other funds applied. 115,063 155,097 179,900 Financing transactions: Redemption of preferred stock . 3,337 9,704 7,175 Retirement of first mortgage bonds . 19,365 8,865 2,297 Repayment of installment purchase transactions . 1,065 1,005 40,050 Repayment of short-term debt and investment in short-term securities-net . . 49,817 64.365 9,265 Total funds applied to financing. 73,584 83.939 58,787 Total funds applied . . $460,166 $448.956 $495,178
- Increase (Decrease) in Working Capital:
Current Assets 1985 1984 1933_ Current Liabilities 1985 1984 1983 Cash and specialdeposits. . $ (1,003) $ 5,136 $ (471) Accounts payable . .5 7,419 $ (3.921) $ 229 Accounts receivable . . . . 43,257 (34,773) 41.623 Taxes accrued . (23,863) (19.417) (2,088) Int 2rcompany receivable / Interest accrued (3,331) (1,210) (6,057) payable-net . (46,235) 13,736 6,209 Dividends declared . 30,075 (9,537) (1,624) Def:rred fuelcost . 10,127 (19,895) (16,235) Co-owner advances. . 17,861 (27,359) 5,619 Fu:linventory. .. (26,055) 39,388 (13.210) Other current liabihties . __11,335 _ (6,644) _f5,124) Mat: rials and supplies . (5,955) 8.534 761 Net change-current habihties . . $39,496 $f68,088) $19,045) Oth tr current assets. . 160 _f2,36_7) _ 2, M6 Net increase (decrease)~ N:t change-current assets. . . S(25,704) $_9,759 $20,823 working capital . . 513,792 _$(58.329) $1_1,778 See Notes to Consolidated Financial Statements. 15
Notes to C:nsolidated Fin n:lal Etat:m:nts
- 1. Summary of Significant Accounting Policies F. Postretirement Benefits The Company has postretirement plans covenng substan-A. Principles of Consolidation tially all of its employees. The policy of the Company is The accompanying consolidated financial statements to fund pension costs in accordance with contnbution guide-include the accounts of Arkansas Power & Light Company lines established by the Employment Retirement income Secur-and its wholly-owned subsidiary, Associated Natural Gas sty Act of 1974 and to fund other postretirement plan costs as Company. incurred.
D. System of Accounts G. Income Taxes The accounts of the Company are maintained in accordance The Company joins its parent in fihng a consolidated with the uniform system of accounts prescribed by the Federal Federal income tax return. Income taxes are allocated b the Energy Regulatory Commission. Company in proportion to its contnbut:on to consolidated taxable income. Deferred income taxes are provided for differ-C. Revenues and Fuel Costs ences between book and taxable income to the extent The Company records revenues as billed to its customers on permitted by the regulatory bodies for ratemaking purposes. a cycle billing basis. Revenue is not accrued for energy investment tax credits allocated to the Company are defened delivered but not billed at the end of the fiscal period. and amortized over the average useful hfe of the related Substantially all of the rate schedules of the Company property, beginning with the year allowed in the consohdated include adjustment clauses under which fuel costs above or tax return. below the levels allowed in the various rate schedules are per-mitted to be billed or required to be credited to customers. H. Allowance for Funds Used During Construction The Company has adopted a deferral method of accounting for To the extent that the Company is not permitted by its those fuel costs recoverable under fuel adjustment clauses. regulator'/ bodies to recover in current rates the carrying cost Under this method, such costs are deferred to the month in of funds used for construction, the Company capitalizes, as an which the related revenues are billed. appropriate cost of utihty plant, an allowance for funds used The fuel adjustment factor contains an amount for a nuclear dunng construction (AFDC) which is calculated and recorded r: serve, estimated to cover the cost of replacement energy as provided by the regulatory uniform system of accounts. when the nuclear plant is down for scheduled maintenance and Under this utility industry practice, construction work in r: fueling. The reserve bears interest and is used to reduce fuel progress on the balance sheet is charged and the income state-expense for fuel adjustment purposes during the shutdown ment is credited for the approximate composite interest cost period. of borrowed funds and for a reasonable return on the equity funds used for construction. This procedure is intended to D. Utility Plant and Depreciation remove from the income statement the effect of the cost of Utility plant is stated at original cost which is less than financing the construction program and results in treating the curr nt cost set forth in Note 13 to the Financial Statements- AFDC charges in the same manner as construction, labor and " Effects of inflation on Operations (Unaudited)." The cost of matenal costs. As non-cash items, these credits to the income additions to utihty plant includes contracted work, direct labor statement have no effect on current cash eamings. After the and materials, allocable overheads and an allowance for the property is placed in service the AFDC charged to construc-composite cost of funds used during construction. The costs of tion costs is recoverable from customers through depreciation units of property retired are removed from utshty plant and such provisions included in rates charged for utihty service. The costs, plus removal costs, less salvage, are charged to effective composite AFDC rate for the Company was 9 0%, Eccumulated depreciation. Maintenance and repair of property 9.1% and 8.8% for 1985,1984 and 1983, respectively. and replacement of items determined to be less than units of The Company's policy is to capitalize AFDC on projects property are charged to operating expenses. during periods of interrupted construction when such Depreciation is computed on the straight-hne basis at rates interruption is temporary and the continuation can be based on the estimated service hves of the vanous chsses of just.fied as being reasonable under the circumstances. property. Depreciation on average depreciai>M property in 1985,1984 and 1983 amounted to approximately 3.3% each I. Other Noncurrent Liabilities year. Pnncipally all the Company's utikty plant is subiect to the it is the policy of the Company to provide provisions for unin-lien of its first mortgage bond indenture. sured property nsks, certain employee benefits, and claims for injuries and damages through charges to E. Jointly-Owned Gsnerating Stations operating expense on an accrual basis. Accruals for these The Company jointly owns two coal-fueled generating provisions have been allowed for ratemaking purposes. stations, both of which have two units. The Company is the J. Reclassifications agent for the respective co-owners and operates the stations. Certain reclassifications of previously reported amounts have it records its investment and expenses associated with these been made to conform with current classifications. These stations to the extent of its ownership interests in the reclassifications had no effect on net income. generatmg stations. The Company's investment and percent ownership in these stations are as follows: Investment at Percent Generating Stations Dec.31,1985 Ownership White Bluff Steam Electnc Station . $391646.000 57.0% Independence Steam Electric Station . 5293.348.000 31.5% 16
- 2. Rate Matters further proceedings in this matter. The decision was affirmed on an appeal to the United States Court of Appeals for the Eighth Grand Gulf Nuclear Station Circuit by the APSC and other intervenors in the proceeding.
The Company is a party to certain agreements and pro- On January 27,1986, the United States Supreme Court denied
, ceedings conceming Middle South Energy, Inc. (MSE) and the a petition for certiorari filed by a party which was an intervenor Grand Gulf Nuclear Station (Grand Gulf) owned by MSE. (See in the proceedings, but which was not a party to the Arkansas Settlement Agreement discussed below.
3 Note 4 to the Financial Statements " Commitments and Con-r tingencies" with respect to these matters.) Arkansas-1984 Rate Request Arkansas-1981 Rate Request On November 9,1984, the Company filed an apphcation with On May 1,1981, the Company filed an application with the the APSC requesting an annualincrease in Arkansas retail
- rates of approximately $139.7 million, later revised to $201.2 Arkansas Public Service Commission (APSC) to increase its million, above the then current level of rates. In addition, the Arkansas retail rates approximately $101.4 million annually. On March 1,1982, the APSC entered an order authorizing <.n esti-application included a proposed rate rider to be effective in the mated increase in retail rates of S26.2 million on an annual event the Company was required to make payments to MSE for
. basis which, after a rehearing in September 1982, was raised costs associated with Grand Gulf Unit 1 (Grand Gulf 1). The I to $29 million. In its March 1982 order, the APSC also required Federal Energy Regulatory Commission's (FERC) June 13,
) the Company to refund approximately S19.3 million to its Arkan- 1985 decision (June 13 Decision) allocated 36% of Grand Gulf 1 sas retail customers. The Company appealed to the Circuit caoacity and energy to the Company. At that time, the Com-5i Court of Pulaski County, Arkansas both the amount of the in- pany proposed a phase-in plan under which recovery of por-
- j. crease as well as the obligation to make the refunds. After a tions of any payments the Company was required to make
, ruling by the Court, the APSC approved a surcharge covenng associated with Grand Gulf 1 could be deferred. On September all issues except a $17.9 million unrecovered fuel cost issue. 9,1985, the APSC approved the terms of the Arkansas Settle-t The surcharge was implemented on February 1,1985, and is ment Agreement which resolved the issues in tims proceeding.
designed to collect S32.4 mi!! ion including interest over a period See Arkansas Settlement Agreement discussed oelow. (( p~ of 31 months. The amount of revenues to be collected under this surcharge was established in accordance with the court's Arkansas-Settlement Agreement On September 5,1985, the Company, together with the Staff, [i ruling and includes a reduction to such revenues of approxi-mately S4.8 million which was made in lieu of requiring a refund. the Arkansas Attorney General, other intervenors in the 1984 rate case described above, and Reynolds Metals Company On October 31,1985, the APSC approved an additional sur-(Reynolds), filed with the APSC a Joint Motion for Approval of a charge on the unrecovered fuel cost issue which was imple-Proposed Arkansas Settlement Agreement (Arkansas Settle-mented by the Company on November 1,1985, and is designed ment Agreement). The Arkansas Settlement Agreement pro-
!',- to collect S26.6 million including interest over a period of ~
posed to resolve all of the disputed issues in the rate case. A 31 months. The Company recorded S42.0 million of revenue hearing was held September 7,1985, and the APSC, on Sep-and $13.7 million in interest in 1985 as a result of the resolution tember 9,1985, entered an order accepting and adopting the I of these issues. Arkansas Settlement Agreement. Arkansas-Rate Investigation Under the terms of the Arkansas Settlement Agreement, the Company will variously retain, defer and recover differing por-p_ On August 24,1984, the APSC, in response to an APSC staff p (Staff) motion alleging ' hat the Company's rates were excessive, tions of the costs anociated with its 36% allocated share of the issued an order opening a proceeding to investigate the rea- capacity and energy from Grand Gulf 1 as follows: [, sonableness of the Company's rates. On April 3,1985, the 1.) Effective September 1,1985, the Company will retain and APSC entered an order in this proceeding which ordered the recover only through possible sales to third parties who .,e riot ) currently customers of the Company, or through sale', to the t Company to reduce Arkansas reta(i rates and abolished a ( previousfy authorized rate nder whicre would have provided for Company's retail customers priced at the Comparr, s avoided i an automatic increase in the Company's rates to recover reve- energy cost, a portion of the Arkansas retail allocation of the nues associated with the expi:ation of'certain arrangements costs associated with its 36% allocated share o' Grand Gulf 1 under which the Company at that time was selling 785 mega- (the " Retained Share"). The Retained Share (sti ted as a rvr-watts of capacity. This order was superseded by the Arkansas centage of MSE's share of Grand Gulf 1) ranges 5~a 132% in Settlement Agreemer.t as discussed below. year one to 7.92% in year nine and all succeeding years. In the
' event MSE subsequently enters into a settlement agreement Arkansas-Show Cause which results in a permanent reduction in the charges MSE 4 On August 31,1984, MSE filed suit against the APSC in the could otherwise recover from the Company under the June 13 I
United States District Court for the Eastem District of Arkansas Decision, such permanent reduction will first be applied to challenging on various grounds an order of the APSC directing reduce, on a dollar for dollar basis, the applicable Retained
-& the Company to appear and show cause why all contracts and Share.
T agreements made by it with respect to any obligations to pur. 2.) Effective September 9,1985 and terminating on August chase power from or to pay for construction and operation costs 31,1995, the Company will defer or inventory the Arkansas ; h '= of Grand Gulf should not be held to be void ab initio as a mat- ? ter of law because prior APSC approval had not been obtained. '_ After heanngs, the Court permanently enjoined the APSC from i E r 17 u
r; tail allocation of an additional portion of its 36% allocated Company's Arkansas retail customers earlier than April 1,1987, shara of Grand Gulf 1 costs (the " Inventory Share"). The costs subject to certa:n exceptions. deferred and accrued in the inventory Share will not be The Arkansas Settlement Agreement provides that should recovered from the Company's Arkansas retail customers until any other System operating company enter into a settlement September 1,1995 except under certain conditions. The Inven- agreement approved by the appropriate retail regulatory author-tory Sb o (stated as a percentage of MSE's share of Grand ity which provides that any such company would absorb a pro-Gulf 1) ranges from 14.88% in year one to 4.08% in year ten. portionately greater share of the costs associated with Grand The Company will be permitted to recover on a current basis Gulf 1 than that provided by the Arkansas Settlement Agree-the incremental cost of financing the deferral of the Inventory ment, the share of Grand Gulf 1 costs to be absorbed by the Sharm. Beginning September 1,1995, the Company will be Company will be correspondingly increased. allowed to include the balance of costs accumulated in the The Arkansas Settlement Agreement provides mechanisms inventory Ghare (which are accumulated during the period for addressing an adverse effect on costs recovered under the September 1,1985 through August 31,1995, and until such plan associated with a change in circumstances, including a time as these costs are reflected in Arkansas retail rates on a change in accounting standards. If proposed revisions to cur-current recovery basis) in its rate base for determining its rent accounting standards become effective and apply to the Arkansas retail revenue requirements. The Company will amor- Arkansas Settlement Agreement, the Company will attempt to tizo such accumulated costs on a level basis and recover them use these mechanisms to make appropriate revisions. (See through its retail rates over the remaining depreciable hfe of Note 4 to the Financial Statements " Commitments and Con-Grand Gulf 1, or such shorter period of time as the APSC may tingencies" regarding proposed amendments to Statement of ! subsequently determine to be appropriate. In the event MSE Financial Accounting Standards No. 71.) ' l should subsequently enter into a settlement agreement con- In addition to the rate matters covered by the Arkansas Set-taining an inventory or deferral plan which results in a reduction t!ement Agreement, the parties thereto, except the Company, in the charges MSE could otherwise recover from the Company agreed to take action voluntanly to dismiss without prejudice, under the June 13 Decision, such reduction due to an inventory terminate or withdraw their interventions in certain htigation and or deferral plan by MSE will first be applied, on a dollar for dollar regulatory proceedings. The Company, for its part, agreed to basis, to reduce the Inventory Share take action voluntanly to dismiss without prejudice or terminate 3.) On September 9,1985, the Company began recovery of certain other litigation conceming the APSC or other parties. All the Arkansas retail share of an additional portion of its 36% alto- parties, including the Company, further agreed to vigorously cated share of Grand Gulf 1 (the " Current Recovery Share") on pursue petitions for reheanng or judicial review of the June 13 a current basis. The Current Recovery Share (stated as a per- Decision. centage of MSE's share of Grand Gulf 1) varies from 1680% The Arkansas Settlement Agreement provided that it did not during year one to 28.08% in year eleven and all succeeding resolve on a permanent basis any issues with respect to alloca-y ars. A portion of Grand Gulf 1 costs to be recovered under tion or rate design and that a new docket was to be estabhshed the Current Recovery Share is to be phased in over a ten year by the APSC for the resolution of such issues by a final order to period, with the Company deferring recovery from customers of be issued on or before March 31,1986. As contemplated by 75% of the estimated first year cost associated with the Current the Arkansas Settlement Agreement, on December 17,1985, Recovery Share in year one,50% of such estimated first year the APSC entered an order establishing a new docket to deal costs in year two and 25% of such estimated first year costs in with the allocation and rate design of the Company's rates as year three and subsequently collecting these deferred amounts they affect commercial, retail and other customers. Hearings in y ars six through ten. Further, the Company will be permitted were held in March 1986 and the matter is pending to recover on a current basis the incremental cost of financing the deferred amounts. In addition to the recovery, deferral and retention of Grand The APSC order approving the Arkansas Settlement Agree-Gulf 1 costs, the Arkansas Settlement Agreement permitted the ment is being contested. On October 3,1985, a class action Company to increase its Arkansas retail rates, effective Sep. suit was filed in the Chancery Court of Pulaski County, Arkan-timber 9,1985, by $45.8 million. These rates reflect an excess sas against the Company and the APSC by an Arkansas retail capacity adjustment which denied the Company a current return customer purporting to represent himself, individually, and all on 969 megawatts of generating capacity, but allowed the Com. Arkansas taxpayers and ratepayers affected by the Arkansas pany to earn a full deferred return on the invertment in such Settlement Agreement. The complaint seeks, among other capacity. The Company will be permitted to recover the amount things, a declaratory judgment declaring the Arkansas Settle-capitalized and deferred, amortized on a level basis over a ten ment Agreement and the rate increase authorized thereby to ., y ar period, commencing on the date new rates are imple. be illegal and therefore null and void; ordering the APSC to mented in accordance with an APSC order in the Company's reconsider and rehear the Company's rate apphcation; ordering next application for a general retail rate increase or July 1,1987, the Company to account for and refund as credits on subse-whichever first occurs. quent billings amounts collected pursuant to the Arkansas Set-Commencing March 1,1986, the Company was permitted to tiement Agreement; and revoking the Company's franchise. At recover additional revenues from its Arkansas retail customers a prehminary hearing on October 15,1985, the Chancery Court to recover the revenue loss resulting from the termination of an concluded that the APSC appeared to have original jurisdiction agreement for the sale of capacity from the Company's White of the matter and deferred further action pending developments Bluff Steam Electric Station. in proceedings before the APSC as described below. In addition, the Arkansas Settlement Agreement provides Certain of the Company's Arkansas retail customers have, that no additional rate increases will become effective for the independently, filed pleadings with the APSC alleging, in essence, that the rates set in accordance with the Arkansas Settlement Agreement were net in compliance with applicable law. A coahtion of consumer c ganizations has filed similar 18
pleadings with the APSC. These pleadings are being consid- tendered by the Company and entered an order in the Com-ered separately by the APSC. These matters are penaing. pany's pending rate case authorizing the Company to file addi-On November 22,1985, a retail customer of the Company tional tanffs increasing its existing Missouri rate base schedules filed in the Circuit Court of Pulaski County, Arkansas, a petition in an aggregate amount approximately equal to the amount the seeking the issuance of an order of mandamus directing the District Court determined to be the Missouri Costs. The Com-Secretary of the APSC to file the customer's application pany considers the PSCM's order to have the effect of granting requesting a rehearing on the Arkansas Settlement Agreement, the Company a general interim increase in its current rates Motions to dismiss the proceeding and to intervene have been rather than a specific interim increase relating only to the Mis-filed by the APSC and the Company, respectively. A hearing on souri Costs. On March 13,1986, the Company filed with the the motions is set for March 24,1986 and a hearing on the District Court a motion stating the Company's position and its merits, if the proceedings are not dismissed, has been set for concem that the PSCM's order could result in rate treatment for l April 4,1986. The matter is pending. non-Grand Gulf costs which would be adverse to the Company i On November 25,1985, the Company announced that it had and that the PSCM's order is not in compliance with the March ' agreed with the other parties to the Arkansas Settlement 10,1986 order of the District Court. The Company asked the Agreement to issue refunds to certa % Arkansas customers for District Court to authorize it to implement tanffs as proposed by service rendered prior to September 9,1985, which was billed the PSCM and to collect the rates established thereunder at rates calculateo ~.nuant to the Arkansas Settlement Agree- without prejudice to its rights to question the PSCM's com-ment. Such refunds did ,ot have a material adverse effect on pliance with the District Court's March 10,1986 order and with-the Company's eamings. out prejudice to its rights to seek further relief from the District Court pending the issuance of the PSCM's final order in its Arkansas-Wholesale Settlement Agreement pending rate case. The matter is pending. Pursuant to a settlement agreement between the Company and its full requirement wholesale customers, wholesale rates Reynolds Metals Company have been agreed upon consistent with the Arkansas Settle- Revenues, including the recovery of fuel and purchased power ment Agreement discussed above. Such rates were appeoved costs, derived from a power supply contract with Reynolds con-by the FERC February 21,1986. One full requirement customer stituted approximately 4% of the Company's total operating negotiated a flat rate contract, which was approved by the revenues for the year ended December 31,1985. In August FERC December 24,1985,and became effective March 1,1986, 1985, Reynolds terminated the contract effective January 1, in lieu of the above rates. 1987. On September 26,1985, Reynolds announced that it w uld close its facilities in Arkansas for the production of Missouri-1985 Rate Re4uest primary aluminum. Under this contract, Reyrolds is obhgated to On June 7,1985, the Company filed an application with the continue to pay the Company monthly demand charges until Public Service Commission of Missouri (PSCM) for an annual
. termination of the contract. Such demand charges will aggre-increase in Missouri retail rates of approximately $5 0 millon gate approximately $24.5 million in 1986. The Company believes and an additional rate nder to provide approximately $12.2 termination of the contract will not have a material adverse million for costs associated with Grand Gulf 1. On September ettect on its future financiai condition.
18,1985, the Company filed a request with the PSCM for a $13.1 million interim retail rate increase and asked the PSCM Transmission Litigation to convene a settlement conference and to settle the entire The Company has been requested by City Water & Light Missouri rate case, including issues related to Grand Gulf 1, in Plant for the City of Jonesboro, Arkansas (CWL) and Farmers a manner consistent with the Arkansas Settlement Agreement. Electric Cooperative Corporation (FECC) to transmit bulk The PSCM, by order dated January 14,1986, denied the Com- power which CWL wishes to sell to FECC and FECC wishes to pany's interim rate request. Hearings began in February 1986 to buy. On February 24,1986, the Company filed with the FERC a consider the Company's request for permanent rate relief. The petition for an order declaring the Company's obligations and matter is pending. duties with respect to this request. The Company stated in its On February 4,1986, the Company filed a complaint in the petiton that its position is that, in accordance with the pro-United States District Court for the Westem District of Missouri visions of the Public Utility Regulatory Policies Act of 1978, it seeking, among other things, judgment deMring that the FERC has no obligations or duties with respect to this request. In has exclusive jurisdiction over the transactions approved by the early March, FECC and CWL filed suit against the Company in June 13 Decision; that, pursuant to the Federal Power Act and the United States District Court for the Eastem District of the United States Constitution, the PSCM has no jurisdiction to Arkansas seeking injunctive rehef and treble damages under inve:tigate the reasonableness of the FERC-ordered rates or to the Sherman Antitrust Act and the Clayton Antitrust Act based otherwise regulate those rates; and that the PSCM, as a matter upon the Company's refusal to comply with the request that it of federallaw, is required to permit the recovery of the Missouri transmit bulk power CWL wishes to sell to FECC. The plaintiffs allocated share of Grand Gulf 1 costs (Missouri Cost) incurred requested a heanng, to be held between March 20 and March under such rates. Hearings were held February 14,1986 for 31,1986, on their application for a preliminary injunction requir-preliminary and permanent injunctions allowing rates to recover ing the Company to provide such transmission service the Missouri Cost to take effect, subject to refund, pending a pending resolution of the issues by the Court and to file with final hearing before the Distnct Court. On March 10,1986, the the FERC a tanff for such transmission service equal to the District Court entered an order requinng the PSCM, pending reso- transmission rate on file for service to other municipalities, sub-tution of the Company's rate case descnbed in the immediately ject to review by the FERC, and refund of any charges found to preceding paragraph, to authorize the implementation of an intenm be excessive. The Company intends to vigorously assert all tanff designed to facilitate collection of the Missouri Cost. available defenses. These matters are pending On March 11,1986, the PSCM rejected such an intenm tanff l 19
3, income Taxes income tax expense (credit) consists of the following: 1985 1984 1983 (in fhousands) Current: Federal. .S 38,921 $ 75,725 $ 6,396 State. . 6,744 14,161 6.223 Total. 45,665 89,886 12.619 Deferred-net: Liberalized depreciation . 22,012 21,383 24,776 Deferred fuel cost. . . 4,978 (9,785) (7,994) Nuclear fuel disposal costs . - - 17,729 Nuclear reserve and related interest 6,429 (3,176) (171) Provision for estimated losses . (25,943) - - Deferred purchased power cost 36,835 - - Deferred excess capacity cost 6,879 - - Other. (2,039) (4,537) (4.653) Total . 49,151 3.885 29.687 investment tax credit adjustments-net . 12,598 30,698 _48,440 Recorded income tax expense . $107,414 $124,469 $90,746 Charged to operations . . S 95,955 $126,457 $98,831 Charged (credited) to other income . 11,459 (1,988) (8,085) ; Recorded income tax expense . . . .... .... 107,414 124,469 90,746 1 Income taxes applied against the debt component of AFDC . 1,664 6,001 9,190 Totalincome taxes. . $109,078 $130,470 g.936 Total income taxes differ from the amounts computed by applying the statutory Federal income tax rate to income before taxes. The reasons for the differences are as follows: 1985 1984 1983
% of % cf % of Pre-Tax Pre-Tax Pre-Tax Amount income Amount income Amount income Computed at statutory rate . ... $100,041 46.0 $123,204 46.0 $100,115 46.0 Incr:ases (reductions) in tax resulting from:
Allowance for funds used dunng construction. . . . (3,549) (1.6) (10,137) (3 8) (12,686) (5 8) State income taxes net of Federalincome tax effect . 6,899 3.2 8.339 3.1 6.086 2.8 Pension expense . 6,137 2.8 - - - - Other-net. (2,114) (1.0) 3.063 1.2 (2,769) (1.3) Recorded income tax expense. 107,414 49.4 124,469 46.5 90,746 41.7 income taxes applied against debt component of AFDC. , 1,664 O.4 6.001 1.1 9,190 2.4 Totalincome taxes. $_109,078 _49.8 $130,g0 J7.6 $ 99,936 44.1 Unused investment tax cred'ts at December 31,1985 Code or State law. During 1983, as a result of the nuclear fuel amounted to $40.0 million, which if not used will expire in disposal contract with the Department of Energy, disposal 1992 and 1993. costs for spent nuclear fuel became deductible for tax pur-Pursuant to an order of the Arkansas Public Service poses. In addition, the APSC approved normalization for Commission (APSC) dated March 1,1982, the Company ceased deferred purchased power cost per the Arkansas Settlement providing deferred taxes on certain timing differences which Agreement. wers previously normalized. However, the order requires Cumulative income tax timing differences for which the Company to continue providing deferred taxes on deferred income tax expense has not been provided are decommissioning costs of nuclear pfant and disposal costs $211.9 million, $202.5 million and $220.0 million in 1985, of nuclear fuel, and provides for continued normalization of 1984 and 1983, respectively. timing differences which are required by the Internal Revenue 20
l
- 4. Commitments and Contingencies Availability Agreement and Reallocation Agreement Construction The Company's construction program contemplates con- The Company, together with the other Svstem operating companies, are severally obligated to MSE under the Availabil-struction expenditures (excluding AFDC and nuclear fuel) of approximately $132 million in 1986 $166 million in 1987 and ity Agreement, as amended, in accordance with stated percen-
$173 million in 1988. Reflecting the Company s cost curtailment tages (the Company 17.1%, LP&L 26.9%, MP&L 31.3%, and NOPSI 24.7%) to make payments or subordinated advances program, these estimates were reduced from prior-year esti-mates by $74 million in 1986, $27 million in 1987 and $17 acequate to cover ail of the operating expenses, including de-million in 1988. preciation, of MSE. The System operating companies, including the Company, in November 1981 entered into a Reallocation Unit Power Sales Agreement D eement which would have allocated the capacity and and New System Agreement energy available to MSE from Grand Gulf to LP&L, MP&L, and On June 18,1982, Middle South Energy, Inc. (MSE) tendered NOPSI. These companies thus had agreed to severally assume for filing with the Federal Energy Regulatory Commission shares of 100% of the responsibilities and obligations of the (FERC), as an initial rate schedule, the Unit Power Sales Agree. Company with respect to Grand Gulf under the Availability ment under which MSE would sell from its 90% share of Grand Agreement, with the Company relinquishing its rights to the Gulf Nuclear Station (Grand Gulf), Unit 1 (Grand Gulf 1) and Unit capacity and energy from Grand Gulf. However, the June 13 2 (Grand Gulf 2) certain percentage allocations of capacity and Decision effectively superseded the Reallocation Agreement energy to Louisiana Power & Ught Company (LP&L), Mississippi insofar as it relates to Grand Gulf 1.
Power & Light Company (MP&L) and New Orleans Public Ser-vice Inc. (NOPSI). The rates and charges after commercial Grand Gulf 2 operation commenced were to be based on the cost of service
. As of December 31,1985 MSE had invested approximately of each unit. Various parties, ,ncluding the Arkansas Public $937 million in Grand Gulf 2, which is approximately 34% t om-i Service Commicsion (APSC), the Louisiana Pubhc Service plete based on the estimated man-hours needed to complete the unit. From late 1979 until September 1985, only a limited Commission, the Mississippi Public Service Commission amount of construction was performed on Grand Gulf 2. Follow-(MPSC), the Public Service Commission of Missouri and the ing a September 18,1985 order of the MPSC, MSE suspended City of New Orteans intervened in the proceedings, and some of these intervenors proposed, among other things, revised construction activities on Grand Gulf 2. MSE has determined to continue with full suspension of construction on Grand Gulf 2 allocations of capacity and energy to the System operating until further evaluations are made, which are estimated to be companies, including an allocation of capacity and energy to completed sometime in 1986, and to limit expenditures on the the Company. The Unit Power Sales Agreement, as approved unit to only those activities which are absolutely necessary for by the FERC on June 13,1985 (June 13 Decision), obligates the demobilization and suspension. MSE has indicated that before System operating companies to purchase from MSE, at MSEs a final decision is made, consideration will be given to various full cost of service, all of MSEs 90% share of the capacity and long-term economic factors and regulatory agency requirements energy from Grand Gulf 1 in accordance with the following per- applicabic to Grand Gulf 2.
centage allocations: the Company-36%; LP&L-14%; MP&L- If it is ultimately decided that Grand Gulf 2 should be can-33%; and NOPSI-17%. The Company's obligation for the non- celled, there can be no assurance that MSE would recover fuel portion of payments to MSE for Grand Gulf 1 related charges is approximately $30 million per month, the full amount of its investment in the unit. MSE has stated that it believes its investment has been prudent and will take all On Apnt 30,1982, the System operating companies tendered actions necessary before the FERC and the courts to attempt for filing with the FERC a new agreement (New System Agree- to recover its investment through rate relief. Such actions ment) which provides for the coordinated planning, construction and operation of its generation and transmission facilities. The would likely involve a filing with the FERC requesting recovery of its futi investment, ovei a period of years, through charges to June 13 Decision also addressed the New System Agreement and, generally, approved it as filed, with certain minor modifi- the System operating companies. As in the case of MSEs filings before the FERC for rate rehef necessary to recover Grand Gulf 1 ' cations-costs, such proceedings and related proceedings before state Various parties to both proceedings requested rehearings regulatory authorities with respect to retail rates for Grand Gulf and some parties, including the Company, requested a stay of 2 could be protracted and strongly contested on various implemeritation of the June 13 Decision. On August 2,1985. grounds, including imprudency. If MSEs investment in Grand the FERC issued an order denying all requests for a stay of its Gulf 2 were allocated to the Company and it was unable to Am 13 Decision. On September 3,1985, the FERC denied recover these costs from its customers, the Company's finan-several requests for rehearing of its August 2 order. On Septem- cial condition might be adversely affected. i ber 26,1985, the FERC issued an order denying all requests for a rehearing of the June 13 Decision. Various parties, includ- Proposed Amendments to Statement of ing the Company and MP&L, have appealed these orders and Financial Accounting Standards No. 71 some parties have filed motions for a stay of these orders with An accounting standard related specifically to pubhc utikties the United States Court of Appeals for the District of Columbia and certain other regulated enterpnses is promulgated by the Circuit. On Novemt;er 26,1985, the Court of Appeals dismissed Financial Accounting Standards Board (Board)in Statement of a petition for a stay of the June 13 Decision filed by one of Financial Accounting Standards No. 71 (FASB 71) The Board these parties. Briefs have t;een filed and oral arguments were has issued an Exposure Draft proposing certain amendments presented in March 1986. The matter is pending to FASB 71. The amendments, if adopted as proposed, would become effective for fiscal years beginning after December 15, 1986 with retroactive application for prior transactionc. The Dposure Draft includes proposed standards for the deferral of costs of new generating units for future recovery pursuant to a 21
phase-in plan. The Company's phase-in plan for recovery of its the Company, each acting in accordance with their share of the share of the costs of Grand Gulf 1 includes deferrals of cost for ownership of SFrs common stock, joined in, ratified, confirmed future recovery (see Note 2 to the Financial Statements " Rate and adopted the contract and the obligations of SFl thereunder. Matters") and complies with generally accepted accounting Under the contract with the joint venture, investment in the mine principles and the current requirements of FASB 71.The failure for leases, plant and equipment is the responsibility of the joint of deferral of costs pursuant to this plan to meet standards venture. In order to limit the joint venture's investment rights which may ultimately be included in any amendments to FASB and, hence, the amount to be paid to it as a component of the 71 could have a material adverse effect on the Company. The price of coal, the contract provided that SFIinvest any funds for Company is studying the Exposure Draft; however, until the plant and equipment in excess of a specified amount. The Board issues a new Statement of Financial Accounting Stan- Company, MP&L and Arkansas Electric Cooperative Corpora-dards, the Company cannot determine what will be the specific tion (AECC) as co-owners in part of ISES, have agreed to make impact of the final changes,if any. the investments rather than SFI and, accordingly, have reim-bursed SFl for investments previously made. Through Decem-Initiated Acts , , pan ad inesM2M mMon in nh On November 22,1985, and on January 24,1986, at the facilities and related capitalized assets. The Company has request of different individuals, the Arkansas Attorney General made the required investments on behalf of the other co-owners approved and certified the popular names and ballot titles to of ISES and is billing them monthly for the carrying cost of appear on petitions for separate initiated acts which, respec-tively, would revoke the Company's franchise and exclusive Te ent co danies of SFI have agreed to make loans to territory and would require the independent operation of all SFl to finance its fuel supply business under a loan agreement electric generating facilities in Arkansas under a public power dated January 1,1984, as amended January 1,1986, which authority and of electric distribution systems under county provides for SFI to borrow up to $75 million from its parent utility commissions. The proposed initiated acts would be voted companies through December 31,1986. As of December 31' on in the general election to be held on November 4,1986 if the 1985, the Company had loaned $6.1 million to SFl under this prerequisite number of signatures on appropriate ballots is ob- agreement and the Company's share of the unused loan com-
'ained. mitment was $17.4 million. Notes under this agreement mature SFl December 31,2011. In addition, the Company had loaned SFl The Company has a 35% interest in System Fuels, Inc. (SFI), $35 million under previous loan agreements. Notes mature in n jointly-owned subsidiary of the System operating companies. 2002 and 2008 under provisions of the previous loan agree-SFI operates on a non-profit basis for the purpose of planning ments.
and implementing programs for the procurement of fuel sup- SFl executed a contract, as amended in November 1982, for plies for the System operating companies; its costs are pri- the purchase of lignite to be used at a future lignite fueled manly recovered through charges for fuel delrvered. In power plant in Arkansas. The Company has guaranteed SFrs connection with certain of SFrs external borrowing arrange- performance and agreed to purchase SFrs share of the lignite. ments, SFis parent companies, including the Company, have AECC notified the Company that it desired to participate in covenanted and agreed, severally in accordance with their ownership of the plant. AECC assumed 50% of SFrs obligation rispective shares of ownership of SFrs common stock, that to purchase lignite. Delivery of lignite is tied to commercial they will take any and all action necessary to keep SFI in a operation of the plant, which may be delayed at the owner's sound financial condition and to place SFl in a position to dis- option until July 1995. The contract, including the guaranty, is charge, and to cause SFI to discharge, its obhgations under conditional upon receipt of regulatory approvals for the con-these arrangements. At December 31,1985, the total loan com- struction of the plant. mitment under these arrangements amounted to $210.0 million. The Company has agreed to purchase, over an approximate of which $189.1 million was outstanding. Also, SFrs parent 20-year period, which began in 1980,100 million tons of coal companies have made similar covenants and agreements in for use at the White Bluff Steam Electric Station presently in connection with long-term leases by SFI of oil storage and commercial operation. handling facilities and coal hopper cars. At December 31,1985, Stockholders' Suit the aggregate discounted value of these lease arrangements Dunng August and September 1985, five purported class was $78.5 million. In connection with SFrs $50 million secured action suits were filed by Middle South Utilities (MSU) sharm financing of nuclear fuel inventories, the Company, LP&L and holders in federal court purporting to cover classes who PUr-MSE have agreed to purchase such inventories financed pur-suant to this agreement in the event that SFI is unable to fulfill chased MSU common stock over varying periods of time. These complaints have been consolidated in the United States it; obligation under the borrowing arrangement. At December 31,1985, the inf al amount outstanding under this arrangement District Court for the Eastern District of Louisiana. The Con-solidated Amended and Supplemental Complaint alleges viola-was $27.8 million. tions of the disclosure requirements of the Secunties and SFl has contracted with a joint venture for a supply of coal Exchange Act of '934 and the Secunties Act of 1933, common from a mine in Wyoming which, based on estimated reserves, is law fraud and common law negligent misrepresentation in con-presently expected to provide the projected requirements of the Independence Steam Electric Station (ISES) for at least 30 nection with the financial condition of MSU and prays for com-pensatory and punitive damages, legal costs and fees and y;ars. By separate agreement, the Company has contracted to other proper relief against MSU, various other Middle South purchase the coal from SFI SFrs parent companies, including System ccmpanies, including the Company, certain officers and former officers of MSU, directors of MSU, MSU's outside auditors and certain underwnters of MSU common stock. While 22
the Company, MSU and the other defendants are reviewing the fuel expense and provisions to recover such costs have been allegations and plan to assert all available defenses thereto, or will be made in applications to regulatory commissions. SFI, they believe that MSU's disclosure of its financial condition was on behalf of the Company, has executed a contract with the in compliance with applicable Securities and Exchange Com- Department of Energy (DOE) whereby the DOE will furnish dis-mission requirements. However, the eventual outcome and posal service for the Company's spent nuclear fuel at a cost of impact on the Middle South System's financial condition cannot one mill per kilowatt-hour of net generation on or after April 7, be predicted at this time. 1983, plus a one-time fee for previously discharged fuel and in-Effect of Insolvency Defaults under SFl and MSE core bumed fuel prior to that date. The Company has selected Financing and Lease Agreements an option made available by the DOE to pay the one-time fee, Certain of SFI's financing agreements and leases may require plus interest accrued until date of payment, which will not be payments by the Company and the other System operating earlier than 1998. The Company, has recorded approximately companies, MSU or MSE in the event SFrs obligations under $62.7 milhon necessary for payment to the DOE for the dis-such documents are accelerated as a result of the insolvency posal of all spent nuclear fuel on hand at April 6,1983, includ-ing accrued interest. of a System operating company and SR is unable to meet these obligations or otherwise to satisfy these obligations in additicn to the recovery of costs associated with the dis-through the sale of the collateral securing such obligations. posal of spent nuclear fuel, the Company is recovering a total insolvency of any System operating company would cause of approximately $160 million for decommissioning costs for its acceleration of MSEs indebtedness unless waivers were two nuclear units. Based upon a study performed by the Com-obtained under certain of the agreements relating to MSEs pany, nuclear plant decommissioning costs are projected to be indebtedness. Given the substantial amount of these obliga- in excess of this amount. The Company will request recovery of tions, MSE, with its financial resources currently limited, would estimated increased costs in app'ications to its regulatory com-not be able to meet these obligations, if accelerated. Under missions-MSEs financing agreements, MSU, and not the System operat- Nuclear Liability insurance ing companies, would be responsible to pay MSEs accelerated The Company is a member-insured of Nuclear Electric Insur-obligations. MSU, with its financial resources currently limited, ance Limited (NEIL), a mutual insurer that provides its members including limitations on its ability to borrow funds or issue addi- with insurance coverage for certain costs of replacement tional shares of its common stock, would not be in a position to power incurred due to certain prolonged outages of nuclear satisfy MSEs accelerated obligations and/or provide the Com- units (NEIL 1). In addition, the Company is a member-insured pany with desired common stock equity. In addition, insolvency under NEIL ll which provides $550 million of coverage for prop-of one or more Middle South System companies would affect erty damage sustained by the insured in excess of $500 milhon terms of financing including an increase in cost of financing, or caused by radioactive contamination or other specified damage. could preclude financing for other Middle South System com- As a member-insured with this mutual, the Company is subject panies. Under these circumstances the viability of the Middle to assessments if losses exceed the accumulated funds avail-South System would be placed in jeopardy including the pos- able to the insurer. The present maximum assessment for sibility of bankruptcy filings for one or more of the insolvent incidents occurring during a policy year is approximately Middle South System companies. $23.0 milhon for the Company. Unit Power Purchase Agreement As of December 31,1985, the Price-Anderson Act (Act) The Company and MP&L are parties to a Unit Power Purchase limited the public liability of a licensee of a nuclear power plant to $650 million for a single nuclear incident. This Umit will Agreement for the sale to MP&L of the Company's 31.5% share of capacity and energy from Unit 2 of ISES for a five-year to-m increase by $5 milhon for each additional operating license which began in December 1984. issued by the Nuclear Regulatory Commission (NRC). Insurance for this exposure is provided by prbate insurance and an Nuclear Fuel indemnity agreement with the NRC. Every licensee of a nuclear The Company has agreements for the purchase and fabrica. Power plant is obligated, in the event of a nuclear incident [ tion of fuel assemblies for its nuclear plant, Arkanns Nuclear involving any commercial nuclear facihty in the United Statas
; One. The Company haa agreed to purchase from Kerr McGee that results in damages in excess of the povate insurance, to R Nuclear Corporation 0 843 milhon kg of uranium over the next pay retrospective assessments of up to $5 milkon per incident four years. The Company also has agreements with Babcock & for each licensed reactor it operates or up to a maximum per Wilcox Company and Combustion Engineering Company for reactor owned of $10 milhon in any calendar year. At Decerrcer the fabrication of fuel assemb'ies used at the plant. 31,1985, the Company had two hcensed reactors. The Act is The Company is a party to two nuclear fuel leases permitting scheduled to expire in August 1987, and Congress is consider-
't to lease, in the aggregate, up to a maximum of $150 million of ing several proposals to amend the Act. The Company is una-nuclear fuel. Two credit knes of $75 milhon each which support ble to predict what action Congress might ultimately take nuclear fuelleases have not been extended and will terminate regarding the Act and what effect such actions might have on December 1,1986 and December 1,1987, respectively, unless the Company.
present credit knes are extended or new knes are secured. Spent Nuclear Fuel and Decommissioning Costs Under the terms of its nuclear fuel leases, the Company is l l responsible for the disposal of spent nuclear fuel The Company ~ considers all costs incurred or to be incurred in the use and disposal of nuclear fuel to be proper components of nuclear 23
5, Leases The Company accounts for leases entered into prior to 1983 Statements of Financial Accounting Standards No.13 and on the same basis as that used by its regulatory authority in the No. 71 (FASB 71). Beginning in 1987, compliance with FASB 71 r' temaking process which determines the revenues utilized to for capital leases entered into prior to 1983 will require record-recover the lease costs. The Company accounts for capital ing the following assets and liabilities on the balance sheet: leases entered into subsequent to 1982 in accordance with 1985 1984 1983 (in thousands) Assets: Utility plant . . $108,387 $111,363 $115,549 Accumulated amortization. 18,109 17,535 16,742 Net leased property . . . $_90,278 $ 93,828 _$ 98.807 Uabilities: Noncurrent obligations under capitalleases, , S 87,224 $ 90.284 $ 94,882 Current obligations under capital leases: 1 Principal. . .. .S 3,054 $ 3,544 $ 3,925 ) Interest accrued . 4,780 4,598 4,4] Total . , , .S 7,834 $ 8,142
$ 8,344 Recording of such leases would not affect the amounts agreements which each allow the Company to lease nuclear reported as either expense or net income. fuel up to a maximum of $75 million. Lease payments, which At December 31,1985, there were noncancellable leases, are not included in the tabulations above, are based on nuclear presently accounted for as operating leases, with minimum fuel use. Both leases, unless sooner terminated by one of the rent:1 commitments as follows: parties, will continue until 20'3. Two credit lines supporting two (in thousands) nuclear fuelleases have not been extended and lines of $75
$ 21,005 million e ch will terminate December 1,1986 and December 1, 1986 ~
1987' 24,387 1987, unless present cred:t lines are extended or new lines are 1988' 25,004 secured. The unrecovered cost base of the leases at Decem-26,354 ber 31,1985,1984 and 1983 was $133,764,000, $136,068,000 1989 " ~ ' 25,630 and $138,708.000, respectNely. Nuclear fuel expense, exclusive 1990 For years thereafter 187,209 of negative salvage, of $66.299,000 in 1985, $72,667,000 in 1984 and $49,687,000 in 1983 was charged to operations. Total . , $309,589 Rental expense for capital and operating leases (excluding nuclear fuel) amounted to approximately $22,315,000, Not reflected in the schedules above, but which are subject $21,949,000 and $20,476,000 in 1985,1984 and 1983, respec-to FASB 71 requirements described above, are two lease tively. 6 Postretirement Benefits The Company has various postretirement plans covering with the Employment Retirement income Security Act of 1974 substantially all of its employees. and a special early retirement program, which was offered for a Pension plans are administered by a trustee who is respon- limited period in 1985, to certain employees of the Company. sible for pension payments to retired employees. Various in-vestment managers have responsibility for management of the plans' assets. In addition, an independent actuary performs the January 1, necessary actuarial valuations for the individual company plans. 1985 1984 Total pension expense of the Company for 1985,1984, and 1983 was $6,317,000,59,555,000 and $7,294.000, respectively. (in thousands) Actuarial present value of The comparison of the actuarial present values of accumu-accumulated pension plan lated pension plan benefits and plan net assets for the Com-pany's defined benefit plans is presented below. ben its. The decrease in 1985 pension expense compared with 1984 4,661 Nonvested ' - - --5,170 results primarily from changes in actuarial assumptions and in -- actuarial cost methods in the Company's major pension plan. Total , S 98,822 $ 89,179 These changes reduced 1985 pension expense approximately Net assets available for
$6.7 mi!! ion. This decrease was offset by approximately $2.1 pension benefits . $151,982 $149,349 million due to amendments effective January 1,1985, to comply === =
24
The assumed rate of return used in determining the actuarial benefits for retired employees is not separable from the cost of present value of accumulated plan benefits was 9%. The providing benefits for the active employees. The total cost of Company also provides certain health care and life insurance providing these benefits and the average number of active and benefits for retired employees. Substantially all employees may retired employees for the last three fiscal years were as follows: become eligible for these benefits if they reach retirement age while still working for the Company. These benefits and similiar benefits for active employees are provided through various 1985 1984 1983 means including payments of premiums to an insurance com- Total cost of health pany and/or accruals for self insurance policies managed by an care and life insur-insurance company. The Company recognizes the cost of pro- ance (in thousands) . . $6,844 $6,501 $4,636 viding these benefits by expensing the payments made to the Average active employees . 5,349 5,319 5,255 insurance company or accruing the cost as recommended by Average retired the managing insurance company. The cost of providing these employees . 1,007 941 888
- 7. Lines of Credit and Short-Term Borrowings At December 31,1985, the Company had $59.0 million in gregate amount of the unused lines of credit with Arkansas lines of credit with Arkansas banks. Additionally, the Company banks at the end of 1985 and 1984 was $59.0 million and $70.2 participates with certain other companies of the Middle South n%n, respectively. At the end of 1984, the Company partici-System in a money pool arrangement whereby those com- pated with the other System operating companies in $180 panies with available funds make short-term loans to other million of consolidated lines of credit with banks outside the companies in the Middle South System having short-term Middle South System service area. At December 31,1984, borrowing requirements. The Company may borrow from these $180 million was available under these consolidated lines of sources subject only to its maximum authorized level of short- credit. At the end of 1985, these non-temtorial bank lines of term borrowings The Company has received authorization from cr edit were no longer available to the Company and no addi-the Securities and Exchange Commission under the Public U*il- tional non territorial bank lines had been established. The short-ity Holding Company Act of 1935 to have outstanding at any term borrowings and the applicable interest rates (determined one time short-term borrowings aggregating not more than by drviding applicable interest expense by the average amount 10% of the Company's capitalization or $233 7 million. Tne ag- borrowed) for the Company were as follows:
1985 1984 1983 (in thousands) Maximum borrowing. . $57,000 $15,000 $31,000 Yzar-end borrowing . - - - Average borrowing: Bank loans . . $23,660 $ 176 $ 977 Associated companies. -
$ 1,002 $10,793 Average interest rate during the period:
Bank loans . 9.56 % 11.07% 10.31 % Associated companies. - 10.22% 9.91% Compensating and working balances at end of period. - - -
- 8. Retained Earnings The indenture relating to the Company's long-term debt In light of the need to conserve cash and in view of the weak-and provisions of the articles of incorporation relating to the ened financial condition of the Company stemming from state Company's preferred stock provide for restrictions on the pay- regulators' delays in approving rate increases, the Company ('
ment of cash dividends on common stock. As of December 31, determined not to declaro third and fourth quarter dividends onits 1985, all retained eamings were free from such restrictions. common stock. 25 hu ... .
- 0. Preferred and Common Stock Pr:ferred stock outstanding at December 31,1985 and 1984 consisted of the following:
Current Shares Shares Outstanding _ Call Price Cumulative, $100 Par Value Authorized 1985 1984 Per Share Without sinking fund: 4.32% series . . 70,000 70,000 70,000 $103.647 4.72% series , 93,500 93,500 93.500 107.00 4.56% series . 75,000 75,000 75,000 102.83 4.56% 1965 series . . 75,000 75,000 75,000 102.50 6.08% series . 100,000 100,000 100.000 102.83 7.32% series . 100,000 100,000 100,000 103.17 7.80% series . 150,000 150,000 150.000 105.20 7.40% series . 200,000 200,000 200,000 104.65 7.88% series . 150,000 150,000 150,000 104.97 Total. 1,013,500 1,0_13,500 1.013_,500 With sinking fund *: 10.60% series . 129,892 129,892 135,937 106.74 11.04% series . 277.572 277,572 286,817 107.02 Total. 407,464 _4_0_7,464 _ 422,814 Unissued. 2,386,500 Total, $100 Par Value . 3,807,464
====
Cumulative, $25 Par Value Without sinking fund: 8.84% series . 400.000 400,000 400,000 27.66 10.40% series . 600,000 600,000 000,000 27.95 Total. 1,000.000 1,000,000 1,000,000
' '~
With sinking fund *: 9.92% series . 1,375,521 1,375,521 1,433,621 27.56 13.28% series . 1,797.626 1,797,626 1,811.626 29.05 Total. . 3,173,147 3_,1_73,1_47 3.245_,247 Unissued. 5,400,000 Total, $25 Par Value . 9,573 447 Without sinking fund: Stated at $100 a share . . $101,350 $101,350 Stated at $25 a share . 25,000 25,000 Premium. . . 540 540 Total preferred stock and premium, without sinking fund . S126,890 $126.690 With sinking fund: Stated at $100 a share . S 40,746 $ 42,281 Stated at $25 a share . 79,329 81,131 Premium. 73_7_ _ _7_58 Total preferred stock and premium, with sinking fund . $120,812 $124,170 The changes in the number of shares of common and preferred stock outstanding in 1985,1984 and 1983 were: _C_o m mon _ Stock _ Preferr.ed St_ock_. _ Shares Sold . Shares. Sold (Red _eem.ed).
$100 Par $25 Par 1985. -
(15,350) (72,100) 1984. , (32,015) (260,112) 1983. 5,200,000 (48,180) (94,281)
*These series are to be returedin fuit through the operation of sinkong funds The 9 92% senes, to 60% senes, II 04% senes and 13 28% senes are being redeemedeach year at the rate of 80.000, t 0,000,20.000 and 100,000 shares. respectsvely In addstron. the Company has the non-cumula tove option to redeem an additional take amount of satd shares each year.
26 -i
- 12. Long Term Debt l Long-term debt outstanding consisted of the following:
1985 1984 (in thousands) FIRST MORTGAGE BONDS: 3-3/8% series due 1985. .$ -
$ 18,000 16-1/8% series due 1986. 70,000 70,000 5-1/2% series due 1988. 373 418 17-3/8% series due 1988. 75,000 75,000 5-5/8% series due 1990. 900 1,000 4-7/8% series due 1991. 12,000 12,000 16-1/2% series due 1991. 80,000 80,000 4 3/8% series due 1993. 15,000 15,000 9-3/8% series due 1993. 5,040 5,460 4-5/8% series due 1995. 25,000 25,000 5-3/4% series due 1996. 25,000 25,000 6-1/4% series due 1996. 2,560 2,760 5-7/8% series due 1997. 30,000 30,000 8-3/4% series due 1998. 7,800 8,200 7-3/8% seties due 1998. 15,000 15,000 9-1/4% series due 1999. 25,000 25.000 9-5/8% series due 2000. . 25,000 25.000 9-3/4% series due 2000. 3,600 3.800 7-5/8% series due 2001. 30,000 30,000 8 % series due 2001. 30,000 30,000 7-3/4% series due 2002. 35,000 35,000 7-1/2% series due 2002. .
15,000 15,000 8 % series due 2003. 40,000 40,000 8-1/8% series due 2003. 40,000 40,000 { 10-1/2% series due 2004 40,000 40,000 i 10-1/8% series due 2005. 40,000 40,000 9-1/8% series due 2007. 75,000 75,000 9-7/8% series due 2008. 75,000 75,000 101/4% series due 2009. 60,000 60,000 13-3/8% series due 2012. 75,000 75,000 i 13-1/4% series due 2013. 25,000 25,000 141/8% series due 2014 . 100,000 100.000 TOTAL FIRST MORTGAGE BONDS. .,1.097,273 1,116,638 INSTALLMENT PURCHASE CONTRACTS: Pope County, Arkansas; due 1986 to 2015 at rates ranging from 71/4% to 11%. . . . . . . 140,755* 20,800 Jefferson County, Arkansas; due 1986 to 2008 at rates ranging from 6-1/8% to 10%. 70,625 71,645 Independence County, Arkansas; due 2013. at rate of 11-1/8%. ....., 45,000 45,000 Less: Amount held in construction funds. 1,904 65 TOTAL INSTALLMENT PURCHASE CONTRACTS . , 254,476 137,380 LONG-TERM OBLIGATION-Department of Energy (Note 4). . 62,681 57,008 UNAMORTIZED PREMlUM AND DISCOUNT ON DEBT-NET. . (6,566) (4.200) TO TA L . . . . . . . . . . . . . . . . . . . . . . . 1,407,864 1,307,717 LESS: CURRENTLY MATURING PORTION . 7_2,8_70 21,2_10 LONG TERM DEBT EXCLUDING AMOUNT DUE WITHIN ONE YEAR . . $1,334,994 $1,286,50]
* $ 120 milhon t 1% Pope County Arkansas due December 2015 issued December 1985 are secured by $ 128 8 million 0% hrst Mortgage Bonds.
27
At December 31,1985, the sinking fund requirements and maturities for long-term debt for the years 1986 through 1990 are as follows: Cash Sinking Fund Sinking Fund
- Matunties" (in thousands) 1986. $1,365 $7,838 $70,725 1987,, , 1,365 7,718 810 1988. 1,320 8,513 76,148 1989. . 1,320 8,688 925 1990. 1,390 8,688 1,425
- These annualsinwng rund requirements may be met bycorrutocarron orproperty additions at a rate of 167% of such requirementsu
** These maturitres do not rettect 30.8 million pollutnan control revenue bonds whoch are subject to redemption at the option or the holders or such bonds at a redemption once of 100%
- 11. Transactions With Associated Companies vices from Middle South Services, Inc.
The Company buys from and sells electricity to the Operating revenues include revenues from sales to operating companies of Middle South Utilities,Inc.,its associated companies amounting to $262.7 million in 1985, parent, under rate schedules filed with the Federal Energy $286.8 million in 1984 and $305.5 million in 1933. Operating Regulatory Commission. The Company also purchases capacity expenses include charges from affiliates for fuel cost, and energy from Middle South Energy's Grand Gulf Nuclear purchased power, and technical and advisory services Station, Unit 1. In addition, the Company purchases fuel from totaling $244.3 million in 1985, $48.1 million in 1984 and System Fuels, Inc., and receives technical and advisory ser- $34.8 million in 1983.
- 12. Consolidated Quarterly Results (Unaudited)
Operating results for the four quarters of 1985 and 1984 were as follows (in thousands): Quarter ended 1985 Marc.h June September December Operating Pevenue . . $327,049 $307,742 $413,451 $316,544 Operating income. , 76,358 64,539 64,470 11,422 48,016 33,996 37,797 (9,741) Net income (Loss) . 1984
$315,704 $317,149 $387,468 $287,362 Operating Revenue .
57,867 51,994 90,356 41,969 Operating locome. 37,307 27,389 64.409 14,262 Net income. , The business of the Company is subject to seasonal without concurrent rates in place to recover associated fluctuations with the peak period occurring during the expenses. summer months. Accordingly, eamings information for any The fourth quarter of 1985 includes the effect of $52.7 million three-month period should not be considered as a basis for provision for estimated losses recorded in December 1985 estimating the results for a full year. associated primanly with engineering and design costs and The first quarter of 1985 includes the effect of $29.7 million of estimated liabilities associated with certain planned future fossil revenues and interest associated with the partial settlement generating facilities, offset by $24 6 million of revenues and of the Company's 1981 Arkansas retail rate case. The reduction interest associated with the final settlement of the Company's in net income for the third quarter of 1985 is the result of Grand 1981 Arkansas retail rate case. Gulf 1 being placed in commercial operation on July 1,1985 28
- 13. Effects of Inflation on Operations (Unaudited)
The following supplementary information about the and Changing Prices " as amended by Statement of Financial effects of changing prices on the Company is provided in Accounting Standards No. 82. It should be viewed as an accordance with the requirements of Statement of Financial estimate of the effect of changing prices, rather than a precise Accounting Standards No. 33. " Financial Reporting measure. STATEMENT OF INCOME FROM OPERATIONS AND OTHER FINANCIAL DATA ADJUSTED FOR EFFECTS OF CHANGING PRICES FOR THE YEAR ENDED DECEMBER 31,1985 (in thousands) l Adjusted For l As Reported in Changes in The Financial Specific Prices Statements (Current Costs) Revenues * $1.364,786 $1,364,786 Operating expenses (excluding depreciation)* 1,038,311 1,038,311 Depreciation . 109,686 215.322 Total operating expenses . 1,147,997 1,253,633 Operating incorre . 216,789 111,153 Other income * ... 34,869 34,869 Int: rest and other charges
- 141,590 141,590 Income from operations (excluding adjustment to net r:coverable cost) . $ 110,068 $ _4,432 Incr:ase in specific prices (current costs) of property, plant and equipment held during the year" ... $ 77,521 Adjustment to net recoverable cost. . 120,523 Effect of increase in general price level . (192,822)
Excess (deficiency) of increase in specific prices, after adjustment to net recoverable cost, over increase in general price level , 5,222 Gains from decline in purchasing power of net amounts owed. 73.295 Nst . $ 78,517
= = ===
- Assurn2d to be on " average for the year" dollars and thus are not restated
- At Deczmber 31,1985, current cost of property, plant. and equipment. not at accumulated depreciation, was $5,2 t9.725.000 whrte histortcal cost or net cost recovsrable through deprecuation was $2,746.294.000 29
FIVE-YEAR COMPARISONS OF SELECTED SUPPLEMENTARY FINANCIAL DATA ADJUSTED FOR EFFECTS OF CHANGING PRICES (in thousands of average 1985 dollars) Years ended December 31, 1985 1984 1983 1982 1981 Operating revenues . . $1,364,786 $1,354,341 $1,302,346 51,165.919 51,201,225 Current cost Information: Income from operations (excluding adjustment to net recoverable cost) . $ 4,432 S 44.689 5 26,724 5 14,198 $ 14.882 Excess (deficiency) of increase in specific pnces after adjustment to net recoverable cost, over increase in general price level . S 5,222 S (1,2%) $ 30.733 $ 19.021 S (114.298) Net assets at year-end at net recoverable cost. $ 732,361 S 735.704 5 765.907 5 728,447 5 675,669 Gsneralinformation: Gain from declina in purchasing power of net amounts owed S 73,295 $ 75,973 5 61.246 5 61.030 $ 151,099 Average consumer price index . 322,2 311.1 298 4 289 1 272.4 Current cost amounts reflect the changes in specific pnces subject allow only the histoncal cost of plant to be recovered of property, plant and equipment from the year of acquisition in revenues as depreciation. Therefore, the excess cost of plant to the present. The current costs of property, plant and is not presently recoverable in rates. This excess (deficiency) is equipment, which represent the estimated costs of replacing reflected as an adjustment to net recoverable cost. While the existing plant assets, are determined by applying the rate-making process gives no reccgnition to the current cost Handy-Whitman index of Public Utility Construction Costs of replacing property, plant, and equipment, the Company (HWI) to the cost of the surviving plant by year of acquisition. believes, based on past expenences, that it will be allowed to Land and certain other plant assets which are not included in eam on the increased cost of its net investment when the HWI were converted using the Consumer Pnce index for replacement of facilities actually occurs. all Urban Consumers (CPI-U). To property reflect the economics of rate regulation in the The current year's depreciation expense on the current Statement of Income from Operations presented above, the cost amounts of property, plant and equipment was adjustment of net property, plant and equipment to net determined by applying the Company's depreciation rates to recoverable cost is adjusted by the gain from the decline in the indexed amounts. purchasing power of net amounts owed. Dunng a penod of Fuel inventories, the cost of fuel used in generation, and gas inflation, holders of monetary assets suffer a loss of general purchased for resale have not been restated from their purchasing power while holders of monetary liabilities histoncal cost in nominal dollars. Regulation limits the expenence a gain. The gain from the decline in purchasing recovery of fuel and purchased gas costs to actual costs power of net amounts owed is pnmanly attnbutable to the incurred through the operation of adjustment clauses or substantial amount of debt which has been used to finance adjustments in basic rate schedules. For this reason, fuel property, plant and equipment. Since the depreciation on this inventories are effectively monetary assets. plant is limited to the recovery of histoncal costs, the As prescobed in Statement of Financial Accotnting Company does not have the opportunity to realize a holding Standards No. 33, income taxes were not adjusted. gain on debt and is limited to recovery only of the embedded The regulatory commissions to which the Company is cost of debt capital 1 3o
Arkcnsas Power & Light Company Officors Jsrry L. Maulden Cecil L. Alexander Marshall Pendergrass President and Chief Executive Officer Vice President, Public Affairs Vice President, Engineering Age 49 Age 50 Age 40 Michaal B. Bemis Robert A. Allen M.W. Rice Executive Vice President, Chief Financial Vice President Customer Services Vice President, System and Administrative Officer. Secretary Age 64 Planning and Operations and Assistant Treasurer Kenneth R. Breeden Age 58 Age 39 Vice President, Marketing W.R. Southern Jack L. King Age 37 Vice President Administrative Services Executive Vice President and Gene Campbell Age 54 Chief Operating Officer Vice President, Nuclear Operations Henry L. Warren Age 46 Age 45 Vice President and Chariss L. Steel John J. Harton Assistant to the President . Executive Vice President and Vice President. Treasurer and Age 45 ! Chief Public Affairs Officer Assistant Secretary Louis N. Burgess Age 62 Age 44 Assistant Vice President John M. Griffin Charles L. Kelly Age 52 l Senior Vice President, Generation, Vice President, Corporate Shirley A. Hunter Transmission and Engineenng Communications Assistant Secretary
, Age 41 Age 49 Age 38 l
d i Company Directory i Transfar Agents for Preferred Stock- Union National Bank of Little Rock 1 Union National Plaza Uttle Rock, Arkansas 72201 First Commercial Bank
. Post O'f ce Box 1471 Little Rock, Arkansas 72203 ! Registrar of Preferred Stock- First Commercial Bank i Post Office Box 1471 i Uttle Rock, Arkansas 72203 l Certified Public Accountants- Deloitte Haskins & Sells One Shell Square l New Orleans, Louisiana 70139 Executive Offices- Arkansas Power & Ught Company First Commercial Building Capitol and Broadway Streets Little Rock, Arkansas 72201
{ (501)371-4000 Associated Natural Gas Company 401 West Park Street Arkansas Power & Light Company I Blytheville, Arkansas 72315 Electric System and Service Area (501)762-3600 Arkansas Power & Ught Company owns electric facilit es in 65 of Arkansas' 75 counties and in 12 of Missoun's 114 countes At December 31,1985, the Annual Meeting- Third Wednesday of May Company fumished retail electnc service in 325 Arkansas and Missoon incorporated municipalities 4 AP&L also provides power at wholesale to eight Ar-1 Middle South System's 1985 Annual Report to the Secunties and Exchange kansas and Missoun municipalitms and in Arkansas
, Commission on Form 10-K, which includes the Company is available to any to two rural electnc cooperatives and one assocla-stockholder upon request, without charge. Persons interested in obtaining a tion of rural electnc cooperatives ! copy should contact Mr Michael B Bemis. Executrve Vice President, at the AP&Us sy tem is interconnected with and oper-address below ated as part of the Middfo South Utilities System.
whech supplies the power requirements of more than ARKANSAS POWER & LIGHT COMPANY t 6 million customers in a 92.000 square-mile area of Post Office Box 551 Arkansas. Louisiana. Mississippi and southeast Mis-Lttle Rock, Arkansas 72203 soon j 31
Arkansas Power & Light Company Ton Years of Progross/ Financial (Consolidated)1 l 1985 l (in thousands of dollars) Capitalization and Capitalization Ratios uiums a couns Selected Financial Data: Operating revenues $1,364,786 3000 Net income 110,068 l l l comr m es, y Total asseis. 3,307,882 2500 ne+eueo 4 l - Long-term debt. . 1,334,994 emh l Preferred stock, with sinking fund 120,812 2000 --- --- Capitalization (end of period): Preferred stock and premium. $ 247,702 Common stock and paid-in capital. 694,764 1500 Retained earnings. 49,417 j Total. 991,883 1000 Long-term debt: . First mortgage bonds2. ... 1,019,342 i 500 Installment purchase contracts 2 252,971
- Long-term obligations-DOE 3 62,681 i o Total. 1,334,994 i 1977 79 '81 '83 '84 1985 Total capitalization $_2,326,877
, Annual Payment Requirements: J Interest on:
- Utility Plant First mortgage bonds . $ 121,772 l uium a couns Installment purchase contracts. 24,704 1 Dividends on preferred stock. 22,864 ,
4000 , ,
. . ^ ~
Utility Plant (end of period): i I row uw, n,, i Plant completed. $3,478,274 3500 - w um see f- Construction work in progress. l 92,563 i Nuclear fuelin excess of fuelleases.
~
i 3000 -- I - _ _ 35,68_3 ; , Total utility plant. 3,606,520 l 2500 - -- - -- Less-accumulated depreciation . _ 860,226 Net utility plant . $ 2,7_46,2_94 2000
~
lncome Statement: 1500 Operating revenues $1,364,7_86 , 1000 Operating expenses: Fuel . 328,088 500 Purchased power-net 241,805 o Gas purchased for resale . 35,816 ! 1976 *77 78 79 '80 '81 '82 '83 '84 1985 Payroll-operation and 3 maintenanca . 102,832 l ' i Other operation and l maintenance . 196,212 , Depreciation . 109,686 Net income Taxes. 133,558 uwoNs & couAns Tdal. IMd9i
~
.l. _ [ _I _ _ _ 1 1
' Operating income . [][216,789
.~ ~,.. r. ~ . Other income and deductions-net 125 L ;;"",- ] ] --
(excluding AFDC4) . 28,871 < j - - Interest and other charges: j 100 _ _. _ ___ _I interest on long term debt. 138,752 l Other interest-net of debt premium. 7,310 ! 75 - - Total (excluding AFDC4) . _ 1_46,062 , Income from revenues . . .. . 99,598
- 50 Non cash income from AFDC4... 10,470 i
income from accounting change 5 _ 25 Net income s}} 110,o68 1 On January 1 1981, Arnansas Poeer & Lught Company at twed Athansas M ssouru Power 1 76 '77 '78 79 '80 '81 '82 83 84 19 % ca 'a
- Sa 5 *mS " '
? recludes currentry mar unny potroon 3 rhM -Depar* ment of f nergt 4 AFOC- Auveeve for funds used during constructuon 5 Cumularrve e?rectla January f.1916 of change m aucun!,nq tot tuelcosts 32 i l
1984 1983 1982 1981 1980 1979 1978 1977 1976 l
$1.307,683 $1,206,145 $1,046,143 $1,015.561 $ 750,497 $ 582.610 $ 553.605 $ 535.298 $ 396,597 143,367 126,896 107,372 96,140 65,230 82,404 86,014 69,305 46,963 3,060,817 2,859.517 2.669,417 2,474,249 2,147,983 1,940,643 1,693.906 1,562,999 1,421,940 1,286,507 1,195,738 1,127,540 993.163 848,667 819,716 749,262 667,484 591,382 124,170 133.931 141,138 144,120 147,065 100,518 60,063 60,063 60,063 $ 251,060 $ 260,821 $ 268,028 $ 271,010 $ 273,955 $ 227,408 $ 171,772 $ 171,772 $ 171,772 694,305 693,297 627,709 547,185 458,569 427,960 397,960 382,960 367,960 26.101 28,158 33,365 43,134 54,700 86,333 78,462 54,261 39.040 971,466 982,276 929.102 861,329 741,701 648,194
_ _7_8_7 224 _ _6_08,993 _ 578,772 1,093,063 1,014,797 1,000,255 849,585 765,430 763,549 709,549 642,979 575,184 135,534 131,541 127,285 143.578 83,237 56,167 39,713 24,505 16,198 57,908 49,400 1,286.507 1,195,738 _1.,12_7.540 993,163 , _ _848,6_67 _ 819,716___ _ 749,2_62 _ _ 667_,484 591,382
$2.257,973 $2,178,014 $2,056,642 $1,854,492 $1,635,891 $1,561,417 $1.397,456 $1,276.477 $1,170,154 $ 122,494 $ 108,727 $ 105,568 $ 82,986 $ 73,551 $ 62,436 $ 56,536 $ 49,364 $ 42,837 11,595 11,688 10,386 14.016 6,593 4,980 4,980 4,103 1,224 23.222 24,366 25,131 25,456 25,778 19,548 14.020 14,020 14.020 $3,307,908 $2.910,470 $2.623,319 $2,546,046 $2,133,704 $1,231,832 $1,178,601 $1,139,511 $1,111,119 105,762 306,398 364,252 255,468 282,376 980,054 785.684 505,669 610.557 27,32? 24,979 16,869 10.214 7.151 12,747 4,562 3,440,991 3,241,847 3,004,440 2,811,728 2,423,231 2,211,886 1,964,285 1,762,81 d 1,621,350 , 766.537 679,232 605,404 532,261 417,435_ _ 364,447 331,231 297,464 _ _2_65,099 $2.674,454 $2,562,615 $2,399,036 $2,279,467 $2,005,796 $1,847,439 $1,633,054 $1,465,351 $1,356,251 $1,307 683 $1,206,145 $1,046,143 $1,015.561 $ 75_0,497__ $ 582,610 $ 553,605 $_535,298_$_396,597 338,429 322,658 262,604 307,213 237,346 174,667 167,681 169,890 107,213 133,964 166,126 178,841 141,316 154,126 171,425 120,804 114,225 107,983 44,894 44,150 40,986 30,637 - - - - -
97,659 87,210 77,566 67,897 49,774 40,607 35,400 29,448 26.626 191,825 150.459 109,500 132,862 100,700 50,994 55,478 53,014 31,224 97,451 92,621 84,194 77,923 59,574 39,708 38,365 36,768 35,025 l 161,275 131,644 101,146 90,530 _ _ _ _54,033 _ _ 34,948 _ _ 55,693 , 6,2,753 _ _ 36,0_22 l 1,065,497 994.868 854,837 848,378 655,553 512,349 473.421 466,098 344,093 ' 242,186 211.277 191,306 167,183 94,944 70,261 80,184 69,200 52,504 11.204 14,457 12,687 17,497 17,468 23,627 16,986 12.466 10.328 126,974 119,466 108,557 90,755 67,036 67,001 56,949 45,047 43,152 7,376 7,152 11,272 21,038 17,649 10,296 4,469 3,980 2,703 134,350 126.618 119,829 111,793 84,685 77,387 61,418 49,027 45,855 119,040 99,116 84,164 72,887 27,727 16,501 35,752 32,639 16,977 24,327 27.780 23,208 23,253 37,503 65,903 50,262 36,666 26,445
~~ '~
~
$ 82.104 T 86 14 T l9
~
$ 143 67 $ 126 96 $ IO7, 727 76 10' $ 65 30 $' 6,
Arkansas Power & Light Company Ton Yocrs of Progress / Operating (Electric)1 1985 Electric Operating Revenues Averageesidential Annual Kilowatt Customers Hour Use (thousands ci dollars): N UsANDS W n "
' 5' Residential. . S 356,492 I I I I Commercial . 202,856 AP&L Averg lndustrial-O!uminum processing . 56,930 12.5 -
Natal Ae'* 242,247 i IndustriaWcther.
- I Govemment and municipal. 19,213 10.0 - '
877,738 Total from retail customers.
! Public utilities . 405,767 j
7.5 Miscellaneous revenues . 33,292 i Total electric operating revenues . $1,316,797 i 5.0 s Electric sales (millions of kilowatt hours): 2.5 Residential. 4,742 Commercial. 3,269 0 Industrial-aluminum processing . 1,676 1976 77 78 79 '80 '81 '82 '83 '84 1985 Industrial-other. 4,548 Government and municipal . , _32_8
' Total to retail cu;tomers . 14,563 j l Pubhc utilities . 11,999 Kilowatt Hour Sales Total energy sold. _ _ _ 2_6,5 6_2_ ! To Retail menC,,us,tomers ! 20 0 Number of Customers (end of year):
Residential. 487,275 j 175 - Commercial . 59,546 l Industrial-aluminum processing . 1 15 0 -
; industrial-other. 16,465.
I 12 5 Government and municipal . 1,137 Total retail customers. 564,424 10 0 17 I j Public utilities . 7.5 Total customers . . 564,441_ 50 Electric Energy (millions of kilowatt hours):
! Source and disposition 2.5 Generated-rict station output:
O Coal . 10,853 1978 '77 78 79 '80 '81 '82 '83 N 1985 Gas 927 Oil . 6 Nuclear . 9,889 Hydro. ~ 207~
" Total generated . 21,882
"'g','fg'n"g c ro suoss or um Purchased . 6,247 30 0 i i i Net interchange . 94 g, Total. 28,223 25 0 -
Less: Company uses, losses and unaccounted for. 1,661 ! 20 0 - - Total energy sold . . 26_,562 ' Peak demand (megawatts)2 3,681 l 15 0 _ . . __ i see nore f on borrum or page enorttre, 2 rse veer ros t ncrune, ne meg,marr, to ,,vory ^< nan,a, tser rne cooperar ,e corporar.on's 50 ','eym,
'CC *' * * *','
emounu o " rso"m"e*,'uv'e"n*e'n"'to a t c"c' '"*" " * " ' ** **' '* *' '""' '* 0 1976 77 78 79 '80 '81 '82 '83 '84 1985 34
1984 1983 1982 1981 1980 1979 1978 1977 1976 S 334,693 S 315,960 $282.204 $257,801 S212,833 S160,992 $164,224 S154,403 $121,267 187,595 169,367 153,393 148,938 128,477 100,741 98.293 92,999 75,641 94,037 56,629 50,175 69,527 69,171 65,861 43,972 40,482 33,100 224,392 200,296 183,975 179,331 140,422 112,615 104,930 102,264 83,844 23,288 20.989 19.081 14,787 12,824 11,447 11,234 10,468 8,536 864,035 763,241 688,828 670,384 563,727 451,556 422,653 400,616 322,388 364,581 379,598 299,724 298,781 181,650 125,980 124,653 128,174 70,362 18,981 6.052 5.572 5,569 5,120 5,074 6,299 6,508 3,847
$1,247,597 S1,148,891 5994,124 5974.734 5750,497 S582,610 $553,605 5535,298 $396,597 4,664 4,612 4,514 4,418 4,480 3,884 4.062 3,838 3,369 3,079 2.927 2,870 2,819 2,682 2,444 2,472 2,353 2,162 3,060 2,571 2,081 3,064 3,411 3,349 2.686 2,597 2,145 4,511 4,251 4,246 4,311 3,675 3,681 3,545 3,443 3,160 405 394 410 312 292 326 334 325 307 15,719 14,755 14.121 14,924 14.540 13,684 13.099 12,556 11,143 8,918 8,965 7,388 8,3_58__ 5,445 _ 4,204 4,475 _ _ 5,170 3.247 24,637 23.720 21,509 23,282 19,985 17,888 17,574 17,726 14.390 480.133 471,508 462,753 458,941 405,717 400,290 394,766 387,495 379,556 58.080 57,141 56,709 57,133 49,444 49,009 48,424 47,580 46,844 1 1 1 1 1 1 1 1 1 14,811 14,161 13.528 13,529 12.284 12,151 11,724 11,182 10,913 2,652 2,481 2,372 2,332 1,548 1,617 1.573 1,519 1,500 555,677 545,292 535,363 531,936 468,994 463,068 456,488 447,777 438,814 17 17 18 23 19 19 19 25 25 555,694 545,309 535,381 531.959 469,013 463,087 456,507 447,802 438,839 7,191 7.237 5,224 4,293 601 - - - -
2,111 2,978 2,660 4,727 4,741 2,468 470 487 1,168 3 35 72 389 1,653 4,050 6,741 6,973 4,010 10,770 7,583 7,463 9,173 7,831 4,101 5.220 5,085 3,858 235 201 176 140 103 251 131 98 94 20,310 18.034 15,595 18,722 14,929 10,870 12,562 12,643 9,130 5,440 7,402 7,241 5,980 6.459 7,740 6,162 6.133 6,172
~'
25, 5 25, 3. -Td 21 ~~15, ~~15f3 ~~15 ~~75 5 1,278 1,816 1,409 1,432 1,194 1,018 1,158 985 955 24,637 23,720 21,509 23,282 19,985 17.888 17,574 17,726 14,390 3,650__ __
-- _._3_,7_48 4
- - - _ __ __ _ _3,541_ _ _ _ _- - _ - _ 369_ _ __ _ _ _ _ 4,179 3.521 _ 3,242
_ _ _ _3 654 . _ _ _3.336_ _ -- - _ _ _ 35 J
pv i d President's 1985 Mossage [ 1 Associated Natural Gas Company A Wholl@wned Subsidiary ot Arkansas Power & Loght Company g_ Reacting to market y As a result of warmer than normal weather in March pressures the field price and April and a mid-year slump in industrial usage, of natural gas declined sales were depressed. Service was extended to two throughout 1985. The new towns during the year and the effect of customer rapid drop of oil prices at M.l. , additions shou!d have a positive effect on 1986 sales year-end and during the j- and revenue. first two months of this (' After almost 25 years with the Company, I retired on year will have a further . March 1,1986. Thomas J. Wright, a long-term AP&L moderating influence. *# employee and former Division Manager, was elected During the last quarter , President and Chief Executive Officer of the Company. of the year the Company y With the favorable marketing conditions that exist in was able to purchase a substantial quantity of ,
\ the industry today and under Tom's capabla leadership, Associated is positioned to take full advantage of the
4 spot market gas at very growth and increased earnings potential.
F favorable rates. With the abundance of supply it is expected that this opportunity will continue through gf the current year. r '/ The consumer will be the ultimate beneficiary of this cost reduction but at the same time the Company's L Thurt McSpadden competitive position will be improved and its marketing Past President and Chief Operating Officer potential enhanced. Associated Natural Gas Company Associated Natural Gas Company Associated Natural Gas Company Officers Directors Jerry L Maulden Paul C. Hughes Kenneth E. Storey Chairman of the Board and President and Choet Executive Ottocer President and Chief Executive Ottocer Past Chief Executive Otticer Farmers Soybean Corporation Food Giant Super Markets. Inc. Age 49 Blythevulle, Aikansas Sikeston Missouri Thomas J. Wright Hal E. Hunter, Jr. Ralph M. Wafter President and Chief Executive Officer Attorney, Hunter & Hunter Vice President, Operations Age 40 New Madrid. Missouri of the Company L. Thurt McSpadden Jerry L. Maulden O # "'#*'###*"*'* Past President and Cniet Operating Ottocer. Chairman of the Board and Thomas J. Wright Retired Past Chief Executive Ottocer Pres' dent and Chief Executive Age 64 of the Company Othcer of the Company Ernest L. McKenzie Vice President. Secretary. Treasurer Robert G. McHaney and Chief FinancialOtticer Vice President Age 63 McHaney Monuments BlythevrIIe, Arkansas l Vice President Operations Ernest L. McKenzie Age 58 Vice President. Secretary. Treasurer and Chief Financial Othcer Glen E. Veteto of the Company Assistant Treasurer Blytheville, Arkansas Age 43 L. Thurt McSpadden Ricky A. Gunter Past President and Chief Operating Assistant Treasurer Othcer of the Company. Retired Age 36 BlythevoIIe, Arkansas Peggy Warrington Assistant Secretary Age 62 36
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ARKANSAS POWER & LIGHT COMPANY
!lil POST OFFICE BOX 551 LITTLE ROCK. ARKANSAS 72203 (501) 371-4000 April 15, 1986 BCAN048610 Mr. Harold R. Denton, Director Office of Nuclear Reactor Regulation U. S. Nuclear Regulatory Commission Washington, DC 20555
SUBJECT:
Arkansas Nuclear One - Units 1 & 2 Docket Nos. 50-313 and 50-368 License Nos. DPR-51 and NPF-6 1985 Annual Financial Report
Dear Mr. Denton:
In accordance with 10CFR50.71(b) and 10CFR140.15(b)1, enclosed are thirteen ( copies of the 1985 Annual Financial Report for Arkansas Power & Light Company. This report contains financial statements for the fiscal years 1983, 1984 and 1985. The financial statements include balance sheets, operating statements, and supporting schedules which may be used for interpretation of the balance sheets and operating statements. Very truly yours, t
. Ted Enos, Manager
} Nuclear Engineering and Licensing JTE/RJS/sg Enclosure l 00k i i 15 MEMBER MiOOLE SOUTH UTIUTIES SYSTEM}}