Text

1990 Annual Financial Rept
	ML20073A980
Person / Time
Site:	Arkansas Nuclear
Issue date:	12/31/1990
From:	James Fisicaro, Maulden J, Miller R; ENTERGY OPERATIONS, INC.
To:	; NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
	0CAN049111, CAN49111, NUDOCS 9104230454
	Download: ML20073A980 (55)
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Washington, DC 20555 SUBJr.CT: Arkanses Nuclear-one - Unita 1 and 2 Docket Nos. 50-313/50-368 License Nos. DPR-51 and NPF-6 1990 Annual Financial Report i

Gentlement In accordance with 10CFR50,71(b) and.10CFR140.15(b)1, attached is'the 1990

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Annual Financial Report for Arkansas Power f Light Company.--This. report' contains certified financial statements for the fiscal years 1988,.1989 and 1990, together with an independent auditor's report.- The-financial-

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statements include balance shoots, operating statements, plus supporting t

schedules which may be needed for interpretation of the balance sheets and operating statements.

j If there are any questions concerning this submittal, please contact me.-

Very truly yours, I

James

. Fisicaro Director, Licensing JJF/SAB/sgw Attachment cc Mr. Robert Hartin 1

U. S. Nnclear-Regulatory Commission t

Region IV 611-Ryan, Plaza Drive, Suite 1000 Arlington, TX 76011 j

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U. S. NRC April 17, 1991 Page 2 NRC Resident Inspector Arkansas Nuclear One - ANO-1 & 2 Number 1, Nuclear Plant Road Russellville, AR 72801 Thomas W. Alexion NRR Project Manager, Region IV/ANO-1 U. S. Nuc1 car Regulatory Commission NRR Mall Stop 11-D-23 One White Flint North 11555 Rockville Piko Rockville, Maryland 20852 Ms. Sheri Peterson NRR Project Manager, Region IV/ANO-2 U. S. Nuclear Regulatory Commission NRR Mall Stop 11-D-23 One White Flint North 1155i Rockville Pike Rockville, Maryland 20852 t

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ARKANSAS POWER & LIGilT CONIPANY At December 31,1990 Arkansas Power & Light Company (AP&L) owned electric facilities in 65 of Arkansas' 75 counties and in 13 of Missouri's 114 counties, and furnished retail electric service in 326 Arkansas and blissouri incorporated municipalities. AP&L also provided power at wholesale to seven Arkansas and two Missouri inunicipahties and in Arkansas to two rural electric cooperathes and one association of rural electric cooperatives.

AP&L is a wholly owned subsidiary of Entergy, the electric utility holding company for the Entergy System. For the past 42 years, the Entergy 'istem has been the leading electrie energy supplier to a 91.000-square. mile region along the lowei reaches of the Mississippi River.

The Entergy System's network ofinterconnected transmission an<l d:stribution lines and diversi-fied grid of fossil fuel and nuclear generating plants provides electricity to more than 1.7 !nillion retail customers in Arkansas. Louisiana Mississippi, and Missouri.

lleadquartered in New Orleans. Louisiana, Entergy includes four retail operating companies:

AP&L, LP&L. MP&L. and NOPSI. System Energy is a nuclear generating subsidiary that sells the capacity and energy from its 90% interest in Grand Gulf 1. at wholesale, to the four retail operating companies. Another subsidiary. Entergy Services, provides various technical. administrative, and corporate services to Entergy and the System companies. A new subsidiary. Entergy Operations was formed on June 6,1990, and is responsible for operating and managing the Entergy System's four nuclear units. Entergy Power, a wholesale generator that purchased AP&L's interest in the Indepen-dence 2 and Hitchie 2 generating units. to sell the capacity and energy from these units outside the Entergy System, was formed as a subsidiary of Entergy on August 27.1990.

TAllLE OF CONTENTS LT Abbreviations and Terms.........................................

2 Report of Management.

4 Audit Committee Chairman's Letter...

5 Management's Financial Discussion and Analysis..

6 Independent Auditor's Report.

14 Financial Statements..

16 Notes to Financial Statements.,.

20 Record of Progress....

49 Directors 51 OfIlcers..

52 Stockholder Information.......

53 t

t 1

1 ARKANSAS POW 0ll & LIGilT COh!PANY DEFINITIONS Certain abbresiations or aeron>ms used in AP&L's Financial Staternents. Notes and hianagement's Financial Discussion and Anal > sis include the following:

AECC.....

Arkansas Electric Cooperative Corporation AEEC..

Arkansas Electric Energy Consumers A FU D C..................

Allowanee for Funds Used During Construction ANG..

Assoelated Natural Gas Corupany ANO.,..

Arkansas Nuclear One Steam Electric Generating Station (nu-clear)

ANO I Unit No. I of ANO ANO 2....

Unit No. 2 of ANO AP&L Arkansas Power & Light Cornpany APSC Arkansas Public Service Commission Aikansas Settlement Agreement Agreement effective September 9,1985, adopted by the APSC, settling AP&L's Grand Gulf I related and other rate issues for the state of Arkansas D.C. Circuit.

United States Court of Appeals for the District of Columbia Circuit DOE....

United States Department of Energy Entergy Entergy Corporation Entergy Operations...

Entergy Operations, Inc.

Entergy Pow er..........

Entergy Power, Inc.

Entergy Services Entergy Services. Inc.

Entergy System or Sysum.....

Entergy and its various direct and indirect subsidiaries FA S il.....................

Financial Accounting Standards Board FEllC.......

Federal Energy Regulatory Commission FEllC Settlement..

Settlement offer fded with the FERC on June 9.1989 by AP&L, LP&L. AfP&L, NOPSI and System Energy and approved by the FEllC on July 21.1989 to settle, among other things, certain then pending Grand Gulf Station related issues litigation and other rate matters Grand Gs.L' Str.tlon...

Grand Gulf Steam Electric Generating Station (nuclear)

Grand Gulf ?.............

Unit No. I of the Grand Gulf Station G rand G ulf 2................ Unit No. 2 of the Grand Gulf Station independence Station......... Independence Steam Electric Generating Station (coal)

Independence 2...........

Unit No. 2 of the Independence Station June 13 Decision.

An order issued by the FERC on June 13,1955. (Optr.lon No. 234) relating to the Unit Power Sales Agreement and the System Agreement KWil.....................

Kilowatt flour (s)

LP&L................

Louisiana Power & Light Company LPSC........

Louisiana Public Service Commission hioney Pool...............

Zntergy System hioney Pool which allows certain System compa, nies to borrow from, or lend to, certain other System compar.les -

N I P& L.....................

hiississippi Power & Light Company h l PS C.....................

hiississippi Public Service Commission htWII....................

hiegawatt flour (s) 2

AltKANSAS POWElt & LIGilT COS1PANY DEriNITIONS - (Continued)

NOPSI New Orleans Public Service Inc.

NILC....

Nuclear Regulatory Commission PSChl.

Public Service Commission of hiissouri Bevised /.d : s.ss Settlanent Agreciment Arkansas Settlement Agreement, as modified by the APSC order issued October 6,19%. to bring the Grand Gulf 1.related phase.

In plan into compliance with the requirements of SPAS No. 92 Ritch4e Static n.

Hitchie Steam Electric Generating Station (gasloil)

Ritchie 2....

Unit No. 2 of the Ritchie Station

'i EC...

Securities and Eschange Commission STAS.....

Statement of Financial Accounting Standards promulgated by the FASB System or Enterity System..... Entergy and its various direct and indirect subsidiaries System Agreement.

Agreement, effective January 1,1953, as modified by the June 13 Decision, among the System operating companies relating to the sharing of gene ating capacity and other power resources System Energy.

System Energy Resourecs. Inc.

System Fuels.....

System ruels. Inc.

System operating companies.

AP&L. LPht. h1PhL and NOPSI, collectively Union Electric...

Union Electric Cornpany of St. Louis, hiissouri Unit Power Purchase Agreement.

Agreement, terminated in Deceinber 1959, between AP&L and hiPhl, related to h1PhL's purchase of capacity and energy from APht's share ol' Independence 2 Unit Power Sales Agreement Agreement, dated as of June 10, 1982. as amended, among the System operating companies and System Energy, relating to the sale of espacity and energy from System Energy's share of Grand Gulf I White Bluff $tation......

White BlulT Steam Electric Generating Station (coal) 3

o AltKANSAS POWi:ll & LIGilT COhlPANY lli: pol lT Ol' hl ANAGEhlENT The inanageinent of Arkansas Power A Light Coinpany has prepared and is responsible for the financial staternents und related financial infortnation included in this annual report. The firiancial staternents are prepared using generally necepted accounting principles. Finaticial infortnation included ehewhere in this report is consistetit with the financial stateinctits.

To ineet its responsibilities with respect to financial infortnation, inanagernent tnalntains and enforces a systein ofinternal accounting controls, that is designed to provide seasonable assurance on a cost cliecthe basis, as to the integrity, objectivity and reliability of the financial locords and as to the protectiot. of assets. This systein includes coininunleation through written policies and procedures, an ernployee Code of Conduct, and an organizational structure that provides for an appropriate division of respotisibility and the training of personnel. The systein is also tested by a cornprehensive internni audit prograin.

The independent certified public accountants provide an objective assessinent of the degree to w hich inanagernent spects its responsibility for fairness of financial toporting. They regularly evaluate the syttern of internal accounting controls and perfortn such tests and other procedures as they deem necesstry to reach and expecss an opinion on the fairness of the finr.nelal statements.

hinnagernent belieges that these policies and procedures provide tensonable assurance that APhl/s operationis are carried out with a high standard of business conduct,

/Nhc

/

m Jerry L. hiaulden Cinaironan c.fIlse lloard b Clsiefihrenth e Oficer Q

LA Lee W. Ilandall Senior Vice besident & Cisief Financial Oficer (llesigned effectisc April 1,1991) l 4

..__m AILKANSAS POWl:ll & l.lGitT CONIPANY Al'DIT CONIN111T00 CllAlllNI AN'S I 171T1:11 The Arkansas Pow er & l.lght Cornpany Audit Conunittee of the lloard of Directors is coinprised of fisc Directors w ho are not officerr, of APhl: Dr. Ilayrnond P. hiiller, Sr., Chairinan; llal E. Ilunter, Jr.;

John J,11 ale; Kaneaster llodges, Jr.; and hitehael E. Wilson. The conunittee held four inectings during 1990.

The Audit Corninittee mersees APhl's financial reporting process on behalf of the Itoard of Directors and provides reasonable assurance to the lloard that sufficient operating, accounting, and financial controls are in esistence and are adequately reviewed by prograins of internal and esternal audits.

The Audit Cotninittee discussed with APh!!s interna! auditors and the independent ecrtified public accountants (Deloitte & Touche) the overall scope and specific plans for their respective audits. The cointnittee also discussed APhl/s fitnineial staternents and the adequacy of APht/s ititernal controls. The corninittee inet, together and sept.rately, with APhl/s internal auditors and independent certified public accountants. without inanagernent present, to (liscuss the results of their audits, theit evaluation of APhIls internal controls, arid the overall quality of APhlfs financial reporting. The inectings also were designed in faellitate and encourage private cointnunication between the conunittee and the internal auditors and/or independent certified public accountants.

I w (,4 s

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e Dr. llayinond P. h! iller, Sr.

Chaironan, Andst Cornonitice l

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AltKANSAS POWEll & LIGitT CONIPANY hlANAGENIENT'S l'INANCIAl, D15CU$510N ANI) ANAL.Y$1S l

ILESULTS OF OPEllATIONS Changes between 1990 and 1989 and between 19h9 and 1985 in selected factors allecting results of operations are detailed in the t.ible below. Iloweser reference is innde to both the table below and the Staternents of Incorne for purposes of the following discussion.

19w in 19w 19w in ipw Iwelse klunths I:nded Intresse/ l'ertent lnerease/ Percent Descripunn noo 19w 1944 (Decrease) Change (Decreasel Change

($ In %lillinnt)

Net income.............

$ 129.5

& 132.0

$ 131.1

$ (2.2)

(2) $

0.9 i

Operating res enue............... $1,451.4

$1.3513)

$ 1.356.6

$ 99.5 7

$ 25.1 2

Fuel and fuel related expenses.... $ 295.9

$ 297.6 8 2h2.1

$ (1.9)

(1) $ 15.7 6

Purchased power expense.

377.2 379.1 435.8 (1.9)

(1)

(56.7) (13)

Deferred purchased power.......

(37.3) _ (bl.1)

(128.9) 43 h 54 47.8 37 Net cost of energy..

6 15.8 395.8 559.0 40.0 7

6.8 i

Other operation and analntenance 455.4 095.5 395.9 59.9 15 J 0j) expenses Total operation and snaintenance espenses,.

$_lf]91J

$jl91J

$_984jl QQ) 10

{y I

lletail revenues:

llesiciential................... $ 464.4

$ 425.6

$ 416.6

$ Sh.8 14 9.0 2

Cornmercial 264.0 254.6 239.7 29.4 12 14.9 6

Ind ustrial............

331.9 307.9 267.6 24.0 8

20.3 7

Governmental......,.......

19 6 21.0 19.6 (1.4 )

(7) 1.4 7

Total retail..........

1,119.9 1.009,1 963.5 110.8 11 45.6 5

Sales for resale..........

339.3 345.3 305.5 (6.0)

(2)

(20.2)

(6)

Other.....................

22.2 27.5 27.8 (5.3) (19)

(0.3)

(1)

Total operating revenue

$1.481.4 61.381.9

$ 1.356.8 SjFl.5 7

L25J 2

1 Iletail energy sales (hlWil):

lleside n tial................,

5,401 5,098 5.149 303 6

(51)

(1)

Cominercial.........,.........

3.821 3.644 3,566 177 5

78 -

2 industrial..............

5,532 5.513 5.325 19 188 4

Governmental.....

285 320 305 (35)

(11) _ 15 5

'I'olal ret ail............... 15.039 14,575 14.345 404 3

230 2

Sales for resale..............,, 13.6t h 12,128 13.144 1,490 12 11,016)

(8)

Total energy sales ( AlWil).. 2h.657 26,703 m-~9 1.954 7

(7_66)

(3) 27,48 6

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t AltKANSAS POWl:lt & IJGIIT CONIPANY NIANAGl311;NTS l'INANCI AL DlhCl'MION AND ANAL.Yhl5- (Continued)

Net incorne AP&L's net income has been relath ely stable during the threcq ear period 19 %.1990. Net incorne in 1990 as cornpared to 1959 decreased less than 2 percent. While details of factors impacting results of l

operation are discussed below. the most significant factors impacting 1990 results of operations as compared to 1959 were increased revenues due in part to increased KWil sales to retail custorners.

decreased resenue due to the termination in December 1959 of the Unit Power Purchase Agtertnent prmiding for the sale to blP&L of APht's 3L5 percent share of capacity and energy from Indepen-dence 2. Increased earnings as a result of the sale in 1990 of Indepetalence 2 and Hitchic 2 to Entergy Pow er (see Note 2 to APhi/s Financial Statements "Itate and llegulatory hiat-ters - Arkansas - Stipulation and Settlement Agreement"h atal significant increases in 1990 operu-tion atul maintenance expemes resulting frorn a comprehensive action plan to imprme operations and safety at ANO. (See Note S to AP&L's Financial Statements

" Commitments and Contingencies -

NRC Actions.")

APhl's 1959 results were basically unchanged from 1944 as evidenced by an increase in net income ofless than I percent. Factors itupacting 1959 results of operations as compared to 1988 are as followt the expiration on July 1,1956, of APSC nuthoritation to record a return on investment in

..lleged eteess capacit) to he subsequently reemcred reduced 1989 results by approximately $7.9 inil-lion; a $Li million after-tas gain in 19% from the sale of ANG: and a one time after tas credit in 1959 of $2.2 milhon from System Energy pursuant to the FEllC Settlement. (See Note 2 to APhl/s Financial Statements "Itate and Regulatory Alatters - Project Olise llranch.")

Operating Resenue and Energy Sales Operating res enue inercased in 1990 as compared to 1969 dne to inercased current collection from retail customers of purchased power costs associated with AP&L's allocated share of Grand Gulf I pursuant to the Revised Arkansas Settlement Agreement and inercased retail KWil sales. Revenue relating to sales for resale decreased $6.0 million or 1,7 percent in 1990 as compared to 1959, primarily due to the elitnination in 1990 of sales to hlPhl from Independence 2 under the Unit Power Purchase Agreement partially offset by increased sales to the City of North Little llock, AECC. and other non-alliliates. Energy sales (KWil) increased 7.3 percent in 1990 as compared to 1959 due primarily to increases in sales for resale.

Resenue from retail customers increased in 1959 as compared to 19SS due in part to increased energy sales and to increased current recovery of Grand Gulf l related costs. Reductions in sales for resale of $20.2 million or 5.5 percent in 1989 as compared to 1958 partially offset increased retail resenues resulting in a net increase in 1959 operating resenue. Sales for resale decreased primarily l

due to decreased System sales and to decreased sales to the City of North Little Rock due to the installation by that city of new hydroelectric generating capacity.

Net Cmt of Energy The net cost of energy in 1990 as compared to 1959 increased 6.7 percent primarily due to decreased deferred purchased pow er costs from increased current collection of purchased power costs associated with APht's allocated share of Grand Gulf I pursuant to the Revhed Arkansas Settlement Agreement. While total generation increased 7.5 percent, fuel expense decreased $3.9 million in 1990 primarily due to increased nuclear generation. Purchased power expense decreased $1.0 million in 1990 as compared to 1959 due to lower fuel and capacity costs for Grand Gulf I of approximately

$13.0 million and to the termination in hlay 19S9 of a purchase power contract of $6.5 million with the City of New hladrid offset by the elTeet of the 19S9 $16.0 million credit received from System Energy l

pursuant to the FERC Settlement.

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I AllKANSAS POWl:ll & LIGilT COhlPANY

\\tANACl3 TEN'1"S FINANCIAL D15CU% ION AND ANALY$lS - (Continued)

The net cost of energy in 1959 as conipared to 19% increased priinarily due te a $17.0 inillion increase in the fuel.related nuclear reserve which was linpacted by the scheduled refueling outage at ANO 2 in 1959 and at both ANO units in 19%. Aceruals to the nuclear reserve inercase fuel expense when the units are in operation and are used to offset replaccinent fuel and purchased power costs during refueling runintenance outages. (See Note I to AP&L's Financial Stateinents "Suininary of Significant Accounting Policies -llevenues and fuel Cests.") A reduction in blWil purchases of 7.5 percent in 1959 as coinpaved to 19%.ontributed to decreased purchased power expense, llowever, significantly contributing to the reduction in purchased power expense was the $16 inillion credit received froin Systern Energy pursuant to the FEllC Settlement and the rednetton in Sysicin Energy's return on its investment in Grand Gulf 1. Approxiinately $14.5 million of the $18 inillion credit was refunded to customers. (See Note 2 to APht's Financial Statements "Ilate and llegulatory hiatters - Project Olive liranch.")

lleductions lu deh rred purchased power in 1990 and 1959 compared to respective prior years were due primarily to the increased current collection of purchased power costs associated with AP&L's allocated share of Grand Gulf I costs pursuant to the llevised Arkansas Settlement Agreement.

Other Operation and \\laintenance I:xpenses Other operation and maintenance expenses increased in 1990 as compared to 1959 primarily due to increased nuclear operation and innintenance expenses of approximately $31 A million and $7.7 inil-tion, respeethely, and an $h.5 million increase in expenses recorded to remove the impact from the income statement of collection in 1990 of projected Grand Gulf I costs in excess of actual 1990 Grand Gulf I costs incurred. A comprehensive action plan to improve operations and safety at ANO contributed approximately $27.5 million to the increase in nuclear operation and maintenance expenses. Comparable expenditures for the comprehensive nellon plan are expected to continue through the period 1991 1993. (See Note h to Al'&l's Financial Statements "Conunitments and Contingencies - NitC Actions ")

Other income As compared to 1959, other income and deductions increased $19.0 million in 1990 $13.9 million was due primarily to the one time amortiration of investment tax ciedit associated with indepen-dence 2 and llitchie 2, which were sold at AP&L's depreciated book value on an after tet basis (exclusive of a small expertise fee), and to increased interest income of $2.5 million.

As compared to 19%, other income and deductions decreased $14.9 million in 1989 due in part to u

$3.0 million reduction in AFUDC resulting from nuclear fuel being leased in 1989 rather than financed by AP&L, a reduction of $5A million associated primarily with the discontinuance in July 19% of deferring a return or3 investment in alleged excess capacity and the $5A million net after tax gain associated with the disposition of ANG in June 19%.

Interest Charges Interest charges increased $19.0 million in 1990 as compared to 1959 primarily due to an increase in interest on first mortgage bonds of $12A million in 1990 and to a reduction of $8.6 million in 1989 in interest accrued on poter tlal income tax liability, 6

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l AltKANSAh POWl:ll & LIGilT CO\\lPANY NIANAGE%1ENT'S l'INANCIAl, DlhCUShlON AND ANA135th- (Continued)

FINANCIAL CONDillON 1.iquidity Cash and cash ecluivalents increased $111.3 inillion in 1990 as cornpared to 1989 and decreased

$25.1 inillion in 1989 as coinpated to 1955, lleference is inade to the Statements of Cash flows for purposes of the following discussion.

Net cash froin operating activities was $201.3 rnillion in 1990, $lh5.0 inillion in 19s9, and $73.7 inillion in 1954. lieductions in deferred purchased power /cseess capacity associated with increased recoscry of Grand Gulf I-related costs under the llevised Arkansas Settleinent Agrectnent (nerensed net cash from operating activities $44.5 million in 1990, $64.6 million in 1959 and $57,5 million in 1958, lieduced deferrals (increased current reemeries) had a positive impact on net cash from operating activities. In 1991 1993 AP&L will be collecting Grand Gulf I costs paid but not collected in previous

> ears pursuant to the flesised Arkansas Settlement Agreement. During periods when deferred costs are recosered, resenue collee i will eseced, to the estent of such current collections, current cash requirements for Grand Gulf 1 osts. Iloweser, the turearound of previous deferrals of Grand Gulf 1-related costs remmes the impact of the resenue collections from the income Statement, (See Notes I and 2 to AP&L's Financial Statements "Suennary of Significant Accounting Policies -llate Deferrals" and "llate and llegulatory Matters - Arkansas - Itetail, Pevised Arkanset Settic.nent Agreement," respeeth ely.)

llad APhL curiently collected such deferred purchased power costs /eseess capacity of $29.0 million, $73.5 million and $135,1 million in 1990,1959 and 1958, respectively, net cash from operating aethities would hase been $230.4 million, $259.2 million and

$211.6 million for those respeethe periods. As detailed in the Statements of Cash Flows, cash flow from operating nothities was affected by a number of factors representathe of normal operations, Factors of an unusual nonrecurring nature were not significant.

Net cash provided by imesting activities increased $130.4 million or 9h.0 percent in 1990 as compared to 1959 due to the August 24,1990 sale of AP&L's intesest in Independence 2 and Ilitchie 2 to Entergy Power which resulted in cash proceeds of $173.4 million oIIset in part by additional mvestments in utility plant. APkL's imestment in utility plant, esclushe of proceeds from the sale of property, of $176.2 million $134.h million and $103.9 million was 67.5 percent,72.6 percent and 141.0 percent of net cash from operating activities in 1990,1959 and 1955, respeethcly, Nuclear fuel expenditures decreased $26,0 million in 1959 as compared to 19hh due to financing under a new nuclear fuel lease of nuclear fuel previously purchased by AP&L. (See Note 9 to AP&L's Financial Statements

" Leases.") Proceeds of $27,1 million received from the sale of ANG and repayment of

$27,7 million to AP&L of notes receivable frma System Fuels ineicased 19Ws net cash from investing activities as compared to 1959.

Net cash used by financing activities was $57,4 million, $50.3 million and $h3.4 milhon in 1990,1959 and 19$5, respeethcly, increasing $7,1 mittion between 1959 and 1990, and decreasing $3,1 millica between 195S and 1959. Principal fmancing activities affecting sash in 1990 as compared to 1989 include the sale of $150 million and $175 million of first mortgage bonds in February and October 1990, respectively, the sale of $20 million of solid waste disposal resenue bonds in November 1990, the retirement of $150 million of first mortgage bonds in Octobcr 1990, and the repurchase of $100 million of AP&L's common stock from Entergy in january 1990 The principal financing activities affecting -

cash flow in 1959 as compared to 19Sh include the sale of $75 million of first mortgage bonds in July 19S9, the retirement of $50 million of first mortgagt bonds and an ingene in payment of common stock dhidends of $49.5 nullion.

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AltKANSAS POWilli & LIGilT CONIPANY M ANACl3f t;NTS l'INANCIAl. DihCUSMON AND ANAIJMS- (Continued)

Capital and liefinancing flequisernenh APhlis construction prograin conteinplates experuhtures (including AFUDC avul excluding auclear fuel) of approxirnately $157,7 inillion in 1991, $17hA million in 1992, atal $102.3 inillion in 1993.

In addition to these capital terpillernents. $63.1 inillion will be re(paired during the period 1991 1993 to sneet long terin debt snaturities and to satisfy sinking fund requirernents.

APhL has received regulatory approval to purchase or otherwise acquire up to $%0 million aggregate principal atuount of its first mortgage bonds up to $150 million aggregate par value of its pre ferred stock and up to $175 million aggregate principal amount of pollution control revenue bonds arul/or solid waste disposal revenue bmuls issued for its benefit.

Certain management, organirational and technical probleens at ANO are being addiessed as part of a cotoprehenske action plan designed to signiGenntly innprove the operations and safety of ANO (see Note 6 to APhL's Financial Statements

" Commitments and Contingencies - NilC Actions"),

'l his aetfor, plan has resulted in an increase in estimated capital expenditures everaging approximately

$10 million per annum for the period 1991 1993 and contemplates an approximate $33 million per annmn userage increase in operation and maintenance expenditures for that period. These increases in operation und maintenance expenditures, along with increased interest expense and preferred stock divideral requirements nuociated with external financing planned for the period 1991 1993, are expected to hase a negathe effect on APNL's results of operations and on earnings coserages required for the knuance of additional first enortgage bonds and preferred ttock, AP&L estinmtes that its earnings emetages are likely to fall below the levels necouary to permit the inuance of additional i

bonds or prefttred stock (exupt for refunding purpmes) by late 1991 and may remain below such lesels through 1992 in respect to bonds and through 1993 in respect to preferred stock. AP&L essentially satisfied its full est mated requirements for external financing for the period 1991 1993 during January 1991. (See Note h to APhl's Finanelal Statements "Conunitments and Contingen-cies - Capital llequirements and Financing.")

i APAL anticipates that its capital tual refinancing requirements for 1991-1993 will be principally -

met from ensh on hand at December 31,1990, and internally generated funds, Any external financing during the period, exclushe of funds derived from the issuance in January 1991 of $27 million of solid 4

waste disposal resenue bonds, would be primarily for optional redemption of currently outstanding securities. As discussed above, AP&L has recched regulatory approval to purchase or otherwise l

acquire certain outstanding seemities, lhternal financing for this purpose would be achieved through the issuance of additional first enortgage bonds and/or preferred stock in 1991 APNL may also obtain i

additional funds during the period 1991 1993 from the poulble sale of APhl's retail properties in Missouri. (See Note 2 to AP&L's Financial Statements "llate and llegulatory Matters - Missouri Itetall Operations.' for information with tespect to the possible sale of AP&L's Missouri retall properties atul possible uses of sale proceeds.)

Capital llesources i

l AP&L derhed $20 tuillion and $27 inillion from the issuance of solid waste disposal revenue bonds l

in November 1990 and January 1991, respectively. Also, APNL issued $150 million and $175 inillion of i

first mortgage bonds in February 1990 and October 1990, respectively. After such sales, APhL has regulatory authorization for the iuuance and sale of up to $75 million of additional first mortgage bonds and up to $100 inillion of additional preferred stock through August 31, 1992. The possible optional retirement of high cost securities could require additional sales of first mortgage bonds and/or preferred stock during the period ending August 31,1992.

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e Alti(ANS AS POW 1It k LIGilT CohlPANY hl ANAGl311 NT'$ 1 IN ANCI AI, lithCUhhlON AND ANAIJhth - (Continued) in 1991 1991 AP&L will be collecting Grand Gulf I costs paid but imt collected in previous years pursuant to the licshed Arkansas Settlenient Agreenient. During per ads when deferred costs are recosered, resenne collections will esteed. to the extent of such current recovery, current cash requirernents for these costs, lloweser, the turnaround of previous deferrals of Grand Gulf 1 related costs ternoses the irnpact of the resenue collections frotn the incorne Staternent.

On August 25,1990 APhL sold its interests in Independetice 2 and Ilitchie 2 to Entergy Power for approstinately $173-1 rnillion. Proceeds froni the sale were applied to the redernption on October 1, 1990, of $50 inill!on 134 percent series first enortgage bonds and $100 inillion 144 percent series first rnortgage bonds.

Union Electric and AP&L huse signed a contract for the sale of APhl's retail properties in hiissouri. subject to certain conditions including tirnely receipt of regulatory approvals. The sales price of such properties. APhl's hiissourt accounts receivable, and innterial and supplies inventories is approsinnately $76 inillion, which is greater than AP&L's booh value of such properties, and is subject to certain adjustinents as of the date the sale is closed. The proceeds frorn this transaction, when and if consutninated, could be used to sneet construction expenditures or for other corporate purposes.

Alternathcly, approtirnately $70 inillion of the proceeds could be used to redeern all or a portion of certain series of AP&L's outstanding first enortgage bonds at special redernption prices, at or near par, pursuant to and in cornpliance with applicable provisions of AP&L's enortgage and detd of trust. (See Note 2 to AP&L's Financial Statunents. " Hate and Regulatory hiatters - hibsouri lietail Operations.")

The ininirnuin earnings coserage requirernents for issuance of additional first inortgage bonds and preferred stock are 2.0 tinies the annual rnortgage interest requirements and 1.5 times the annual interest charges and preferred stock divideed requirements, respeethcly. The amount of additional first mortgage bonds APNL inay issue is limited by the lesser of amounts based on inortgage coverage ratios or unfunded bondable property. In addition, APhl has the ability, subject to meeting certain conditions, to hsue bonds againt.t the retirernent of bonds without meeting an earnings test, The earnings emerages for APNL's first inortgage bonds at December 31,1990 and 19S9 w ere 2.51 and 2.60, respeethcly. The earnings emerages for preferred stock were 1.69 and 1.71 at December 31,1990 and 19$9, respeeth ely. Based upon the inost restrictive test and an assumed interest / dividend rate of 10 percent, at December 31,1990, APNL would have been permitted to hsue $261 million in additional first mortgage bonds and $202 million in additional preferred stock, respectively. As discussed in

" Capital and itefinancing Requirements" abme, increases during the period 1991 1993 in A P h t's estimated capital expenditures useraging approximately $16 million per annum and in its operations and maintenance espenditures of approximately $33 inillion per annum related to a comprehensive action plan to significantly improve operations and safety at ANO are espected to have a negative i

effect on APhils restdts of operations and on earnings coverages required for the issuance of l

additional first mortgage bonds and preferred stock. AP&L estimates that its earnings coverages are likely to fall below the levels necessary to permit the issuance of additional bonds or preferred stock l

(except for refunding purposes) by late 1991 and may remain below such levels through 1992 in l

respect to bonds and through 1993 in respect to preferred stock.

1 Short term borrowings of $125 million base been authorized by the SEC through November 1992, subject to the availability of credit resources. Short term borrowings can be effected through the hioney Pool subject to the asallability of funds which at any particular time may be ilmited, and through available territorial bank lines of credit. At December 31,1990, AP&L had no short term borrowings outstanding from the hioney Pool and had available bank lines of credit of $76,2 million all of which were unutill ed, Additionally, at December 31,1990, APhL had $100 rnillion of temporary imestments in the hioney Pool. (See Note 4 to AP&L's Financial Statements

" Lines of Credit and Related Borrowings.")

11 l

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4 1

ARKANSAS POWER k LIGHT COh!PANY 4

1 MANAGEhtENT'S l'INANCI AL DISCUSSION AND ANALYSIS - (Continued)

ACCOUNTING ISSUES i

SFA5 No. 96 In December 1957, the FASB issued SFAS No. 90, " Accounting for Income Taxes," which was i

effective for fiscal years beginning after December 15,1988. The FASB subsequently issued statements nutnbers 100 and 103, whleh delayed the effective date of SFAS No. 96 to fiscal years beginning after December !$,1991, The FASB is expected to issue a new exposure draft in the second quarter of 199L This exposure draft may further delay the effective date and simplify the implementation of SFAS No. 90. Based upon a preliminary study, AP&L expects that the adoption of SFAS No. 90,in its present i

form, would result in a net increase in accumulated deferred income taxes with a corresponding i

increase in assets. It is not expected that results of operations for AP&L would be significantly

]

impacted by the adoption of SFAS No. 96 in its present form. (See Note 3 to AP&L's Finanelal Statements

" Income Taxes.")

SFAS No,106 In December 1990, the FASB issued SFAS No.100, " Employers' Account og for Postretirement Benclits Other Tl un b nsions," which is generally effective for fiscal years beginning after Decem-ber !$ 1992. The new standard requires a change in accounting requiremeats for postretirement benefits other than pensions from a cash method to an accrual method. Tlie impact of this new i

standard has not been fully determined, but the change likely will result in greater espense being i

recognited for provision of these benefits. The effect of the increased benefit expense on net income could be reduced to the extent such increased costs are recovered through rates or through the recording of a regulatory asset to be recovered in *he future. AP&L plans to adopt this statement in 1993.

ENVIHONhtENTAL hlATTERS -

Clean Air Legislation r

On November 15, 1990, the President signed into law the Clean Air Act Amendments of 1990 (Act) that, among other things, place limits on emissions of sulfur dioxide and nitrogen oxide from fossil fueled generating plants. The Act inay require installation of low nitrogen oxide burner technology on AP&L's generating units, depending on the emissions levels-that are set by the Environmental Protection Agency (EPA). There are several other areas, such as air toxicity and visibility, that will require regulatory study and rule promulgation to determine whether pollution control equipment is necessary, AP&L has evaluated the Act to' determine the impact on AP&L of '

overall costs of nitrogen oxide emissions control and monitoring equipment.

Based on such evaluation in connection with existing generating facilities AP&L h'as determined -

that no additional equipment will be required to control sulfur dioxide emissions'in' order to comply with the Act.- However, AP&L will be required to install nitrogen oxide emissions controls on four -

jointly owned coal units by the year 2000. (See Note 1 to AP&L's Financial Statements - "Sunimary '

.of Signilleant Accounting Policies-Jointly-O_wned Generating Stations ")- Based on estimates from t

the designers of the units,- AP&L's total capital co'st required to control nitrogen oxide emissions is:

estimated to be approximately $7,3 million, although the cost could be somewhat higher C the t:PA) imposes more stringent nitrogen oxide emissions limitations by regulation.

I 12' i

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+ - -

AllKANSAS POWEll & I.lGIIT CO\\lPANY hlANAGl'.NIENT'$ FINANCIAL DIhCUh5 TON AND ANALYSIS - (Concluded)

In addition. APkL will be required to install continuous emission monitoring systems at other fossil fueled un;ts at a capital cost of approximately $2.0 inillion and will incur an additional operating cost of approximately $1.7 million annually in permit fees, depending on the fees imposed by the state regulatory authorities.

The Act provides additional" allowances", with respect to sulfur dioxide emissions, starting in the year 2000, to the " clean" utilities (i.e., utilities with emissions levels below specified amounts) in recognition of their earlier emissions reductions. Each unit of allowance is an entitlement to emit one ton of sulfur dioxide per year. Under the Act. utilities will be required to achiese specified emission rates or possess allowances for any excess emissions. APhL believes that it will be able to operate its units efficiently without installing scrubbers or purchasing allowances from outside sources. Ulti-inately,if AP&L continues its recent operational and fuel consumption trends,it may becotne entitled to excess allowances that could be sold in the new nilowance trading market created by the Act.

LITIGATION hl ATTEPS Law suits base been filed against AP&L. among other parties,in connection with the operation by AP&L of two dams. One suit eeks, tunong other things, approxitnately $16 million in property losses and other compensatory damages and $500 rnillion in punitive damages. Although an adscrse outcome could aficet liquidity or results of operation. AP&L believes that it has meritorious defenses which it intends to assert aggressively and that the outcome will huse no innterial adverse financial impact.

(See Note 6 to AP&L's Financial Statements "Conunitments and Contingencies - Flood Litigation" for a discussion of this litigation.)

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4 INDEPENDENT AUDITOllh' ilEPOllT To the Shareholders and the floard of Directors of Arkansas Power & Light Company:

We have audited the accompanying balance sheets of Arkansar Power oc Light Company ( AP&L) as of Decernber 31,1990 and 1989, and the related staternents ofincome, retained earnings and cash flows for each of the three years in the period ended December 31,1990. These financial statements are the responsibility of AP&L's managernent. Our responsibility is to express an opinion on these financial staternents based on our audits.

We conducted our audits in accordance with generally accepted auditing, standards. Those standards require that we plan and perform the audit to obtain reasonable assurance abotit whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all inaterial respects, the financial position of AP&L ut December 31,1990 and 1989, and the results ofits operations and its cash flows for each of the three years in the period ended December 31,1990 in cor.formity with generally accepted accounting principles.

Deloitte & Touche Little llock, Arkansas February 15,1991 i

14

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AllKAN54S POWEll & l.lGilT CO%lPANY 11 AIANCI'. $111'l:TS AShi'TS t>ctember 31, 199a ling On husande Utility Plant (Notes I and 6):

63.796.461 $3.909,526 Electric Property under capital leases (Note 9)...

95.940 97.373 Construction work in progress 135.155 90.125 Nuclear fuel...

155 55 Nuclear fuel under capital leases (Notes 6 and 9) 151.635 165,000 Total 4.162.379 4.265.139 Less - aceutnulated depreciation and arnortiration..

_l.245.702 1.216,703 1

Utility plant - net.

2.936.677 3,046,436

)

Other Property and linestenentu linestnients in associated conipanies. at equity (Note h).

11.226 11.219 Other, at cott (less accuinulated depreciation).

1,695 213 Total 12.921 11,432 Current Auctu Cash and cash equivalents:

Cash...

12,301 1,190 Ternporary investinents, at cost w hich approsiinates snarket:

Associated companies (Note 4)..

100,000 Other......

144 Tot al......

112,445 1.190 Notes receivable - net.

17.579 6.336 Accounts recehable:

Associated cornpanies 27,856 25,555 Custorner (less allowance for doubtful accounts - $3.430.000 in 1990 and $1.290.000 in 1959).

63.597 5h,707 Other........

9,573 5,913 Deferred purchased power costs (Notes 1. 2 and 6).

6.795 Deferred escess capacity (Note 2)..

h.514 ~

35,674 8.514 Fuel imentor), at as erage cost.

31.991 hlaterials and supplies, at aserage cost...

75,426 5S,901 Prepayments and other......

19.075 17.4,26 Total 372,h54 220,446 Deferred Dehltu Deferred purchased power costs (Notes 1. 2 and 6) 697,017 666,256 Ocierred escess capacity (Note 2)..

55,222 63.736 Other.

61217 51,290 Total 515,456 781,252 TOTAL....

{ l37.935 64,059.596 l

See Notes to AP&L's Financial Staternents.

16

= - _ _ _ _ - -

AltliANSAS POWEll & I.lCllT COMPANY ll AIANCI: $llEETS CAPITAllZATION AND 1.lAlllLITIES December 31 190a 1 98i9 (in Thovundi)

Capitalitation:

Commor stock. $0.01 par value: authorized 325.000.000 shares; issued and outstanding - 46.9N0.196 Shares in 1990 and 54,940.196 shares in 19S9 (Note 5) 470 $

550 Paid.in capital....

595.457 695,301 lletnined earnings (Note 7).

307,6*3 314.602 Total..

903.610 1,010,453 Preferred stock, net of premium and expense (Note 5):

Without sinking fund...

126,690 126,890 With sinking fund.

116,361 127.554 Long. term debt ( Note 6)................

1.443.200 1.264,049 Total.

2.590.06) 2.528.946 Other Noncurrent 1.labilitiesi Obligations under capital leases (Note 9) 170,455 192,012 Other (Note 1).

29.904 28,054 Total 200.349 220.000 Current I.labilitieu Currently maturing long. term debt (Note 6)..............

14.690 3,0SO Notes payable (Note.1):

Associated companies..

27,000 Other.................

667 667 Accounts payable:

Associated coinpanies............

34,474 26,635 Other.

125.715 105,737 Customer deposits...............

11.115 8,344 Ta x e s a cc r u ed.............................................

66.232 79.853 Interest accrued.............

39.404 33,395 Preferred disidends declared (Note 7)..........

5,263 5,584 Nuclear iefueling reserve ( Note 1 )......,.......................

8,550 7.136 Co ow ner ad vances ( Not e 1 ),...................................

30.177 27,543 De ferred fuel cost (Not e 1 ).............................,

6.553 6.959 Obligations under capital leases (Note 9)........................

77,090 73.421 Other.......

14.151 11,164 Tot al...

436.551 416.548 l

Deferred Credth and Other 1.iabilities i

Accumulated deferred income tases (Note 3)........................

621.103 604,834 l

Accumulated deferred investment tax credits (Note 3)................

175.130 187,152 l

Other...

115,174 102,050 i

Total

_ 911,407 894,036 _

Commitments and Contingencies (Notes 2. 8 and 9)

T OT A L............................

$4.137.938 44.059.596 m

See Notes to APkL's Financial Statements.

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ARKANSAS POWER k LIGilT CO\\lPANY i

STATE %lENTS OF INCO\\tE AND RETAINED EARNINGS STATE %lENTS OF INCONIE ror the Years I:nded December St.

1990 1940 1944 (in Wmandi)

Operating Revenues (Notes 1,2 and 10):

$ 1,481.40s

$1.341,871

$1,3%789 l

Operating Expenses:

Operation (Note 10):

Fuel and fuel related......

295.662 297,795 282.051 Purch ase d pow e r..........................

377,166 370.095 435.611 Other........................................

3% 375 300.502 296,835 hi ai n t e n a n ce.....................................

100.045 95 002 99.096 Dep reciat io n.....................................

129,114 123,493 120.030 Taxes other than income taxes 26.901 34.858 36,400 income taxes (Note 3)........................ /.

16.613 (1,903)

-(23,390) a llate deferral:

l Deferred purchased power (Notes 2 and 6)..,....

(37,246)

(61.122)

(128,697)

J Income tax es (Not e 3).........................

14.142.

30.769.

48,891 To t al..................................

1.260.172

,,,1),78.489 1,166,827 O pe ra t i n g i n co m e.......................

201,236 2006J 189.962 Other income and Deductions:

Allowance for equity funds used during const ru ction................................

3.278 2,657 6.303 kilscellaneous - net (Notes I and 2)... o 64.723 60,274 72.626 income taxes (Note 3)...........................

(25.887)

(20,384)

(21.514)

To t al...................................

62,114

,,,,, 4 2.54 7 57,415-Interest Chargest Interest or. long. term debt........................

132.607 120,164 117,873 Other interest - net of debt premium..............

4,385 (3,910) 3,114 Allowance for borrowed funds used during -

co n s t ru c t io n.....................,............

(3,407) '

(2.304)

(4.759)

Total......................................

133.585 113.950 116,228 Net Income (Note 12) 129.765 131,979 131.149 Preferred stock dividend requirements................

21,454 22.790 23.858 Earnings applicable to common stock................. $ - 108,311

$ 109.189

$ - 107.291 j

STATENIENTS OF RETAINED EARNINGS Retained Earnings - January 1...................... $ 314,602:

$. 303,105 -

~ $ 244.025 -

~

Add - Net income (Note 12).....................

129;765 131,979 131,149 Total.............'........................

444.367 4Roh4 -

375.174 Deduct - Cash Dividends:

Pre ferred st ock '........,............. ;..........

2N54_

- 22.700 23,85S Common stock (Note 7)........................

115.230-

-97,692 48.211 Total.....................................

l E GS4 120.482 -

72,069_

7 Retained Earnings - December 31 (Note 7)........... $ 307.683

$ 314 602 8 303.105 1

g See Notes to AP&L's Financial Statements.

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l ARKANSAS POWF.R & l.! Gilt CONIPANY l

srAmicNis OF Casu rtOws

_l'or the Yeart I:nded December 31, 1990 IM9 19u _

(In Thousands)

Operating Activitieu Net income.

$ 129.765

$ 131.979

$ 131.149 Noncash items included in net income:

Depreciation....

129.114 123.493 120,030 Delerred taxes & investment tax credit

23.272 40.511 37,481 Allowance for equity funds used during construction (Note 1).

(3.278)

(2.657)

(6,303)

Provisions for estimated losses....

4,694 (1.673)

(6.626)

Deferred purchased power cost / excess capacity (Note 2)

(29,044)

(73.517)

(13S,077)

Net gain on sale of ANG (Note 1).

(5,350)

Changes in working < apitah Receivables.....

(9.992)

(13,706) 11,645 Accounts payable.

30.944 9,450 (10.731)

Fuel inventory 3.643 (13.569) 6,820 Deferred fuel costs...

1,561 (2.308) 570 Other working capital accounts.

(20.347)

(10,733)

(39,131)

Taxes accrued..

(43.747) 12.496 826 Decommissioning trust contributions (14,433)

(9.837)

(25,385)

Other..

~......

(1.080)

(4.614)

(3,216)

Net cash flow provided t>y operating activities 201.315 155.645 73.700 investing Activities:

Utility plant:

Construction expenditures (net of accruals)

(179.342)

(137,568)

(136.395)

Proceeds received from sale of property (Note 2) 173.406 Nuclear fuel expenditures - net (104) 143 26,182 Allowance for equity funds used during construction (Note 1 3.278 2,657 6,303 Other proper)ty - net.

107 1,320 1,724 Proceeds received from sale of ANG (Note 1 27,095 Reduction of investments in associated compa)nies.

27,674 Net cash flow used by investing activities.....

(2.655)

(133.448)

(47,417)

Financing Activitieu Proceeds from sale of:

First mortgage bonds Si d,o u 73,282 Instalbnent purchase contracts.

19,107 Repayment of installment purchase contracts (1,025)

(925)

(665)

Long term obligations - DOE 6,661 6.659 4,628 Retirement of first mortgage bonds......

(151,322)

(55,700)

(1,603)

Dividends paid:

Common stock..

(115,230)

(97,692)

(48,211)

Preferred stock.

(21.775)

(23,070)

(24 3.55)

Retirement of common stock..............,,.....

(100.005)

Redemption of preferred stock...

(11.056)

(9,766)

(13,i47)

Changes in short. term borrowings (27,000) 27.000 Other..,

(250)

(74) 99 Net cash flow used by financing activities....

(67,405)

(80.256)

(83.354)

Net increase (decrease) in cash and cash equivalents 111,255 (28,089)

(57,071)

Cash and cash equivalents at beginning of year....

1,190 29.279 86.350 Cmh and cash equivalents at end of year (Note 4)....... $ 112 445 1,190

$ 29,279 See Notes to AP&L's Financial Statements.

19

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ARKANSAS POWER & LIGitT CON 1PANY NOTES TO FINANCIAL STATENtENTS NOTE 1. SU51%iAlW OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation Prior to 1958, the financial statements included the accounts of AP&L and its wholly owned subsidiary, ANC, On June 1,1958, AP&L, as required by the SEC. disposed ofits interest in ANG by means of a cash merger of ANG with and into Arkansas Western Gas Company ( Arkansas Western), a subsidiary of Southwestern Energy Company. The cash merger consideration was approximately

$27.1 million with Arkansas Western assuming all liabihtles including approximately $3.8 million of f

outstanding long term debt of ANG, (See Note 11 to AP&L's Financial Statements "Postretirement.

Benefits.") APkL recorded an $8.2 million gain on the merger, with a tax effect of $2.6 million, resulting in a net after tax gain of $5.4 million. The net gain on the sale of ANG, including the results

- of 1958 operations prior to the sale, are included in miscellaneous other income and deductions.

System of Accounts The accounts of AP&L are maintained in accordance with the uniform system of accounts l

prescribed by the FERC.

lievenues and Fuel Costs AP&L records revenues as billed to its customers on a cycle billing basis. Itevenue is not accrued for " energy delivered but not billed" at the end of the fiscal period.

Substantially all of the rate schedules of AP&L include adjustment clauses under which fuel and purchased power costs aboie or below the levels allowed in the various rate schedules are permitted to be billed or required to be credited to customers. AP&L has adopted a deferral method of accounting _

for those fuel and purchased power costs-recoverable under fuel adjustment clauses. Under this method, such costs are deferred to the' month in which the related revenues are billed.

The fuel adjustment factor contains an amount for a nuclear reserve, estimated to cover the cost of replacement energy when either ANO 1 or: ANO 2 is down for scheduled maintenance and refueling. The reserve bears interest and is used to reduce fuel expense for fuel adjustment purposes during the maintenance and refueling period. In addition, the fuel adjustment clause provides, as an incentive with respect to ANO, for over or under recovery of cost of replacement energy in excess of the cost of equal amounts of nuclear energy when the units are not down for refueling. The recovery of fuel cost and purchased power cost for hilssouri retail customers is presently limited to the amount of such costs included in each service rate schedule.

t Utility Plant and Depreciation

- The cost of additions to utility plant includes contracted work, direct labor and materials,-

allocable ovetheads and an allowance for the composite cost of funds used during construction. The t

costs of units of property retired are removed from utility plant and such costs, plus removal costs,less -

salvage, are charged to accumulated depreciation, hiaintenance and repair of property and replace-ment of items determined to be less than units of property are charged primarily to operating expenses.

Depreciation is computed on the straight line basis at re.tes based on the estimated service lives of-the various classes of property. Depreciation on average depreciable property was approximately 3.4 percent in 1990 and 3.3 percent in 1989 and 1988. Substantially all of AP&L's utility plant is subject -

to the lien ofits mortgage and deed of trust.

20 i

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ARKANSAS POWER & LIGitT CONIPANY NOTE 5 TO FINANCIAL STATENIENTS - (Continued)

Jointly Otened Generating Stations AP&L is a co ow ner in two coal-fueled, two unit generating stations, the White Bluff Station nd the Independence Station. (See Notes 2 and 6 to AP&L's Fmancial Statements

" Rate and Regula-tory Matters - Arkansas - Stipulation and Settlement Agreement" and " Commitments and Contin-gencies - Unit Power Purchase Agreement" with respect to the sale of AP&L'S interests in Independence 2 and Ritchie 2 to Entergy Power on August 2S,1990.) AP&L is the agent for the respectise co owners and operates the stations.

AP&L records its imestment and expenses associated with these generating stations to the extent ofits ownership interests. At December 31,1990, AP&L's investnent and accumulated depreciation in these generating stations were as follows:

l'ertent 4ccumulated Generating Statinns Ownership Insestment Degreelation White Bluff:

Unit l' 57.00'7c

$217,396.542

$ 66.321,692 Unit 2' 57.00 179,595.000 49,737,931 Independence: Unit 1 31.50 116.370.676 27,785.956 Common Facilities..

15.75 29.219,264 6.719.289

Including common facilities Postrctirernent Urnefits AP&L has postretirernent benefit plans cosering substantially all of its emplo>ces. The policy of AP&L is to fund pension costs in accordance with contribution guidelines established by the Employee Retirement income Security Act of 1974, as tunended, and the Internal Revenue Code of 1956, as amended, and to fund other postretuement plan costs as incurred. The costs of postretirement healthcare and life insurance benefit plans are accounted for on a cash basis. (See Note 11 to AP&L's Financial Statements "Postretirement Benefits", for additional information with respect to postre-tirement benefits other than pensions.)

incorne Tates AP&L joins its parent in filing a consolidated Federal income tax return. Pursuant to an intra-system income tax allocation agreement, income taxes are allocated to AP&L in proportion to its contribution to the consolidated taxable income. In accordance with SEC regulations no System company is required to pay more income taxes than would have been paid had a separate income tax return been filed. Deferred income taxes are provided for differences between book and taxable income to the extent permitted by the regulatory bodies for ratemaking purposes. Investment tax credits allocated to AP&L are deferred and amortized over the average useful life of the related property, in April 1990 AP&L began amortizing all deferred investment tax credits. (See Note 2 to AP&L's Financial Statements " Rate and Regulatory Matters-Arkansas-Stipulation and Settle-ment Agreement ")

Allottance for Funds Used During Construct!on To the extent that AP&L is not permitted by its regulatory bodies to recover in current rates the carrying cost of funds used for construction, AP&L capitalizes, as an appropriate cost of utility plant, AFUDC which is calculated and recorded as provided by the regulatory uniform system of accounts.

Under this utility industry practice, construction work in progress on the balance sheet is charged and the income statement is credited for the approximate composite interest cost of borrowed funds and for a reasonable return on the equity funds used for construction. This procedure is intended to 21

I b

l AllRANSAS POWEll & LIGilT CONIPANY j

NOTES TO l'INANCIAL STATE %lENTS - (Continued) l remose from the income statement the effect of the cost of financing the construction program and results in treating the AFUDC charges in the same manner as construction, labor and material costs, i

As not. cash items, credits to the income statement for the return on equity funds have no effect on

)

cash flows from operating activities. After the property is placed in service, the AFUDC charged to construction costs is recoserable from customers through depreciatica provisions included in rates charged for utility service. The effective composite AFUDC rate for AP&L was 8.6 percent, 9.0 percent. and 9.2 percent for 1990 1959 and 1955. respectively, llate Deferrals Under the terms of the Revised Arkansas Settlement Agreement (see Note 2 to AP&L's Financial

]

Statements " Rate and Regulatory hiatters - Arkansas - Retail, Revised Arkansas Settlement Agree.

ment"), AP&L will variously retain, defer and recover differing portions of the purchased power costs associated with its 36 percent allocated share of the capacity and energy from Grand Gulf 1.

By

{

deferring Grand Gulf I purchased power costs incurred but not concurrently recovered through rates, the impact of Grand Gulf 1 related costs is removed from the income statement, excluding the Retained Share. Only those costs permanently retained and not recovered through rates or through sales to third parties result in a reduction of net income. Recause the actual collection of revenues to recover the deferred amounts will not occur until the future, AP&L incurred cash requirements and recorded a deferred asset in the amount of the deferral. The carrying charges associated with the fmancing of the deferrals are recovered currently from customers. In 1991, AP&L will begin to recover deferred costs and revenue collections will exceed, to the extent of such recovery, current cash requirements for these costs. Recovery of previously deferred amounts does not increase net income because the related deferred costs are concurrently amortized into operating expenses.

Other Non.Cwrent I, labilities It is the policy of AP&L to record provisians for uninsured property risks. and claims for injuries and damages through charges to operating expense on an accrual hasis. Accruals for these provisions have been allowed for ratemaking purposes.

Tieclassifications Certain reclassifications of previously reported amounts have been made to conforin with current classif eations. These reclassifications had no elicet on net income.

NOTE 2. RATE AND REGULATORY NIATTERS Grand Gulf Nuclear Station AP&L is a party to certain agreements and proceedings concerning System Energy and the Grand Gulf Station. of which 90 percent is owned or leased by System Energy. (See " Unit Power Salea Agreement" below and Note 6 to AP&L's Financial Statements " Commitments and Contingencies -

Availability Agreement and Heallocation Agreement", with respect to these matters.)

Unit Poteer Sales Agreement Pursuant to the allocation specified in the Unit Power Sales Agreement among System Energy and the System operating companies as ordered by the FERC in its June 13 Decision, System Energy sells to the System operating companies all ofits 90% share of the capacity and energy from Grand Gulf 1 in accordance with specified percentages ( AP&L, 36%; LP&L,14%; hlP&L, 33%; and NOPSI,17%).

Charges under the Unit Power Sales Agreement, which are billed monthly, are based on System Energy's full cost of service, including System Energy's operating expenses, depreciation, and capital costs. AP&L's monthly obligation for payments to System Energy for Grand Gulf I capacity and 22

ARKANSAS POWER & LICllT CONIPANY NOTES TO FINANCIAL STATENIENTS - (Continued) energy !s approximately $24 million. The Unit Power Sales Agreement will remain in effect until terminated by the parties and approved by the FERC, which most likely would occur after Gran:1 Gulf I is retired from service.

The June 13 Decision allocating the capacity and energy from System Energy's share of Grand Gulf I and the costs associated therewith amon_g the System operating companies was reafIlrmed by the FERC in its November 30.1987 order. The challenges to this decision terminated on April 16,1990, when the U.S. Supreme Court denied a petition for writ of certiorari seeking review of the D.C.

Circutt's afiltmance of the November 30,1957 order, thereby ending the appeals process with respect to the June 13 Decision. (See Note 8 to AP&L's Financial Stateents

" Commitments and Contingencies - Availability Agreement and Reallocation Agreemuf with respect to certain contractual arranger..ents among the System operating companies relating to Giand Gulf 1.)

Adaraas - Retail, Settlement Agrcement On September 9,1955, the ANC %- ved the terms of the Arkansas Settlement Agreement which, among other things, resolo d C a w (except allocation and rate design, which were dealt with in a subsequent order) reb, to ten <ery by AP&L of the portion, attributable to Arkansas retail customert of its costs asso Jed with N allocated share of capacity and energy from Grand Gulf 1 ( Arkansa Costs). Under the term Cm Arkansas Settlement Agreement, AP&L would retain.

defer and recover varying portions of meh e-.s over the life of the unit.

The APSC order approving the Arx as Settlement Agreement was contested by pleadings filed in separate dockets with the APSC in November 1985. AP&L and the APSC staff have answered and mosed to dismiss these cotr. plaints. There has been no significant activity in these matters since late 1955.

Adansas - Retail, Recised Adansas Settlement Agreement The deferral provisions of AP&L's Arkansas Settlement Agreement relating to recovery by AP&L of the Arkansas Costs did not comply with the requirements of SFAS No. 92, an accounting standard issued in August 1987 by the FASB relating to recording of deferred amounts as assets for accounting purposes. Therefore, the parties, pursuant to the terms of the Arkansas Settlement Agreement, negotiated an mr.endment thereof which brought such provisions into compliance. The Revised Arkansas Settlement Agreement was approved by the APSC on October 6,1988, and became effective January 1,1959. AP&L believes, and has been advised by its independent auditors, that the Revised Arkansaa Settlement Agreement sati< lies the requirements of SFAS No,92.

Like the Arkansas Settlement Agreement, the Revised Arkansas Settlement. Agreement provides that AP&L permanently retain and not recover (except through other sales as described below) a portion of a Arkansas Costs (Retained Share). The Retained Share (stated as a percentage of System Energy's share of Grand Gnif I) ranges from 5.67 percent in 19S9 to 7.92 percent in 1994 and all succeeding years of ecmmercial operation of the unit, Under the terms of the Revised Arkansas Settlement Agreement, APkLis permitted to recover on a current basis a portion of its Arkansas Costs (Current Recovery Share). (fee " Arkansas - Rate Riders" below.) The Arkansas Set;lement Agreement had provided that prior to January 1,10S9, a portion of the Current Recovery Share would be phased in, with AP&L deferring for future recovery certain costs in the first three years. Under the Revised Arkansas Settlement Agreement, these previously deferred amounts are now included in the Deferred Balance described below, and there is no further deferral of any part of the Current Recovery Share. The Current Recovery Share (stated as a percentage of System Energy's 90% interest in Grand Gulf 1) ranges from 17.86 percent in 1989 to 26.0S percent in 1994 and thereafter.

23 l

i ARKANSAS POWER & LIGIIT CONIPANY NOTES TO l'INANCI AL STATENIENTS - (Continued)

Under the provisions of the Arkansas Settlement Agreement, through December 31,19S5, AP&L had deferred approximately $578 million of its Arkansas Costs for future recovery, through both the phasing in of part of the Current Recovery Share (as described above) and the inventurying of an additional portion of Arkansas Costs. The Revised Arkaesas Settlement Agreement provided for an additional 1017 percent and 6.95 percent of such costs (stated as a percentage of System Energy's share of Grand Gulf 1) to be deferred in 1959 and 1990, respectisely, for future collection (Deferral Share). The Deferral Share, plus the $576 million of previously deferred costs (collectisely, Deferred Balance) will be recovered by AP&L in increasing percentages from 1991 through 1995, at which time the Deferred Balance will have been fully collected. The Deferred Balance at December 31,1990 was

$702.9 million. AP&L is permitted to recoser on a current basis the incremental cost of financing the unrecovered portion of the Deferred Balance.

APhlfs agreement to defer the recovery of Arkansas Costs is contingent upon and conditioned by (a) its ability to fmance such deferral on reasonable terms and (b) its ability to record on it", books, on a current basis, deferral of any Arkansas Costs under applicable accounting standards. In the event ArhL is not able to finance all or any portion of its deferred Grand Gulf 1-related costs on reasonable terms, then, provided AP&L gives proper notice and subject to possible proceedings before the APSC j

contesting AP&L's assertion of inability to fmance, the Deferral Share will be reduced during the y

perir d of such inability to fmance, and the Current Recovery Share will be increased to the extent d

necessary to reco er, on a current basis, the costs which would otherwise have been allocated to the 2

Deferral Share. In the eveet AP&L is not able to record on its books, on a current basis, the deferral of any Arkansas Costs, the parties to the Revised Arkansas Settlement Agreement have agreed to attempt to negotiate a suutually acceptable amendment, falling which the Revised Arkansas Settlement Agreement will thereafter be terminated. The Revised Arkansas Settlement Agreement also specifies that in the esent accounting standards are changed such that AP&L would be permitted to defer i

Crand Gulf 1 related costs without having to satisfy the criteria established in SFAS No. 92, then any party to the Revised Arkansas Settlement Agreement may propose a rr 'sion to AP&L's phase in plan, and all parties agree to negotiate in good faith with respect to such t osal.

AP&L has the right under the Revised Arkansas Settlement Agreeme, to sell capacity and energy available from its Retained Share to third parties, which shall not include AP&ljs wholesale customers.

In the event AP&L is not able to sell such capacity and energy to such third parties,it has the right to sell the energy available from such capacity, and to date a significant portion has been sold, to its retail customers at a price equal to A"&L's avoided energy cost, which is currently less than AP&L's cost of such energy. Proceeds from s'Jes of capacity and/or energy from AP&L's Retained Share shall accrue to the sole benellt of AP&I's stockholders and shall not be used to reduce the determination of the appropriate revenues to be recovered from AP&L's customers. However, any such sales of capacity and energy from the Arkansas Costs to third parties during the period between January 1,1989, and December 31,1995, will be allocated in the following manner: (1) fifty percent of the capacity and/or energy sold (not to exceed the amount of capacity allocated to the Retained Share) will be considered to be a sale of capacity and/or energy from the Retained Share, and (2) the remainder of the capacity and/or energy sold will, unless the APSC determines otherwise, be considered to be a sale proportion-ately from the Deferral Share and the current Recovery Share and the proceeds of such sale shall be applied to reduce the Deferred Balance, The Revised Arkansas Settlement Agreement provides that, should any other System operating company enter into an agreen.ent to absorb a greater portion of Crand Gulf I related costs than AP&L, or should System Energy enter into a settlement agreement to reduce its charges to AP&L under the June 13 Decision, the Retained Share will be correspondingly increased or decreased, respectively.

(See " Unit Power Sales Agreement" above for a discussion of the June !3 Decision.)

24 b

i ARKANSAS POWER & LIGilT CONIPANY NOTES TO FINANCI AL STATENIENTS - (Cont!nued)

Arkansas - Bate Riders in conjunction with the Revised Arkansas Settlement Agreement, AP&L was permitted to implement annual updates to the Grand Gulf rate rider (Rider $133), increasing Arkansas retail rates by approximately 2.6 percent, 4.0 percent, and 2.7 percent, for the years 1991,1990, and 1959, respectively. These increases reflcet scheduled phase in plan increases adjusted for any prior year over or under collection.

Effectise in September 1956 the APSC approved an AP&L-proposed tax adjustment rider (Rider h!35), Rider h135. as modified, was designed to reduce Arkansas retail rates by approximately $31 million annually to reflect the reduction in the corporate income tax rate included in the Tax Reform Act of 1956. Rider h135 also included a corresponding credit of approximately $58.6 million over a three year period, which concluded in 1959, to reflect reductions in certain accumulated deferred income tax accounts.

In 1955, the Arkansas Settlement Agreement denied AP&L a current return on alleged excess capacity of 969 megawatts, but allowed AP&L to earn a full deferred return on the investment in such capacity through June 30,1958. Deferrals ceased June 30,1955, and pursuant to Rider ht39, which was designed to recover such deferred amounts over a 10-year recovery period. AP&L begen recovering such deferred amounts July 1,1955.

On hlarch 9,1958, the APSC approved an AP&L-proposed revision to the existing Nuclear Decommissioning Cost Rider 5126 and a new Depreciation Rate Reduction Rider h141, The riders were simultaneously implemented hlarch 23, 1955, and were designed to reduce AP&L's rates by approximately $1.7 million annually, composed of a $7.6 million increase in decommissioning cost and a

$9.3 million decrease in depreciation cost. This ordei also approved the funding of decemmissioning costs with external trusts due to tax incentives provided by the Tax Reform Act of 19S4 and provided for an annual update of the Decommissioning Cost Rider. The APSC approved annual adjustments to Rider ht26 which resulted in increased Arkansas retail rates of approximately 0.4% in 1990, and will decrease Arkansas retail rates by approximately 0.1% in 1991. (See Note 8 to AP&L's Financial Statements

" Commitments and Contingencies - Spent Nucle. "uel and Decommiss oning Cost.")

Missouri - 1985 Bate Request On June 7,1955, AP&L filed an application with the PSChi for an annual increase in hiissouri retail rates of approximately $5.0 million and an additional rate rider to provide approximately $12.2 million for Grand Gulf I related costs associated with hiissouri retail customers (htissouri Costs). On April 24,1956, the PSCNI entered an order allowing AP&L to recover the hiissouri Costs of $9.0 million, o(Tset by a reduction of approximately $3 million in other costs, phased in over five years. On h! arch 11,1958, the PSChi issued an order approving a Stipulation and Agreement and Tariff Sheets disposing of allissues in this rate case. The phase in concluded on htarch 21,1991, after recovery of all hiissouri Costs deferrals under the phase in. At that time an 11.59 percent reduction in rates took effect.

AP&L and Union Electric have signed a contract for the sale by AP&L to Union Electric of AP&L's retail properties in 511ssouri. In the event that the proposed sale is consummated, AP&L will no longer be subject to the general jurisdiction of the PSChi with respect to retail rate matters. (See "blissouri Retail Operations" below.)

Project Olive Branch in connection with an effort, referred to by the System as " Project Olive Branch", to settle outstanding issues and litigation surrounding System Energy and the Grand Gulf Station and to 25 l

ARKANSAS POWER & LIGIIT CONIPANY NOTES TO FINANCI AL STATEhlENTS - (Continued) stabilire retail rates in the System service area, on June 9,1959, AP&L, the other System operating companies, and System Energy filed the FERC Settlement with FERC to resolve various FERC-related issues in a way that would be beneficial to the System, its investors and its customers. The FERC Settlement was subsequentiv supported by the FERC staff, state and local regulators and ofileials, and Other interested parties and was approved by the FERC on July 21,1959.

Implementation of the terms of the FERC Settlement in 1959 resulted in, among other things, the following: (1) System Energy canceled and wrote oIIin September 1989 approximately $900 million of its $926 million investment in Grand Gulf 2 (construction on which had been suspended since September 1955) without seeking rate recovery from its customers, the System operating companies, including AP&L: and (2) System Energy also made a one-time credit to the System operating companies' bills in an aggregate amount of $50 million which was allocated among the System operating compruiics M accordance with their respective percentage allocations of Grand Gulf 1 capacity and energy. AP&L's share of this credit totaled $1S.0 million of which $14.5 million was refunded to customers m 1959.

While all parties to the FERC Settlement agreed not to pursue any prudence disallowance of Grand Gulf I construction costs and operating and maintenance expenses recorded through June 9, 1959, the FERC Settlement will not prejudice any party's right to seek disallowance of such costs recorded after that date or the right of parties to seek future changes to the Unit Power Sales Agreement which are not inconsistent with the FERC Settlement.

Arkansas - Stipulation and Settlement Agreement in addition to settlement of FERC-related bsues embodied in the FERC Settlement, in 1989 AP&L, the Staff of tha APSC and the Arkansas Attorney General entered into a Stipulation and Settlement Agreement requesting among other things, that (1) the APSC permit AP&L to recover in 1995 certain deferrals, amounting to $4.4 million, (2) in order to avoid an immediate application by e

AP&L for increased retail rates in Arkansas, the APSC approve the sale and transfer of AP&L's interests in Independence 2 and Ritchie 2 to Entergy Power (see "Entergy Power" below), (3) the APSC approve consolidation within the System of operating responsibility for the System's nuclear generating units, including ANO (see " Nuclear hianagement Consolidation" below), (4) the APSC permit amortization by AP&L of certain investment tax credits, without changing AP&L's retail rates to reflect such amortization and (5) the APSC approve a rate change moratorium whereby AP&L would not seek changes in retail rates until December 31,1991, except under specific circumstances.

By order dated April 2,1990, the APSC approved the Stipulation and Settlement Agreement, subject to certain conditions. With respect to the Entergy Power transactions, the APSC required, among other things, (a) that AP&L have a right of first refusal to repurchase from Entergy Power its interests in Independence 2 and Ritchie 2 at Entergy Power's book value should Entergy Power ever wish to sell the facilities. (b) that AP&L agree to a " rate cap" which would limit AP&L's rates for new capacity for the next 15 years to a level that reflects the cost to ratepayers if the units had not been sold and (c) that without a waiver from the APSC, Entergy Power not sene retail or wholesale loads in Arkansas or enter into capacity sales with any Entergy affiliate. Such conditions were a cepted by AP&L The APSC order is also subject to certain conditions, which were accepted by AJ&L, with respect to the consolidation of nuclear management in Entergy Operations.

On hlay 1,1990, the AEEC, an intervenor in the proceeding, filed with the APSC an Application for Rehearing and Request for Stay of the APSC's April 2,1990 order on the grounds, among others, that the proposed transactions were allegedly detrimental to Arkansas ratepayers. On hlay 31,1990, the APSC denied the AEEC's Application for Rehearing and Request for Stay. On June 28,1990, the AEEC fded with the Arkansas Court of Appeals a Notice of Appeal and an Application for Stay Pending 26

l ARKANSAS POWER & LIGilT COhlPANY NOTES TO FINANCIAL STATEhlENTS - (Continued)

Appeal of those portions of the APSC's April 2,1990 and hiay 31,1990 orders pertaining to the transfer of Independence 2 and Ritchie 2 to Entergy Power ana the transfer of management and operating responsibility for ANO to Entergy Operations. On July 3,1990, the Arkansas Court of Appeals ordered the AEEC's Application for Stay Pending Appeal be denied. Also, on July 3,1990, the AEEC filed with the Arkansas Court of Appeals a hiotion for Reconsideration of Denial of Stay of the Arkansas Court of Appeals

July 3.1990 order, which motion was denied by the Arkansas Court of Appeals on August 1, 1990. On July 20,1990, the AEEC filed a Petition for Review of the denial of stay with the Arkansas Supreme Court, which was denied on September 10, 1990. As to the AEEC's pending Notice of Appeal, AEEC, AP&L and the APSC have fded briefs with the Arkansas Court of Appeals and oral argument before the court has been scheduled for April 24, 1991. The matter will thereafter be decided by the Court of Appeals AP&L, believes this matter will be resolved without a material adverse impact on its fmancial condition.

Entergy Pou er AP&L filed applications in 1959 with the APSC, the PSChi, the FERC and the SEC in connection with the approval of the formation of Entergy Power, a then proposed subsidiary of Entergy to be formed to own generating capacity and to sell such capacity and energy in the wholesale market outside Arkansas and hiissouri and in markets not otherwise served presently by the System.

By order dated April 2.1990, the APSC approved, subject to certain conditions, the Stipulation and Settlement Agreement that, among other things, provided for the sale and transfer of AP&L's interests in Independence 2 and Ritchie 2 to Entergy Power An appeal by the AEEC of the APSC's order is pending before the Arkansas Court of Appeals (see " Arkansas - Stipulation and Settlement Agreement" above).

On hlay 1,1990, the PSChi issued an order approving the Entergy Power transactions.

On June 29,1990, the FERC approved the related transmission service agreement. On July 30, 1990, the LPSC, the AEEC and the City of New Orleans fded requests for rehearing by the FERC ofits June 29,1990 order. The FERC denied such requests on September 21,1990. On October 2,1990 and October 19,1990, the AEEC and the City of New Orleans, respectively, filed petitions with the D.C.

Circuit for review of the FERC's June 29,1990 and September 21,1990 orders, hiotions to intarvene were granted with respect to numerous parties, including Entergy Services, as agent for Entergy Power and AP&L. On November 19, 1990, the FERC filed a motion to consolidate the proceedings on petitions for review ofits orders filed by the AEEC and the City of New Orleans. On November 28, 1990, the AEEC stated that it does not oppose the requested consolidation so long as it is permitted to submit separate opening and reply briefs and to have separate oral argument on the issues it intends to raise, and on December 7,1990 the City of New Orleans stated that it opposes the FERC motion to consohdate those appeals. On December 11,1990, the FERC requested dismissal of the AEEC's and the City of New Orleans' petitions for review. On December 18,1990, January 4,1991 and January 11, 1991, the AEEC, the City of New Orleans and the LPSC, respectively, requested that the FERC's motion to di,miss be denied. The matter is pending.

On August 27, 1990, the SEC issued an order approving the Entergy Power transactions. On October 19,1990, October 23,1990 and October 26,1990, the City of New Orleans. the LPSC and the State of htississippi, respectively, fded a petition with the D.C. Circuit for review of the SEC's August 27.1990 order, hiotions to intervene were granted with respect to numerous parties, including Entergy, Entergy Power, Entergy Services, AP&L and System Fuels ("Entergy, et al."). On Novem-ber 20,1990 and November 30,1990, the City of New Orleans and the LPSC, respectively, filed motions with the D.C. Circuit requesting that the D.C. Circuit consolidate the proceedings with respect to the appeal of the SEC's order with the proceeding brought by the City of New Orleans in its October 19, 27 l

ARKANSAS POWER & LICilT CONIPANY NOTES TO FINANCIAL STATEMENTS - (Continued) 1990 petition for res few of the FERC's orders. On December 6,1990 and Decanber 11,1990 Entergy, et al. and the FERC, respectively, each filed replies requesting that the motions to consolidate of the City of New Orleans and the LPSC be denied. The matter is pending.

Upon receipt of the SEC order, the board of directors of Entergy Power held an organizational meeting to form Entergy Power as a new subsidiary of Entergy. On August 28,1990, AP&L seld its interests in Independence 2 and Ritchie 2 to Entergy Power for an aggregate purchase price of approximately $173.4 million. AP&L used a portion of such proceeds to redeem on October 1,1990, the balance of the 13M% series first mortgage bonds due December L 2012 ($50 million) and the 14%%

series first mortgage bonds due December 1,2014 ($100 million).

On August 20.1990 the City of New Orleans filed a complaint at the FERC against Entergy, the System operating companies and System Energy requesting the FERC to investigate certain issues related to the transfer of Independence 2 and Ritchie 2 to Entergy Power and its effect upon the System operating companies and their ratepayers. On September 21, 1990, Entergy, the System operating companies and System Energy filed with the FERC an answer to the City of New Orleans' complaint asking that the complaint be dismissed. Numerous parties have intervened in this proceeding. In the first quarter of 1991, the FERC issued an order (1) denying motions to dismiss the complaint, (2) dismissing the complaint, in part, without prejudice, (3) setting for investigation the question of whether overall billings under the System Agreement will increase as a result of the transfer of the two units to Entergy Power and,if so, whether those higher charges reflect prudently incurred costs that may be reasonably passed through the System Agreement and (4) providing that rates charged under the System Agreement after the transfer of the two units be subject to refund, effective October 19,1990. The matter is pending.

Nuclear blanagement Consolidation i

in June 1959, plans were announced whereby a nuclear management service company, Entergy Operations, would assume operating responsibility for ANO, L.P&L's nuclear Waterford Steam Electric Generating Station Unit No. 3 (Waterford 3) and Grand Gulf 1 subject, respectively, to AP&L's, LP&L's and System Energy's oversight. Under the proposal. AP&L, LP&L, System Energy and the other Grand Gulf I and Waterford 3 co-owners would retain ownership of their respective nuclear generating units. Further, AP&L LP&L, and System Energy would retain their associated capacity and energy entitlements and would pay directly or reimburse Entergy Operations at cost for service associated with the operation and management of these units. Applications for approval of or non-opposition to, as applicable, the proposed arrangements were filed with the NRC, the LPSC, the APSC,

(

the Council of the City of New Orleans, Louisiana and the SEC and all such approvals were received i

by June 5,1990. The APSC order provides for certain conditions, which were accepted by AP&L, including, that the APSC has the right to reexamine its approval and withdraw such approval at any time, and that AP&L flow through to ratepayers, through its fuel adjustment clause,50 percent of the net savings projected from the nuclear consolidation until December 31,1991. However, the APSC's l

order is being appealed (see " Arkansas - Stipulation and Settlement Agreement" above). On June G, 1990, an organizational meeting of the board of directors of Entergy Operations was held to form Entergy Operations as a new subsidiary of Entergy, and Entergy Operations assumed responsibility for the operation of ANO, Waterford 3 and Grand Gulf 1.

(See Note 10 to AP&L's Financial State-ments

" Transactions With Associated Companies.")

l l

Minouri Retail Operations Union Electric and AP&L have signed a contract for the sale of AP&L's retail properties in Missouri. AP&L's retail properties in Missouri constitute less than 2% of AP&L's total property, The l

j 28

l l

ARKANSAS POWER & LIGilT COhlPANY NOTES TO FINANCIAL STAT 13f ENTS - (Continued) sale price of such property, hiissouri accounts receivable, and material and supplies inventories is approximately $76 million, which is greater than APacL's book value of such properties, subject to l

certain adjustments as of the date the sale is closed. The properties, located in southeastern and southcentral hiissouri, are generally contiguous to Union Electric's present service area. Under the terms of the contract, AP&L's 25,000 hiissouri retail customers will become Union Electric customers and AP&L's employees in hiissourt will become Union Electric employees, in addition, the terms of the contract call for AP&L to sell to Union Electric 120 megawatts of capacity and associated energy for an initial period of 10 years. Beginning on January 1,1995, Union Electric shall also purchase 40 megawatts of peaking capacity, The closing of the sale is currently required by the contract to occur by April 30,1991, but may be delayed by regulabry proceedings.

On August 2,1990, AP&L and Union Electric filed a joint application with the PSChi seeking approval of the sale and AP&L filed an application with the APSC seeking a declaration that the APSC does not have jurisdiction over the sale or, alternatively, an order approving the sale, In August 1990, interventions were fded at the PSChi by various parties. Ilearings before the PSChi commenced in late hlarch 1991. No action is expected by the APSC until the PSChi order is receised.

On August 27,1990, AP&L filed the power contract and related transmission or interconnection agreements with the FERC. In September 1999, interventions were filed at the FERC by various parties. On January 7,1991, the FERC rejected the filing because the power contract did not contain certain provisions required by the FERC, but objected to by Union Electric. The power contract was refded in the first quarter of 1991 after revision to avoid the FERC's objections. On November 8,1990, AP&L filed with the SEC for requisite approval of the transaction un<ler the Public Utility Holding Company Act of 1935.

The consummation of this transaction is dependent upon obtaining required regulatory approvals.

The proceeds from this transaet!on, when and if consummated, could be used to meet construction expenditures or for other corporate purposes. Alternatively, approximately $70 million of the proceeds could be used to redeem all or a portion of certain series of AP&L's outstanding first mortgage bonds at special redemption prices, at or near par, pursuant to and in compliance with applicable provisions of its mortgage and deed of trust.

29

ARKANSAS POWER & LICliT COhlPANY NOTES TO FINANCI AL STATEhlENTS.- (Continued)

NOTE 3. INCOhfE TAXES The components of income tax expense (credit) are as follows:

I'or the 1 rears I:nded December 31,-

1990-1969 1946 (in Thousands).

Current:

Fe d e ral........................................... $ 45.689

$ 9.227

$ 2,222 State 5.232 (788) 4,505 Total.........................................,

50,921 8,439 6,727 Deferred - net:

Liberalized depreciation...............................

827

-28,697 30,960 -

Alternative minimu m tax...............................

(14,755)-

- (10,126) -

5,850

.i Coal freight settlement :...............................

1,410 14,987 (6,406)

-.i Net operating loss carryforward................,........

21,028 L 10,025

-(31,053)

In terest on tax deficiency..............................

. 73 -

4,369 -

3,237 Amortization of excess deferred tax......................

1,880

-(13.287)

(21.385)

Nuclear maintenance expenses..........................

(2,480)

- (1,920) 8,459 -

Nuclear reserve and related interest,,,.................

(539)-

(1,165)

L5,683 Provision for estimated losses....

(1,722) 864-

. 5,542-Deferred purchased power costs......................

13.097

' 32,614 l

' 45,49'2' Deferred excess capacity costs...

(3.233)

- (3,114) 1.548 -

Unbilled revenue..

(1,700)

'(9,620)

. (798);

Other.,

4,108 944

_- (4.869)

To t al........

17,943 37,268-42.260 investment tax credit adjustments - net (12,022)

L 3,543 (1,972)

Recorded income tax expense,......,............. $ 56.84 2 -

$ 49,250 -

$ 47,015 -

Charged to operations...........,..................... $ L30,055

$' 28.866

$ 25,501.

[

Charged to other income..

' 25,887

' 20.384 21.514 j

Recorded income tax expense......................

56,842 ;

49.250,

47,015 i

income taxes applied against the debt component of AFUDC.

134;

-77 72 To t al i ncom e t ax es................................... $ 56,976'

$ 49,327 L $ 47,087 :

l i

t

' y t

f h

i 30 i

l' j

i.

?:

m

~

r

l 1

l ARKANSAS POWER & LIGIIT COMPANY NOTES TO FINANCIAL STATEMENTS - (Continued)

Total income taxes differ from the amounts computed by applying the statutory federal income tax rate to income before taxes as shown below:

For the Years I:nded I)ccember 31, 1990 1949 104%

% of

% of Amount Pre. Tax Amnuut Pre.Tas Amount Pre.Tas (000)

Income (000)

I ncsime, (lMM))

Income Computed at statutory rate.

$63,447 34.0% $61,618 34.0 % $60,576 34.0 %

Increases (reductions) in tax resulting from:

Amortization of excess deferred tax 1,650 1.0 (13,287)

(7.3)

(21,385) (12.0)

State income taxes net of federal income tax elTect....

5,143 4.4 6.514 3.6 6,831 3.8 Amortization of investment tax credit.

(20,428) (11.0)

(1,767)

(1.0)

(1,387)

(0.8)

Basts difference of assets involved in the sale of Independence 2 and Ritchie 2,,

7,011 3.8 Depreciation.,

(4,579)

(2.5)

(3,800)

(2.1)

(3,688)

(2.1)

Other - net 1,368 0.7 (28) 6.068 3.5 Recorded income tax expense......

56,542 30.4 49,250 27.2 47,015 26.4 income taxes applied against debt component of AFUDC.

134 0.1 77 72 Total income taxes,

$56.976 30.5% $49,327 27.2% $47,057 26.4 %

=

Unused investment tax credits at December 31, 1990, amounted to $13.7 million after the 35%

reduction required by the Tax Reform Act of 1956. These credits may be applied against federal income tax liabilities in future years. If not used, they will expire in 1993 through 2004.

The alternative minimum tax (AMT) credit at December 31,1990 is $44.7 million. This AMT credit can be carried forward indefinitely and used against regular income tax.

Pursuant to an order of the APSC dated March 1,1982, AP&L ceased providing deferred taxes on certain timing differences which were previously normalized. However, the order requires AP&L to continue providing deferred taxes on applicable decommissioning costs of nuclear plant and ptovides for continued normalization of timing differences which are required by the Internal Revenue Code or state law. In addition, the APSC approved normalization for deferred purchased power costs in accordance with the Revised Arkansas Settlement Agreement.

Cumulative income tax timing differences for which deferred income taxes have not been provided are $271.9 million, $279.7 million and $272.2 million at December 31,1990,1989 and 1988, respectively.

In December 19S7, the FASB issued SFAS No. 96, " Accounting for Income Taxes," which was scheduled to be effective for fiscal years beginning after December 15,1988. The FASB subsequently issued statements numbers 100 and 103, which delayed the eff-etive date of SFAS No. 96 to fiscal years beginning after December 15.1991. The FASB is expected to issue a new exposure drait in the second quarter of 1991. This exposure draft may further delay the effective date and simplify the implementa-tion of SFAS No. 96. SFAS No. 96 expands the requirements to record deferred income taxes for all 31 1

1

AllKANSAS POWEll & LIGilT COMPANY NOTES 'lO l'INANCI AL STATEMENTS - (Continued) temporary differences that are reported in one year for financial reporting purposes and a different year for tax purposes. This will require the recognition of deferred tax balances for certain items not previously reflected in the financial statements. such as a deferred tax liability relating to AFUDC.

Under the liability method adopted by SFAS No. 96 deferred tax balances will be based on enacted tax laws at tax rates that are expected to be in effect when the temporary differences reverse.

Ilased on a preliminary study, AP&L expects that the adoption of SFAS No. 96,in its present form, would result in a net increase in accumulated deferred income taxes with a corresponding increase in assets it is not expected that results of operations for AP&L would be significantly impacted by the adoption of SFAS No. 96 in its present form.

NOTE.8. l.INES OF CilEDIT AND llELATED IlOllilOWINGS Under the Public Utility llolding Company Act of 1935, AP&L has authorization from the SEC to has e outstanding short term borrowings aggregating $125.0 million at any one time through November 1992, subject to increase to a maximum of $240 million with further SEC approval. Short term borrowings and the applicable interest rates (determined by dividing applicable interest expense by the aserage amount borrowed) follow:

l'or the Yean I:nded December 31, 1990 1950 104%

(In Thouueds)

Maximum month end borrowing.

$121,132

$30.96h

$51,172 Year-end borrowing 667

$27,667

$ 667 Aserage borrowing:

llank loans

$ 7,107

$ 6,023

$21,001 Associated companies.

3.795 L861 Other.

667 667 667 As erage interest rate-During the period -

llank loans 10,00 %

11.05 %

9.15%

Associated companies.

8.34 6.62 Other.

10.01 11,00 9.35 At end of period -

Ilank loans Associated companies.

7.97%

Other.

10.00%

10.50 10.50%

AP&L had $76.2 million and $62.5 million in lines of credit with Arkansas banks at December 31, 1990 and 1959, respectisely. AP&L had no outstanding borrowings under these lines of credit at year-end 1990 or 1959. In addition, AP&L had approximately $667,000 in other short term borrowings at December 31.1990 and 1959.

AP&L participates with certain other System operating companies in the Money Pool whereby those System companies with available funds make short term loans to other System companies (other than Entergy) having short-term borrowing requirements. AP&L may borrow from these sources 32

l l

AllKANSAS POWEll & LIGitT CONIPANY NOTES 10 l'INANCIAL STATENIENTS - (Continued) subject only to its inaxituum authorired level of short-terrn borrowings. At December 31,1990, AP&L had $100 million of short term investinents and no outstanding hoirowings in the hioney Pool.

NOTE 5. PREl'EllitED AND CON 1NION STOCK On January 22,1990, AP&L repurchased from Entergy 6 million shares of AP&L's common stock,

$').01 par value, et a purchase price of $12,50 per share for an aggregate purchase price of $100 inillion.

AP&L has received SEC approval to purchase or otherwise acciuire up to $150 million aggregate par value of its outstuding preferred stock, Changes in Shares Outstanding During the Year, ItM) 10%9 19%%

Conunon stock shares sold (repurchased),,,

(6,000,000)

Preferred stock shares sold (retired):

$100 par value (45,000)

(45,000)

(53,337)

$25 par value (266,433) (199,056) (337,216)

Preferred Stock Outstanding At December 31, 1990

!!AD (In 1 houunds)

Without sinking fund:

Stated at $100 per share

$101,350 $101,350 Stated at $25 per share 25,000 25,000 Premiurn and expense - net 540 540 Total preferred stock without sinking fund

$ 126.600 $126.690 With sinking fund:

Stated at $100 per share

$ 65,500 $ 73,000 Stated at $25 per share 49,027 55Ess Premium and expense-net (1,166)

(1,134)

Total preferred stock with sinking fund,

$116.361 $ 127,554 33

._m.__

. - _. - _ -. ~.. _ _ _. _

. ~ _. _. _ _. _ _ _. _ __

9 AllKANSAS POWEll & I IGIIT CONIPANY NOTES TO FINANCIAL STATENIENTS- (Continued)

Preferred Sinck issues Outstanding Sharn Outstanding Curr 1

$ hares At Dnonher 31 c,ll g.ent

,ge,

.y Authorised ifMM) 1949 l'er Share -

Cumulative. $100 Par Value:

Without sinking fund:

4.32% series 70.000 70.000

-70,000

$103fA7 4.72% series......

93,500 93,500 93,500 107.000-4.56% se ries....................

75.000 75,000 75,000

.102.830 4.56% 1965 se ri e s..................

75,000 75,000 75,000 102.500 6.0S% series 100,000 100,000 100,000.

102.830 -

I 7.32% se ries,,.................,

100,000 100,000 100,000 103.170 7.80% series........,..........

150.000 150,000 150,000 103,250 -

7.40% series......................

200,000 200,000 200.000 102.800-7.88% series.....................

150.000 150.000 150,000 103.000 Total...

1,013,500 1.013.500 1,013,500 With sinking fund *:

10.60% series...................

80,000 60.000 00.000

'104.090 11.04% series.

120,000 -

120,000 140,000

-104.200 S.52% series.......

485.000 485,000 500,000 108.520 To t al.......... '.......

685.000 '

655,000 730,000 U n i s s u ed............................

2,031,500 '

s l

Total, $100 Par Value........... _3,730.000 -

1,698.500'.

1,743,500 Cumulative. 425 Par Value:

Without sinking fund:

6.84% series....................

400,000 400,000 ;

400,000.

27,110 10.40% series............

600,000 600.000

' 600,000-

'27.300' To t a l......................

1,000.000

-1.000,000-1,000.000 With sinking fund *:

9.92% series.

-961,085'.

961,085 1,027,518 l 26.940 13.28% series................

1.000,000 1.000.000' 1,200,000.

28.220

. To t a l...........................

1,961,085 1,961,085 ~

2.227.518 -

U n i ss u ed............................

6.038,915

' Total. $25 Par Value.............

9.000,000.

2.961.085 3.227.518.

.j i

Cumulative, $0.01 Par Value:

U n is s u ed............................ 15.000.000 Total, $0.01 Par Value....

15.000,000

}

These series are to be retired in full through the operation of sinking funds. The 9.92% series,10.60%

series,.ll.04% series and 13.28% series are being redeemed each year at the rate of 80,000,10,000,.

20,000 and 100.000 shares. respectively. Ileginning November 1,1991.' the 8.52% series is to be-redeemed at the rate of 25,000 shares each year. In addition, AP&L; has the non-eumulative option--

to redeem an additional like amount of said shares each year.

'34; t

m y,,e,,

, i,.

I ARKANSAS POWER & LIGilT CONIPANY NOTES TO FINANCIAL STATEh1ENTS - (Continued)

NOTE 6. LONG TEll%1 DEBT Long-term debt at December 31,1990 and 1989 consisted of the following:

1990 1989 (In Thousands)

First htortgage Bonds:

5%% series due 1990 500 4%% series due 1991 12,000 12,000 4%% series due 1993 15,000 15,000 4%% series due 1995 25.000 25,000 5%% series due 1996 25.000 25,000 6%% series due 1996.

1,560 1,700 5%% series due 1997 30.000 30,000 8%% series due 1998 5,800 6,200 7%% series due 1998 15,000 15,000 9%% series due 1999 25,000 25.000 9%% series due 2000 25,000 25,000 9%% series due 2000....

2,600 2,800 7%% series due 2001 30,000 30,000 6 % series due 200) 30.000 30,000 7%% series due 2002......,,..

35.000 35,000 7%% series due 2002..,,

15,000 15,000 8 % series due 2003 40,000 40,000 8%4 series due 2003 40.000 10,000 10%% series due 2004 40,000 40,000 10%% series due 2005 40,000 40,000 9%% series due 2007......

75,000 75,000 9%% series due 2008 75,000 75,000 10%% series due 2009,.

60.000 60,000 13%% series due 2012 50,000 14%% series due 2014 100,000 10%% series due 2016 50,000 50,000 9%% series due 2019.........

75,000 75,000 10 % series due 2020 150,000 10%% series due 2020...

175,000 Total First hiortgage Bonds..

1,111,960 938,260 Installment Purchase Contracts:

Pope County, Arkansas; due 1990 to 2020 at rates ranging from 7%% to 11% *..........,..

160,275 140,505 JelTerson County. Arkansas; due 1990 to 2008 at rates ranging fr o m 6%% t o 10%......................................

66,575 67,525 Independence County, Arkansas; due 2013 at rate of 11%%.........

45,000 45,000 Total Installment Purchase Contrr. cts...,

271,850 253,030 Long-Term Obligation - Department of Energy (Note 8),...........

89.053 82,393 Unamortized Premium and Discount on Debt - Net...

(14,973)

(6,554)

Total Long Term Debt...

1,457,890 1,267,129 Less - Amount Due Within One Year........................

14,690 3,080 Long-Term Debt Excluding Amount Due Within One Year...... $1,443.200

$1,264,049

' $20 million,8% Pope County, Arkansas Solid Waste Disposal Revenue Bonds due November 2020, issued November 1990. are secured by $21.1 million,0.0% First hfortgage Bonds and $120 million.

11% Pope County, Arkansas Pollution Control Revenue Bonds due December 2015, issued Decem, ber 1985, are secured by $128.8 million. 0.0% First biortgage Bonds.

35 l

l

ARKANSAS POWER & I.lCllT COhlPANY

.q NOTES TO FINANCIAL STATEhlENTS- (Continued)

At December 31,1990, the sinking fund requirements and maturities for long-term debt for the years 1991 through 1995 are as follows:

Cmh M

Sinking I'und Mnting Fund' Maiorlinci" (in Thousands) 1991.........,..............

$b00

$5.765

$13,135 1992...

800 5,76S 1,225 1993,......

800

-5,618 16,350 l

1994.....,

600 5.616.

1,470 1995.

600 5,368

- 26,625

-)

' These ann'ial sinking fund requirements may be met by certification of property additions at a rate l

of 167% of such requirements.

j

" These maturities do not reflect $755,000 of pollution control revenue bonds which are subject to-redemption at the option of the holders of such bonds at a redemption price of 100%.

AP&L issued $150 million of 10% first mortgage bonds on February 1l1990l-Subsequently,'in 1990, 1

AP&L received regulatory approval allowing the sale of up to $250 million of additional llrst mortgage -

j bonds and $100 million of preferred stock through August 31,1992. Pursuant to this authorization, AP&L issued $175 million of 10%% lirst mortgage bonds lii October 1990; AP&L derived $20 million and $27 million from the issuance of solid waste disposal revenue bonds

.l In November 1990 and January 1991, respectively.

On August 28,1990. AP&L sohl its interests in Independence 2 and Ritchie 2 to Entergy Power for.

approximately $173.4 million. Proceeds from the sale were applied to the iedemption on-October 1, 1990 of $50 million 13%% first mortgage bonds and $100 million 14%% first mortgage bonds, (See=

i Note 2 to AP&L's Financial Statements

" Rate and Regulatory hiatters - Entergy Power" for -

information regarding the sale ofIndependence 2 and Hitchic 2 to Entergy Power, and '.* Missouri RetailJ Operations" for'information on the possible redemption of first mortgage bonds at special redemption prices at or near par with a portion of the proceeds from the proposed sale of AP&l/s hilssouri retallj properties).

AP&L has received SEC approvnt to purchase or otherwise acquire up to $3'i0 million principal amount ofits outstanding first mortgage bonds and $175 million principal amount'of pollution control revenue bonds and/or solid waste disposal revenue bonds issued for the benefit of AP&L..

i NOTE 7, RETAINED EARNINGS The indentures relating to AP&l/s long term debt and provisions of the amended and restated i

articles ofincorporation relating to AP&L's preferred stock' provide for restrictions on the payment'of L cash dividends on common stock and acquisition of outstanding shares of AP&L's common stock [ As of December 31,1990, $16.4 million'of retained earnings were free from such restrictionsc j

r NOTE 8. COMMIThlENTS AND CONTINGENCIES -

Capital llequirements and Financing APhils construction program cositemplates expenditures (including 5AFUDC:and excluding

j nuclear fuel).of approximately $157.7 million in 1991, $178.8 million in 1992, aiid $162.3 million in 1993.

~

In addition, AP&L will-require $63.1 million during the period :199F19931to-meet long term debt maturities and to satisfy sinking fund requirements.

36

g

AltliANSAS POWl:ll & LIGitT CONIPANY SOTES TO FINANCIAL STAT 131ENTS - (Continued)

AP&L anticipates that its capital and refinancing requirements for 1991-1993 will be met principally from cash on hand at December 31. 1990, and internally generated funds. Any external l

financing during the period. exclusise of funds derived from the issuance in January 1991 of $27 million of solid waste disposal revenue bonds, would be primarily for optional redemption of currently outstanding securities. AP&L has received regulatory approval to purchase or otherwise acquire up to

$350 million of first mortgage bonds. $150 million of preferred stock and $175 million of pollution control resenue bonds and/or solid waste disposal revenue bonds issued for the benefit of AP&L.

External financing requirements for this purpose would be achiesed through the issuance of up to $75 million of additional first mortgage bonds and up to $100 million of additional preferred stock, for which AP&L has regulatory appros als. AP&L may also obtain additional funds during the period 1991-1993 from the possible sale of AP&L's retail properties in hiissouri. Approximately $70 million of the proceeds from this transaction, when and if consummated, could be used to redeem all or a portion of certain series of AP&l/s outstanding first mortgage bonds at special redemption prices. at or near par, pursuant to and in compliance with AP&I/s iaortgage and deed of trust. (See Note 2 to AP&l/s Financial Statements "Itate and llegulatory hlatters - hiissouri lletail Operations." for information with respect to the possible sale of AP&L's hlissouri retail properties and possible uses of sale proceeds.)

During the period 1991 1993 AP&L will be collecting Grand Gulf I costs incurred but not collected in previous years pursuant to the llevised Arkansas Settlement Agreement. During periods uhen deferred costs are recovered, resenue collections wdl exceed, to the extent of such current recovery, current cash requirements for Gred Gulf I costs.

As discussed in "NITC A SM ' hdow, a comprehensive action plan to improse performance at ANO has resulted in an ira rease in estimated capital expenditures and operation and maintecance expenditures for 1991-1993, which is expected to hase a negatise effect on AP&lis results of operations and on earnings coserages required for the issuance of additional first mortgage bonds and preferred stock. This action plan has resulted in an increase in estimated capital expenditures averaging approximately $16 million per annum for the period 1991-1993 and contemplates an approximate $33 million per annum average increase in operation and maintenance expenditures for that period. These increases in operation and maintenance expenditures, along with increased interest expense and preferred stock dividend requirements asseeinted with external financing planned for the period 1991-1993, are expected to have a negative effect on AP&l/s results of operations and on earnings coverages 1

required for the issuance of additional first mortgage bonds and preferred stock. AP&L estimates that its earnings coverages are likely to fall below the lesels necessary to permit the issuance of additional bonds or preferred stock (except for refunding purposes) by late 1991 and may remain below such levels through 1992 in respect to bonds and through 1993 in respect to preferied stock.

Acailability Agreement and lleallocation Agreement The System operating companies are severally obligated, under the Availability Agreement in accordance with stated percentages ( AP&L,17.1%; LP&L,26.9%; hlP&L,31.3%: and NOPSI,2-1.7%), to make payments or subordinated advances in amounts that, when added to any amounts received by System Energy under the Unit Power Sales Agreement or otherwise, are adequate to coser all of the operating expenses, induding depreciation and interest charges, of System Energy. (See Note 2 to AP&L's Financial Statements "Itate and Itegulatory hiatters -l' nit Power Sales Agreement.")

System Energy has, with the consent of the System operating companies assigned its rights to payments and advances from the System operating companies under the Availability Agreement to certain creditors as security for certain ofits indebtedness for borrowed money. Payments or advances under the Availability Agreement are only required to be made to the extent System Energy's receipts 37 1

AltKANSAS POWEll & LIGitT CONIPANY NOTES TO flNANCI AI STATE \\lENTS - (Continued) from all somees, including the Unit Pow er Sales Agreement as approved by the FEllC, are less than the amount required under the Availabihty Agreement.

In June 1959, System Energy and the System operating companies, with the prior consent of such creditors, amended the Availability Agreement so that the Grand Gulf 2 write-off would be amortized for Asailability Agreement purposes over 27 years rather than in the inonth the write off was recognited on System Energy's books (see Note 2 to AP&I/s Financial Statements, "Itate and llegulatory hiatters - Project Olive liranch"). This amendment was made so that the write off of Grcnd Gulf 2 in Septeinber 1959 would not cause a payment by the System operating companies to be required under the Availability Agreement. Since commercial operation of Grand Gulf L payments under the Unit Power Sales Agreement (which include a return on equity) hase exceeded the amounts payable under the Availability Agrei ment (which does not provide for a return on equity), Accord-ingly, no payluents hase eser been required under the Availability Agreement, in November 1951, the System operating companies entered into a lleallocation Agreement, which would hase allocated the capacity and energy available to System Energy from the Grand Gulf Station and the related costs to LP&L, b1P&L. and NOPSL These companies thus agreed to assume all the responsibilities and obligations of AP&L with respect to the Grand Gulf Station under the As ailability Agreement, with AP&L relinquishing its rights to capacity and energy from the Grand Gulf Station. Each of the S) stem operating companies, including AP&L, would have remained primarily liable to Sy stem Energy and its assignees for payments or advances under the Availabilit) Agreement and assignments thereof. AP&L was obhgated to make its share of the payments or adsances only if the other System operating companies were unable to meet their contractual obligations. Ilowever, the FEllC's June 13 Decision allocating a portion of Grand Gulf I cap city and energy to AP&L supersedes the lleallocation Acreement insofar as it relates to Grand Gulf 1.

llesponsibility for any Grand Gulf 2 amortization amounts has been allocated to LP&L (26.23%),

51 PAL 613.9N), and NOPSI (29h0%) under the terms of the Reallocation Agreement entered into in 1951. AP&L would be liable fer its shate of such amounts only if the other System operating companies were unable to meet their contractual obligations. No payments of any amortization amounts will be required as long as amounts paid to System Energy under the Unit Power Sales Agreement, together with other funds available to System Energy, exceed amounts required under the Availability Agreement, which is expected to be the case for the foreseeable future.

(init Poner Purchme Agreement AP&L and StP&L were parties to a Unit Power Purchase Agreement, which terminated in December 19S9. for the sale to SIPAL of AP&L's 31/> percent share of capacity and energy from Independence 2. AP&L's revenue associated with the sale of such capacity to AIP&L was approxi-mately $27 million in 1989. This adverse earnings impact associated with the termination of the Unit Power Purchase Agreement was partially ofTset in 1990 by the elTects of the sale of AP&L's interest in independence 2 to Entergy Power on August 28, 1990. (See Note 2 to AP&L's Financial State-ments "flate and Regulatory hiatters - Entergy Power" with respect to AP&L's sale of its interest in Independence 2 and Ritchie 2 to Entergy Power.)

Srpstem Fuch AP&L has a 35 percent interest in System Fuels, a jointly owned subsidiary of the System operating companies. System Fuels operates on a non profit basis for the purpose ofimplementing or maintaining programs for the procurement, delivery and storage of fuel supplies for the System operating companies. Its costs are primarily recovered through charges for fuel delivered.

3S

l l

I AllKANSAS POWI 11 & I IGilT COMPANY NOTES TO FINANCI AL STAT 131ENTS - (Continued)

The parent companies of System Fuels agreed to make loans to System Fuels to finance its fuel supply business under a loan agreement dated January 4,19h, as amended through December 31, 1953. The rate of interest that is charged pursuant to this loan agreement is adjustable and is correlated to the highes' annual interest rate on outstanding short term bank borrowings by AP&L or to the prime comtnercial rate if AP&L has no such short-term bank borrowings outstanding. At this time no future loans may be made to System Fuels by the patent companies. As of December 31,1990, AP&L had $11 million of loans outstanding to System Fuels which mature December 31,2005, System FueW parent companies, including AP&L have cosenanted and agreed. sescrally in accordance with their respective shares of ownership of System fuels' common stock, that they will take any and all action necessary to keep System Fuels in a sound financial condition and to place System Fu-Is in a position to discharge, and to cause System Fuels to discharge, its obligations in connection with long-term leases of oil storage and handling facilities and coal cars having, at December 31,1990, an aggregate discounted value of approximately 603 million.

Fuel exploration and deselopment activities of System Fuels base declined over recent years and some fuel programs have been or are being phased out or transferred to other parties. In this connection. certain charges and credits relating to System Fuels'im estment in the fuel programs may be allocated to the System operating companies, including AP&L. A.y such charges or credits allocated to AP&L are not expected to significantly affect AP&lfs future results of operations.

On October 3,1959 System Fuels entered into a revolsing credit agreement with banks that prosides for up to $45 million of borrowings to finance System Fuels' nuclear materials and services inventory, in connection with these arrangements. AP&L LP&L and System Energy, as purchasers from System Fuels of the maar materials and sersiees, agreed to purchase from System Fuels the nnelear materials and services fmanced under the agreement if System Fuels should default in its obligations thereunder. The purchases under these circumstances wouhl be of percentages agreed upon between the parties but, in the absence of such agreement, AP&l, LP&le and System Energy would each be obligated to purchase one-third of System Fuels' nuclear materials and sersices im entory.

Coal AP&L is a party to a contract with a joint venture for a supply of coal from a mine in Wyoming which, based on estimated reser es,is presently expected to provide the projected requirements of the Independence Station through at least 2014. Under the contract with the joint venture, investment in the mine for leases, plant and equipment is the responsibility of the joint venture. In order to limit the joint senture's investment and, hence, the amount to be paid to it as a component of the price of coal, the contract provides that investment of all funds for plant and equipment in excess of a specilled amount be made by AP&L MP&L, AECC and the City of Jonesboro, Arkansas, as co owners,in part, of the Independence Station (owning 96.5% collectively). On August 25,1990. AP&L sold its interest in independence 2 to Entergy Power and in connection therewith transferred an allocable portion (15.75%) of its interest in these imestments to Entergy Power and Entergy Power agreed to make its proportionate share of such required imestments ahar August 26,1990. At December 31,1990, AP&L had a net investment of $5.2 million in mine f acilities and related capitalized assets. AP&L has made the required investments on behalf of the other co owners of the Independence Station (owning 3.5%

collectively) and is billing them monthly for the depreciation and carrying cost of these investments.

AP&L has agreed to purchase, over an approximate 20-year period, which began in 1950, 100 million tons of coal for use at the White BlufT Station.

39 1

4 ARKANSAS POWER & LIGilT COMPANY NOTES TO FINANCIAL STATEMENTS - (Continued)

Nuclear Fuel AP&L has agreements with Habcock & Wilcox Company and the Ccmbustion Engineering Company for the fabrication of fuel assemblies used at ANO.

Spent NucIcar Fuel and Decommissioning Cost Under the Nuclear Waste Policy Act of 19S2 (NWPA), the DOE is required for a specific fee to construct storage facilities for and dispose of all spent nuclear fuel and other high level radioactive waste generated by domestic nuclear power reactors. The NRC, pursuant to the NWPA, also requires operators of nuclear power reactors to enter into spent fuel disposal contracts with the DOE. Under the terms of AP&L's nuclear fuel lease, AP&L is responsible for the disposal of spent nucler. fuel.

AP&L has entered into contracts with the DOE, whereby the DOE will furnish disposal service for AP&L's spent nuclear fuel at a cost of one mill per KWil of net generation after April 7,1983, plus a one time fee for generation prior to that date. AP&L has selected an option made available by the DOE to pay the one time fee, plus interest accrued, no earlier than 1998. The fees payable to the DOE may be adjusted in the future to assure full cost recovery. AP&l. has recorded a liability of approximately $69.1 million including accrued interest at December 31,1990, for payment to the DOE for the dispostd of all spent nuclear fuel on hand at April 6,1983. A 1989 federal court ruling effectively changed the basis for the fee to I mill per net KWil sold, rather than generated, which could reduce AP&L's payments. AP&L considers all costs incurred or to be incurred in connection with disposal of spent nuclear fuel to be proper components of nuclear fuel expense and provisions to recover such costs base been or will be made in applications to regulatory authorities.

By law the DOE was to begin accepting spent fuel in 1998 and to continue accepting spent fuel until the disposal of all fuel from reactor sites is accomplished. flowever, the DOE's repository program has been delayed. Based on the DOE's current schedule for acceptance of spent nuclear fuel, AP&L's initial shipment of spent fuel from ANO to the DOE's storage facilities will occur in 201L In the meantime. AP&L will be responsible fer storage of spent fuel. Current on site spent fuel storage capacity at ANO is estimated to be suffleient to store fuel from normal operations until 1995, it is expected that any additional storage capacity required due to, among other things, delay of the DOE's repository program will be provided by AP&L. The cost of providing the additional on site spent fuel storage capability required at ANO by 1995 is estimated to approximate $10 to $15 million (in 1990 dollarsh in addition, approximately $5 to $10 million (in 1990 dollars) will be required every two to three years subsequent to 1995 until the DOE's repository begins accepting ANO spent fuel.

Currently, these expenditures qualify for funding by the issuance of solid waste disposal revenue bonds, subject to certain restrictions on the issuance of such bonds.

In addition to the recovery of costs associated with the disposal of spent nuclear fuel, AP&L is also recovering decommissioning costs for its two nuclear units. These amounts are deposited in external trust funds that etm only be used for future decommissioning costs. The after-tax market value of these funds at December 31. 1990, is approximately $56.8 million. AP&L regularly reviews and updates estimated decommissioning costs to reflect inflation and changes in regulatory requirements and technology. Decommissioning costs for_ ANO are estimated to be approximately $399A million (in 19S6 dollars), AP&L has been authorized to recover through rates, amounts which, when added to estimated trust investment income during the collection period, should be sullicient to meet currently.

estimated decommissioning costs. These rates are reviewed and adjusted annually and are subject to regulatory.approsal (See Note 2 to AP&L's Financial Statements " Rate and Regulatory Matters -

Arkansas - Rate Riders.")

40

l l

ARKAN5AS POWER & LIGitT COhlPANY NOTES TO l'INANCI AL STATEAIENTS - (Continued) l Nuclear Insurance 1

The Price Anderson Act provides for a limit of public liability for a single nuclear incident. As of December 31,1990 the limit of public liability for such type ofincident was approximately $7.807 bil-lion. AP&L has protection with respect to this liability through a combination of private insurance (currently $200 million) and an industry assessment program. Under the assessment program, the maximum amount AP&L wouhl be required to pay, with respect to each nuclear incident at a licensed nuclear facility, would be $66.15 million per reactor (such amount to be indexed every five years for inflation and includes a 5 percent surcharge in the event total public liability claims and legal costs approach or exceed the limit of protection otherwise established), payable at a rate of $10 million per licensed reactor per incident per year. AP&L has two licensed reactors, AP&L is a member of certain insurance programs that provide coverage for property damage, including decontamination expense, to members' nuclear generating plants. At December 31,1990 AP&L was insured against such losses up to $2.185 billion with a $200 million sublimit for premature decommissioning coverage, in addition, AP&L is a member of an insurance program that provides insurance cos erage for certain costs of replacement power incurred due to certain prolonged outages of nuclear units. Under the property damage and replacement power insurance programs, AP&L could be subject to assessments if losses exceed the accumulated funds available to the insurers. At December 31,1990, the maximum amount of such possible assessments for AP&L was $11,77 million.

The amount of property insurance presently carried by AP&L exceeds the NRC's minimum requirement for nuclear power plant licensees of $1.06 billion per site. EfTective April 2,1990, NRC regulations provide that the proceeds of this insurance must be used, first, to place and maintain the reactor in a safe and stable condition and, second, to complete required decontamination operations.

Only after proceeds are used or dedicated for such use and appropriate regulatory approval obtained would the balance of these proceeds, if any, be available for plant owners, or their creditors, benefit.

NRC Actions On January 24,1956, the NRC Executive Director for Operations issued a letter to the chairman of the Babcock & Wilcox ("B&W") Owners Group Executive Committee identifying the need for a broad reassessment of the B&W reactor design v % respect to the perceived level of safety. The B&W reactor owners, including AP&L, were invitet. m take the lead in the reassessment elTort and are working with the NRC to address the NRC's concerns. AP&L is continuing its participation in these reassessment efforts and is making the modification found to be necessary. AP&L believes that any modifications required by the reassessment wdl not have a material adverse effect on its financial condition.

During 1959. as a result of certain incidents,ine uding incidents leading to the assessment of civil penalties by the NRC, AP&L reviewed its management controls and policies at ANO. This review resulted in significant organizational, procedural and management changes at ANO in 1989.

In addition, an NRC special Diagnostic Evaluation ("DE") conducted in 1989 reported that ANO had several substantial management, organizational and technical problems that needed increased management attention. These inchided: (1) identification and resolution of equipment problems with the highest safety significance and potential impact on plant operation and on operator performance, (2) resolution of the plani design basis and as-built configuration problems, (3) establishment of resource commitments and priorities to more expeditiously resolve long-standing maintenance, engineering, and materials control problems, (4) implementation of better performance monitoring, self-a<sessment, and root cause analysis efforts, and (5) increased emphasis on teamwork, communica-tions, and accountability among the ANO organizations. In addition, the NRC determined in a 41

4 ARKANSAS POWER & LIGilT CONIPANY NOTES TO FINANCIAL STATENIENTS - (Continued)

Systematic Assessment of Licensee Performance ("SALP") evaluation of ANO for the period July 1, 19% through September 30,1959, that lower ratings, relative to the prior period, were warranted in four of seven functional areas. The four areas receiving lower ratings were: plant operations, radiological controls, maintenance /surseillance and safety assessment / quality verif cation. In two of the sesen functional areas, Inalntenance/ surveillance and safety anessment/ quality verification, ANO received ratings of "3", indicating performance not significantly exceeding that needed to meet minimal regulatory requitements.

In responding to concerns with the operations of a nuclear generating station, the NRC has available a variety of options, including, among others, increased surveillance, fines or even plant shut-down. ANO has experienced some degree of increased surveillance by the NRC stemming from the concerns reflected in the DE and SALP reports. A comprehensi e action plan designed to signiGeantly improve the operations and safety of ANO was implemented. This plan is an integrated program to speci6cally address each of the concerns raised in the DE and SALP reports as well as other areas of potentialimprovement identified by management, For each project in the action plan, work schedules were assigned. goals and objectives were identified and priorities established. Approximately 1,000 individual action items are included in the action plan. Alore than one-half of these work items were completed in 1990, and most of the work is scheduled for completion by the end of 1991 The actions to be completed are primarily (1) complex, resource-intensive projects that take seseral years to complete, of which the more important include (a) the design configuration documentation program (a comprehensh e effort to improve the quality, completeness and retrievabil-ity of the documentation describing the significant aspects of the design of ANO), (b) the electrical drawing upgrade program (a program designed to upgrade ANO switchgear, Niotor Control Center and major control electrical drawings, and to enhance presentation of drawing information to provide complete "as constructed" configuration to facilitate management and operations), (c) the piping drawing update program (which wdl invohe the preparation of new piping isometric and support drawings based on lleld veriGed information, a review of new drawings against qualifying analyses and a reconciliation of discrepancies between the two, the goal of which is to develop improved and iegible drawings and to upgrade the adequacy of qualifying analyses and design basis ir Srmation), and (d) the engineering work backlog elimination project (which is designed to reduce the significant backlog of engineering work at ANO to a manageable level by dispositioning items systematically, commensurate with safety significance), and (2) lower priority iteris which hase little or no safety impact but which will provide long term benefits to programs ti at are acceptable now but could use improvement. The NRC has approved the prioritizadon aml acheduling of the remaining work and meets periodically with management to discuss the statns of work under and any changes to the action plan. At the end of 1990, implementation of the action plan was ahead of schedule, implementation of this plan has produced improvements in the problem areas cited by the NRC, On January 29,1991, the NRC issued an initial SALP report for ANO covering the period from October 1,1959 through November 30,1990. In this report, the NRC recognized management's commitment to higher quality operatioLs at ANO and stated that overall performance at the facility had improved during the assessment period, in the seven functional areas evaluated by the NRC, ANO improved its SALP category rating in three of these areas and maintained its prior rating in the other four areas.

ANO did not receive a "3" rating in any of the categories. AP&L and Entergy Operations are committed to taking the actions necessary to achieve the highest standards of operation and safety at ANO and will continue to work with the NRC to achieve that goal. (See " Capital Requirements and Financing," above for information on the effect ofincreased operating and maintenance expenditures at ANO on AP&L's results of operation and financial position.)

l l

42

ARKANSAS POWER & LIGilT COh1PANY NOTES TO FINANCIAL STATE \\ TENTS- (Continued)

In hlay 1959, the NRC issued a license amendment, based upon AP&l/s identification of a previously unanalyzed small break in the liigh Pressure injection System piping, limiting the maximum pow er les el of ANO I to 60% AP&L corrected this problem during a refueling outage at ANO 1 in late 1990, and the NRC issued a license amendment on December 5,1990 permitting ANO I to return to 100'4 power.

On January 16,1991. Entergy Operations paid a $50,000 civil penalty to the NRC for violations at ANO relating to an inaccurate statement that had been made in a Starch 1959 submittal to the NRC and the failure to adequately test certain valves in the control room ventilation system as required by the NBC. Actions have been taken to correct the cause of the problems that resulted in the violation.

Shareholder Litication Entergy and certain other System companies, including AP&L, and individuals were defendants in a consolidated purported class action suit filed in the United States District Court for the Eastern District of Louisiana (" District Court") in 1955 by Entergy shareholders (purporting to represent classes that purchased Entergy conunon stock). On October 5,1990, the parties to the suit entered into a settlement agreement, subject to the approval of the District Court, providing for, among other things, payment to the members of the asserted plaintiff classes frcm an interest bearing $15.3 million settlement fund established by Entergy, On January 31,1991, the District Court entered an Order and Final Judgment approving the settlement agreement and dismissing the suit with prejudice, The time for filing appeals of this order expired with no such appeals being filed, Flood Liliention On hlay 19 and 20,1990, exceptional amounts of rainfall caused flooding in the area around the City ofIlot Springs, which is located in central Arkansas, As a result of the flooding lawsuits were filed in state and federal courts in Arkansas naming AP&L as defendant, The amount of damages sought was not specified, By agreement among AP&L and the plaintiffs in the state court lawsuit, that proceeding was dismissed on October 16, 1990, and on October 25, 1990, those persons were permitted to intersene in the federal court lawsuit. In the federal court lawsuit, which was filed in the United States District Court for the Western District of Arkansas. Ilot Springs Division (" Arkansas District Court")

on June 22,1990, the asserted liability of AP&L is based upon allegations of violations of the Federal Power Act in connection with its operation of two dams licensed by the FERC, common law negligence and trespass. AP&L has responded denying substantially all of the allegations against it and asserting as a'lirmative defenses, among other things, that the events complained of resulted from an Act of God for which AP&L could not be held responsible, that AP&L owns and maintains flowage casements giving it the permanent right to inundate the lands owned or occupied by the plaintiffs in connection with the construction, maintenance and operation of the dams and that the plaintiffs were guilty of contributory negligence and assumed the risk of damage to their property due to flooding.

AP&L also filed pleadings in opposition to the plaintiffs' request to be certilled as representatives of a class of similarly situated persons and, on February 7,1991, the federal judge assigned to the case denied the plaintiffs' motion for class certification. This lawsuit was consolidated in February 1991, with the litigation described in the following paragraph, On November 30, 1990, an additional lawsuit relating to such flooding was filed in the Arkansas District Court naming, among others, AP&L and Entergy as defendants, The asserted liability of AP&L and Entergy is based upon allegations of violations of the Federal Power Act in connection with AP&L's operation of two dams licensed by the FERC, negligence and public nuisance, and, with respect to AP&L only, trespass and intentional infliction of emotional distress. The suit seeks, among other things, approximately $16 million in property losses and other compensatory damages and 43

AllKANSAS POWEli & IIGilT COhlPANY NOTES TO FINANCIAL STATEMENTS- (Continued)

$500 million in punitive damages. Entergy filed a motion, which was denied. to be dismissed from the lawsuit, asserting that there is no basis for the allegations made against it. AP&L responded to the complaint denying the substantive allegations upon which the claims against it are based and asserting the affirmative defenses it asserted in connection with the federal court litigation discussed in the preceding paragraph, among other things. AP&L further maintains that the dams' operators followed proper procedures in the operation of floodgates, did not violate any provisions of the Federal Power Act and were not negligent in the performance of their duties. This lawsuit was consolidated in February 1991, with the federal court litigation described in the preceding paragraph. The matters are pending.

While the outcome of these matters and their impact,if any, on AP&L's financial condition cannot be predicted with certainty at this time, AP&L believes it has meritorious defenses which it intends to assert aggressisely and that the outcome will have no material adverse financial impact.

NOTE 9. LEASES At December 31,1990. AP&L had obligations under capitalized leases of approximately $247.6 mil-lion. Included in this amount is approximately $151.6 million associated with its nuclear fuel lease which permits the lease of up to $195 million of nuclear fuel. The lessor finances its acquisition and ownership of nuclear fuel under a credit agreement and through the issuance of intermediate term notes. The credit agreement has a term of five years and the intermediate term notes have varying maturities of up to 10 years, it is contemplated that these arrangements will be extended or alternative financing will be secured by the lessor upon the maturity of the current arrangements based on AP&L's nuclear fuel requirements. If the lessor cannot arrange for alternative financing upon the regularly scheduled maturity ofits borrowings. AP&L must purchase nuclear fuelin an amount equal to the amount required by the lessor to retire such horrowings.

Ilental expense for capital and operating leases (excluding the nuclear fuel lease expense) amounted to approximately $26.2 million, $24.3 million and $23.6 million in 1990,19S9 and 1988, respectively. Nuclear fuel expense, exclusive of negative salvage, of $69.7 million in 1990, $60.2 million in 1959 and $61.1 million in 1958 was charged to operations.

Excluding nuclear fuel lease obligations which are reduced based upon nuclear fuel usage at December 31,1990, noneancellable leases with minimum rental commitments are as follows:

Capital Operating br lxases

1. cam (In Thomar.ds) 1991.

$ 18,590

$ 7,396 I992.

I8,590 6.525 1993.

18,567 6,330 1994.

18,287 6,206 1995.

15,875 6,324 For years thereafter.

65,795 6.165 Total 175,704

$38.946 Less; Amount Ilepresenting Interest.

(79,764)

Present Value of Minimum Lease Payments 8 95.940 44

l 1

e ARKANSAS POWER & LIGIIT CONIPANY NOTES TO FINANCIAL STATDIENTS - (Continued)

NOTE 10. TRANSACTIONS WITil ASSOCIATED COhiPANIES i

AP&L buys from and sel!3 electricity to the operating companies of Entc rgy, under rate schedules filed with the FERC. AP&L also purchases capacit) and energy from System Energy's Grand Gulf 1.

in addition. AP&L purchases fuel from System Fuels, receives technical and advisory services from Entergy Services, and receives management and operating services from Entergy Operations.

AP&L and blP&L were parties to the Unit Power Purchase Agreement which terminated in December,1989 for the sale to MP&L of AP&L's 31.5 percent share of capacity and energy from Independence 2. (See Note 8 to AP&L's Financial Statements "Conunf tments and Contingencies -

Unit Power Purchase Agreement.") AP&L's before-tat income associated with the sale of such capacity to hlP&L was approximately $27 million in 1989. On August 28,1990, AP&L sold its interest in independence 2 and Ritchie 2 to Entergy Power. While Independence 2 and Ritchie 2 were sold to Entergv Power at AP&Li book value, net income increased $13.9 million in 1990 primarily due to the one time amortization ofinsestment tas credits associated with these assets. (See Note 2 to AP&L's Financial Statements

" Rate and Regulatory Matters-Arkansas - Stipulation and Settlement Agreement" with respect to the sale of Independence 2 and Ritchie 2 to Entergy Power.)

Operating revenues include revenues from sales to associated companies amounting to,192.7 million in 1990,$218.1 million in 1959 and $223/2 million in 1988. Operating expenses include charges from affiliates for fuel cost, purchased power, and technical and advisory services totaling $449.9 million in 1990,$322.1 million in 1989 and $387.5 million in 19S$. The 1990 operating expenses include approximately $115.5 million of costs associated with operating ANO subject to an operating agree-ment with Entergy Operations. Effective June 6,1990, Entergy Operations became a general agent for AP&L and assumed management and operating responsibility for, but not ownership of, ANO. The 1990 operating expenses also include $12.5 million of power purchased from Entergy Power.

NOTE 11. POSTRETIREMENT BENEFITS In conjunction with the sale of ANG (see Note I to AP&L's Financial Statements

" Summary of Significant Accounting Policies - Principles of Consolidation"), in 1988 the assets and benefit obligations of AP&L's pension plans were merged, effective January 1,10S7, through an amendment and restatement of AP&L's primary pension plan. The provisions of the plans were substantially the same but covered employees in different divisions of AP&L and ANG.- On June 1,1985, under the terms of the sale agreement between AP&L, ANG and Arkansas Western Gas Company (" Arkansas Western"), Arkansas Western assumed the assets and benefit obligations, effective January 1,1987, which were related to active ANC participants at June 1,19SS. AP&L's plan, as amended, retained the net assets and benefit obligations associated with all ANG retirees as of June 1,1955.

Effective June 6,1990 AP&L nuclear operations related employees became employees of Entergy Operations. However, these employees still remain under AP&L's plan and no transfers of related pension liabilities and assets have been made.

AP&L's pension plan, as amended, cosers substantially all employees of AP&L. Benefits are based on years of service and the employee's compensation during the last ten years of employment. AP&L's funding policy is to fund pension costs in accordance with contribution guidelines established by the Employee Retirement income Security Act of 1974, as amended, and the Internal Revenue Code of 1956, as amended.

45

AllKANSAS POWEll & LIGilT CONIPANY NOTES TO l'INANCIAL STATENIENTS - (Continued)

The plan is adtninistered by a trustee who is responsible for pension payments to retired employees. Various investment managers have responsibility for management of the plan's assets, in addition, an independent actuary performs the necessary actuarial valuations for AP&L's plan. The components of AP&L's 1990,1989 and 198S pension cost, as determined by the actuary, are as follows:

At December 31.

1990 10%9 19 %

(in 'I housands)

Service cost - benefits earned during the period..

$ 7,223 $ 5,968 $ 5,649 Interest cost on projected benefit obligation,

16,907 15,196 14,212 Actual return ou plan assets.

1,593 (42,495)

(23,737)

Net amortization and deferral..

(20.994) 23.672 4.286 Net pension cost...

$ 4.729 $ 2.341 $

410 The assets of the plan consist primarily of common and preferred stocks, fixed income securities and insurance contracts.

The weighted average discount retes used in determining the actuarial present values of the projected benefit obligations were 8,75 percent for 1990,8.5 percent for 1989 and 9.0 percent for 19S8.

The weighted average rate of increase in future compensation used in determining the actuarial present valuer. of the projected benefit obligations was 5.6 percent for 1990,1989 and 19S8. The expected long term rate of return on plan assets was 6.5 percent in 1990,1989 and 19S8. Transition assets are being amortized over 15 years. The funded status of the plan at December 31.1990 and 1989 was as follows:

At December 31.

1990 1959 (in Thousands)

Actuarial present value of accumulated pension plan benefits:

Vested.

$ 160.946 $ 147,005 Nonvested.

7,613 _ 6,295 Accumulated benefit obligation.

$ 168.559 $ 155,303 Projected benefit obligation.

$(212.826) $(197,371)

Plan assets at fair value 216.03l 229,759 Plan assets in excess of projected benefit obligation 3,205 32,386 Unrecognized prior service costs,

3.306 296 Unrecognized transition assets (25.693)

(28.029)

Unrecognized net (gain) loss (8.666)

(27,976)

Accrued pension asset (liability).

$ (28.050) $,,(23.321) l 46

. ARKANSAS POWER & LIGilT CONIPANY NOTES TO FINANCIAL STATENIENTS - (Continued)

AP&L also provides certain health care and life insurance benefits for retired employees.

Substantially all employees may become eligible for these benefits if they reach retirement age while still working for AP&L and have vested benefits in AP&L's pension plan; These benefits and similar benellts for active employees are provided through various means including payments of premiums to an insurance company and/or accruals for selfinsurance policies managed by an insurance company.

The cost of providing these benefits for retired employees is not separable from the cost of providing-benefits for the active employees. The total cost of providing these benefits to AP&L employees was

$11.1 million, $12.9 million, and $8,4 million in 1990,1989 and 1988, respectively The average number 1

of AP&L active and retired employees for the last_three years was as follows:

At December 31,'

l 1990 1999 1988 Average number of active employees........,

4,093* 4,711 4.658 Average number of retired employees..

1,3S1 1,319 1,213

The decrease in the number of active employees for 1990 was primarily due to the transfer of all i

ANO nuclear employees from.AP&L to Entergy Operations on June 6,1990, In December 1990, the FASB issued SFAS No.106, " Employers' Accounting for Postretirement lienefits Other Than Pensions," which is generally effective for fiscal years beginning after Decem.

- ber 15.1992. The new standard requires a change in accounting requirements for postretirement benellts other than pensions from a cash method to an accrual method. The impact of this new standard hs not been fully determined; but the change likely-will result in greater expense being-recognized for provision of these benefits.' The effect of the increased benefit expense on net income could be reduced to the extent such increased costs are recovered through rates or through the recording of a regulatory asset to be recovered in the future. AP&L plans to adopt this statement in 1993.

NOTE 12. CASil AND CASil EQUIVALENT 5 For purposes of the Statements of Cash Flows, AP&L considers all unrestricted highly liquid debt :

instruments purchased with an original maturity of three months or less to be cash equivalents. The

~

supplemental disclosures required by SFAS No. 95 " Statement of Cash Flows are shown in the table below:

For the licars Ended December 31, 1990 19*9 1988 (la Thouunds)

Cash Paid (Received) During the Period for:

Interest (net of amount capitalized of (in thousands) $3,407,

$2,304 and $4,759.in 1990,19S9 and 1988, respectively..

$ - 118.395 - $ llLl72

'$ 111,076 -

1 Interest on capital leases..........

11,310 -

-11,772 11,659 Daily lease charges - nuclear fuel..............

I1,382 13,099 14,683' Income taxes (refund)..............................

61,030 '

(3,667) 4,030 -

Noncash Investing and Finar.cing Activities:

Capital lease obligations incurred (Note 9)

- $ 48,245

$ 56,902

~$

70,778 First mortgage bonds assumed by purchaser in the sale of ANC.....,,....,

(3,780),

4 L

47 i

... _._,~ _

u-,_

J--.

-... ~ _. - -.. -..

i ARKANSAS POWER & LIGitT COMPANY NOTES TO FINANCIAL STATEMENTS - (Concluded)

NOTE 13. QUARTERLY RESULTS (UNAUDITED)-

- Operating results for the four quarters of 1990 and 1989 are as followsi y

Operating

' Operating

' Net 1

Quarter Ended Resenues -

Income.. Income

]

(In Thousands) 1990:

March.........................................

$330,062 '

$41,434

$20.306 June................................

357.795 42.380 19,183.-

......... - 475,554 86.937-78.717-Se p t e mbe r........................

De ce mbe r.................................... 1317,997 30.485 11,559 1989; March,......

$317,943 - ' $47,665

$28.872

........ 319,735 38.110 20,817, June......

Septe mbe r.....................

427,153

. 80,262.

63.514

............ 4.........

..'317,040 37.345 18,776-December............

AP&L's business is subject to seasonal fluctuations with' the peak period occurring during the-summer months. Accordingly, earnings information-for -any; three-month period should not be corisidered as a basis for estimating the results for a full year. ~

i

)

k a

t 1

-48 y

.o, f

es w

--4 ev-@

.y9

--e-a s

4 a--,

-79d N

=

ARKANSAS POWER & LICitT COMPANY RECORD OF PROGRESS 19so-1990 1990 EM9 IMS 1987 IM6 IM5 1994 IM3 1982 IMI 1990 Selected Financial Data (1)

(thousands of dollars):

o Operating revenues..

$1.481.408 $1.381.871 $1.356.789 $1.404.856 $1.389,494 $1.364.786 $1.307.683 $1.206.145 $1.046.143 31.015.561 8 750.497 Net income........

129.765 131.979 131.149 141.160 124,821 110.068 143.367 126.896 107.372 96,140 65,.230 Total assets (2).

4.137.938 4.059.596 3 928.082 3.889.453 3.737.693; 3.307,882 3,060.817 2.859.517 2.669.417 2,474.249 2.147.983 Long term obligations (6)..

1,730.046 I,583.615 1.565.870 1 525.901 1.613.!!! L455.806 I,410.677 1.329.669 1.268,678 1.137.283 995.732

- Capitalization Preferred stock (including premium and issuance expense):

Without sinking fund..

. ~$ 126.890 $ 126.890 $ 12o.890 $ 126.890 $ 126.890 S.126.890 $ 126.840 ' S 126.890 $ 126.890 $ 126,890 $ 126.890 l

116.361 127.554 137.Tl9 151.255 165,009 120.812. 124.170 133.931 141.138 144.120 147.065 With sinking fund leng-term debt (escluding currently.....

Conanon stock and paid-in capital.......

1.443.200 1.264.049 1.235.440 1.236.223 1.313.604 1.334.994 1.286.507 IJ95.738 1.127.540 - 993.163 848.667 maturing debt )........

595.927 - 695.851 695.804 695.108 694.848 694.764 694.305 693.297 627.709 547.185 458569 Retained earnings.....

307.683 ~ 314.602 303.105 244.025 151.063 49.417,

26.101 28.158 33.365 43.134 54.700 Total capitalization.

. $2.590.061 - $2.528.946 $2.498.615 - $2.453.501 $2.451.414 $2.326.877 82.257.973 $2.178.014 $2.056.642 31.854,492 $1.635.891 o less - accumulatmi depreciation.......

$4.182.379 $4.265.139 $4.133.546 $4,0~6.844 $3.948.669 $3.606320 $3.440.991 $3.241.847 $3,044.440 $2.811.728 82.423.231 Utility plant..........

. y 1.245.702 1.218.703 1.115.595 1.068.407 - 961.615 860.226 766.537 679.232 605.404 537.261 417.435 '

$t936.677 $3.046.436 : 33.018.251 $3.008.437. $2.987.254 $2.~46.294 $2.674.454 32.562.615 32.399.036 32.279.467 $2.005.796 Net utility plant...

Electric Operating Revenues (5)

{ thousands of dollars):

$ - 356.492 8 334.693 $ 315.960 3 282.204 8 257.801 l8 212.833 '

8 484.359 $. 425.568 8 416.646 $ 406.130 $ 391.044 Residential...

. Industrial-aluminum processing (3).....

283.971 254.636 239.740

-230.842 223.597 202.856 ' 187.595 169.367 153.393' ~148.938 128.477-Commercial..................

25.226 56.930

, 94.067 56.629 50.175 -

69.527' 69,171

' Industria!.......,..'......

331.929 307.853 287.558 270.575 250.401. '242.247 '. 224.392 : 200.296 183.975 179.331 140.422 Governmental.

19.599 20.990 19.5A 17.941 17,403 19.213 23.288 20.989 19.061 14.787 '-

12.824

... Total from retail cunomers.......

.1.119.858 1.009.047. 963.507 925.451- " 907.671 877.738 - 864.035 763.241 688.828 ' 6 0.384

,563.727 Sales for resale (4)....

339.366. 345.377 -. 365.5G0 409.347-405.882 405.767 : ' 364.581 379.598 299.724 298.781 181.650 22.184

'27.447 27.722 30.282 '-

31.862 '

33.292

'18.981 6.052 5.572 5.569 5.120 Other...

Total electric operating revenues...... $1.481.408 $1.381.871. $1.356.789 81,365.080 $1,S15.415 St.316.797 $1.247.597 St.148.891 $ 994.124 8 974.734 3 750.437 Electric Energy Sales (millions of KWII):

. 5.401

-5.098 -

5.149 i 5,091 4.903

'4.742 4.664

'4.612 4.514 4.418 4.490

' Residential........,.........

3.821 -

3.644.

3,566 3.500 ~

3,363,

3.269..' 3.079

, 2.927 -

2.570

' 2.819 2.682 Commercial......

~.

101

' l.676 3.060 ~

2.571 -

2.08I 23.064 -

3.41I Industrial -aluminum processing (3) L,.

Industria!.....,

' 5.532

' 5.513.

5 3a.5

- 5.017 4.560..

' 4,548 l 4.511 4.251

- 4.246 4.311

- 3.675 m

Governmental J.............

'285 320-305.

284-281 328 405 394 410 312

' 292'-

Total to retail customers,

15.039 14.575 ;. 14,345 13.892 13.208 L I4.563.'

15,719 14.755 14.121-14 924 14.540

- Sales for resale (4) ;.;. -.......

13.618

- 12J28,

13,144 '

15.509-14.398:

11.999 8.918 8.965 7.388 8.358' 5.445 Total energy sold..

28.657 26.~03 '

27.489 29.401'__

27.606 26.562-24.637-23.720 21.509 J 23.282 19.985 Number of Customers (at December 31);

514.503 512.826; i 508.151 :

497.8'S 493.569 487.2 5 : 480.133 ' 471.C08 462.753 458.941'.

405.717

Residential.... 1.,...

Industrial-almwinum processing ('t) ;..,..

' 64.756 63.849 - ' 62.915 ' - 6!.325 ; ; 60.224 '

59.546 58.050 57.141 :. 56.709 157.133 - ' 49.444

' Commerczal...,...

=

I

I-1' I

I1 1-1 18,~96

~ I8,1651 17,550 16.945 16.623

- 16.465 ---

14.811 14.161

'13.528

'13.529'-

-12.284 Industrial.......

175 ~

853-

-l.287 '

1.212 '

l.142 1.137

'2.652 2.(St '

' 2.372 2.332 1.548 Covernmental.........

, Sales for resale (4).......

' 16 '

15 15 15

'.571.559

.564.424

- 555,677 545.292 535.363 = 531.936 468.994

~ Total retail customers ~..

- 598.530 595.693

'589.906 : 577.160 1 17 17

'17 17 18 23 19 Total customers,..........

~ 598.546 - 595.708 - ' 589.921 ; 577.175 " 571p 564.441 - 555.694 545.309 535.381

- 531.959 469.013 -

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ARKANSAS POWER & LICIIT CO.\\f PANY

. NOTES TO RECORD OF PHOCRESS 1980-1999

1. On January 1,1981,' Arkansas 41assoun Power Company, includmg its wholly-owned subsidiary ANC, consolidated with AP&L.. On Jun 1985, AP&L, as required by the SEC, disposed of ANC.The financial data in this report for the years 1981 timi 1987 are consolidated and not been restated since neither the effect of acquisition nor disposition is material.

2. In January 1987, AP&L capitalized its leases and restated 1956. therefore. years after 1985 include utility plant under capital leases.

3. Reynolds Afetals Company began phasing out its aluminum smelting operations in Arkansas in 19S5. Once its contract expired (Dece 19S6),' its account reverted to a standard industrial rate and was reclassified as an industrial customer.-

- 4. Includes sales to associated companies.

5. Electric Operating Revenues relates to AP&I's electric operations and does not include data related to ANC for the period 1981 through 1

- See Note I to AP&L's Financial Statements - ~ Summary of SigniGeant Accounting Policies - Principles of Corisolidation~ for information on

-the disposition of ANC.

6. Includes longderm debt (excluding currently maturing debt), preferred stock with sinking fund and noncurrent capital lease obligations.

E

- Prior to 19S6, capital lease obligations were not required to be recorded as assetsi and liabilities on the balance sheet.

~

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AllKANS A$ POWl:ll & LIG'IT CO'slP ANY llOAllD Ol' DillEC'lOlis William Cavanaugh til President and Chief Executhe Officer of System Energy aral Lnterg> Operationt Senior Yne President, System Esecuthe-Nuclear of Entegy and Entergy servlees. Esecuthe Vice President and Chief Nuclear Ofilter of APhl. and LPhl Cath) Cunningham

}l cal estate and industrial deseloper. plannet and h!storie preservationist John J. I' lake Chairman of the 11oani of Flake, Tabor. Tacker. Wells. & Kelley filthard P. llerget, Jr.

hianaging Director of hlarsh & hielerman. Nc.

lonuny 11. Ilithnan President of Wintoel Farms. Inc.; Vice Chairman of Riceland Foeds. Inc.

Kancaster llodges js.

Attorney at Law. Sole Practitioner: Hethodist lay ininister llal l'.. Ilunter, Jr.

Attorney at Law, ilunter & llunier

11. Drake Keith Pre sident and Chief Operating Officer of AP&L Jack L. King Senior Vlec President. System Exceuti c - Operations of Entergy; Esecuthe Vice President -

Operations of Entergy 5ctsiees. President and Chief Esecuthe Officer of Entergy Power Edwin Lupherger

man of the llourd and Chief Esecutive Officer of Entergy 1

Jerry L. Stail. 8 n Group Presa, it. System Esecuthe - Distribution and Customer Service of Entergy and Entergy a

Sersites; Chairn, u of the lloard and Chief Esecutive Officer of APhl, LPAL h1Phl.. und NOPSI Rapnond P. Niiller, Sr, hl.D.

Physician - Part! r in the Little llock Internal hiedicine Clinie; Assistant Clinical Professor at Unhersity of Arkr aas School of hiedicine lloy L. Sturph)

Chairman and President of hild South Engineering Co.

William C. Nolan, Jr.

Attorney at Law, Nolan & Aldersoi.

Itobert D. Pugh Chairman of the 11oard of Portland Gin Co.

Woodson D. Walker Attorney at Law, Walker, Roaf, Campbell, lvory and Dunklin. P.A.

Gus II, Walton, Jr, Partnst in Fiederick Poe. Inc. (Travel Service) hilchael E. Wilson Chairman and Chief Exceutive Ofileer of Lee Wilson & Co.

ADVISOltY DIRECTOllS (All past directors of AP&L)

Richard C. Butler, past chairman of the board. Commercial National llank and Peoples Savings & Loan L C. Carter, retired past president of Riceland Foods, Inc.

3 George K. Reeves, retired partner in the law firm of Ward & Reeves Reeves E. Ilitchie, retired past president and chairman of the board of AP&L Si

AllKANSAS l'OWEll & l lGilT COhil'ANY OITICI:lth JI.nitY L hl AUI.DI:N N. b. (lLUZZ) CARNS CL,urnian of the lloard nrul Vier President - Nuclear Cinef 1:scruthe Olla er Eficethe March 1.1940 it DRAKE KLITil Preudent amt jollN j. II AhTON Cluel Operating Officer Vice Prcudent - Finanetal

h' ',"l

' "[,,,,

Willl ut (:AV AN AUGil 111 l secutne \\, ice Presulent and Cluef Nutlear Office' Cil ARLES L KF.Lt.Y Kl;NNI'llt 11 Ithl:l; DEN Yl00 E'0*Ido"I ~

Scinor Vu e President --

C"'l*'"t

C""'""'utuiuuns Cu.tniner hetshc6 h klarketing Hrt4ned clIretage hinteh 1,1991 lieugned (fleethe April 1.1991 h MllM DON ALD C. IllNTZ Ylee President -

Senior Vu e Perudent - Nuclear Custorner Senken DON Al.D llON'llill M Alts!! At1 L l'ENDl;ltCHAss hennir Vice President -

Vice Proddent - funil I osul Operation $

Production it Tranunkuun 1;fleethe Ostuber 1. lino hedgned eRecuse Decendier 31, two 111: W. IMND8.11 kl. W. (I'l?tti filCE senior Viec Pecudent -

Vice Pres 6 dent - $1 stern Planning vmance s. Adnunntrutnin igetired c(fecthe Deternher 31,1990 Cini f Fin intial O$cer, sn retar> and Anistant Tarasurr.r

]I:lthY j $AACKS lieugneil e>lleethe Apr'.I 1.1991 he Preudent - Tranuntulon Cl;CIL L Al FA ANDI.It I;;iecthe Nmeinber 1, imio Vier Preudent -

y g,gg Public Allairs V P dM -

K AY K. ARNOI.D Planning a Control Vue President - Con:niunications Linc<tne Apetl I,1991 CARY J DUDiiNilEl'f;ll Assistarit Secretary T. GENE CANIPinELL Yke Presulent - Nuclear

$111RLTY A IlONTER liesigned ellectise rebtur> 2%,1990 Ansktant Secretary 9

52

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AllKANSAS POWEll 6t 1.lGilT COhlPANY STOCKilOLDEll IN1'Oll%I ATION l'ransfer Agents for Preferred Stock Union National llank of Little llock i Union National Plara Little flock Arkansas 72201 First Coinmercialllank Post Olhee Itot 1471 Little flock Arkansas 72203 llegistrar of Preferred Stock first Cominercial llank Post Office llox 1471 Little llock Arkantas 72203 Certified Public Accountants Deloitte & Touche 113 Center Street Little liock. Arkansas 72201 l'wcetive Offices Aikanus Power N Light Cornpany 425 W. Capitol Little Itock, Arkana 72201 (T.01) 377-4000 Annual hiceting Third Wednesday of hlay Fc,rm 10.K The 1990 annual report to the SEC on Form 10-K is wallable to any stockholder upon request, without charge by writing:

Shirley A. Ilunter, Assistam Secretary Arkansas Power & Light Company Pest Ofhe 110s 551 i

Little Itock. All 72203 Eoiergy Corporattor A mual lleport To request a copy of the 1990 Entergy Corporation Annual lleport, call or write:

Entergy Corporation System investor llelations P.O. Ilox (11005 z

New Orleans, LA 70161 (600) 29M960 53 O

____------A--

0CAN049111, 1990 Annual Financial Rept

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