GNRO-2002/00038, Annual Financial Report for South Mississippi Electric Power Association (Smepa)

Annual Financial Report for South Mississippi Electric Power Association (Smepa)

ML021280598
Person / Time
Site:	Grand Gulf
Issue date:	04/23/2002
From:	Bottemiller C Entergy Operations
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
GNRO-2002/00038
Download: ML021280598 (42)

Text

ALteg Entergy Operations, Inc.

Wateroo Road P0. Box 756 aort Gibson, N/S 39150 Tel 601 437 6299 Charles A. Bottemiller Manlage PotLic ns:nc April 23, 2002 U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Attention: Document Control Desk

Subject:

2001 Annual Financial Report for South Mississippi Electric Power Association (SMEPA)

Grand Gulf Nuclear Station Unit 1 Docket No. 50-416 License No. NPF-29 GNRO-2002/00038 Ladies and Gentlemen:

The 2001 Annual Financial Report for South Mississippi Electric Power Association (SMEPA), one of the licensees of Grand Gulf Nuclear Station, is herein submitted in response to the requirement of 10CFR50.71 (b).

The 2001 Annual Financial Reports for System Energy Resources, Inc., Entergy Mississippi, Inc., and Entergy Operations, Inc., will be submitted as part of the Entergy Corporation Annual Report by our Corporate Staff.

This letter does not contain any commitments.

Should there be any questions concerning this submittal, please contact this office.

Yours truly, 6V'21-ý CAB/AMT:amt attachment: SMEPA 2001 Annual Report cc: (See Next Page)

G020038 )k-ýJ OOL-)

April 23, 2002 GNRO-2002/00038 Page 2 of 2 cc:

Hoeg T. L. (GGNS Senior Resident) (w/a)

Levanway D. E. (Wise Carter) (w/a)

Reynolds N. S. (w/a)

Smith L. J. (Wise Carter) (w/a)

Thomas H. L. (w/o)

Mr. E. W. Merschoff (w/a)

Regional Administrator U.S. Nuclear Regulatory Commission Region IV 611 Ryan Plaza Drive, Suite 400 Arlington, TX 76011 U.S. Nuclear Regulatory Commission ATTN: Mr. S. P. Sekerak, NRR/DLPM (w/a)

ATTN: ADDRESSEE ONLY ATTN: U.S. Postal Delivery Address Only Mail Stop 07D1 Washington, D.C. 20555-0001 G020038

SOUTH MISSISSIPPI ELECTRIC POWER ASSOCIATION 2001 PERFORMANCE HIGHLIGHTS Increase  % Increase

($ In Thousands) 2001 2000 (Decrease) -Decrease Total Revenue $354,447 $366,444 ($11,997) -3.3%

Current Net Margins $2,126 $1,839 $287 15.6%

Total Assets $731,551 $687,380 $44,171 6.4%

Total Equity $84,848 $82,722 $2,126 2.6%

Equity as % of Assets 11.6% 12.0%

TIER 1.06 1.05 DSC 1.03 1.06 Average Cost of Debt 5.88% 6.30%

Wholesale Rate to Members - 44.83 44.02 0.81 1.8%

Mills/KWH Energy Sales (MWH)

Members 8,050,419 8,259,185 (208,766) -2.5%

Non-Members 26,269 81,704 (55,435) -67.8%

Total 8,076,688 8,340,889 (264,201) -3.2%

Net Generation (MWH) 3,548,906 4,051,486 (502,580) -12.4%

Member Demand (MW) 1,977 2,030 (53) -2.6%

Boar of Die t r ................. A Ge ea Inor S7 ato ................

S EA D p S rm ns................ 8-O p r tn S9~SRe-r ..................

Fi a ca Re or .................... 1 1

EXECUTVE MESAG We are proud to share the many successes that have occurred in 2001 for SMEPA and its employees. Employee dedication and commitment toward common goals exist throughout our organization and are evident throughout this report. We have continued to perform critical roles individually and collectively while influencing constructive change in our business. SMEPA is prepared to meet the challenges of an ever-changing environment with unity of purpose as our employees continue to strive for excellence.

We present this portrait of the continuing achievements of a focused workforce.

Henry Thomas General Manager W.C. McKamy, Jr.

President 2

MEMBER SYSTEMS

'COAHOMA Lyon EPA Giles Bounds, Manager Date energized 1/18/38 1,545 miles of line 7,145 meters 2 COAST EPA Bay St. Louis Robert Occhi, General Manager Date energized 5/20/38 5,018 miles of line 63,513 meters 3 Greenwood DELTA EPA Harry H. Bonner, General Manager Date energized 1/30/39 5,497 miles of line 23,608 meters 4 DIXIE LaurelEPA 7 SINGING RIVER EPA Lucedale Lee Hedegaard, General Manager James T. Dudley, Jr.,

General Manager Date energized 12/5/39 Date energized 7/28/39 5,956 miles of line 4,454 miles of line 60,156 meters 33,640 meters 8SOUTHERN 10 Hollandale 5 MAGNOLIA EPA McComb Sammy Williams, General Manager Taylorsville PINE EPA Donald Jordan, General Manager Date energized 5/13/39 TWIN COUNTY EPA Vesper Bagley, Manager Date energized 12/24/38 9,433 miles of line 2,313 miles of line Date energized 9/19/39 59,698 meters 12,943 meters 3,555 miles of line 26,471 meters SPEARL RIVER VALLEY EPA 9 SOUTHWEST MISSISSIPPI EPA Lorman 11 YAZOO VALLEY EPA Yazoo City Charles H. Shelton, Columbia General Manager W.T. Shows, General Manager Percy McCaa, Manager Date energized 3/27/38 Date energized 3/23/38 Date energized 5/19/39 2,719 miles of line 5,724 miles of line 4,138 miles of line 24,069 meters 9,876 meters 37,346 meters 3

BOARDO PDIRC, COAHOMA ELECTRIC POWER ASSOCIATION Billy Hardin (left)

Giles Bounds, Manager (right)

COAST ELECTRIC POWER ASSOCIATION Douglas Mooney (left)

Robert J. Occhi, General Manager (right)

DELTA ELECTRIC POWER ASSOCIATION Henry Waterer, Jr.

(left)

Harry H. Bonner, General Manager (right)

DIXIE ELECTRIC POWER ASSOCIATION L.G. Pierce, Secretary-Treasurer (left)

James T. Dudley, Jr., General Manager (right) 4

MAGNOLIA ELECTRIC POWER ASSOCIATION Jewell Smith (left)

Sammy Williams,, General Manager (right)

PEARL RIVER VALLEY ELECTRIC POWER ASSOCIATION Ben F. Hudson, Jr.

(left)

W.T. Shows, General Manager and Acting Secretary-Treasurer (right)

SINGING RIVER ELECTRIC POWER ASSOCIATION Ronald "Bo" Hall (left)

Lee Hedegaard, General Manager (right)

SOUTHERN PINE ELECTRIC POWER ASSOCIATION Harlan Rogers, Vice President (left)

Donald Jordan, General Manager (right) 5

BOARD OFDRETRm SOUTHWEST MISSISSIPPI ELECTRIC POWER ASSOCIATION James P. Mullins (left)

Percy McCaa, Manager (right)

TWIN COUNTY ELECTRIC POWER ASSOCIATION W.C. McKamy, Jr., President (left)

Vesper Bagley, Manager (right)

YAZOO VALLEY ELECTRIC POWER ASSOCIATION R.D. Hines (left)

Charles H. Shelton, General Manager (right) 6

GENERAL INFORMATION SMEPA HEADQUARTERS Location: Hattiesburg, Forrest Counfy Employees: 119 SMEPA is fortunate to have its Morrow and Moselle generating stations each located approximately fifteen miles from Headquarters. Energy from both stations is dispatched from SMEPA's Control Center'in Hattiesburg.

SR.D.

STATION MORROW, SR., GENERATING Commercial Operation: 1978 Location: Lamar County Capacity: 400 MW I

Fuel: Bituminous Coal Employees: 96 E t7 MOSELLE GENERATING STATION Commercial Operation: 1970 Location: Moselle, Jones County Capacity: 260 MW Fuel: Natural Gas/Fuel Oil Employees: 30 IL GRAND GULF NUCLEAR STATION (10% Undivided Interest)

Commercial Operation: 1985 Location: Port Gibson, Claiborne County Capacity: 1,250 MW Fuel: Nuclear Employees: 1 Ia PAULDING UNIT Commercial Operation: 1972 Location: Jasper County Capacity: 20.6 MW SMEPA counts one employee among Entergy's 800+ Fuel: Diesel Fuel who work at the nuclear site. Joe Czaika is the SMEPA's two combustion turbines, Benndale Association's nuclear specialist. Grand Gulf Nuclear Station is located approximately 145 miles from and Paulding, are unmanned stations remotely SMEPA's headquarters. operated from the Control Center located at SMEPA's headquarters facility. Personnel from Plant Moselle maintain the two units.

During 2000, the units were operated on a BENNDALE UNIT Commercial Operation: 1969 Location: George County Capacity: 16.2 MW occasion to support load demand. The units were also placed into service from time to time for test purposes to assure continued availability and reliability.

Fuel: Natural Gas 7

SMEFADVARTENTS An experienced management team leads South Mississippi Electric Power Association's dedication to excellence in efficiency and service. This leadership provides the necessary expertise and foresight to manage our business during periods of growth and change.

FINANCE DEPARTMENT Jack Harpole ENGINEERING DEPARTMENT Terry Lee (right)

HUMAN RESOURCES &

DEVELOPMENT DEPARTMENT Benny Murray (left)

TRANSMISSION DEPARTMENT Jerry Pierce (right)

POWER SUPPLY DEPARTMENT Gary D. Tipps (left)

PRODUCTION DEPARTMENT Marcus Ware (right) 8

OPERAING EPOR PLANT MOSELLE The Moselle Station was operated in an intermediate and peaking mode for the entire year. Availability of the Moselle units remained especially good for the year; however, operating efficiency declined by 1.8% due primarily to reductions in capacity factor at the facility. From one to three steam units were in operation at any one time as the units were cycled into service as needed to meet system generation demand. During the peak demand period of June, July and August, all three of the steam units were in service for certain limited periods of time. The 83.5 MW combustion turbine was operated as needed for load support.

Natural gas remained available in sufficient quantities to support operation throughout the year; however, cost proved to be a factor in limiting use. The price approached record high levels during January and remained much higher than normal for most of the year. Prices moderated substantially in the last quarter. The unfavorable fuel cost situation adversely impacted the economics of operating the Moselle units. The usage of natural gas was the lowest for an annual period since 1996.

The net generation during 2001 amounted to 401,996 MWH. This includes 14,451 MWH of production from the Moselle combustion turbine. This is 30% less than the 2000 production. Output from the steam units was 78% of 2000 production, while production from the combustion turbine was only 19% of the amount produced during the prior year.

Since entering commercial operation in June 1997, the 83.5 MW simple-cycle combustion turbine has been utilized in peaking service as needed. Unit operability, availability, and reliability have met the high expectations that were established for the unit.

Throughout the year several maintenance and inspection projects were successfully completed to maintain the efficiency of plant operations. In order to fulfill the requirements of the Acid Rain Program, the Relative Accuracy Test Audit was performed on the Continuous Emissions Monitoring Systems monitors for all units. The testing was successfully completed in October of 2001.

The Paulding and Benndale combustion turbines underwent a controls upgrade. In conjunction with this upgrade, necessary supplemental spare parts were secured and placed in inventory to maintain the availability of the units.

Natural gas purchases were scheduled for flow on a monthly basis to meet projected generation requirements. Portions of the projected requirements I were purchased in advance to mitigate potential spikes in natural gas market pricing. Records indicate that usage amounted to 4,975,059 MMBtu for the Moselle Generating Plant units, which is 39%

less than the volume used during 2000.

Fuel oil usage for 2001 amounted to 51,783 gallons. This quantity was used to supplement gas usage during January when the cost of gas David Baylis and Teddy Brown work to bring Mosell e Unit I back exceeded the cost of fuel oil. onine,,

I -I r t,'d,,-,

, nonce.

9

OPE*N REPORT1*

In June 2001, SMEPA began receiving energy from Batesville Unit 3, a 280 MW combined-cycle facility, which is located at Batesville, Mississippi. In addition to the natural gas that was secured for Moselle, SMEPA arranged for the fuel for the Batesville unit. Fuel purchases for the unit, which are procured through Aquila Energy, totaled 3,350,152 MMBtu.

PLANT MORROW The plant was primarily operated in an intermediate and base load mode during the year.

Simultaneous operation of the two Morrow units occurred except when planned maintenance outages were underway. A total of 1,027,290 tons of coal was delivered to Plant Morrow, a record for an annual period. Coal consumption amounted to 966,627 tons, representing an 8%

decrease from 2000 usage.

The annual net generation from the facility was 2,154,027 MWH. The production was almost 10%

below the record-setting production of 2000. However, the output was 7% more than the average annual generation that was provided by the facility during the 10-year period 1991-2000.

Plant technicians replaced the generator voltage control system, which was part of the original equipment installed in 1978. The new system is the latest in technology and will improve generator voltage stability and regulation. The equipment also provides generator limiter and protection software to ensure safe and reliable operation using state-of-the-art technology.

A new Invensys/Foxboro I/A Distributed Control System [DCS) was purchased for installation by plant technicians. This system replaced the existing fly ash and scrubber flue gas flow control system that was also part of the original equipment installed in 1978. The controls upgrade will consist of Operator CRT workstations and fault-tolerant control processors. The DCS will include networking capability to other plant monitoring and control locations. Installation will be completed during 2002.

Various preventive maintenance tasks were completed during the year to ensure the continued integrity of plant equipment. A scheduled preventive maintenance turbine inspection was performed during a spring maintenance outage. This inspection was the first inspection performed since the outage intervals were increased to six years. Repairs were completed to restore the turbine to original condition.

The combined volume of dry fly ash and landfill material marketed during the year totaled 49,000 tons. This reflects a 41% decrease in volume when compared to 2000 figures and is the result of a decline in sales activity. Approximately 50% of the ash produced during the year was marketed.

GRAND GULF The 2001 operating statistics for Grand Gulf were quite favorable even though a refueling outage was scheduled in April. The plant capacity factor was 93.6% based on the net maximum dependable capacity of 1,210 MW, which increased the three-year average from 89.3% at the end of 2000 to 91.4% at the end of 2001. The three-year average continues to be impacted by the disappointing plant performance in 1999. The 2001 capacity factor places Grand Gulf among the top quartile of all domestic nuclear plants. The plant availability factor was 91 .8%, which is the facility's best for a refueling outage year.

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The net generation for the year was 9,923,978 MW, which is the highest amount ever for a refueling outage year and is the plant's third best year historically. Production was down. only 7.2% from 2000, a non-refueling year. The average net thermal efficiency for the year was 10,409 BTU/KWH, which is the best ever for the plant and a 0. 1% improvement over last year. The plant staff has reduced the heat rate by 14.7% since the plant entered commercial operation in 1985. Constant attention to plant thermal efficiency has paid dividends. In addition to day-to-day monitoring and correcting equipment performance, upgrades to the main turbine generator over the course of four refueling outages have added about 84 MW to the output of the plant without raising reactor power level. The staff also improved the substandard natural-draft cooling tower performance. These changes resulted in colder return water to the plant, thus improving thermal efficiency.

The plant established a new record on January 2, 2001, by producing 31,033 MW within a 24-hour period, at an average power level of 1,293 MWH. This record-setting day was due primarily to the completed main turbine upgrade and the cold ambient conditions at the time. A subsequent new record was expected to be set late in 2001 after the new cooling tower fill was installed during the spring 2001 refueling outage (RFO1 1). However, the weather refused to cooperate, and the record remained unchallenged.

The year 2001 offered many firsts in the history of Grand Gulf Nuclear. For the first time there were no planned or unplanned downpower maneuvers for equipment reasons for a full quarter. The plant remained at 100% power during the fourth quarter of the year, except for three planned downpower maneuvers for surveillance testing. In October the plant was operated for a full month without any power reductions of any kind, which is another first for Grand Gulf Nuclear. The plant is in the top quartile for the Institute of Nuclear Power Operations' safety performance indicator, which is a composite of several important plant parameters.

The plant staff met or exceeded goals in 35 of 42 of the station's goals of various types, ranging in categories from plant and personnel safety to operations, personnel, and cost performance. For several of the indicators, the plant's performance indicator was in the top quartile of domestic nuclear plants. For collective radiation exposure, the plant staff is in the top decile band. The plant was in the top category (green) for all the NRC performance indicators during 2001. NRC's performance indicators cover reactor safety, radiation safety, and safeguards (security).

The plant staff had major successes with regard to the plant's standing within the industry. The two-year average for the collective radiation exposure totaled very low, placing the plant well into the best 10% of all nuclear plants. Another area of success was in the industrial safety accident rate. Throughout 2001, Grand Gulf experienced no lost-time accidents. This placed the plant in the industry's top decile for this indicator.

The eleventh refueling outage proved to be-a major success. RFO1 1 was concluded in only 21 days, 17 hours1.967593e-4 days <br />0.00472 hours <br />2.810847e-5 weeks <br />6.4685e-6 months <br />, and 40 minutes, which was A scheduled preventive mainten just below the challenge goal of 22 days. The outage was the shortest turbine inspection was performeonce refueling outage ever for the facility. d on M.rrow Unit I

/TIVIfVFT Villi J t 11

0PERATN RPOT The Mini-Power Uprate Project, which was authorized in August 2000 by Entergy in partnership with SMEPA, is progressing on schedule. The project will improve the annual average plant power by 46 MW through reduced seasonal cycling of plant output due to weather conditions and by an increase in reactor license power of 1 .7%. The project is scheduled for implementation in 2002 without a plant shutdown.

SMEPA received a total of 992,751 MWH of energy deliveries from Grand Gulf during 2001, which is 7% less than in 2000, and is primarily a result of having a refueling outage. This represents the highest annual delivery into SMEPA's system from the facility during a refueling outage year and was the third highest delivery for an annual period. The entire year was characterized by relatively high availability.

Power was supplied from the unit on 339 of 365 days during the year, and the unit was operated without disruption in 9 of the 12 months. The overall production and performance (heat rate) reflected the positive benefits that have been realized from recent high-pressure and low-pressure turbine upgrades and cooling tower fill replacement.

BENNDALE AND PAULDING COMBUSTION TURBINES The two remotely located combustion turbines were operated only for test purposes during the year.

Neither unit was needed to support load requirements during peak demand periods or for system emergencies. The units were placed in service for test purposes at scheduled intervals in an effort to assure availability and reliability.

Benndale was operated on six separate days of the year and produced 60 MWH. Paulding was operated on five separate days and produced 83 MWH. Both units are intended to provide critically needed support when system demand is high or during system emergencies.

As usual, Moselle maintenance personnel completed routine maintenance work at the remote sites, conducted periodic operating tests at each location, and responded on occasion when starting and operating problems were identified with the units.

KENTUCKY COAL PROPERTY During the early part of 2001, Ikerd-Bandy remained as the lessee under the coal property lease agreement, and no coal was produced from the property during this period. In May, the lease agreement was modified and assigned to Chas Coal. With the transition, Chas Coal initiated plans to develop the reserves and to resume mining operations on the property. Production from the reserves began in September. For the year, clean coal production amounted to only 37,544 tons from surface, highwall, and deep mine operations. The decline was due to the absence of mining for eight months of the year and low production rates indicative of start-up efforts for the remainder of the year. Substantial increases in production are expected during 2002.

Under an Oil & Gas Lease Agreement, SMEPA received royalty payments as a result of oil and gas production from the property. A relatively small but steady volume of gas flowed from a total of 23 wells throughout the year. Revenue was generated from a limited amount of oil production each month.

As part of the effort to monitor and adequately manage developments on SMEPA's Kentucky property, quarterly inspections of the mining operations and the preparation plant were conducted. Meetings were held with Ikerd-Bandy and Chas Coal management personnel to review current and planned development of the coal reserves. SMEPA's mining consultants prepared and submitted a report of 12

detailed findings, recommendations, and other pertinent information relative to the property operations at the conclusion of each of the visits. Attention was also directed to developments under the Oil & Gas Lease Agreement and to timber removal operations.

ENVIRONMENTAL AFFAIRS Environmental efforts during 2001 focused upon continued compliance with existing regulations. This marked the second year of participation of SMEPA's Morrow and Moselle Generating Plants in Phase IIof the Acid Rain Program. Emission rates of acid rain pollutants allowed for the continued "banking" of emission credits for use in meeting future generation requirements. Continuous Emission Monitoring Systems, used to quantify and account for unit emissions, were successfully recertified at each of SMEPA generating plants.

A Title V air permit renewal application was prepared and submitted for Plant Morrow during the year.

This permit will be issued for a period of five years from the issuance date.

Geotechnical investigation and agency consultation were conducted for the expansion of the coal combustion byproduct landfill at Plant Morrow. Completion of the design phase is expected during 2002, with construction beginning during 2003.

Environmental Reports (ERs) were submitted to and approved by RUS for approximately 30 miles of SMEPA transmission line, three member cooperative distribution substations, and several categorically excluded SMEPA projects. As the year ended, no environmental reports were in process for transmission-related projects.

Environmental Assessments (EAs) were submitted and approved by RUS for the planned Silver Creek and Sylvarena Generating Plants. An EA for the construction of an additional generating unit at Moselle was submitted to RUS during December. SMEPA conducted a public scoping meeting at Headquarters to fulfill the scoping requirements of the RUS environmental review process in conjunction with the planned combustion turbine additions at Silver Creek, Sylvarena, and Moselle.

Applications for air, water, and storm-water permits we*re prepared and submitted during the year for the Silver Creek and Sylvarena Generating Plants. The Mississippi Department of Environmental Quality will use the information to issue construction and operating permits for the new facilities.

POW 0"? 5UPPI';' PbHNNKNG The 2001 Power Requirements Study was completed, approved by the boards of all eleven members, as well as SMEPA's board, and submitted to RUS for final approval. SMEPA currently bills its members based on a non-coincident peak methodology. A new coincident peak billing methodology will be phased in over a four-year period beginning with the year 2003.

SMEPA has executed a Participation Agreement with other SeTrans Regional Transmission Organization (RTO) sponsors for the purpose of developing an RTO that would operate the transmission systems of participating companies in the Southeast United States. Currently, SeTrans has eleven utility members including investor-owned utilities, cooperatives, and municipals in an eight-state region. Once it becomes operational, SeTrans would be one of the nation's largest RTOs, serving an area with more than 73,000 MW and operating some 53,000 miles of transmission lines, with an investment in assets in excess of $9 billion.

13

OEATN REPORT OPERATIONS CONTROL CENTER SMEPA's Control Center was audited by a team of representatives from other SERC members to determine whether the SMEPA Control Area was in compliance with the requirements of NERC's Operating Policies Year 2001 Templates. The audit team reviewed SMEPA Control Area procedures, self-certification forms, and other documentation developed by SMEPA to meet the applicable Template requirements. The audit team determined that SMEPA's Control Area was in full comptiance on all 2001 Operating Templates.

SMEPA started receiving capacity and energy from the 280 MW Batesville Unit 3 in June 2001. This purchase for the total output of Unit 3 was consummated in a 20-year contract with SMEPA, Aquila Energy Marketing and Utilicorp United, Inc. that had been signed in August 1999. During 2001 SMEPA received more than 439,000 MWh from the unit. It is estimated that the Batesville Unit 3 generation saved SMEPA approximately $2 million over purchases of the same amount of market energy. The Unit provided much needed energy for SMEPA load.

During the year Control Center personnel continued to effectively implement planning for optimizing generation resources. Through a combination of falling gas prices, the continued availability of both Plant Morrow units, and the use of risk management todls, fuel and energy costs to serve SMEPA members for the year were reduced by $5.7 million below budget.

A PC-based backup control system was implemented for the Control Center's energy management system. This will be used to view and control the transmission and generation system from a separate location should the main control system experience problems. The backup control system will allow SMEPA operators to continue remote control of the transmission system and will allow the continued purchase and sale of power.

SMEPA initiated a modification of the current unit commitment program to allow for more accurate pricing of power. This will aid SMEPA operators to more accurately forecast the price of power from individual units and prices needed for the sale and purchase of power.

Nostradamas software was installed in 2001 for use by Control Center operating personnel. It uses past load history and weather data, integrates forecast weather data, and estimates future hourly loads. The software has the capability of "learning" over time in order to provide increasingly accurate hourly load forecasts. This tool is very valuable in helping Control Center operating personnel determine the appropriate amount of generation and purchase energy needed for each hour of the upcoming day or period. As a result, resources can be optimized to better control cost of service to SMEPA's members.

MARKETING The SMEPA Member Marketing Committee, with assistance from the Electric Power Associations of Mississippi statewide organization, launched the Comfort Advantage Home program in 2001. A full economic assessment of the Comfort Advantage Home program was completed and presented to the Member Marketing Committee. SMEPA served the Comfort Advantage Home program in an advisory role, presented on-site customized marketing training, responded to media inquiries, presented the Comfort Advantage Home software training, and worked toward development of Comfort Advantage Home construction standards and promotional materials. Member interests were represented on the board of Energy Rated Homes of the South, an Energy Star' service provider.

114

ELECTRONICS MAINTENANCE Electronics maintenance personnel completed the activation of a new microwave alarm system and ten microwave alarm units on SMEPA's new digital microwave system.

TRANSMISSION SYSTEM MAINTENANCE AND CONSTRUCTION SMEPA is committed to providing reliable power through the maintenance of 1,570 miles of transmission line, right of way, and numerous switches. Transmission system personnel also coordinated the surveying and construction management of fiber optic installations and several transmission lines, including those necessary for the Silver Creek and Sylvarena turbine projects.

SMEPA's line crews performed climbing inspections on 7,730 structures and completed 292 line maintenance work orders. Construction of four new transmission lines was completed, and line adjustments were made on several SMEPA transmission lines for line uprating.

The annual reclearing of right of way was performed on more than 4,850 acres. Pole groundline inspections and treatments were performed on 2,574 poles, and aerial patrol inspections were performed bi-monthly.

TRANSMISSION SYSTEM PLANNING AND SYSTEM PROTECTTION SMEPA's Engineering Department prepared three Addenda to the current Construction Work Plan (CWP) for various communication improvements, new member delivery points, and tran smission system additions required for the new SMEPA generation to be added at Silver Creek, Sylvare na, and Moselle. SMEPA's Engineering Department also participated with neighboring transmission utilities to develop the RTO in the Southeast.

Metering technicians checked calibration of all 207 wholesale revenue meters at 183 site:s on the SMEPA system and installed several new meter packages, upgraded current transforme rs, and calibrated under-frequency packages at various locations.

Relay technicians calibrated 2,388 relays at 27 locations and installed new relay panels with 78 new relays at four sites (two sites were new substations). Equipment was added to provide immedi ate fault location information to the Control Center on ten existing transmission lines.

ENGINEERING DESIGN AND SUBSTATION MAINTENANCE SMEPA's Engineering Department completed the design for the installation of 39 miles of fiber optic cable, the design and installation of 27.6 MVAR of 69kV capacitors at three different sites, and also began the design process for two substations that will tie the two new generation sites to the transmission system.

Several active transmission line projects were initiated in 2001 including: the design of 28 miles of new 69kV line required by the latest CWP; the design requirements to uprate 21 miles of 16 1kV line and 52 miles of 69kV line; preparation of a new design with larger conductor for 36 miles of existing 69kV line associated with the new generation at Sylvarena; and the preparation of a new design with a large 15

OPERATN RPORTp conductor for four miles of new 11 5kV line associated with the new generation at Silver Creek.

Major substation maintenance activities include collecting Dissolved Gas Analysis samples from 42 power transformers, 29 load tap changers, and 30 oil circuit breakers. Annual routine preventive maintenance was performed on 123 motor-operated switches, and 24 new motor-operator sets were installed on the system.

SMEPA performed the annual infrared survey/inspections for all substations, switching stations, and delivery point facilities.

COMPUTER INFORMATION SYSTEMS The CIS department completed several software projects during 2001. The largest project included an upgrade of Oracle Financials in support of planned 2002 migration efforts and implementation of Oracle Financial Analyzer to support SMEPA's budget and reporting processes.

CIS installed a virus protection application for the email system to reduce the potential of an employee's system infecting the internal network. This system has almost eliminated virus occurrences.

The Novell operating system was upgraded on'all client PCs and file share servers at Headquarters, Plant Morrow, and Plant Moselle. This upgrade contributed to improving the reliability of CIS server investments.

The year 2001 was also a planning year to create a strategy for migration from in-house developed legacy applications and a series of software upgrades. This planning included analysis of available asset and work management software applications and documentation of existing business processes.

SAFETY SMEPA employees continued to set outstanding safety records while maintaining improved efficiencies and reducing cost of service to consumers. The year 2001 marked more than eight consecutive years that employees have worked without incurring a lost-time accident due to an on-the-job injury. Once again, SMEPA employees are commended for this unprecedented and most important achievement.

ASSOCIATION RELATIONS SMEPA continued to invest in the surrounding communities through participation in and support of such programs as the United Way of both the Pine Belt Region and Southeast Mississippi, Adopt-A-Family, the American Red Cross, the Boy Scouts of America, the EPA's Youth Leadership Tour, MathCounts, the Hattiesburg Area Education Foundation, the Area Development Partnership, and the Adopt-A-School partnership.

16

Overall, SMEPA reported good financial results for 2001 notwithstanding difficult economic conditions. The wholesale rate collected from members for the year was slightly below budget while the net margin was slightly above budget.

Like others, SMEPA began the year faced with $10 per million BTU prices for natural gas. To the extent possible, SMEPA reduced gas generation and relied more on coal and nuclear generation and purchased power contracts.

By year-end, the spot price for gas was below $3, and SMEPA had avoided the need to change its budgeted wholesale rate to members.

SMEPA's wholesale power rate charged to the eleven member cooperatives averaged 44.8 mills per kilowatt hour during 2001, up 1.8%. Net revenues from members amounted to $354 million, a decrease of $9.4 million compared to last year. Energy sales to members were down 2.5% to 8.05 million megawatt hours. Demand billings to members were down 4.8% to a monthly average of 1,539 megawatts, a decrease of 78 megawatts. Both sale components reached all-time records in the prior year, 2000, but seemed to turn down in March 2001, about the same time many economists think was the start of an official recession in the United States.

All eleven member cooperatives served by SMEPA reported growth in the number of meters served during 2001.

The total now stands at 359,301 meters, an increase of 1.8% over 2000. Year 2001 marked the fifth consecutive year that all members reflected an increase in customers served. The decrease in sales quantities discussed above resulted from a combination of milder weather and a slowdown in economic activity.

SMEPA's $85 million equity balance at year-end was 12% of total assets. Cash and short-term investments were $32 million. Capital outlays were $57 million during 2001 compared to $26 million the prior year. During the year SMEPA received approval from RUS and CFC under a "fast-track" loan program for $275 million of financing for its 481 MW combustion turbine project. At year-end, SMEPA had invested a total of $51 million in the project and was forecasting that an additional $90 million would be needed in 2002. Outstanding debt increased for the first time in more than a decade as SMEPA borrowed to invest in the turbine project. Debt was $592 million at year-end with a weighted average cost of 5.88%, including $47 million borrowed for the new project.

17

FIANCA REOR 84.8 82.7 80.9 78.9 76.8 EQUITIES AND PATRONAGE CAPITAL (millions of dollars) 2001 2000 1999 1998 1997 4.1 4.0 3.7 3.7 3.5 GENERATION (millions of MWH) 2001 2000 1999 1998 1997 A

8.1 7.8 7.5 6.9 SALES TO MEMBERS (millions of MWH) 2001 2000 1999 1998 1997 44.83 44.02 41.95 40.75 40.99 WHOLESALE RATE TO MEMBERS (mills per KWH) 2001 2000 1999 1998 1997

Comparative Balance Sheets and Selected Financial Ratios ($ in Thousands)

ASSETS 2N01 1999 1992 ELECTRIC UTILITY PLANT In Service - at cost $ 845,253 $ 828,332 $ 820,003 $ 815,305 $ 809,115 Construction work in process 84,354 42,277 24,620 20,861 17,326 929,607 870,609 844,623 836,166 826,441 Less accumulated depreciation 397,434 373,874 350,183 330,062 308,328 Net Utility Plant $ 532,173 $ 496,735 $ 494,440 $ 506,104 $ 518,113 INVESTMENTS Investments in associated organizations 13,295 7,719 7,814 7,905 10,481 Debt service reserve investments 4,617 4,594 4,613 5,488 5,554 Decommissioning trust investments 10,501 10,407 10,220 9,666 7,981 Debt service prepayments 7,031 Total Investments 35,444 22,720 22,647 23,059 24,016 CURRENT ASSETS Cash - general funds and cash equivalent investments 24,639 22,119 23,122 17,124 14,275 Other invested funds 2,251 11,727 13,577 Accounts Receivable - Members 28,952 33,745 27,498 24,091 23,714 Accounts Receivable - Others 723 1,502 1,003 1,088 4,017 Coal and other fuel inventories 7,804 5,206 18,446 11,022 14,313 Materials and supplies inventories 15,167 14,712 15,467 15,836 15,735 Other 437 557 1,030 3,602 989 Total Current Assets 77,722 77,841 88,817 84,490 86,620 DEFERRED CHARGES 86,212 90,084 106,335 99,455 104,013 TOTAL ASSETS $ 731,551 $ 687,380 $ 712,239 $ 713,108 $ 732,762 EOUITIES AND LIABIITIES EQUITIES Patronage capital 84,313 $ 82,187 $ 80,348 $ 78,337 $ 76,299 Memberships and donated capital 535 535 535 535 535 84,848 82,722 80,883 78,872 76,834 Long-Term Debt (excluding current maturities) 559,105 516,265 549,557 571,672 594,152 Accrued Decommissioning Obligation 10,501 10,407 10,220 9,666 7,981 Deferred Credits and Other Long-Term Liabilities 10,8s0 4,075 4,096 3,962 3,991 CURRENT LIABILITIES Accounts payable 30,807 29,243 24,666 20,326 22,969 Notes payable 2,000 18,000 Accrued interest 541 8,052 566 804 642 Other accrued expenses 2,308 2,339 2,127 2,166 1,795 Current maturities of long-term debt 30,591 34,277 22,124 25,640 24,398 66,247 73,911 67,483 48,936 49,804 TOTAL EQUITIES AND LIABILITIES $ 731,551 $ 687,380 $ 712,239 $ 713,108 $ 732,762 RATIOS TIER 1.06 1.05 1.06 1.05 1.06 DSC 1.03 1.06 1.02 1.06 1.11 Equity as % of Assets 11.6% 12.0% 11.4% 11.1% 10.8%

DEBT Long-Term Debt and Notes Payable $ 561,105 $ 516,265 $ 567,557 $ 571,672 $ 594,152 Current Maturities on Long-Term Debt 30,591 34,277 22,124 25,640 24,398 TOTAL DEBT $ 591,696 $ 550,542 $ 589,681 $ 597,312 $. 618,550 Average Interest Rate 5.88% 6.30% 6.23% 6.27% 6.23%

19

FIANCAL REOR Comparative Operating Statements ($ in Thousands)

S2901 2001 199 1998 1997 OPERATING REVENUES

$ 354,120 $ 363,535 $ 328,716 $ 305,751 $ 281,472 Electric energy revenue from members 731 3,216 547 7,301 19,632 Other electric energy revenue (404) (307) 11 373 1,355 Other - net

$ 354,447 $ 366,444 $ 329,274 $ 313,425 $ 302,459 OPERATING EXPENSES 63,881 78,217 66,641 74,885 64,940 Fuel 13,639 13,987 13,616 12,970 13,192 Production 185,497 183,174 157,532 132,977 132,714 Purchased Power 11,710 12,171 11,977 11,424 10,361 Transmission 4,328 4,030 3,661 3,424 3,467 Administrative and General Maintenance expenses:

10,297, 8,508 8,871 9,789 7,508 Production 2,188 2,186 2,294 1,810 2,215 Transmission 731 736 692 609 656 General Plant 26,960 26,461 25,736 25,776 27,720 Depreciation and amortization 319,231 329,470 291,020 273,664 262,773 OPERATING MARGIN BEFORE INTEREST 35,216 36,974 38,254 39,761 39,686 AND OTHER DEDUCTIONS INTEREST AND OTHER DEDUCTIONS 36,489 37,344 38,444 40,594 41,705 Interest 29 14 44 54 61 Other Deductions 36,518 37,358 38,488 40,648 41,766 (1,302) (384) (234) (887) (2,080)

OPERATING MARGIN NONOPERATING MARGIN:

1,534 1,709 1,943 2,590 3,131 Interest income 1,618 355 217 258 1,119 Allowance for funds used during construction 276 159 85 77 60 Other 3,428 2,223 2,245 2,925 4,310 Total Nonoperating Margin

$ 2,126 $ 1,839 $ 2,011 $ 2,038 $ 2,230 NET MARGIN 20

Selected Financial Data 2001 2000 1999 1998 1997 Mills per KWh Wholesale Rate to Members 44.83 44.02 41.95 40.75 40.99 Wholesale Rate to Non-Members 27.82 39.36 42.95 26.05 29.15 Average Cost of Purchased Power 39.86 41.66 36.29 33.77 33.40 Average Cost of Fuel (per net generation) 18.00 19.31 18.24 18.72 17.54 Comparative Summary / Energy Sources and Sales 2001 2000 1999 1998 1997 ENERGY SOURCES - MWH Generated 3,548,906 4,051,486 3,654,436 4,000,428 3,703,426 Purchased 4,653,782 4,396,938 4,340,954 3,950,485 3,993,529 TOTAL ENERGY AVAILABLE FOR SALE - MWH 8,202,688 8,448,424 7,995,390 7,950,913 7,696,955 ENERGY SALES - MWH Members Coahoma EPA 136,694 137,280 127,441 128,845 113,455 Coast EPA 1,429,392 1,497,819 1,345,675 1,186,129 1,082,399 Delta EPA 517,677 529,637 530,839 521,834 448,519 Dixie EPA 712,545 721,905 676,403 669,078 611,153 Magnolia EPA 549,602 559,367 522,275 514,763 488,867 Pearl River EPA 826,141 831,542 761,825 717,346 631,588 Singing River EPA 1,232,291 1,280,415 1,189,922 1,143,285 1,067,486 Southern Pine EPA 1,670,862 1,678,363 1,634,359 1,584,680 1,491,970 Southwest Mississippi EPA 414,021 437,638 443,512 445,689 412,882 Twin County EPA 260,148 302,357 296,437 294,815 267,243 Yazoo Valley EPA 301,046 282,862 307,335 296,939 251,935 TOTAL SALES TO MEMBERS 8,050,419 8,259,185 7,836,023 7,503,403 6,867,497 Non-Members 26,269 81,704 12,716 291,913 702,509 TOTAL SALES 8,076,688 8,340,889 7,848,739 7,795,316 7,570,006 MEMBER DEMAND -- KW 1,976,642 2,030,075 1,892,133 1,762,216 1,646,802 (Non-Concurrent Peak) 21

REPORT L INDEPENDENT AUDITORS' P Richards, Sims & Iupe, PLLC 317 E. Capitol Street, Suite 800 Phone: (601) 974-5100 Jackson, MS 39201-2592 Fax: (601) 969-7335 INDEPENDENT AUDITORS' REPORT To the Board of Directors of South Mississippi Electric Power Association We have audited the accompanying balance sheet of South Mississippi Electric Power Association ("SMEPA") as of December 31, 2001, and the related statements of revenues, expenses and patronage capital, and cash flows for the year then ended. These financial statements are the responsibility of SMEPA's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of SMEPA for the year ended December 31, 2000, were audited by other auditors whose report, dated February 2, 2001, expressed an unqualified opinion on those statements.

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

In our opinion, the 2001 financial statements present fairly, in all material respects, the financial position of SMEPA as of December 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

February 1, 2002 22

South Mississippi Electric Power Association Statements of Revenues, Expenses and Patronage Capital (In Thousands)

Years Ended December 31 2001 2000 OPERATING REVENUES Electric energy revenue from members $ 354,120 $ 363,535 Other electric energy revenue 731 3,216 Other - net (404) (307) 354,447 366,444 OPERATING EXPENSES Fuel 63,881 78,217 Production 13,639 13,987 Purchased Power 185,497 183,174 Transmission 11,710 12,171 Administrative and general 4,328 4,030 Maintenance expenses:

Production 10,297 8,508 Transmission 2,188 2,186 General 731 736 Depreciation and amortization 26,960 26,461 319,231 329,470 OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS 35,216 36,974 INTEREST AND OTHER DEDUCTIONS Interest *36,489 37,344 Other deductions 29 14 36,518 37,358 OPERATING MARGIN (1,302) (384)

NONOPERATING MARGIN:

Interest income 1,534 1,709 Allowance for funds used during construction 1,618 355 Other 276 159 Total Nonoperating Margin 3,428 2,223 NET MARGIN 2,126 1,839 PATRONAGE CAPITAL AT BEGINNING OF YEAR 82,187 80,348 PATRONAGE CAPITAL AT END OF YEAR $ 84,313 S 82,187 See "Notes to Financial Statements" 23

South Mississippi Electric Power Association Balance Sheets (In Thousands)

December 31 2001 2000 ASSETS ELECTRIC UTILITY PLANT

$ 845,253 $ 828,332 In service - at cost 84,354 42,277 Construction work in process 870,609 929,607 373,874 397,434 Less accumulated depreciation 496,735 532,173 Net utility plant INVESTMENTS 13,295 7,719 Investments in associated organizations 4,617 4,594 Debt service reserve and other investments 10,501 10,407 Decommissioning trust investments 7,031 Debt service prepayments 22,720 35,444 Total Investments CURRENT ASSETS 24,639 22,119 Cash - general funds and cash equivalent investments Accounts receivable: 28,952 33,745 Members 723 1,502 Others Inventories (at average cost):

7,804 5,206 Coal and other fuel 15,167 14,712 Materials and supplies 437 557 Other 77,722 77,841 Total Current Assets 86,212 90,084 DEFERRED CHARGES

$ 731,551 $ 687,380 TOTAL ASSETS See "Notes to Financial Statements" 24

South Mississippi Electric Power Association Balance Sheets continued (In Thousands)

December 31 2001 2000 EQUITIES AND LIABILITIES EQUITIES Patronage capital $ 84,313 $ 82,187 Memberships and donated capital 535 535 84,848 82,722 LONG-TERM DEBT (excluding current maturities) 559,105 516,265 ACCRUED DECOMMISSIONING OBLIGATION 10,501 10,407'.

DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES 10,850 4,075 CURRENT LIABILITIES Accounts payable 30,807 29,243 Notes Payable 2,000 Accrued interest 541 8,052 Other accrued expenses 2,308 2,339 Current maturities of long-term debt 30,591 34,277 66,247 73,911 COMMITMENTS AND CONTINGENCIES (Notes 4 and 14)

TOTAL EQUITIES AND LIABILITIES $ 731,551 $ 687,380 See "Notes to Financial Statements" 25

South Mississippi Electric Power Association Statements of Cash Flows Years Ended December 31 (In Thousands) 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES 2,126 $ 1,839 Net Margin Adjustments necessary to reconcile net margin to net cash provided by operating activities: 30,070 30,826 Depreciation, amortization, and depletion (1,618) (355)

Allowance for funds used during construction Change in Operating Assets and Liabilities: 5,571 (6,746)

Accounts receivable 13,995 (3,053)

Inventories (871) 454 Other assets 1,526 4,767 Accounts payable and other liabilities (7,511) 7,486 Accrued interest payable (1,654) (258)

Nuclear outage maintenance costs 6,783 9,629 Fuel Cost Adjustments 94 186 Increase in accrued decommissioning payable 61,823 31,463 Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES (57,422) (25,950)

Construction and acquisitions of electric utility plant 43 78 Proceeds from retirements of electric, utility plant (net) (694) (4,392)

Purchase of available for sale securities 600 4,206 Sale of available for sale securities 94 (5,577)

Investment in associated organizations 6,833 Maturities of held to maturity securities (4,564)

(7,054)

Purchase of held to maturity securities (70,104) (23,695)

Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES (34,249) (21,131)

Principal payments on long-term debt (18,000)

Principal payments on short-term borrowings 73,410 Proceeds from long-term borrowings 2,000 Proceeds from short-term borrowings 41,161 (39,131)

Net Cash Provided By (Used in) Financing Activities 2,520 (1,003)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,119 23,122 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 22,119

$ 24,639 CASH AND CASH EQUIVALENTS AT END OF YEAR See "Notes to Financial Statements" 26

AI CAL mEPmRi South Mississippi Electric Power Association Notes to Financial Statements Years Ended December 31, 2001 and 2000 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES South Mississippi Electric Power Association ("SMEPA") is a member-owned, not-for-profit electric generation and transmission cooperative supplying wholesale electricity and other services to eleven member systems, which, in turn, provide retail electric service to approximately 350,000 consumers in certain areas of Mississippi. Under long-term wholesale power contracts with each of its members, SMEPA is obligated to provide all of the power required by the member systems to the extent that SMEPA has power available. Financing assistance is provided by the United States Department of Agriculture, Rural Utilities Service ("RUS"). In addition to being subject to regulation by its own governing board of directors, SMEPA is subject to certain rules and regulations promulgated for rural electric borrowers by RUS. SMEPA maintains its accounting records in accordance with the Federal Energy Regulatory Commission's ("FERC") Chart of Accounts as modified and adopted by RUS. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As a regulated utility, the methods of allocating costs and revenue to time periods may differ from those principles generally applied to nonregulated companies.

SMEPA owns a 10% undivided interest in a nuclear generating plant known as Grand Gulf Unit I

("Grand Gulf'). System Energy Resources, Inc. ("System Energy"), a subsidiary of Entergy Corporation ("Entergy"), owns the remaining 90% either outright or through leasehold interests.

Entergy Operations, also a subsidiary of Entergy, operates the plant along with other nuclear plants owned by Entergy, subject to owner oversight. Grand Gulf commenced commercial operation on July 1, 1985.

The more significant accounting policies are generally described as follows:

a. Electric Utility Plant and Depreciation Electric utility plant is stated at cost, which includes contract work, materials and direct labor, allowance for funds used during construction, and allocable overhead costs. The cost of electric generating stations and related facilities also includes costs of training and production incurred.

less revenue earned, prior to the date of commercial operation.

Depreciation is provided by the straight-line method for utility plant at the following annual composite rates:

Nuclear generation plant 2.85%

Non-nuclear generation plant 3.00% to 3.10%

Transmission plant 2.75%

General plant and transportation equipment 2.00% to 25.00%

At the time units of electric utility plant are retired, their original cost and cost of removal, less salvage value, are charged to accumulated depreciation. Replacements of electric utility plant involving less than a designated unit of property are charged to maintenance expense. At each balance sheet date, SMEPA evaluates the recoverability of long-lived assets based upon expectations of nondiscounted cash flows and operating income.

27

FIA i CA REPORT..,...

b. Cost of Decommissioning Nuclear Plant SMEPA's portion of the estimated decommissioning cost of Grand Gulf is charged to operating expenses over the estimated service life of the plant. The current operating license received from the Nuclear Regulatory Commission terminates in 2024.

c. Allowance for Funds Used During Construction Allowance for funds used during construction represents an allowance based on the average cost of appropriate borrowings when general funds are used to fund construction. The allowance is capitalized as a component of the cost of electric plants and related facilities while they are under construction.

d. Investment Securities Debt service and other investments are categorized as held to maturity and are carried on the balance sheet at amortized cost. SMEPA has the intent and ability to hold these securities until their estimated maturities but may sell them under certain circumstances.

Decommissioning trust investments are categorized as available for sale and are carried at fair value. In accordance with the regulatory treatment for decommissioning trust funds, unrealized gains on investment securities are also included as a regulatory liability as part of the accrued decommissioning obligation.

Premiums and discounts are amortized and accreted to operations using the level yield method, adjusted for prepayments as applicable.

e. Deferred Charges SMEPA was a 10% owner in a second unit at the Grand Gulf site when construction was terminated in 1989. With the approval of the RUS, SMEPA is amortizing its remaining investment over a 27-year period ending in 2016.

As a condition of repricing certain outstanding debt in recent years so as to significantly reduce as annual interest expenses, SMEPA paid penalties of varying amounts that are accounted for deferred charges to be amortized over the remaining life of the debt.

Bond issue costs are being amortized by the straight-line method, which does not differ materially from the interest method, over the term of the related debt. The amortization during the period of construction is capitalized.

Nuclear outage maintenance costs represent SMEPA's ten percent share of Grand Gulf's incremental maintenance costs associated with refueling outages. These costs are recorded as deferred charges when incurred and are amortized by the straight-line method over the eighteen months between outages.

From time to time, the Board will set a benchmark fuel cost adjustment rate to be collected from Members so as to match revenues with actual and forecasted fuel and purchased power costs consistent with the cooperative not-for-profit operation of SMEPA. Material variances between these revenues and costs may cause the recognition of deferred credits or deferred charges from one year to the next.

28

SMEPA's accounting policies include compliance with Statement of Financial Accounting Standards ("SFAS") 71, "Accounting for the Effects of Certain Types of Regulation." In accordance with SFAS 71, SMEPA has regulatory assets of approximately $86 million, including $57.3 million relating to the unamortized cost of abandoned plant (Note 7). In the event that SMEPA is no longer able to comply with SFAS 71 as the result of a change in regulation or effects of competition, SMEPA would be required to recognize the effects of its regulatory assets and liabilities currently in its statements of revenue, expenses, and patronage capital.

f Patronage Capital The bylaws of SMEPA provide that any excess of revenue over expenses and accumulated prior-year deficits shall be treated as advances of capital by the member patrons and credited to them on the basis of their patronage.

g. Income Taxes SMEPA is exempt from United States income taxes pursuant to Section 501(c)(12) of the Internal Revenue Code, which requires that at least 85% of SMEPA's gross income be derived from its members.

h. Cash and Cash Equivalents For purposes of reporting cash flows, all temporary investments with original maturities of three months or less are deemed to be cash equivalents.

NOTE 2 - ACCOUNTING STANDARDS TO BE ADOPTED IN THE FUTURE In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," which is effective for all business combinations initiated after June 30, 2001. This statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and Statement of Financial Accounting Standards No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using the purchase method.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001, with earlier application permitted. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This Statement addresses the accounting for goodwill and other intangible assets after they have been initially recognized in the financial statements. This Statement requires that goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to impairment tests.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. This Statement addresses financial accounting and reporting for asset retirement obligations, and requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which is effective for fiscal years beginning after December 15, 2001, with earlier application permitted. This Statement addresses financial accounting and reporting for the impairment or disposal- of long-lived assets by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions.

SMEPA does not believe that the adoption of these Statements will have a material effect on the financial statements.

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FIANCAL REOR NOTE 3 - ELECTRIC UTILITY PLANT Electric utility plant consisted of the following (in thousands):

Cost Accumulated Depreciation 2001 2000 2001 2000 Grand Gulf Nuclear $411,246 $407,612 $170,597 $159,012 Morrow Steam 191,386 190,419 126,499 120,723 Moselle Steam 23,979 23,978 21,132 20,395 Moselle Gas Turbine 21,723 21,723 2,949 2,298 Benndale/Paulding Gas Turbines 4,420 3,844 34379 3,352 Total Generating Plant 652,754 647,576 324,556 305,780 Transmission Plant 148,698 138,501 48,041 44,663 General Plant and Equipment 18,654 17,108 10,159 9,306 Electric Plant Leased to Others 25,147 25,147 14 ,682 14,115 Electric Plant in Service 845,253 828,332 397,438 373,864 Construction Work in Process 84,44 42277 -4 10 Total Utility Plant $929,607 $870,609 $397,434 $373,874 NOTE 4 - COMMITMENTS REGARDING GRAND GULF sets forth SMEPA and System Energy are co-licensees and parties to a joint ownership contract that owners, and SMEPA is generally obligated to pay 10% of the rights and obligations of the Grand Gulf to receive 10% of the electricity generated by the plant.

all operating and capital costs and is entitled SMEPA paid $18,837,000 and S19,894,000 under the contract in 2001 and 2000, respectively.

than those for Ownership of nuclear capacity entails risks and uncertainties somewhat more complex non-nuclear capacity, and these are discussed below.

Nuclear Insurance and Assessments As the 90% majority co-owner of Grand Gulf, System Energy is responsible for arranging is appropriate insurance and industry assessment programs for itself and SMEPA. SMEPA obligated to pay 10% of all appropriate costs and assessments, if any. Under the program, SMEPA could be assessed up to approximately $9 million for each nuclear incident involving licensed reactors, payable at a rate of $1 million per reactor per incident per year.

The property insurance presently arranged by System Energy exceeds the NRC's minimum requirement for nuclear power plant licensees of $1.06 billion per site. NRC regulations provide in a safe that the proceeds of this insurance must be used, first, to place and maintain the reactor second, to complete decontamination operations. Only after proceeds and stable condition and, be are dedicated for such use and regulatory approval is secured would any remaining proceeds made available for the benefit of plant owners or their creditors. Under a member assessment program, SMEPA could be assessed approximately $1.0 million for property damage, decontamination, or premature decommissioning expense involving other members' nuclear generation plants.

Nuclear Fuel company, for System Energy contracts with System Fuels Inc., another Entergy subsidiary a nuclear nuclear fuel for Grand Gulf, including maintaining inventories. System Energy has for fuel lease arrangement for up to $100 million with respect to Grand Gulf. SMEPA pays nuclear fuel as it is consumed; and such payments include appropriate charges for processing, fabrication, storage, inventory, shipment, and handling.

30

Spent Nuclear Fuel System Energy and SMEPA provide for estimated future disposal costs for spent nuclear fuel in accordance with the Nuclear Waste Policy Act of 1982. System Energy entered into contracts with the United States Department of Energy ("DOE"), whereby the DOE will furnish disposal service at a cost of one mill per net KWh generated and sold. The fees payable to the DOE may be adjusted in the future to assure full recovery. Delays have occurred in the DOE's program for the acceptanceand disposal of spent nuclear fuel at a permanent repository and considerable uncertainty exists regarding the time frame under which the DOE will begin to accept spent fuel for storage or disposal. Pending DOE acceptance and disposal of spent nuclear fuel, the owners of nuclear plants are responsible for their own spent fuel storage. Current on-site spent fuel storage capacity at Grand Gulf is estimated to be sufficient until approximately 2005, at which time dry cask storage facilities will be placed into service.

Decommissioning Costs The total cost to decommission Grand Gulf has been estimated to be approximately $601 million (based on a 1999 cost study using 1999 dollars). SMEPA is responsible for 10% of the estimated cost and has submitted a formal plan to the NRC that demonstrated assurance that sufficient financial resources would be available at the time it becomes necessary to decommission. In addition, SMEPA received approval from the Internal Revenue Service to establish a "tax-free" grantor trust as a vehicle to fund the estimated decommissioning costs. Because of decreases in the market value of securities maintained in the trust, the actual market value of the trust at December 31, 2001 was below the target value. Because of that deficiency, SMEPA will increase its annual funding to $800,000 through 2024 in place of the $600,000 annual funding previously planned. The estimated funding requirement will continue to be recalculated and adjusted periodically.

The Energy Policy Act of 1992 has a provision that assesses nuclear utilities with fees for the decontamination and decommissioning of the DOE's past uranium enrichment operations. The decontamination and'decommissioning assessments will last for fifteen years and will be used to set up a fund into which contributions from utilities and the federal government will be placed.

SMEPA's aggregate liability is estimated at $2,500,000 and is being paid over the fifteen-year term.

Depreciation Rate Except for the years 1996 and 1997, SMEPA has used a 2.85% annual rate for depreciation for Grand Gulf since its commercial operation starting in 1985. For years 1996 and 1997, SMEPA tentatively used a 3.33% rate, which was being used by its co-owner pending approval by its regulators. It is SMEPA's understanding that regulators will not approve the higher rate although the matter may not be settled. At December 31, 2001, the accumulated depreciation account includes $3,966,000 in depreciation charges related to the higher rate. Management believes that the impact, if any, of final action on this matter will be accounted for prospectively and will not have a material effect on the financial statements.

NOTE 5 - INVESTMENTS IN ASSOCIATED ORGANIZATIONS Investments in associated organizations are stated at cost and consisted of the following (in thousands):

2001 2000 National Rural Utilities Cooperative Finance Corporation ("CFC") Certificates:

Membership subscription $6,223 $6,223 Loan and guarantee 6,693 1,114 Other - 379 382

$13295 $7,719 31

AIEAL RE-CFC membership subscription certificates bear interest at a 5.0% rate and mature in 2070 through 2080. The loan and guarantee certificates bear interest at rates of 3.0%, 5.2% and 5.8% and mature in 2005 through 2007.

NOTE 6 - INVESTMENT SECURITIES The amortized cost and related approximate fair values of investment securities were as follows (in thousands):

Gross Amortized Unrealized Unrealized Fair December 31, 2001 Losses Value Cost Gains Decommissioning Trust:

Equity mutual funds $6,714 $390 $20 $7,084 3,407 11 Fixed income mutual funds $21 $10,501

$10,121 $401 Securities to be Held to Maturity:

Obligations of states and political subdivisions $4,617 $17 $4,600 December 31, 2000 Decommissioning Trust:

Equity mutual funds $5,530 $1,746 $6 $7,270 58 3,137 Fixed income mutual funds 3 19 5

$8,725 $1,746 $64 $10,407 Securities to be Held to Maturity:

Obligations of states and political $4,786

$4,594 $192 -

subdivisions be held to maturity at The amortized cost and approximate fair value of investment securities to December 31, 2001, by contractual maturity, were as follows (injthousands):

Amortized Fair Cost Value

$4,617 $4,600 Due after five years through ten years Actual maturities may differ from contractual maturities because of the borrowers' right to call or prepay obligations.

Sales of decommissioning trust assets by the trustee aggregated S600,000 in 2001 and $4,208,000 in 2000, resulting in no realized gains in 2001 and S2.600 in 2000 under the specific identification method.

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NOTE 7 - DEFERRED CHARGES (INCLUDING REGULATORY ASSETS)

The following is a summary of amounts recorded as deferred charges (in thousands):

2001 2000 Unamortized cost of abandoned plant $57,268 $60,357 Unamortized penalties on repriced debt 24,750 26,687 Unamortized debt discount and issuance cost 733 811 Nuclear outage maintenance cost 845 667 Deferred decontamination and decommissioning of past uranium enrichment operations 1,036 1,173 Other 1,580 389

$8,2l2 $9%084 Plans for constructing a second unit at the Grand Gulf site were terminated in 1989. SMEPA was to have been a 10% owner in the second unit and had invested approximately $104 million, net of recoveries and transfers. With the written approval of the RUS, SMEPA is amortizing its remaining investment in the abandoned plant over a 27-year period ending in 2016, and amortization was

$3,089,000 and $3,010,000 in 2001 and 2000, respectively.

SMEPA repriced or refinanced significant amounts of its outstanding debt in recent years. As a condition of the transactions, SMEPA paid various prepayment penalties, which are treated as deferred charges to be amortized over the remaining life of the debt. Amortization of all such penalties was

$1,936,000 in 2001 and 2000.

NOTE 8 - PATRONAGE CAPITAL Patronage capital consisted of the following (in thousands):

2001 2000 Cumulative margins $90,167 $88,041 Less: Retirements to date 5,854

$84,313 $82,187 Under the provisions of debt covenants, until the patronage capital equals or exceeds forty percent of the total assets of SMEPA, the return to patrons of contributed capital is generally limited to twenty five percent of the patronage capital or margins received by SMEPA in the prior calendar year. The patronage capital of SMEPA represents 11.5% and 12.0% of the total assets at December 31, 2001 and 2000, respectively.

NOTE 9 - SHORT-TERM BORROWINGS SMEPA has a $25,000,000 short-term line of credit available with CFC that is subject to renewal in September 2002 and a $5,000,000 short-term line of credit with a bank that expires in July 2002. At December 31, 2001, SMEPA had $2,000,000 of borrowings against the short-term line of credit with a bank at an interest rate of 4.25%. SMEPA had no borrowings against these lines of credit at December 31, 2000.

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• NOTE 10 - LONG-TERM DEBT 2001 2000 Long-term debt consisted of the following (in thousands):

Mortgage notes payable to Federal Financing Bank ("FFB")

at interest rates varying from 4.935% to 10.705%, due in quarterly installments through 2030 $448,674 $447,693 2% RUS mortgage notes payable, due in quarterly 6,996 9,138 installments through 2009 5% RUS mortgage notes payable, due in quarterly 12,018 13,007 installments through 2015 5%, 5.375%, 5.125% and 5.75% RUS mortgage notes 16,714 17,181 payable, due in monthly installments through 2020 Mortgage notes payable to CoBank at 6.120% at December 31, 2001 and 7.84% at December 31, 2000 due in 2,043 2,141 quarterly installments through 2019 Mortgage notes payable to CFC bearing interest at variable rates (4.70% at December 31, 2001and 8.300% at December 4,434 4,537 31, 2000) due in quarterly installments through 2022 CFC advances at interest rates ranging from 4.10% to 6.45%

45,373 to finance construction of new turbines.

Lamar County, Mississippi, Pollution Control Bonds:

1,095 1,230 1978 A Series, 6.125%, due semi-annually through 2008 13,804 15,771 1993 S Series, 4.35% to 4.95%, due annually through 2007 Claiborne County, Mississippi, Pollution Control Bonds:

1985 G Series, variable interest rates (1.45% to 2.15%

at December 31, 2001), due annually through 2015 38.545 39,845

$589,696 $550,542 30,591 34,277 Less current maturities

$559,105 $516,265 provide permanent SMEPA has applied to the RUS for a $275 million loan guarantee that would Note 14). RUS has requested additional information financing for its combustion turbine project (See the application sometime in 2002 or 2003. In the from SMEPA. SMEPA expects RUS to approve interim financing for the project. The CFC loan is meantime, CFC has agreed to provide $275 million year mortgage loan should the RUS ultimately a four-year loan which can be converted to a 20 RUS has granted CFC a determine not to approve SMEPA's application for the loan guarantee.

as the CFC four-year loan is outstanding. It is priority claim to certain debt service payments so long the FFB and repay the CFC loan once RUS has SMEPA's plan to borrow permanent financing from approved the loan guarantee.

equity certificates in A condition of the CFC interim $275 million loan requires SMEPA to purchase loan to SMEPA for this purpose. The equity CFC and CFC has also provided a $37 million as the $275 million loan is repaid.

certificates earn interest income and can be redeemed 34

At December 31, 2001 SMEPA owed $39.7 million and $5.7 million on the two CFC loans related to the combustion turbine project. SMEPA also owed $2 million on the bank line of credit at that date.

There were no borrowings for the project at December 31, 2000.

Substantially all assets of SMEPA are pledged as collateral on long-term debt.

Approximate annual maturities (scheduled periodic principal payments) of long-term debt for the next five years are as follows (in thousands):

2002 $30,591 2003 $32,485 2004 $33,655 2005 $36,805 2006 $40,551 SMEPA paid approximately $42,099,000 and $27,562,000 in 2001 and 2000, respectively, in interest on long-term debt. The large difference was caused by the timing of quarterly debt service payments.

On January 31, 2001, RUS gave final approval for a $58,653,000 guaranteed loan from the FFB to SMEPA to finance the addition of transmission facilities. At December 31, 2001, the remaining unadvanced commitment was $30,616,000.

SMEPA is required by mortgage covenants to maintain certain financial ratios of interest coverage and annual debt service coverage. SMEPA was in compliance with such requirements at December 31, 2001 and 2000.

NOTE 11 - DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES The following is a summary of deferred credits and other long-term liabilities (in thousands):

2001 2000 Deferred revenue (fuel cost adjustments) $6,783 Postretirement benefit obligation (other than pensions) 3,189 $3,081 Deferred decontamination and decommissioning of past uranium enrichment operations 682 994 Miscellaneous 196

$10,850 $4,075 The benchmark fuel cost adjustment rate approved by the Board and collected from Members may result in under-recovery or over-recovery of actual costs and cause a deferred charge or deferred credit. The deferred revenue (fuel cost adjustment) of $6,783,000 shown above was collected from Members in 2001 but will be recognized as revenue in 2002. During 2000, $9,629,000 was collected from Members for purchased power charges that were incurred but deferred in 1999 and expensed in 2000.

NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by SMEPA in estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates fair value.

Investment securities: The fair values for debt and equity securities are based on quoted market prices when available and the present value of future cash flows discounted at a commensurate market rate.

Medium-term CFC obligations have been estimated based upon published terms of recent issues of 35

Li!

A- A R comparable instruments since quoted market prices are not available. See Note 6 for additional information.

Investments in associated organizations: The fair value of investments in associated organizations is not estimable since these instruments must be held by SMEPA and can only be returned to CFC. CFC requires SMEPA to hold these investments as a condition of CFC financing.

Notes payable: The carrying amount reported in the balance sheets for notes payable approximates fair value.

Long-term debt: The fair values of SMEPA's long-term debt are estimated using discounted cash flow analyses based on SMEPA's current incremental borrowing rates for similar types of borrowing arrangements and rates which would be charged by the applicable issuer where appropriate.

The carrying amounts and approximate fair values of long-term debt, including current maturities, are as follows (in thousands):

2001 2000 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value FFB $448,674 $477,520 $447,693 $480,912 RUS 35,728 3_,325 39,326 37,739 Pollution Control Bonds 53,444 54,095 56,846 56,846 Other 51850 51,850 6,677 6,677

$589,696 $615,790 $550,542 $582,174 There was no material difference between the contract or notional amount and the estimated fair value of loan commitments.

The aggregate estimated fair value amounts presented do not represent the underlying value of SMEPA and may not be indicative of amounts that might ultimately be realized upon disposition or settlement of these assets and liabilities.

NOTE 13 - EMPLOYEE BENEFITS SMEPA sponsors a defined benefit plan that provides certain health insurance benefits to retired employees and their eligible dependents and also provides life insurance benefits to a closed group of seven employees who retired prior to January 1, 1'990. The estimated costs of these benefits are accrued over the years that the employees render service. The approximate periodic expense for postretirement benefits, other than pensions, included the following components (in thousands):

2001 2000 Service cost of benefits earned $94 $ 87 Interest cost on accumulated benefit obligation 134 134 Amortization of actuarial gain 36) (36)

Total current year expense $192 $185 Payments relating to postretirement benefits other than pensions were $84,000 in 2001 and $77,000 in 2000.

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The Accumulated Postretirement Benefit Obligation ("APBO") is accrued as an unfunded long-term liability and is composed of the following (in thousands):

2001 2000 Retirees and dependents $516 $568 Fully eligible active plan participants 46 40 Active participants not yet eligible 1,960 1,768 Unrecognized gain 667 705

$3,189 $3,081 The weighted average discount rate used in determining the APBO was 7.0 percent. The assumed health care cost trend rate of increase used in measuring the APBO was 7.5 and 8.0 percent in 2001 and 2000, respectively, declining to five percent by the year 2005. For measurement purposes, a 7.0 percent annual rate of increase in cost of covered health care benefits was assumed for 2002.

The health care cost trend rate of increase assumption has a significant effect on the APBO and periodic expense. A one percentage point increase in the trend rate for health care costs would have increased the APBO by approximately 9.3% and service and interest costs by approximately 10%.

Substantially' all of SMEPA's employees participate in the National Rural Electric Cooperative Association ("NRECA") retirement programs, which include both a defined benefit pension plan and a defined contribution pension plan. Both plans are qualified under Section 401 and are tax-exempt under Section 501(a) of the Internal Revenue Code. The defined benefit pension plan is a multi employer plan available to all member cooperatives of NRECA, but the accumulated benefits and plan assets are not determined or allocated separately by individual employer. SMEPA incurred $1,095,000 in pension expense for the defined benefit pension plan in 2001 and $968,000 in 2000. SMEPA makes monthly payments to NRECA for the benefit of those employees who voluntarily participate in the defined contribution pension plan. SMEPA expenses the payments as they are accrued, and such expense amounted to $384,000 and $371,000 for 2001 and 2000, respectively.

SMEPA provides medical benefits to current employees through a managed care program. SMEPA makes payments during the year to a trust account controlled by an independent administrator for the claims and expenses considered appropriate. SMEPA made payments to the trust and recorded expenses amounting to $86 1.000 and $657,000, respectively, for the fiscal years ended December 3 1, 2001 and 2000.

NOTE 14 - COMMITMENTS AND CONTINGENCIES In the normal course of doing business, SMEPA has entered into significant contractual commitments for coal, coal transportation, gas, and purchased power. The commitments require minimum annual purchases that extend through the year 2020. Such commitments are significantly less than anticipated purchases, and all such contractual costs will be recovered through normal operating revenue.

In its normal operations, SMEPA consumes about 900,000 tons or more of coal each year. SMEPA's present coal supply contract expires in 2007. SMEPA's present coal supplier has notified SMEPA of its intent to restructure by means of a prepackaged Chapter 11 bankruptcy. SMEPA cannot be certain what effect, if any, that situation will have on its coal supply but believes the coal supplier will continue to supply coal in accordance with the terms of its contract.

SMEPA is also a party to arbitration with its rail shipper regarding the appropriate rate per ton of coal shipped by rail from eastern Kentucky. At December 31, 2001, the amount in dispute may be as much as $2 million and is increasing at a rate of about $700,000 each month. SMEPA cannot be certain what effect, if any, the rail freight dispute will have on its financial statements but no liability has been recorded and SMEPA is costing coal consumption at the lower rate it had been paying before the rail shipper started billing a higher rate. SMEPA believes it will prevail in the arbitration process.

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A A 7 SMEPA uses natural gas as the fuel for several of its generating units and also purchases power from others that use natural gas as fuel. Substantially all natural gas purchases are subject to short-term changes in the market price for gas, and such market prices have greatly increased since early 2000 and remain quite volatile. In the normal course of operations, SMEPA enters into forward purchase commitments for certain quantities of gas at agreed-to prices. At December 31, 2001, such commitments amounted to approximately $32.9 million.

SMEPA has entered into a 20-year contract for rights to the output of a 280-megawatt gas-fired, combined-cycle combustion turbine-generator located near Batesville, Mississippi. SMEPA is obligated to make monthly capacity payments as of June 1, 2001, amounting to approximately $20 million on an annual basis. SMEPA has the right to substantially direct how the generating unit is operated and also is obligated to pay for gas fuel consumed and certain operating and maintenance costs that will vary as the output for SMEPA's use increases or decreases.

SMEPA has entered into a turnkey contract with a major developer for the purchase and installation of seven gas-fired combustion turbine-generators on three sites to be owned by SMEPA ("the combustion turbine project"). The total cost of the project is budgeted to be $275 million including the purchase internal cost of the seven turbines, engineering and installation, transmission system improvements, service by May 1, 2003 with one costs and so forth. Four of the turbines are scheduled to be placed in turbine to be placed in service in each of the three following years. The project includes four turbines rated at 85 megawatts each and 3 turbines rated at 47 megawatts each for a total of 481 megawatts.

and The natural gas fired simple cycle generators will be used to augment SMEPA's peaking resources purchased from other suppliers. SMEPA is reduce the amount of such power that was previously the project and total investment in the project was using both internal funds and loan funds to pay for to

$51.4 million and $7.0 million at December 31. 2001 and 2000, respectively. SMEPA expects invest approximately $90 million in the project in 2002.

the Prior to 2000. the Mississippi Public Service Commission ("MPSC") had conducted hearings on in Mississippi. On May 2, 2000, the MPSC possibility of restructuring the electric utility industry indicated that starting retail competition at this time was "premature" and not in the public interest.

date The MPSC indicated that it would monitor national developments and review the issue at a future if appropriate. Neither SMEPA nor its Members are currently subject to MPSC rate regulation but to protect the long-term interests of retail customers. Management is were participating in the hearings if any, that changes related to retail competition in Mississippi will unable to determine what effect, have on SMEPA's financial statements.

The FERC has issued rulings supporting major changes in the ownership and operation of transmission in assets throughout the United States. While not regulated by FERC, SMEPA is cooperating beneficial changes. SMEPA has over $148 discussions with neighboring utilities regarding mutually million invested in transmission assets as of December 31, 2001.

SMEPA is a defendant in certain litigation incurred in the normal course of business. Management, will not based on advice of legal counsel, is of the opinion that the ultimate resolution of the litigation have a material adverse effect on SMEPA's financial statements.

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