GNRO-2004/00031, South Mississippi Electric Power Association (Smepa) 2003 Annual Report Grand Gulf Nuclear Station, Unit 1

South Mississippi Electric Power Association (Smepa) 2003 Annual Report Grand Gulf Nuclear Station, Unit 1

ML041260441
Person / Time
Site:	Grand Gulf
Issue date:	04/27/2004
From:	Bottemiller C Entergy Operations
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
GNRO-2004/00031
Download: ML041260441 (47)

Text

6.

Waterloo Road P.O. Box 756 Port Gibson. MS 39150 Tel 601 4376299 harles iller Manager Plant Licensing GNRO-2004/00031 April 27, 2004 U S . Nuclear Regulatory Commission Attn: Document Control Desk Washington, DC 20555-0001

Subject:

South Mississippi Electric Power Association (SMEPA) 2003 Annual Report Grand Gulf Nuclear Station, Unit 1 Docket No. 50-416 License No. NPF-29

Dear Sir or Madam:

The 2003 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 2003 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.

Sincere1y ,

CABIAMT;a mt attachment: SMEPA 2003 Annual Report cc: (See Next Page)

GO40031

GNRO-2004/00031 Page 2 cc: Mr. Bruce S. Mallett (w/a)

Regional Administrator U. S. Nuclear Regulatory Commission, Region IV 611 Ryan Plaza Drive, Suite 400 Arlington, TX 76011-4005 U. S. Nuclear Regulatory Commission Attn: ADDRESSEE ONLY Attn: Mr. Nageswaran Kalyanam (w/a)

Mail Stop OWFN/7D-1 Washington, DC 20555-0001 NRC Senior Resident Inspector (w/a)

Grand Gulf Nuclear Station Port Gibson, MS 39150 Mr. D. E. Levanway (Wise Carter) (w/a)

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

Mr. N. S. Reynolds (w/a)

Mr. H. L. Thomas GO40031

Financial rs i Total Revenue $ 411,588 $ 393,524 $ 18,064 4,6%

Current Net Margins $ 4,177 $ 2,556 .$ 1,621 63 4%

I Total Assets $ 873,855 $ 839,943 $ 33,912 4.0%

Total Equity $ 91,581 $ 87,404 $ 4,177 4.8%

Equity a s % of Assets 10.5% 10.4%

TIER 1.1 1 1.07 DSC 1 .u3 1 .u4 Average Cost of Debt 4 84%

I 5 40%

I Wholesale Rate to Members Mills/KWH 47.27 45.27 2.00 4.4%

Energy Sales [MWH)

Members 8,780,699 8,657,954 128,745 1 ,5%

Non-Members 12,775 16,361 (3,586) (21 ,90/,)

Total 8,793,474 8,668,315 125'1 59 1.4%

Net Generation (MWH) 4,159,337 3,806,529 352,808 9.3%

Member Demand [MW) 2,176 2,011 165 8,2%

Executive Message 2 Facilities 8 Table of Contents Member Systems Board of Directors 3

4 Operating Report Financial Report 10 19 SMEPA Departments 7

fncrecrsed regional grow'h confinuesfo piace demarxis on Soufh ~ ~ s s i s s ifectrk i p ~ ~ Power Association and its Members. As a result SMfPA continues wjih an aggressive generalicjn cnd fransmissionwork plan. During 2003, 224 MW of addifionci generation was piaced in service.

Anofier 83 MW is scheduled for 2004 wih?

additbns of 82 MW ,in 2005 and 2006. These fcrciliijes required major transmission Hefiry Yk=>rnas,Genera Manager improvements in order to meet defivery schedu/es, A dedicated work force and employee 3, Harlafi Rogers, President commihenl. to these projecis hiwe enabled them io be on schedule and within budget Other ongoing activities in all areas are reflected in ibis reporf which i//ustr@es the professionalismof a united workforce.

t-tezry Tt3omas Genera! Mcnctger

Giles Bounds, i\/lanager Date ensrgized 117 8/38 >ate enercjzed 5/23/38 1,556 miles of line 5,233 rniles of line 7,663 meters 6 7,040 meters Ronald W, Robertson James T. DGdIey, Jr, General Manager General Manager Date energized 1/30/39 Date energized 7/28/39 5,555 miles of line 4,461 miles of line 23,71 4 meters 34,699 meters Y - -

W, T. Shows Lee Aedegcwd General Marcger General Manage:

$;are enersized 51 9/39 Date energized 2/5/39 5,860 miles 3f line 6,169 miles of h e 39,373 meters 62,412 meters Donald Jcrdan Percy McCaa, Manager General Manager Date eregizeci 3/27/38 Date energized 5113/39 4,189 miles of line 9,595 milzs of line 24,472 meters 61,737 meters

General Manager President General Manager South Mississippi E!ec:ric Power Asscciaiion bids fcireweli to c dedicated friena, For 45 years, W, C.

(6ili) McKamv offerad his time and service to rural electrification in j p ~toi the advancement

~ i s ~ ~ s sand of cooperatives, Mr. McKamy served as a board member for both South Mississippi Electric Power Associatioq and Twin County Electric Power Association, Mr. McKamy away on Friday, October 3, 2003.

Since 1980, Mr. McKarny served on SMEPA's board of directors and was elected president in June, 7 986, He became a board rnernber for Twin County EPA 45 years ago, serving as the president for t h e last 1 7 years, s

Mcnager

Hattiesburg, Forrest Coundiy SMEPA is foriunate to have 8s Morrow and Moselle (1 Gyo UndivicJedInterest) generating stations each located approximately  : 7985 fif-leer. miles from Headquarters. Energy from both laiborne County stations is dispatched from SMEPAs Control Center in Haliiesburg.

counts one employee urnong Entergy's stafi who work at tne nuclear site, Grmd Gulf Nuclear Stai-ion is located approximately 145 miles from SME?As hecrdquaders.

1978 bminous Coal SMEPAs four combustionturbine stations, Benndale, Paulding, Silver Creek and Sylvarena are unmanned plants remotely operated from the control center located at SMEFA's headquark facilily. Personnel from Plant Moselle maintain the units at the fcui sites, During 2003, the units were operated on occasion to support load demand The units were also placed into service from tirrie +o time fo; test ptirooses to cssure con?ir.jed availubili-y crnd

2003 the year, thus promoting efforts to minimize operation of the Moselle units to the extent possible.

The net generation from the steam units during 2003 amounted to 387,954 MWH. In addition, 7,846 MWH was produced by the Moselle combustion turbine, Output from the steam units was about 13% less than 2002 production, and generation from the combustion turbine was also less than the amount produced during the prior year, The decline in activity was the result of a combination of factors, including weather/load conditions; high cost of natural gas; and favorable availability of other SMEPA units, Since entering commercial operation in June 1997, the 83.5 MW simple cycle combustion turbine has been utilized for peaking service as needed. Unit operability, availability, and reliability have met the high expectations which were established for the unit, During 2003, the unit was operated 104 hours0.0012 days <br />0.0289 hours <br />1.719577e-4 weeks <br />3.9572e-5 months <br /> and produced 7,846 MWH.

The unit provided load support on a total of 23 separate days of the year, There were several inspections conducted and maintenance projects completed throughout the year in order to maintain the availability and efficiency of Plant Moselle operations, As part of the preventative maintenance program, a five year major inspection was performed on the Unit #2 steam turbine. Also, attention was focused on upgrading the Unit #2 control system, The The Moselle Station was operated in an installation of the new control systems required the intermediate mode to provide load support for the upgrade of most of the Unit #2 instrumentation, entire year. At least two units were in service, except modifications to the turbine front standard, and for a 15-day period in December when only one modification of the plant control room. The Unit # 2 unit was needed, All three of the steam units were Controls Upgrade should be complete during active simultaneously for a 10-day period in 2004, with similar upgrades to be conducted on February. The number of units in service varied Unit # 3 beginning in early February, As part of the according to load requirements, economic original equipment manufacturer recommended considerations, and the need for load regulation maintenance program, a combustion inspection support. The 8 3 5 MW combustion turbine was was performed on the Unit #4 combustion turbine, Considering the peaking service that the unit operated as needed for load support.

provides, the components were found to be in Natural gas remained available in sufficient relatively good condition, quantities to support operation during 2003. The Natural gas purchases were scheduled to provide cost, however, remained unfavorable throughout flow on a monthly basis to meet projected

generation requirements. Portions of the anticipated requirements were purchased in advance to mitigate the potential of spikes in natural gas market pricing, Records indicate that usage amounted to 4,930,358MMBtu for the Moselle Generating Plant, which is about 14% less than the volume used during 2002.

Fuel oil usage for 2003 amounted to 12,381 Report gallons, all of which was consumed by the Moselle A non-destructiveexamination of the boiler header combustion turbine, Unit #4,This quantity was used and steam piping was conducted by an outside primarily for test purposes followingthe combustion contractor on the Unit # I boiler headers and high-inspection on the unit, energy steam piping. The results confirmed the integrity of the boiler headers and steam piping, Since June 2001, SMEPA has, when needed, and indicated that the equipment was fit for scheduled energy from Batesville Unit #3, a 280 MW combined cycle facility which is located at continued safe operation. This process is part of an Batesville, Mississippi, In addition to the natural gas ongoing program to assure the integrity of plant which was secured for Moselle, SMEPA arranged for equipment and systems. Several areas of concern the fuel for the Batesville unit. Fuel purchases for the on the Unit # l and #2 coal pipes were replaced unit during 2003 were procured through Aquila due to deterioration over the years, These areas Energy, and totaled 2,929,183 MMBtu. included high-wear locations such as elbows, sweeps, and adjacent piping. This is the first of a two-phase plan to replace all problem areas of the coal piping, thereby restoring the integrity of that system, Phase 2 of the project will take place in The plant was primarily operated in an 2004, intermediate and base load mode during the year.

Simultaneous operation of the two Morrow units Scheduled preventive maintenance was occurred except when maintenance outages performed throughout the plant to maintain were scheduled in the spring and fall when load continued, efficient, reliable and safe operations. A requirements were not demanding. During 2003,a number of tasks were performed to improve the total of 1,082,685 tons of coal were delivered to integrity of various plant systems, Plant Morrow, a record for an annual period, Coal consumption amounted to 1,135,586tons, The combined volume of dry fly ash and landfill material marketed during the year totaled 47,896 another annual record and an increase of 12%

tons, This reflects a 1% increase in volume and a above 2002 usage, The extent of usage, coupled 6% increase in income when compared to 2002 with the increase in receipts, resulted in a year-figures as a result of a slight improvement in sales ending inventory of 185,768 tons. Fuel oil activity, Approximately 33% of the ash produced requirements for start-up and flame stabilization during the year was marketed.

purposes totaled 303,71 6 gallons, the lowest annual usage since 1998.

The annual net generation from the facility was 2,642,506MWH, The Production Was a record The operating statistics for Grand Gulf during 2003 amount for an annual period, and almost 10% were exceptionally good even though there were above the prior record, as was established in 2000. two unexpected scrams within the first half of the The output was 23% more than the average year. Subsequently, there were no other outages annual generation which was provided by the during the year. In spite of the early events affecting facility during the 1 0-year period 1993-2002. plant power, the capacity factor was still 103,l o/o

The plant was in the top category (green]for all the Nuclear Regulatory Commission (NRC) performance indicators all year, NRCs performance indicators cover reactor safety, radiation safely and safeguards (security),Green indicators suggest that the NRC needs only to conduct basic oversight and inspection of the plant.

Overall, 2003 was a very successful year for Grand based upon the ated net maximum dependable Gulf,Of course, as always, the plant staff continues capacity of 1 210 Therewere four months in to strive to improve performance even more, For the lasf half Of the year in which there Was Only One 2004 and beyond, four areas of focus have been scheduled and no forced power reduction.This is CI identified: continued safe, event-free operation of testament to the value Of performing as much the plant; a true zero tolerance for equipment maintenance on line as possible and not delaying failures; a commitment to execute a base tasks for a refueling outage, refueling outage scope within 15 days and $1 5M; The total net electrical energy generated during the and an improvement in the culture to achieve year was 10,902,489 MWH, which is the highest both a high level of team performance and yearly output ever for the plant, The year 2003 was accountabilh along with lewardsf recognition, the second year in a row, and the fourth in the 1 8 development and accomplishment, years of commercial operation, that the net The entire year was characterized by relatively high electrical output of the plant exceeded 10,000,000 availability, Power was supplied from the unit on MWH. The average, net thermal efficiency (heat 359 of 365 days during the year and the unit was rate) for the year was 10,384 BTU/KWH, which is the operated without disruption in nine of the twelve best ever for the plant and 0,3% better than the months, with only two unplanned outages being previous best year, 2001 recorded (one in January and the other in April).

I SMEPA received a total of 1,090,233 MWH of The overall production and performance (heat energy from Grand Gulf during 2003, which rate) reflected the positive benefits which have represents the highest annual delivery into SMEPAs been realized from recent high-pressure and low-system from the facility. Deliveries to SMEPA were pressure turbine upgrades, cooling tower fill about 8,4%greater than that supplied during 2002. replacement, addition of the auxiliary cooling tower and the Appendix K power uprate, The Institute of Nuclear Power Operations (INPO) performance indicator for Grand Gulf is 99,2, The indicator is designed to serve as an overall Benn performance summary and is a weighted, rolling average composite of such indicators as the capability factor, forced loss rate, unplanned Combu automatic scrams, safety system performance, The two remotely located combustion turbines collective radiation exposure, the fuel reliability were not operated for load support during the year, index and the chemistry indicator, INPO performed The units are typically used when needed to an extensive evaluation of plant operations in support load requirements during peak demand January, 2003, The team identified a number of periods or for system emergencies, During 2003, strengths as pad of this process. In the final analysis, the units were placed into service only for test an INPO rating of I, the highest rating, was purposes at scheduled intervals in an effort to awarded to Grand Gulf. assure availability and reliability when needed.

Benndale was operated on two occasions and produced 3 1 MWH. Paulding was operated on four separate times and produced 50 MWH. Both units are intended to provide critically needed support when system demand is high or during emergency situations, As usual, Moselle maintenance personnel completed routine maintenance work at the remote sites; conducted periodic operating tests at each location; and responded on ,

I p-u --__

occasion when starting and operating problems Although some challenges were encountered and were identified with the units, certain modifications are yet to be performed, the units were placed into commercial operation on ek and Sylva July 1, 2003, At the Silver Creek site, the units are each rated at C tian Turbine P 83 MW and are General Electric model 7EA turbine-generators, which are almost identical to In conjunction with plans to meet the growing the combustion turbine that was placed into power supply needs of SMEPA's member systems, service at Moselle in 1997 [Unit #4), The primary construction activities were initiated at two (21 new difference is that the Moselle unit can operate on power plant sites during 2002, Subsequently, site both natural gas and diesel fuel, while the Silver development was completed for the Silver Creek Creek units will be operated solely on natural gas Plant in Jefferson Davis County and for the fuel. During 2003, production from Unit #1 totaled Sylvarena Plant in Smith County. During 2003, the 5,236 MWH, initial simple cycle combustion turbine-generators for these projects were added to SMEPA's The Sylvarena units are each rated at 47 MW, The generating unit fleet for use primarily for peaking General Electric model LM 6000 units are the first purposes, aero-derivative type turbines in SMEPAs ' system.

These units are of a more efficient design and After the site development process was completed operate exclusively on natural gas. Production from at each location, construction activities the facility during 2003 amounted to 25,480 MWH commenced under an engineering, procurement, as the units provided peaking support at various and construction contract arrangement with times during the year.

Allegheny Energy Solutions (AES), At Silver Creek, construction activities were completed on Unit # 1 , Although physical activity at the site has not yet and the unit was placed into commercial begun, plans call for the addition of another 83 MW operation on June 1, 2003. Silver Creek Unit #2 was simple cycle combustion turbine at Moselle, for delivered and installation was essentially complete startup in 2006, Permitting efforts have been as 2003 came to an end, Startup and initiated and engineering and construction will be commissioning activities for Unit #2 were focused upon this location after completion of the conducted during February 2004. The third and initial phases of the project at Silver Creek and final Silver Creek unit is scheduled for delivery during Sylvarena. I ,

2004, with commercial operation planned for May 2005.

At Sylvarena, all three of the units for the facility were completed and placed into service during 2003.

I Environmental efforts during 2003 focused upon continued compliance with existing regulations, maintaining permits and regulatory requirements for existing facilities and fulfilling regulatory requirements for the construction of new SMEPA generating units at Silver Creek, Sylvarena, and Moselle, 2003 marked the fourth year of participation of SMEPAs R,D, Morrow, Sr, and Moselle Generating Plants in Phase 11 of the Acid Rain Program. Emission Chas Coal continued to rates of acid rain pollutants promoted the pursue the development of continued "banking" of emission credits for use in the coal reserves and maintained active mining meeting future generation requirements.

operationson the SMEPA prope@under provisions Continuous Emission Monitor Systems (CEMS),used of the Coal lease Forthe year, to quantify and account for unit emissions, were clean coal production amounted to 295,026 tons successfullyrecertified at all of the SMEPA from surface, highwall and deep mine operations. generatingplants, This reflects the highest annual production from the Propew Since 1999, hther increases in Efforts to obtain Title V air operating permit renewals production are expected during 2004. for the Moselle and Morrow Generating Plants were continued during the year, The terms and Under an Oil and Gas Lease Agreement, SMEPA conditions for the Moselle permit have been received royalty payments as a result of oil and gas agreed upon with the Mississippi Department of production from the properly, A relatively small but Environmental Quality, and the permit was under steady volume of gas flowed from a total of 31 review by the Environmental Protection Agency wells throughout the year. Revenue was generated (EPA) at year's end, A draft version of the Morrow from a limited amount of oil production each permit is expected for review and comment early month, in 2004, Each of these permits will be valid for a period of five years from the issuance date.

As part of the effort to monitor and adequately manage developments on SMEPKS Kentucky A National Pollutant Discharge Elimination System property, SMEPA's Director of Environmental Affairs (NPDES)wastewater discharge permit was received and Fuels and representatives of Summit for the Moselle Generating Plant during 2003, The Engineering, SMEPA's mining consultant, visited the renewal portion of the permit included permit property on a quarterly basis. On each occasion, coverage for existing plant operations, The an inspection of the mining operations and the modified portion of the permit included the preparation plant was conducted, Meetings were addition of an evaporation pond for treatment held with Chas Coal management personnel to and containment of metal cleaning wastes as well review current and planned development of the as the addition of a simple cycle combustion coal reserves. At the conclusion of each of the turbine. NPDES permits to discharge wastewater visits, Summit prepared and submitted a report to from the SYlvarena and Siber Creek Generating SMEPA of detailed findings, recommendations and Plants Were received in April 2003, These permits other pertinent information relative to the properly govern the quality of Wastewater that 1s allowed to operations. While on the property, attention was be discharged from the facilities, also directed to developments under the oil and gas lease agreement and to timber removal Startup and certification Of CEMS for the Silver operations. Creek and Sylvarena Generating Plants were

completed during 2003, The addition of these generating units has doubled the number of Acid Rain affected units that SMEPA operates as well as the amount of effort required to ensure compliance with requirements, Support was provided for start-up efforts at Silver Creek and Sylvarena during the year, Stack testing was conducted for Sylvarena Units #1, #2 and #3 as Well as Silver Creek Unit #1 The results Of this SMEPA, along with other interested parties also testing was used to VerifY contractual guarantees intervened in the annual Entergy transmission rate US Well US environmental Compliance with air re-determination,Entergy had asked for a rate of permit requirements. $1,03/W-Mo.The parties agreed to a rate of $1 .OO Der KW-Mo.This rate will amlv

. . , to deliverv of SMEPAs Power Supply Planning capacity and energy from Louisiana kenerating and transmission of capacity and energy from other resources for delivery to SMEPA load across During 2003, SMEPA completed new Power the Entergy transmission system from May 1, 2003 Requirements Studies for the years 2003 - 2023 for until April 30, 2004.

each of its eleven Members. Members were given the opportunity to review and revise their respective In December, SMEPA and Mississippi Power study. After all the Members' boards approved their Company (MPCo) executed a revised service respective studies, SMEPA compiled the eleven agreement and related transaction schedules for new Power Requirements Studies to produce the market based delivery points served by MPCo, SMEPA's new study which was approved by the SMEPA board in November, All of the Member The new revised agreement will result in savings to Studies as well as SMEPA's Power Requirements serve the twelve market based delivery points and Study have been forwarded for RUS approval. Wellman as well as define how costs will be determined in future years.

SMEPA and other parties agreed to a settlement with Southern Company on its new formulary transmission rate determination, The settlement ntrol Center agreement was executed in late summer followed by Federal Energy Regulatory Commission (FERC) During the year Control Center personnel made affirmation. The rate became effective October 1, purchases of power from the market resulting in 2003. The new rate results in cost savings to more than $6 million in savings over published transmission customers, including specifics on market prices, These savings were made possible return on equity and transmission losses for by the addition of the four new combustion turbines capacity and energy- (SylvarenaUnits 1, 2, and 3 and Silver Creek Unit 1 ),

System Operators were able to shop for and buy Prior to 2003, SMEPA and other parties had hourly spot market power while holding the new intervened in Entergy's transmission ancillary combustion turbines in reserve and as a back-up services filing, In January 2003, a FERC judge against high hourly market power prices, as issued an initial decision that was largely favorable to the intervenors. In December 2003, the FERC opposed to committing to more costly day ahead issued an order that improved on the judge's initial market pricing.

An integral part of SMEPA's commitment to providing reliable power is the maintenance of 1,623 miles of transmission line, right of way, and numerous switches, Transmission system personnel remotely controlled also coordinated the surveying and construction switching stations and management of fiber optic installations and several substations throughout the G&Tarea and with the transmission lines, including those necessary for the assistance of SMEPA and Member personnel for Silver Creek and Sylvarena turbine projects, locations not remotely operated. SMEPA's line crews performed climbing inspections on 6,476 structures and completed 320 line maintenance work orders, In conjunction with the Sylvarena turbine project, 19,4 miles of transmission SMEPA signed a contract with General Electric to lines were rebuilt, and adjustments were made to upgrade the existing seven-year-oldControl Center several transmission lines for uprating, computer system, The upgrade, which includes hardware and software improvements, will occur in The annual reclearing of right of way was 2004. The contract includes annual maintenance performed over 5,627 acres, Pole groundline and software upgrades on the control system for six inspections and treatments were performed on years, 2,666 poles and a number of danger trees were removed from critical lines, and aerial patrol Engineering Systems modified the Control Center inspections were performed quarterly, computer software to better coordinate with the new Moselle Unit one controls, The arrangement was changed from a raise/lower scheme to a set-point control scheme,This improvementwill also be implemented on the Moselle Units 2 and 3 new controls when they are installed in 2004, Marketing SMEPA marketing planned and provided a Member training workshop through the Electric Food Service Council, entitled Meeting the Needs of Food Service Customers, SMEPA provided consultation and research in the areas of marketing program planning, rate application, commercial load information, energy efficiency, legislative updates and orientation for new Member marketing employees. The Comfort Advantage program rebated over 1,300 homes in Member system territories.

16

n9inee~in9Design nd Electronic Maintenance Engineering Design and Electronics Maintenance completed and placed into service six new digital microwave links and three new spread spectrum radio links, SMEPA's design engineering staff completed and placed in-service three new substations with relayng and circuit breakers at Martinville - three transformers; and installationof one new 16 1 kV gas gas circuit breakers; Gwinville Junction - three gas circuit breaker and 14 new 69kV gas circuit circuit breakers; and Sylvarena GT - nine gas circuit breakers.

breakers, and installed a second 50MVA autotransformer and added a new transfer bus at SMEPA performed the annual infrared Hintonville, survey/inspections for all substation, switching stafions, and delivery point facilities, Substation Maintenance Transmission System Planning The Substation Maintenance section collected Dissolved Gas Analysis samples from 46 power and System Prokction transformers and 28 Load Tap Changers, Some other activities of this section include preventive The T~ansmissm System Planning section maintenance on 1 6- f 61 kV oil circuit breakers, three coordinated SMEPA's first NERC Planning Standards 161kV gas circuit breakers, 18 - 69kV gas circuit Audit In addition to the Engineering Department, breakers, and one 115kV oil circuit breaker, Pe~SOnnelform Production and Power Supply Preventive maintenance was also performed on Departments were also Involved. The audit was 131 motor operators located on remote controlled conducted by SERC. SMEPA was judged to be switches,This section continued with installation and 100% compliant.This section also implementedan testing on Seven new 125VDC battery banks; evaluation and coordination procedurefor outage preventive maintenance on 18 battery banks; requests on SMEPAs transmission system, preventive maintenance on 16 power Metering technicians checked calibration of all 206 wholesale revenue meters on the SMEPA system. They also calibrated underfrequency relay packages at 49 locations. Undervoltage packages were also installed at eight sites in southwest Mississippi. They also assisted with switch inspections at 87 sites. New Supervisory Control and Data Acquisition ("SCADA") projects include two new substation sites and two new generator sites, Relay technicians in System Protection calibrated 1617 relays at 52 locations and were involved in checkout and installation of 122 new relays associated with one new substation site and five new generators.

17

CIS and the Engineering Department installed a new server to support the new ION meter data collection application, This application captures and stores meter information to support engineering analysis and trends.

Server operating system upgrades and new installations were completed in 2003. New servers and software upgrades were completed for SMEPA's Email and Firewall Servers, Computer Inform Systems SMEPA employees continued to focus on performing their work safely during 2003.

CIS and the Maximo Project Team completed ksocia implementation of the Enterprise Asset Management Systems Maxirno streamlined and SMEPA continues to be an integral part of the redefined many of SMEPA'S business processes. This communities it Serves with participation in system integrates Purchasingl receiving and economic development and through the support invoicing with the new asset work management of communiv and civic organizations, Employees and life-cycle maintenance fUnCtiOnaliv, Maximo's from all departments dedicate their time and Enterprise Asset Management system Will provide energies by supporting charitable organizations the software functionality to support and maximize such as United Way of both the Pine Belt Region SMEPA's transmission and generation assets while and Southeast Mississippi, Salvation Army and the reducing costs, The implementationof Maximo was American Red Cross Adopt-A-Fire Family program, a two phase process, requiring SMEPA personnel to SMEPA is active in the Area Development revamp many business processes.The first phase of Partnership and the local Adopt-A-Schoolprogram, implementation included the purchasing, inventory Throughout 2003, SMEPA supported the March of and work order systems. The second phase Dimes, local schools and other worthy included the asset management systems and a organizations.

customized capital budget application, Maximo went live in January 2003, offering an integrated system that reduces paperwork and makes information immediately available to employees, The payroll and human resource systems were also migrated in 2003. The Abra software integrates two separate in-house developed systems, This system will provide additional functionality for payroll processing and human resource management,

19 The year 2003 was another year of growth and solid financial results for SMEPA. Revenues from Member cooperatives were $41 1 million, up 4.5%. Energy sales to Members were up slightly to 8,8 million megawatt hours, a new all-time record, Generation by SMEPA-ownedplants was up 9% to 4.2 million megawatt hours, also a new all-time record, Demand billings for the year were below billings for 2002, but SMEPA experienced a new all-time peak load on January 24, 2003, Because of the extreme cold weather, SMEPA's Members needed almost 2,000 megawatts on that day to meet consumer demand, The measured concurrent peak load was 1,993 megawatts, about 16% higher than the winter peak load the prior year. SMEPA's eleven Members serve more than 365,000 customers throughout rural Mississippi, The wholesale rate to Members for the year averaged 47-3 mills per kilowatt hour, up 2 mills or 4.4% compared to year 2002, The cost of natural gas during 2003 was a major problem for SMEPA and other utilities and led to a rare mid-year increase in the fuel cost adjustment rate. SMEPA's average price for natural gas for 2003 was more than $6 per million British Thermal Unit (BTU), The average price in the prior year was $3.53, The 70% increase in the cost of natural gas caused SMEPA to drastically reduce its gas generation when possible and shift to coal generation and other resources to meet Member load. In fact, generation from coal set a new all-time record, up 9,9% to 2,64 million megawatt hours thereby providing about 30% of the total energy required by SMEPA's

Members, SMEPA invested $59 million in new generation, transmission and other utility plant assets during 2003 bringing gross investment to $1 -1 billion, At mid-year, SMEPA successfully placed into service four new natural gas fueled combustion turbine generators valued at more than $1 30 million including related transmission improvements.

Three turbine generators are rated at 47 megawatts each and one is rated at 84 megawatts giving SMEPA a total of 225 megawatts of new peaking power resources using the latest modern technology and environmental controls, Three additional turbines rated at 84 megawatts each are at different stages of construction and installation,At year end 2003, SMEPA had about $77 million invested in the ongoing combustion turbine project.

During December 2003, SMEPA received near-finalapproval from the Rural Utilities Service (RUS), formerly the REA, for a $275 million loan guarantee to provide permanent 30 year financing for the combustion turbine project.

Since the project was started in late 2000, SMEPA has primarily used interim financing provided by CFC under a "fast-track loan program developed by CFC and RUS, The expedited loan program enabled SMEPA to go from concept to commercial operation in about thirty-six months, SMEPA expects to draw funds under the loan guarantee in early 2004 to replace the CFC interim funding, The net margin for the year was up noticeably to $4.2 million,Total equity increased to $91.6 million and improved slightly to 10,5%of net assets. The average cost of all debt ($725 million) declined markedly to 4.84% from 5.40°/0 the prior year, Market interest rates were historically low during 2003 and the temporary loans on the combustion turbine project are priced at short-term rates pending release of permanent long-term loan funds by RUS, Looking forward, the cost of natural gas continues to cause problems for SMEPA and all utilities that rely on natural gas to fuel generators, Many economists consider the price of natural gas to be the most volatile of all commodities, SMEPA has a blend of resources including coal, nuclear, hydro and purchased power in addition to those using natural gas and remains committed to providing its core customer-owners, the eleven Member cooperatives, with reliable wholesale power and the best possible price,

91.6 2003 (Millions of MWH) 4.2 2003 (Millions of MWHj 8.8 2003 (Mills per W H )

47.27 2003

In tbousunds us of December 31, 2003 2002 2001 2000 1999 ASSETS Electric Utility Plant In Service - at Cost $ 996,241 $ 859,736 $ 845,253 $ 828,332 $ 820,003 Construction Work in Process 1 11,894 188,948 84,354 42,277 24,620 1,108,135 1,048,684 929,607 870,609 844,623 Less Accumulated Depreciation 446,938 420,938 397,434 373,874 350,183 Net Utility Plant 661,197 627,746 532,173 496,735 494,440 Investments 58,508 50,982 35,444 22,720 22,647 Current Assets Cash - General Funds and Cash Equivalent Investments 12,468 15,434 24,639 22,119 23,122 Accounts Receivable - Members 37,343 31,731 28,952 33,745 27,498 Coal and Other Fuel Inventories 8,046 10,572 7,804 5,206 18,446 Other Current Assets 20,181 19,581 16,327 16,771 19,751 Total Current Assets 78,038

. 77,318 77,722 77,841 88,817 Deferred Charges 76,112 83,897 86,212 90,084 106,335 TOTAL ASSETS $ 873,855 $ 839,943 $ 731,551 $ 687,380 $ 712,239 EQUITIES AND LlABlLlTlES Patronage and Other Capital $ 91,581 $ 87,404 $ 84,848 $ 82,722 $ 80,883 Long-Term Debt (excluding current maturities) 680,760 659,249 559,105 516,265 549,557 Accrued Decommissioning Obligation 12,718 10,021 10,501 10,407 10,220 Deferred Credits and Other Long-Term Liabilities 12,442 8,377 10,850 4,075 4,096 Current Uabillties Accounts Payable 28,066 30,718 30,807 29,243 24,666 Notes Payable 10,600 8,000 2,000 18,000 Other Current Liabilities 37,688 36,174 33,440 44,668 24,817

~~

Total Current Liabilities 76,354 74,892 66,247 73,911 67,483

~~ ~

TOTAL EQUITIES AND UABILEIES $ 873,855 $ 839,943 $ 731,551 $ 687,380 $ 712,239 Equity as % of Assets 10.5% 10.4% 1 1.6% 12.0% 1 1.4%

DEBT Long-Term Debt and Notes Payable $ 691,360 $ 667,249 $ 561,105 $ 516,265 $ 567,557 Current Maturities on Long-Term Debt 33,921 32,736 30,591 34,277 22,124 TOTAL DEBT $ 725,281 $ 699,985 $ 591,696 $ 550,542 $ 589,681 Average Interest Rate 4.84% 5.40% 5.88% ~5~30% 6.23%

In thousands, for the years ended December 31, 2003 2002 2001 2000 1999 REVENUES Electric Energy Revenuefrom Members $ 410,734 $ 393,123 $ 354,120 $ 363,535 $ 328,716 Interest Income and AFUDC 2,609 2,329 3,152 2,064 2,160 Other Revenue - net 934 446 603 3,068 643 EXPENSES Purchased Power 210,981 215,819 185,497 183,174 157,532 Fuel 82,927 67,086 63,881 78.21 7 66,641 Production 16,856 15,687 13,639 13,987 13,616 Transmission 13,661 12,245 11,710 12,171 1 1,977 Maintenance 14,894 14,888 13,216 1 1,430 11,857 Depreciation and Amortization 30,376 27,707 26,960 26,461 25,736 Interest 34,727 34,993 36,489 37,344 38,444 Administrative and General 5,640 4,883 4,328 4,030 3,661 Other Deductions 38 29 14 44 NET MARGIN $ 4,177 $ 2,556 $ 2,126 $ 1,839 $ 2,011 FINANCW RATIOS TE IR 1.11 1.07 1.06 1.05 1.06 DSC 1.03 1.04 1.03 1.06 1.02 RATESlCOSTS MMs per I(WH Wholesale Rate to Members 47.27 45.27 44.83 44.02 41 -95 Average Cost of Purchased Power 44.02 43.07 39.86 41.66 36.29 Average Cost of Fuel [per net generation) 19,94 17.62 18.00 19.31 18.24 ENERGY SOURCES MWH - 159,337 Generated 806,529 18,906 051,486 54,436 Purchased 4,792,965 5,010,337 4,653,782 4,396,938 4,340,954 TOTAL ENERGY AVAILABLE 8,952,302 8,816,866 8,202,688 8,448,424 7,995,390 ENERGY SALES MWH -

Members Coahoma EPA 166,325 152,281 136,694 137,280 127,441 Coast EPA 1,553,667 1,538,159 1,429,392 1,497,819 1,345,675 Delta EPA 530,031 545,505 51 7,677 529,637 530,839 DMe EPA 772,959 758,571 71 2,545 721,905 676,403 Magnolia EPA 602,981 583,274 549,602 559,367 522,275 Pearl River Valley EPA 922,775 900,961 826,141 831,542 761,825 Singing River EPA 1,326,422 1,323,324 1,232,291 1,280,415 1,189,922 Southern Pine EPA 1,852,988 1,826,044 1,670,862 1,678,363 1,634,359 Southwest Mississippi EPA 457,106 451,258 41 4,021 437,638 443,512 Twin County EPA 259,532 262,307 260,148 302,357 296,437 Yazoo Valley EPA 335,913 310,270 301,046 282,862 307,335 Total Sales to Members 8,780,699 8,651,954 8,050,419 8,259,185 7,836,023 Non-Members 12,775 16,361 26,269 81,704 12,716 TOTAL SALES 8,793,474 8,668,315 8,076,688 8,340,889 7,848,739 Member Demand - I(W (non-current pea4 2,176,084 2,010,942 1,976,642 2,030,075 1,892,133 13

To the Board of Directors of South Mississippi Electric Power Association Mattierburg, Mississippi We have audited the accompanying balance sheet of South Mississippi Electric Power Association (SMEPK) as of December 31, 2003, 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 SMEPAs management. Our responsibilityis to express an opinion on the financial statements based on our audit. The financial statements of SMEPA for the year ended December 31, 2002, were audited by other auditors, whose report dated January 28, 2003, 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 assessingthe 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, such financial statements present fairly, in all material respects, the financial position of SMEPA as of December 31, 2003, 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, Ridgeland, Mississippi February 3, 2004 24

Balance Sheets Financial Report In thousands as of December 3 1, 2003 2002 Assets Electric utiliw plant In service - at cost $ 996,241 $ 859,736 Construction work in proqress 111,894 188,948 1,108,135 1,048,684 Net utilitv Dlant 661.197 627,746 Investments Investments in associated organizations 35,771 28,946 Debt service reserve and other Investments 4,648 4.626 Decommissioningtrust investments 12,718 10,021 Debt service Drements 5.371 7,389 Current assets Cash - general funds and cash equivalent investments 12,468 15,434 Accounts receivable:

Members 37,343 31,731 Others 1,214 2,794 Inventories (ataverage cost):

Coal and other fuels 8,046 10,572 Materials and supplies 17,631 15,918 Other 1.336 869 Total current assets 78.038 77.318 erred charaes 76.1 12 83.897 Equities and Liabilities Equities Patronage Capital $ 91,046 $ 86,869 Long-termdebt (excludingcurrent maturities) 680,760 659,249 Accrued decommissioningobligation 12,718 10,021 Deferred credits and other long-term liabilities 12,442 8,377 Current liabilities Accounts payable 28,066 30,718 Notes payable 10,600 8,000 Accrued interest 1,660 1,444 Other accrued expenses 2,107 1,994 Current maturities of long-termdebt 33,921 32,736 Total current liabilities 76,354 74,892 Commitments and contingencies (Notes4 and 14)

Total eauities and liabilities $ 873.855 $ 839,943 S e e Notes to FinancialStatements

In thousands for the years ended December 31, 2003 2002 Operating Revenues Electric energy revenue from members $ 410,734 $ 393,123 Other electric energy revenue 455 548 Other - net 399 (147)

Total operating revenues 41 1,588 393,524 Operating Expenses Fuel 82,927 67,086 Production 16,856 15,687 Purchased power 210,981 215819 Transmission 13,661 12,245 Administrative and general 5,640 4,883 Maintenance expenses:

Production . 11,121 1 1,229 Transmission 2,768 2,834 General 1,005 825 Depreciation and amortization 30,376 27,707 Total operating expenses 375,335 358,315 Operating margin before interest and other deductions 36,253 35,209 Interest and Other Deductions Interest 34,727 34,993 Other deductions 38 34 Total interest and other deductions 34,765 35,027 Operating margin 1,488 182 Nonoperating Margin Interest income 2,348 1,933 Allowance for funds used during construction 261 396 Other 80 45 Total Nonoperating Margin 2,689 2,374 Net Margin 4,177 2,556 Patronage Capital at Beginning of Year 86,869 84.31 3 Patronage Capital at End of Year $ 91,046 $ 86,869

_ _ ~ ~

See Notes to Financial Statements 26

In thousands for the vears ended December 3 1, 2003 2002 Operating Activities Net margin Adjustments necessary to reconcile net margin to net cash provided by operating activities:

Depreciation, amortization, and depletion 34,069 31,431 Allowance for funds used during construction (2611 (396)

Change in operating assets and liabilities:

Accounts receivable (4,032) (4,850)

Inventories 815 (3,520)

Other assets (4661 (2,854)

Accounts payable and other liabilities (2,8421 (3801 Accrued interest payable 216 903 Nuclear outage maintenance costs (1,905)

Fuel cost adjustments 4,366 (2,497)

Accrued decommissioning obligation 1,993 (480)

Net cash provided by operating activities 38,035 18,008 Investing Activities Construction and acquisitions of electric utility plant (57,323) (1 19,973)

Purchase of available for sale securities (2,8361 (576)

Sale of available for sale securities 843 1,056 Investment in associated organizations (6,8231 (15,651)

Maturities of held to maturity securities 190 Purchase of held to maturity securities (221 (557)

Net cash used in investing activities (66,161) (135,511)

Financing Activities Principal payments on long-term debt (30,941) (30,524)

Debt prepayment penalties (21161I Proceeds from long-term borrowings 55,662 132,822 Proceeds from short-term borrowings 2,600 6,000 Net cash provided by financing activities 25,160 108,298 Net decrease in cash and cash equivalents (2,9661 (9,205)

Cash and cash equivalents at beginning of year 15,434 24,639 Cash and cash equivalents at end of year $ 12,468 $ 15,434 Additional Cash Flow Disclosures:

Non-cash investing and financing activity - redemption of cushion of credit investments applied as a reduction of related debt $ 2,018 See Notes to Financial Statements

Note 1 = Nature of Operations 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 365,000 consumers in certain areas of Mississippi,Under long-termwholesale 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 1 ("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, Note 2 = Summary of Significant Accounting Principles 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, 28

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

Nuclear generation plant 2 85%

I Non-nuclear generation plant 3.00% to 3,10%

Transmission plant 2,75%

General plant and transportation equipment 2.00% TO 25,OOYo 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-livedassets based upon expectations of nondiscounted cash flows and operating income, Cost of Decommissioning Nuclear Plant SMEPA's portion of the estimated decommissioning cost of Grand Gulf is charged to operating expenses as it is funded over the estimated service life of the plant, The current operating license received from the Nuclear Regulatory Commission terminates in 2024, Allowance for Funds Used During Construction SMEPA capitalizes interest on certain significant construction and development projects while in progress, The interest cost capitalized related to debt specifically borrowed for construction and development projects during construction is reflected as a reduction in interest expense. The imputed interest cost related to construction and development projects funded without specific borrowings during construction is reflected as allowance for funds used during construction, Investment Securities Debt service reserve 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 securiiies 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 decommissioningtrust funds, realized and unrealized gains on investment securities are also included as a regulatory liability as part of the accrued decommissioning obligation, 29

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

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 annual interest expense, SMEPA paid penalties of varying amoin7t.sthat are accounted for as deferred charges to be amortized over the remaining life of the debt.

Bond issue costs are being amortized by the straight-linemethod, 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 SMEPAs ten percent share of Grand Gulfs 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 of Directorswill 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, SMEPAs 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 $76.1 million, including $50,8 million relafing 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, 30

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, Income Taxes SMEPA is exempt from United States income taxes pursuant to Section 501 (c)(l2)of the Internal Revenue Code, which requires that at least 85% of SMEPA's gross income be derived from its members.

Note 3 = Electric Utility Plant Electric utility plant consisted of the following:

Accumulated cost Depreciation In thousunds us of December 31, 2003 2002 2003 2002 Grand Gulf Nuclear $ 414,203 $ 41 1,454 $ 193,758 $ 182,014 Morrow Steam 191,730 191,601 138,047 132,255 Moselle Steam 23,996 23,996 22,617 21,874 Moselle Gas Turbine 21,723 21,723 4,250 3,600 Silver Creek/Sylvarena Gas Turbines 114,739 1,795 Benndale/Pauldina Gas Turbines 4,420 4,420 3,644 3,513 Total Generating Plant 770,811 653,194 364,111 343,256 Transmission Plant 179,429 161,330 55,340 51,595 General Plant and Equipment 20,854 20,065 11,906 10,876 Electric Plant Leased to Others 2 5 147 25,147 15,856 15,268 Electric Plant in Service 996,241 859,736 447,213 420,995 Construction Work in Process 111,894 188,948 (2751 (57)

Total Utilitv Plant $1,108,135 $ 1,048,684 $ 446,938 $ 420,938 31

Note 4 Commitments Regarding Grand Gulf SMEPA and System Energy are co-licensees and parties to a joint ownership contract that sets forth the rights and obligations of the Grand Gulf owners, with SMEPA generally obligated to pay 10% of all operating and capital costs and entitled to receive 10% of the electricity generated by the plant, SMEPA paid $1 9,830,000 and $22,392,000 under the contract in 2003 and 2002, respectively, Ownership of nuclear capacity entails risks and uncertainties somewhat more complex than those for 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 appropriate insurance and industry assessment programs for itself ahd SMEPA, SMEPA is obligated to pay 10% of all appropriate costs and assessments, if any. Under the program, SMEPA could be assessed up to approximately $1 0.1 million for each nuclear incident involving licensed reactors, payable at a rate of

$1 million per reactor per year, The property insurance presently arranged by System Energy exceeds the NRC's minimum requirement for nuclear power plant licensees of $1006billion per site. 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 decontaminationoperations, Only after proceeds are dedicated for such use and regulatory approval is secured would any remaining proceeds be made available for the benefit of plant owners or their creditors. Under a member assessment program, SMEPA could be assessed approximately $1 8 million for property damage, decontamination, or premature decommissioning I

expense involving other members' nuclear generation plants, Nuclear Fuel System Energy contracts with System Fuels Inc,, another Entergy subsidiary company, for nuclear fuel for Grand Gulf, including maintaining inventories, System Energy has a nuclear fuel lease arrangement for up to $80 million with respect to Grand Gulf, SMEPA pays for nuclear fuel as it is consumed; and such payments include appropriate charges for processing, fabrication, storage, inventory, shipment, and handling.

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

Notes to Financial Statements Financial Report 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'Sprogram for the acceptance and disposal of spent nuclear fuel at a permanent repositorynYucca Mountain, Nevada has been legislated to be the permanent spent fuel repository in the United States, The DOE will proceed with licensing and, if the license is granted by the NRC, eventual construction of the repository will begin and receipt of spent fuel may begin as early as approximately 201 0, Considerable uncertaintyremains regardingthe time frame under which the DOE will begin to accept spent fuel for storage or disposal and as a result, future expenditures will be required to increase spent fuel storage capacity, 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 2007, at which time dry cask storage facilities will be placed into service, Decommissioning Costs The total cost to decommissionGrand Gulf has been estimatedto 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. SMEPA is currently funding $1,050,000 on an annual basis through 2024, The estimated funding requirement is recalculated and adjusted periodically based on market changes.

The Energy Policy Act of 1992 has a provision that assesses nuclear utilities with fees for the decontamination and decommissioning of the DOES past uranium enrichment operations, The decontamination and decommissioningassessments 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 in annual increments through 2007,

Note 5 = Investments in Associated Organizations Investments in associated organizations are stated at cost and consisted of the following:

In fhousunds us of December 31, 2003 2002 National Rural Utilities Cooperative Finance Corporation (IICFC")Certificates:

Membership subscription $ 6,223 $ 6,223 Loan and guarantee 29,059 22,355 Other 489 368

. $ 35,771 $ 28,946 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 2004 through 2007, 31,

Notes to Financial Statements Note 6 Investment Securities The amortized cost and related approximate fair values of investment securities were as follows:

Gross Gross Amortized Unrealized Unrealized Estimated In thousands us of December 31,2003 cost Gains losses Fair Value Decommissioning Trust:

Equity mutual funds $ 11,137 $ 1,008 $ 10,129 Fixed income mutual funds 2,508 $ 81 2,589

$ 13,645 $ 81 $ 1,008 $ 12,718 Securities to be held to maturity:

Obligations of states and political subdivisions $ 4,648 S 503 S - S 5.151 In thousands as of December 3 I, 2002 Decommissioning trust:

Equity mutual funds $ 8,301 $ - $ 1,787 $ 6,514 Fixed income mutual funds 3,352 155 3,507

$ 11,653 $ 155 $ 1,787 $ 10,021 Securities to be held to maturity:

Obligations of states and political subdivisions $ 4,626 $ 413 $ - $ 5,039 The amortized cost and approximate fair value of investment securities to be held to maturity, by contractual maturity, were as follows:

In thousands as of December 3 1, 2003 Amortized Cost Fair Value Due after five years through ten years $ 4,648 $ 5,151 35

Actual maturities may differ from nominal maturities because of the borrowers right to call or prepay obligations.

Sales of decommissioningtrust assets by the trustee aggregated $843,000 in 2003 and $1,056,000 in 2002, resulting in a realized gain of $6,000 in 2003 and $1,000 in 2002 under the specific identification

method, Note 7 = Deferred Charges (Including Regulatory Assets)

The following is a summary of amounts recorded as deferred charges:

In thousands as of December 31,

. 2003 2002 Unamortized costs of abandoned plant $ 50,846 $ 54,099 Unamortized penalties on repriced debt 22,884 22,814 Unamortized debt discount and issuance cost 577 655 Nuclear outage maintenance cost 157 1,570 Deferred DOE assessments (see Note 4) 712 878 Other 936 3,881

$ 76.112 $ 83,897 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 $3,253,000 and

$3,170,000 in 2003 and 2002, 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 $2,091,000 in 2003 and $1,936,000 in 2002.

In 2003, SMEPA repriced $44,300,000 of debt and paid a penalty of $2,161,000. The interest rate on the debt for the remaining life will be 3.76% in lieu of 7,68%.

36

Notes to Financial Statements n

Keport Note 8 = Patronage Capital Patronage capital consisted of the following:

In fhousunds us of December 31, 2003 2002 Cumulative margins $ 96,900 $ 92,723 Less: Retirements to date 5,854 5,854

$ 91,046 $ 86,869 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 percentof the patronage capital or margins received by SMEPA in the prior calendar year, The patronage capital of SMEPA represents 10,4% and 10.3% of the total assets at December 31, 2003 and 2002, respectively, 37

Note 9 = Long=TermDebt Long-term debt consisted of the following:

In thousands us of December 31, 2003 2002 Mortgage notes payable in quarterly installments to Federal Financing Bank ("FFB") at interest rates varying from 3.873%

to 10,705%, maturing in 2030 $ 408,268 $ 432,396 CFC advances at interest rates ranging from 3,48% to 6,45%

to finance construction of new turbines 225,861 171,435 Mortgage notes payable in quarterly installments to CFC (255%

at December 31 , 2003, 3,40% in 20021, maturing in 2022 4,207 4,324 RUS mortgage notes payable in monthly or quarterly installments:

2% notes maturing in 2009 2,946 4,832 5% - 5,75% notes maturing in 2015 through 2020 25,591 27,201 Mortgage notes payable in quarterly installment to CoBank (4.96% at December 31, 2003, 4,37% in 20021, maturing in 2019 1,849 1,946 Lamar County, Mississippi, PollutionControl Bonds:

1978 A Series, 6.125%, due semi-annually through 2008 805 955 1993 S Series, 4.65% to 4,95%, due annually through 2007 9,609 1 1,751 Claiborne County, Mississippi, Pollution Control Bonds:

1985 G Series, variable interest rates (1 15% to 1.26%

I at December 31, 2003), due annually through 2015 35,545 37,145 714,681 69 1,985 Less current maturities 33,935 32,736 Lona-termdebt fexcludina current maturities] $ 680.746 $ 659,249 38

In January, 2004 the RUS approved a $275 million loan guarantee for SMEPA that will provide permanent financing for its combustion turbine project (See Note 14). In the interim, CFC has provided $275 million constructionfinancing for the project in the form of a four- year loan, It is SMEPA's intent to repay the CFC loan and its bank line of credit in 2004 after the permanent financing from the FFB is received. At December 31, 2003 SMEPA owed $1 97,6 million on the CFC loan related to the combustion turbine project and $8 million on the bank line of credit.

A condition of the CFC interim $275 million loan required SMEPA to purchase equtty certificates in CFC and CFC also provided a $39 million loan to SMEPA for this purpose. The equity certificates earn interest income and can be redeemed as the $275 million loan is repaid. At December 31,2003 SMEPA owed

$28.2 million on this loan.

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 (inthousands):

2004 $ 33,921 2005 35,024 2006 40,395 2007 42,733 2008 42,446 S 194.519 In 2001, RUS approved a $58,653,000 guaranteed loan from the FFB to SMEPA to finance the addition of transmission facilities, At December 31, 2003, the remaining unadvanced commitment was

$22,622,000.

SMEPA is required by debt compliance covenants to maintaincertain financial ratios of interest coverage and annual debt service coverage. SMEPA was in compliance with such requirements at December 31, 2003 and 2002, 39

Note 10 = Deferred Credits nd Other Long-Term liabilities The following is a summary of deferred credits and other long-termliabilities:

In thousands as of December 31, 2003 2002 Deferred revenue (fuelcost adjustment) $ 8,653 $ 4,286 Postretirement benefit obligafion (otherthan pensions) 3,312 3,298 DeferredDOE assessments (see Note 4) 355 521 Miscellaneous 122 272

$ 12,442 $ 8,377 The benchmark fuel cost adjustment rate approved by the Board and collected from Members may result in under-recoveryor over-recovery of actual costs and cause a deferred charge or deferred credit.

The deferred revenue (fuelcost adjustment) amounts of $8,653,000 (2003)and $4,286,000 (2002)were collected from Members in the year deferred and will be or have been recognized as revenue in the succeeding year.

Note 11 = Short-Term Borrowings SMEPA has a $25,000,000 short-term line of credit available with CFC that is subject to renewal in September 2004 and a $10,000,000 short-termline of credit with a bank that expires May 1,2004,SMEPA had $2,600,000 of borrowings against the CFC line of credit at December 31, 2003, at an interest rate of 2.8% and $8,000,000 of borrowings against the bank line of credit at December 31, 2003 and 2002, at an interest rate of 3.5% and 3.75%, respectively.

ncial 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, 40

Notes to FinancialStatements Financial Report 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 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 and long-term debt The carrying amount reported in the balance sheets for notes payable approximatesfair value. The fair values of SMEPAs long-term debt are estimated using discounted cash flow analysis based on SMEPAs 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 approximatefair values of long-termdebt, including current maturities, are as follows (inthousands):

2003 2002 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value FFB $ 408,268 $ 465,612 $ 432,396 $ 500,844 RUS 28,537 29,198 32,033 29,205 Pollution Control Bonds 45,959 46,690 49,851 50,910 CFC and CoBank advances and notes 231,917 231,91 7 177,705 177,705

$ 714,681 $ 773,417 $ 691,985 $ 758,664 There was no material difference betweenthe 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 = Emplo~eeBenefits 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, 1990.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:

Service cost of benefits earned $ 57 $ 52 Interest cost on accumulated benefit obligation 136 127 Amortization of actuarial gain . (75) (75)

Total current year expense $ 118 $ 104 Payments relating to postretirement benefits other than pensions were approximately $1 04,000in 2003 and 2002.

The Accumulated PostretirementBenefit Obligation ("APBO")is accrued as an unfunded long-termliability and is composed of the following:

In thousands as of December 31, 2003 2002 Retirees and dependents $ 879 $ 983 Fully eligible active plan participants 45 45 Active participants not yet eligible 1,219 1,026 Unrecognized gain 1,169 1,244

$ 3,312 $ 3,298 The weighted average discount rate used in determiningthe APBO was 7,Opercent.The assumed health care cost trend rate of increase used in measuring the APBO is 8.0% in 2004,declining to 5.5percent by the year 2009.

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 6.9% and service and interest costs by approximately 6.9%.

Substantially all of SMEPA's employees participate in the National Rural Electric Cooperative Association

("NRECK) 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-employerplan 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 $1,387,000 in pension expense for the defined benefit pension plan in 2003 and $1,220,000 in 2002. 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 $455,000 and $421,000for 2003 and 2002, 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 $1,247,000 and $1,080,000, respectiely, for the fiscal years ended December 31, 2003 and 2002.

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 900,000tons or more of coal each year. SMEPA's present coal supplier is in the process of restructuring by means of Chapter 1 1 bankruptcy, SMEPA cannot be certain what effect, if any, this 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 which expires in 2007. SMEPA is obligated to load no less than 85% of its rail shipments through 2006 with a specified party at contractual rates that are adjusted quarterly.

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, All such commitments are expected to be recovered through normal operating revenue.

SMEPA has 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 began monthly capacity payments in 2001, aggregating approximately $20 million on an annual basis. SMEPA has the right to 43

Report 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 usage increases or decreases, SMEPA has contracts for the purchase and installation of seven gas-fired combustion turbine-generators on three sites owned by SMEPA ("the combustion turbine project"). The total cost of the project is budgeted to be $275 million including the purchase cost of the seven turbines, engineering and installation, transmission system improvements, internal costs and so forth. Four of the turbines were placed in service in 2003 and one turbine is scheduled to be placed in service in each of the three following years. The project includes four turbines rated at 84 megawatts each and 3 turbines rated at 47 megawatts each for a total of 477 megawatts.These natural gas fired simple cycle generatorswill be used to augment SMEPA's peaking resources and replace power previously purchased from other suppliers, SMEPA is using both internal funds and loan fuhds to pay for the project and total investment in the project was $206.3and $1 59.3 million at December 31, 2003 and 2002, respectively.

In 2003, SMEPA became aware of an underbilling error involving a Member of SMEPA and one of its major customers, SMEPA is working with all parties to resolve the underbillingwhich involves three years of service and a power supplier other than SMEPA. No receivables or payables have been recorded in the accompanying financial statements and SMEPA believes the settlement of the matter will not be material to SMEPA's financial statements, After conducting hearings on the matter, the Mississippi Public Service Commission ("MPSC") indicated in May, 2000 that starting retail competition in the electric utility industry at that time was "premature" and not in the public interest. The MPSC indicated that it would monitor national developments and review the issue at a future date if appropriate. Management is unable to determine what effect, if any, changes related to retail competition in Mississippi would have on SMEPA's financial statements.

The FERC has issued rulings supporting major changes in the ownership and operation of transmission assets throughout the United States. While not regulated by FERC, SMEPA is cooperating in discussions with neighboring utilities regarding mutually beneficial changes and is assessing what affect, if any, the presence of regional transmission organizations and the implementation of other FERC proposed rules will have on SMEPA's financial statements. SMEPA has over $1 79 million invested in transmission assets as of December 31, 2003.

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

44