Text

South Mississippi Electric Power Association (Smep) Annual Report for 2002
	ML031200389
Person / Time
Site:	Cook
Issue date:	04/28/2003
From:	Bottemiller C; Entergy Operations
To:	; Document Control Desk, Office of Nuclear Reactor Regulation
References
	GNRO-2003/00026
	Download: ML031200389 (39)
	v • d • e

6.

Waterloo Road P.0. Box 756 Port Gibson, MS 39150 Tel 601 437 6299 arles er Manager Plant Licensing April 28,2003 U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Attention: Document Control Desk

Subject:

South Mississippi Electric Power Association (SMEPA) 2002 Annual Report Grand Gulf Nuclear Station Docket No. 50-416 License No. NPF-29 GNRO-2003100026 Ladies and Gentlemen:

The 2002 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 2002 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, CABIAMT:amt attachment: SMEPA 2002 Annual Report cc: (See Next Page)

GO30026

April 28, 2003 GNR0-2003/00026 Page 2 of 2 cc:

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

L@vanway (wW Reynolds (w/a)

Smith J. (Wise Carter)

Thomas H. L.

egulatory Commission ATTN: Mr. E. W. Merschoff (w/a) 611 Ryan Plaza Drive, Suite 400 A~ington,TX 760114005 U.S. Nuclear Regulatory Commission ATTN: Mr. Bhalchandra Vaidya, ~ R ~ D L P(w/a) M ATTN: ADDRESSEE ONLY ATTN: U.S. Postal Delivery Address Only Mail Stop OWFN17D-I

~ a s h i n ~ t oD.C.

n , 20555-0001 GO30026

2002 P E R F O R M A N C E HIGHLIGHTS Increase % Increase

($ In Thousands) 2002 2OUl (Decrease) (Decrease)

TOW Revenue $393,524 $354,447 $39,077 11.0%

Current Net Margins $2,556 $2,126 $430 20.2%

Total Assets $839,943 $731,551 $108,392 14.8%

Total Equlty $87,404 $84,848 $2,556 3.0%

Equlty as % of Assets 10.4% 11.6%

Total

~ eCeneratlon t (MWH) 3,806,529 3,548,906 257,623 7.3%

Member Demand (MW) 2,011 1,977 34 1.7%

Executive MeSSag........................................ 2 Member Svstems ........................................... 3 Board of Directors ....................................... 4 General Information .................................... 7 SMEPA Departments .................................... 8 Operating Rep0........................................... 9 Financial Report ........................................... 16 1

South Mississippi Electric Power Association's operations have experienced the challenge of change during 2002. NO department has escaped the reality of the changing environment that is being experienced by ail utilities, yet SMEPA'S employees have stepped forward with positive contributions in a unified manner t o ensure that all challenges were met or exceeded.

The Transmission and Production Departments continue to experience ever-increasing workloads due to growth and generation additions that exceed past years, and each demand continues to be met in a timely manner without interruption. The Engineering and Power Supply Departments continue to explore and identify the most cost-effectiveways to meet the growth and needs of our members. The Finance Department continues to meet i t s goals as the Association's business system goes through extreme change, and the Human Resources Department continues to refine and develop employment programs that address organizational needs.

This report illustrates the cooperative spirit of SMEPA's workforce.

2

ryon Giles Bounds, Manager Date energized 1/18/38 1,548 miles of line 7,184 meters Bay St. Louis Robert Occhi, General Manager Date energized 5120138 5,133 miles of line 66,366 meters Greenwood Ronald w. Robertson, General Manager Date energized 1/30/39 5,527 miles of line 23.704 meters Laurel I James T. Dudley, Jr., Lee Hedegaard, General Manager General Manager Date energized 12/5/39 Date energized 7/28/39 6,055 miles of line 4,491 miles of line 61,223 meters 34,159 meters McComb Donald Jordan, General Manager Vesper Bagley, Manager Darrell Smith, General Manager Date energized 5/13/39 Date energized 12/24/38 Date energized 9/19/39 9,538 miles of line 2,232 miles of line 3,626 miles of line 60,743 meters 12,752 meters 26,996 meters Columbia Lorman Charles H. Shelton, W.T. Shows, General Manager Percy McCaa, Manager General Manager Date energized 5/19/39 Date energized 3/27/38 Date energized 3/23/38 5,779 miles of line 4,165 miles of line 2,733 miles of line 38,544 meters 24,286 meters 9,923 meters 3

COAHOMA ELECTRIC POWER ASSOCIATION Billy Hardin (left)

Ciles Bounds, Manager trigh t )

COAST ELECTRIC POWER ASSOCIATION Douglas Mooney (left)

Robert J. Occhi, General Manager trightl DELTA ELECTRIC POWER ASSOCIATION Henry Waterer, Jr.

(left)

Ronald W. Robertson, Cenera/ Manager (right)

DIXIE ELECTRIC POWER ASSOCIATION

MAGNOLIA ELECTRIC POWER ASSOCIATION Pat Ard (left)

Darrell Smith, 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 n ' ~ oHall (left)

Lee Hedegaard, General Manager (right)

SOUTHERN PINE ELECTRIC POW E R ASSOC l AT1ON Harlan Rogers, Vice President (left)

Donald Jordan, General Manager (right) 5

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

Location: Hattiesburg, Forrest County Employees: I22 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.

-I Commercial Operation: 1978 Location: Lamar County Capacity: 400 MW Fuel: Bituminous Coal Employees: 96 Commercial Operation: 1970 Location: Moselle, Jones County Capacity: 260 MW Fuel: Natural Gas/Fuel Oil Employees: 32 (10% Undivided Interest)

Commercial Operation: 1985 Location: Port Gibson, Claiborne County Capacity: 1,250 MW Fuel: Nuclear Employees: I Location: Jasper County Capacity: 20.6 MW SMEPA counts one employee among Entergy's 800+ Fuel: Diesel Fuel who work a t the nuclear site. Joe Czaika is the Association's nuclear specialist. Grand Gulf Nuclear SMEPA's two combustion turbines, Benndale Station is located approximately 145 miles from and Paulding, are unmanned stations SMEPA's headquarters. remotely operated from the Control Center located a t SMEPA's headquarters facility.

Personnel from Plant Moselle maintain the two units.

During 2002, the units were operated on Commercial Operation: 1969 occasion to support load demand. The units Location: George County were also placed into service from time to Capacity: 16.2 MW time for test purposes to assure continued Fuel: Natural Gas availability and reliability.

7

SMEPA's management team continues t o strive for excellence in an ever-changing industry. This experienced leadership maintains an ongoing dedication to facing future challenges and obtaining successful resolutions.

FINANCE DEPARTMENT Jack Harpole (left)

ENGINEERING DEPARTMENT Terry Lee (right)

HUMAN RESOURCES &

DEVELOPMENT DEPARTMENT Benny Murray (left)

TRANSMISSION DEPARTMENT Jerry Pierce (right)

POWER SUPPLY DEPARTMENT Roger Smith (left)

PRODUCTION DEPARTMENT Marcus ware (right) 8

were prepared for the design, engineering, testing, and supply of modern control components for these three systems. Yokogawa The Moselle station was operated in an provided the new boiler control system, intermediate mode to provide load support for replacing the existing combustion control, the entire year. Availability of the Moselle units burner management system, and motor control.

remained especially good for the year, and GE Global controls provided the new turbine and operating efficiency improved by 0.7% due generator voltage controls. The installation of primarily t o an increase in capacity factor a t the the new control systems required the upgrade facility. The number of units in service varied of most of the Unit #I instrumentation, according t o load requirements, economic modifications to the turbine front standard, and considerations, and the need for load modifications to the plant control room. The regulation support. A t least two units were in Unit # controls I upgrade should be complete service all year, with the exception of a short during January of 2003, with similar upgrades t o period in February when only one unit was be conducted on Unit #2 in the fall of 2003, and needed. The 83.5 MW combustion turbine was on Unit #3 in the spring of 2004.

operated as needed for load support.

Natural gas purchases were scheduled for flow Natural gas remained available in sufficient on a monthly basis to meet projected quantities to support operations throughout generation requirements. Portions of the the year. The cost proved to be more stable projected requirements were purchased in than during the previous year, even though advance t o mitigate the potential of spikes in prices increased substantially in the last quarter.

natural gas market pricing. Records indicate The favorable fuel cost situation favored the that usage amounted to 5,629,762 MMBtu for economics of operating the Moselle units.

the Moselle Generating Plant units, which is 17% more than the volume used during 2001.

The net generation during 2002 amounted to 471,855 MWH. This includes 25,550 MWH Of Fuel oil usage for 2o02 amounted to 11,997 production from the Moselle combustion gallons. This quantity was used primarily for turbine. This is 17% more than the 2001 test purposes.

production. Output from the steam units was 15% more than 2001 production,while generation In June 2001, SMEPA began receiving energy from the combustion turbine was 77% more than from Batesville unit #3, a 280 MW combined the amount produced during the previous year.

cycle facility that is located a t Batesville, Mississippi. In addition to the natural gas that Since entering commercial operation in June 1997, was secured for Moselle, SMEPA arranged for the 83.5 MW simple cycle combustion turbine has the fuel for the Batesville unit. Fuel purchases been utilized in peaking service as needed. Unit for the unit during 2002 were procured through operability, availability, and reliability have met the Aquila Energy, and totaled 6,071,922 MMBtU.

high expectations that were established for the unit. During 2002, the unit was operated 345 hours0.00399 days 0.0958 hours 5.704365e-4 weeks 1.312725e-4 months Plant Moselle and produced 25,550 MWH.

control systems receive upgrades.

There were several inspections conducted and maintenance projects successfully completed throughout the year in order to maintain the efficiency of Plant MOSelle operations. These maintenance projects included maintenance on the Paulding, Benndale and Moselle combustion turbines.

The existing controls for the boiler, turbine, and F" - - - $6-generator voltage control systems were original equipment. Due t o the age of the equipment, obtaining spare parts had become a challenge and in some cases impossible. Specifications 9

continued, efficient, reliable and safe operations. A number of tasks were performed Plant Morrow was primarily operated in an to improve the integrity of various plant intermediate and base load mode during the systems.

year. Simultaneous operation of t h e t w o The combined volume of dry fly ash and landfill Morrow units occurred during the peak load periods. Maintenance outages were scheduled material marketed during t h e year totaled 41,500 when load requirements were not demanding. tons. This reflects a 15% decrease in volume A total of 1,055,058 tons of coal were delivered when compared to 2001 figures and is a result of to Plant Morrow, a record for an annual period. a decline in sales activity. Approximately 38% of t h e ash produced during the year was marketed.

Coal consumption amounted to 1,012,557 tons, representing an increase of 4.8% above 2001 usage. For the year, 9,975 carloads of coal were received and handled a t the Morrow Station.

The annual net generation from the facility was 2,328,407 MWH. The production was 8% above Overall, 2002 was a very successful year for Grand 2001 output, and only 3.2% below the Gulf. The operating statistics for the facility were record-setting production of 2000. The output again quite favorable even though a refueling was 12% more than the average annual outage was scheduled in September and an generation that was provided by the facility unexpected scram occurred in June. There were during the 10-year period 1992-2001. no forced outages in 2002 other than t h e scram, which was due to an external event. The plant A scheduled preventive maintenance turbine capacity factor was 95.1% based upon t h e net inspection was performed during a spring maximum dependable capacity of 1,210 MW, outage. This inspection was the first inspection which increased the three-year average from 91.4% a t t h e end of 2001 to 96.4% a t the end of performed on this unit since the outage 2002. The capacity factor for 2002 places Grand intervals were increased to six years. Repairs Gulf among the top ten percent of all domestic were completed to restore the unit to its nuclear plants. The piant availability factor was original condition.

92.9% for 2002, which is the plants best for a Invensys/Foxboro field service engineers and refueling outage year.

Plant technicians completed upgrades to both The net generation for 2o02 was 10,059,000 Unit # I and Unit #2 boiler controls during 2002.

MWH, which is the highest amount ever for a The upgrades consisted of new workstations and application Processors which improved refueling outage year and is the plants third best year historically. The other two years control performance and control screen update time. Additional system input/output hardware in which the milestone was exceeded were was added for future system expansion. non-outage years. The year 2002 was the first in which t h e plant exceeded 10,000,000 MWH of The Plant Morrow track scale weighing system, net generation in an outage year. Production was up by 1.4% from 2001, another refueling which is used to monitor rail-delivered coal volumes, also received a n upgrade. The year. The average net thermal efficiency for t h e in-motion coal car weigh system was replaced year was 10,420 BtuIKWH, which is t h e second best ever for the plant.

with the latest technology in train weighing.

The new system software allows for collection, The plant staff is continuing to pursue a goal manual entry, manual correction, storage and of improving performance. Before 2002, in printing of critical information required for weight processing. The scale diagnostics allows addition to reducing t h e plant heat rate by 14.7%

technicians to access data for analyzing system since t h e plant went commercial in 1985, the staff had improved plant capacity by adding faults. Calibration faults, zero errors, and system errors are examples of data that are available. approximately 84 MW to the output through various improvements. In 2002, t h e plant staff Scheduled preventive maintenance was improved capacity even more. Additionally, t h e performed throughout the plant to maintain staff sought and received from t h e Nuclear 10

Regulatory Commission ( N R C ) , a 1.7% increase in the highest annual delivery into SMEPA's system the licensed power of the plant tkrough the from the facility during a refueling outage year, NRC's "measurement uncertainty recovery" and was the third highest delivery for an annual initiative (better known as the Appendix K power period. The entire year was characterized by uprate). The new license limit on reactor power relatively high availability. Power was supplied for Grand Gulf is now 3,898 MW (thermal),which from the unit on 340 of 365 days during the year added an additional 22 MW to plant output. and the unit was operated without disruption in 9 of the 12 months. The overall production and The plant broke a plant net generation record performance (heat rate) reflected the positive and a domestic record for Boiling Water benefits that have been realized from recent Reactor (BWR) unit on November 27, 2002, by high pressure and low-pressure turbine producing 31,285 MW within a 24-hour period a t upgrades, cooling tower fill replacement, an average power of 1,304 MW. The record addition of the auxiliary cooling tower, and the setting day, a 0.8% increase over the previous Appendix K power uprate.

record, was due primarily t o upgrades completed in previous years, contributions from the new auxiliary cooling tower, the Appendix K power uprate, and the cold ambient temperature a t the time. Just prior t o this event, the plant broke a record for net generation for an hourly period. On November 24, the plant produced 1,313 MW between 8:OO p.m. and 9:00 p.m., which established a new domestic record for a BWR unit. The two remotely located combustion turbines were operated sparingly for load support The twelfth (RFO22) refueling outage >was a during the year. The units were used when great success. The duration of RF012 was 22 needed to support load requirements during days, 1 8 hours9.259259e-5 days 0.00222 hours 1.322751e-5 weeks 3.044e-6 months , and 7 minutes, the second peak demand periods or for system shortest for the facility and short of the record emergencies. The units were placed into by only 24.4 hours4.62963e-5 days 0.00111 hours 6.613757e-6 weeks 1.522e-6 months . ~n addition to plant outage Service for t e s t purposes a t scheciuled intervals issues, the plant staff had t o endure The in an effort to assure availability and reliability.

remnants of two hurricanes that came through the area during the outage time period. The Benndale was operated on nine separate days heavy winds and rain made moving about the of the year and produced 284 MWH. Paulding site uncomfortabie and hazardous. was operated on six separate days and produced 105 MWH. Both units are intended to The plant staff continues t o strive to improve provide critically needed support when system efficiency in operations. The staff is committed demand is high or during emergency situations.

to continued excellent performance, but a t the same time is striving to do better to keep ahead As usilal, Moselle maintenance personnel of the industry. Plant equipment reliability has completed routine maintenance work a t the benefited from a continual focus, an0 further remote sites; conducted periodic operating improvement is anticipated. ln order t o tests a t each location; and responded on maintain short outage durations, the staff will occasion when starting and operating continue to conduct more and more work with problenls were identified with the units.

Plant personnel the plant on-line. This requires very careful contmuous/y undergo planning and execution, with a great deal of Hazar-doits Ma teria Is innovation a t times. However, as experience is training.

gained, this becomes more natural and roui'ine.

Significant planned on-line work is scheduied for 2003 for several plant safety sysrems.

SMEPA received a total of 1,005,878 ~ i w f iof in conjunction with plans t o meet the growing energy from Grand ~ u l during f 2032, which is power supply needs of SMEPAs member 1.3% niore than 2001 deliveries. This reuresents systems, ConstrLiction activities were initiated a t two new power plant sites during 2002. Site 11

development began for the Silver Creek Plant in Jefferson Davis county and for the Sylvarena Plant in Smith County Simple cycle combustion turbine-generators are being added to SMEPA'Sgenerating unit fleet for use Chas Coal continued plans t o develop the coal primarily for peaking purposes. reserves and maintained active mining operations on the SMEPA property under The site development process was completed provisions of the coal Property Lease at each location, and construction Agreement. For the year, clean coal production activities commenced under an engineering, amounted t o 268,556 tons from surface, procurement, and construction contract highwall, and deep mine operations. This arrangement with Allegheny Energy solutions. reflects the highest annual production from AS the year progressed, unit #I equipment, the property since 1999. Further increases in including the turbine-generator, was delivered production are expected during 2003.

t o Silver Creek and equipment associated with Units ##2, I, and #3 was delivered t o Sylvarena. under an Oil & Gas Lease Agreement, SMEPA The components were placed on the respective received royalty payments as a result of oil and foundations, and significant progress was gas production from the property. A relatively made in the installation of piping, conduit, small but steady volume of gas flowed from a wiring, and associated equipment, in total of 31 wells throughout the year. Revenue preparation for initial operation in May 2003. was generated from a limited amount of oil production each month.

A t the Silver Creek site, the single 83 MW unit is a General Electric model 7EA turbine-generatorr As part of the effort t o monitor and adequately which is almost identical t o the combustion manage developments on SMEPA's Kentucky turbine that was placed into service a t Moselle property, quarterly inspections of the mining in 1997. The primary difference is that the operations and the preparation plant were Moselle unit can operate on both natural gas conducted. Meetings were held with Chas coal and diesel fuel, while the Silver Creek unit will management personnel to review current and be operated solely on natural gas fuel. Two planned development of the coal reserves. A t additional units will follow a t Silver Creek with the conclusion of each of the visits, SMEPA's completion in May 2004 and May 2005. mining consultants prepared and submitted a report of detailed findings, recommendations, The Sylvarena units are each rated a t 47 MW. The and other pertinent information relative t o the General Electric model LM 6000 units are the first property operations. Attention was also directed aero-derivativetype turbines in SMEPA's system. to developments under the oil & Gas Lease These units are of a more efficient design, and Agreement and t o timber removal operations.

will be operated exclusively on natural gas.

The natural gas supply pipeline has been constructed into each of the sites, and required metering and regulating stations have been installed. Also, transmission lines have Environmentalefforts during 2002 focused upon been routed into the new Silver Creek continued compliance with existing regulations and Sylvarena switchyards. Silver Creek is while completing permitting efforts required connected to Entergy's grid a t 115kV, while for the construction of new SMEPA generating sylvarena is tied to SMEPA'Sown 69kV system.

units a t silver Creek, Sylvarena, and Moselle. This year marked the third year of participation of Although physical activity has not yet begun, SMEPA'SR. D.Morrow, sr. and Moselle Generating plans call for the addition of another 83 MW Plants in Phase II of the Acid Rain Program.

simple cycle combustion turbine a t Moselle, for Limited emission rates of acid rain pollutants startup in 2006. Attention will return t o this provided for the continued "banking" of location upon completion of the initial phase of emission credits for use in meeting future the projects a t Silver Creek and Sylvarena.

generation requirements. Continuous Emission Monitors (CEMS), used to quantify and account 12

for unit emissions, were successfully recertified continue billing members based on non-a t all SMEPAgenerating plants. coincident peaks as well as t o continue providing members with sample coincident A Title V air permit renewal application was peak bills. Beginning with the January 2004 prepared and submitted for the Moselle bills, SMEPA will begin a three-year phase-in of Generating Plant during the year. The Mississippi coincident peak billing.

Department of Environmental Quality (MDEQ) will issue this permit for a period of five years SMEPA participated in interventions for from the issuance date. transmission rate redetermination and ancillary services on the Entergy transmission system The MDEQ issued Title V Operating Permits for and transmission rate on the Southern the Benndale and Paulding combustion turbine company transmission system. AS the year facilities. These permits allow continued ended, the Entergy rate issue was resolved and operation of these facilities for a period of five is awaiting final Federal Energy Regulatory years, when permit renewal will again be Commission (FERC) ruling. Filing of comments necessary. on the Entergy transmission ancillary services issue was completed by year's end and the The Rural Utilities Service (RUS) issued Findings- parties were awaiting FERC ruling that is Of-No-Significant-Impactsfor the Silver Creek, expected to be issued in 2003. SMEPA also sylvarena, and Moselle combustion turbine intervened in the Southern Company projects. This determination included essential transmission formula rate filing and environmental approval of these projects by participated in negotiations with Southern RUS, thus allowing construction and project Company representativesafter a FERC Technical financing to proceed. This determination was conference in August. AIIparties have reached based upon information that was submitted to a settlement agreement and will be seeking RUS by SMEPA a t the end Of 2001. FERC approval in 2003. The settlement provides significant savings for delivery of capacity and The MDEQ issued air and storm water energy t o the Borderline System.

construction and operating permits for the Silver Creek and Sylvarena Generating Plants SMEPA negotiated and signed an during 2002. The issuance of these permits by interconnection agreement with Entergy for the agency was necessary prior t o the new Silver Creek generating facility.

commencement of construction of the new Entergy filed this unilaterally executed plants. Anti-Degradation Studies for these document with FERC in November. The facilities were prepared and submitted to this agreement outlines the responsibilities of agency in order t o complete the application SMEPA and Entergy for interconnecting the process for wastewater discharge permits. new plant t o Entergy's transmission system.

Capacity and energy generated by the plant will Design and construction of CEMS for the Silver be delivered to SMEPA member load using Creek and Sylvarena Generating Plants were transmission service provided in the 1979 completed during the year. Monitoring plans Interconnection and Operating Agreement for these facilities were also submitted to and between SMEPA and Entergy Mississippi, approved by the Environmental Protection formerly Mississippi Power & Light Company.

Agency. The addition of these generating units will double the number of acid rain-affected units that SMEPA operates.

SMEPAs Control Center personnel, in conjunction with Production personnel, During 2002, as part of the initial phase-in to implemented plans for optimizing the use of coincident peak billing, SMEPA provided i t s generation resources, both owned and members with sample bills based on coincident purchased. Through a combination of fuel peaks. For 2003, SMEPA's Board decided to 13

management, economic dispatch of generating four new transmission lines was completed, units, timely purchases and the use of risk and line adjustments were made on several management tools, fuel and energy costs to SMEPA transmission lines for line uprating.

serve SMEPAs members for the year were reduced to $3.43 million below budget The annual reclearing of right of way was performed on more than 4,358 acres. Pole SMEPA Control Center personnel also worked groundline inspections and treatments were with Engineering personnel t o update data in performed on 2,300 poles, and aerial patrol the state estimator model. This included inspections were performed bi-monthly.

adding new SMEPA switching stations, transformers and capacitor banks t o the model.

The model is used by the regional reliability coordinator t o monitor regional transmission system operating conditions in order to assure regional transmission reliability.

The Transmission System Planning personnel of SMEPA's Engineering Department prepared a During 2002 SMEPA acknowledged approximately new SMEPA Long Range Transmission Plan for 1500 new Comfort Advantage HOtneS in member the years 2003 through 2017 and a new service territories. SMEPA marketing developed Construction Work Plan for the years 2003 member employee-training presentations through 2007. Both studies were delivered t o aimed a t internal communication/customer RUS for their review and approval.

service and coincident peak rate education.

Additional online training for member Metering technicians checked calibration of all employees enhanced marketing skill levels. 206 wholesale revenue meters on the SMEPA SMEPA provided consultation and research for system. They also calibrated under-frequency members in the areas of e-procurement, relay packages a t 49 locations.

lighting, energy efficiency, interdepartmental relationship marketing, rate application, Relay technicians calibrated 2,874 relays a t 44 promotional brochure development, and locations and were involved in checkout and distributed generation. installation of new relays and panels a t six sites (four sites were new substations).

SMEPA maintains its commitment t o providing reliable power through the maintenance of 1,623 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 5,818 poles and completed 360 line maintenancework orders. Construction for 14 Construction for the Silver creek turbine projects begins.

ROSS Be// (right -

stewart, Sneed, Hewes, BancorpSouth Inc.,

lnsurancel presents Roy Foster, Mr.Thomas and SMEPA employees with a congratualtory plaque for acnieving more than 4 SMEPA entered into the Enterprise Asset million man-hours Management system (EAM) Project beginning without a lost time SMEPA'S Engineering Design and Electronics in 2002. MRO's Maxim0 was selected to replace accident.

Maintenance staff completed and placed in SMEPAs in-house developed Material service 39 miles of fiber optic ground wire Management System. Vehicle Maintenance (OPCW), two gas circuit breakers (GCBs), three system, and Work order System. This system digital microwave projects, bus and switch will provide data collection and reporting upgrades, and a new 115kV switchyard a t the capabilities for headquarters, plants, and field new Silver Creek location. personnel. A new Sunfire V880 database server was also purchased to centralize data SMEPAS Engineering staff also completed collection for the Oracle Financials and the new various stages of design and construction for EAM system. A new tape backup library system two new 69kV switching stations, a new 69kV was installedfor disaster recovery and Provides switchyard a t the new Sylvarena location, a 1.5 data backups for the production databases.

mile OPGW project, and two more digital microwave links. A Remote Access system was installed in 2002 t o provide controlled access for emergency and traveling personnel. Employees can check emails, transfer files, and access business system resources without using the Internet.

substation maintenance activities included the collection of Dissolved Gas Analysis samples from 44 power transformers and 28 load SMEPA employees continued t o achieve tap changers. Annual routine preventive an exceptional safety record during 2002.

maintenance was performed on 24 motor Employee commitment to safety was evidenced operated switches, 17 battery banks, twelve by an extremely IOW incidence rate, which 161kv oil circuit breakers, seven 161kV GCBs, six was reflected in workman's compensation 69kv GCBS and seven new 125VDC battery banks insurance premium reductions. During January were installed and tested. 2002, SMEPA employees achieved a milestone record of more than 4 million man-hours SMEPA'S Engineering Department also worked without a lost time accident.

performed the annual infrared survey/

inspections for all substation, switching stations and delivery point facilities.

SMEPA continues to be an integral part of the communities it serves with participation in economic development and by supporting several community organizations. Employees from all departments dedicate their time and The computer Information Systems' s t a f f energies to supporting such organizations as completed the transition t o the PC lease United Way of both the Pine Belt Region and program that began in 2000. This lease covers southeast Mississippi, Adopt-A-Family, the all employee desktop and laptop computers a t American Red Cross, Kiwanis Club, the EPA's Headquarters, Plants Morrow and Moselle. This Youth Leadership Tour program, MathCounts, also includes general purpose PCs for the the Hattiesburg Area Education Foundation, Control Center and test equipment laptops for the Interaction Factory, the Area Development Engineering. Partnershipand the Adopt-A-Schoolpartnership.

15

The electric utility industry remains stressed megawatt combustion turbine project. SMEPA as reported by the trade press during 2002. invested $107 million in the project during Some of the issues include the war 2002 bringing the project-to-date investment economy, foreign acquisitions, credit ratings to $158 million (57% of total project estimate).

downgrades, corporate misconduct, capacity SMEPA is financing the project under a $275 mismatch, regulatory initiatives, volatile fuel million "fast-track" loan program approved in prices, and severe weather changes. SMEPA 2001 by RUS and CFC. CFC is providing the achieved strong results during 2002 and interim construction financing while RUS is remains committed to i t s core customers, the taking the necessary steps to provide eleven member cooperatives that in turn permanent guaranteed financing to replace serve 366,000 customers throughout rural the interim funding. SMEPA expects RUS to Mississippi. s t a r t providing long-term funding before the end of 2003. The combustion turbine project The year 2002 was another year of solid includes seven turbines with four to be placed financial results for SMEPA. The wholesale rate in service before June of 2003. The remaining collected for the year was right on budget three turbines are scheduled to be placed in while the net margin was slightly above service one a t a time over the following three budget. SMEPA invested $120 million in new years. The turbines are needed to provide utility plant assets bringing total life-to-date peaking power for summer and winter infrastructure investments to more than one peaking demand and also to improve load billion dollars. management capabilities. The "fast-track" loan program established by RUS and CFC Revenues from members amounted to $393 enabled SMEPA to move from the request for million for 2002, up 11%or $39 million from the proposals stage to commercial operation in 36 previous year. Energy sales to members were months.

up 7.5% to 8.7 million megawatt hours - t h e highest ever. Generation by SMEPA owned plants was up 7.3% over 2001 to 3.8 million megawatt hours. Demand billings to members were up 10.4% with a monthly average of 1,699 megawatts, an increase of 160 megawatts. All eleven of the member cooperatives increased their purchases of energy from SMEPA.

Member purchases were down during the previous year, as the economy experienced a brief recession, but collectively, the member cooperatives show a strong five-year compounded growth rate of 4.7%.

The $2.6 million margin for 2002 was close to budget and up slightly from the $2.1 million earned last year. SMEPA'Sequity increased to

$87.4 million and is now 10.4% of total assets.

Discretionary investments amounted to $23 million a t year-end 2002 compared to $32 million a t the start.

Total debt outstanding a t year-end 2002 was

$700 million, up $108 million from the previous year due t o the construction of the 481 16

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

ASSETS -

2002 2001

~

2000 -

1999 1998 ELECTRIC UTILITY PLANT In Service - a t cost $ 859,736 $ 845,253 $ 828,332 $ 820,003 $ 815,305 Construction work in process 188,948 84,354 42,277 24,620 20,86 1 1,048,684 929,607 870,609 844,623 836,166 Less accumulated depreciation 420,938 397,434 373,874 350,183 330,062 Net Utility Plant S 627,746 S 532,173 S 496,735 $ 494,440 S 506,104 INVESTMENTS Investments in associated organizations 28,946 13,295 7,719 7,814 7,905 Debt service reserve investments 4,626 4,617 4,594 4,613 5,488 Decommissioning trust investments 10,021 10,501 10,407 10,220 9,666 Debt service prepayments 7,389 7,03 1 Total Investments 50,982 35,444 22,720 22,647 23,059 CURRENT ASSETS Cash - general funds and cash equivalent investments 15,434 24,639 22,119 23,122 17,124 Other invested funds 2,251 1 1,727 Accounts Receivable - Members 31,731 28,952 33,745 27,498 24,09 1 Accounts Receivable - Others 2,794 723 1,502 1,003 1,088 Coal and other fuel inventories 10,572 7,804 5,206 18,446 1 1,022 Materials and supplies inventories 15,918 15,167 14,712 15,467 15,836 Other 869 437 557 1,030 3,602 Total Current Assets 77,318 77.722 77,841 88,817 84,490 DEFERRED CHARGES 83,897 86,212 90,084 106,335 99,455 TOTAL ASSETS S 839,943 S 731,551 S 687,380 3 712,239 3 713,108 EOUITIES AND LIABILITlES EQUITIES Patronage capital $ 86,869 $ 84,313 $ 82,187 $ 80,348 $ 78,337 Memberships and donated capital 535 535 535 535 535 87,404 84,848 82,722 80,883 78,872 Long-Term Debt (excluding current maturities) 659,249 559,105 5 16,265 549,557 571,672 Accrued Decommissioning Obligation 1O,O21 10,501 10,407 10,220 9,666 Deferred Credits and Other Long-Term Liabilities 8,377 10,850 4,075 4,096 3,962 CURRENT LIABILITIES Accounts payable 30,718 30,807 29,243 24,666 20,326 Notes payable 8,000 2,000 18,000 Accrued interest 1,444 541 8,052 566 804 Other accrued expenses 1.994 2,308 2,339 2,127 2,166 Current maturities of long-term debt 32,736 30,591 34,277 22,124 25,640 74,892 66,247 73,911 67,483 48,936 TOTAL EQtJITIES AND LIABILITIES S 839,943 S 731,551 $ 687,380 S 712,239 $ 713,108 RATIOS TIER 1.07 I .06 I .05 1.06 1.05 DSC 1.04 1.03 1.06 1.02 1.06 Equity as YOof Assets 10.4% 1 1.6% 12.0% 1 1.4% 11.1%

DEBT Long-Term Debt and Notes Payable $ 667,249 $ 561,105 $ 516,265 $ 567,557 $ 571,672 Current Maturities on Long-Term Debt 32,736 30,591 34,277 22,124 25,640 TOTAL DEBT S 699,985 3 591,696 S 550,542 S 589,681 $ 597,312 Average Interest Rate 5.40% 5.88% 6.30% 6.23% 6.27%

18

Comparative Operating Statements ($ in Thousands) 2002 ~2001 ?

J -

1999 -

1998 OPERATING REVENUES Electric energy revenue from members $ 393,123 $ 354,120 $ 363,535 $ 328,716 $ 305,751 Other electric energy revenue 548 73 1 3,216 547 7,301 Other - net (147) (404) (307) 11 373

$ 393,524 $ 354,447 $ 366,444 $ 329,274 $ 313,425 OPERATING EXPENSES Fuel 67,086 63.881 78,217 66,64 1 74,885 Production 15,687 13,639 13,987 13,616 12,970 Purchased Power 215,819 185,497 183,174 157,532 132,977 Transmission 12,245 11,710 12.171 1 1.977 1 1,424 Administrative and General 4,883 4,328 4.030 3,661 3,424 Maintenance expenses:

Production I 1,229 10,297 8,508 8.871 9.789 Transmission 2,834 2,188 2,186 2,294 1,810 General Plant 825 73 1 736 692 609 Depreciation and amortization 27,707 26,960 26.461 25,736 25,776 358,315 319,231 329,470 291,020 273.664 OPERATING MARGIN BEFORE INTEREST AND OTHER bEDUCTIONS 35,209 35,216 36,974 38,254 39,761 INTEREST AND OTHER DEDUCTIONS Interest 34,993 36,489 37,344 38,444 40,594 Other Deductions 34 29 14 44 54 35,027 36,518 37,358 38,488 40,648 OPERATING MARGIN (887)

NONOPERATING MARGIN:

Interest income 1,933 1,534 1,709 1,943 2,590 Allowance for funds used during construction 396 1,618 355 217 258 Other 45 276 159 85 77 Total Nonoperating Margin 2,374 3,428 2,223 2,245 2,925 NET MARGIN $ 2,556 $ 2,126 $ 1,839 $ 2,011 $ 2.038 I9

Selected Financial Data 2002 -

2001 rn -

1998 Mills Der KWh Wholesale Rate to Members 45.27 44.83 44.02 41.95 40.75 Wholesale Rate to Non-Members 33.49 27.82 39.36 42.95 26.05 Average Cost of Purchased Power 43.07 39.86 41.66 36.29 33.77 Average Cost of Fuel (per net generation) 17.62 18.00 19.31 18.24 18.72 Comparative Summary I Energy Sources and Sales 2002 -

2001 rn -1999 -1998 ENERGY SOURCES - MWH Generated 3,806,529 3,548,906 4,05 1,486 3,654,436 4,000,428 Purchased 5,010,337 4,653,782 4,396,938 4,340,954 3,950,485 TOTAL ENERGY AVAILABLE FOR SALE - MWH . 8,816,866 8,202,688 8,448,424 7,995,390 7,950,913 ENERGY SALES MWH -

Members Coahoma EPA 152,281 136,694 137,280 127,441 128,845 Coast EPA 1,538,159 1,429,392 1,497,819 1,345,675 1,186,129 Delta EPA 545,505 517,677 529,637 530,839 521,834 Dixie EPA 758,571 712,545 72 1,905 676,403 669,078 Magnolia EPA 583,274 549,602 559,367 522,275 5 14,763 Pearl River EPA 900,961 826,14 1 83 1,542 761,825 717,346 Singing River EPA 1,323,324 1,232,291 1,280,415 1,189,922 1,143,285 Southern Pine EPA 1,826,044 1,670,862 1,678,363 1,634,359 1,584,680

, Southwest Mississippi EPA 45 1,258 414,021 437,638 443,5 I2 445,689 Twin County EPA 262,307 260,148 302,357 296,437 294,815 Yazoo Valley EPA 3 10,270 30 1,046 282,862 307,335 296,939 TOTAL SALES TO MEMBERS 8,651,954 8,050,419 8,2S9,185 7,836,023 7,503,403 Non-Members 16,361 26,269 8 1,704 12,716 291,913 TOTAL SALES 8,668,315 8,076,688 8,340,889 7,848,739 7,795,316 MEMBER DEMAND -- KW 2,010,942 1,976,642 2,030,075 1,892,133 1,762,216 (Non-Concurrent Peak) 20

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 sheets of South Mississippi Electric Power Association (SMEPA) as of December 31, 2002 and 2001, and the related statements of revenues, expenses and patronage capital, and cash flows for the years then ended.

These financial statements are the responsibility of SMEPAs management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States 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 audits provide 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, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

January 28,2003 21

South Mississippi Electric Power Association Balance Sheets (In Thousands)

December 31 2002 7 -2001 ASSETS ELECTRIC UTILITY PLANT In service - at cost $859,736 $845,253 Construction work in process 188.948 84.354 1,048,684 929,607 Less accumulated depreciation 420.938 397.434 Net Utility Plant 627,746 532,173 INVESTMENTS Investments in associated organizations 28,946 13,295 Debt service reserve and other investments 4,626 4,617 Decommissioning tnrst investments 10,021 10,501 Debt service prepayments 7,389 7,03 1 Total Investments 50,982 35,444 CURRENT ASSETS Cash - general funds and cash equivalent investments 15,434 24,639 Accounts receivable:

Members 31,731 28,952 Others 2,794 723 Inventories (at average cost):

Coal and other fuel 10,572 7,804 Materials and supplies 15,918 15,167 Other 869 437 Total Current Assets 77,318 77,722 DEFERRED CHARGES 83,897 86,212 TOTAL ASSETS $839,943 $731,551 See Notes to Financial Statements 22

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

December 31 2002 -

2001 EQUITIES AND LIABILITIES EQUITIES Patronage capital $86,869 $84,313 Memberships and donated capital 535 535 87,404 84,848 LONG-TERM DEBT (excluding current maturities) 659,249 559,105 ACCRUED DECOMMISSIONING OBLIGATION 10,021 10,501 DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES 8,377 10,850 CURRENT LIABILITIES Accounts payable 30,718 30,807 Notes payable 8,000 2,000 Accrued interest 1,444 54 1 Other accrued expenses 1,994 2,308 Current maturities of long-term debt 32,736 30,591 74,892 66,247 COMMITMENTS AND CONTINGENCIES (Notes 4 and 14)

TOTAL EQUITIES AND LIABILITIES $839,943 $731,551 See Notes to Financial Statements 23

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

December 31 2002 OPERATING REVENUES Electric energy revenue from members $393,123 $354,120 Other electric energy revenue 548 73 1 Other - net (147) (404) 393,524 354,447 OPERATING EXPENSES Fuel 67,086 63,881 Production 15,687 13,639 Purchased power 215,819 185,497 Transmission 12,245 11,710 Administrative and general 4,883 4,328 Maintenance expenses:

Production 11,229 10,297 Transmission 2,834 2,188 General 825 73 1 Depreciation and amortization 27,707 26,960 358,315 3 19,23 1 OPERATING MARGIN BEFORE INTEREST AND OTHER DEDUCTIONS 35,209 35,216 INTEREST AND OTHER DEDUCTIONS Interest 34,993 36,489 Other deductions 34 29 35,027 36,518 OPERATING MARGIN 182 (1.302)

NONOPERATING MARGIN:

Interest income 1,933 1,534 Allowance for funds used during construction 396 1,618 Other 45 276 Total Noaoperating Margin 2,374 3.428 NET MARGIN 2,556 2,126 PATRONAGE CAPITAL AT BEGINNING OF YEAR 84,313 82,187 PATRONAGE CAPITAL AT END OF YEAR $86.869 $84.313 See Notes to Financial Statements 24

South ~ i s s i s s i p pElectric i Power Association Statements of Cash Flows (In Thousands) December 31 2002 -

2001 CASH FLOWS FROM OPERATING ACTIVITIES Net Margin $2,556 $2,126 Adjustments necessary to reconcile net margin to net cash provided by operating activities:

Depreciation, amortization, and depletion 31,431 Allowance for funds used during construction (39 6 )

Change in Operating Assets and Liabilities:

Accounts receivable Inventories Other assets Accounts payable and other liabilities Accrued interest payable Nuclear outage maintenance costs Fuel Cost Adjustments Accrued decommissioning payable Net Cash Provided by Operating Activities 18,008 31,463 CASH FLOWS FROM INVESTING ACTIVITIES Construction and acquisitions of electric utility plant (1 19,973) (57,379)

Purchase of available for sale securities (576) (494)

Sale of available for sale securities 1,054 600 Investment in associated organizations (15,65 1) (5,577)

Maturities of held to maturity securities 190 Purchase of held to maturity securities (557) (7,054)

Net Cash Used in Investing Activities (135,511) (70,104)

CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (30,524) (34,249)

Proceeds from long-term borrowings 132,822 73,410 Proceeds from short-term borrowings 6.000 2.000 Net Cash Provided By Financing Activities 108,298 41,161 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,205) 2,520 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,639 22,119 CASH AND CASH EQUIVALENTS AT END OF YEAR $15,434 $24.639 See Notes to Financial Statements 25

I South Mississippi Electric Power Association Notes to Financial Statements Years Ended December 3 1,2002 and 200 1 I NOTE 1 - SIJMMARY 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 365,000 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 Commissions (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.

The more significant accounting policies are generally described as foliows:

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 atlocable 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.

26

b. Cost of Decommissioning Nuclear Plant SMEPAs 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 SMEPA capitalizes interest on certain significant construction and development projects while in progress. The interest cost capitalized related to debt specificzlly borrowed for construction and development projects during construction is reflected as a reduction in interest expense. The interest cost related to construction and development projects funded without specific borrowings during construction is reflected as allowance for funds used during construction.

d. 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 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, realized and 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 20 16.

As a condition of repricing certain outstanding debt in recent years so as to significantly reduce annual interest expense, SMEPA paid penalties of varying amounts that 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-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 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 Directors 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.

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 $83.9 million, including $54.1 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.

27

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 SMEPAs 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 STANDARD TO BE ADOPTED IN THE FUTURE In June 200 1, the Financial Accounting Standards Board (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.

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

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

cost Accumulated Depreciation 2002 200 1 2002 200 1 Grand Gulf Nuclear $4 1 1,454 $4 1 1,246 S 152,O14 $170,597 Morrow Steam 191,601 1 9 1,386 132,355 126,499 Moselle Steam 23,996 23,979 21,874 21,132 Moselle Gas Turbine 2 1,723 2 1,723 3,600 2,949 Benndale/Paulding Gas Turbines 4,420

- 4,420

- 3,513

__ -3,379 Total Generating Plant 653,194 652.754 343,256 324,556 Transmission Plant 161,330 148,698 5 1,595 48,04 1 General Plant and Equipment 20:005 18,654 10,876 10,159 Electric Plant Leased to Others 25,147 25,147 15.268 13.682 Eletric Plant in Service 859,736 845,253 420,995 397,438 Construction Work in Process 188,948 84,354 (57)

Total Utility Plant $1.048,684 $929.607 $420.938 s397.434 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, and SMEPA is generally obligated to pay 10% of all operating and capital costs and is entitled to receive 10% of the electricity generated by the plant.

SMEPA paid $22,392,000 and $18,837,000 under the contract in 2002 and 2001, 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 and SICIEPA. SMEPA is obligated to pay 10% of all appropriate costs and assessments, if any. Under the program, 28

SMEP-4 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 NKC s minimum requirement for nuclear power plant licensees of $1.06 billion 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 cornplete decontamination operations. 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 $1.6 million for property damage, decontamination, or premature decommissioning 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 S95 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 United States Department of Energy (DOE), whereby the DOE will furnish disposal service at a cost of one nil1 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 DOEs program for the acceptance and disposal of spent nuclear fuel at a permanent repository. After twenty years of study, the DOE, in February 2002, formally recommended, and President Bush approved, Yucca Mountain, Nevada as the permanent spent fuel repository. DOE will now proceed with the 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 2010. Considerable uncertainty remains regarding the 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 2006, 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 NKC 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, 2002 was below the target value. Because of that deficiency, SMEPA will increase its annual funding to $1,050,000 through 2024 in place of the $800,000 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 DOEs past uranium enrichment operations. The decontamination and decommissioning assessments will last for fifteen years and will be used to set up a hind into which contributions from utilities and the federal government will be placed.

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

29

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 System Energy pending approval by its regulators. At December 3 1,2002, the accumulated depreciation account includes $3,966,000 in depreciation charges related to the lugher rate. Management believes that the unpact, 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):

2002 200 1 National Rural Utilities Cooperative Finance Corporation ("CFC") Certificates:

Membership subscription $6,223 $6,223 Loan and guarantee 22,355 6,693 Other 368 379

$28.946 $13.295 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. SMEPA is required to purchase loan and guarantee certificates in CFC as a condition of borrowing loan funds for the combustion turbine project (see Note 14).

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

Gross Gross Amortized Unrealized Unrealized Fair December 3 1,2002 cost Gains Losses Value Decommissioning Trust:

Equity mutual fbnds $8,301 $0 $1,787 $6,5 14 Fixed income mutual finds -3,352 155

__ 0- -3,507

$11.653 u $1.787$10.021 Securities to be Held to Maturity:

Obligations of states and political subdivisions $4.626 &LLi $9: $5.039 December 3 1,2001 DecommissioningTrust:

Equity mutual hnds $6,714 $390 $20 $7,084 Fixed income mutual fhds -

3:407 11

- 1

- 3,417

$10.121 $401 $26 $10,501 Securities to be Held to Maturity:

Obligations of states and political subdivisions - $12 $4.600 30

The amortized cost and approximate fair value of investment securities to be held to maturity at December 3 1, 2002, by contractual maturity, were as follows (in thousands):

Amortized Fair cost Value Due after five years through ten years $4.626 s.LQ32 Actual maturities may differ from nominal maturities because of the borrowers right to call or prepay obligations.

Sales of decommissioning trust assets by the trustee aggregated $1,056,000 in 2002 and $600,000 in 2001, resulting in a realized gain of $880 in 2002 and no realized gains in 2001 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):

2002 2001 Unamortized costs of abandoned plant $54,099 $57,268 Unamortized penalties on repriced debt 22,814 24,750 Unamortized debt discount and issuance cost 655 733 Nuclear outage maintenance cost 1,570 845 Deferred DOE assessments (see Note 4) 878 1,036 Other 3,881

- 1,580

$83.897 $86.2 12 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

$3,170,000 and $3,089,000 in 2002 and 2001, 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 2002 and 2001.

On January 2, 2003, SMEPA repriced $44,300,000 of debt and paid a penalty of $2,200,000. The interest rate on the debt for the remainihg life will be 3.76% in lieu of 7.68%. The penalty will be amortized similar to other repricings.

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

2002 2001 Cumulative margins $92,723 $90,167 Less: Retirements to date 5,854

___ -5,854

$86.869 $84,3 13 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 10.3% and 11.7% of the total assets at December 31, 2002 and 200 1, respectively.

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NOTE 9 - SHORT-TERM BORROWINGS SMEPA bas a $25,000,000 short-term line of credit available with CFC that is subject to renewal in September 2003 and a $10,000,000 short-term line of credit with a bank that expires May 1, 2003.

SMEPA had $8,000,000 and $2,000,000 of borrowings against the bank line of credit at December 3 1, 2002 and 2001, at an interest rate of 3.75% and 4.25 %, respectively.

NOTE 10 - LONG-TERM DEBT Long-tern debt consisted of the following (in thousands):

2002 2001 Mortgage notes payable to Federal Financing Bank ("FFB")

at interest rates varying from 4.935% to 10.705%, due in quarterly installments through 2030 $432,396 $448,674 CFC advances at interest rates ranging fkom 4.10% to 6.45%

to fmance construction of new turbines 171,435 45,373 2% RUS mortgage notes payable, due in quarterly installments through 2009 4,832 6,996 5% RUS mortgage notes payable, due in quarterly installments through 20 15 10,979 12,018 5%, 5.375%, 5.125% and 5.75% RUS mortgage notes payable, due in monthly installments through 2020 16,222 16,714 Mortgage notes payable to CoBank at 4.370% at December 3 1,2002 and 6.12% at December 3 1,2001 due in quarterly installments through 20 19 1,946 2,043 Mortgage notes payable to CFC bearing interest at variable rates (3.40% at December 3 1,2002 and 4.70% at December 3 1,2001) due in quarterly installments through 2022 4,324 4,434 Lamar County, Mississippi, Pollution Control Bonds:

1978 A Series, 6.125%, due semi-annually through 2008 955 1,095 1993 S Series, 4.35% to 4.95%, due annually through 2007 11,751 13,804 Claiborne County, Mississippi, Pollution Control Bonds:

1985 G Series, variable interest rates (1.30% to 1.40%

at December 3 1,2002), due annually through 2015 37,145 38,545

$691,985 $589,696 Less current maturities 32,736 30,591

$659.249-SMEPA has applied to the RUS for a $275 million loan guarantee that would provide permanent financing for its combustion turbine project (See Note 14). RUS has requested additional information from SMEPA. SMEPA expects RUS to approve the application sometime in 2003. In the meantime, CFC has agreed to provide $275 million interim financing for the project. The CFC loan is a four-year loan which can be converted to a 20 year mortgage loan should the RUS ultimately determine not to approve SMEPA's application for the loan guarantee. RUS has granted CFC a priority claim to certain debt service payments so long as the CFC four-year loan is outstanding. It is SMEPA's plan to borrow permanent financing from the FFB and repay the CFC loan once RUS has approved the loan guarantee.

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

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At December 3 1, 2002 SMEPA owed $150 million and $2 1.4 million on the two CFC loans related to the combustion turbine project and $8 million on the bank line of credit.

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):

2003 $32,736 2004 $36,502 2005 $38,094 2006 $40,589 2007 $42,680 SMEPA paid approximately $35,905,000 and $42,099,000 in 2002 and 2001, respectively, in interest on long-term debt.

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, 2002, the remaining unadvanced commitment was $23,857,000.

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, 2002 and 2001.

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

2002 2001 Deferred revenue (fuel cost adjustment) $4,286 $6,783 Postretirement benefit obligation (other than pensions) 3,298 3,189 Deferred DOE assessments (see Note 4) 52 1 682 Miscellaneous 272

- 196

$IL1Zz$10.850 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 $4,286,000 shown above was collected fiom Members in 2002 but will be recognized as revenue in 2003. During 2001, $6,783,000 was collected from Members and recognized as revenue in 2002.

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 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.

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

Long-term debt: The fair values of SMEPAs long-term debt are estimated using discounted cash flow analyses 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 approximate fair values of long-term debt, including current maturities, are as follows (in thousands):

2002 200 1 Carrying Estimated Carrying Estimated Amount Fair Value Value Fair Value FFB $432,396 $500,844 $448,674 $477,520 RUS 32,033 29,205 35,728 32,325 Pollution Control Bonds 49,85 1 50,910 53,444 54,095 Other 177,705 177,705 51,850 5 1,850

$691.985$758.664$589.696$615.790 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, 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 (in thousands):

2002 2001 Service cost of benefits earned $52 $94 Interest cost on accumulated benefit obligation 127 134 Amortization of actuarial gain 0 0 Total current year expense $104 a22 Payments relating to postretirement benefits other than pensions were $104,000 in 2002 and $84,000 in 200 1.

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

2002 2001 Retirees and dependents $983 $913 Fully eligible active plan participants 45 45 Active participants not yet eligible 1,026 91 1 Unrecognized gain -1,244 -

1,320

$3.298 $3.189 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 9.0 and 7.5 percent in 2002 and 2001, respectively, declining to 5.5 percent by the year 2009. For measurement purposes, an 8.5 percent annual rate of increase in cost of covered health care benefits was assumed for 2003.

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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 SMEPAs 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 $1,220,000 in pension expense for the defmed benefit pension plan in 2002 and $1,095,000 in 2001. 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 $42 1,000 and $384,000 for 2002 and 200 1, 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 $1,080,000 and $861,000, respectively, for the fiscal years ended December 3 1, 2002 and 200 1.

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 wilI be recovered through normal operating revenue.

In its normal operations, SMEPA consumes 900,000 tons or more of coal each year. SMEPAs 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.

During 2002 SMEPA settled an arbitration action with its rail shipper regarding the appropriate rate per ton of coal shipped by rail fiom eastern Kentucky. The settlement rate is good through December 2003 at which time the rail shipper may seek a revised rate.

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, 2002, such commitments were not material.

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 on 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 SMEPAs use 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 sy&em improvements, internal costs and so forth. Four of the turbines are scheduled to be placed in service by May 1,2003 with one 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 o f 481 megawatts. These natural gas fired simple cycle 35

generators will be used to augment SMEPAs peaking resources and power that was previously purchased from other suppliers. SMEPA is using both internal funds and loan funds to pay for the project and total investment in the project was $159.3 and $51.4 million at December 31, 2002 and 200 1, respectively. SMEPA expects to invest approximately $6 1 million in the project in 2003.

Prior to 2000, the Mississippi Public Service Commission (MPSC) had conducted hearings on the possibility of restructuring the electric utility industry in Mississippi. On May 2, 2000, the MPSC indicated that starting retail competition at this 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. Neither SMEPA nor its Members are currently subject to MPSC rate regulation but were participating in the hearings to protect the long-term interests of retail customers. Management is unable to determine what effect, if any, changes related to retail competition in Mississippi will have on SMEPAs 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 SMEPAs financial statements. SMEPA has over $161 million invested in transmission assets as of December 3 1,2002.

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 SMEPAs financial statements.

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GNRO-2003/00026, South Mississippi Electric Power Association (Smep) Annual Report for 2002

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GNRO-2003/00026, South Mississippi Electric Power Association (Smep) Annual Report for 2002

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