ML19332D348

Forwards Audited Financial Statements for Cajun Electric Power Cooperative,Inc

ML19332D348
Person / Time
Site:	River Bend
Issue date:	11/22/1989
From:	Booker J GULF STATES UTILITIES CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
RBG-31793, NUDOCS 8912010048
Download: ML19332D348 (35)

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i GULF '- STATES UTELETEES COMPANY

. fuvEH ElfsD hl AflON POST OHict UOX 220 . 67. fRANCIbviLLE, t.OU@ANA 70775 ARLACQu($O4 $35 (094 34$ %$$

i November 22, 1989 RBG-31793 File Code'G9.5 i

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-1 U.S. -Nuclear Regulatory Commission -

Document Control Desk Washington, D.C. 20555 Gentlemen:

River: Bend Station Unit 1 Docket No '50-458

' Secondary Financial Protection

'In a letter. dated. August "28, 1989, (RBG-31424). Gulf States Utilities Company (GSU)-and Cajun' Electric Power' Cooperative, Inc. (Cajun) provided Certified Cash ' Flows as required by 10CFR140.21-and GSU's Annual Report. The Cajun Annual. Financial Report was to be provided upon availability. 1

. Sincez an annual financial report will not be compiled for 1988, L attached is en independent auditor's report of Cajun Electric Power Cooperative, Inc. to complete that obligation.

Should' you have any questions in this matter, please contact Mr.  ;

'L. L. Dietrich of my staff at (504) 381-4866. .

Sincerely, N .. _ _

J. E. Booker i Manager, River Bend Oversight River Bend Nuclear Group JEB/LAE/LLD/WJS/pg cc: U. S. Nuclear Regulatory Conmission i 611 Ryan Plaza Drive, Suite 1000 Arlington, TX 76011 NRC Resident Inspector i P. O. Box 1051 l St. Francisville, LA 70776 hgk20ggggy$$h e I

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. Audited Financial Statements

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I December 31, 1988 1

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I' AUDITED FINANCIAL STATEMENTS CAJUN ELECTRIC POWER COOPERATIVE,INC.

DECEMBER 31,1988: j

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= REPORT OF INDEPEN DENT AUDITORS ... ... ... . ............... ........................................ .............. 1 BALANCESHEETS....................................................................................................................................3 5

STATEMENTS OF_ REVENUE AN D EXPEN SES................................................................................. -}

J STATEMENTS OF CHANGES IN EQUlTY AND MARGIN (DEFICIT) ........................................ 6 STATE M E NTS O F CAS H FLOWS ......... ........ .. ......... .. .......... ........................... ...................... ................. 7 '

' NOTES TO~ FINANCIAL. STATEMENTS:

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NOTE A COMMITMENTS AND CONTINGENCIES ....................................................... 8 ' t NOTE B - SIGNIFICANT ACCOUNTING POLICIES .........................................................12 N OTE C . UTI LITY PLANT ......... ................. .... ......... ..... ........ ......................... .......................... 14 NOTE D e INVESTMENTS IN ASSOCIATED ORGANIZATIONS .................................16 I N OTE E ' DEFERRED CH ARG ES ..... ... .................................................................................. 17 NOTE F - FEDERALLY GUARANTEED LONG. TERM DEBT SUBJECTTO ACCELERATION, LONG. TERM DEBT SUBJECT TO ACCELERATION -

AN D LO N G .TER M DEBT..... ........ .................. ... .................. ........................ ........... 17

(: NOTE G - NOTES PAYABLE AND AMOUNTS DUE GUARANTOR.......................... 22 >

N OTE H - SH ORT TERM INVESTMENTS............................................................................ 23 -

.f- N OTE I - IN COME TAXES ....... .............................. . .............. ....................... ............................ 23 NOTE J - EMPLOYEE BENEFIT PLAN ................................................................................ 25 -

i NOTE K - RELATED PARTY TRAN SACTION S ................................................................. 25 l

. I;: NOTE L - SPENT NUCLEAR FUEL AND DECOMMISSIONING COSTS................... 25 N OTE M - NU CI. EAR IN SURAN CE ........................................................................................ 26 N OTE N - EXTRAORDIN ARY ITEM ................... .................................. ........................... 27

~g-NOTE O - GULF STATES UTILITIES COMPANY.............................................................. 28 NOTE P - RATES AND REGULAT10N ................................................................................. 29 L

NOTE O - SUBSEOUENT EVENTS ............ .................... ......................... .................. 30 n

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i EE Ernst&Whinney suae ism.eremier To er I Baton Rouge, Louisiana 70801 504/383-0166 REPORT GF INDEPENDENT AUDITORS Board of Directors '

I Cajun Electric Power Cooperative,Inc.

Baton Rouge, Louisiana We have audited the accom ying balance sheets of Ca'un Electric Power Cooperative, Inc. (the Cooperative) as of ecember 31,1988 and 198 , and the related statements of I revenue and expenses, changes in equity and margin (deficit), and cash flows for the years then - ended. These financial statements are the responsibility of the Cooperative's man gement. Our responsibility is to express an opinion on these financial statements base on our audits.

We conducted our audits in accordance with generally accepted auditin standards. Those standards require that we plan and perform the audit to obtain reasona le assurance about whether the financial statements are free of material misstatement. An audit includes l' 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 bv. management, as well as evaluating the overall financial statement -

presentation. We believe that our audits provide a reasonable basis for our opinion.

L Our report, dated March 4,1988, on the 1987 financial statements was qualified in that the l Cooperative had not classified its long term debt in default as a current liability and did not expense approximately $25 million related to excess coal costs. The rative has restated its 1987 financial statements to properly classify such long term debt i default as a "I

u current liability and, accordingly, our present opinion on the 1987 financial statement is no longer qualified with respect to such c assification.

In our opinion, except for the effects on the 1987 financial statements of the matter discussed in the preceding paragraph, the financial statements referred to above present '

fairly,in all material respects, the financial position of Cajun Electric Power Coo >erative, l

L am Inc. at December 31,1988 and 1987, and the results of its operations and its cash lows for Lg y

the years then ended in conformity with generally accepted accounting principles, L -

The accompanyi,ng financial statements have been prepared assuming the Cooperative will continue as a gomg concern. As described in Note A, the Cooperative has determined that L due to sresent economic and market conditions and costs related to its investment in the River Eend nuclear generating facility,it will not be able to increase its wholesale power rates to a level necessary to recover the recorded costs of its utility plant nor to liquidate its I liabilities in the ordinary course of business. The Cooperative sustained net deficits for the years ended December 31,1988 and 1987, and was unable to meet certain mortgage covenants and to pay all ofits scheduled interest payments on certain ofits notes when due; 1

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l- these events of default placed substantially ell of the Cooperative's long term indebtedness in default under cross default provisions contained m the debt instruments. The Cooperative is neg,otiating with the United States Department of riculture Rural Electrification Admmistrauon (REA ,its major creditor as guarantor of s tantiall ' all of its long term debt, and with other si, nificant creditors, to substantially restructure i s debt i agreements to defer and reduce its c ebt service requirements to a level which will provide for recovery of its recorded assets and liquidation of its liabilities in the ordinary course of L business. The Cooperative is presently unable to determine the outcome of the restructuring. The. financial statements do not include any adjustments relating to the and classification of recorded asset amounts or the amounts and recoverability classification o f liabilities that might be necessary in order for the Coo 3erative as a goin neern Realization of its assets and ent of its liebilities are dependent l upon the rative's ability to successfully obta e necessary testructuring of its debt agreements and the improvement ofits operating results.

l As discussed in Notes A and Q, Citibank, N.A. has filed suit in a United States district -

court in New York against the Cooperative seeking payment of approximately $206 million p on certain. demanc notes, interest and other charges owed by the Cooperative.

Management is unable to determine the outcome of present negotiations with Citibank, l

N.A.

As discussed in Notes A and O to the financial statements, the ability of Gulf States Utilities Company (GSU) to continue making payments to the Cooperative under an yI l

agreement for the output of the nuclear generating facility is uncertain. Also, GSU has asserted significant claims against the Cooperative for certain transmission charges. The Coo erative disputes these claims and is involved in proceedings with the Federal Energy L Re latory Commission to resolve this matter. Further, as discussed in Notes A and Q, the

ul imate outcome of the bankrupt roceedings of one of the Cooperative's members as to L the collection of amounts receiva from the member of approximately $23 million and

! the r 'ection of the existing contract for the supply of power by such member, which is L being i ated, are uncertam; the ultimate effects of regulation by the Louisiana Public Service mmission and the ultimate resolution of certam liti ation cannot be presently determined. Failure of the Cooperative to satisfactori resolv these uncertainties could have a material effect on its financial position and cou further impair the Cooperative's I ability to continue as a going concern.

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as to the March 10,1989, of third paragraph excekote O, the date of which is March 20,1989.

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'I i I . December 31  ;

1988 -1987 5

EQUITY AND LIABILITIES

-E EQUITY AND MARGIN (DEFICIT) 5 1 3- 1

!5:  : Memberships 36,533-36,533  ;

Patronage capital credits. (66,402)

Una!!ocated deficit (535,333) 406. 406.

Donated capital (29.462)

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(498.393)

I . IANG. TERM DEBT

. less scheduled maturities.

11,567 20,965 l . CURRENT LIABILITIES Federally guaranteed long term debt subject 2,875,144 .I 2,645,314.

to acceleration 77,904 .91,217 l Long term debt subject to acceleration 8 - Notes payable and amounts due guare.ntor 312,527 263 2,105-I

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Accounts payable 78,742 -

113,401 I ~ Accrued interest and other expenses Scheduled maturities of long term debt 11.066-3.160.475 3.101 3.050.309' 5,466 8,790 DEFERRED CREDITS.

COMMITMENTS AND CONTINGENCIES l .

$2,679,115 $3,050,602 I

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See notes to financial statements. ,

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STATEMENTS OF REVENUE AND EXPENSES-~

l CAJUN ELECTRIC POWER COOPERATIVE,INC.

II (In Thousands)

Year Ended December 31 1987 I< 1088 l ,

OPERATING REVENUE H Sales of electric energy:. $ 293,538. 1 5 269,779

. Members . 177;89 217,696:

Nonmembers . 996 643 L

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Other 448.164 511.877 OPERATING EXPENSES R Power production: 121,378.  ;

I Fuel:

148,688 64,029 d 63,736 '

Operations and maintenance 10,181 I Purchased power Other power supply expenses Transmission 4,356 645 32,126 14,522 758 24,934:

15,472-Administrative and general 89,692l 78,253

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Depreciation and amortization Taxes, other than income 2.353 2.460-

328.904-344.679 103,485 182,973 OPERATING MARGIN '

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OTHER INCOME AND EXPENSES

. Interest, rents'and leases Other income-7,342 1,061 5,626 2,893 Allowance for funds used during 1,218 -;

1,138

' construction . .

(12.945) 1 Amortization of deferred charges . (10.263)

(722) (3.208) ,

. MARGIN' BEFOREINTEREST AND OTHER 102,763 179,765 -

l DEBT EXPENSE AND EXTRAORDINARY ITEM 250.856 ' 246.167 _

INTEREST AND OTHER DEBT EXPENSE l

(148,093) (66,402)

DEFICIT BEFORE EXTRAORDINARY ITEM (320.838) p EXTRAORDINARY ITEM

$(468,931) $(66,402) fl NET DEFICIT

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STATEMENTS OF CHANGES IN EQUITY AND MARGIN (DEFICIT)

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l CAJUN ELECTRIC POWER COOPERATIVE,INC.

(In Thousands) l i

Years Ended December 31,1988 and 1987 -

l Patronage Member- Ca ita. Unallocated Donated -l "I-; -shins Cr dits Deficit ranital Total (

BALANCE JANUARY 1,1987 .$1 . $36,533 $406. $ 36,940  !

(66.402) l Net deficit for the year $ (66.402)

BALANCE DECEMBER 31,1987 1 36,533 (66,402) 406 (29,462)-  !

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Net deficit for the year (468.931). (468.931)

,. BALANCE DECEMBER 31,1988 g $36.533 $(535,333) g . $(498.393) v

'See notes to financial statements, u

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P l, STATEMENTS OF CASH FLOWS :

CAJUN ELECTRIC POWER COOPERATIVE,INC. [

(In Thousands) .

Year Ended December 31 1988 1987 t

1 O?EA.ATING ACTIVITIES

. 14et deficit $(468,931) $(66,402)

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Adjustments to reconcile net income to net s c cash provided by operating activities:

71,455 84,050 s Depreciation 19,719 15,456

' E -- Amortization of nuclear fuel F Amortization of deferred charges and credits net 15,845 10,195 t F

(Increase)in accounts receivable (34,386)'

(3,963)

LI and other accrued revenue (Increase),in fuel and supplies (3,216) inventones (5,145)

,-l (Increase)) decrease in prepayments 659 (1,842)

(166 (1,109)  ;

,s (Decrease in accounts payable

. Increase in accrued interest 40,186 45,885 and other expenses

, 8;: Extraordinary item less current payments 298.305 i

NET CASH PROVIDED (USED) BY (33.712) 50.307 OPERATING ACTIVITIES F -INVESTING ACTIVITIES (24,042) (25,094)

,3 Increase)in utility plant 4,758 (6,503) 3 decrease in investments i Increase)in ecrease restricted funds held by trustee 27,618 265 (6,724) (4,524)

. .m- (Increase)in deferred charges 4 300 Incre=Se in deferred credits 5 753 E

NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 7.363 (31.556)

FINANCING ACTIVITIES I Proceeds from issuance of long term debt 1,045,350 1,000 Proceeds from issuance of demand notes payable and payments by guarantor 326,887 i

Re>ayment oflong term debt, federally guaranteed i- fong term debt subject to acceleration and long-term debt subject to acceleration (1.309.813) (23.269)

E NET CASH PROVIDED (USED) BY 62.424 (22.269) 4 5 FINANCING ACTIVITIES a: INCREASE (DECREASE)IN CASH AND CASH 36,075 (3,518)

' 3: EQUIVALENTS Cash and cash equivalents at beginning of year 52.071 55.589 CASH AND CASH EQUIVALESTS AT S 88,146 $ 52,071 END OF YEAR g

See notes to financial statements.

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l NOTES TOL FINANCIAL STATEMENTS u o

4 CAJUN ELECTRIC POWER COOPERATIVE, INC.-

I December 31, 1988 j l

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l NOTE A COMMITMENTS AND CONTINGENCIES During 1988, Cajun Electric Power Cooperative, Inc.- (the g ' Workout / Debt Restructure:

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Cooperative) was unable to make full payment on all debt service obligations as they becam

and, as of December 31, 1988, cumulative arrearages totalled $149.8 million. In addition, the l f

Cooperative did not pay certain demand notes of approximately $200 million held by an l

(.- unsecured creditor.(see' Notes G and Q). Through cross default provisions of various debt

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agreements, an event of default exists on substantially all of the Cooperative's debt.

L December 31,.1988, no creditors, other than the unsecured creditor mentioned above, have accelerated the Cooperative's debt (see Notes F and Q).

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As'of December 31,1988, the Cooperative was operating under payment restrictions set forth by fg the United States Department of Justice (DOJ), representing the U.S. Department of Agriculture, t

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Rural Electrification ' Administration (REA). The DOJ stated in a letter dated September 16, a

L 1988,that the DOJ, on behalf of the REA,would not bring suit against the ' Cooperative's offic directors, and manager with respect to funds used to pay reasonable operating expenses and J' certain other costs necessary for the continued reliable operation of the Cooperative (the 3713 [

l3 Waiver). The 3713 Walver relates to Section 3713 of Title 31 of the U.S. Code and, in the pl

! Cooperative's case, is effective for a period of ninety days; however, the DOJ reserved the rig '

revoke or modify any provision of its action on seven days written notice .to the Cooperative. The -

n first 3713 Waiver was issued by the DOJ on December 14, 1987, and the DOJ provided the i '

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. Cooperative a 3713 Waiver approximately every 90 days daring 1988. On December 8,19 L Cooperative received a 3713 Waiver effective for the first quarter of 1989 (see Note Q). In event of the DOJ's revocation of the 3713 Waiver, the Cooperative may seek protection from its i

creditors under Chapter 11 of the Bankruptcy Code. The Cooperative believed it was in

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compliance with the provisions of the 3713 Waiver during 1988, and has engaged special lE - to assist in workout / debt restructure negotiations and bankruptcy matters, f

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Notes to Financial Statements . Catinued

. Cajun Electric Pcwer Cooperative,Inc.  ;

NOTE A Continued I '

The Cooperative anticipates that the DOJ will continue to provide a 3713 Waiver each ninety days i

as it has done throughout the past year. The 3713 Waiver has allowed the Cooperative to pay ly5 - certain indebtedness related to River Bend Unit- 1 (River Bend) and the Cooperative's  !

headquarters building but it does not provide protection from legal action by the DOJ with respect to payments made by the Cooperative on certain unsecured debt; accordingly, during 1988 the Cooperative, acting on the advice of counsel, ceased making payments with respect to debt senice  ;

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and fees on pollution control revenue bonds (see Notes G and Q).

On July 10,1987, the Cooperative filed a workout / debt restructure plan with the REA. The jg'

Cooperative's plan involves several proposed actions by the Cooperative, its suppliers and creditors, and its Members and is designed to achieve reliable, competitively priced electricity for l

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'W rural Louisiana. The workout / debt restructure plan proposed by the Cooperative included the following major provisions: a)a reduction of wholesale rates charged to Members and the indexing of future rate increases; b) the restructuring of debt senice obligations to coincide with fl_ ,

projected cash flows; c) access to low interest rate substitute loans (or REA equivalent relief) to ll l

reduce future interest costs; d) continued negotiations with suppliers to reduce future operating costs; e) the selling of existing assets, when and if nppropriate; f) the return of any excess cash to the REA and g) the implementation of appropriate accounting changes.

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During 1988, the Cooperative met on several occasions with all major creditors to negotiate a debt restructure and efforts were continuing as of December 31,1988. At the request of the REA, on November 15, 1988, the Cooperative delivered to the REA a comprehensive draft term sheet ll l

setting forth more detail and certain changes to the plan filed on July 10, 1987. The REA indicated it would be unable to respond by year-end to the comprehensive term sheet so, on December 2,1988, the Cooperative proposed an interim Implementation- Agreement to be l

executed by the REA, Jackson Bank for Cooperatives (JBC) and the Cooperative. 'Ihe purpose of the Implementation Agreement was to set forth certain understandings and agreements regarding

. the basis upon which the workout / debt restructure of the Cooperative would proceed. The REA and JBC declined to execute the Implementation Agreement. On December 22,1988, the f

Cooperative submitted a proposed Fuel Cost Phase In Program to the REA in an attempt to remove any uncertainty about the Cooperative's ability to maintain stable rates for 1989. As of

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year end, none of these proposals had been approved. As of December 31,1988, these creditors had not presented a counterproposal to the plans proposed by the Cooperative nor had they 1

ll instituted legal action against the Cooperative and all parties were continuing to negotiate.

During 1988, the REA approved a special credit to the fuel cost adjustment which allowed a rate lI

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Notes to Fifancial St'ate mentWContiimed Cat:n Electric Power Cooperative,1:c.

NOTE A . Co; tin::ed 1

, teduction for the Cooperative's Members and also approved new rate schedules promoting special 1

incentives and economic development (see Note P).

The Cooperative has based its workout / debt restructure plan negotiations on the belief that all g parties (secured and unsecured creditors, suppliers, regulators, the Cooperative und its Members) are better served if the Cooperative remains a reliable producer of competitively priced wholesale I electricity for the long term. The Cooperative cannot predict the outcome of the workout / debt restructure negotiations currently underway (rce Note O).

Washington St. Tammany Electric Coopeu'tve, Inc.: On July 17,1987, one of the Cooperative's Members, Washington St.Tammany Elet.s. Cooperative, Inc. (WST), sought protection from its

c. 'ditors under Chapter 11 of the U.S. Bankruptcy Code. At the time of filing, WST owed the l

Cooperative $6.7 million in pre petition power bills. WST is continuing payments for power, but at amounts below the billed rate. The Cooperative has deemed it prudent to continue to supply g

power to WST.

On March 8,1988, WST filed a motion in bankruptcy court to reject the existing contract with the Cooperative for the supply of power. Post petition unpaid power bills as of December 31,1988 (including interest) amounted to $16.3 million. The total amount receivable from WST (including interest) aggregated $23 million at December 31,1988, of which approximately $21.6 million is included in other receivables. The Cooperative is the single largest unsecured creditor in the l

WST bankruptcy proceeding. Recovery of amounts owed to the Cooperative for power supplied

'g to WST cannot be predictW with certainty (see Note O). .

Gulf States Utilities Company: As discussed more fully in Note O, Gulf States Utilities Company I (GSU) will owe the Coenerative approximately $171 million over the remaining two and one half years of the Sell back Agreement which is related to the Joint Ownership Participation and l Operating Agreement for River Bend. This Sell back Agreement has the effect of mitigating the cost and rate impact of the Cooperative's $1.5 billion investment for its 30% share of River Bend.

Should these revenues not be received from GSU in the amounts and in accordance with the l

schedule contractually agreed to, the Cooperative could be further impaired in its ability to meet g its obligations (see Note O).

The Coonrative and GSU are parties to a Federal Energy Regulatory Commission (FERC)

I proceeding regarding certain transmission service charges. At December 31,1988, GSU alleged that the Cooperative had underpaid transmission charges in the amount of approximately $43.6 I

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Notes to FWancial Statements . Continued ~

Caj:n Electric Power Cooperative,I c.

I NO'IE A. Conti;ted million. The Cooperative disputes the GSU assenion. Proceedings at the FERC are continuing. ]'

The timing and outcome of this matter cannot be predicted with certainty.

,I Coal and Transportation Commitments: Purchases under the terms of contracts for the

l acquisition of coal and related transportation caracts during 1988 and 1987 were approximately 5120 million and $114 million, respectively. Certain contract purchases are subject to variors price escalators and deflators, to minimum quantity takes and to periodic price reopeners at then g current market prices. Management is of the opinion that these coal contracts will properly meet 1 anticipated fuel needs. De transportation contracts begin to expire in 1999 while the coal l i

I contract; are for the usefullives of the coal units (see Note C).

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Litigation: In August 1988, a federal district court jury in Baton Rouge ruled the Cooperative j

[h must pay US.3 million in compensatory damages plus compounded interest at 129'c in litigation related to abandoned lignite projects. In November 1988, the Cooperative petitioned the court 4l requesting the jury verdict be set aside and a new trial be granted. As of December 31,1988, the

judge had not affirmed the jury's decision. The Cooperative is also involved in an arbitration

hearing with a claim concerning construction issues associated with its Big Cajun II, Units 1 and 2 jg coal fired generating facility. The results of these hearings and lawsuits cannot be predicted with certainty and the final judgments could be significant and material to the Cooperative (see Notes

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Gand0).

i Iman Commitments: As of December 31, 1988, the Cooperative had unadvanced loan commitments from the Federal Financing Bank (FFB)(subject to the control and guarantee of the ,

l REA) totalling approximately 590 million. The Cooperative does not expect to be able to access these commitments until the wo.tkout/ debt restructure negotiations have been completed. At l December 31,1988, the Cooperative had other loan commitments (the FFB set asides) subject to

g the comrol and guarantee of the REA amounting to approximately $106 million related to I5 previously outstanding pollution control revenue bonds and the Citibank, N.A. demand notes.

During 1988, the REA denied a requisition by the Cooperative for set a'ide s funds and therefore,

!l the ability of the Cooperative to draw down future funds under the FFB set asides is uncertain.

The Cooperative's lines of credit with National Rural Utilities Cooperative Finance Corporation

'g (CFC) and JBC expired in February and March of 1988, respectively. De JBC declined to renew the Cooperative's line of credit until the workout negotiations are completed, while CFC agreed to consider the extension of a line of credit provided certain conditions were met. At December 31,1988, the Cooperative had no lines of c edit available and,because of the above uncertainties, j

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l Notes to Firancial Statemer.ts . Ccc.tinred Caj:n Electric Power Cooperative,Inc.

l NOTE A Continued the Cooperative has established cash on hand above levels normally required for day to-day operations (see Note F).

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Emironmental Closure Fund: The Cooperative is required by the State of Louisiana Department g of Emironmental Quality (DEO) to provide assurance thst it has the ability to fund the actions l which will be necessary to secure and refurbish its Big Cajun Il fly ash pond areas which, as 5 disposal sites, are subject to DEO review and supervision. Prior to 1987, the Cooperative had provided a letter of financial assurance to the DEO stating that the Cooperative for the year in l question had a net worth of at least $10 million. As a result of the net deficits for 1987 and 198 and their impact upon the equity position of the Cooperative, this form of assurance can no longer be provided. The total estimated liability for funding the solid waste disposal site rehabilitation l currently estimated to be approximately $4 million (1987 dollars), of which GSU is responsible for approximately 5500,000. The actual payments for site rehabilitation are not scheduled to occur g until the end of the estimated usefullife of the Big Cajun 11 coal fired facility (see Note Q).

NOTE B . SIGNIFICANT ACCOUNTING POLIClES

,h General: De Cooperative is a rural electric generation and transmission cooperative owned by 13 distribution cooperatives (Members) which provide electricity to approximately 300,000 metered customers representing over 1,000,000 people residing throughout 80% of the land area of l Louisiana. The Cooperative and its 13 Members have entered into wholesale power contracts which require the Members to purchase all of their electric energy requirements from the g Cooperative through the year 2021. The Cooperative is subject to certain rules and regulation promulgated for rural electric borrowers by the REA.

System of Accounts: The Cooperative maintains its accounting records in accordance with the FERC's chart of accounts as modified and adopted by the REA.

l Electric Plant in Service: Electric plant in service is stated on the basis of cost. Depreciation is computed using the straight line method over the expected usefullives of the related componen assets. De cost of units of property replaced or retired, including costs of removal net of any g salvage value, is charged to accumulated depreciation.

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Notes to Fi:ancial Statements . Conti ved CWra Electric Power Cooperative,1:c. j I NOTE B .Co:tinued f 1

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Nuclear Fuel: The cost of nuclear fuci, including interest on borrowed funds and allowance for 4

funds used during construction (AFUDC),is being amortized to fuel expense on the basis of the actual number of units of thermal energy produced, multiplied by a unit cost which reflects the j total thermal units expected to be produced over the life of the fuel (see Note L). I I

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Construction in Progress: Construction in progress is stated on the basis of cost, which includes interest on borrowed funds and AFUDC, adjusted for costs allocable to joint panicipation g

agreements.

l E Investments: The term!, of financing arrangements with the CFC and the JBC require investment i in capital term cenificates and Class *C" stock, respectively. These investments are carried at cost in the accompanying financial statements together with undistributed patronage capital credits ,

from these organizations (see Note A). The Cooperative allocates patronage capital credits i ll received from associated organizations to assets and expenses in the same ratio as the interest paid to these organizations is capitalized and expensed (see Note O).  ;

l

'I Fuel and Supplies Inventories: Fuel and supplies inventories are stated on the basis of cost utilizing the weighted average cost method ofinventory valuation.

II I Deferred Charges and Credits: Prior to the discontinuation of SFAS No. 71 (see Note N),

i deferred charges consisted primarily of certain costs associated with an abandoned lignite project, the costs of development and operation of electrical generating facilities (including costs  !

l associated with common facilities and stockpiling fuel inventory) prior to commercial operation )

i status and/or thereafter, but before the facilities achieved full capacity and certain costs

,g associated with an amendment to the River Bend Sell back Agreement (see Note O). These costs, with the exception of costs associated with stockpiling fuel inventory, were being amortized over l

I I

periods prescribed by the Cooperative's Board of Directors and by the REA which did not exceed 15 years (see Ncse E). Deferred credits at December 31,1988 consisted primarily of insurance I claims and liability for environmental closure funds (see Note A). l I

l Income Taxes: Certain revenue and expense items are recognized in different periods for  !

j' financial reporting and income tax purposes thus creating timing differences. Deferred income taxes are provided on these timing differences which are principally related to depreciation on l

j

! electric plant in service, income and deductions related to the additions to and amortization of  !

deferred charges and credits, and the sale of tax benefits. The Cooperative uses the flow through j method of recognizing investment tax credits.

3 -

J .

Notes to Finanelal St:tements . Crtired )

Caga Electric Power Cooperative,Inc.

g NOTE B . Continued I Patronage Capital Credits: The Cooperative is organized and operates on a not for profit basis. l j

Patronage capital credits represent that portion of the Cooperative's net margins which have been 5 allocated to Member cooperatives. As provided in the Cooperative's bylaws, all amounts received from the furnishing of electric energy in excess of the sum of operating costs and expenses and j I amounts required to offset any current year losses are assigned to Members' patre : age capital credit accounts on a patronage basis or, at the discretion of the Board of Directors, may be offset '

against losses of any prior fiscal year. All other amounts received from operations in excess o l costs and expenses may be used to offset losses incurred during the current or any prior fiscal yea and to the extent not needed therefore, are allocated to Members on a patronage basis. In g accordance with the Cooperative's bylaws, the 1987 and 1988 net deficits have not been allocated i to the Member cooperatives.

Cash Equivalents: The Cooperative considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

i Reclassifications: Certain reclassifications have been made to the 1987 financial statements i

l conform to the 1988 presentation.

I NOTE C . UTILIT)' PLOT I Electric plant in senice at December 31 consisted of the following (in thousands) (see Note N):

Production:

$1,468,357 $1,465,891 Nuclear I Coal Gas Transmission 1,021,972 32,169 85,531 1,080,915 31,781 89,510 12.001 10.621  ;

I General $2,620,030 $2,678.718 (I Net Megawatt Cooperative Ownership Megawatt Rating Fuel Share s ,are Generating Unit l l Nuclear 30 % 281 River Bend 936

'un II, Unit 1 540 Coal 100 % 540 j Bi Coal 100 % 540 1 Bi un II, Unit 2 540 540 Coal 58 % 313 Bi un II, Unit 3 i

105 Natural Gas 100 % 105 Bi un I, Unit 1 I Bi un I, Unit 2 105 Natural Gas 100 % 105 14-

c Notcs t3 Fixancial SMements.Conti ved Caj:a Electric Power Cooperative, Inc.

g i NOTEC Continued l I River Bend and Big Cajun II, Unit 3 are jointly owned by the Cooperative and GSU (see Note O).

I in November 1988, the Cooperative received REA approval to prospectively change the estimated useful life of River Bend from 32 to 40 years effective January 1,1988. Coincident with the change in the depreciation rate from 3.125% to 2.481%, annual depreciation expense will be

I reduced by approximately $9.1 million.

Construction in progress consists of general additions to existing plants and certain costs related l

to recovery cf claims arising out of the construction of Big Cajun II, Units 1 and 2 (see Note O).

The estimated cost to complete these projects at December 31,1988 was approximately $15.8 g l

. million. j i I Nuclear fuel represents the Cooperative's 30% share of River Bend fuel and at December 31

! consisted of the following (in thousands):

iI i,

1988 1987 Nuclear fuelin process 5 51,595 5 41,359 l Nuclear fuelin reactor 63,567 63,541 Spent nuclear fuel 5.257 5.257 120,419 110,157 i 5 1.455 nuclear fuel amortization - (45.441)

$ 74.978 (25.721)

$ 84.436 Net nuclear fuel Nuclear fuel in process represents the accumulated cost, including interest and AFUDC, of fuel

! required for the second reload, the third fuel reload and a portion of the fourth reload. The fuelis

! in varying stages of conversion, enrichment or fabrication. Nuclear fuel in the reactor was initially l loaded in Fioruary 1985 and is being amortized to fuel expense. It will be replaced over three operatint .ycles covering approximately five years. The first operating cycle was completed in late l 1987 and in December 1987, the first replacement of nuclear fuel (totalling approximately one-third of the initial core) was completed. De second replacement of nuclear fuel (totalling fg 1

approximately one third of the initial fuel load) is scheduled to begin in March 1989. Spent l nuclear fuel consists of the original cost of nuclear fuel assemblies, in the proceu of coonrig, transferred from nuclear fuel in the reactor during the first reload. ,

"l On March 18,1988, the Cooperative and Sam Rayburn G&T Cooperative, Inc. (SRG&T) entered into a joint ownership participation and operating agreement enabling SRG&T to acquire a 7%

undivided ownership interest in Big Cajun II, Unit 1. The agreement must be approved by the

,g~

REA and must be closed prior to June 1,1990. SRG&T is currently litigating certain issues with l

GSU. De Cooperative cannot predict the timing or the outcome of the SRG&T actions against

!gW GSU and, consequently, csnnot predict whether REA will approve this transaction.

15-g

Notes 87 Financial Ststements . Conti.;oed CWu] Electric Power Cooperative, I:c.

NOTE C.Conti;oed I 1.and relating to an abandoned lignite project has been retained as a possible site for a future

~ generating facility and its cost,59.8 million, is included in electric plant held for future use.

The net change in accumulated depreciation and amortization for the years ended December 31 I was as follows (in thousands):

1988 1987

$71,455 $84,050 a Charged to operating expenses 1,073 1,215 Charged to fuelinventones Extraordinaryitem C 3.267)

S9,261 85,265 I IAss asset disposals ($98) (1.218) 558.663 $84.(M7 i NOTE D . INVESTMENTS IN ASSOCI ATED ORG ANIZATIONS Investments in associated organizations at December 31 consisted of the following (in thousands):

' 1988 1987 g $ 9,528 CFC $ 8,963

' 66,062 67,277 JBC 371 421 Other 577.176

- $75.446 The Cooperative's investment in the JBC is pledged to secure certain borrowings from that organization (see Notes A and F).

J I

,I iI LI I

. u.

g .

m--- ~ --r

g r . Notes to naancial Ststements . CSati:ved

' Cada Elecade Power Cooperative, Inc.

g _

6

[ j NOTE E. DEFERRED CHARGES l

' Deferred charges at December 31, net of accumulated amortization, consisted of the following (in l l

thousands)(see Note N): J

< 1988 1987

' $ 73,037  ;

' Abandoned project costs Interest on excess coal 83,760 l 68,668 i

'I Charges for nondelivery of coal 507 2,492 Work orders $

Losses resulting from the decrease in Btu .

I content of stockpiled coal Amendment to the River Bend Sell back Agreement 12,561 10,997 j

i l

'Eur Depreciation and interest on common iscilities at Big Cajun 11 allocable to l

Unit 3 9,506 ,

Solid waste closure fund 3,476 3,584 .

Other 6.287 9.997 e I $10,270 $274,602 l LI NOTE F FEDERALLY GUARANTEED LONG TERM DEBT SUBJECT TO ACCELERATION, LONG TERM DEBT SUBJECT TO ACCELERATION AND LONG TERM DEBT ,

Substantially all of the Cooperative's long term debt is guaranteed by the REA which has the mortgage rights of noteholders whose notes have been guaranteed. As of December 31,1988, the l il Cooperative was in a-cars or. scheduled debt service payments, and the REA, as guarantor, had ,

l jg l

paid _on behalf of the Cooperative approximately $124.6 million to the FFB, the Cooperative Utilky Trusts and the JBC. Thus, as of December 31,1988, all guaranteed noteholders were made I

current. However, as a result of the Cooperative's inability to make all payments on long term lg

'W debt when due and, through the cross default provisions of various loan agreements and its mortgage, an event of default exists on substantially all of the Cooperative's long term debt which is therefore subject to acceleration of scheduled maturities by creditors and is hereafter referred t to as federally guaranteed long term debt subject to acceleration and long term debt subject to acceleration. As of December 31,1988, no secured creditor had commenced any material action l related to mortgage rights or remedies against the Cooperative (see Notes A and Q).

l LI i

I 17 y

Notes n Fla:acial statements . Contiived j Caj:3 Doctric Power Cooperative,1:c.

, l NOTE F . Contissed -

j I In accordance with generally accepted accounting principles (GAAP), the Cooperative has ]

reclassified all long term debt subject to acceleration as a current liability (see Notes A and O). )

.g Federally guaranteed long term debt subject to acceleration, long term debt subject to acceleration and long term debt at December 31 consisted of the following (in thousands):

19RR 1987 l Federally numranteed Inne terrn  ;

5 debt subfect to acceIgIgig able to the - '

Guarahteed notes paf% to 10.4%

l FFB, interest at 6.

due in quarterly installments through December 2021.

$1,052,799 , $2,107,444 j

j I Guaranteed notes payable to the' JBC, interest at varying rates -

(7.8% to 9.6% at December 31,

'I' 1988), due in quarterly install-

. ments through December 2016.

551,881 560,050 Polhition Control Revenue Bonds, 4 8 Series 1984, interest at varying  :

rates based on a nationally i iE recogmzed index of comparable

~

'W tax exempt 'A nd issues (see 207,650 i Notes A, G and Q).

able to

!h Guaranteed notes the Cooperative tilit 1,040,634 l

Trusts (see t< low), . y

$2.645,314 $2,875,144 Federally )piaranteed debt su ject long term to acceleration lg 1

3;

~ ~

" I-18-

g ' ; C$a Notes D Finametal Doctric Power Cooperative,Ststesse:ts I;e. - . Costi :ed -

s NOTE F. Continued l 1988 1087 12me term debt subject to peceleration Mortange : notes payable to the i 8 REA interest at 2% to 5%.

due in. quarterly instalhnents I

through June 0016.~- $39,143 $41,258 Mort ge notes payable to the

, f interest at varying rates

~ 8.1% to 8.2% at Decem wr 31, 988), doe in quarterly install- ,

ments through September 1998. 34,711 45,459  ;

Industrial Develo3 ment Revenue

. Bonds, Series 982, interest at ]

two thirds of prime rate 7.04% q

at December 31,198 , d(ue in 9 ,

I annual installments rom 1989 J

through 1997. 4,050 4,500 j 1.ong term debt subject to

- acceleration $77,904 - $91.217 1mng-term debt River Bend construction commitments, interest at 1%

to 3% below prime rate 0 10.50% at December 31, 988), 54,831,000 due m

' January 1989. with the i  ; remainder due in momhlv .

installments - of $600,006 (including interest). $22,633 $24,066 I

i 1. ass scheduled maturities 1 ) 1)

! long-term debt Ull, 0.050 -

Dere are two types of notes payable to the FFB. De first type can have, at the option of the

,g i W Cooperative, short-term maturity periods of 2 to 7 years during the first 7 years an advance is outstanding, unless the Cooperative elects a long term maturity, in which case the maturity date would be 34 years after the end of the calendar year in which the advance was made. Principal l

repayment is generally deferred for 7 years. The second type of note can have, at the option of the

{ Cooperative, recurring short term maturity perieds of 2 years during the term of the note, unless the Cooperative elects a long term maturity, in which case the maturity date would be a maximum of 34 years from the end of the calendar year in which the note was issued. Principal amortization j +19

,, .a- .m__..._ . . . _ . . _ _. .. _ _ . . . _ -

Notes to Financial Statements . Contin:ed CW:n Doctric Power Cooperative, lac. l

,g NOTE F Continued

I on ? secorid type of note is related to the projected commercial operation date of the project as pro 'ed by the REA.

g On February 25,1988, the Cooperative executed final documents on the refinancing of its highest j5 cost FFB debt (average coupon rate of 10.82%) whereby the JBC loaned the Cooperative $1.045 billion at a variable rate which was used to prepay an equal principal amount of FFB loans. The Cooperative issued thirteen notes in an aggregate amount equal to the amount of th

loan from l

_ the JBC, each guaranteed by the REA, to thirteen separate Cooperative Utility Trusts. Each trust issued to the JBC certificates representing the entire beneficial interest in the trust (CBIs). On g

March 24,1988,5500 million of CBIs were sold in tne public capital markets calling for semi- ,

l annual interest payments and annual principal payments with final maturities and mupons as follows:

5 21,896,000 at 8.08% due March 15,1993 5 37,750,000 at 8.93Fc due March 15,1998 ll 5440,354,000 at 9.52% due March 15,2019 On May 16,1988, $200 million of CBis were sold in the public capital markets calling for semi-g annual interest payments and annual principal payments with finai maturities and coupons as I follows:

! $ 8,759,000 at 8.857c due March 15,1993

$ 15,101,000 at 9.65% due March 15,1998 5176,140,000 at 10.125% due March 15,2019 iI

, The proceeds of the public offerings were u,ed to repay the JBC and caused the interest rates to be fixed for the remaining life of the CBis. The remainder of the CBIs at December 31,1988, g

totalling approximately $340.6 million, bear interest on a variable rate basis (averaging 9.53%)

which is determined by the Cooperative and the JBC. It is the intent of the Cooperative that these CBIs will be the subject of a public offering upon improvement of interest rates in the long term

< bond market. The interest rates of the CBIs determine the interest rates of the Cooperative's guaranteed notes payable to the Cooperative Utility Trusts.

!l At December 31,1988, the Cooperative had exclusive right to decide when to sell the remaining

$340.6 million of CBis in the public capital markets; however, the documents allow the JBC to cause a public offering should interest rates move above a benchmark rate.

cg

i Notes to Fi anetal Statements.Celtized l CaC3 Electric Power Cooperative,1:c.

g NO1EF Continued Scheduled maturities of long term debt at December 31,1988 are shown below (in thousands)-

I.oheterm bt 1989 $ 11,066. .

1990 6,694 4.873 1991

$ 22,633

{

Interest and other deli expense incurred on long term debt, federally guaranteed long term debt l j .

! . subject to acceleration, long term debt subject to acceleration, and notes payable and amounts due guarantor for the years ended December 31 consisted of the following (in thousands);

1988 1987 -

i

' 3 Interest charged to operating expense $242,867 7.980

$242,334 3.833 Other debt expense 246.167 Total interest and other debt expense 250.856 g 10,508 10,293 Interest on excess coal notes 3,465 2,855 Nuclear fuel

'I Constraction in progress Total interest deferred or capitalized 13.148 14.299 326

$260.466 i

$2tA004 j Totalinterest incurred Substantially all of the Cooperative's assets are pledged to secure federally guaranteed long term debt subject to acceleration and long term debt subject to acceleration as well as other amounts ll'

! owed the REA as guarantor by means of the Supplemental Mortgage and Security Agreement dated February 24,1988 (the REA Mortgage") between the Cooperative, the REA and the JBC, l-

'l j

Certain office facilities in Baton Rouge are separately pledged to secure Industrial Development Revenue Bonds.

'g i 'Ibe JBC is r,ecured by the REA Mortgage for approximately $34.6 million and $45.5 million as of December 31,1988 and 1987, respectively, and for certain letters of credit supporting potential indemnity payments under a sale leaseback transaction completed in 1983 amounting to approximately $75.3 million. During 1988, the JBC renewed the letters of credit for an additional

l five year period. The JBC also asserts a certain secured interest in stock and patronage capital arising from the Cooperative's borrowing relationships with the JBC. During 1988, the JBC failed ,

to remit approximately $6 million in revolving patronage capital claiming a right of setoff and ig 21

Notes 45 Financi:1 Ststeme:ts . Contin:ed  !

Cadun Electric Ptmer Cooperative, arc, I NOTE F. Cortinued J l

l placed the funds in an interest bearing account controlled by the JBC. The SC asserted that this action was allowed by virtue of its lien on the Cooperative's stock investrr;en And accumulated l equities and by the pledge of the Cooperative. The Cooperative informed the J3C that it did not consent to this action knd demanded that the JBC promptly r:mit the funds being withheld. At fg the time, the Cooperative was not in arrears to the JBC. Later, as a response to the JBC's action, the Cooperative did not remit approximately $3.6 million to the JBC for regularly scheduled principal and interest due in October 1988 on its non. guaranteed debt. The JBC applied $3.6

'g million of the funds being withheld in sstisfaction of the October debt service obligation. At December 31,1988, the JBC still held approximately $2.4 million in funds due the Cooperative (see Note O).

NOTE G - NOTES PAYABLE AND AMOUNTS DL'E GUARANTOR ,

4 Ig Notes payable sind amounts due guarantor at December 31,1988 wnsisted of the following (in  !

thousands):  !

_ 1988 REA promissory demand mort e note $ 43,175 Other amounts payable to the A as guarantor 87,310 lI Citibank, N.A. c emand note 182.012

$312,52 7 interest rates on the demand notes and other amounts due to the guarantor ranged from 6% to 12.5% at December 31,1988.

On February 25,1988, as a condition precedent to the completion of the FFB refinancing, the

!l Cooperative was required by the REA to execute a promissory demand mortgage note for approximately $43.2 million related to payments made by the REA on behalf of the Cooperative to the FFB (see Note F). Other amounts payable to the REA as guarantor at December 31,1988 lg i~ represent interest which the REA paid es guarantor to other lenders on behalf of the Cooperative.

'g 1

W Citibark, N.A. in 1984, provided letters of credit for each of the four pollution control revenue .

bond issues of the Cooperative. On May 10,1988, Citibank, N.A sent default and acceleration

.h notices to the respective bond trustees. By May 16,1988, all four bond issues were called and redeemed at par by the respectiv$ bond trurees. The bond trustees utilized bond reserve funds

,g and requisitioned approximately $200 million against the four letters of credit to pay all principal, interest, and certain fees with respect to the bonds. Draws on the Citibank, N.A. letters of credit jg are evidenced as unsecured demand notes with an interest rate at prime rate plus two percentage  ;

.u.

Notes t3 Fi enclal St:temer.ts . Ccetin:ed t Caj:a Electric Power Cooperative,1:c. i l

NO'IE G Continued

I points. In accordance with the terms and conditions of the letters of credit and reimbursement

g agreements, Citibank, NA demanded payrnent of the notes by the Cooperative and, with respect to one of the notes, the Cooperative,in turn, requisitioned funds from the FFB set asides to pay the demand note. The REA denied the request for funds on the basis that the Cooperative had

[gW failed to make all paymems when due on outstanding loans made or guaranteed by the REA.

Citibank, NA brought suit in 1988 against the Cooperative and the trustees for the pollution >

, control revenue bonds seeking rights to certain bond reserve funds. In November 1988, the +

United States District Court for the Soothern District of New York awarded Citibank, N.A. $18.1 Ll million which was being held by the bond trustees at that time and the Cooperative reduced the jg outstanding balance of the Citibank, N.A. demand notes accordingly. As a consequence of the redemption at par of the pollution control revenue bonds, approximately $5.6 million of  ;

'g unamortized bond issuance costs were expensed by the Cooperative in 1988 (see Note O).

3  :

NOTE H . SHORT. TERM INVESTMENTS At December 31, 1988, the Cooperative's cash and short term investments were substantially invested in short term instruments issued by CFC. All investments conform with the guidelines l established by the REA and the Cooperative's Board of Directors. Maturities ate selected to i

correspond with cash flow requirements and are generally for periods of less than two months.

NOTEI INCOMETAXES I During 1983,less than 85% of the income of the Cooperative was collected from Members for the l sole purpose of meeting losses and expenses. As a result, pursuant to Section 501(c)(12)(A) of the Internal Revenue Code of 1986 as amended, the Cooperative became a taxable entity. The l Cooperative hn received a private letter ruling from the Internal Revenue Service (IRS) stating that once taxable, the Cooperative shall remain taxable until an application is submitted and approved for the redetermination of its taxable status. The Cooperative has made an election g-vader the Internal Revenue Code to remain a taxable entity through the year 2003 in order to participate in certain equipment leases.

The Cooperative had no current or deferred income tax provisions for the years ended l December 31,1988 and 1987.  !

I 23-g

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

Notes t) Fi:ancial Stsiements . Co:ti?.ned  ;

CaCn Electric Power Cooperathe, I;c.

NOTT.,I Continued i

~g At December 31, 1988, the Cooperative had general business credit carryforwards of approximately $166 million of which approximately $9 million expire in 1999; $27 million in 200 I $128 million in 2001; and $2 million in 2002. As a consequence of the Tax Reform Act of 1986, the investment tax credit portion of the general business credit carryforwards were reduced by 17.5% for 1987 and were further reduced by an additional 17.5% to $166 million for years ,

subsequent to 1987.

I ?n addition, the Cooperative has loss carryforwards of approJmately $2 billion whi:h may be used to offset future taxable income. The e.xpiration dates and amounts of the net operating loss g portion of the total loss carr> forwards are as follows (in thousands):

2000 $ 4,000 2001 203,000 2002 295,000 ,

171,000 l I 2003 2004 303.000

$976.000 g.

The remaining losses of approximately $1 billion are attributable to Member activities and may be 4

carried forward indefinitely.

The Cc,operstive has available approximately $817 million in net operating loss carryforwards for f l

alternative minimum tax purposes. The expiration dates and amounts of these loss car yforwards are as follows (m thousands):

I 2000 2001

$ 4,000 203,000 I 2002 2003 2004 295,000

%,000 219.000

$817,000 Also, the Cooperative has approximately $852 million of losses attributable to Member activities I for alterr.'.tive minimum tax purposes which may be carried forward indefinitely. Additionally, approximately $166 million of the general business credit carryforwards of the Cooperative may h be used to offset future alternative minimum tax. These credits expire in the same manner as general business credit carryforwards for regular tax purposes.

I e24-g ,

l"

_r

+-- ~. - _ - .

Notes to Fl ancial Statements .' Contin:ed CC F.loctric Power Cooperative, IIc.

I J i

t NORI Continued l

>l In December 1987, the Financial Accounting Standards Board (FASB) issued Stttement of .)

Financial Accounting Standards (SFA5i) No. 9G, Accounting for income Taxes. Management is in l the process of analyzing this Statement and its potential impact upon the Cooperative. SFAS No.  ;

96 must be adopted before 1991 and the extent of its impact has not yet been determined.

g NOTEJ EMPIXWEEBENEFITPLAN  ;

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

l

! Cooperative Assoc:stion (NRECA) Retirement and Security Prograrn he Cooperative typically makes atmual contributions to the plan equal to the amounts accrued for pension cxpense. In this l "l master multiple-employer plan, which is available to all member < ooperatives of the NRECA, the accumulated benefits and plan assets are not determined or allocated separately by individual l

I employer. The Cooperative's pension expense under the plan for 1987 was $422,000. As a result of a better thr.n anticipated return from the plan's investments, the Cooperative was not required to make any 1988 contributions to the plan.

I NOTE K RELATED PARTY TRANSACTIONS l

I In December 1986, the Cooperative purchased certain substation equipment owned by eight of 1.s Member cooperatives. The purpose of the transaction was to better define the operating ,

l responsibilities of the transmission s>uem. The aggregate purchase price of $12.4 million was I partially financed by the Cooperative assuming long term notes payable to the REA it; the amount of $8.4 million. In addition, the Cooperative agreed to make future payments to certain Members and to the REA for the benefit of these Members totalling S4 mi!! ion over 25 yens. Final REA I action on certain of these transactions is still pending as of December 31,1988.

l NOTE L SPENT NUCLEAR FUEL AND DECOMMISSIONING COSTS l GSU has executed a contract with the Department of Energy (DOE) whereby the DOE will furnish disposal service for the spent nuclear fuel from River Bend. Currently, the cost amounts  :'

to 0.1 cents per kilowatt hour of net generation. The Cooperative, as a joint owner of River Bend, J shares ti;is cost with GSU. The DOE spent nuclear fuel fee is subject to change in accordance

- with the provisions of the Nuclear Waste Policy Act of 1982 I

g 25

Notes to Firancial Ststements . Co:ti:ved -

Caj a Electric Power Cooperative,Inc.

4 \ NOTE L.Co:tinred i

II The Nuclear Regulatory Commission in 1985 proposed an amendment to its regulations which

sets forth the technical and financial criteria for decommissioning licensed nuclear facilities. The ,

l' rule addressed decommie,sioning alternatives, timing, financial assurance and emironmental review requirements. The rule requires electric utilities either to certify that a minimum dollar i j amount will be available to decommission the facility or '.o submit a decommissioning funding l plan. In addition, the Snal rule, which was issued in 1988, requires that financial assurance be provided by either prepayment, an external sinking fund, or by a surets;, msurance, or other form g

of guarantee. On December 2,1988, the Cooperative established en external grantor trust, the i g River Bend Decommissioning Trust Fund, and is accruing an uount currently estimeted to be 5 sufficient to pay for its share of the cost of decommissioning at toe end of the estimated useful life i of River Bend. The initial funding of the decommissioning trust totalled $3.7 million. Annual contributions to the trust based on current estimates and assumptions are approximately $1.4 i million.

NOTE M NUCLEAR INSURANCE iI The joint ownership of River Bend subjects the Cooperative to certain risks. The Cooperative is insured, as described belc,w, for public liability and property damage.

The Price Anderson Act (the Act) was renewed by Co1gress in 1988 and was extended through .

August 1,2002. Public liability under the Act for an) nuclear incident is currently limited to $7.7

! billion. The Cooperative and GSU are insured for this exposure by private insurance as well as by j

l a secondary financial program. Recent legislaive changes to the Act related to the secondary financial program may require the Cooperative to become subject to a possible retroactive assessment of which the Cooperative's share would not exceed $19.8 m!!! ion per it.cident with a g

snaximum of $3 million per incident payable in any one year for losses at any licensed nuclear

g- facility.

<5 f The Cooperative, together with GSU, maintains $500 million of property damage insurance and l $400 million of excess insurance related to River Bend obtained from the private insurance

! ma ket. Additionally, the Cooperative is a member-insured of the Nuclear Electric Insurance Limited (NEIL II) program which provides $825 million of excess property insurance. As a

' l member insured of NEIL II, the Cooperati,+ is subject to a maximum assessment of $2.3 million in any one policy year. .Although the Cooperative and GSU continue to attempt to increase the g limits of coverage as capacity becomes available, the Cooperative can give no assurance as to the adequacy of its share of such limits in the event of a major accident. Total available property

.u.

~~ ~~ ~~ '~~ ~- " --

-~7 Notes t3 FISanelal Ststeineets . Conti sed' ' ~  !

CC Electric Power Cooperative,1:c.

NOTE M.Cortized damage insurance is substantially less than the potential insurable value of River Bend. The Cooperative has joined GSU in establishing a Nuclear Workers' Uability policy which covers i l liability for the claims of workea employed at River Bend after January 1,1988 for non-l catastrophic nuclear related injury such as prolonged exposure to low level radiation. Any claims i

by workers employed at River Bend prior to January 1,1988 will continue to be covered under the

'l Nuclear Energy Uability policy if the claim is made by December 31,1997. Under the Nuclear Workers' Uability policy, the Cooperative is subject to a maximum potential retrospective g

premium assessment of 5%0,000.

It is possible that liabilities related to the release or , scape of a hazardous substance from River l Bend may be greater than the coverage limitations on policies currently carried and existing insurance may not be sufficient to meet all possible liabilities or losses. The Cooperative cannot l '

provide assurance that it will be able to maintain coverage at present levels. Any liability or loss l in excess of that covered under existing policies could have a material adverse effect upon the Cooperative.

NOTE N . EXTRAORDINARY ITEM In December 1988, the FASB isstad SFAS No.101, Rerulat' e d Enterprises Accounting for the Discontinuation of Application of FASB Statement No. 71. SFAS No. 71 allosvs regulated entities to account for tt'e effects of regulation by capitalizing or deferring certain costs which enterprises in general would be required to expense under GAAP. In order to apply the provisions of SFAS l No. 71, a regulated entity must meet certain criteria, one of wh'ch requires the recovery of incurred costs of service through rates. SFAS No.101 specifies the accounting required when an entity determines that SFAS No. 71 no longer applies to all or a portion of its operations.

in December 1988, the Cooperative determined that SFAS No. 71 no longer applied to its ,

I operations inasmuch as it was no longer reasonable to assume that rates could be set at levels an charged to customers which would re.over the Cooperative's cost, including interest and other debt expense, of providing service. Accordingly, the Cooperative adopted SFAS No.101 effective h

December 31,1988, which required the write-off of all regulatory assets and liabilities that were l capitalized or deferred in accordance with SFAS No. 71.

- The SFAS No.101 write off of $320.8 million included deferred charges of $175.3 million principally related to the cost of stockpiled fuelinventory and the charges associated with the amendment of a coal supply contract; 563 million of net costs of an abandoned lignite project; $8.7 I 27 I .-. . . - _

Notes to Fi:anelal Statements . Corti:ved Caj:n Electric Power Cooperative,1 c.

NOTE N Continued million related to certain work orden; $65.4 million associated with period costs capitalized during the partial commercialization of the coal units Big Cajun II, Units 1 and 2; $8.6 million in I defened interest and depreciation on facilities common to all three coal units of the Big Cajun 11 facility; $13.2 million in miscellaneous deferred charges and a $13.4 million reduction in l accumulated depreciation assodated with the previously capitalind period costs of Big Cajun II, Units 1 and 2. The tax effects associated with the discontinuation of SFAS No. 71 are immaterial.  :

I During 1988, the Cooperative did not expense approximately $38 million related to excess coal I and other costs pursuant to SFAS No. 71. Dae amounts were included in the SFAS No.101 write-off o. deferred charges as of December 31,1988, and are included in the amounts in the preceding paragraph. -

NOTE O GULF STATES UTILITIES COMPANY I In August 1979, the Cooperative and GSU -ntered into a contractual agreement for the joint g ownership of River Bend (see Note C). Comtrue:'on has been completed and the unit was declared to be in commercial operation as of June 16, 1986. The Cooperative has a 30%

t I undividec'. interest in River Bend and is responsible for 30% of River Bend's costs of conttruction, capital enJitions and operations. GSU is the operator of the facility.

In November 1980, the Cooperative and GSU entered into a contractual agreement for the joint ownership of Big Cajun 11, Unit 3, a 540 net megawatt coal fired generating tatit, and certain Ll common facilities at Big Cajun II (see Note C). The Cooperative retained a 58% undivided .

ownership interest in Unit 3 and an 86% undivided ownership interest in the common facilities, g The Cooperative is the operator of the Big Cajun 11 facilities.

I In August 1979, the Cooperative and GSU entered into a Sell back Agreement related to River Bend. On September 2,1986, the Cooperative and GSU amended the Sell back Agreement such that, retroactive to June 16, 1986, GSU would purchase, regardless ofa' vailability, 70% of the Cooperative's share of the output of River Bend for the Erst twelve :nonths,56% during the second twelve months,~42% during the third twelve months,28% during the fourth twelve months l and approximately 19% during the 6fth twelve months. De Cooperative recorded revenues of approximately $117 million in 1988, $1% ndllion in 1987 and $109 million in 1986, and expects to receive approximately $1'71 million over % remaining two and one half year term of the ll amended Sell back Agreement (see Note A).

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~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Notes to Fif ancial St'atements . Continfed ~ ~ ^ ' ' !

Caj a Electric Power Cooperative,I:c. ,

NOTE O .Conti;ued l r

l On December 9,1988, the Cooperative and GSU entered into a Cost of Funds Agreement (the Agreement) which resolved several areas in dispute relating to the Sell back Agreement, in l

general, the Agreement sets forth the methodology for determining charges under the provisions ,

l of the Sell back Agreement for the period June 16,1988 through June 15,1991. Specifically, the  ;

Agreement established fixed charge rates and capacity charge amounts for the period June 16, 1986 through June 15,1988. Additionally, GSU's return on common equiry was fixed at 14.50%

for purposes of calculating the capacity charge for the period June 16,1988 through June 15,1991.

I GSU and the Cooperative agreed upon a 2.5% annual depreciation rate for River Bend for purposes of calculating the capacity charges for the period June 16,1986 through June 15,1991.

l In order to reflect the results of the Agreement, the Cooperative reduced its 1988 revenues and recorded receivables from GSU by $33.9 million.

I in September 1988, the Cooperative informed GSU that it intended to exercise its option under I the River Bend Joint Ownership Panicipation and Operating Agres. nent and independently perform a final cost audit of River Bend. The final cost audit is expectea to be completed by April g 1989. The Cooperative expects the results of this audit to be a matter of extensive wgotiations.

5 The Cooperative expects to make a decision on possible litigation concerning alleged mismanagement relating to the construction of River Bend or fraud in the inducement to enter l into the River Bend agreements following completion of the final cost audit.

• NOTE P . RATES AND REGULATION l

(

During 1987 and 1988, rates were set by the Cooperative's Board of Directors and were generally .

j designed in accordance with its not for profit character and the provisions of the REA Mortgage as modified by certain agreements. In accordance with State law, any proposed change in rates g

a must be announced in a notice to its Members and be the subject of a public bekring. Following [

! the public hearing, the Board of Directors may, after receiving REA approval, enact a change in l

rates. Through prodsiom in loan documents, the REA exercises control and supervision in matters of regulatory accounting, issuance of securities, rates and charges for the sale of l electricity, and the operation of facilities.

Prior to December 31, 1987, seven of the Cooperative's thirteen Members had voted in accordance with 1.ouisiana Revised Statute 12:426 to be regulated by the IMC. In September 1987, the LPSC issued Special Orders 8-87 and 9 87 asserting jurisdiction over the Cooperative I and all thirteen of its Members. The Cooperative and its six Members not electing 1.PSC regulation filed legal actions to clarify the authority of the LPSC.

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c _- - . _ _ _ _ ._ _ _. _.._ . __ _ _ __ _ _ _ _

Notes to F6mancial Statements Contir.ned

' ' Caden Electric Power Cooperative,Inc.

-NOTE P Continued J I On October 31,1988, the Louisiana Supreme Court reversed a lower coun ruling and upheld existing State statutes exempting rural electric cooperatives from LPbc regulation unless the I membership voted to be regulated. On December 15, 1988, the Supreme Coun granted the LPSC's request for a rehearing. The Cooperative cannot predict the timing or outcome of the rehearing by the Supreme Court.

l I

g NOTEQ SUBSEQUENTEVENTS I CoBank: On January 1,1989, the JBC joir.ed several other regional Banks for Cooperatives in a merger that created a new National Bank for Cooperatives (CoBank).

l Workout /Dr.bt Restructure: Settlement discussions between the Cooperative and its creditors have continued beyond December 31, 1988. On February 2,1989, the REA presented a {

l counterproposal to the Cooperative on certain key elements of the workout and on March 3,1989, presented a substantial revision and supporting schedules to its earlier counterproposal. Also, on l

i February 2,1989, CoBank tendered a counterproposal involving the defeasance of the g l

! Cooperative's mongage debt to CoBank through offset of the Cooperative's investment in CoBank stock and equity. Neither secured creditor has instituted legal action to accelerate the l I Cooperative's debt or exercise other inaterial rights as provided in the REA Mortgage. l On March 20, 1989, the Cooperative received a renewal of the 3713 Waiver for the period  ;

beginning April 1, 389 and ending on June 30,1989.

On January 3,1989, the Cooperative did not remit its regularly scheduled fourth quarter principal l paymnt of $2,860,726 to CoBank. The Cooperative instead paid CoBank approximately $341,000 and O . Bank utilized all remaining funds being withheld, including interest earnings, to satisfy the remainder of the Coopera.in's abligation (see Note F). On March 10,1989, CoBank remitted I approximately $2.1 million t > the Cooperative as patronage capital credits for 1988.

We shington.St. Tammany Electric Cooperative, Inc.: On February 1,1989, a federal district court L judge in New Orleans entered an order remcving the contract rejection motion by WST from jurisdiction of the federal bankruptcy court and placing the matter under the jurisdiction of a ll federal district court in New Orleans. Hearings on the issue of contract rejection are s:heduled for July 10, 1989. On February 28,1989, the federal distiirt court terminated the exclusivity

,l l

i period of WST thereby allowing others to file proposed plans for the reorganization of W l

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>E

Notes so Fi ancial Statements . Continued

• Ca@ Electric Power Cooperative, I:c.

NOTE Q .Contirued Unsecured Demand Notes utigation: On February 3,1989, Citibank, NA filed suit against the Cooperative in the United States District Court for the Southern District of New York alleging l damages of approximately $2% million, including interest and other charges, as a result of drawings on its letters of credit which occurred during 1988 when the Cooperative's pollution control revenue bonds were called and redeemed. Under the terms of the suit, the alleged damages would be reduced by $18.1 million which Citibank, NA tad previously collected from I the bond trustees. On February 24,1989, Citibank, NA moved for a summary judgment. The motion for summary judgment is scheduled to be heard on April 21,1989. The Cooperative's response is to be filed with the court by March 31,1989. Citibank, NA may, if it prevails in this I action, attempt to enforce the judgment by attaching the cash accounts of the Cooperative. Such an outcome may require the Cooperative to seek protection from its creditors under Chapter 11 of

,l the Bankruptcy Code. Settlement talks between the Cooperative, Citibank, NA and the REA are continuing. The Cooperative cannot predict the outcome of the litigation or the settlement

'g discussions. On March 10,1989, the REA offered Citibank, NA a discounted settlement of all claims in this matter. The Cooperative has not paid any amounts relsted to the unsecured demand notes since legal counsel has advised that to do so may subject the officers, directors and manager of the Cooperative to personalliability (see Notes A and G). ,

Abandoned Lignite Projects Litigation: On February 22,1989, a Federal district court judge set ,

aside the jury verdict of $25.3 million and ordered a new tria' regarding the breach of contract suit ll against the Cooperative. The judge has stipulated that the new trial will be on issues more limited than the first trial. The Cooperative cannot predict the timing or outcome of the matter.

Arbitration: On February 7,1989, the American Arbitration Association ruled the Cooperative should be paid $31.9 million by the Riley Stoker Corporation (Riley) concerning certain

! construction issues associated with the Big Cajun II, Units 1 and 2 coal fired generating facility.

Conversely, the Cooperative was directed by the arbitrators to pay Riley approximately $10 l

million principally for unpaid invoices and retainage. On March 9,1989, Riley paid the net award of $21.9 million into the registry of the U.S. District Court for the Middle District of louisiana.

l The timing of the actual receipt of the cash by the Cooperative is uncertain.

( Environmental Closure Fund: On November 14, IN, the DEO extended the deadline for providing assurance to the DEO that the Cooperative has the ability to fund the work which will be necessary to establish, maintain and refurbish its Big Cajun Il fly ash pond areas. The I Cooperative is presently analyzing forms of assurance including insurance, letters of credit or 31 I - .

. Notes o Fi encial Ststements.Conti ced Cad:n Electric Power Cooperative,Ize.

NOTEQ Continued I

i j

trusts. The Cooperative expects to create a trust fund or provide other forms of assurance on or 1

,a before March 31,1989 (see Note A). )

ig l I

~ Amounts Paid by Guarantor: Since December 31,1988 and through February 28,1989, the REA, il as guarantor of substantially all of the Cooperative's debt, has made additional payments to creditors for scheduled debt service on behalf of the Cooperative of approximately $33.1 million il bringing the total of such payments to $157.7 million. The Cooperative expects the REA to continue to honor its guarantee (see Notes A, F and G).

I e

b

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