ML20043B732

Gulf States Utils Co 1989 Annual Rept. W/900524 Ltr

ML20043B732
Person / Time
Site:	River Bend
Issue date:	12/31/1989
From:	Draper E, Plunkett T GULF STATES UTILITIES CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
RBG-32896, NUDOCS 9005310213
Download: ML20043B732 (49)

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GULF STA TES UTILITIES C'OMPA NY

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A4( A CMit f,04 fnfW4 Mt Rbt May 24 ,1990 PM- 32896 rile No. G9.5 U. S. Nuclear Regulatory Comtission Document Control Desk Washington. D.C. 20555 Gentiment River Bend Station - Unit 1 Docket No. 50-458 Enclosed are ten (10) copies of the Gulf States Utilities Company l 1989 Annual Report. 'this report is being submitted in accordance with Section 50.71 of Title 10 of the Code of Federal Regulations and U. S. Nuclear Regulatory Camtission Regulatory Olide 10.1.

Copies of the Cajun Electric Power Cooperative, Inc. 1989 Annual Report are at this tino unavailable but will be provided upon availability.

Sincerely,

/

.. ,ett W

General Manager f) Business Systems and Oversight T/ River Bend Nuclear Group i WI1O/ ILD/ $/pg l Enclosures cc U. S. Nuclear Regulatory Comtission ,

611 Ryan Plaza Drive, Suite 1000 Arlington, TX 76011

, NRC Resident Inspector Post Office Box 1051 St. Francisville, IA 70775 Mr. W. A. Paulson U. S. Nuclear Regulatory Camtission One White Flint North 6 11555 Rochille Pike -

Og Rockville, MD 20852 9005310213 891231 ,

FDR ADOCK 05000458 I FDC  !

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TABLE OF CONTENTS )

I' mgg REPORT TO SilARCHOLDERS ... . .. . .

4)

L:

i' a

' l 1989 g

IN REVitW. . . . . . ..

6 i.

', , j Sales and Earnings . . ... . . .. . .. . ..

6l

' /j Rates and Regulations . .. .. .

0l

[ p <

, i River Bend . 8 l t 9'f p ,

?at, l egal Proceedings . .. .. ... . . .. .

9)

['

i'

, ] Ocncral Operations . . . . .. .. . . .

10 )

Ad COMPETINO IN A OLOBAL MARKET . . . . 10 PINANCIAL INFORMATION . . .. . .. . .. 14 l

p. STATISTICAL

SUMMARY

, . .. ... . . . 45 !

OrPICERS . . ... . . . . .. . .. 40 DIRECTORS . . . . .. .. . . .... 47 '

About 'the Cover: Description of Business in the face of storms, Oulf States Utilitics Co. facility in Daton Rouge '

hurricanes and the generates, transmits and and is a partner in a coldest winter in 50 sells electricity to more cogeneration project, years, the men and than 563,000 customers in Nelson Industrial Steam women of Oulf States a 28 thousand squarc mile Co., near Lake Charles.

Utilitics time and again area that stretches Oulf States owns and in 1989 proved thclr 350 miles west from Baton operates a natural gas dedication to providing Rouge, La., to a point retail distribution system reliable public service, about 50 miles cast of serving about 83,000 Through the good days Austin, Texas, customers in the Baton and bad their The territory served by Rouge area, knowledge, shills and Gulf States has a As a member of the -

hard work - doing the population of about Southwest Power Pooi, the rightjob, the right way 1.4 million and includes company has the ability to

- hept the electricity the northern suburbs of Interchange electricity with flowing. Houston and the major 44 members (29 full citics of Contoc, members and 15 assocl-Huntsville, Beaumont and ated members) in eight Port Arthur in Texas and states in the South and Lake Charles and Baton Southwest. '

Rouge in Loulslana, in 1989, the company <

At the end of 1989 the had a peak load of 5,040 company was providing megawatts, while it had  !

wholesale scrylte to seven Installed capacity and firm l municipalitics and threc power purchase rural clectrical coopera- agreements totaling 6,541 1 tives in both states, in megawatts at the time of I addition, OSU supplies the peak load.

l steam and electricity to a OSU headquarters is large industrial customer located at 350 Pine Street,:

through a cogeneration Beaumont, Texas.

2 I

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Maancial Highl6ghts 1989 1988 Change Total Operating Revenue (000) $1,007,406 $1,520,477 5.7 Operating Expenses and Taxes (000) $1,279,580 $1,087,621 17.6 Net income (Loss) (000) $ (45,573) $ 103,143 (144.2) income (Loss) Applicable to Common Stock (000) $ (108,412) $ 40,079 '

tamings (Loss) per Agerage Share of '

Common Stoch Outstatiding $(1.00) $0.37 Diddends per Share of Common Stock - - -

Avtrage Common Shares Outstanding (000) 108,055 100,055 -

Number of Electric Customers (end of year) SG3,277 557,576 1.0 Total Kilowatt Hour Sales (000) 27,400,189 27,196,591 1.0 System Peak Load - Kilowatts 5,040,000 4.910,000 2.0

• Percent change greater than (200) percent 1

Earnings Per Share of Common Stock Dollars 2'00 The limited reconry of the company's Investment in 1 b0 River Bend resulted on the l loss of $t Mr common share 3,ng recorded dunng 1909. Of that amount, BSc per share was '$n attnbutable 10 accounting wate otts

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+ Report to Shareholders DEAR TELLOW SHAREHOLDER:

At Oulf States ct Ocnging times Utilitics, wethishave for so long that condi- te tion nas become the norm. The end to our

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challenges is not in sight: We continue walking a financial tightrope, anticipating dramatic qb

/ changes in our industry and measuring how they i

'7 ) 1 will affect us while preparing our company to l y 49ftk(

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move into a new and changing era.

! $ Our River Bend nuclear plant har, been produc j q

Ing power for more than four years, and yet we l l G are still struggling to obtain reasonable regu-L w# #w./V V Pa,'R . latory treatment in Texas and Loulslana. We have now received the third of four or five annual l

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~*$ increases in Loulslana and we hope for positive l J( h- W Lp-; ,

79 G rate developments in Texas during 1990, if all ,

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goes well, these steps should provide vitally

~ needed additional revenues.  ;

'b 3 Although we reported a loss of $1 per share of -

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• i common stock for 1989, please bear in mind that <

E. Linn Draper Jr. Rthis loss is primarily the result of write offs i g

%p%retpttr,cd rate case mdtters and related by regulatory atandal?lse.Qcperiding upon the outcome of our appeals, the

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1 j :?significant latest rate order write additioria{ h1 Loffs.

oulslana Despite alone these cou

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l hurdles and our cuyent negative camings, I L ch l- qp. dgf believe' we are makMg steady and measurable Q ;. ) . p: progress in regainingpur financial health. Obyl- ,

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. d ously, we all want to ajeclerate this process.

1W HowcVer, the company has significant litigation f l . b o(utstanding that involvert the Southern Co. and 3i i1! M.W> 0% i Cajunf our partner in the nuclear plant. '

f [Our' recovery is in largd measure tied to that of U h4t-Lbh j jj {}. ' C( ,

d d the territory we serve, and,Oulf States is proud to -

(G Q be working closely with ligal govemments, V d {d ~

$'gJ community groups and economic development

+ M.;entitics to attract industry,'creatcJobs and foster

=% . 1 t g>hw g [.( e. ; @ gjr growth.

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s you are keenly aware, the last time Gulf States was abic to pq common stock divi- -

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h ,? .tt 'dends was in the second quarter of 1986. Pre-Nk i i M y l ferred and preference stock divmnd arrear.

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L' t ages will total almost $204 nlllion as of '

f;0Ji  ?* 6 MQ ! .$:;' r March 15,1990, and must be paid before common

. < . dividends can .O resumco. The board of direc-k" '.M '7 =04:il-Q . p%Ot f [' e tors and management are acutely aware of the 1

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7 g<h ;U ' hardships created by the suspension of dividend '

5= payments and I want to assure you that we are b ia A 6.q p jg Q;[pV,p%jM.g- rj- 3- doing everything we can to hasten the day G

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' . when they can be reinstated. '

' #'k @. Meanwhile, we continue our efforts to cut our i7 y f: 7*

costs to the fullest extent possible, consistent with rendering reliable public service. "

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[? In January of this year, following a six month organizational study, we effected a work force 4

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reduction of 312 OSU and contractjob positions.1 On a more personal note, I must report that sincerely regret having to let any employees go, Dr. Paul Murrill is ghing up his active employment but we have an obligation to you, our owners, at Gulf States. Ile has served the company well and our customers to operate as efficiaritty as over the past cight years, first as chairman and possible. While there are costs associated with the chief executive and then as special advisor to separation of employees, once these are paid, the chairman. Although he has retired as an offi-we e pec h nual labor cost savings to be ccr of the company, I am very pleased that he is remaining on the board of directors where his Letelectric me now tumindustry, to the changing face of the guidance is invaluabic. On a similar note, the utility which is grappling with board is losing two board members who are deregulation much as other industries have retiring at the ant'ual meeting in May. I want to done. Some utilitics are already in competition with independent power producers for big electric personally thank Charles McCoy of Baton Rouge customers and there is talk of forcing utilitics to and Nat S. RoScrs of 11ouston for their dedi-give other parties open access to their transmis, cated service. At this time I want to welcome two sion systems, new members to our board of directors. Frank Harrison Jr. Is a consulting geologist from These issues are too complex to discuss in Lafayette, La., and Bookman Peters is chairman of depth here, except to say that the implications for the board and chief executive officer of first City Oulf States shareholders and customers are enormous. Proposals now t.nder consideration in Texas in Bryan, Texas.

Washington seem to overlock two fundamental Y facts: first, independent power producers, unlike {astdown year,the I reported we wererecovery, makin9 progress utilities, have no obligation to provide service road to financial but that to ultimate consumers of c!cctricity. They will thejourney would not be a short one. Based on terwn in business only as long as it is profitabic, the ev2nts of 1989, I believe we are still moving regardless of the customers' need for electric, ahead. There may be a few detours along the Ity. Second, OSU's transmission system was way, but we are steadily gaining ground.

designed and developed with reliability of service for all the customers in our service area as the We continue to make progress because of our foremost concem. It is my belief that our ability hard working and dedicated employees. Our to provide reliable service to our own customers employces will enable us to overcome the chal-could be threatened if we are forced to open our lenges that lic ahead. Our employees will help transmission lines to other parties that have no us reach our goal of financial stability. Our interest in OSU customers, employees are Gulf States Utilitics, in the event that there were open access to OSU's transmission system and large customers Sincerely, were able to switch at will from supplier to sup-

!ler, it would be virtually impossible to plan a (* oQ4 b A system to provide both reliable and economic service for our customers.

O E. Liriri Dra er Jr.

The loss of customers from a system built to Chairman of the carda serve them would mean the company's fixed costs President and chief D ' " " O * *'

would have to be spread over a smaller cus-tomer base, raising costs to the remaining customers. March 1,1990 1

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- c ? m 4. 2g%gpgMMtw 1989 in Review SALES AMD Quif States Utilitics co. accounting order deferrals and phasc in plans, rep ned a loss of $1 per compared with $128 million of camings, or $1.19 EARMINGS share of common stock for per share, recorded for those items in 1988.

OSU Reports 1989, compared with cam- Kilowatt hour sales for 1989 totaled 27.5 billion

$1 per Sharc ings of 37 cents per kwh, compared with 27.2 billion kwh for 1988.

share for the previous year. The overall 1 percent increase in sales was seen Loss for 1989 financial results for 1989 in the residential, commercial and industrial were adversely affected by four significant non- sectors, cash accounting charges. The after tax effects CompanJ1 Ends OSU cnded 1989 with of these transactionL are: YCar With about $198 million of cash

• In the first quarter, a charge to camings of $15 $j98 M(llfon investments, but antici-million, or 14 cents per share, rcilecting the Loul- pated cash recclpts dur-slana regulatory treatment of the canceled River Ing 1990 are expected to be about $60 million Bend Unit 2. less than obilgations. During 1990, the company e in the third quarter, a charge to camings of has about $220 million in debt and other maturi-

$37 million, or 34 cents per share, for the write- tics due off of River Bend deferrals related to the rederal Slightly increased kilowatt hour sales during the Energy Regulatory Commission whoicsalc year, the additional rate relief in Loulslana in jurisdiction. February and continued efforts by employees to o Also in the third quarter, a charge to camings hold down costs, helped OSU meet its manda-of $10 million, or 17 cents per share, reflecting tory financial obilgations, the write-off of abandoned lignite leases. In March 1989, OSU entered into a one year, e in the fourth quarter, a charge to camings of $100 million secured credit agreement with a

$22 million, or 20 cents per sharc, for the write- group of banks led by Morgan Quaranty Trust Co.

off of River Bend deferrals related to the com- of New York. This agreement is in the process of pany's steam department electric operations, being extended at or near the same level for another year to March 1991.

Electdc Sale, Oulf States filed a River RATES AMD Bend related rate case in Texas on March 21,1989, REGULATIONS B@ons KWH 30 sccking a nct $67.5 mU Texas Rate Case The growth in electric sales lion fltst year rate Features Cost since 1967 increase after considera- RCConcillaflon 25 contenues to tion of a proposed fuct track the slow refund. The package also included a cost reconcil-recoveryof the U lation study of the $1.4 billion of the company's s localeconomy system-wide investment in River Bend that the hard-hit by the 15 l'ublic Utility Commission of Texas (I'UCT)

O said OSU had notjustified in the previous rate 0#

memW9SC888'0"os.f case that ended in May 1988.

to An in depth study performed by Sandlin 5

Associates and filed with the rate case established that about 82 percent of the $1.4 billion in total River Bcnd construction costs beyond the 1979 e

g g gg estimate resulted from safety requirements of the Nuclear Regulatory Commission and were, accordingly, beyond the control of the company.

The 1989 rate case proposal, referTed to as the The write-offs of River Bend deferrals were the Regional Recovery I'lan, included several unique result of the company's competitive pricing of features aimed at helping the recovery of the wholcsale rates and the anticipated reduction in region's economy. In its filing, the company has kilowatt hour sales to the steam department's proposed placing the Texas portion of the $1.4 electric operations which cause the deferrals to be billion system wide investment in " inventory,"

unrecoverable, rather than rate base. The electricity generated These four charges totaling $92 million from the inventoried portion of the plant - about increased the 1989 per share loss by 85 cents. 135 megawatts on a Texas retall basis - could During 1989, OSU recorded $41 million of cam- cither be sold back to OSU customers at a speci-Ings, or 38 cents per sharc, attributable to fled rate or sold off system for a higher price.

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. ~ . w 4?M %N?MnWW 5tD M w r As part of the plan, OSU is reqtiesting two more to a $58 million increase in February 1990 and to River Bend-related increases. After that period, two more increases - an additional $38 million the revenues deferred during these years would in 1991 and $20.7 million in 1992 - to recover be recovered over the remaining years of the the Loulslana portion of the $1.6 billion in River 8W year phase-in plan. Send system wide costs which the commission Hearings on the 1989 rate case began Sept. 5 said in 1987 were prudently incurred.

and centered on revenue requirements and fuci Oulf States will study the written order before costs. However, before hearings began on the deciding if some aspects of the decision should be prudency phase, the Texas Supreme Court on appealed to district court.

Oct.11 temporarily halted the proceedings. The The company received a court ordered $92 mil-high court acted on motions by intervenors lion rate Increase in February 1988, which questioning the authority of the PUCT to review included $65 million granted by the LPSC in the prudence of the set aside plant costs. The December 1987, and a second step $38 million Supreme Court heard oral arguments on increase in February 1989.

Feb.28,1990, on the matter.

$1nce the summer of 1989, Intervenors and the The LPSC in December 1987 ruled, among other things, that $1.4 billion of the company's total Office of Public Utility Council (OPC) have been system River Bend costs were imprudent and, arguing in district and intermediate appellate therefore, disallowed from rate basc. In the courts that the issue of prudency was definitively same order, the commission allowed an inillal $63 litigated in the previous rate case and that the million rate increase as part of an unquallfled costs not deemed prudent must be phase in plan to cover the prudently incurred disallowed. costs of the nuclear plant. The commission con-The PUCT and the company strongly contend tended OSU should have built lignite genera-that the commission had always intended-as tion rather than nuclear, the PUCT Indicated in its final order- to ricctsic Department Customers address the prudence of these costs in a subse quent proceeding.

While the district court held with the interrenors, 600 the 3rd Court of Appeals said it was clear that the TheS.701 PUCT had always intended to take another look new &ctnc s

at the $1.4 billion system wide costs set aside

$ h ned 500 . ; -

from the previous case, dunnp 1969 <i. L in light of the Supreme CouWs action, the com. amounted to a "

pany agreed in late October to postpone hear- 8 0"8 PN"i 3 L  ;, _

, i}l; ings until the high court decided whether it would

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["h the 300 hear the casc However, the company did reserve the riSht to ask for hearings to proceed on continued E. I E 3I ?E growth since v

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3 other phases of the rate case if the Supreme 1987. N f

Court did not act in a timely fashion. ;j- -

Lotalslana Rate The Loulslana Public Serv-

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Case Activity lec Commission (LPSC) on reb.22,1990, granted cg.%g gr,4 Contintics Gulf States a $28 million, e a t: g e third step base rate increase. In recommending $ 3,. 3

,. 3,.

the rate increase, the commission's special counsel said that, if current conditions hold, the Gulf States immediately appealed all major company should receive a $19.6 million increase aspects of the commission's decision and a state in 1991 as the fourth step in the phase in plan. district judge on reb. 18,1988, granted the The $28 million increase is based on a 12.79 $92 million rate increase and ordered imple-percent retum on equity, mentation of a quallfled phase in plan to enabic The order also includes a deregulated asset the company to recover deferred costs, plan previously ordered by a district court on The matter of disallowance and other issues was Oct.11,1989, handled by a second district judge who, on Gulf States, in its Nov. 28,1989, filing for the Oct.11,1989, attirmed the LPSC's finding that j third step, told Loulslana regulators it was entitled the company was imprudent to have restarted )

7

1

, . ? . l?j L} 'ff,h, hhff l{h{ f 1989 In Review  !

construction of the nuticar plant in 1979. The remaining 30 percent. During this 3% year period, !

order did say OSU was entitled to modlfled "inven- the 936 megawatt plant near St. Trancisville. La., l tory" treatment for the disallowed portion, established a capacity factor of 65.7 percent  !

The judge d!rected the LPSC to impicment a and an equivalent availability factor of 68.1 "dcregulated asset plan" that had been proposed percent. A capacity factor is the actual generation by the commission in November 1988 in as a percentage of a unit's maximum capability i response to the inventory plan suggested by while equivalent availability means the i OSU. percentage of time it was availabic for service.

Constemtion tapenditures l River Bend underwent its second refueling and j M oons maintenance outage from March 15 through  ;

construction 700 June 23. Because the plant was out of service for Nr drastically this period cf time for refueling, the plant output .

600 for 1989 was reduced, compared with the previous following the completion of year, for calendar year 1989, River Bcnd gener-  !

Siver Bend tn 500 aled almost 4.8 million megawatt hours of elec- '

ny tricity, had a capacity factor of 58.4 percent e co 4on

/ollowed stongent and an equivalent availability factor of 60.2 }

cash saving percent. OSU's share of the output was 3.3 million 300 toeasures. mwh.  ;

200 Tha third refuc!!ng outage for River Bend is scheduled to begin Sept. 15,1990.

• ~ ~

During the year, the River Bend power plant

& gL E Joined with the Perry, Clinton and Orand Gulf g gg g g nuclear stations to form a bolling water reactor 6

- - - - - (BWR) owners'sub group to share information, in addition, Outf States and lilinois Power, owner The deregulated asset plan, similar to the inven- of the Clinton unit, are working out an agree-tory proposal in Texas, would allow OSU to sell ment for a shared inventory pool of spare parts.

power from the deregulated portion of River This will help the company teduce the volume of Bend to OSU customers or, with LPSC approval, materials it must keep on hand as well as con-off system. The company, at the time the commis* scn'c cash, ston's plan was put on the table in 1988, rejected it because of several conditions. The Nuclear Regulatory Commission mandated Thejudge in Octobc/ also affirmed the series of random drug and alcohol testing program, " fit-rate increases previously granted on a temporary ness for Duty," went into effect officially on basis by another district judge in 1988. Jan. 3,1990. Testing of the River Bcnd program Several partics, including the company, have began Dec.14 with randomly selected manage-appealed portions of the district court's decisions ment employces.

to the state Supreme Court, from the time construction was restarted on The LPSC granted a $1.9 million increase in River Bend in January 1979 through March 1989, retail natural gas rates on May 30. OSU had filed a employees had worked 8 million manhours with- ,

$3.34 million rate increase case in May 1988, out a lost time accident. They were honored OSU provides natural gas retall service to about Aug. Il by the Edison Electric Institute for holding 83,000 customers in the Baton Rouge area. the U.S. record for safety in operation of a single-RIVER BEND Since June 16,1986, unit power plant, either nuclear or non nuclear, when the River Bend i

lYucicar Unit nuclear power plant went Outf States' nuclear unit also holds the corn-  !

l Ocncrates into commercial operation, pany's record for safely worked man hours. Before -

l 19 MllIlon Mit'11 through the end of1989, a minor incident on Dec. 31, employces at the unit generated 19.1 River Bend had worked 9.2 million safe man-million megawatt hours of electricity. hours, outdistancing the company's previous Oulf States owns 70 percent of the unit and the record of almost 9 million man hours set by Baton Cajun Electric Power Cooperative has the Rouge Division employees !n 1965.

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[fGR Litigation contem- resale to two new industrial customers that werc  !

ing OSu's purchased building facilitics adjacent to the Gulf States PROCEEDINGS power contracts system and miles away from the cooperative's j

' Southern Co. Case with the Southem system. The company countered that Cajun's i Still Pending Co. Is still pending request was not provided for under the existing i in Court before the U.S. District contractual arrangements and nt 'n he best i Court in Beaumont, interest of the company, its custu , or the i but no trial date has been set, in the breach of public. s contract lawsuit, filed in July 1986, OSU con- l tended, among other things, that the Southem Co. Return On Average Capitalliation volded the contracts by lefusing to renegotiate in  ;

good faith when Gulf States requested modifica- percent tions because of changed economic conditions. "

On Sept. 22,1989, a threejudge panel of the Retum on #

U.S. Circuit Court of Appeals for the District of average Columbia affirmed, without written opinion, an capitalestion ,

April 1988 federal Energy Regulatory Commis. has declined ',

sha lystnce slon (fERC) decision that the contracts are valid and reasonable. Both OSU and the Southern fn#0 3gf h8j0 6

7 Co. had filed complaints with the TERC in July rate relief. i 1986. However, in its rudng, the federal agency 4 said certain state law contract issues remain i open for the courts to resolve. The circuit court denied Gulf States' motion for a new trial and for 2 a review by the entire court and the case is being appealed to the U.S. Supreme Court. _

Cajun The Cajun Electric Power Cooperative Inc. (Cajun)

I I

I II MIes Sult Against OSU flied a lawsuit for at least

$1.6 billion against Gulf On Oct. 25, the FERC dismissed the complaint, States in a Baton Rouge federal district court on saying OSU was not obilgated to provide the ,

June 26, alleging, among other things, that OSU meter points to Cajun. Then in January 1990, the misrepresented or concealed material facts, federal agency denied Cajun's motion for a '

such as the estimated cost of the project,in order rchcaring, to lure the co op into investing 10 the River Bend in early October Cajun flied a bre:ach of contract nuclear plant project, Cajun also charged that anti trust lawsuit in the Westem District of i OSU did not manage construction of the plant in a Loulslana, asking, among other things, to bar competent manner. OSU from taking any action that would prevent The company believes the suit is without merit the Jetierson Davis co op from competing for new and will contest it vigorously, it was Cajun that business in the area served by Gulf States. A initiated the successful effort to become a part- federaljudge in Alexandria, La., denied Cajun's ,

ner in River Bend. The co-op persuaded the fed- application for a preliminary Irdunction on Nov.

cral govemment to force OSU to offer Cajun and 9. Trial on the merits of the case has not been other entitles a chance to participate in the scheduled,

• project. Both Cajun and the Rural Electrification Antl. trust Sult in August, Gulf States and Administration had their own outside experts Settled the Sam Raybum O&T

• evaluate the project and its anticipated costs dur- Electric Cooperatbc ing the late 1970s and early 1980s, rather than Out of Court (SRO&T) settled the co- ,

rely on OSU cstimates. op's four count anti trust lawsult. '

Co-op Complaint Cajun and one of its in the lawsuit flied in June 1988 in the U.S.

Against Company member co ops in District Court in Austin, SRO&T alleged OSU Loulslana flied a com. refused to transmit power from other companics is Dismissed to the co op's service arca. Oulf States and Sam plaint with the TERC in August, charging that Gulf States was contrat. Rayburn had been in negotiations when the lawsuit was filed, tually obilgated to provide the cooperative with meter points on OSU's lines near Lake Charles. Under the terms of the settlement, OSU wl:1 Cajun, a generation co op, wants to sell power transmit 98 megawatts of electricity from Entergy to one of its members, Jefferson Davis Co-op, for (formerly Middle South Utilitics) and Cajun to 9,

~

V '

.. ~ ; .; h , Rf(fpfjMPjffMMM Vd89 In Review l meter points on the SHOWT system. The co op has The Short Term Energy Plan for the Oct.1 contracted for a minimum of 30 megawatts of through reb. 28 time period is based on load and power, as well hs electricity for future load growth, energy forecasts prosided by the Corporate Plan-from OSU. ning Department and addresses issues such as I GENERAL With the National Weather potential power resources, both intemal and i OPERATIONS Senice f recasting p ssibly external. l the coldest weather of the l'Owcr l'lantS century for the Gulf States Some of the things the committee did to get

' Weather' service area, the company's ready for cold weather was to make certain there i the Weather C C we in o act$n t jte" was a sufficient oil inventory for the power plants j week of December. Lessons Icamed from a harsh that have the capability to switch from natural gasil Chr.< ;aas time freeze in 1983, combined with make arrangements for extra purchased power; l

preparations begun last fall, kept OSU's power and schedule no maintenance for the power j plants on line, providing clectricity to keep the plants during the December through February l lights - and the heat - on for customers, time period.

COMPETING IN A GLOBAL MARKET G5U ' Sells' the Service the Loulslana - Texas serv- percentage of residential .

Area Ice area as a good place to do growth, the numbers are up "The People to See for the business. Individual person- throughout the service area.

. Place to Be Between Hous- nel are targeting the Pacific ton and New Orleans" reads Rim countries and Europe for Company wide Employee the headline above a picture the same reason. I""lV***"I of Gulf States Utilitics' cco- OSU has a history of leader- uaH y se cc Is anous nomic development (cam in ship in economic develop-selling point in 030 s market-a national publication' '"E "" ~ "" *" #8 ment and that commitment a I empi yces, it is through The advertisement copy continues to show results, in ,

places emphasis on a well- 1989,87 new companics' such quaHty sewice to trained local work force, with a potential for S 700 new custones diat OSU cxpects to ,

abundant natural resources, jobs, announced plans for c mpete with the low price of the recreational and educa- expanding or moving to the natural gas and attemative tional facilitics and the energy sources, service area. This more than access and proximity to major doubled the previous 12 A slogan prominently dis-markets, played throughout the com-month total of 39 companics Marketing electricity in thC making relocr. don and pany reads, " Marketing is not 1 21st Century regulrcs " scil' expansion announcements to the whole company, but the )

Ing" Oulf States' service arca create 2,500 newjobs. New whole company is I to businesses and Industries or expanding businesses and marketing."

throughout the nation and the {

industrics in the service area One goal of the marketing world in combined marketing added $2.6 million to com- department, therefore, is to I cfforts with local and state pany revenues in 1989. mobilize all OSU cmployces in I cconomic development a concerted effort to retain spectatists. Employment is beginning to l show a modest gncrease in our long term customers by A key clement in tbc market- helping these employees ing strategy to compete in a the OSU service area. The yment ate or understand the value of 1 worldwide market is OSU's electric service and its eftl- l ampic supply of electricity. [ncm ( g as cient, safe and reliable end use Unlike some utilities in the 8.65 percent compared with l 9.66 percent for 1988. for these customers.

Northeast and Midwest, OSU's supply of power is adequate Another positive economic $5 Billion Invested in Area to support the economic indicator is the number of new The chambers of commerce 1 growth of its service arca into residential customers who in Gulf States' service arca the next century. moved to the senice arca estimate that about $5 billion Marketing teams from Outf during 1989 - more than was invested in major indus- '

States ate scouting the United 5,000. While the Conroe area trial projects in the service States and Canada, selling experienced the largest arca during the year.

10

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Lessons were learned during the frecze six ) cars OSU's energy mix on the cyc of the cold weather ago as to what parts of the company's power included nuclear, coal, natural gas, hydro clec-plants were vulnerable to extreme cold. Some of tric, oil and purchased power from three the measures taken since the '83 freeze neighboring utilitics. The company's nuclear Included wrapping pipes and valves with heat trac- plant, River Bend, remained at full powcr through-Ings - an electrical wire that warms the pipe, cut the freeze, much like an electric blanktt - then covering them with Insulation, l' rom the time the extremely cold weather Sitcc lt is inevitable that extremely cold weather began on '!hursday, Dec. 21, through noon on creates gas curtallments, once the winter storm Christmas Eve, there was an unusually heavy was well on its way the lines of communications demand by customers. In fact, Oulf States, a sum-with gas suppliers were kept open in order to mer peaking utility, set a new winter peak hour maintain a reliable supply of fuel. While there were load - 4,801 megawatts - on Dec. 22. The a few problems at some of the power plants and energy requirement on that same day was the some trouble with gas supplies, OSU's cus- highest - 104,474 megawatt hours - of any tomers did not suffer. day since August 1985.

A 1989-1990 survey by the work with these customers to work force of about 70,000 by Port of South Loulslana help them become more the early 21st Century.

predicts about $7.2 billion in efficient and profitable, new or expanded plant invest * "

The Team City program is "" "

ment 14 the state. The strong "O O another key cicment in OSU's " "" "" ""

uptum in t oulslana's indus- marketing effort. The com- "O trial growth can be """'"C'" "' "" "

pany and its communitics Arc c card Center has attributed to worldwide eco- assisted by state agencies, nomic conditions and the **C "" 0" "O form partnerships to " scil" the cfforts of state and local eco- ccts to serve the fundamental town, city, county and parish nomic development groups. or applied rescarch needs to national and Intemational in Texas, a 1989 utility com- business prospects as a good of g vernment and Industry, pany study cites increased place to locate their oper3* Rcscarch is becoming big manufacturing, particularly tions. During 1989,59 com- business at the opposite end of petrochemical production, as munitics either had been certl* the service area. Daton Rougc the main force in the fled an Team Citics or were in is the site for the Center for state's economic revival which the process of bcIng certi- Advanced Microstructures began in 1987, Since October fled. Twenty five more citics and Devices. This $25 million 1988, the study says, the are expected to join the pro- super micro chip rescarch Texas economy has shifted gram by year's end. center has the prospect of from a recovery mode to becoming the anchor for a expansion. Resead h is Big Business complex of high-tech facilitics.

Oulf States' cconomic One of the fastest growing The Pennington Biomedical development effort strives for areas in OSU's service territory Rescarch Center at Loulslana diversity through selective is the planned community of State University continues marketing, targeting those The Woodlands, north of to focus on major nutritional businesses and Industrial firms llouston. This community of issues facing the nation and which are compatible with the ~27,000 residents has seen the roic the center will play region, but with little or no amazing growth since its crea- In preventive medicine, dependency on the oil, gas tion in 1974. In fact, The and petrochemical Woodlands captured The resurgence in ship-Industrics, 10 percent of the housin9 building, clothing manufactur-In addition, Gulf States has a growth in the Orcater flouston ing, metal fabrication and marketing staff familiar with area in 1989, up from 3 building of airline and rail car the various industrial percent in 1986. maintenance facilitics and processes.' They know how a Today, there are about 750 state prisons are all positive refinery, or a chemical plant, or businesses with about 7,800 indications that diversifica-a paper mill, or a large office employees and The Wood lion is developing in the area building operates and they lands Corp. Is projecting a served by Gulf States Utilitics.

11

1

- - v R E @ E M 2 D !d W .Tain 2 1989 In Review  :

Oulf States and its customers made it Average Residential ricctric Use a through the unusual winter weather, basically (Per Customer) l unscathed. Contributing to the success was the I pre planning, the diversity of energy resources, KWH l the cooperation among departments and, most of all, the dedication of employces, its both the field Theincreasein 14000 and ollice, to provide uninterrupted service to residentialuse l customers, recordedsince 12000 1 s

Work Ibite in late January 1990 Oulf [g#$7, fomer Citt Back States announced that demand /or 10000 j

A/lcr Sti4dy 72 management employees electuc4 yin 4 were being laid off and the form of 8000 j 50 more unfilled management positions were more and i bcIng climinated. The action was taken as a result V8"8# 8'"C'"C 6000 8 ' ' "

• of a six month organizational study designed to , 7 ho es  ;

further cut costs and streamilne operations. being built 4000  !

The company also has discussed with union within the representatives the climination of 45 bargaining sem area.

p0oo unit positions and is reducing by 145 the number of contract workers used for maintenance, Janitorial and other support activitics, including non safety tclated jobs at the River Bend plant site, g

2 gs! ggE OSU cxpects to save $12.9 million in annual

• labor costs, once the expenses associated with Taking into account all company and contractor i the separations are paid, positions that are being climinated, the Residential Cost Per 1,000 MWHs* authorized work force will be reduced by 312. In .

1986, Oulf States reduced its work force signifl. . !

poliars cantly when more than 300 cmployees took carly 125 retirement.

GSus As part of the organizational study begun last residential August, supervisory employees filled out ques-rates remain 100 - tionnaires about their work. These were analyzed lower than and then used by company officers to examine the national amrape their respective departments. Throughout the 75 -

process, the focus was on the company's structure w jfj, and the positions required to meet the needs of with OSU and its customers, rather than on the individ-so ,

neighbonog ,

ual employees themscives.

"Uh"8-All the departing management employces were 25 given a two month paid administrative leave, plus

[ severance pay based on their years of employ-ment. Laid off management employces who werc

! M 50 years old or more and who had worked for OSU '

Nationallt Natbnal GSU Nationally for at least 10 years could elect to also take early ,

uoit ueen system Least retirement.

Expensive Average Expensive i

12

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In addition, the company is providing an array of as chairman of the board. He will remain a corn-outplacement services designed to help these pany director, employces find new employment as quickly as Corporate Secretary Ann Cobb was named a possible*

vice presirient at the September board meeting, Employment practices for the 4,B85 Outf States She has 34 years service with the company and employces are guided by the principles of equal has served as corporate secretary since 1979, opportunity for all. Affirmative action programs At the february 1990 meeting, the board clected have helped the company obtain skilled personnel J. l.cc Miller vice president of human resources, a from all community sectors and fair employment position that had been vacant since November policles assist OSU in developing its human 1989 when James R. Aldridge. who joined OSU in .

resources to serve customers more effectively. 1980, was Branted early retirement. Miller, a OSU '

employee since 1982, had been general manager' ChangCs MadC A Lafayette, La., geolo- of organization development.

On Board, gist and a Bryan, Texas, '

in ManagCment banker have been elected l'rOJCCl CA/E Paying energy bills was a to the board of directors of ASSISis 4,800 littic caster for more than Outf States Utilitics, cffective March 1,1990. The fn [>aylng glll3 4,800 ciderly households in two were elected at the february 1990 board the OSU service area during 1 meeting. 1989, thanks to company sponsored Project CARE. The program was initiated in 1983 to help Trank W. tiarrison Jr., a consulting geologist those 60 and older with their electric, gas or fuct and former president of the American Association bills when faced with financial emergencies. The of Petroleum Ocologists, and Bookman Peters, funds can also be used for weatheritation work or chairman and chief executive officer of first City minor repairs to heating or cooling equipment.

Bank of Bryan, took office March 1. Two directors, Supported by donations from employees and Charles McCoy of Baton Rouge and Nat S. Rogers customers, social service agencies administer the of flouston, will be retiring in the near future and program which is governed by monitoring the two new directors will help provide t' ' card councils in both states.

with continuity.

During 1989, almost $350,000 was provided to Dr. Paul W. Murrill retired as special assistan. - help the needy ciderly, Contributions from all the chairman eficctive March 2,1990, tic had held sources totaled about $340.000, but the program that post since 1987 when he stepped down begrn 1989 with about a $118.000 balance.

The foregoing portion of this report is intended to present Information the company t elleves may be of interest to shareholders, for purposes of making investment decisions. the more complete information contained in the company's Annual Report on form 10-K and other current reports filed with the $ccuritles and cuchange comr.11ssion should t>e consulted.

13

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NanCial Information FINANCIAL SECTION Contents Management Responsibility for Consolidated financial Statements . . . ... 14 Common Stock Prices and Cash DhIdends Per Sharc . .... . .. 14 Scletted Consolidated f'inancial Data . . ,. .. .. . .. ... . . . . 15 Management's Discussion and Analysts of financial Condition and Results of Operations . ... 15 Consolidated Statement of income . . . .. . ... ... . . ........... 23 Consolidated Statement of Cash flows . .. .,. ... ... . ..... .. .. . 24 Consolidated Balance Sheet. . . . . .. . . .. . . . . ... . . 25 Consoli.lated $tatement of Capitalization . . . . . . . . .. . . .... ..... ... . .... 2G Consolidated Statement of Changes in Capital Stock and Retained Earnings. . . . .. .... . 28 Notes to the Consolidated financial Statements. . ,,. .... .... .. . .... ...... 29 Report of Independent Accountants . . .... . .. ...... .... ............ 44 statistical summary . . ..... ..... . . .. .... .... .... ........ ............... 45 Management Responsibility for Coopers & l ybrand, independent certifled pub-Consolidated Financial Statements lic accountants, are engaged to audit, in accor-dance with generally accepted auditing stand-Management is responsible for the preparation, ards, the consolidated financial statements of the integrity, and obJcctivity of the consolidated Company and issue their report thereon, which financial statements of Oulf States Utilitics Com- appears on page 44. Their opinion, including pany. The statements have been prepared in explanatory paragraphs, is based on procedures believed by them to provide reasonable assur-confonnity with generally accepted accountin9 principles and, In some cases, reficct amounts ance about whether the consolidated financial statements are free of material misstatement.

based on estimates and judgement of manage- The Board of Directors, through its Audit Com-ment, giving due consideration to materiality, mittee, has general oversight of management's The Company maintains an adequate system of preparation of the consolidated financial state-Intemal controls to provide reasonable assur- ments and is responsible for engaging, subject to PP ante that transactions are executed in accor*

acu n .Tc u t Co mitt omp ed dance with management's authorization, that the entirely of outside directors, reviews with the Inde-consolidated financial statements are ptc* pendent accountants the scope of their audits pared in accordance with generally accepted and the accounting principles applied in finan-accounting principles, and that the assets of the clat reporting. The Audit Committee meets :cgu-Company are properly safeguarded. The system larly, both sparately andjointly, with the Inde-of intcmal controls is documented, evaluated, pendent accountants, representatives of and tested by the Company's intcmal auditors on management, and the Intemal auditors, to review a continuing basis. No intemal control system activitics in connection with financial reporting, can provide absolute assurance that errors and The independent accountants have full and

"" # US ## # ^" "

• irre9ularitics will not occur due to the inherent without management representatives present,"'

limitations of the effectiveness of intcmal con

• to discuss the results of their examination and trols; however, management strives to maintain a their opinion on the adequacy of intemal account-balance, recognizing that the cost of such a ing controls and the quality of financial system should not exceed the benefits derived. reporting.

Common Stock Prices and Cash Dividends Per Share for the ) cars ended December 31 1989 High OlADa NEAY.$

too rer there 4988 High Low ret there first Quarter . . $9 $7% $- First Quarter . $ 6% $5 $~

Second Quarter 12 8 -

Second Quarter 6% 4% -

Third Quatter , 13W 11 -

Third Quarter . 7% 5% -

fourth Quarter . . 14 % 10% -

rourth Cauarter . 9% 7 -

The Common Stock of the Company is listed on the New York. Midwest and Pacific Stock Exchanges. The approxi-mate number of common shatcholders on December 31,1989, was 54.788.

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SeDected Consolidated l'inancial Data (in thousanas encept per share amounts and ration)

For the Years Ended December 31 1989 1988 _1987_ _ 1986 1985 Operatlog Revenue . . . . . . . . . . . $ 1.607.406 $1,520.477 $1,432,586 51.478,388 51,858 436 income Before Entraordinary item and the Cumulative Effect of Statement of Financial Accounting Standards ($ RAS)

No. 90 1n 1988 . . . . . . . . . . . . . 13.251 117.512 241,101 271,872 276,484 income (Lost) Applicable to Common Stock . . . . . . . . . . . . . (108,412) 40.079 178,091 181,854 205,362 Earnings (less) Per Average Share of Common Stoc.k Outstanding Before Entraordi-nary item and the Cumulative EWect of SFAS No. 90 in 1988 (.46) .50 1.65 1.97 2.21 Dividends Per Share of Common Stock .................... - - -

.67 1.64 Return on Average Common Eq uity . . . . . . . . . . . . . . . . . . . . (5.29)% 1.95% 9.29 % 10.49% 13.05 %

Ratio of Earnings to rited Charges.................. 1.16 1,56 1.84 1.92 2.18 As of December 31 T otal Assets . . . . . . . . . . . . . . . . $6.726,591 $6.858,086 $6,821,866 $6,492,582 $5,937,126 isong Term Debt and Preferred Stock Subject to Mandatory Redemption . . . . . . . . . . . . . . . 2,801.860 2,990.934 3.090.977 3,134.950 2,794,112 Capital Lease Obligationa (Current and Non current) . . . . 180,552 98,852 187,640 228.270 223,734 Book Value Per Share . . . . . . . . . 18.58 19.32 18.70 16.79 16.02 Book Value Per Share (reduced for all Preferred and Preference Stock Dividend Artearages) ............... 17.80 18.80 18.43 16.79 16.02 l Capitallration Ration Common Shareholders' Equity 39.8% 39.3% 3 7.8 % 35.0 % 35.4 % 4 Preferred and Preference Stock................... 12.0 11.7 11.1 10.8 11.3 Long Term Debt . . . . . . . . . . . . 47.3 49.0 51.1 54.2 53.3 100.0 % 100.0 % 100.0% 100.0 % 100,.0,%

w===== = = = = = r===-= == -

See Notes 1 and 3 to the Consolidated financial Statements regarrling contingencies, cunent rate matters involving possible disallowances and write offs and accounting standards.

Management's Discussion and Analysis of Summary of Rate Matters t'inancial Condition and Results of As of December .'L 1989, the Company's rate Operations situation remained urgrtain. The Company has in reviewing this Management's Discussion and received varying rate treatments concerning Analysis of financial Condit!on and Results of River Bend Unit 1 (River Bend) In the two retall ,

Operations and the Consolidated financial State. jurisdictions in which the Company operates. I ments of the Company, special attention should bc Detalled below is a summary of significant River given to the disclosure that the Company may Dend rate related events. See Notes 3 and 14 to the have to scck relief from its creditors under the Consolidated financial Statements for a more Bankruptcy Code. This report was based upon detalled description of current rate matters.

Information available at the time it was released for Taas Retall Jurisdiction (Regulator - Public printing. Litigation and retail rate proceedings Utility Commission of Texas IPUCT)) {

continued in an active status at such time. Signifl- e Effective June 16,1986, the commercial in-  !

cant developments may occur during the printing service date of River Send, the Company and distribution period as well as thereafter. Read- received an accounting order from the PUCT crs are urged to investigate and consider such which allowed the Company to defer, for finan-subsequent developments, clal reporting purposes, those expenses 15 i

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q \ Finandal Information incurred in connection with the operations of a The same state district court had pending River Bend and the cost of buying bath powcr before it an appeal of the May 1988 rate order from Cajun Electric Power Cooperative, Inc. in which the PUCT had postponed for later (CEPCO) and to record a non cash carrying consideration the River Bcnd prudence issues charge on the Company's investment in River as to $1.4 billion of the cor,ts of such unit. On Bend not already reflected in rate base. July 10,1989, the district court ordered a sev-e On April 7,1987, the Company received a crance of the PUCT's ability to futther con-539,900,000 annualized Interim rate increase sider such prudence issues, entered a final from the PUCT, judgement that such issues might not be fur-ther considered, and issued a permanent e On March 30,1988, the Company received an Ir1] unction to that effect. The appeal of the other additional $22,500,000 annualized Interim issues by the Company and others remain rate increase from the PUCT. before the court. (The Company was required to reduce the deferred River Bend costs by $1.50 for cach e On September 5,1989, the PUCT began hear-ings on certain issues of the March 21,1989

      $1.00 of revenue received while the interim rate                        ra e request increases were in clicct.)

e On May 10,1988, the PUCT adjusted the two e On September 20,1989, a court of civil appeals previous interlm rate lncreascs to a total level icversed the state district court decision and of $59,900,000, ordering a one time perma- dlss tved the July 10,1989 state district nent rate increase of that amount based on court irtunction. Including in rate base approximately $1.6 bil. o On October 11,1989, the Texas Supreme lion of River Bend investment and approxi- Court ordered the PUCT to stay hearings on the mately $182,000,000 of related Texas retall aticyed $1.4 billion of River Bend investment jurisdiction deferred River Bend costs. The included in the March 21,1989 rate request. order also set aside $1.4 billion of River Bend The Supreme Court considered arguments on investment (approximately $440,000,000, this matter on Februaly 28,1990, net of accumulated depreciation and related Pending the ultimate outcome of the various out-tax benclits, on a Texas retailjurisdiction standing matters before the courts in Texas, the basis, as of December 31,1989) with no finding Company's rate situation will remain uncertain, as to prudency, and disallowed as imprudent

       $63,468,000 (approximately $20,000,000,                       Loulslana Retall Jurisdiction (Re ulator - Loul-nct of accumulated depreciation and related slana Public Service Commission LPSC))

tax benefits, on a Texas retalljurisdiction e Eticctive June 16,1986, the Company received basis, as of December 31,1989), an accounting order from the LPSC (similar to e On July 23,1988, the retall rates set in the May the one described above from the PijCT). 1988 rate order became effective. The Com. e On March 2,1987, the Company received a pany ceased deferring amounts under the $57,000,000 annualized emergency rate accounting order and began amortizing the increase, allowed portion of the deferred River Bend (The Company reduced the deferred River costs over a 40 year period. Bend costs by $1.00 for each $1.00 of revenue e On July 29,1988, the Company flied an appeal received while the emergency rate increase of the May 1988 rate order in a state district was in effect.) court seching to overturn key portions of the e On December 15,1987, the LPSC issued a per-order. Other parties have also appealed the manent rate order granting a $63,000,000 order, rate inc case (including the $57,000,000 of e On March 21,1989, the Company filed a previously granted emergency rate relief), request for a first year rate increase of while also disallowing $1.4 billion of the Com-

        $07,500,000, net of fuel refunds. The request                            pany's total River Bend plant investment also provided for the $1.4 billion of River                              (approximately $500,000,000, net of accumu-Bend investment previously placed in abey-                               lated depreciation and related tax benefits, ance to be placed in inventory rather than rate                          on a Loulslana retail jurisdiction basis, as of base, or alternatively in rate base through a                            December 31,1989). As of December 15, phase In plan.                                                           1987, the Company also ceased deferring e On May 15,1989, a state district court issued a                            amounts under the accounting order and temporary injunction prohibiting the PUCT                                began amortizing the deferred River Bend costs from proceeding with the issues regarding the                            over a 10 year period.

abeyed $1.4 billion of River Bend investment e On December 30,1987, the Company appealt a included in the March 21,1989 rate request. the LPSC's action In a state district court. 16

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v -v w y$0h ng n cowsw uismaco. j e On February 18,1988, a Loulslana state district appealed various portions of the district court I courtjudge issued a preliminary tr$ unction order to the Loulslana Supreme Court. The ordering the immediate implementation of a Company has not recorded any effect of the l

       $92,000,000 rate increase (which included the                       October 11,1989 district court order pending          '
       $63,000,000 granted by the LPSC on                                  resolution of the appeals.

December 15,1987) and adopted a quallfled e On February 22,1990, the LPSC Dranted the  ; phase in plan for the prudent costs of the Com- Company a $28,000,000 rate increase as the pany s Rhcr Bend investment as determined third step in the february 18,1988 court-by the LPSC. ordered phasc in plan. The LPSC order among i e On february 28,1989, the LPSC authorized a other things includes the deregulated asset '

       $38,000,000 rate Increase as the second step                        plan, discussed above, which was previously of the february 18, 1988 court ordered                              proposed by the LPSC in November 1988               .

phase in plan, and ordered by the district court on October 11,1989. Sec Note 3 to the Consoll- ) e On April 27,1989, the Company filed an appeal of the february 28,1989 rate order which dated financial Statements for additional information, contained a disallowance from rate base of

        $30,563,000 for deferred revenue requirement                     Pending the ultimate outcome of the various out-that the Company recorded for the period                       standing appeals in Loulslana, the Company's December 16,1987 through February 18,                         rate situation will remain uncertain.

1988. The Company interpreted the february Liquidity, Financings, and Capital 18,1988 court ordered phase In plan to have Resources J begun on December 16,1987, while the L.PSC Interpreted the phase in plan to have begun During 1989, the Company's cash position on Tcbruary 18,1988. Improved from 1988 and 1987, t10 wever, due to inadequate rate relief and the maturity of substan-

• e On October 11,1989, the state district court tlal debt obilgations as detalled in Note 11 to the hcaring the Company's appeal of the December Consolidated financial Statements, the cash posi-15.1987 rate order attirmed the LPSC finding tion will continue to be under severe pressure that $1.6 billion of the River Bend costs were during 1990. While management presently believes prudent and ordered the LPSC to implement that rate relicIgranted to date and the nuclear fuel a deregulated asset plan for the $1.4 billion reflnancing during 1989 has improved its cash that the LPSC had disallowed. The court upheld position, significant litigation, rc9ulatory, and oper-the LPSC finding that the Company was ational contingencies exist which, if adverse imprudent to have restarted construction of results occur, could necessitate financings from River Bend
• cxternal sources, and there is no assurance such e On November 20,1989, the Company flied for financings could be obtained, the third step rate increase of the count Cash provided by operations continues to be the ordered phase-in plan. Company's primary source of funds, in addition to e in December 1989, an appeal of the the funds provided by the sale and leaseback of October 11,1989 district court order was filed nuclear fuel in February 1989, while the retirement by the Loulslana Attorney Ocncral with tnc of long term debt has been, and will continue t Loulslana Supreme Court, in January 1990, as, a primary cash use. The following table shows '

both the Company and the LPSC also selected cash flow items: 1989_ 1988_ 1987 runds Provided By "" " Net operating activitics . . .. .

                                                                                           $220,071 $203,314 $ 97,537 Sale of nuclear fuci - River Bend fuel lease                                              114,931       -          -

t:xisting cash and cash equivalents . . . - 65.672 - c Other . . ..... ... . . _ 6,642 15,263 65,622 , Totai ... ,. . . .

                                                                                           $341,644 $284,249 $163,159
                                                                                           ~       ~ ~

runds Used For Capital expenditures . . . ... .. .. $ 74,888 $114,184 $ 69,052 Retirement of long term debt and deferred River Bend construction

• and continuing services commitments . 143,170 115,720 32,570 Payment of lease obligations . . . 27,552 38,188 37,454 investment in cash and cash equivalents 95,125 - 24,083 Other . . . 909 16.157 -

Total . . , . , , .

                                                                                           $341,644 $284,249 $163,159 17

j L if / ; WW G . . L" fAJ R M W W M YM Q GMliV2 FinancialInformation As of December 31,1989, the Company had covenant which Ilmits the amount of first mortgage available $100,000,000 under a bank credit agree- bonds which the Company may issue. Based ment as described in Note 12 to the Consolidated upon the results of operations for the year ended financial Statements. Such agreement was duc December 31,1989, and existing circumstances, to expire on March 2,1990, however, the bank the Company believes it does not have sufficient credit agiccment at or near such level is in the coverage to issue additional first mortgage bonds, process of being extended to March 1991. The The Company does believe it could presently

 . agreement contains restrictions upon additional         issue approximately $16,000,000 of first mortgage borrowings, payment of dividends, and other              bonds to icplate first mortgage bonds previously actions of the Company,                                   retired. External intermediate or long term financ-runds provided from operations and exis'.ing         Ing may only be available through the issuance funds on hand are anticipated to be adequate to          of unsecured or subordinated tien debt securttles satisfy the Company's cash requirements for              if, and to the extent, they can be marketed.

1990, but there can be no assurance that operating Due to the uncertaintics about the Company's results, regulatory attlons, court decisions, or ability to obtain funds if and when needed, there other developments will not necessitate additional can be no assurance that the Company would have external financing, if availabic. available funds to meet its needs, in which event The Company's ability to arrange external financ- the Company may have to scck relief from its ing has been and continues to t.c materlady creditors Under the Bankruptcy Code. affected by its weak financial postilon. The credit ratings assigned by credit rating agencies to the Results of Operations Company's long-term debt and preferred and pref- The Company's 1989,1988, and 1987 net crence stock were reduced to " speculative" income (loss) has been affected by amounts grade in 1986. The failure to pay dividends on recorded in accordance with phase In plans and picferred and preference stock during 1987,1988, amounts recorded in accordance with accounting and 1989, and the omission of a common stock orders issued in 1986 by regulators. These items dividend since the second quarter of1986, make (nct of the related tax effects) have reduced the it highly unlikely that additional equity securitics 1989 net loss and related loss per share and have could currently be marketed. The Company's increased the Company's 1988 and 1587 net Mortgage Indenture contains an Intetest coverage income and carnings per sharc as follows: 1989 1988 1987 ENect on Erect ENect on ENect ENect on ENect Net Loss on EPs met income on EPs Met income on Er6 (in thousands encept per share amounts) Deferred River Bcnd expenses $ (11,048) $ (.10) $ 31,503 $.29 $168,573 $1.56 Dcferred revenue requirement 75,717 .70 130,516 1.21 15,862 .15 Amortization of accumulated deferred River Bend costs . (23,133) (.22 ) (27,754) (,26) (1,431) (.01) River Bend carrying thatges . . . . . (519) - 24,723 .23 263,988 2.44 Reduction of detericd River Bend costs . .. . _-_ (30,576) (.28) (56,938) (.53) S 41,017_ $.38 $128,412_ $1.19 $390,054 $3.61 Without the inclusion of the above items in the Company's Consolidated Statement of Income, the Company would have reported net losses before extraordinary item and the cumulative effect of SPAS No. 90 in 1988, of $27,766,000,

                                                               $10,900,000, and $148,953,000, for 1989,1988, and 1987, respectively. The deferred items described above include substantial cash expendi-tures which were only partially recovered in 1989, 1988, and 1987, and there can be no assurance that all of such expenditures will ultimately be recovered.

The 1989 net loss and loss per average share of common stock outstanding resulted primarily from the discontinuation of regulatory accounting pr!nciples to the Company's wholesalc jurisdic-tion and stcam department, and the abandonment of lignite Icases by the Company's wholly-owned 18

1 EMbbbb $NINkNbbdMbNbkNb I NNkb #(MbN Gulf States utilleles Co.  ! l subsidiary, Varibus Corporation, in addition to were ultimately unsuccessful in the pending litl-the effects of the Loulslana and Texas rate orders gation and were required to make substantial pay-  ! discussed previously and in hote 3 to the Con- ments to the Southern Company and not per-solidated financial Statements. As of December mitted to pass these costs through to customers l 31,1989, the Company has not recovered any of in its rates, the Company would probably be unable i the depreclation and return associated with the to make such payments and would probably have  ! portion of River Bend disallowed in the Loulslana to scck protection from its creditors under the rate order of December IS,1987, and the portion Bankruptcy Code, of River Bend placed in abeyance as part of the CEI'CO Litigation. CCPCO has filed a civil action , Texas rate order which went into effect July 23, against the Company in the U. S. District Court for l 1988, the Middle District of Loulslana seeking to annul, ' rescind, terminate, and/or dissolve the Jo!at Own- i ruture results of operations could be adversely ership i,articipation and Operating Agreement affected bY substantial addit,ional write offs or (the Agreement) with the Company relating to i write downs of the Company s investment in River Bend and deferred costs related to such unit, which River Bend because of alleged fraud and error by l the Company, breach of its fiduciary dutics owed may result from regulatory actions, or from pric- to CCPCO, and/or the Company's repudlation, Ing of energy below the full cost of service to meet renunciation, abandonment, or dissolution of its competition and the associated application of core obilgations under the Agreement, as well as accounting principles. See Note 3 to the Consoll-the lack or failure of cause and/or consideration dated financial Statements for potential exposurcs. for CCPCO's performance under the Agreement. Substantial write-offs would adversely affect the The suit sccks to recover at least CCPCO's Company's ability to reinstate dividends and alleged $1.6 billion investment in the unit as dam-obtain financing, which could in turn affect the ages, plus attorneys' fees, Interest, and cost. The Company's liquidity. See " Liquidity, financings, Company believes the sult is without merit and ' and Capital Resources" above. Intends to contest it vigorously. No assurance can  ! Significant Litigation and Risks be given as to the outcome of this liti ation. If the Company were ultimately unsuccess ul in this As discussed below and more fully in Note 1 to litigation and were required to make substantial the Consolidated Financial Statements significant payments, the Company would probably be una-litigation and otEcr risks exist which, if adverse ble to make such payments and would probably results occur, could force the Company to scck have to scck protection from its creditors under the relief from its creditors under the Bankruptcy Code. Bankruptcy Code. The risks which presently appear to be the most Nuclear insurance. Ownership and operation of significant are discussed below, a nucicar generating unit subjects a company to Southern Company Litigation. In the early sign!ficant special risks. The Company is insured 1980's, the Company and the Southctn Company to an extent as to its interest in River Bend for entered into purchase power contracts providing property damage and decontamination, liability for purchases by the Company of capacity and to employees and third parties, and incremental energy from the Southern Company. The Com- replacement power costs, tiowever, some potential pany ceased making payments of contract amounts liabilitics, including but not limited to liabilitics to the Southern Company in 1986. In the Com- relating to the release or escape of hazardous sub- , pany's opinion, based on advice from legal coun- stances into the environment to which the Com-sci, such contracts have been terminated by pany may be subject, may not be insurabic, and the reason of breach of' contract by the Southern Com- amount of insurance carried as to the various pany and for other reasons and its obligations risks may not be sufficient to meet potential liabill-under the contracts have been discharged and tics and losses. There is also no assurance that the Company will be able to maintain insurance excused. The Southern Company has filed claims coverages at their present levels. Under those In court against the Company for damages of circumstances, such losses or liabilitics would an unspecified amount' havc a very substantial adverse effect on the finan-As of December 31,1989, the Company had not clal condition of the Company. The property dam-recorded as a liability and had not paid an esti- age insurance policy limits are substantially less mated $5SA,000,000 of charges related to the than the replacement cost of the River Bend Southern Company contracts. The Company has facilitics. cstimated that minimum payments for capacity Other Litigation. The Company has been notl-which would be duc under such contracts from fled by the U. S. Environmental Protection Agency January 1,1990, through their termination in (EPA) that it has been designated as a poter41 ally 1992, would aggregate approximately responsible party for the cleanup of sites on which

      $441,000,000 and that payments for energy would the Company and others have or have been be approximately $228.000,000. If the Company      alleged to have disposed of material designated as 19 k

l

                          ~

s . , [ L l ; . ;.';.4 L ,& ' ~  ; g j Q &,W[,(lff,@[& & Nancial Information hazardous waste. The Company is currently nego- Company developing rates lower than the rates tlating with the EPA and state Sutnoritics regard- approved by the PUCT and Li'SC for such industrial ing the cicanup of sorr.e of these sites, customers. Such rates are designed to retain such Several class action and other sults have been customers, and to compete for and develop new filed in state and federal courts $cching relief from loads, and do not presently recover the Company's the Company and others for damages allegedly full cost of service. The number of customers caused by the disposal of hazardous waste and for qualifying for such rates has increased over the asbestos tclated tilscase which allegedly last five years. At December 31,1989 and 1988, occuned from exposure on Company premiscs. approximately 18 percent and 9 percent, respec-One hazardous waste related suit claims approxl. lively, of the total industnal sales were at such mately $15 billion of damage from the defendants, rates. While the amounts in issuc in these cleanup The Company anticipates only a 1 percent efforts and suits may be very substantial sums, the increase in total Industrial sales under the competi-Company presently believes that its financial con- tive rates during 1990; however, the risk exists dition will not be materially adversely affected by that further load will in the future be lost to other the outcome. competitive sources of powcr and that further The discussion below provides additional infor- pricing below the full cost of service may be neces-mation on significant items which also affected sary to meet competition. the Company's results of operations during the liholesalc Sales. Competition for wholesale period from 1987 through 1989. sales resulted in the Company and a majority of its Operating Revenue wholesale customers reaching agreements during Operating revenue increased by 6 percent during 1989, for rates that are lower than the existing 1989, when compared to 1988, and by 6 percent approved rates for the Company's wholesale during 1988, when compared to 1987. Operating electric service and, in some cases, lower the revenue declined 5 percent during 1987. The energy and power requltcments from those cut-components of the changes in operating revenue rently contracted for. The rates agreed to in con-are, detailed below: tracts running until 1996 2000 do not recover

                                                           '"T//."d/C"              the full cost of service. The city of College StatDn.

ione inaa _iset Texas intends to cease purchasing its energy change in base rates $38.289 1"SC $ 68.453 requirement from the Company when its contract ruct cost recoverv . . . . . 29.281 (25.710) (99.592) expires at the end of December 1991. Non fuel salen volume and other 1s.359 26.451 (14.643) related revenues were approximately $8,900,000

                                                  ,$86.929    6 87.891 6 (4Sg) during 1989 from sales to College Stallon.

Nates. The changes in base rates shown above Steam Department Clectric Sales. The Company reflect rate orders, settlement agreements, and has for a number of years produced steam at its rate changes implemented during the period from Loulslana Station No. l in Baton Rouge and sold 1987 through 1989. As discussed in the Sum. such steam, along with the cogenerated elec-mary of Rate Matters above, the Company Impic. tricity, to Industrial customers located acCacent to mented Interim, cmergency, and permanent rate Loulslana Station. P.lectric power requirements of increases In 1987,1988, and 1989. these customers in Ness of the by product itflowatt hour Sales. Total kilowatt hour saler, cicctricity have been met by the Company with increased 1 percent during 1989, when compared power from the Company's system power grid, to 1988. This increase followed a 2 pcrt Ont The remaining steam customer now Intends to increase in sales for 1988, when compared wit: rt place a substantial portion of power previously 1987. Kilowatt hour sales declined by 1 percent provided from the Company's grid with power from for 1987, when compared with 1986. Changes In additional cogenerated facilitics which are cur-the four major kilowatt hour sales categorics rently under construction and expected to be com-are detailed below: plcted in mid to late 1990. Non fuel revenues

                                                                       $#/.1 from sales of electric power off the Company's sys-tem power grid to the steam department nesidentiat . .                                         'Q          amounted to approximately $22,800,000 during Eno$s"trEI ~

whoicsaic .

                                                                      $2 En, (25) -            Operating Expenses and Taxes See the Statistical Summary on l' age 45 for addl-                ruel and Ibrchased Ibwcr. Fuct expense tional Information on kilowatt hour sales and                       decreased 1 percent during 1989, when compared related revenues by customer class                                  to 1988, because of decreased generation from       ,

Industrial Sales. Cogeneration projects devel- Company-owned generating units, due primarily to l oped or considered by certain industrial customers the refueling outage at River Bend during the over the last several years have resulted in the first part of 1989. 20

    @$UNdMS                     @NS5NUM                   funAb '                #
                                                                                       & - @#NMM Gulf States utilleles Co.

Fuel expense increased 3 percent during 1988, PUCT and LPSC rate orders, the Company when compared with 1987. The increase in fuel recorded a deferred charge and reduction to opera-resulted from the increased utilization of Company- tions and maintenance expenses associated owned generating units, primarily River Bend, to with the retail portion of the early retirement plan. meet its energy requirements. A slight decrease in Other operations and maintenance expenses, the Company's average fuel cost, due to excluding those associated with River Bend, increased utilization of low cost nuclear fuel, helped decreased 6 percent during 1987. offset in part the increase described above. Other operations and maintenance expenses fuel expense decreased 10 percent during 1987, related to River Bend increased during 1987, as when compared with 1986. The decline in fuel compared to 1986, due to the full year of commer-resulted from lower fuel prices, offset slightly by cial operation and the fuel reloading outage increased generation. The 10 percent decrease in which occurred in the last part of 1987. the Company's average fuel cost in 1987 high- Depreciation and Amortization. Amortization lighted the decline in the price of natural gas as expense increased $5,544,000 in 1989, when com-well as the low cost of nuclear fuel, which was pared to 1988. The Company began amortizing utilized more extensively in 1987 than in 1986. the Loulslana retall and steam jurisdiction's Purchased power expense decreased 1 percent amounts of the previously cancelled River Bend during 1989, when compared to 1988, due to Unit 2 over 10 years, as ordered by the february 28, reduced capacity payments to CEPCO under the 1989 rate order. buyback agreement, as discussed in Note 13 to the The reduction in depreciation and amortization Consolidated financial Statements, and adjust- expense from 1987 to 1988, of $10,034,000 was ments reflecting the settlements with CEPCO, as attributable to a reduction in the depreciation rates discussed in Note 1 to the Consolidated finan- in the Loulslana and Texas retalljurisdictions in cial Statements. This decrease was offset in part by accordance with the LPSC and PUCT rate orders increased purchases required by the River Bend and an adjustment to decommissioning expense refueling outage durino the first part of 1989, which resulted from ccvised assumptions and Purchased power expense decreased 29 percent 33.yca r nucicar decommissioning' funding during 1988, when compared to 1987, due primar- approved by the PUCT and LPSC. ily to reduced capacity payments to CEPCO The increase in depreciation and amortization under the buyback agreement, as well as increased expense from 1986 to 1987, of $25,187,000 is pri-utilization of Company owned generating units. marily associated with a full year of depreciation Purchased power expense decreased 7 percent expense recorded for River Bend in 1987, com-during 1987, when compared to 1936, primarily pared to the 1986 commercial in-service year of the as a result of decreased kilowatt-hour purchases depreciated cver a 40-reflecting reduced load requirements, cessation of unit. River year life Bend at 2.50 is being' annually, percent capacity payments to the Southern Company during 1986, and the increased utilization of River 1989, Tucs. Deferred income taxes decreased during Bend to meet existing load requirements. This wher, compared to 1988, due to decreased decrease was offset in part by increased capacity River Bend costs deferred for financial reporting costs associated with the CEPCO buyback. purposes. See Notes 3 and 4 to the Consolidated financial Statements for the deferred River Bend Other Operations and Maintenance t> pense. costs and the components of federal income ! Other operations and maintenance expenses taxes' increased during 1989, when compared to 1988, due primarily to increased payroll and benefit Deferred income taxes increased almost 150 charges, expense of $2,738,000 associated with percent during 1988, despite a decrease in the stat-the cleanup of two hazardous waste disposal utory rate from 40 percent to 34 percent rne i sites, and increased costs associated with the increase resulted primarily from lower tax losses refueling outage for River Bend. In addition, opera. and permanent differences related to River Bend. tions expense also increased due to a tentative Dcferred income taxes increased dramatically settlement reached with CEPCO regarding the during 1987, due to the tax effect of deferring cer-overhead related to administrative and general tain River Bend related operations and mainte-expensc3, which resulted in the Company increas- nance expenses and capacity buyback costs for mg operations expense by $8,310,000, as dis- the entire year of 1987, in accordance with regu-cussed in Note 1 to the Consolidated finaricial latory accounting orders, versus capitalizing the Statements. operations and maintenance expenses in 1986, Other operationt and maintenance expenses, prior to commercial operation and deferring them including those associated with River Bend, subsequent to June 16,1986, in accordance with decreased 4 percent during 1988, as a result of the the accounting orders. Company's continued effort to reduce such Other taxes have increased as a result of ( expenses. During 1988, in accordance with the higher franchise and revenue related taxes.

 \

21 1

3.pggg w 4.xgggggggggmy Financial Information Non Operating Items ilterest on inventoried nuclear fuel. Prior to 1987, Allowance for f1tnds Used During Construction such interest was capitalitcd as part of the Com-(AIUDC) and River (3end Carrying Charges. AfUDC p ny's nuclear fuel icase. decreased during 1989, due to the sale of Com- f xtraordinary item - Discontinuation of Regu-pany owned nuclear fuel in february 1989. latory Accounting I'rinciples (Net of income 7mes). APUDC increased slightly during 1988, due to the See Note 3 to the Consolidated financial State-Company's increased ownership of nuclear fuel, ments for a description of the write offs in 1989 River Bend carrying charges decreased due pri- resulting from the application of STAS No.101 to marily to the termination of the accrual of carry the Company's wholesalc jurisdiction during the ing charges upon receipt of permanent rate orders. third quarter of 1989, to the steam department in the fourth quarter of 1989. The application of Heduction of Deferred River I3cnd Costs. As a result of the interim rate relief granted in both the SFAS No.101 could also have a substantial adverse Texas and Loulslana retail jurisdictions in 1988 affect on future reported results of operations. and 1987, the Company reduced the amount of Work Force Restructuring deferred River Bend costs being recorded in accor-dance with accounting orders issued in 1986 by in January 1990, the Company announced the the regulatory commissions. This amount reflects results of a six month study on work force restruc-a reduction of $1.50 (Texas) and $1.00 (Loulslana) turing. The restructuring resulted in the climina-for each $1.00 of revenue received as a result of tion of 312 positions. The cost of the restructuring the interim /cmergency rate increases. The reduc' through special termination benefits, including tion of deferred River Bend costs was terminated an early retirement program, was approximately in both jurisdictions upon receipt of the $6,765,000. permanent rate orders. Other - Net. During 1989, other - net incr^ased due to increased interest income, The effects of inflation upon the Company have n less n e ast h gars man in k mnt Other - net increased during 1988, due to past because the rate of inflation has declined. increased Interest income and tax benefits related This decline is evidenced by the minimal to the sale of Ncison Units 1 and 2 to a joint growth m the Consumer Price Index over the period venture. from 1987 to 1989. flowever, over the longer tenn, Other - net dccteased during 1987, as com- inflation has had serious effects on the Com-pared to 1986, due to decreased interest income pany's financial position. During periods of high carned on temporary cash investments. Inflation, provisions for depreciation become inade-Application of SPAS No. 90 - Accounting for quate as construction costs increase. The rise in Af>andonments and Disallowances of I'fant Costs. construction costs, in tum, results in the need for See Note 3 to the Consolidated financial State- larger amounts of capital and increased extemal ments for the effect of the application of SFAS financing. The effects of inflation have been fur-No. 90 to the Company's previously cancelled ther exacerbated by slower saics growth. River Berd Unit 2. New Accounting Standards interest Charges. Interest charges on long term debt decreased slightly during 1989, due to the The financial Accounting Standards Board rc+.irement of maturing debt, offset in part by (FASB) has issued SFAS No. 96 which may affect increased interest charges on the Company's vari- the Company's results of operations and finan-able rate debt caused by higher interest rates. cial position when adopted. See Note 4 to the Con-Interest charges on short-term debt and other solidated financial Statements for information interest expense decreased during 1989, due to the regarding SPAS No. 96. elimination of the required payment by the Com- The FASB is currently working on a proposed pany of interest on inventoried nuclear fuel. statement, Imployers' Accounting for Post Retire-Interest on the inventoned nuclear fuel is currently ment Benellts Other Than Pensions,' that will being capitalized as part of a nuclear fuel lease significantly change the accounting for such which was entered into in February 1989. benefits. The Company estimates the annual Interest charges decreased slightly during 1988. cxpense for such benefits could range from due primarily to the retirement of maturing debt. $15,000,000 to $50,000,000 if the proposed state-During 1987, interest on long term debt ment is adopted in its present form. See Note 1 to increased due to the annual interest requirement the Consolidated financial Statements for the on flrst mortgage bonds issued during 1986. cost recorded during 1989. The Company antici-Interest on short-term debt and other interest pates the final statement to become effective for expense increased duc to the required payment of fiscal years beginning after December 31,1991. 22

f7MMMMMMM.BM&MWdWEEMJMM@!bidiMhnBfGGW Gulf States Utilleles Co. ' Consolidated Statement of Income For the years ended December 31 (in thousands except per share amounts) 1989 1988 1987_ Operating Revenue r,lectric. . . . . . . . . . . $ 1,501.874 $1,415,713 $1,330,106 Steam . . . . . . . . .. . . . . . . , , 69,200 70,728 69,056 Oas . ... .. ... .. ... , . . . . . 36,332 34,036 33A24 1,607,406 1,520,477 1A32,586 Operating Expenses and Taxes ruel.. .. ,,.. ., ,. . . 412,591 417,030 406,139 Purchased power . . .. . . 225,781 228,330 322,732 Other operations , , . . . . . 274,150 234,320 240,788 Maintenance . . . ... .. . . 120,570 100,270 108,797 Depreciation and amortization . . . 185,843 177,425 187.459 Deferred River Bend expenses . . . . , . . 16,739 (57.670) (292,845) Deferred revenue requirement - River Bend phase-in plans (114,722) (197,752) (26,436) Amortization of accumulated deferred River Bend costs 33,228 38,575 1,793 income Taxes federal - .. . .... . . . 24,987 59,517 24,291 State ... ..,. 8,778 272 (275) Other taxes . . . .... . . . 91.641 87,304 83,523 1,279,586 1,087,621 1,055,966 + Operating income , , . . 327,820 432,856 376,620 Other Income and Deductions Allowance for equity funds used during construction . 875 3,115 259 River Bend carrying charges. . s . (519) 24,723 263,988. Reduction of deferred River Bend costs - (46,266) (94,806) Abandonment of subsidiary lignite leases . . (19,183) - Other - net . . .. . . . 16,345 8,355 i 6,24,0-Income Before Interest Charges and the Application of SFAS No. 90 . . ... . ...... . . . , 325.338 422,783' 550,211, Application of SPAS No. 90 - Accounting for Abandonments - and Disallowances of Plant Costs (Note 3). . , . (23,853) (21,771) -.- Related income taxes , . ' . , 8,965 -7,402 - t (14,888) (14,369) e Interest Charges Long term debt . . . . 289,058 298,009 299.931  ! Short term debt and other . . . . . . - . . . 10,403 14.302 17,35.0 Allowance for borrowed funds used during construction (2,262) (7,040) _( bly)- 297,199 -305.271 , 309/110 l Income Before Extraordinary Item. . . . . . .

                                                                                                                                                             .13,251           103.143            241.10'1         i Extraordinary Accounting Principles items - Discontinuation (net of income of                               Regulatory taxes)             (Note 3) .                                      (58,824)                -

Net income (Loss) . . ....... . . . . . . . . . . . . , . . -(45,573) 103/143 241,101-Dividends on Preferred and Preference Stock (unpaid in 1989,1988 and 1987). ., . . . . 63,839 63,064 63,010 Income (Loss) Applicable to Common Stock $ (108.412) $ 40,0_79 $ 178,091 , I Average Shares of Common Stock Outstanding 108,055 108,055 107,995 Earnings (loss) per average share of common stock outstanding before extraordinary item and the cumulative effect of SFAS No. 90 in 1988 .. . . . $ (,46) $ .50 $ 1.65 Earnings (loss) per average share of common stock outstanding . . ... . . $ (1.00) $ .37 $ 1.65 Dividends Per Share of Common Stocl. . $ - The accompanying notes are an integral part of the consolidated flnancial statements.

                  .. WF                                      %M W~ .                                                                         b;a' w?hD99MIWM9/2 MnancialInfor nation Consolidated Statement of Cash Flows for the years ended Deceanber 31 (in thousands)                                                                                                                                                                       1989              1988                 1987 Operating Activities Net income (loss) . . . . . . . ... .                                      . .. .                            . ..                                ..                          $ (45,573) $ 103,143                   $ 241,101 Items not requiring cash:

Dcferred fuel and purchased power expense - net . . ,. .. (18.103) (5,084) 5,505 AmortlIation of nuclear fuci .. . . .. .... .. ..... 30,102 44,393 34,450 Depreciation and amortlzation, . . . .. . .., ,,. .. 189,112 179,947 191,859 Deferred River Bend expenses, revenue requirement, and carrying charge 3 . . . ,,........... ........... .. (97,464) (280,145) (583,269) Amortization of accumulated deferred River Bend costs . . . 33,228 38,575 1,793 Reduction of deferred River Bend costs . . . ..

                                                                                                                                                                                                          -              46,266                94,896 Deferred income takes - net . ... ....                                                           ....                        ,               .                           49,993             71,594                35,418 --

Investment tax credits - net . .., ...... .. ... (4,424) . (4,118) (3,703) Allowance for funds used durin construction . . . . . (3,137) (10,155) (8,438) Abandonment of subsidlary lign te leases. . . . . . . . . . . .....,, 19,183 - - Application of STAS No. 96 - accounting for abandonments and disallowances of plant costs (net of income taxes) . .... 14,888 14,369 - Extraordinary item - discontinuation of regulatory accountlog

                               - principles (net of income taxes) . . . .                                                                                                       ,,                    58,824                  -                     -

Disputed amount . ... .... . . . .. ,. .. (7.795) 3,624 25,570 Other . . . . . . . .. , .. .. . .. 26,995 (9,257) 10.876 Changes in: Receivables - net of disputed amount . . ., (16,990) (756) 6,076 fuel inventories ... . ., , .. . . 3,113 1,920 3,277 Materials and supplies . ... .... ., , ,. (1,027) 237 130 Prepayments and other current assets . . .. 2,072 (7,496) (7,890) Accounts payable .- trade .. . , (7,828) 4,197- 37,596 - Customer deposits . . .. ... . 1,221 1,053 444 Taxes accrued . . . . ... , , , ,, (12.419) 14,704 (623) Interest accrued . . . . ,, .. ,, . . . (1,322) (7,353) 1,478 Other current liabilitics . . . . .. 7,422 3,656 11.191 Net cash flow provided by operating activitics. . ,. .. .. 220.071 203,314 97,537-Financing Activities Sale of common stock . . . . . . . . .... . . . .. .. . . .

                                                                                                                                                                                                            -                   -                   1,145 Pollution control funds held by trustees . . ..... .....                                                                                                ...,
                                                                                                                                                                                                            -                   -             .20,019 increase in deferred River Bend construction and continuing services commitments . . . ... ..... ...                                     ..                            ...,,                                                    .                  2,826               4,428                13,779-term debt                  . . ...                           ...              .....                            .....                                679                  680                  679 Increase Payment of       in deferred other longiverR          Bend construction and continuing services commitments . . . . . . . . <                      , ...                              ..,,                                           ,,                            .      (31,517)             - (8A00)                   -

Payments of lease obligations .. , , ... (27,552 i (38,188) (37,454) Retirement of long-term debt . . ., , ,, , . .. (111,653) (107,320) (32,570) Nct ca3h110w used by financing activitics .... (167,217) (148.800) (34,402) Investing Activities Construction expenditures . . . . . (54,679)- (38,654) (48,721) Nuclear fuel expenditures . . . . . . . . . . . . . . . . .. .. .. (20,209) (75,530) (20,331) Sale of nuclear fuel - River Bend fuel lease . . . 114,931 - - Allowance for funds used during construction . . 3,137 10,155 -8,438 Deposit to escrow account . ... . . . . .. - (12,000) - Other property and Investments. . . (909) (4,157) 21,562 fict cash flow provided by (used by) Investing activities . , 42,271 (120,186) (39,052) Net change in cash and cash equivalents ... . 95,125 (65,672) 24,083 Cash and cash equivalents at January 1 102,393 168,065 143,982 Cash and cash equivalents at December 31. . .. , $ 197,518 $ 102.393 $ 168,065 Supplemental Cash Flow Disclosure - Cash paid during the period for: Interest .. . . . $ 286,211 $ .~e99,665 $ 293,084 Income Taxes . . . . . . . ....... . 812 2,406 1,291 increase in nuclear fuel lease obilgations . 3,521 - 8,824 The accompanying notes are an Integral part of the consolidated financial statements. 24

MR??MliB31MfMMiEli%MSMIMM52MdM?WGiMW ouwsee uom c.. Consolidated Balance Sheet December 31 (in thousands) g ,g,- 1989 1988 Utility and Other Plant, at original cost Plant in service . . . ....... ... ..... .. . . , , . $ 6,598,182 $ 6,579,622 Less: Accumulated provision for depreclation . . . . . 1,674,749 1,523,229 4,923,433 5,056,393 Consiruction work in progress . . ...... . .. 15,600 7,690 Nuclear fuch net of accumulated amortization . 146,116 161,688 5,085,149 5,225,771 Other Property and investments . . . . . 31,678 50,988 Current Assets Cash and cash equivalents . . . 197,518 102,393 Receivables Customers . . . ,, . . . 176,522 147,913 Other . . , , 15,883 11,289 fuel inventories . . . . . 24,274 27,387 Materials and supplies . . . .. 7,032 6,005 Prepayments and other . . . 37,631 39,703 458,860 334,690 Dcferred Charges and Other Assets Unamortized debt expense . . . . ... . . 20,571 22,506 Unamortized project cancellation costs . .. . 57,578 94,848 Accumulated deferred income taxes . . . , . 56,462 61,899 Deferred River Bend costs , . . . 957,502 997,079 Long-term receivable. . . 46,498 47,220 Other ~ . ..., , 12,493 23,085 1,150,904 1,246,637 Capitalization and Liabilities ' ' Capitalization (See Statement of Capitalization)

                  - Common shareholders' equity                                                  .                                                                                       $ 2,007,350                               $ 2,088,055 Preference stock                       ..                 .                                                 .                                                                   100,000                            100,000 Preferred stock Not subject to mandatory redemption.                               .                        .                                                                        136,444                           136,444 Subject to mandatory redemption , ,                                  .          .                         .                                                         414,651                            387,189 Long term debt                .                                                  ,
                                                                                                                                                                  ,                             2,387,209                            2,603,745 5,045,654-                            5,315.433 Current Liabilitics Long term debt due within one year . . . . . . . . . . ... . ...                                                      .                         .                                135,333                            84,333 Preferred stock and long-term debt sinking fund requirements .,                                                             ...                                                     84,647                         36,967 Deferred River Bend construction and continuing services commitments                                                                                                                 15,241                        -29,170 Accounts payable - trade .                                                          .     .                           .                  ,                                           99,637                        107.465 Customer depositi                                          .              ..        . .                               .                                                              17,867                         16,646 Taxes accrued . .                 .
                                                                                                                                                               .                                           22.574                         34,993 Interest accrued,                  ..         .        ,                                                 ,                                                                          85,005                         86,S27-Capital leases - current . .                         .                                                                                                                              45,003                          79,074 Over recovery of fuel costs .                                                                                                .                                                                -                      14,602 Other .                .

48.609 41,187 553,916 530,764 Deferred Credits and Other Liabilitics investment tax credits. . ... . 105,483 109,907 Accumulated deferred income taxes 570,794 576,512 Capital leases - non current . ... 135,549 19,778' Deferred River Bend financing costs. 121,561 135,764 Over recovery of fuel costs . 15,561 19,062 Disputed amounts . .. ,...... ..... 81,211 72,793 Deferred income from sale of utility plant . . 45,663 46,283 Other . 51,199 31,990_ 1,127,021 1,011,889 Commitments and Contingencies (Note 1).

                                                                                                                                                                                          $ G,726,591                               $ 6,858,086 a

The accompanying notes are an integral part of the consolidated financial statements. 25 m

 -__,_-_n-_         _ _ _ _ _ _ _       __                                                                                          - - - - - - - - - - - - - - - - - - - - - ^ - ~ - - - " - - - - - ~ ~ - - - ~ - - - ^ ~ ~ ~ ^

y B N

     ..                l%i$hv4W4                                                              --    ~ L-J,l.,   MMN5$$&$$$$$$$$t&

FinancialInfonnation LConsolidated Statement of Capitalization December 31 (in thousands) 1989 1988 Common Shareholders' Equity Common stoch

                 . Authorized 200,000,000 shares without par value
                                                                                                                                                        $1,195148 $1,195,148 Outstanding 108,055,065 shares ...                                                                      .   .                .

(3,936) (3,936) Premium and expense on capital stock-. . .. .. 26,163 26,173 Other pald-in capital ... .. , , . , 789,965 870,680 Retained camings . . . .. .. ... . . . . . . 2,007,350 2,088,055 Preference Stock Authorized 20,000,000 shares without par value, cumulative Outstanding 4,000,000 shares Cumulative Redemption Per Share Price as of Dividends Shares December 31, . Dividend Series in Arrears Outstanding, 1989

                                                                                     $13.38               2,000,000                   $ 50.45                  50,000           50,000
               $ 4.40           ....,, ,                              .

50,000 50,000 3.85.. .... . 11.71 2,000,000 30.15 100,000 100,000 Preferred Stock Authorized 6,000,000 shares, $100 par value, cumulative Outstanding 4.617,568 shares Cumulative Redemption Per Sharc Price as of Dividends Shares December 31, Dividend Series in Arreara Outstanding _ 1989 Not subject to mandatory redemption 5,117 5,117

               $ 4.40 .                                  .                            (13.38                     51,173               $108.00 4.50 . . . . . .                                                      13.69-                    5,830                 105.00                      583              583 166 4.40 1949                                                             13.38                     1,655                 103.00                      166 4.20.                      .,
                                                                  ,.                    12.78                     9,745                 102.818-                    975              975.

14,804 103.75 1,480 1,480 4.44 . . . .. . 13.51 10,993 104.25 1,099 1,099 5.00. . 15.21 26,845 104.63 2,685 2,685 5.08. . 15.45 1,056 - 4.52, 13.75 10,564 103.57 1,056 32,829 103.34 3,283 3,283 6.08, , , 18.49 35,000 23.00 350,000 101.80 35,000 7.56. . 50,000 50,000 8.52 . . . 25.92 500,000 104.43 350.000 104.64 35,000 35,000 9.96. ,, - 30.30 136,444 136,444 Subject to mandatory redemption 30,103 8.80. . . 26.77 301,029 103.00 30.103 29,636 103.00 2,963 2,963 9.75. . 29.66 30,247 26.28 302,465 103.00 30,247

                  ' 8.64.'                                                                                                                                       48,000.          48,000 11.48.                   .                                              34.92                  480,000                  105.00 41.49                    40,000                 105.00                    4,000            4,000 13.64 .              ,

60,000 60,000 12.92. .. 39.30 600,000 112.92 34.98 750,000 111.50 75,000 75,000-11.50. . . . . . . . 30,000 30,000 Adjustable Rate 28.64 300,000 103.00 28.79 450,000 103.00 45,000 45,000 : ustable Rate . . . 106,6G5 71,523 ' A4)ferred Pre dividends in arrears. 396,836 431,978 Preferred stock sinking fund requirements . . (17,327) (9,647) ' 414,651 387,189 (statement conunued on tonowing page.)

 .        26

                    $ f5$hkY$b h $bhhb?hb$5kNYEh$Yb?$Nb,$ $

5b5!$$bbN?hib$h$$bk$ Glalf %ates Utilities Co.- 1989 1988 Long Term Debt first mortgage bonds Maturing 1990 through 1994 - 4%% duc July 1,1990. . ., . . . . . .$ - $ 17,000 14%% due May 28,1991 . .. . . , , . . .. 37,500 .56,250-17W% duc January 13,1992. . . . 100,000 100,000 4%% due May 1,1992 . . . . . . . . . 17,000 17,000 16.8% due September 23,1993 . . , 34.290 42,860 13%% due March 1,1994 . . . .. ... . .. 100,000 100,000 Maturing 1995_ through 1999 - 5% through 8%% . . , , 170,000 170,000-Maturing 2000 through 2004 - 7W% through 8%%. . . . 205,000 205,000 Maturing 2005 through 2009 - 8%% through 12.3%, . . . 310,000 310,000 Maturing 2010 through 2014 - 11%% through 15% , ,

                                                                                                                                                                      .               375,000         375,000 Maturing 2015 through 2016 - 11%% through 12%% .                                                                                                        300,000         300,000 -

First mortgage bond sinking fund requirements . , , (67,320) (27,320) 1,581,470 1,665,790-

                        - Pou ution control and industrial development bonds                                                                                                                                        J 7% due 2006         .       ..                      ,      ,,         .                                                                                   25,000          25,000 5.9% due 2007,                , ,                   .            .                                  .                   ..                                23,000          23,000 10%% due 2012,                    .                                                          .          , ,                                               48,285          48,285 9W% duc 2015.         ,                  ,               .                  .                . . . .                                                      17.450          17,450       1 10%% duc 2014. . ..                    .                                      ..                 .                       ,                  .             50,000          50,000.    -

12% due 2014 , , , , . . 52,000 -52,000 Variable rate duc 2014 . . . . . 94,000 94,000 Variable rate due 2015 , , ,. ... 154,000 154,000 Variable rate due 2016 , , . . .. , 20,000 20,000 Debentures - Quaranteed debentures - 16% due April 15,1990. . - 60,000 Euro-debentures - 13% duc March 4,1992. . 75,000 75,000 - Convertible debentures - 7%% due September 1,1992. . 2,003 2,003 2 Revolving credit agreement , ,

                                                                                                                                                                              ,       233,334          291,667'  -

Deferred River Bend construction and contmuing services commitments (variable rate through 1991) . . . , 12,625 27,387 Other long term debt . , , 2,038 1,359 2,390,205 2,606,941 Unamortized premium and discount on debt - net , (2,996) (3,196) _2,387,209 2,603,745

                                                                                                                                                                                $5,045,654         $5,315,433 The accompanying notes are an integral part of the consolidated financial statements.
                                                                                                                                                                                                                     ,I 4

b ,i 27 d a

v . ;. ; + t y e r g.. g .s m . .. c... r s jl,7 gpggygyjg?[ggggg FinancialInformation Consolidated Statement of Changes in Capital Stock and. Retained Earnings For the years ended December 31 (in thousands)

                                                                                   "O'L" ne     p n    'ETEm"      .        pe     U$!"n.I Balance: January 1,1987..                   ... ..            .         .
                                                                                  $323,313 $1,194,003 $ (3,869) $26,130 $595,964 241,101 Net f.,7ume - 1987 . ...            .... . . .
    . Common stock sold:

Employee benefit plans (149,365 shares). 1,145 Reacquired capital stock . . . . 31 Preferred stock sinking fund requirements . (2,946) Dlvidends in arrears on preferred stock subject to 36,155 (34,160) mandatory redemption . . . . Capital stock expense . .., , (37) 356,522 1,195,148 (3,906) 26l161 802,905 Balance: December 31,1987 .. . ,. . 103,143 Net income - 1939 .,, . ... 2 Reacquired capital stock . . Preferred stock sinking fund requirements , (4,701) Dividends in arrears on preferred stock subject to 35,368 (35,368)- mandatory redemption .. . . .. . Capital stock expense .. , , (30) Balance December 31,1988 . 387,189 1,195,148 (3,936) 26,163 870,680 Net loss - 1989 , . . (45,573) Preferred stock sinking fund requirements (7,680) Dividends in trrears on preferred stock subject to 35,142 (35,142) ~

        - mandatory redemption                       .               .

10 Capital stock expense .. . Balance December 31,1989 ...

                                                                                    $414.651 $1,195,148 $ (3,936) $26,173 $789.965 The accompanying notes are an integral part of the consolidated financial statements.

28

D$$!?!! tube $b05$lYY$$$S&$$NWa$hb$$$&&$N&0$k$$ r wsw.umma co. Gulf States Utilities Company such action could include suspension of operation of River Bend, which could have a substantial Notes to the Consolidated adverse effect on the financiai condition or the Financial Statements Company,

1. Commitments and Southem Company Lltigation. In the early 1980's, the Company and the Southern Company Contingencies entered into purchase power contracts providing Mnancial Condition. The Company's financial f r purchases by the Company of capacity and condition has been strained by its inability to obtain energy from the Southern Company, in the Com-timely and adequate rate relief recognizing its pany's opinion, based on advice from legal coun-Investment in and costs of operating the River sc!, such contracts have been terminated by Bend Unit 1 (River Bend) nuclear unit which was reason of breach of contract by the Southem Com-completed in 1986. Although the Company has pany and for other reasons and its obilgations received some rate relief during 1987,1988, under the contracts have been discharged and 1989 and 1990, it has been unable to obtain excused.

permanent rate relief Mequate to meet its needs, As of December 31,1989, the Company had not it is still experiencing strong regulatory, political, recorded as a liability and had not paid an esti-and consumer resistance to rate increases, and mated $554,000,000 of charges related to the it faces the prospect of continued inadequate rate Southern Company contracts. if the Company, in relief issues to be finally resolved in the Loulslana management's opinion, had not been dis-Public Service Commission (LPSC) and the Pub- charged, and had recorded the charges as ifit had lic Utility Commission of Texas (PUCT) rate pro- not been discharged ano excused, the net loss for ccedings and appeals thereof, combined with the the year ended December 31,1989, would have i application of accounting standards, may result in increased by approximately $159,000,000, and net substantial write offs and charges that could income for the years ended December 31,1988 result in substantial net losses being reported in and 1987 would have decreased by approximately 1990 and subsequent periods with resulting sub- $112,000,000 and _$73,000,000, respectively. The I stantial adverse adjustments to common sharc-Company has also withheld payment of l holders' equity and to the Company's ability to $21,398,000 which is recorded as an amount in purchase its stock to satisfy sinking fund require- dispute on the balance sheet resulting from differ-meets, reinstate dividends and obtain financing l cnces in certain amounts billed by the Southem  ! In the future. While management presently believes that the rate relief granted to date and the nuclear Company and amounts paid. The Company has l fuct refinancing in 1989 have improved the estimated that minimum payments for capacity I Company's financial position, and combined with which would be due under such contracts from l January 1,1990, through their termination in 1992, currently available short term bank credit agree' ments, should enable the Company to meet its would aggregate approximately $441,000,000 and I normal current obilgations until final resolution that payments for energy would be approxi- l mately $228,000,000. of the rate proceedings, significant litigation, regu- I latory, and operational contingencies exist which, On July 2,1986, the Company filed sult against  ; if adverse results occur, could force the Company the Southem Company in U.S. District Court I

   .to scck relief from its creditors under the Bank,      requesting that the Company be excused and dis-ruptcy Code or to attemot to negotiate such relief, charged from the contracts and for other relief, and there can be no assurance that any such            The sult is currently in the discovery stages, and no negotiations could be timely or successfully           trial date has been set. Additionally, the Company

concluded. and the Southem Company cach filed applica-The Nuclear Regulatory Commission (NRC), ti ns with the federal Energy Regulatory Commis-which regulates the operation of River Bend, slon (FERC) seeking findings and actions to vold expressed its concem in 1986 that the Company's or reform the contracts and to support and con-financial condition could negatively impact activi- tinue such contracts, respectively. The FERC ties associated with River Bend. The NRC ccepted jurisdiction over certain issues but requested that the Company evaluate its plans to refused hearing on state law contract issues, assure that continued safe operation and fulfillment On March 30,1988, the FERC held "the presiding of commitments to the NRC will not be affected, lawjudge's detcrmination that grounds for modifl-report the results of the evaluation, and continue cation of the purchase power contract pursuant to keep them informed of developments. If the to Section 206(a) of the federal Power Act have Company's financial condition deteriorates, what not been established." The FERC also ordered the action the NRC may take and its financial impact Company's " complaint for relief under Section upon the Company cannot be predicted, but 206(a) of the federal Power Act" be dismissed, 29 L

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                                            ~
                                                 ;     - ; , ;3Q3gGygggggg}

l financialInformation that the Southern Company's petition for declar- probably have to scck protection from its credi-atory order be granted as to certain issues, and that tors under the Bankruptcy Code, the dockets involved are terminated. The FERC Cajun Electric (bwer Cooperative, Inc. (CEPCO). found no basis within itsjurisdiction to telleve the The Company has significant business relation-Company of its obilgations under the contracts, ships with CEPCO, including co ownership of River but reconfirmed that certain state law contract Bend and Big Cajun 2 Unit 3. The Company and issues remain open for the court to resolve. The CEPCO own 70 percent and 30 percent of River Company's application for rehearing has been Bend, respectively, while Big Cajun 2 Unit 3 is denied, and the Company appealed the TERC owned 42 percent and 58 percent by the Com-order. On September 22,1989, the U.S. Court of pany and CEPCO, respectively. Appeals for the D.C. Circuit affirmed the FERC On June 26,1989, CEPCO filed a civil action order without a written opinion. The Company,s against the Company in the U.S. District Court for request for rehearing and the rehearing by the full the Middle District of Loulslana. CEPCO stated in court was denied on November 27,1989. The its complaint that the object of the suit is to Company has appealed the denial to the U.S. annul, rescind, terminate, and/or dissolve the Supreme Court. Joint Ownership Participation and Operating Agree-On June 27,1988, the Southem Company ment entered into on August 28,1979 (the Agree-requested FERC approval of a suspension of pet. ment) related to River Bend because of fraud and formance by the Southern Company effective error by the Company, breach of its fiduciary July 1,1988, under its Unit Power Sales Agreement dutics owed to CEPCO, and/or the Company's repudiation, renunciation, abandonment, or disso-and certain other service schedules with the Com- lution ofits core obilgations under the Agreement, pany. On August 26,1988, the PERC granted such suspension, denied an intervenor's request to as well as the lack or failure of cause and/or consideration for CEPCO's performance under the cancel the rate schedules, and noted that the Southem Company had not walved any of %t Agreement. The suit sccks to recover at least legal rights, remedics, and claims for r' Mages CEPCO's alleged $1.6 billion investment in the available against the Company. The effet i such a unit as damages, plus attomeys' fees, interest, and suspension upon the ultimate outcome - the cost. ongoing litigation cannot yet be predicteo. The Company believes the suit is without merit and intends to contest it vigorously. No assur-On December 5,1988, the Southem Company ance can be given as to the outcome of this litiga-filed with the district court an amended motion to tion, if the Company were ultimately unsuccessful dismiss and counterclaim. The counterclaim in this litigation and were required to make sub-sccks to enforce the power sales contract and stantial payments, the Company would proba-recover an unspecified amount of compensatory bly be unable to make such payments and would and punitive damages, including the amounts probably have to seek protection from its credi-equal to the contractual payments due to date tors under the Bankruptcy Code. and the present value of the remaining payments The Company has been Informed that CEPCO alleged to be due under the contracts, interest, and has had serious financial problems but that the attomeys' fees. The counterclaim alleges, among ' Rural Electriflcation Administration (REA) may other things, that the Company has been in have refinanced or be in the process of refinancing breach of the contract since July 1986, and has been guilty of fraudulent conduct in relation to serv. CEPCO's outstanding debt. Additionally, one of ice taken since July 1986, but not paid in full. On CEPCO's member cooperatives has filed bank-January 24,1989, the district court overruled the ruptcy. Further deterioration of CEPCO's financial condition and its bankruptcy codd have signifl-Southem Company's amended motion to dismiss, cant adverse effects on the Company, including, Also, the Company's appeals to the appropriate but not limited to, possible NRC action as described state courts of the actions of the PUCT and the above and a need to bear additional costs assocl-LPSC in 1986, disallowing pass through of ated with the co-owned facilities. During 1990, Southem Company capacity charges under the and for the next several years, it is expected that contracts, are pending. CEPCO's share of River Bend related cost will be in the range of $60,000,000 to $65,000,000 per The Company cannot predict the timing or out. year. If the Company were required to absorb such come of the various proceedings; however, if the costs and to continue to meet its current obliga-Company were ultimately unsuccessful in the tions to CEPCO, there can be no assurance that the pending litigation and were required to make sub. Company's resources would be adequate. stantial payments to the Southem Company and not permitted to pass these costs through to The Company and CEPCO are parties to FERC customers in its rates, the Company would proba- proceedings regarding certain long-standing dis-bly be unable to make such payments and would putes relating to transmission service cnarges. 30

_ , _ - _ _ . . . ~ ,. fS3MNE$fM$$$$5N5MMSENNMEUSOSEOMNII/E5@ Gulf States Utilities Co. Hearings before the FERC were completed in program. The changes to the Act necessitated December 1988. On May 11,1989, an administra- modifications to the secondary financial protection, tive law judge issued an initial decision, which is such that the Company will be subjected to a subject to a final FERC order. The Company potential retrospective assessment of approxi-claims CEPCO has underpaid transmission mately $66,150,000 per incident with a maximum charges, which as of December 31,1989, amount amount of $10,000,000 per incident payable in to $59,813,000. Such amount was recorded on any one year foi losses in the event of a nuclear the balance sheet as an account receivable and incident at its facility or any other licensed offsetting amount in dispute, with no effect on net nuclear reactor facility in the United States. Any income. No assurance can be given as to the retrospective assessments pertaining to this liabil-timing or outcome of the final FERC order, ity are subject to the 70/30 percent ownership The Company and CEPCO were in dispute over Interest in River Bend between the Company and ccitain billings related to the jointly owned facill. CEPCO. ties, River Bend and Big Cajun 2 Unit 3. During The Company maintains $500,000.000 primary the first quarter of 1989, the Company and CEPCO property damage insurance and $560,000,000 of - reached a tentative settlement regarding the excess insurance for River Bend from the private amount of overhead related to administrative and insurance matket. Additionally, the Company general wenses to be paid by CEPCO for River has acquired $975,000,000 of cr. cess property Bcnd and the amount the Company will pay to insurance coverage on River Bend through par-CEPCO for Big Cajun 2 Unit 3, retroactive to ticipation in the Nuclear Electric insurance Limited June 1986. During the first quarter of 1989, the (NEIL) 11 program. Under NEIL 11, the Company is Company made adjustments to reflect the tenta- subject to a maximum assessment of approxi-live settlement related to River Bend, which mately $7,500,000 in any one policy year. Although increased the net loss for 1989 by $4,346,000, the Company has continued to increase the limits The Company and CEPCO have also reached a of such insurance as capacity becomes r./alla-settlement regarding disputes under the River ble, no assurance can be given about thc adequacy Bcad buyback arrangement which was ratilled by of such insurance limits in the event of a major the RCA on March 6,1989. During the first quarter accident. The property damage insurance policy of 1989, the Company made adjustments to limits are substantially less than the replace-reflect the settlement of the River Bend buyback ment cost of the River Bend facilities. arrangement with no material effect on the net The Company maintains a Nuclear Workers' Lla-loss, bility policy which covers liability for tort claims by Nuclear insurance. Ownership and operation of on site workers first employed at a nuclear facil-a nuclear generating unit subjects a company to ity after January 1,1988, for non catastrophic significant special risks. The Company is insured nuclear related injury such as the exposure to long-to an extent as to its interest in River Bend for term, low-level radiation. Nuclear related claims property damage and decontamination, liability by workers employed in a nuclear facility prior to to employees and third parties, and incremental January 1,1988, will continue to be covered ' replacement power costs, as described below. How. under the Nuclear Energy Liability policy provided ever, potential liabilities, including but not limited the claim is made by December 31,1997. Under the to liabilities relating to the release or escape of Nuclear Workers' Liability policy, the Company is hazardous substances into the environment to subject to a maximum retrospective premium which the Company may be subject, may not be assessment of $2,800,000. Insurable, and the amount of insurance carried Some extra expense for River Bend replacement as to the various risks may not be sufficient to meet power is insured through the NEIL I program. Fol-potential liabilitics and losses. There is also no lowing an insured property loss which results !n assurance that the Company will be able to the unit being unavailable for generation and a maintain insurance coverages at their present 21 week waiting period, the NEIL I program will pay levels. Under those circumstances, such losses or the Company a specifled weekly indemnity for 52 liabilitics would have a very substantial adverse weeks followed by 67 percent of the specifled efTect on the financial condition of the Company, weekly indernnity for the next 52 week period, fol-Public liability in case of a nuclear incident at any lowed by 33 percent of the specified weekly licensed nuclear facility in the United States is indemnity for tbc next 52 week period. Under the currently limited to $7.8 billion under provisions of NEIL I program the Company is subject to a mexl-the Price Anderson Act (Act) which was renewed snum annual retrospective assessment of approx-and revised in 1988 and extends through August 1, Imately $1,600,000. 2002. The Company insures River Bend for this D!sposal of Spent Nuclear niel and NucIcar exposure through a combination of private insur- Decommissioning. As provided in the Nuclear ance and the Industry-wide secondary flnancial Waste Policy Act of1982, the Company has entered 31

                 . pm y we a .                             .3.1. mgggggggggg%

MnancialInfonnation into contracts with the United States Department As of December 31,1989, the Company has not of Energy (DOE) for disposal of spent nuclear met sinking fund obligations totaling $9,647,000, Under the terms of a bank credit agreement fuel from River Bend. Under the terms of the con- discussed in Note 12, the Company is also tract, the Company is required to pay a quarterly fee to the DOE of one mill per net kilowatt hour restricted from paying dividends on any of its generated by River Bend. The Company is currently classes of stock while such credit agreement recovering such costs in alljudsdictions, remains outstanding. The Company's ability to pay The Company has received approval from the ""fk(as n s neces ary o m e p cf tred PUCT, LPSC, and PERC to collect in rates amounts stock sinking fund obilgations) will be adversely necessary to decommission River Bend when it affected, and possibly foreclosed, for an Indetermi-reaches the end of its service life. Decommis- nate period of time If significant write-offs result sioning costs are subject to the 70/30 percent own- from regulatory actions, judicial actions, or ership interest in River Bend between the Com- requirements of accounting standards, pany and CEPCO. In 1989 dollars the Company's The Company has accrued dividends on and share of decommissioning costs is estimated to be increased the balance of mandatory redeemable

 $165,725,000, which at the end of the life of the       preferred stock with an offsetting decrease to unit may be well over $700,000,000. To provide for      retained eamings. tiowever, since dividends on all future decommissioning costs, the amounts col,          series of the Company's preferred and preference lected through rates from customers were placed         stock are cumulative (the aggregate amount of in a master trust fund beginning in 1989, where the accumulated and unpaid preferred and preference contributions plus Interest will provide amounts         stock dividends as of December 15,1989is needed in the future. The Company has elected            $188,315,000), income (loss) applicable to com-the provisions of section 468A of the Intemal Reve. mon stock and earnings -(loss) per average com-nue Code to qualify for an annual tax deduction         mon share outstanding have been computed for payments made to the nuclear decommis,              assuming that all such dividends through sioning fund. There can be no assurance that the December 31,1989 were accrued.

amount bcIng provided for will be adequate. Other Litigation.' The Company has been noti-Dluidend Suspension. The Board of Directors fled by the U.S. Environmental Protection Agency-did not declare any dividends on the Company's (EPA) that it has been designated as a potentially common stock for the third quarter ofl986, and no responsible party for the cleanup of sites on dividend on common stock has been declared which the Company and others have or hue been through December 31,1989. The Board of Direc- alleged to have disposed of material designated tors did not declare the dividends on the prc~ as hazardous waste. The Company is currently ferred and preference stock of the Company paya- negotiating with the EPA and state authorities ble on March 15,1987, and has continued not to regarding the cicanup of some of these sites. Sev-declare them through December 31, 1989. cral class action and other suits have been filed in Unless the financial condition of the Company state and federal courts seeking relief from the materially improves, the Company expects to con' Company and others for damages caused by the tinue to be unable to pay dividends on such stock, disposal of hazardous waste and for asbestos-Dividends on all series of the Company's pre- related disease which allegedly occurred from ferred and preference stock are cumulative. Since exposure on Company premises. While the the Company has failed to pay such dividends, amounts in Issue in the cleanup efforts and suits the holders of preferred stock became eligible, as may be very substantial sums, management

   -of March 15,1988, to elect a majority of the Board believes that its financial condition will not be mate-of Directors and have done so since the annual         rlally affected by the outcome of the suits, meeting on May 5,1988. The holders of preference                         b ah hoW M ll@h M%

stock became eligible, as of September 15, in the normal course of business. While the results 1988, to elect two directors and did so at the annual g7  ; meeting on May 4,1989. The Company may not tainty, management believes that the flnal out-pay any dividend or distribution on any of its common stock, or purchase or otherwise acquire W a edal hw & m h financial condition. common stock,-unless all cumulative dividends and sinking fund obilgations have been paid on 2. Summary of SigniflCant prefctred and preference stock. Under its Restated Accounting Policies Articics of incorporation (Articles), as amended, the Company may not pay any dividend or distri- System of Accounts. The accounting records of bution on any of its preference stock, or other- the Company are maintained in accordance with wise acquire preference stock, unless all sinking the Uniform System of Accounts as prescribed by fund obilgations have been paid on prefetced stock. the FERC and adopted by the LPSC and the PUCT. 32

b. N b M M /5hM Ni[Nb b b MAN N$ b M N NINf$b b b MES M *M M Gulf States Utilities Co.

Utlllly I'lant and Depreciation, utility and other purchased power, and gas distributed. The Com-plant is stated at original cost when first dedl- pany's Texas retall rate schedules include a cated to public service. Costs of repairs and minor fixed fuel factor approved by the PUCT. Such replacements are charged to expense as incurred. factor remains the same until the Company files for The original cost of depreciable utility plant a general rate increase or fuel reconcillation or retired and cost of removal, less salvage, are until the PUCT orders a reconcillation for any over charged to accumulated provision for depreciation, or under collections of fuel cost. fuel and ' The provision for depreciation is computed using purchased power costs in excess- of those the straight line method at rates, approved by included in base rates or recovered through fuel the commissions, - which will amortize the adjustment clauses are deferred (or accrued) until unrecovered cost of depreciable plant over the esti- such costs are billed (or credited) to customers. mated remaining service life, inventories. The Company's fuel Inventories are Composite depreciation rates were as follows: comprised of fuel oil, valued at weighted average 1989 1988 1987 Cost, and Coal, valued at last In, first out (Lif0) Electric . ,, 2.68 % 2.72 % 2.94%' Cost. Materials and supplies are valued at weighted steam . , . . 4.10 4.05 4.55 average Cost. NNmpany . !No 2'N

                                        .         $$          Income Taxes. The Company and its sub-Decommissioning. The Company is accruing              sidiaries   file a consolidated federal income tax the decommissioning costs of River Bend in accor- retum. Income taxes are allocated to the individual dance with the regulatory commissions

• orders companics based on their respective taxable over a 38 to 40-year period, income or loss and investment tax credits subject to the limitation ,for recognition of net operating Allowance for 1%mds Used During Construction loss carryforwards.

(APUDC) and Capitalization ofinterest. The accrual The Company follows a policy of comprehensive of AFUDC is a uti;lty accounting practice calcu- Interperiod income tax allocation where such-lated under guidelines prescribed by the FERC and treatment is permitted for ratcmaking purposes by capitalized as part of the cost of utility plant rep- regulatory bodies. Dcferred income taxes result resenting the cost of servicing the capital Invested from timing differences in the recognition of reve-in construction work in progress (CWIP). Such nue and expenses for tax and accounting APUDC has been segregated into two component purposes, parts - borrowed and equity funds. That portion investment tax credits have been deferred and allocated to borrowed funds is reflected as an are being amortized ratably over the usefullives of adjustment to interest charges, while that portion the related property, applicable to equity funds is shown as a source of other income. Both the equity and the borrowed Substdlary Companies. The Company accounts portions of AFUDC are non cash items which have for the operatlo".s and financial position of its the effect of increasing the Company's reported wholly owned nonutility subsidiary companies, net income. When the related utility plant is placed Varibus Corporation (Varibus), Prudential Oil and in service, a retum on and recovery of these costs Gas, Inc. (Prudential), OSO&T, Inc. (OSO&T), and generally have been permitted by regulators in Gulf States Overseas finance N.V. on a consoll-determining the rates charged for utility service dated basis. See Note 6 for information regarding (see Notes 3 and 14 for information regarding the abandonment of lignite leases by Varibus. recent rate actions). Retirement />lan and Other Ibst Employment Senefits. The Company has a noncontributory in 1987, due to the construct!on Interest capitall- pension plan which covers all employees meeting zation provisions of the Tax Reform Act of 1986, certain age and service requirements. Benefits are the Company began accruing AFUDC at pre tax based on years of service and the highest five rates. These rates were as follows: years of employees' compensation during the January 1,1987 March 31.1987. , 12.00 %

• last 10 years of service. All of the Company's hc$ber1?1 a Ih sf. i Apru 1,1988-March 31,1989 . . . .

[d 12.25 employees are entitled to retirement benefits upon - Completlon of flVe years of servlCe and after reach-Apru 1,1989 December 31.1989 11.75 Ing age 50. The Company's policy is to fund the Revenue, fluel, and Purchased Ibwer. The Com actuarially computed pension contribution pany records revenue as billed to its customers on annually. Past and prior service costs are being a cycle billing basis. Revenue is not recorded for funded by the Company over penods of up to 40 energy delivered and unbilled at the end of each years, fiscal period. The Company's wholesale and Loul- In addition to the pension plan, the Company slana retall rate schedules provide for adjust- provides retired employees with life and health care ments to substantially all rates for increases or insurance benefits All of the Company's decreases in the costs of fuel for generation, employces may become eligible for benefits upon 33

J. -

                     .' ~ 10Juv& L . .                              n4;28'i6M3G&ilGM W M L

Mnancial Information reaching normal retirement age. The Company in additional rate relief be granted. The Com-records the cost of such benefits as claims are pany's appeal also covers the imprudency disal-actually paid.- The cost of such benefits was towance related to River Bend. Pending resolution

       $4,051,000 and $3,736,000 for the years 1989 and of this case, the Company has not recognized 1988, respectively,                                        the alleged imprudency disallowance. No assur-Consolidated Statement of Cash Dows. For the ance can be given as to the timing or outcome of ourposes of the Statement of Cash Plows, the               the court appeals.
   -   Company considers all highly liquid investments                On March 21.1989, the Company filed with the with original maturitics of three months or less            PUCT     and Texas municipalitics a request (Docket to be cash equivalents.                                    No. 8702) for a first year rate increase of
          ' Unamortized Pro, Ject Cancellation Costs, luring $67,500,000, net of fuel refunds. The request also 1984, the Company began amortizing the ust of              provides for the Texas retail share of the $1.4 the River Bend Unit 2 cancellation applicable to           billion of River Bend investment previously placed its Texas retall operations over 15 years in accor- In abeyance to be placed in inventory rather than -

dance with the february 28,1989 rate order, the rate base, or attematively in rate base through a Company began amortizing the cost of the River phase in plan. Bend Unit 2 cancellation, applicable to the Loul- Since the filing in March 1989 of Docket No. 8702, slana reta!i jmisdiction, over 10 years, various partics opposing the Company's rate Reclassi/kalon of Mnancial Statements. Prior increase request have filed numerous motions year financial statements have been reclassilled in seeking to keep the PUCT from hearing the order to be consistent with current year presenta. prudency issue of the previously abeyed River Bend tion with no effect on net income or common construction costs. shareholders' equity. On September 5,1989, the PUCT began hearings n certain issues of the March 21,1989 rate

3. Rates and Accounting request.

Rate Matters On September 20,1989, the Court of Civil Texas. On May 16,1988, the PUCT granted the Appeals of the Third Supreme Judicial District of Company a onc-time permanent rate increase of the State of Texas reversed a decision of the 250th

          $59,900,000. The increase is based on including           District Court of Travis County, Texas and dis-in rate base approximately $1.6 billion of the Com. solved a permanent injunction issued July 10, pany's system wide River Bend plant investment 1989 by that district court which would have and approximately $182,000,000 of related Texas           prevented the PUCT from holding hearings on the .

retalljurisdiction deferred River Bend costs ruled prudency of the $1.4 billion of River Bend invcSt-prudent. Additionally, the PUCT afttrmed its preliml. ment previously placed in abeyance, nary ru!!ngs made in February 1988 to disallow as Certain parties requested emergency relief from imprudent $63,468,000 of the Company's sys- the Supreme Court of the State of Texas with tcm wide River Bend plant costs (approximately respect to the consideration by the PUCT of the

         - $20,000,000, net of accumulated depreciation              prudency   of River Bend costs. On October 11, and related tax benefits, on a Texas retailjurisdic- 1989, the Texas Supreme Court ordered the PUCT tion basis, as of December 31,1989) and placed in         to stay hearings on the River Bend cost issues abeyance upproximately $1.4 billion of the Com-           while the court considers the request for relief. The pany's system wide River Bend plant investment Texas Supreme Court denied the Company's (approximately $440,000,000, net of accumu-               request for an expedited hearing. On February 28, lated depreciation and related tax benefits, on a         1990, the Texas Supreme Court considered argu-Texas retalljurisdiction basis, as of December 31, ments on this matter. If the underlying issues are 1989) and approximately $157,000,000 of Tcxas             disposed of in a manner adverse to the Com-reta!! Jurisdiction deferred River Bend costs with no     pany and the PUCT, the PUCT may not be per-finding as to prudency. The PUCT affirmed that            mitted to proccext with prudence hearings. Depend-the ultimate rate treatment of such amounts will be ing upon the outcome of these rate and appellate subjec'. to future demonstration by the Company          proceedings in Texas, very substantial write-offs of the prudency of such costs,                           could be required. No assurance can be given as to On July 29,1988, the Company filed an appeal of the timing of either the state district court appeal the May 16,1988 rate order in a state district            or the actions of the Texas Supreme Court, court.' Other parties have also appealed the order.         Loulslana. Phase in Plan Second Step. On The Company's appeal included, among other                February 28, 1989, the LPSC authorized a things, a request that the $1.4 billion of River Bend $38,000,000 rate increase as the second step in the plant investment which was set aside with no find-        Company's murt ordered 10-year phase-in plan, ing as to prudency be included in rate base, as           The  LPSC phase in plan provides for a total of four well as a request that approximately $27,000,000 annual increases, subject to LPSC review, and 34

                         &$??$$$$$!b5&h5'h?$bb$$$$$$$$$$b550$$$&W&{.\                                          Gulf States Utilities Co.

level rates for six years thercafter. The LPSC order, Court. The Company has not recorded any effect of among other things, modified certain aspects of the October 11,1989 district court order pending earlier decisions by reversing the prior denial of resolution of the appeals. Depending upon the recovery of the Company's Investment in the can- outcome of this appeal and the rate proceedings in <

celled River Bend Unit 2, reduced the appropriate Loulslana described above, very substantial write-level of retum on common equity from the 14 offs could be required, percent ordered by the court to 13 percent, and Loulsfana. Phase In Plan Third Step. On

      ,                  made other adjustments-                                  November 20,1989, the Company flied for the third On April 27,1989, the Company filed an appeal of step rate Increase of the court ordered phase In the LPSC's February 28,1989 rate order which             plan. On february 22,1990, the LPSC granted the contained a disallowance of $30,563,000 from rate Company a $28,000,000 rate increase as the base of deferred revenue requirement that the            third step in the february 18,1988, court-ordered Company recorded for the period of December 16, phase in plan. The LPSC order among other things                ,

1987 through February 18,1988. Such appeal did includes the deregulated asset plan, discussed. not address any other aspects of the rate order. above, which was previously proposed by the Pending resolution of this case, the Company has LPSC in November 1988 and ordered by the district ' not recognized the disallowance of the deferred court on October II,1989. The Company is in the I revenue requirement. There can be no assurance process of evaluating the LPSC order, which may as to the timing or outcome of this appeal. result in the appeal of certain aspects of the order. Loulslana. Appeal of December 15,1987 Rate No write-down of the Loulslana retail River Bend Order. On October 11,1989, the district court rul, deregulated asset has been made pending the p ing on the Company's appeal of the LPSC's outcome of the appeals to the Loulslana Supreme Court, as discussed above. Current analysis of December 15,1987 rate order upheld the LPSC finding that the Company was imprudent to have the february 22,1990 rate order Indicates that if , restarted construction of River Bend and the deregulated asset plan becomes final as i attirmed the LPSC disallowance of certain construc. Issued, the Company could be required to discon-tion costs from rate base, $1.4 billion of River tinue application of Staterr.ent of. Financial Bend plant investment (approximately Accounting Standards (SPAS) No. 71, to the Loul-

                          $500,000,000, net of accumulated depreciation          slana retall deregulated portion of the River Bend and related tax benefits, on a Loulslana retalljuris. Investment. This could result in a net of tax write-diction basis, as of December 31,1989). The             off of River Bend investment, for financial report-       ,

district court ordered the LPSC to implement a Ing purposes, which could range from zero to ' deregulated asset plan previously proposed by the $250,000,000, depending on a number of factors LPSC for the $1.4 billion of River Bend plant which are subject to further review. No assurance investment. The plan would allow the Company to can be given, however, that a larger write-off sell power from the deregulated portion of River could not be required. The factors affecting the Bend to customers or, with LPSC approval, off. possible write-off include projections of River system, but the plan may not provide additional Bend's future operating costs and the unit's effl-revenues during the period of the phase in plan clency and availability, and the future market for described above. The Company is not certain as energy, over the remaining life of the unit. to all elements of the LPSC plan that could be Hholesale Jurisdiction. During June through implemented pursuant to the court's order. One August 1989, the Company and a majority of its element of the plan as proposed by the LPSC was a wholesale customers reached agreements which provision that settlements by the Company with provide for rates that are lower than the existing other regulators more favorable to ratepayers with approved rates for the Company's wholesale respect to River Bend costs would entitle the electric service and, in some cases, lowers the LPSC to revise the plan to obtain the incremental energy and power requirements from those previ-benefits, ously contracted for. The individual agreements The district court also affirmed the LPSC finding were approved by the FERC in August and that the $1.6 billion of River Bend costs was pru. September 1989, and will become effective at vari-dent. Based upon such LPSC flnding, the district ous times through April 1990, court confirmed the phase-in plan awarded the Accounting Developments Company on february 18,1988, by another court. SFAS No. 90. In December 1986, the financial in December 1989, an appeal of the October 11, Accounting Standards Board (FASB) issued SFAS 1989 district court order was filed by the Loulslana No. 90, Regulated Enterprises - Accouniing for Attomey Ocneral with the Loulslana Supreme Abandonments and Disallowances of Plant Costs, Court. In January 1990, both the Company and which amends certain accounting standards for the LPSC also appealed various portions of the rate regulated enterprises. STAS No. 90 specifics district court order to the Loulslana Supreme the accounting for the effect of disallowances of , 35

7d 1gMjMMQ%3%$$ Financial Information costs of newly completed plants and plant abandoned, as opposed to recording the effects abandonments. Additionally, it requires the Com- cumulatively as detalled above: 1988 19a7 pany to reduce its investment in the abandoned River Bend Unit 2 to an amount equal to the (in thousands

 ' present value of the probable future revenues                                                        share"aNo7n'ts)-

expected to be. provided over the amortization income applicable to common stock, period authorized by regulators. in subsequent Qdfnge cumulative effects of , periods, the Company is recognizing interest interest income (net of income taxes). . - 2,027 income to -the extent of the difference between Pro forma income applicable to ' amortization allowed for regulatory purposes and common stock . .. , . . $ s4.448 $180.110 the reduced amortization recorded for financial Pro forma camings per average share reporting purposes, of common stock outstanding before ema rdinan item . .. $ 30 $ 147 1989. During 1989, the Company reduced its nn ' investment in River Bend Unit 2 by $23,853,000 Prgfpo nm #" "[h nt outstEndl%g $ .50 $ 1.67

 - before related income tax beneflts of $8,965,000
 - for the Loulslana retailjurisdiction and steam               Pending resolution of the appeals of the department. This -write down resulted from the            December 15,1987 LPSC rate order and the resolu-February 28,1989 LPSC rate order which allowed tion of the appeals of the October 11,1989 Loul-the Company to recover its investment in River            slana state district court order, the Company has Bend Unit 2, but did not allow a retum on the investment. Accordingly, this write down was com- made              no write off for the previously disallowed por-tion of River Bend, which at December 31,1989, puted in accordance with SFAS No. 90 and was              would be approximately $500,000,000, net of not recorded as a cumulative effect of an                 related income taxes, assuming the application of accounting change, SFAS No. 71 is not discontinued. Additionally, if 1988. The following table illustrates SPAS No,90's cumulative effect of the River Bend Unit 2 the PUC'I rate order of May 16,1988 had not been appealed, at December 31;1989, the Company plant write down for the Texas retall and Whole-          would have been required to record a write off for sale jurisdictions recorded in 1988:                      the disallowed portion of River Bend of approxi-198a (in thousands   mately $20,000,000, net of related income except pet share taxes. See Texas - Rate Matters for additional-
                                                      "" "I  possible write ofTs of River Bend plant investment Prop un [t d Abandonment - River Bend                       which were previously placed in abeyance.

Texasget ggu"$Nnc"e sa - STAS No.101. In December 1988, the FASB discounted $19.277 issued SPAS No.101, Regulateo Enterprises - 554) Accounting for the Discontinuation of Application of p[,e uI'di$t$o...t8585 s Retum ut> allowance - FASB Statement No. 71. 84 ) SFAS No.101 specifles how an enteiprise that Re income'thes effect of River Bend Unit 2 plant Ceases to meet the criteria for application of SfAS write down under srAS No. 90. $14.369 No. 71, Accounting for the Effects of Certain tamings per average share of Types of Regulation, to all or part of its operations common stock outstanding before should report that event in its general purpose t.oss per NeragEs^ hare of ommon I cxtemal finanClal statemCnts, stock caect of SrAs No. 90 (.13) An enterprise's operations can cease to meet tamings per average share of those Criteria for various reasons, including deregu-common stock outstanding $ .37 lation, a change in the method of regulation, or a STAS No. 90 Pro forma f/Tects. The following change in the competitive environment for the table details the pro forma effects had the Company enterprise's regulated services or products. retroactively restated the SFAS No. 90 cffects for Regardless of the reason, an enterprise whose oper-the Texas retail and wholesalejurisdiction back ations cease to meet those criteria should discon-to 1984, the year River Bend Unit 2 was tinue application of SFAS No. 71 and report that discontinuation by eliminating from its balance sheet the effects of any actions of regulators that had been recognized as assets and liabilities pur-suant to SFAS No. 71 t>ut which would not have been recognized as assets and liabilities by enter-prises in general. STEAM DEPARTMENT. The Company has for a number of years produced steam at its Loulslana 36

I MWsMEEMEGEN4EMsEGREMEE2EE Gailf States Utilities Co. i Station No,1 and sold such steam, along with portion of the unit incurred subsequent to the unit's j l the cogenerated electrichy, to industrial customers commercial in scrylce date emd accrued carrying located actjacent to Loulslana Station. Electric charges upon the retail portion of both the cash power requirements of these customers in portion of the deferrals and the Investment in the ' excess of the by product electricity have been met unit not included in the Company's rate base. by the Company with power from the Company's The deferral of costs and accrual of carrying system powcr grid. In the past, contractual charges associated with River Dend was tenninated i arrangements with the steam customers called for in the Loulslana retail jurisdiction on that power provided from the grid to be billed at December 15,1987, upon receipt of the perma-rates set in rate proceedings by the LPSC. As a ncnt rate decision and terminated in the Texas result of this arrangement, the Company has previ- retalljurisdiction on July 23,1988, the effective ously accounted for the steam department in date of rates authorized by the PUCT rate order of accordance with the provisions of STAS No. 71. May 16,1988. The remaining steam customer now Intends to The following table details balances of amounts replace a substantial portion of power previously deferred and accrued under accounting orders provided from the Company's grid with power from Issued by regulators, net of amortization and additional cogenerated facilities which are cur- write offs of such amounts, and deferred revenue rently under construction and expected to be com-plcted in mid to late 1990. requirements related to phase In plans recorded for financial reporting purposes, net of deferred As a result, in the fourth quarter of 1989, the River Bcnd financing costs. Company discontinued regulatory accounting prin- n.i.nce .t ciples for the steam department and wrote off the necember 31, necember 31. deferred revenue requirement and accounting __ 1989 1968 order deferrals, and made other adjustments. The (in thousands) write off is recorded as an extraordinary item and DertRRED ntVtNUt amounted to $34,431,000 before the related 3 "I income tax benefits of $12,527,000. E $E gT.[n {3n[E" i.oulslana retail jurisdiction . . . . . . $277,940 $173.461 W110LESALE JURISDICTION. As discussed pre- wholesale jurisdiction - 55.506 i vlously in Wholesale Jurisdiction - Rate Matters, stearn department . - 8.673 the Company has reached agreements with a 277.94_o 237.640 majoilty of its wholesale customers which, AccouMTINo onDen among other things, lowers the contracted amount DEFER 7,x,s e il jurisdiction l of power and the rates for such power. Upon Deferred niver uend approval by the FERC of these agreements, the expenses and Company discontinued regulatory accounting carrying charges 368.953 377,329 principles for the wholesalc jurisdiction, wrote off ^ acuN!N"d eferred the deferred revenue requirement previously River Bend costs . (6.570) (2.010)

'     recorded by the Company with respect to the                       Loulslana retail phase in plan for its wholesale customers, and made other adjustments. The write off is recorded                  MdNo"niver oc                       send expenses and                                                                                                    l as an extraordinary item and amounted to                              carrying charges                                                            400.375              408.854
      $65,S02,000 before the related income tax                            ^jcg[j,"d benefits of $28,582,000.                                                                       crerred River Bend costs .                                                           (83.396)             (42.549)   i Deferred Revenue Requirements- Kluer Bend                         YeTer#'o*n$e'"n'end re Phase in Plan. In accordance with the terms of the                    expenses and phase in plan authorized by the court in Loul,                        carrying charges                                                               -                   19,884 slana, and adopted by the LPSC, the Company is                       ^$cumNd                   eferred recording a deferred revenue requirement repre-                       niver Bend costs .                                                             -

(2.069) senting those River Bend costs which have been 679.362 759.439 deferred for future recovery. Dtrenato Riven acNo Bluer Send Cost Deferrals. Pursuant to account- DtNto' Mven atrW

    ' ing orders received in 1986 from the LPSC and the                rtNAnciNo costs. NET
    . PUCT, the Company deferred recognition, for                      or AMonTIZATioN                                                                  121.561              135,764 hnancial reporting purposes, of the retall portion of                                                                                            sa35.74j            $861.315 the operating costs associated with Riv2r Send and costs of purchasing capacity from CEPCO's 37

mjwe . n . - v.AEEEEEE5MM&K?EE Financial Information . The deferred income taxes related to the The components of federal income taxes are as amounts detailed above at December 31,1989 and follows: 1988 of $242,839,000 and $251,366,000, respec- -1989' 1988 1987 tively, are included in " DEFERRED CREDITS AND (in thousands) OTHER LIABILITIES - Accumulated deferred charged to operating income taxes" on the Consolidated Balance Shect. ege"'Dederai r en income tax P'*'*" *~ * ~ * ~ Recovery of Costs -- Amortization of Accumu- "' ' lated Deferred River Bend Costs. The Company **l,*"'d g es _ net '* was ordered by the LPSC, as part of the Tax depreciation . . . . 55.361 56,692 105,714 December 15,1987 rate order, to amortize the capgIlzed construction deferred- costs and accrued carrying charges nucicar unit cancellation related to the accounting order over a 10-year costs net of

                                                                                                   "        "                   (2,414)      (2/104       (1.627) period, in July 1988, the Company began amortiz-                                      ruIaNhrdasEd.

Ing = over a 40 year period approximately power costs deferred 6,974 4,704 (1,662)

       $182,000,000 of deferred costs and accrued carry.                                     (accrued) ... ,...

Ing charges associated with the portion of River @x*"S ur *0seI" (714) (1,094) (5.447) Bend ruled prudent by the PUCT in accordance with Tax net operating loss a the May 16,1988 rate order. The balance of Texas ye%g7 egocu$c"Niy. (39,605) (56.581) (140,955) jurisdiction deferred River Berid costs which are River Bend operating expenses deferred for not being amortized pending resolution of the cur. rent rate case is approximately $187,000,000. $'Ns'e'd'oN8' purposes . 25.705 64,517 74,040 d "" ( (#"} I*'## }

4. Federal Income Taxes s' '*ta/*e*funE' e

deferred for nnancial reporting . (5,741) - - The provisions for federal income taxes were dif. other (4,622) 1,638 (1,059) fcrent from the amounts computed by applying I # the statutory federal lacome tax rate to net income lnc N x*e nI 29.4n 63,635 27,994 (loss) before federal income taxes. The reasons investment tax credits - net (4,424) (4,118) (3,703) for these differences are as follows: . Total federal income taxes 1989 1988 1987 charged to operating expenses .. ... 24,987 59.517 24,291 (in thousands except percents) Charged to other income 11,620 8,794 7,699 Net income (loss) trtfore - net . . ....... federal income taxes ,

                                               $ (51,144) $164,052 $273,091                Application of STAS statutory tax rate .                            34 %         34 %        40%       No. 90 - Accounting for rederal income taxes at                                                               sa lowa ce o p ant statutory tax rate ....                 (17.389) 55,778 109,236                   costs . . .            ....           (7,670)       (7,402)         -

Additions (reductions) in Charged to extraordinary federal income taxes item , (34.500) - - resulting from: Total federal income Exclusion of AFUDC and taxes $ (5,571) $ 60,909 $ 31.990 River Bend carrying charges from taxable income . . . .... . 8,653 (305) (105,325)

                  **                                                                   'Tir"ing differences exist for which deferred taxes purdesN exkensedIor tax purposes .                        (7.484)      (5,779) *- 542 have not been provided and, therefore, have not 12,009                     3,249 been recovered through rates. The cumulative difIerenc"es                                       6,040 amount       of timing differences for which no deferred Aqjustment f'or prior years taxes and other regulatory                                              taxes have been provided was approximateiy a     t                             I*       I        (U                $109,000,000 at December 31,1989. The tax n ujef           differences o'f' nonutility subsidiaries .             6,026           (53)        584 effect of the Company's 1989 federal tax loss has Deferral of nuclear fuel                                                   been recorded as a reductior' of deferred income taxes. At December 31,1989, for tax purposes, Am         allon Ninvestment tax credit .                         (4,424)      (4,118)     (3,712)    the Company had tax loss carryforwards of approxi-other items .                              (107)      1,811       4.526     mately $1,020,000 and investment tax credit car-Total federal income                                                  ryforwards for book and tax purposes of approxi-tn es .                    $ (5,571) $ 60 ] $ 31,990 mately $185,000,000. These will be used to effective federal lncome tax                                            11.7% reduce income taxes in future years and, if not rate                                         10.9 %      37.1 %

Used, will expire through the year 2004. 38

r y f ,

• _

E .

 +                                                                                                         CAdf States UtilitleS CO.

In December 1987, the FASB issued SFAS No. 96, The obligations for plan benefits and the amount Accounting for income Taxes, which significantly recognized in the Company's Consolidated Bal-changes accounting for income taxes and super. ante Sheet at December 31,1989,1988, and sedes almost all existing authoritative accounting 1987, are reconciled as follows: literature on accounting for income taxes. While 1989 1988 1987 the statement retains (with the exception (in thousands) described below) the existing requirement to ^C or "g*c$c't ( b i aN"s* record deferred taxes for transactions that are Accumulated enefit reported in different years for financial reporting "bljga""NI"oi"" c ed t c and tax purposes, !! revises the computation of $125.958. $123,125. end $127,384. . . ,$j4,0.623 $ 135,279 $ 139,308 deferred income taxes so that the amount of ctcd enefit deferred income taxes on the balance sheet is I$gi i9 .. $ (190,770) $ (167,509) $ (173.687) adjusted whenever tax rates or other provisions of Plan assets, at fair the income tax law are changed. Required adop- m thet value 253,810 217,559 200,762 assc " tion of SFAS No. 96 has been repeatedly delayed I$"p o ecped benkt by the FASD, as possibic revisions to SFAS No. 96 obligation . . . . . . 63.040 50,050 27.075 (61.362) (39,253) (15,65m are bcIng considered. Adoption of SFAS No. 96 N e Q " d $ gain is currently required in 1992, and when adopted it assets, being is expected to have a significant impact on the "ye"$'r ...[.. (26.262) (28.649) (31.036) Company's balance of deferred income taxes unrecognized prior through reclassifications. Pending final modifica- ,], c,' 7,'ccrued tion of SPAS No. 96, the impact on the Company's pension asset Consolidated Statement of Income for future (itability) . $j1.206) $ 1.151 $ 1.842 years cannot be determlncd at this time. The accumulated benclit obligation is the present SFAS No. 96 also changes current practice by value of future pension benefit payments and is significantly limiting the ability to recognize net based on the plan's benellt formulas without con-deferred tax assets, the net defe Ted tax effects sidering expected future salary increases, of expenses or losses reported later for tax pur- Assumptions used to determine net pension cost arc as detailed below, poses than for financial reporting purposes. 1989 1988 1987 Discount rate . . .. .,. . 735% 8.25% 7.50%

5. Retirement Plan "f's'e't, *d

                                                                               ,'?"9"" '8l? ' '***" " 7,3o             7,3o  7,3o Average future salary level increase . 6.10              6.10  6.10 The Company's pension provision for the years                At December 31,1989,63.2 percent of plan ended December 31,1989,1988, and 1987 was                     assets were invested in equity securitics, 24,9
   $2,357,000, $691,000, and $798,000, respec-                   percent in bonds, and 11.9 percent in cash or cash tively. Of such amounts, $2;107,000, $608,000, and equivalents.
   $703,000, respectively, were charged to income                   in addition to the net pension cost detailed with the balance of such costs for each period                above, the Company recorded $574,000 of expense charged to construction and other accounts.                   related to the 1986 carly retirement plan for the year ended December 31,1989 in accordance The components of the pension provision for with regulatory directives.

1989,1988, and 1987, are summarized as follows: 1989 1988 1987 N (in thousands) service cost $ 7,835 $ 6,742 $ 6,690 Varibus acquired the rights to lignite reserves in

   '"NNt t      ob$gUlon               12.876     11.933    11.330 the mid 1970's as fuel reserves for the Company's Actual return on plan assets   (46.308) (26.869)      (8,356) proposed lignite generating units. Upon deferral Unrecognised net gain Ooss)     29.991'    11,812     (6.853) of Construction of the proposed l!gnite units, Amodtzation of net gam.           (745)     (1,270)     (356) Varibus retained its investment in the lignite Amortization of prior service                                 reserves in order to market them, in October 1989, cost .                         1,095         730       730 VJribus determined all efforts to markct the lignite tIar$ttioIa"sNt .             (2.387)     (2.387)   (2.387) reserves had failed and, theicfore, abandoned Net pension cost.             $ 2.357 $        691 $     798                                                '     '

ment in lignite leases. 39

                            , - T ;d &% v' N' - l M%25$$YIEW50IEWt$$?5@LW FinancialInformation L

• 7. Jointly Owned Facilities As of December 31,1989, the Company owned undivided interests in three jointly-owned electric generating facilities as detailed below (dollars in thousands):

River Bend Roy S. Nelson Big Cajun 2 Unit 1 Unit 6 - Unit 3 Company Share of Investments: Plant in service . . ..... ... .. .. $3,062,402 $405,203 $219,528 Accumulated depreclation , , .... . 268,978 95,295 36,054 Total plant capability . . . . . . 936 MW 550 MW 540 MW Pucl source . . . . . .. .. .. . . . .... Nuclear Coal Coal Ownership share . .... . . ... . . .. . 70% 70% 42% The Company's shar: cf operations and maintenance expense Bend and Nelson Unit 6. The amounts above do not reflect related to the joinuy-owned unlis is included in operating ~ costs previously recovered through CWil' included in rate expenses, see Note U for Information relating to buybach base, agreements between the Company and the participants in River

8. Leases 9. Capital Stock and Retained The Company has existing agreements for the Eamings leasing of certain vehicles, coal rail cars and other The Company offers its common, preference, and equipment, buildings, and nuclear fuel. Lease preferred shareholders the opportunity to reinvest charges were $60,819,000, $75,398,000, and their dividends and to make additional cash pay-

    $67,367,000, for the years ended December 31,                                                    ments to acquire shares of the Company's com-1989,1988, and 1987, respectively. Of such                                                       mon stock through its Dividend Reinvestment and amounts, . $60,256,000, $74,431,000, and                                                         Stock Purchase Plan (DRIP) (Sec Note 1 for infor-
     $65,925,000, respectively, were charged to income, matlan on the omission of common, preferred, Future minimum lease payments under non.                                                     and preference stock dMdends during 1986,1987,
   . cancellable capital and operating leases for each of 1988, and 1989.) The Company also offers all the next five years and in the aggregate at                                                     employees meeting designated service require-December 31, 1989, are estimated to be (in                                                       ments the option to participate in benefit plans thousands);                                                                                      which provide an opportunity to obtain common shares of the Company. At December 31,1989, the 1990,       ..           .         .
                                                                          $ 69,579                    Company had reserved 5,562,503 shares of com-1991. .. .                                    .

63,625 mon stock to be issued in connection with its DRIP and employee benefit plans. The Company cur-

         -1992.                                                                      57,516.-

rently intends that the DRIP and employee benefit 1993. ... . . . 58,019 plans purchase shares of common stock in the 1994... . 24,136 open market rather than offering unissued shares which would have s dilutive effect on cam-Remaining years . 160,028 Ings per share and book value.

                                                                            $438,903                     At the Company's option, the Articles provide that all or part ofits preferred and preference stock On February 7,1989, the Company completed a may be redeemed at stated prices. Certain issues new nuclear fuel financing agreement. The pro-                                                  are subject to restrictions in the Articles which cceds of $160,000,000 were used to retire the out-                                               prohibit redemption for a period of time, directly or standing balance of the previous nuclear fuel                                                    indirectly out of the proceeds of or in anticipation lease and to reimburse the Company for nuclear of borrowings or issuance of additional stock of fuel costs incurred during 1987 and 1988. The                                                    equal or prior rank having a lower interest cost or agreement calis for the Company to make quar-                                                    dividend rate. See additional restrictions under terly payments for the cost of fuel consumed during the bank credit agreement in Note 12.

the previous quarter, including capitalized inter- At December 31,1989, the Company had est, and additional payments, if necessary, to pay authorized 10,000,000 shares of preferred stock costs related to the fuct or reduce related debt. without par value (none issued) and authorized - The Company is leasing the Lewis Creek generat- 6,000,000 shares of preferred stock $100 par ing station from its wholly owned consolidated value (4,617,568 issued). Limitations based on the subsidiary, OSO&T, ratio of after tax camings to fixed charges and 40-

W

            $$ $ $$hN $ $ $ $ $ $ .Y/$$$ $ $ $ $ $ $ & $ $ $ $ I $ 5 b 5 $

Gulf States Utilities Co. preferred dividends are imposed by the Articles 10. Preferred Stock Subject to upon the issuance of additional preferred stock. Mandatory Redemption Based upon the results of operations for the year ended December 31,1989, and existing cir- 1hc scrics of preferred stock subject to manda-cumstances, the Company is unable to issue any tory redemption are entitled to sinking funds

           . additional preferred stock.                                          which provide for the annual redemption of shares (varying in amount from 3 percent to 5 percent of Certain limitations on the payment of cash divl' the number of shares originally issued) at $100 dends on common stock are contained in the                            per share, plus any dividen 's in arrears on such
   .        Articles, indentures, and loan agreements. Under                      stock (see Note 1).

existing limitations, as discussed in Notes 1 and As discalssed in Note 1, as of December 31,1989 12, the Company may not pay dividends stock, if such restrictions did not exist, the most on such the Company has failed to satisfy $9,647'000 of ' restrictive limitation at December 31,1989, as t preferred stock sinking fund requirements. Sec Note 1 for the consequences of such failure, the amount of such dividends which might be paid, was contained in the Trust Indenture. Based During 1906, the Company purchased in the on such limitation, the retained camings available open market, shares of the applicable series of 3 for payment of dividends as of December 31, preferred stock in excess of the amount needed to 1989, amounted to $629,536,000. Preferred and satisfy the 1986 sinking fund requirement. At U. preference dividend requirements, as well as pre. December 31,1989, assuming that the additional ferred stock sinking fund requirements, have pri. shares purchased during 1986 are used to satisfy ority over the payment of cash dividends on com. future sinking fund requirements, minimum mon stock, redemption requirements amount to $7,679,700,

                                                                                   $11,066,700, $14,816,700, $14,816,700, and Payment of dh'Idends on preference stock is sub- $14,816,700 during the years 1990 through 1994, ordinate to payment of dividends on preferred                        respectively, exclusive of the $9,647,000 unsatis-stock and preferred stock sinking fund obligations, fled provision discussed above. See Notes 1 and 12 There are no limitations in the Articles on the                      for limitations on payment of dividends on and issuance of preference stock,                                        purchases of preferred stock.

11. Long Term Debt The Company's Mortgage Indenture contains an interest coverage covenant wnich limits the The Company's Mortgage indenture contains amount of first mortgage bonds which the Com-sinking fund provisions which require, generally, pany may issue. Based upon the results of opera-that the Company make annual cash deposits tions for the year ended December 31,1989, and equal to 1.2 percent of the greatest aggregate prin- existing circumstances, the Company believes it cipal amount of first mortgage bonds outstanding does not have sufficient coverage to issue addi-or, in lieu thereof, to apply property additions or tional first mortgage bonds. The Company does

- reacquired first mortgage bonds for that purpose. believe it could presently issue approximately The Company has satisfied the mortgage require- $16,000,000 of first mortgage bonds to replace first ments in past years and plans to meet current mortgage bonds previously retired. and future requirements by certifying "available net Revolving Credit Agreement. At December 31, addittor.s" to the trustee. 1989, the amount outstanding under the Com-Certain series of the Company's first mortgage pany's revolving credit agreement consisted bonds and pollution control and industrial develop. of $125,000,000 bearing an interest rate of ment bonds require cash sinking funds. Sinking 9yis percent and $166,667,000 at 9"/ie percent. fund requirements, along with long temi debt Deferred Rfuer Send Construction Commitments, maturitics, for cach of the next five years are Certain post completion costs relating to the con-detailed below (in thousands): struction of River Bend remain unpaid to Stone Sinking Fund Long Term Debt Maturities

• e Requirements First Deferred SatisSed by Mortgage Revolving River Bend Property Bonds and Credit Construction Cash, Additions Debentures Agreement Commitments 1990. . $67,320 $17,724 $ 77,000 $ 58,333 $15,241 1991. . 48,570 17,724 10,750 233,334 12,625 i

1992. 8,995 17,520 114,003 - - 1 1993. 425 17,520 8,580 - - i

              .1994.     .         .   ..                  .               425         16,320        100,000         -                -

41

                          / ; ; y ' % [ ['[gjeg / : .                           ; / /fgQQQGjggff FinancialInformation
    . & Webster Engineering Corporation, the pencral                      worth test. The bank credit agreement is collateral contractor for River Bend. As of December 31,                       Ized by the pledge of $100,000,000 principal 1989, the- Company's share of such costs                            amount of the Company's first mortgage bonds, amounted to $27,866,000, The Company and                                The Company had no short term debt outstand-CEPCO began making monthly installments of                          Ing during the three year period ended December
      $2,000,000 on July 1,1988, and will continue until 31,1989.

the principal amount due and related accrued interest is paid. The Company and CEPCO own 13. Purchase Power Agreernents 70 percent and 30 percent of the unit, respectively. As of December 31,1989, the Company has American Municipal Bond Assurance Corporation agrecments with Sam Raybum Municipal Powcr (AMRAC). The Company has agreements with Agency and CEPCO to buy back declining amounts AMBAC which guarantee the payment of principal of their share of the capacity of Nelson Unit G and and interest on $65,735,000 of pollution control River Bend, respectively,1sce Note 7) for'seven revenue bonds, more years in the case of Nelson Unit 6 and 18 more months in the case of River Bend. The During January 1988, the Company and AMBAC variabic costs associated with such buybacks are amended the original agreements. As part of the composed of fuel costs and operations and main-amendment, the Company aqrced to deposit tenance expenses, while the fixed costs are

       $12,000,000 in an escrow accou:n which may be                       based upon gross plant investment and other returned to the Company, based on the fixed                        factors.

charge coverage ratio at and subsequent to Areril 1990, while AMBAC agreed that no further cash Nelson Unit 6. For the years ended deposits would be required through April 1990. As December 31,1989,1988, and 1987, variable costs of December 31,1989, the Company had exe. applicabic to the Nelson Unit 6 buybacks were cuted $82,885,000 of notes (representing 200 $10,444,000, $13,285,000, and $12,829,000, percent of the actual cash payment) which are due respectively, while the fixed costs associated with such buybacks were $13,692,00G, in April 1990.

                                                                            $16,542,000, and $17,945,000, respectively.

12. Short Teran Lines of Credit Based upon current information, the Company esti- '

mates that the annual fixed costs incurred in con-As of December 31,1989, the Company had nection with the Nelson Unit 6 buybacks will agreements with banks and banking institutions range in declining amounts from $8,557,000 in which provided for short term lines of credit totaling 1990 to $3,869,000 in 1994. For 1995 and 1996,

          $110,400,000 of which $100,000,000 is collateral-                 aggregate flxed cost payments for the buyback of Ized as described below. There can be no assur-                   power of such unit arc estimated to be approxi-ance that the remaining unsecured sources of                      mately $4,461,000, short term funds may be accessed at this time, or                     River Bend. The Company and CEPCO have a will remain available, or that new sources can be                  five year agreement which began on June 16,1986, arranged. Interest rates associated with these                     whereby the Company will buy back power from lines are based on the prime rate. Commitment                      CEPCO for declining amounts of CEPCO's share of fees on the collateralized line of credit cost 1/2 of1 River Bend. The fixed costs incurred in connec-percent of the amount of available credit. In lieu of tion with the buybacks werc $55,830,000, commitment fees on the uncollateralized lines,                     $100,688,000, and $150,382,000, for the years certain banks require a nonrestricted cash balance ended December 31,1989,1988, and 1987, respec .

be maintained equal to 10 percent of the tively, and are estimated to be approximately commitment. $46,269,000 in 1990, and $17,198,000 In 1991.

 /:           Included in the total short term lines of credit is a for the years ended December 31,1989,1988, and
           $100,000,000 banit credit agreement which was                      1987, variable costs applicable to the River Bend due to expire on March 2,1990, however, the bank buyback were $17,341,000, $34,233,000, and credit agreement, at or near such level is in the                  $49,658,000, respectively, process of being extended to March 1991. The                         Southem Company. As discussed in Note 1, the short term bank credit agreement contains nega- Company entered into contracts, some of which it tive covenants which, among other restrictions,                    asserts are terminated and on which it is cur-restrict the incurrence of additional debt, creation               rently withholding payment, with the Southern of liens, prepayment of debt (with certain excep- Company providing for power purchases by the tions), payment of dividends, purchase of stock                   Company. The fixed costs applicable to the power other than to satisfy mandatory sinking fund                      purchases from the Southern Company are requirements, sale of assets, and acquisition of                   based on' costs of existing and future generating assets and require satisfaction of a minimum net                   units and other factors. For the years ended 42

N I N d N }i $ k.Y[) N M [ N $ N 5 $h5 7$ b M EN N b [ b , 5 b b b N E b i b N d M E 5I Gtsif States Utlittles Co. December 31,1989,1988, and 1987, the fixed ThcJoint venture began in 1988, with a primary costs associated primarily with facilities charges term of 20 years. totaled $11,685,000, $11,996,000, and

                                 $19,442,000, respectively. Under the terms of the                                                           for the years ended December 31,1989 and contract, if determined to still be effective, the                                                      1988, the purchases of electricity from thejoint Company would be required to make, on a take or, venture totaled $62,583,000 and $15,541,000, pay basis, annual payments for fixed costs cur.                                                         respectively.

rently estimated to range in amounts from approx-imately $167,000,000 to approximately 14. Subsequent Events

                                 $82,000,000 during the period from 1990 through 1992. The variable costs associated with such                                                                  it'orkforce Hestructuring. In January 1990, the purchases are composed of fuel costs and opera.                                                          Company announced the results of a six month tions and maintenance expenses. For the years                                                            study on workforce restructuring. The restructur-ended December 31,1989,1988, and 1987, such                                                             ing resulted in the climination of 312 positions.

Variable costs totaled $0, $17,594,000, and The cost of the restructuring through special termi-

                                  $60,337,000, respectively. Sec Note 1 for total                                                         nation benefits, including an early retirement pro-charges provided for in the contracts.                                                                  gram, was approximately $6,765,000.

Nelson Industrial Steam Company (NISCO). The Loulslana. Phase-in Plan Third Step. On Company entered into a joint venture with February 22,1990, the LPSC granted the Company Conoco, Inc., Citgo Petroleum Corporation, and a $28,000,000 rate increase as the third step in Vista Chemical Company (the participants) the February 18,1988 court ordered phase in whereby the Company's Nelson Units 1 and 2 plan. The LPSC order among other things includes (100 MW cach) were sold to a partnership (NISCO) the deregulated asset plan, which was previously consisting of the participants and the Company, proposed by the LPSC in November 1988 and The participants are supplying the fuel for the ordered by the district court on October 11,1989. anits, while the Company operates the units at the The Company is in the process of evaluating the - discretion of the participants and purchases the LPSC order which may result in the appeal of cer-ciectricity produced by the units. The Company tain aspects of the order. See Note 3 for addi-is continuing to sell electricity to the participants, tional information.

15. Quarterly Financial Information (Unaudited)

(in thousands except per share amounts) Earnings (Loss) Per Average Share of income Common Stock (Loss) Outstanding Before Before Extraordinary Extraordinary Earnings item and the item and the (Loss) Cumulative Cumulative Per Average ENect of Net ENect of Share of Operating operating SFAS No. 90 Income SFAS Mo. 90 Common Stock 1989 Revenue Income in 1988 (Loss) in 1988 Outstanding First Quarter . . . . . . . . $365,688 $ 77,066 $ (10,675) $ (10,675) $ (.24) $ (.24) Second Quarter . . . . . . . 392,525 75,663 3,137 3,137 (.12) (.12) Third Quarter . . . . . . . . . 466,816 107,768 20,416 (16,625) .04 (.30) Fourth Quarter . . . . . . . . 382,377 67,323 373 (21,410) (.14) (.34) 19aa First Quarter . . ... . $353,857 $102,081 $ 22,819 $ 8,450 $ .06 $ (.07) Second Quarter . 362,610 116,265 30,082 30,082 .14 .14 Third Quarter 437,181 138,647 57,005 57,005 .38 .38 Fourth-Quarter . . 366,829 75,863 7,606 7.606 (.08) (.08) See Note 3 for information regarding the extraordinary item recorded in the third and fourth quarters of 1989, due to the write off for the discontinuation of regulatory accounting principles to the Company's wholesale jurisdiction and steam department, respectively. See Note 6 for information regarding the abandonment oflignite leases in the third quarter of1989 by Varibus. Certain reclassifications have been made to be consistent with current year presentation with no effect on net income (loss). 43

_ ,_ l ? -

             ,                , 79 i _.

Financial Information Report of Independent Accountants To the Shareholders of Gulf States Utilities Company: We have audited the accompanying consolidated balance sheets of Gulf States Utilitics Company as of December 31,1989 and 1988, and the related consolidated statements of income, cash flows, and changes in capital stock and retained camings for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financlal statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and pMorm 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gulf States Utilitics Company as of December 31,1989 and 1988, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1989, in conformity with generally accepted accounting principles. As of December 31,1989 and 1988, the Company has capitalized approximately $3 billion of construction costs related to its River Bend Unit 1 Nuclear Ocnerating Plant and has capitalized, in accordance with regulatory orders, $957 ml!!!on and $997 million, (net of amortization and write-offs) respectively, of deferred charges representing plant operating and carrying costs incurred subsequent to commercial operation. Without regulatory orders prescribing the deferral and capitalization of such charges, the net loss for 1989 would have been increased by $41 million ($.38 per share), and net income for 1988 and 1987 would have been reduced by $128 million ($1.19 per share) and $390 million ($3.61 per share), respectively. The Company has filed requests with regulatory commissions in Texas and Loulslana requesting rate increases for recovery of River Bend construction costs and deferred charges and has bcen granted increases covering a portion of such costs. As discussed in Note 3 to the consolidated financial statements, if current regulatory orders are not modified, a significant write off of capitalized costs associated with River Bend may be required, however, the extent of such write-offs, if any, will not be determinable until appropriate rate proceedings, including court appeals, have been concluded. Management can provide no assurance that the Company will ultimately eam a retum on or fully recover its investment in River Bend. As discussed in Notes 1 and 3 to the consolidated flnancial statements, the Company is involved in legal proceed 5gs relating to contractual disputes, River Bend, and rate issues. The ultimate outcome of the proceedings cannot presently be determined. Accordingly, no provision for any liability that may result from the resolution of the proceedings has been made in the accompanying consolidated financial statements. As discussed in Notes 1 and 3 to the consolidated financial statements, significant legal proceedings, rate issues, and operational contingencies exist which raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue as a going concem and do not include any adjustments that might result from the outcome of these uncertainties. As discussed in Note 3 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 90, Regulated Enterprises - Accounting for Abandonments and Disallowances of Plant Costs. In 1988 and the provisions of SFAS No.101, Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71, for its wholesale jurisdiction and steam department in 1989. Houston, Texas February 28,1990 44

m GWGEi!MIMIMMEUMEMEFEEEEIW'MMMMED Gulf hees uttittles Co. Statistical Summany t : For the years ended December 31 L 1989 1988 1987 1986 1985 ELECTRIC DEPARTMENT Nember of rustomers at year end: Residentlaf . . .. ..,,... . 492,054 486,993 484,838 484,608 485,825 Commercial . .. . .. .,,, . , , . 62,469 61.958 61,861 62,059 61,712 Industrial . ... .. . .. . . . 4,511 4,563 4,319 4,322- 4.338 Temporary construction . . . . . .. 1,638 1,477 1,442 1,656 2,188 Othe r . . . , , . . . . . . . . . , . 2,605 2,585 2,445 2,430 2,333 1- - Total Customers , , . .... . 563,277 557,576 554,905 555,075 556A56

                                                                                                         -=              ::,-

Sales - Kilowatt hours (thousands): Residential . . , .. ... . . . . 6,473,021 6,326,089 6,208,961 6,174,567 6,224,555 Commercial . ..., , . . ,, 5,197,356 5,023,755 4,911,378 4,920,882 4,964,416 Industrial . . . . . . . . . . . . . ., ,. ... . 12,321,905 12,072,078 .11,811,676 12,158,762' 13,590,004 i.' Temporary construction . ,,.. , ,, , 10,759 13,133 16,241 42 A98. 47,475 Other . ..... . . . . . .. 1,191,720 1,482.652 1,485,242 1,508,245 1,890,700

Total Sales . . ,, . . . 25,194,761 24,917,707 24.433,498 24,804,954 26,717,150 Revenue - (thousands):

? Residential , , , , . , ,. ., . $ 487,972 $ 452,538 $ 430,392 $ 425.206 $ 528,593 Commercial , . , ,,, ,, ,,. .. 357,568 331,178 312,544 309,440 358,882 Industrial . .,. .. . , 539,94 510.354 476,871 500,026' 680,755 Temporary construction . 1,075 1,130 1,364 3,066 3,666 r Other ,, . . ... , , . 115.315 120,513 108,935 120,690 142,509 L Total Revenue . . . , . $1.501,874 $1,415,713 $1.330.106 $1.358,428 $1,714,405 l- Average Annual KWH Use Per Customer: l' Residential . . .., , 13,228 13,029 12,818 12,731 12,806 Commercial . ... .. . 83,513 81,339 79,180 79,416 80,951 Industrial , . . . . . ... ,,, . 2,703.951 2,717,101 2,744,980 2,781.053 3.110.553 Revenue Per KWH - (cents):... Residential . , , ..,, , , 7.54 7.15 6.93 6.89 8.49

         ' Commercial .                                ,,          .                                  6.88        6.59          6.36          6.29        7.23 Industrial . . . . . .                   ....              ....                            4.38        4.23          4.04          4.11        5.01 l       Electric Energy Output - Thousands of..

KWH: Net Oenerated . . . . . . . ... .... . 23,955,660 25,146,780 23,421,700 23,009,283 19,286,014 Net Purchased and Interchanged . 5,352,485 3,570,812 4,593,232 5,281,404 11.340,923 29,308,145 2_8,717,592 28,014,932 28,290,687 30,626,937 System Peak Load - Including Interruptible Load - Megawatts . . . . . . ... 5,040 4,910 4,991 5,089 5,139 Total Capability, including Contract

         . Purchases at Time of System Peak Load (MW)   ..    ,,             . .            ,                    ,                        6,541       6,805         6,871        7,548       6,610 Load factor -.        .                            .                         .                 66.4 %      66.6 %        64.1 %        G3.5%       68.0 %

STEAM PRODUCTS DEPARTMENT Steam Revenue (thousands) .... . $ 69,200 $ 70,728 $ 69,056 $ 77,783 $ 102,576 Electric Sales - KWH (thousands) 2,271,428 2,278,884 2,186,789 2,344,058 2,288,108 Steam Sales - millions of pounds. . 11,398 10,494 8,593 7,516 7,695 OAS DEPARTMENT Oas Revenue (thousands) .,.. $ 36,332 $ 34,036 $ 33,424 $ 33,125 $ 41,455 Number of Customers at year end 82,681 82,510 83,003 83,994 85,039 Output - MM cu. ft. of natural gas

         - purchased .        ...                      .                                     .

7,826 7,320 7,305 7,086 8,454 Sales - MM cu. ft. . 7,072 7,134 7,489 7,065 7,946 WEATHER DATA Cooling degree days (Normal 2,696) 2,794 " 2,742 2,660 2,935 2,877 Percentage change from normal . . . . 3.6 1.7 (1.3) 8.9 6,7 l Heating degree days (Normal 1,830), 1,654 " 1,812 1,892 1,636 1,565 Percentage change from normat (9.6) (1.0) 3.4 (10.6) (14.5)

• Excludes 182,580 MWH and $9,052 applicable to prior periods, related to capitalized River Bend construction energy. .

     " Estimated.

t 45

                         . ' }g) .- P..p (.$ & b         ' ..
                                                                                 ?i ',p;.$/.cL.-}7 M        -

ofHeers Chairmart President & CEO E. Linn Draper Jr. (10) 47 Bobby J. Willis (27) 55

     - Chairman of the iSoard, hesident               Mce President & Controller
       & Chief tkecutive,0#icer                       Jasper F. Worthy (35) 61
   "                                                  Mce est ent General Services Senior Executive Vice Presidents Dh'ision Vice Presidents
      -Joseph L.1>0nnelly (10) 60                     John W. Conley (51) 58 6

saaOr Taecuttle Mce hesident \\'estem Division

       & Chief financial Oficer -

Arden D. Loughmiller (28) 51 Edward M. Loggins (51) 59 Seaumont Division Senlo- faccutive Vice hesident* Ronald M. McKenzie (23) 49 Operations Ibrt Arthur Division Senior Vice Presidents J. Ted Meinscher (39) 57 Lake Charles Division James C. Deddens (6) 61 James D. Watkins (31) 58 Senior Mce hesident. Daton Rouge Division River Bend (1uclear Group ggye7 9y,,ce7, Calvin J. Hebert (27) 55 Clyde W. McBride (12) 57 Senior Vice hesident E.Alemal ARalrs Assistant Treasurer Timothy L. Morris (10) 58 Vice Presidents Assistant Secretary - William E. Barksdale (32) 58 ( ) Years of service Vice hesident Engineering Ag', ' and years of service as of Dec. 31,1989 and Technical Services Amery J. Champagne (16) 46 Vice resident Energy Resources Leslie D. Cobb (54) 54 Mce President & Secretary Anthony P. Gabrielle (D) 62 Vice President Computer Appilcatlotts

       - Charles D. Glass (40) 61 Mce President Operations William J. Jefferson (9) 60 Mce hesideni-Rates &

Regulatory Agalts Cecil L. Johnson (13) 47 Vice President Legal Services J. Lee Miller (7) 40 Mce President fluman Resources James E. Moss (51) 55 Vice President Marketing Jack L. Schenck (8) 51 Mce President & Treasurer 46

3 z [ ; _ ' _ :}, . 3pq yp;; _ _ . yo p ,j >.. jggggggYg

   ' Directors Directors          ,

Stockholder Information

      ' Robert H. Barrow                      '(1)Nat S. Rogers                        Stock Listing General, Retired Commandant                Kettred Chairmun nrst City         Gulf States Utilities Co.'s United Statcs Marine Corps                 Bancorporation of Texas Inc        common stock is traded under the St. tYancisville, la. (1984)                tiouston, Texas (1978) symbol GSU on the New York,
     ** John W. Barton                                                                  Midwest and Pacific Stock 0*

Vice Prr.sident Loulslana E* 'h* "9 Cha a f he Board Alicraft Inc. & Otoner* (9gge(gggg ggng, g g. Banon Pams flouston, Texas (1988) Stock Transfer Agents Baton Rouge, La. (1970) Outf States Utilities Co. Joseph L. Donnelly ' Bismark A. Steinhagen Beaumont, Texas Senior Executlte Vice President Chairman of the Board-

         & Chlef nnancial Offlcer                   Stelnhagen Oil Co. Inc.             Virst Chicago Trust Co. of New York Beaumont, Texas (1986)                      Beaumont, Texas (l974)             Mew York, N.Y.
        'E. Linn Draper Jr.                         James E. Taussig 11 Chairman of the Board'                      President Taussig Corp.              'S * * '*

President & Chlef Executive Lake Charles, la. (1975) Yttst City Texas-Beaumont M.A. OMccr Beaumont, Texas Beaumont, Texas (1985)

                                                   ' Executive Committee first Chicago Trust Co. of New York Chalman, Cxecutive Committee Pre Ide t u hwest                                                              Mew York, N.Y.

Research institute (1)Will not stand for San Antonio, Texas (1983) re election May 3,1990 Dividend Reinvestment Plan Agent u ates WWes Co. Frank W. Harrison Jr. Consulting Geologist P.O. Box 1671 lafayette, 12.(1990) Beaumont, Texas 77704 Edwla W. Miam Intestment Consultant 7agm gg.g Boston, Ma. (1959) William H. LeBlanc Jr. Principal Offices The form 10 K Annual Report to Chairman of the Board Baton Rouge Supply Co. Inc. 350 Pine St. the Securities and Exchange Baton Rouge, la. (1974) Beaumont, Texas Commission and OSU's 1989 77701 Financial and Statistical Report can be obtained without charge from et r d Chkl of the Board Premier Bancorp inc. Divisions Leslie D. Cobb, Vice President & Baton Rouge, la. (1985) Secretary,

         ,                                            285 Liberty Ave.                   P.O. Box 2951 -
                                                                *" Texas               Beaumont. Texas nM.

Re tred Cha an of the Board y,, 3

           & Chlef Evecutive Offlcer                                                      Notice ohnnual Meeting Beaumont, Texas (1978) 1540 Ninth Ave Eugene H. Owen                              Port Arthur, Texas Chairman of the Board &                     77640                              The 1990 Annual Meeting of Chlef Evecutive Officer                                                        shareholders will be held at 2 p.m.

Otven & White Inc. Highway 75 North Thursday, May 3,1990, in the Baton Rouge, La. (1989) Conroe, Texas company's headquarters,350 Pine 77301 Street, Beaumont, Texas. Formal Bookman Peters Chairman of the Board & CEO notices of the meeting, proxy 44 0 statements and proxles w'll be Mrst City Texas B Ro Loulslana Bryan, Texas (1990) malled to all shareholders on or 70802 about March 16,1990. Monroe J. Rathbone Jr. Nedical doctor and partncr. 314 Broad St. Shareholders are invited to attend, The Surgical Clinic Lake Charles, Louisana but if they cannot, they are urged Baton Rouge, La. (1975) 70601 to fill out and retum their proxles. 47

v '- i  ! MM ' P. O. Box 2951 U.S O AGE

          ' Beaumont, Texas 77704             PAID

- Houston, Texas Permit Number 427 -

 - u.

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