ML20084P551

Middle South Utils,Inc Annual Rept,1983

ML20084P551
Person / Time
Site:	Grand Gulf, Waterford, 05000000
Issue date:	12/31/1983
From:	Lewis F MIDDLE SOUTH UTILITIES, INC.
To:
Shared Package
ML20084P530	List: ML20084P526 ML20084P551 ML20084P557
References
NUDOCS 8405180260
Download: ML20084P551 (50)

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Corporate Identification Afiddle South Utilities, Inc. is an investor-ouned public utility holding com-pany that ouns all the outstanding com-mon stock offour operating companies.

Those companies are Arkansas Pk>wer

& Ught C<nnpany, Louisiana Power &

Ught Compcmy, AfississippiPk>wer

& Ught Company, andNew Orleans Public Service Inc. Otherprincipal subsidiaries of Afiddle South Utilities, Inc. are Afiddle South Services, Inc., a service company, Afiddle South Energy, MO Inc., which owns the major portion ofa 2.5 million kilonatt gen *ratingfacility, Grand GulfNuclear Station, rww under construction in Alississippi, and Electec, Inc., a diversified subsidiary which markets the capabilities, expertise, and resources ofthe System companies.

System Fuels, Inc. is afuels procure-ment subsidiary of thefour operating companies. AssociatedNaturalGas Company is a gas distribution subsidiary ofArkansas Pk>wer & Dght Company.

The Middle South Utilities System Major Service Generating Station Area e Gas & Oil E AP&L

$ Nuclear 33 Lpat (Operating) 0 Nuclear E MP&L (Under Construction)

E Coal f.7 (Operating)

.I.

'N

- o;jg[,i O Coal NI Mi'($

i. ;

(Under Construction)

' 'J,j Abbreviations: In this report, references to companies in the Middle South Utilities System are as follows:

htSU nr the LA company.... Mukile South Utilities. Inc.

AP&L.

.. Arkanus Power & Light Company l

1.P& L.

.. Louisiana Power & Light Company MP&L.

.. Mimmppi Power a Light Company NOPSI.

.. New Orleans Public Service Inc.

t 1%S.

.. Midile South Servstes. Inc.

M1..

.. System Fuels. Inc.

Gulf of Mexio MNE.

.. Maldte South Energy. Inc.

Awariated-

.. Awwiated Natural Gas Company Sptem..

. Thecompanicsof the Muktle South Utilities System

Performance Highlights 1983 1982

% Increase Total Operating Revenues (millions)....................

$ 2,910

$ 2,846 2.2 Tot.1 Operating Expenses (millions)...

$ 2,465

$ 2.4II 2.2 Fuel, Purchased Power,& Purchased Gas Costs (millions)...........

$1,474

$ 1,550 (4.9)

Operating income (millions)........

$ 444

$ 435 2.1 Allowance for Funds Used During Construction (millions)....

$ 426

$ 353 20.7 Net income (millions)........

$ 378

$ 311 21.5 Rate of Return on Average Common Equity 13.7 9 %

13.3 0 %

Earnings per Common Share.

$ 2.46

$ 2.33 5.6 Dividends Paid per Common Share...................

$ 1.70

$ 1.66 2.4 t

R:t il Electric Customers at Year-end.......

1,613,797 1,586.874 1.7 R:t:il Electric Energy Sales (million kwh)....

48,350 49,353 (2.0)

System Peak Load (megawatts)....

10,870 10,382 4.7 Net Utility Plant at Year-end(billions)......

$10.2

$8.9 14.6 Const ruction Expendit ures (millions)......

$1,454

$ 1,393 4.4 Average Number of Common Shares Outstanding (thousands).

153,383 133,193 15.2 Table of Contents Chrirman's Letter to Stockholders..........................

2 1983 in Re v ie w.........................

4 Financial Review Operating Review Research and Development Economic Development and Community Activities Future System Growth Ramrt of Alanagement...

17 51:nagement's Discussion and Analysis of Financial Condition and Results of Operations.

18 Consolidated Financial Statements...

23 Corporate Information.............................

45 1973-1983 Financial Record.

46 Aliddle South Utilities System Companies.....................

48 Di r ec t o rs a n d Offic e rs...........................................................

Inside back cover Almut the Cover The Independence Steam Electric Station near Newark, Arkansas, pictured on the cover, consists of two coal-fueled units and is majority ow ned by MSU System operating companies. Unit I (.f the station began commercial operation in January 1983 and quickly (chieved a high standard of operating efficiency. Unit 2 is expected to be in commercial operation by January 1985.

')bU I

I t.

.r U 1 ry A

Chairman's Letter to Stockholders

Dear Fellow Stockholders:

average was ahead of 1982. The

• In November, low-power testing 1983 was a tough transitional Middle South System generation was successfully completed ahead year for the Middle South Utilities pattern was not so bright. As seen of schedule at Grand Gulf Nuclear System. We experienced mixed 11-in the graph on page 3, a sustained Station Unit I near Port Gibson, nancial perfbrmance, but achieved positive growth in electric energy Mississippi, and the project is pre-significant progress toward the con-demand above the 1982 level did pared fbr a full-power operating struction of new plants for a better not occur for our System until July, license and achievement of com-iuel balance and more reliable and and our cumulative electricity de-mercial operation.

adequate supply of electricity for the mand never reached the 1982 level.

• In December, the percentage of future economic growth of our These late year gains, however, reactor operators passing licensing region.

make us optimistic about the future.

examinations at the Waterford 3 The nation's economic recovery There is a close link between a util-nucicar facility near Taft, Louisi-did not occur with equal intensity ity's ability to provide adequate ana, was among the highest re-levels of reliable service and the eco-corded in the industry, moving Ug

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nomic growth of that utility's service this facility toward its full-power

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f area. One gauge used by private see-license and commercial operation J'j ' 1 M tor economic planners in determin-in late 1984.

k, k[ ^ f

, )

ing where to hicate or expand

• In December, a new Middle South

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electric energy at a reasonable cost.

Inc., was chartered in Louisiana business is the availability of reliable Unlities, Inc. subsidiary, Electec, 3.

.4,...

k.M N k.';} !,.1 Our System operating compa-to develop diversilled business T.T O l

.T_i nics enhance the potential for eco-opportunities using the resources M '.i Y' f. - q! ; ' T"

/ 3.h f..

nomic development of their service of the System companies.

areas by providing reliable electric As a nation, we are moving to-

,9 k(~*;. g, c. h '

%. N service at rates that are well below ward greater electrificadon. Electric g],.g,ji F.7 ' (} fg by the System in 1983 further country's total energy consumption 4 '. ;."

the national average. Actions taken power pros ided just one-sixth of our

- ].;5.,V 1-strengthen our capabilities in this re-in 1950, but by year-end 1983, elec-g11

'M-

.u

'! % Q.6 f [d [($}M gard, as seen by these achievements:

tricity demand had risen to one-third df Q " ;

fr.,

• In January, the System's coal gen-of total energy consumption. Electric

=

dy Af;;,

s.ig ? V ;f cration was expanded by 472 utility industry experts maintam that

.g f., y,C.. ti'M[h megawatts through System com-continuation of this trend will require panies' ownership of 56.5 percent the construction of an estimated 300 across the country, and we were well of Unit I which came on line at additional generating plants by the into the third quarter of the year the Independence Steam Ele.ctric end of this century to meet the belbre the sustained improvement in Station near Newark, Arkansas, nation's growing electric energy de-the economy of our area was re-and quickly established a high per-mand, as well as to replace facilities 11ected in our customers' electric en-fbrmance record. Construction of that will have reached the end of ergy usage. The industry average for a second unit is moving ahead well their useful life.

electricity generation began to im-and should be completed by the prove steadily in January, and by beginning of 1985.

September, the cumt.i:itive national

• In July, the transit operations of New Orleans Public Service Inc.

were transferred to the Regional Transit Authority, a state agency, freeing NOPSI to concentrate its efforts on electric and gas service.

2

Lessons of the past have taught Independence Unit 2 and the two nu-Our greatest challenges and op-us that an energy system based on clear units, Grand Gulf I and Water-portunities in 1984 and beyond are domestic fuel supplies is the most se-ford 3. These have been costly those associated with getting our new cure and reliable. And the only plen-undertakings, but we expect that the coal and nuclear facilities into com-tiful energy resources of proven future will prove them to have been mercial service for safe and efficient e.vailability and adequate supply for sound economic investments in pro-power production. Then we face the the future are nuclear and coal.

viding the System with reasonably financial urgency of gaining ade-However, expanding total generating priced, reliable electric energy.

quate tnd timely ratemaking treat-capacity or replacing older generat.

We are confident that these ment that will allow us to recover the nuclear units will be successfully costs associated with constructing the licensed and put into commercial op-units. Assuming that both of these cration. Our standards of construc-objectives are met, the Company's MSU System Energy Demand comparimnor m ana m3 c gmn noun tion are meeting or exceeding all need for exterr.al financing will de-licensing requirements. And, we are crease dramatically in 1985, and our l,

[

training and obtaining certification ability to generate funds internally I

for the necessary plant personnel to should improve.

m operate the units safely and The progress of your Company 3300 efficiently.

during 1983 toward achieving its

[f These units will bring us signifi-corporate goals could not have been cantly closer to our goal of reducing made without the talent and dedica-sac the System's over-dependence on nat-tion ofits employees and the support j /

j ural gas and oil as generating fuels.

ofits stockholders. I invite you to r

A b

The System operating compa-learn more of our plans and achieve-nies that will receive power from ments as discussed in the remainder y v Grand Gulf Unit I are considering of this report.

proposals to phase into rates the costs y

associated with constructing the unit.

Most sincerely, el Under the proposals being consid-Jan Feb Mar Apr May Jun Jul Aug Sepoct Nov Dec cred, a portion of the Costs asmCi-

[

ated with Grand Gulf energy would M

LegendMear be deferred for the first few years of 52 Floyd W. Lew.is m3 operat. ion and would be recovered.m Cha.irman/ Pres. dent i

Note A gismuhr is i mimon Howau-houn.

rates dur ng subsequent JCars. If thC operating companies' proposals, J

ing units with either coal-or nuclear-which inch:de earning a reasonable fueled capacity has become even cash return on the deferred charges more capital intensive than it was in are accepted, the phase-in will both earlier decades.

moderate the impact on customer it is estimated that when they rates and protect the shareholders' are finished, approximately $5.8 investment. This approach would be billion will have been spent for the favorable to the region's potential for additional coal-fueled capacity from continued economic development w hich is important to future earnings and financial health.

l 3

1983 In Review Actions taken by Middle South Utilities System companies during 1983, alcag with the economic recovery, have strengthened our capabilities to continue building the generating capacity needed for reliable electric service and to support the economic development of the Middle South region.

Financial Review The System's 1983 financial re-

$2.47 billion were just slightly suits reflect the transitional aspects higher than the $2.41 billion of of the Company's region moving 198?. The System's costs of fuel,

[*["]ny and Disidends Per Share from a recessionary economy to purchased power, and natural gas su y

one of growth, and the effects of purchased for resale, which are sizable construction expenditures substantially recovered under ap-necessary to reduce the System's proved pass-through adjustment

E over-dependence on gas and oil as clauses in rate schedules, are re-generating fuels.

flected in revecues. These expenses durin8 1983 were $1.5 billion,4.9

'l i

Consolidated Net income and percent less than 1982.

Earnings Improve Gas revenues for 1983 increased The Company's consolidated net by 11.9 percent compared with 1932 income for 1983 was $378 million, to $193.3 million, or approximately a 21.5 percent increase over the 6.6 percent of the Company's total 1982 net income of $311milhca.

operating revcnues. The increase Earnings per share rose 5.6 percent was due almost totally to collection to $2.46 on a 15.2 percent greater from customers of increasing E

o average number of common shares prices charged by our gas suppliers rn9 ive ini 1982 ive utstanding, compared with $2.33 under applicable regulation.

M Earmnp M Dndends Pad These improvements are attribut.

Customer Peak Demand Exceeds able to increases in rates totaling Forecast

$114.1 million on an annual basis The System's peak electric de-during the year, of which $9.1 mil.

mand - the one hour in the year in lion were being collected subject to which customers' requirements are possible refund; management's con.

greatest - during 1983 occurred on tinued emphasis on controlling August 29 at 4:00 p.m., when costs; and an increase in the allow.

10,870 megawatts were needed by

=

ance for funds used during con.

the System operating companies.

struction. The 166 million shares of This peak was 5.5 percent higher MSU common stock outstanding at than we had forecasted for the year.

i year-end were held by 217,654 The previous year's peak demand stockholders of record.

was 10,382 megawatts.

Total retail customer usage of Operating Revenues and electric energy for the year, how-Expenses increase ever, was 48.4 billion kilowatt-The System's 1983 operating hours,2 percent below that of revenues of $2.9 billion represent 1982. This decline reflects the lin-an increase of 2.2 percent over gering effect of the economic reces-1982, wl.ile operating expenses of s on on business activity in the Company's service area for much 4

of the year, a return to generally m 1933. Common stock was gener-normal weather conditions, and ally sold above the daily average customer conservation efforts.

market price without adversely af-Industrial customers' usage de-fecting the market price of the stock creased for the second straight on any given day. It is expected that year, falling 4.6 percent to 21.1 bil-the continuous offering program lion kilowatt-hours. Vhile business will be used in 1984 as a cost-effec-activity in the hfiddle South area tive method of meeting a portion of demonstrated increasing strength Middle South Utilities' needs for by the end of 1983, the increases in additiona! common equity.

industrial electric energy usage dur-The Company also sold common ing the latter part of the year were stock in 1983 through competitive not sufficient to offset the declines bidding to underwriters who, in experienced earlier in the year.

turn, reoffered the shares to the Operating Resenues and Expenses Residential customer usage of public. In February,8 million 7"""

15.5 billion kilowatt-hours also was shares of Middle South Utilitics lower in 1983, although 1.7 percent common stock were sold in this more residential customers were manner with the Company receiv-being served at year-end. The de-ing net proceeds of approximately

_ {( h cline is attributable primarily to

$122.6 million. An additional 7 mil-

{

more normal weather conditions lion shares were sold in November 2

y throughout the System's region than at $15.56 per share for which the y

were experienced during 1982 and Company received nearly $108.9

[

to the effects of customer conserva-million.

tion efforts.

Stockholders continued to take Commercial sales rose by 1.6 per-advantage of the Company's Divi-cent to 9.8 billion kilowatt-hours as dend Reinvestment and Stock this sector of the service area's Purchase Plan which raised $95 cconomy recovered more quickly million during 1983 through the from the recession. Usage by gov-sale of 6.5 million shares of o

Crnmental CustomCrs was slightly common stock to participants in the 1979 IWO 19H1 1982 19M3 bClow the 1982 level.

Plan. The number of stockholders MIR Total operaung Resenues as T.,ui oper nne rxpe"*

1983 Financing participating in the Plan has in-gg gg g;g, continu.

creased each year since its incep-mas ruci.rai rurch.ca ro.er cosis ous offering program to sell com-tion in 1976. At the end of 1983, mon stock completed its first year 35.6 percent of the Company's in January 1984. Through this pro-stockholders were participating gram, nearly 5 million shares of in the Plan, common stock were sold through The proceeds of the Company's The First Boston Corporation as sales of common stock, together exclusive sales agent. A procedure with the proceeds of borrowings initially adopted by the Securities under the Coinpany's revolving and Exchange Commission in early credit agreement and other funds 1982 allows us to take advantage of available to Middle South Utilities, the continuous offering program.

were used for various corporate Under it, we can decide on a day.

purposes including the purchase of to-day basis, according to market common stock of the Company's conditions, whether and how subsidiaries. During 1983, the many shares of common stock we Company made investments of $65 wish to sell. This program resulted million in AP&L, $150 million in in additional capitai for the Com.

LP&L, $29.9 million in MP&L, pany of approximately $77 million and $99 million in Middle South Energy, Inc. MSE has a 90 percent 5

ownership interest in the Grand

$799 million, respectively, com-Gulf Nuclear Station, Unit I of pared to $1,454 million in 1983.

which is scheduled to go into com-These estimates are predicated on mercial operation during the third our meeting the construction pro-quarter of 1984.

gram schedule shown on page 19.

Certain of the htSU System com-The 1984 requirements will be panics were also active in the capi-achieved primarily through external tal markets in 1983. AP&L sold $25 sources, including short-term bank million of 30-year first mortgage loans and the sale of first mortgage bonds in February at an interest bonds, preferred stock, pollution rate of 13.25 percent. In June, $45 control revenue bonds, and htSU million of tax-exempt 30-year pollu-common stock.

tion control revenue bonds were Capitalization Ratios !mprose sold by AP&L at an mterest rate of The hiiddle South Utilities Sys-Construction Expenditures 11% percent. A portion of the tem's capitalization ratios improved

• oa 5) pollutmn control revenue bond pro-from 1982. At the end of 1983, the 5 ' "

ceeds was used to retire an issue Company's capitalization ratios which matured in 1983.

• 1. • '""E'I#'*

E"##"*;

LP&L sold preferred stock in preferred stock,8.7 percent; and February and first mortgage bonds common equity,34.1 percent.

um m both h1 arch and September. In the February preferred stock sale, Operating Review LP&L sold 3 milhon shares of $25 par value preferred stock at a divi.

The System's operations were E

dend rate of 12.6% percent. Two strengthened during 1983 by the g

issues of first mortgage bonds, each addition of a new coal generation consisting of $100 million, were unit, modest rate relief, and the sold in March. One issue of 13.25 improving business activity of the percent bonds matures in 30 years.

region. Significant progress was The other issue, with an interest made on completing the Company's o

rate of 12 percent, has a 10-year current construction program u n o u 33 maturity. LP&L used proceeds which is expected to add an aggre-so,,: p m,,acacos,sio,i9u. aions 3

from the September sale of $50 gate of approximately 2,229 mega-gerggaf million of first mortgage bonds at watts of nuclear generating w,gompi,,,a,,,,,,,9 an interest rate of 13 percent to re.

capacity to the Systein during 1984.

aheduled.

fund a first mortgage bond issue System Rates Below National which matured in September.

Average MP&L also sold first mortgage A survey by the Edison Electric bonds and preferred stock during Institute ofinvestor-owned utilities the year. In March, MP&L sold during the winter of 1983 showed 100,000 shares of $100 par value that the average residential electric preferred stock at a dividend rate bill for the Middle South System of 12 percent, and in June, sold operating companics is signifi-

$45 million of first mortgage bonds cantly below the national average, with a five-year maturity and an Based on a 1,000 kilowatt-hour interest rate of 11.25 percent.

monthly use and rates in effect en MM1 sold $49.5 million of tax-January 1,1983, the national aver-exempt pollution control revenue age bill was $67.58, while the Sys-bonds in December at an initial tem-wide average for a 1,000 interest rate of 8 percent.

kilowatt-hour bill was $62.~3.

Less Financing Required Commercial and industrial rates in The System's total capital re.

the Middle South Utilities System cere also below the national aver-quirements for 1984 and 1985 are expected to be $1,231 million and age, according to the same survey.

After our large new sources of 6

power have been incorporated into when cooler weather would case rates, we expect our rates to still be the impact on customers. The quite competitive.

amount deferred is being collected through a surcharge.

System Compam.es Activein On a similar basis, a settlement Regulatory Arena The System companies were ac-8.'##* nt was reay @ q Missoun Public Service Commis-tive m 1983 in the regulatory arena.

sion for a $3.15 million increase for AP&L and MP&L received rete or-ders, and LP&L and NOPSI filed

". service area in Southeast A

Missouri.

major rate cases in early 1983. As of year-end 1983, rate increases LP&L,NOPSI Rate Decisions pending or on appeal totaled $463 On February 20,1984, the Loui-1983 Residential Monthly Senice million of additional annual net siana Public Service Commission

$2*["

revenues.

granted LP&L $69.0 million ofits un tw,9 At the wholesale level, lengthy request for a $309 million net in-5m hearings were held at the Federal crease in retail electric rates, which Energy Regulatory Commission included its portion of costs of RI during 1983 with respect to the power and energy from the Grand agreement under which MSE will Gulf nuclear plant when it goes into g

sell to System operating companies commercial operation. LP&L had

[

its share of the power and energy adjusted its requested revenue in-from Grand Gulf and on a revised crease to $309 million, compared to y

System operating agreement among its original net request of $412 mil-a g

the System operating companies.

lion, to reflect the Commission's M rch 1983 decision allowing I

AP&L Rate Increases Granted LP&L to use $500 milhon of the k

At the end of 1983, Arkansas M

Texaco settlement to reduce the rate H

Power & Light Company did not base. The settlement, which dealt h

have an electric rate case pending with disputes under gas contracts 6

before any regulatory agency in f r p wer plant fuel extending to o-either Arkansas or Missouri.

1992, resulted in Texaco agreemg to ma m.na r cas.

However, Associated Natural Gas, Pay LP&L $1.087 bilhon in cash in um n12rseucme. Avenne a subsidiary of AP&L, had gas um uso smem ^,coge revenue net increases of $1.059 tW instaumenq ang to guarantee at least $585 milhon in other benefits.

million pending in Arkansas.

In what was one of the largest AP&L and Associated Natural Gas utility refunds ever undertaken, also had net revenue increases to-LP&L mailed to current and former taling $33.4 milhon on appeal in customers during 1983 more than Arkansas and Missoun.

1.1 million checks representing the In August 1983, the Arkansas initial $587 million received from Public Service Commission granted Texaco, plus interest. In early 1984, AP&L a retail electric rate increase LP&L will begin the first of 10 an-of $39.8 million, or 43 percent of nual refunds covering the last $500 the amount requested, m ime with a million of the Texaco settlement.

settlement agreement between The Louisiana Public Service AP&L and the Commission staff.

Commission on February 20,1984, A reduction in the rate ofinflation granted NOPSI a $24 milh,on in-and lower than budgeted construc-crease n ret i electric rates. NOPSI's tion costs were principal reasons J nu ry 1983 filing requested a why the settlement was lower than

$113 million net increase in retail the original request. Because the electric rates, meluding costs associ-rates were scheduled to go into ated with power and energy from effect during the state's worst heat "I*"*"""

wave since 1980, AP&L deferred

1. E "' # * *" " "P""I collecting the increase until October 7

y..

An $11.5 million increase in an-Public Service Commission in April nual gas revenues was authorized 1983 reduced a 1980 rate order for for NOPSI by the Louisiana Public N1P&L from a $48.3 million annual Service Commission in November retail rate increase, based on a pro-1983. The Commission approved jected test year, to $39.8 million the increase after reconsidering a annually, based on a historical pro

$16.9 million increase that it had forma test year and with certain denied in its entirety on June 24, other adjustments. In accordance 1983. NOPSI had appealed the with applicable law, MP&L had earlier decision to the courts.

been ollecting rates since July 1, 1980, at the full amount of the Grand Gulf Costs Excluded

$68.8 milhon increase origmally from LP&L, NOPSI Rate requested. The company subse-Increases quently refunded all amounts above As part of their rate requests, the adjusted rate level, plus inter-LP&L and NOPSI had proposed to en, totalmg approximately $75 mil-phase into rates the costs associated li n. Principally because revenues

- =

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with their share of the capacity and above the Commission's order level

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'. g# %wNg; e-cnergy from Grand Gulf Nuclear had been reserved, the refund had F

i Station Unit I when it begins com-n m terial effect on MP&L s earn-mercial operation. Under this pro-ings for 1983, and no effect for

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r te change filings and collection

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g In its February 20 orders, the of new rates m the state. The Act

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took no action on the companies, the hearing time from six months to t -

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ce rate moderation proposals. LP&L f ur m nths, and prevents a utility

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p and NOPSI will seek to have this from having more than one major matter resolved prior to commer-change in rates in effect under re-1.C cial operation of Grand Gulf Unit 1.

funding bond at the same time.

The Middle Samth Utilities System oper-hlP&L Rece.ives Rate Increase SISE Asks for Cost of Service Rate a'inx om'imin wort ch>sely with stare The Mississippi Public Service Extensive hearings were held in

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F slo"alorganicaimns to attract new and Commission m January 1983 ap-the spring of 1983 before an adm.m-apanaca business and industry ro their proved a retail electric rate increase istrative law judge of the Federal service areas. An example is this stor, of $47.5 milh.on for M.ississippi Energy Regulatory Commission on JacAsun. Musissippi, m the MPal 3 err-

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Power & Light Company, or ap-a Unit Power Sales Agreement. The ice area. which willemphey approsimately proximately 51 percent of the Agreement provides for the recov-2.Soo eople.

v amount requested in July 1982. The cry by MSE ofits share of the cost increase was a 6 percent increase in of power produced at the Grand rates over the level then being col-Gulf Nuclear Station and sold at lectedfiWer bond m a 1980 rate wholesale to System operating case, and a substantial portion of c mp nies pursuant to certam f,xed i

the increase was related to fixed percentages. On February 3,1984, charges on MP&L's 25 percent the adm..mistrative lawj. dge ren-u ownership of the coal-fueled Inde-dered an imtial decision m the case pendence Unit 1.

providing for full recovery of On remand from an appeal to the MSE's con of power from Grand Mississippi Supreme Court, the Gulf Unit 1, but at fixed percent-ages alh>cated among the operating 8

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i When it begins commercial operation, the Grand GulfNuclear Station Unit I near Port Gibson, Mississippi, will help assure customers ofthe Middle South opemting companies ofthe ade-quate and reliable supply ofelectricity that is requiredfor con-tinued economic growth.

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companies different from those set A new System Agreement em-f forth in the Unit Power Sales ploying certain new concepts and

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Agreement. Thejudge also ruled refinements with respect to the co-that it was premature to allocate ordinated planning, construction, power and energy from Unit 2 of and operation of the electric gener-Grand Gulf. The decision is subject ation and transmission facilities of to review and action by the full Fed-the System operating companies eral Energy Regulatory Commission.

was filed with the Federal Energy

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l Advance Payments hlade to htSE Regulatory Commission in April for Grand Gulf Power 1982. The FERC accepted the new l

Under the terms of the Power greement for filmg in July 1982, l

Purchase Advance Payment Agree-and it became effective on January ment, the operating companies were 1,1983, subject to refund. Eviden-committed to make advance pay-tiary hearings began before an ad-I i

l ments to htSE in the event that mmistrative law judge at the FERC l

l Grand Gulf Unit I was not in ser-in I te September 1983 and con-l cluded m mid-December 1983.

vice by December 31,1983. Under

. A number of parties intervened the terms of a suosequent dealk)ca-

.l tion Agreement, AP&L relinquished

!n the proceeding before the FERC, j

including the public service com-its rights in the Grand Gulf station, and the other System operating

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companies agreed to assume all of isgissippi, and Missouri. The Louisiana Public Service Comnus-the responsibilities and obligat. ions L

si n advocated that generating of AP&L with respect to the station.

costs should be equalized among all j

Accordingly, in January 1984, t System op" dng companies.

LP&L, h1P&L, and NOPSI began 7

In J nuary 1984, after the con-j making payments totaling $12.5 mil-clusi n of the hearings, LP&L, lion monthly, borne proportionally MP&L, and NOPSI decided to by each company according to its share of electricity to be derived change their positions with respect

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t how generating costs should be

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l from MSE's 90 percent ownership of the 1,250 megawatt unit. The 11 e ted among the System operat-

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l ing c mp nies. These three compa-

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j companies will receive credit for the advance payments, plus accrued nies are now takmg a position m the

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7-j proceedmg m favor of a program to rersvirrielfruir, du wous system com-interest, over an 18-month period effect the equalization of generating panies spent many wech in mahing-l after the unit begins commercial costs among all of the System oper-ron, a c, during 1933. re3rihing E*'"

ating companies. AP&L, along

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agreementsfiled with the Federal En-System Agreement Under Review with the Arkansas Public Service ergy Regulatory commissiori. <me of I

llistorically, the System operat-Commission, continues to support the many fedend and state agencies ing companies have planned and the new System Agreement as filed.

d'"' n'gulare,*arie urnities.

dispatched tLe electric system on a Middle South Utilities, Inc.,

l coordinated basis. Until the end of the parent company, is not a party 1982, the contractual basis for this to the Agreement or the FERC coordinated development and proceeding.

j operation ivas a System Agreement Coal Capselty Expanded which originally became effective The System reached a major in !973, superseding other agree-milestone in its fuel diversification ments utending back to 1951.

program when its third coal-fueled Minor amendments to the 1973 unit, the Independence Steam Elec-i agreement were made in 1979, tric Station Unit 1, entered com-1980, and 1981.

mercial operation January 18, 1983.

AP&L and MP&Ljointly own f15 percent of the 836 megawatt unit 10 l

which established one of the highest in 1979 to unify and spearhead self-performance records in the industry improvement programs related to during its first year of operation.

operational safety and reliability of Coal now represents 10 percent of nuclear power plants. With the the System's electric generating ca-commercial operation of Grand pacity. Two other substantially Gulf Unit I and Waterford 3, nu-identical coal units at the White clear power will represent 24 per-Bluff Steam Electric Station began cent of the System's generating operation in 1980 and 1981. Con-capacity. The fuel diversification struction on a second 815 megawatt provided by these facilities lessens capacity unit at Independence, also the System operating companies' 56.5 percent owned by AP&L and dependence on natural gas and oil h1P&L, is making excellent prog-and assures their ability to continue Electricity Generation ress toward completion, and that to provide adequate and reliable (7 fMW unit should be in commercial opera-electric service to meet present and tion by January 1985.

future customer needs.

m g" ' g' j In July 1983, a long-term con-Grand Gulf AIoves Toward Full g

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tract for the railroad transportation q

f of coal to White Bluff and Indepen-80 Grand Gulf Unit I performed qg dence stations was signed. Coupled well during 45 days oflow-power y.

with the low-sulfur coal supply con-testing and completed this phase of tracts from mines in the Powder the licensing process ahead of River Basm of Wyoming, the con-schedule. With recertification of tract helps assure an adequate and operating personnel completed in reliable low-cost fuel supply for February 1984, Grand Gulf Unit I these two generating stations. The S waiting for its full-power transportation contract is expected operating license.

3 to resuit m a $16.5 billion savings in H

the cost of electricity to be gener-hlP&L and htSE Ordered to ated by these two facilities over the Rejustify Grand Gulf Unit 2 o

next 25 years. Over $7 billion of In 1974, the Mississippi Public w no u s2 o

" Cal the savings will go to AP&L cus-Service Commission granted to Mill Nuclear (omers, $2 billion to MP&L cus-MP&L and MSE a Certificate of tomers, and the remainder will go Public Convenience and Necessity Bas m

" Ca$

to customers of the other co-owners for the construction of Grand Gulf Nae: percenages s,han represenuoul of the units.

Units 1 and 2. In September 1983, eiedrw energy generaienna nu spie"'

the Commission ordered a rehear-caruar Proven 'I, rack Record IIelps ing on the Certificate of Public Nuclear Expansmn Convenience and Necessity, requir-System nuclear projects also.

ing MP&L and MSE to show the moved forward in 1983. In addition need and economic justification for to Grand Gulf Unit I and Waterford 3, which are scheduled to be in lic Service Com-Af service during 1984, Arkansas Nu-mission denied a motion by MP&L clear One Units I and 2 have con-and MSE to dismbs the September tmued to provide fuel cost savings order, a new motion was filed re-to AP&L customers. And,during questing that the Commission clar-1983, the nuclear training program ify issues in the order, specifically at these Arkansas Nuclear One regarding Grand Gulf Units I and tinits was the second such program

2. Subsequently, the Commission m the United States to receive ac-amended its September order on creditat,on from the Institute of i

January 5,1984, to limit the scope Nuclear Power Operations (INPO).

of the proceeding solely to Grand INPO is an organization established Gulf Unit 2, and ordered MP&L 11

I I

I and MSE tojustify the continued The second report, conducted by l

construction and need for this unit.

Arthur Young & Company, re-i Hearings on this issue aie scheduled viewed not only LP&L's manage-l for March and May of 1984.

ment policies, but also the benefits

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derived by LP&L as a result ofits l

Reactor Operators Licensed at Participation in the four-operating-l Waterford 3 e mPany Middle South Utilities Twenty-seven employees at Ment report to Momm,s-i LP&L's Waterford 3 nuclear facility sion reflected upon the cost effi-near Taft, Louisiana, were licensed ciencies derived from System f

by the Nuclear Regulatory Com-dispatching, group fuel purchases, mission as reactor operators. The j

and forecasting services provided number exceeds the minimum of 20 under the current Middle South operators required to staff the j

Utilities System organizational plant. Nineteen senior reactor oper-umn His ydo reviewed ators and eight reactor operators

, g g;g were licensed after undertak,ng i

t that System participat. ion has al-j more than 80 weeks ofintensive I wed LP&L to take advantage of l

study, some of which was hands-on existing long-term contracts and experience at nuclear plants already has resulted in lower than average in operation. Another reactor oper-costs for LP&L. The report cited f

ator class of 13 took their examina-fav r ble productivity levels and tions in January 1984, and most are cost controls at LP&L.

expected to be h.eensed this spring.

All direct construction work nec-NOPSI Divests Transit Operations essary for fuel loading at Waterford New Orleans Public Service Inc.

3 was completed in October 1983.

transferred operation of the New 27 Loading of fuel is scheduled to be-Orleans transit system to the Re-MP gin during the second quarter of gional Transit Authority, a state 1984, upon receipt of an NRC agency, effective at midnight June 4

l operating license.

30,1983. The transfer marked the l

culmination of active efforts by M

Independent Reports Favorable NOPSI since 1976 to divest itself of O

to LP&L its transit properties. NOPSI realized Two independent studies, one ex-a $2.4 million gain from the sale.

amining construction costs of Wa-In October, voters in the City of flighly trained reaaor operators assure terford 3 and the other a limited New Orleans rejected a ballot pro-rhe safe operation ofnuclearfacilities management audit of LP&L, were posal that would have returned reg.

throughout the uiddle south Utilities ordered by the Louisiana Public S 5'em N3e "Puau>rs at the Wunford 3 J

ulation of NOPSI and that portion steam Electric Generating station at Taft.

i Service Commission in early 1983 of LP&L within New Orlcans to the hiuisiana, were licensed recentiv by the

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after LP&L filed for a retail electn

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New Orleans City Council. Such Nuclear Regulatory Commission after rate inercase.

'"3'" 3'"d 8"d ""i"i"K-7 regulation had been transferred l

Decision Management Com-from the City Council to the Louisi-pany,Inc. of Laguna Hills, Cali-ana Public Service Commission in forma, found that the estimated January 1982 by vote of the peo-

$2.65 billion construction cost of ple. The latest proposal was viewed Waterford 3 is below the average by many as an initial step toward I

cost of nuclear piants built in th?

attempted municipal takeover of the same time period. The report said electric facilities within the City.

that Waterford 3 costs "should be

)

i deemcd prudent," reflecting the LP&L, NOPSI Consolidation l

l difficulties of constructing nuclear Delayed i

j plants during the 1970's and early The functional consolidation of i

1980's, and were not the result of several areas of two System operat-mismanagement, inefficiency, or ing companies, LP&L and NOPSI, lack of care on the part of LP&L.

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Waterford3 Steam Electric Generating Station at 7hft, Louisiana, l

will add 1,104 n~gawatts ofnuclear capacity to the Middle S<nah l

Utilities System 's generation when it begins conunercial opemtion.

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i was achieved during 1983. How-through its own efforts as well as l

ever, approval of legal consolida-through industry organizations such j

tion is still pending before the as the Electric Power Research in-l Louisiana Public Service Commis-stitute (EPRI) in Palo Alto, Califor-sion. The consolidation, if ap-nia. We are especially interested in proved by the various regulatory applied research that enables Sys-bodies, will offer a number of eco-tem operating companies to adapt nomic advantages to customers of for the benefit of their customers both companies.

the technology developed by EPRI.

For example, EPRI research was l

Electee, Inc., Diversified Pplied at the Grand Gulf Nuclear Subsidiary, Created St ti n to mhibit stress corrosion Electec, Inc. has been approved cracking in piping. Similarly, re-l by the Securities and Exchange search findings are expected to help Commission as a new Middle South extend the service life of steam Utilities, Inc. subsidiary to pursue generators at Arkansas Nuclear diversified businesses. Its primary One Unit 2. Estimated financial

'4 a

T focus will be to market at a profit bendits to be derived from these ap-the capabilities, expertise, and re-E C,ations alone are, respectively, l

sources developed by the existing three times and five times the total System companies.

contribution the System has made to l

The Public Utility Holding Com-EPRI since the organization s m-pany Act of 1935 requires all activi-aptmn in M3.

ties undertaken by Electec to meet As a mem of ens Pm a test of functional relationship to j

release User's Group, Middle South the System's bas.ic business. Under i

Services, Inc. participated with this test, any new business must be electrie utilities m a research proj,-

f.8 y,

reasonably incidental to or econom-ect to test a computer program de-ically necessary or appropriate to veloped by EPRI for modeling the operations of an integrated elec-p wer plant dynam.ics. This pro-l tric public utility system. Electee gram was used to develop a com-g will explore the marketing of Sys-puta nmdel of a standard coal-l tem engineering and computer fueled unit and also to build a com-technologies as well as participation plete model of the Grand Gulf Nu-in co-generation projects.

(, car Station Unit I to investigate Electec is already investigating the spirit ofcooperation that e sists P ant dynam. behav.ior.

l ic

,,,v,y,3, Ari.ui, south usuitin sys.

participation in the Arkansas Lig.

EPRI's many other research and

,,m op,ra,ing companie, j, npeciany nite Conversion Project, a coal development projects include stud-niJcnt in timo ofmajor storm cauwd gasificat. ion and combm.ed cycle g

g g vuiaen when crews / rom throughout co-generation project that had been the snt<m wrA toxether to rotore I ".

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'I'd'ir "i" '" ra""""-

i initiated by AP&L. The project altern lives such as co-generation, would employ Dow Chemical Co.

the w of solid wastes as fuel, geo-gasification technology, and Inter-thermal energy, solar power, and national Paper Co. would be the in-other renewable resources.

dustrial steam user.

Economic Development Diversification into new business ventures through Electee should provide broader opportunities for and Community AcilVities improvement of the System's finan-A major objective of the System cial condition over the long term.

operating companies is to enhance the economic and social develop-Research and Development ment of their service areas. System The Middle south Utilities Sys, personnel work continuously with tem supports and funds energy re, state and h> cal agencies as well as search and development projects 14

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Electronic meter reading is an example ofhiiddle South Utilities Systent operating cornpanies' application ofindustry researchjbr the herujit ofcustorners. The Systern I as a long-standing Cornnlittnent to sitch research.

.i 15

civic cnd professional org:niza-of those who live in our companies' tions to attract new and expanded service areas. Through programs business and industry, such as " Helping Hands" and "En-The System's support of the 1984 ergy CONCERN," our operating Louisiana World Exposition to be companies effectively help elderly, held in New Orleans demonstrates handicapped, and low-income cus-our commitment to the social and tomers who have energy budget economic development of the hiid-problems. And all customers are dl; South region. htSU Chairman encouraged, through energy audit and President Floyd W. Lewis is services and literature, to practice serving as chairman of the Exposi-energy conservation.

tion which opens hiay 12 and closes November 11. During its six-month Future System Growth run, this event is expected to create The hiiddle South region can more than 10,000 jobs and generate expect economic growth at a rate approximately $2.6 billion in re-of about 3 percent annually over gional economic activity. It will the next 10 years, slower than the provide an excellent opportunity to growth rate experienced in the past, promote the htiddle South region as but in line with forecasts for growth

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g, c desirab!c place to live, work, and of the national economy. While the prosper. NOPSI anticipates that its recovery's strength became evident

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1984 operating revenues will in-in the hiiddle South region later crease by approximately $5 million than in other parts of the nation, the because of the fair.

area's financial indicators foretell The Exposition theme, "The increased prosperity for the region World of Rivers: Fresh Water as a in 1984.

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Source of Life," is especially ap-The htiddle South System's fuel propriate for a fair ri e located on diversification program and the t

the banks of the hiississippi River.

generating plant construction that

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af The idea will be carried a step fur-accomplishes it are sound invest-in prominent view ui sh, world', fair ther in the electric industry's pavil-ments in support of the region's "hi< h "Pra' Afdv 12 '"Nr* 0rird"8-

"# d"'"

1. '"'d# I""## E'h#'d lon theme, " Rivers of Electricity."

future.

IAl:1:l:) n!#"

ill sponsor a majorpavilion Sponsored by America's Electr,c Shifting the fuel base from pri-a,,hrfair to rnhance the unda3 rand.

i Energy Exhibit, a nonprofit corpo-marily natural gas and oil to coal int v/rlw ric raney d' d l*Ic

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ration of associations and busi-and uranium assures that sufficient y

nesses in or related to the electric fuel supplies will be available to thefairis cientra to provide up.

utility industry, the pavilion's en-generate the electricity necessary proilmatelv loJm/ obi ana gennarc t:rtainment and exhibitry will en-for customer demand and economic

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i hance the visitor's understanding of development. Ilecause an electric electric power as a basic element utility's health is dependent up(m, for maintaining and improving the and directly related to, the econ-American standard ofliving, job omy of its service area, the htiddle opportunities, and economic South Utilities System has posi-competitiveness.

tioned itself to help build a better Protection of the region's human and more prosperous htiddle South environment is manifested in many

region, cays by the System operating com-panics. Installing and carefully monitoring anti pollution processes at System facilities helps to assure safe and environmentally sound op-erations. We are also vitally con-cerned with improving the lifestyles 16

Middle S<mth Utilities, Inc. & Subsidiaries FinancialTable of Contents Report o f M a na geme nt.................................................................................

17 Management's Discussion and Analysis of Financial Conditionand Results of Operations................

18 A u d it o rs' Opi n i o n..................................................................................................

22 Statements o f Consolidated Income...............................................................................

23 Co nsolidat ed Bala nce Sh ee ts.......................................................................................

24 Statements of Consolidated Retained Earnings and Paid-In Capital.........................................

26 Statements of Changes in Consolidated Financial Position.....................................................

27 Notes to Co nsolidated Financial Statements.......................................................................

28 Report of Management The management of Middle South Utilities, Inc. has prepared and is responsible for the financial state-ments and related financial information included in this annual report. The financial statements are based on generally accepted accounting principles, consistently applied. Financial information included elsewhere in this report is consistent with the financial statements.

To meet its responsibilities with respect to financial information, management maintains and enforces a system ofinternal accounting controls which is designed to provide reasonable assurance, on a cost.cffective basis, as to the integrity, objectivity, and reliability of the financial records and as to the protection of assets.

This system includes communication through written policies and procedures, and an organizational structure that provides for appropriate division of responsibility and the training of personnel. This system is also tested by a comprehensive internal audit program.

The board o 'lirectors pursues its responsibility for reported financial information through its audit com-mittee, composeu sf outside directors. The audit committee meets periodically with management, the internal auditors, and the independent public accountants to discuss auditing, internal control, and financial reporting matters. The independent public accountants and the internal auditors have free access to the audit committee at any time.

The independent public accountants provide an objective assessment of the degree to which management meets its respon<ibility for fairness of financial reporting. They regularly evaluate the system ofinternal accounting controls and perform such tests and other procedures as they deem necessar) to reach and express an opinion on the fairness of the financial statements.

Management believes that these policies and procedures provide reasonable assurance that its operations are carried out with a high standard of business conduct.

17

Middle S<mth Utilities, hic. & Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Grand Gulf Unit 1, the companies pr+

Liquidity and Capital pose a rate inoderation plan as amha-Resources The hiiddle South System. at the native to traditional ratesetting end of 1983, was approach, g the procedures. Under the plan, w hich was During the period 1981 to 1983, the m

turning point that will determine w hen intended to mitigate the initially higher h1iddle South System had construction it is to attain a more stable imancial pos,i-cost of nuclear power from Grand Gulf, expenditures totaling M.0 billion, includ-tion. Such financial stability is depen-LP&L and NOPSI would defer the col-ing allowance for funds used during con-dent, in part, upon the placing int lection from their cestomers of an aggre-struction (AFDC). Of this amount,71 commercial operation of two nuclear fa-gate of M80 million during the first four percent was funded through external cahues in 1984 and the concurrent receipt years of commercial operation and financings. Grand Gulf Unit I is expected of adequate rate relief to recover and would collect this deferred amount from to be in commercial operation during the cirn a return on the investment. The their customers over the subsequent five third quarter of 1984, with Waterford 3 System s mvestment in construction years. In connection with LP&L's and following later in the year. The comple-work in progress (CWIP) was approxi-NOPSI's rate increase requests, the Lou-tion of the two units as scheduled will re-mately $5.9 billion at the end of 1983, an isiana Public Service Commission duce the financial burden of recent years increase of $0.9 billion over year-end (LPSC) on February 20,1984, opproved on the System resulting from construction 1982, and S2.0 billion over year-end a rate increase of approxinutely $69 mil-of the two units. Accordingly, System 1981. The rate increases implemented I on annually for LP&L and approxi-construction expenditures for 19M,1985, since 1980 have strengthened the Sys-mately $24 million annually for NOPSL and 1986 are projected to be $1,231.2 tem s financial condition during the past The LPSC in its order took no action on million, $798.6 million. and $828.9 mil-three years, but the System is still earn-tpgg.s and NOPSI's rate moderation lion, respectively.

ing below the rates of return granted to proposals for Grand Gulf and the rate in-In 1983, the System operating com-the operating companies in their recent creases granted did not include recovery panies generated funds externally through rate proceedings. When Unit I of the of any of Grand Gull's costs. The two the sales of $320 million of first mongage Grand Gulf Nuclear Station and the Wa' companies have not yet decided whether bonds and $85 million of preferred stock.

terford 3 Nuclear Station are placed in they will appeal the LPSC's decision.

In addition, promissory notes and other commercial operation, the amount of Assuming that LP&L and NOPSI do long-term debt, in an aggregate amount expenditures needed to support the not appeal the order, they intend to of approximately $681 million, were is-Syst. m's construction program will be make all necessary filings with the LPSC sued by the Company and its subsidiaries.

dramatically reduced. Additional rate re-and to take all necessary legal and other Also during 1983, the Company raised lief is critical, however, with the com-action in order to obtain the rate relief approximately M10 million through sales mercial operatmn of the two new units necessary to enable them to meet their of its common stock.

because the System Companies must obligations resulting from the in-service De Mortgage and Charter coverage begin to recover those costs that have not stuus of Grand Gulf Unit 1, promptly as ratios of the System operating companies previously been allowed m rates and to Grand Gulf Unit I goes into commercial limit the ' amounts of additional first mort-earn a return on the investment.

operation. In its March 9,1984 retail gage bonds and preferred stock that At December 31,1983, the System rate request of approximately $7! mil-they may issue to finance their construc-operating companies had 963 million in lion above test year revenue leve's, tion programs and other capital require-rate increase requests that were either AP&L included a rate rider that would ments. Based on year-end 1983 ratios, pending or on appeal %is included rate be effective if the capacity and energy of AP&L and MP&L could have issued an requests filed by LP&L and NOPM in Grand Gulf Unit 1 is to be alkicated to aggregate of approxinutely $233 million knuary 1983, aggregating $525 million AP&L in addition to the other operating of preferred stock or $698 million of first in additional net revenues for 19M over companies. (See Note 8 to the Consoli-mortgage bonds at annual interest or divi-projected 1983 revenues. These two rate dated Fin:mcial Statements " Commit-dend rates of 13 percent. Ilowever, requests, which were subsequently re-ments and Contingencies".) AP&L's rate LP&L's and NOPSI's earnings coverage duced by approximately $100 million, request also included a phase-in plan to ratios had declined to the point that at were filed to cover both the increased mitigate the initial impact of the rate in-December 31,1983, neither could issue costs of operations in general and the crease on its customers. MP&L has not any additional preferred stock and NOPSI costs awociated with Grand Gulf Unit 1 yet filed a rate increase request in con-could only issue approximately $11 mil-and, in LP&l 's case, Waterford 3. Con' nection with Grand Gulf Unit 1.

lion of first mortgage bonds, except such current with these filings, with respect to bonds issued solely for refunding pur-18

poses. The ability of the two companies to such reftmd, a portion of the settlement ant to the terms of the Power Purchase sell additional first mortgage bonds and proceeds in linancing its continuing con-Advance Payment Agreement, three of preferred stock to sinance their con-strt'etion program. Based on this order, the System operating companies, on Jan-struction programs and for other capital LP&L reduced the M12 million of addi-uary 2,1984, began to make advance requirements is dependent, among other tional annual net revenues sought in its payments for power purchases to h1SE things, upon improved earnings through January 1983 general rate increase appli-that, in the aggregate, total $12.5 million adequate rate reliefin their rate cases cation to the LPSC by approximately per month. The o;vrating comp nies will currently before their public service

$100 million, and withdrew its emergency continue to make the payments until commission.

application of $160.8 million.

commercial operation of Grand Gulf The System operating companies are h1SE contemplates construction ex-Unit I or December 31,1984, whichever currently authorized to make short-term penditures, including AFDC, of $1,065 occurs first.

borrow ings in an aggregate amount out-million for 1984 through 1986, for con.

The Company must be able to sell standing at any one time of up to the struction costs associated with its 90 per-its common stock in order to maintain an lesser of 920 million or 10 percent of cent ownership of the two-unit Grand acceptable capital structure and to pro-capitalization. The short-term borrowings Gulf Nuclear Station. In connection with vide the System operating companies of the System operating companies Grand Gulf, the Company has under-and htSE with additional funds to con-amounted to $78 million, $45 million, taken to provide or cause to be provided tinue their construction programs. Dur-and $93 million at Dnember 31,1983, to h1SE, sufficient capital to complete ing the year ended December 31,1983, 1982, and 1981, respectively. Unused the two-unit facility. To this end, through the Company issued an aggregate of lines of credit amounted to $266 million, 1983, the Company had invested $689.9 26,748,194 shares of common stock,

$193 million, and $274 million at Decem-

, million in 'he common stock of N1SE. At which provided the Company with net ber 31,1983,1982, and 1981, respec-December 31,1983, htSE had also made cash proceeds of approximately M10 tively. Additionally, the four System intermediate-term borrowings of $1,453 million. The Company used these funds operating companies, together with htSU, million under a $1,711 million revolving to purchase additional common stock of NISS, and SFI, are authorized to partici-loan agreement with a group of domestic certain ofits subsidiaries, to repay re-pate in a System money luol whereby banks and had borrowed the full $378 volving bank borrowings, and for other those companies in the System with avail-million available under a separate revolv-corporate purposes. The Company's ex-able funds can inwest in the pool u hile ing loan agreement with a group of for-isting revolving credit agreement pro-other companies in the System (except eign banks. Also at year-end 1983, AISE vides for borrowings of up to $115 NISU) having short-term needs can bor-had outstanding $426.5 million of first million, of w hich $83 million remained row from the pool, thereby reducing the mortgage bonds. htSE has covenanted to unused at December 31,1983.

System's dependence on citernal short-complete Unit 1 of the Grand Gulf Nu.

In addition to funds needed to con-term borrowings.

clear Station by December 31,1984, and tinue its construction program, the hiid-On klarch 21,1983,in connection to complete Unit 2 of the station by De-die South System will require approxi.

with the June 1982 settlement of a dispute cember 31,1988. If either of these cove-mately $2,119 million during the three-between LP&L and a gas supplier (See nants is not fulfilled, the outstanding year periott 1984-1986 to meet debt Note 11 to the Consolidated Financial bonds and bank borrowings would then maturities, cash sinking fund require-Statements " Settlement Agreement with become due and payable, unless exten-ments, and to make preferred stock sink-Gas Supplier".), the LPSC amended its sions could be arranged, and the Com-ing fund redemptions. The Company January 17,1983 order pertaining to the pany would be required to provide htSE contemplates that a substantial portion of manner in which LP&L is to refund to its with sufficient funds to meet these obli-these requirements will be funded through customers the funds received from the gas gations to the extent that the funds are external sources, including the sales of supplier. The h1 arch 21,1983 order, in not provided from other sources. Pursu-similar securities, with the balance being effect, permit,s LP&L to use, pending provided by internally generated funds.

Construction Program Scheduled Major Generating Units Megawatt Commercial Unit Company Fuel Capacity Operation Grand Gulf I MSE Nuclear 1,125*

1984 W terford 3 LP&L Nuclear 1,1(M 1984 Independence 2 AP& UMP &L Coal 461" 1985 Grand Gulf 2 MSE Nuclear 1,125*

• Represents the System's anticipated 90% interest in these 1,250MW units.

• • Represents the System's 56.5 % interest in this 815MW unit.

• • • The schedule to complete Grand Gulf 2 will be dependent, among other things, upon the coua arcial operation of Grand Gulf 1.

19

Results of Operations in 1983 compared to an increase of $91 compared to an increase of $33 million, million, or 3.5 percent, in 1982. The or 24.0 percent, in 1982. The increases he hiiddle South System's net in-1983 increase was attributable to modest were almost entirely the result ofin-come for 1983 was $378 million, an in-rate increases collected during the year.

creases in the cost of gas purchased for crease of approximately $67 million, or in contrast, in 1982, an increase in pur-resale, which was billed to customers, of 21.5 percent, over 1982 and an increase chased power costs or $82 million, which

$19 million, or 13.9 percent, and $31 of approximately 5%.6 million, or 34.3 was billed to customers, was the main million, or 28.9 percent, in 1983 and percent, over 1981. De qualit,. J. -

component of the increase in electric 1982, respectively. However, h1CF us-1983 carnings was virtually unchanged revenues.

age by gas customers declined by 2.0 from the 1982 level as AFDC as a per-Energy sales to retail customers de-percent and 6.3 percent, respectively, in cent of net income decreased from i14 creased by 2.0 percent in 1983 to 48.4 1983 and 1982.

percent in 1982 to 113 percent in 1983.

billion KWH compared to a decrease of hiaintenance expense increased by De quality of the 1981 earnings, how-1.7 percent in 1982. Retail sales have im-

$17 million, or 13.2 percent, in 1983 cver, was better than that of either the proved since late summer 1983, how-compared to an increase of $5 million, or 1982 or 1983 carnings with the percent of ever, compared to the same period of 3.9 percent, in 1982. The 1983 increase AFDC to net income being 107 percent.

1982, because of an improvement in busi-was due primarily to maintenance ex-AFDC increased to $426 million in 1983, ness activity in the System's service penses incurred at Arkansas Nuclear One compared to $353 million and $301 mil-area. The improvement in industrial us-during and following a normal refueling lion in 1982 and 1981, respectively-age since mid-1983 was not sufficient to outage.

AFDC is expected to continue to be a offset declines in early 1983, however, Deferred fuel and other expenses substantial portion of net income in 1984 and energy sales to industrial customers increased by $75 million, or 26 percent, and then to decline in subsequent years decreased by 4.6 percent in 1983 com-during 1983 as compared to a decrease of after Grand Gulf Unit I and Waterford 3 pared to a decrease of 5.8 percent in

$19 million, or 6.2 percent, during 1982.

have entered commercial operation in 1982. Residential sales have been level The variability in these amounts is the late 1984.

since 1981 with the very modest decrease result of fluctuations in deferred fuel Earnings per share on hiiddle South in 1983 and increase in 1982 of 0.8 per-costs over time. Such fluctuations reflect Utilities, Inc. common.;tock increased to cent each being due primarily to a return the cost of energy and the amounts billed

$2.46, up from $2.33 in 1982 and $2.44 to more normal weather conditions dur-to customers of previously deferred fuel in 1981. The 1983 increase takes into ac-ing the two-year period and to continued costs.

count a 15.2 percent greater average conservation efforts by residential ne decrease in other interest-net of number of shares outstanding in 1983 customers.

$27 million, or 36.3 percent, in 1983 as over 1982.

Gas operating revenues increased compared to the less than I percent de-Electric operating revenues in-by $21 million, or 11.9 percent, in 1983 crease in 1982, is due to a reduction in creased by $43 million, or 1.6 percent, the amount of short-term borrowings Selected Financial Data-Five Year Comparison (dollars in thousands, except per share amounts)

M3 1980 19M Net Operating Revenues

$2,909,657 $2,846,2M $2,722.020 $2,295,299 $1,788,747 Net Incorne 378,050 310,595 281,483 195,907 180,719 Earnings Per Share 2.46 2.33 2.44 2.01 2.12 Dividends Declared Per Share 1.71 1.67 1.63 1.59 1.535 Total Assets 11,100,667 10,3M,653 8,318,556 7,334,030 6,503,068 Long-Term Debt (excluding current maturities) 5,032,175 4,429,447 3,896,370 3,392,309 3,017,816 Preferred Stock with Sinking Fund 429,601 354,957 300,219 283.165 193,507 Ccmmon Stock Data by Quarter 1910 First Second

'Ihird Fourth Price Range liigh-Low

$16%-14%

$16%-14%

$16%-14 %

$16%-13%

Dividend Declared

$.42%

$.42 %

$.42%

$.43 %

1982 Price Range liigh-Irw

$14% 12%

$14 %-12 %

$15%-12%

$15 %-14%

Dividend Declared

$.41 %

$.41 %

$.41%

$.42%

20

from ixternal sources during 1983 and a which it limited the issues to relate solely and on the other rate applications cur-decline in interest rates.

to Grand Gulf Unit 2 and ordered MSF rently pending or on appeal will deter-Income tex expense increased in and MP&L to show cause for the contin-ming the future viability of the Middle 1983 by $9 million, or 35 percent, be-ued construction and need for Grand South System. Swift, fair, and sufficient czuse the increase in pre-tax book in-Gulf Unit 2. MSE continues to believe rate relief is essential if the Company is come was greater than the offsetting that it will be.w ur.iite to complete to attain and maintain a financial position increase in recorded AFDC. De 1982 Grand Gulf Unit 2 and that this will be strong enough to provide both a reasona-decrease in income tax expense of $24 the conclusion of the MPSC in the re-ble return to its stockholders and the re-million, or 50 percent, was due to the hearing on the Certificate of Public Con-sources necessary to serve the present large increase in AFDC recorded rela-venience and Necessity for the Grand and future energy requirements ofits tive to the small increase in pre-tax book Gulf Station as it relates to Grand Gulf customers.

income.

Unit 2.

MSE reduced construction activi-ties at Grand Gulf Unit 2 in December gg gg 1979. In January 1982, construction ac-LP&L currently expects to receive tivity was increased on a limited basis in an operating license for the Waterford 3 order to preserve the site and equipment facility in the second quarter of 1984.

and as an alternative to building tempo-The license will permit LP&L to load nu-rary storage facilities. In late 1983, con-clear fuel and to conduct low-power test-struction on Grand Gulf Unit 2 was ing. Grand Gulf Unit I has completed its again reduced by MSE in order to con-low-power testing and is awaiting its full-centrate its financial resources on Grand Gulf Unit 1.

power operating license. In an effort to resolve certain questions relating to ex-perience and training of reactor plant op-Effects ofInflation crators at Grand Gulf Unit 1, MSE has voluntarily initiated a comprehensive Despite the reduced level ofinfla-recertification program under which all tion in 1983 and 1982, its impact on the of the reactor operators are receiving ad.

System's operations in recent years ditional training. MSE expects that the has been significant. (See Note 14 to the additional training will confirm the abil.

Consolidated Financial Statements -

ity of the operators to safely operate the "Effect ofInflation on Operations facility.

(Unaudited)".)

On yo.L..- 26,1983, the Mississippi Public Service Commission y

(MPSC) ordered a rehearing on the Certificate of Public Convenience and The System's overall financial con-Necessity for the Grand Gulf Station and dition has shown a slight improvement directed Issuance of Citation to Show '

over the past three years. However, the Cause for the Grand Gulf Station. On rate increases received since 1980 have December 20,1983, the MPSC granted still bren inadequate in terms of timeli-MPAL and MSE a Clarification ofIs--

ness or amount to permit the System to sues related to the M..bs order in earn the rates of return granted to the which it stated that MP&L and MSE operating companies in their recent rate must demonstrate (1) the need and eco-proceedings. With the impending com-nomicjustification for any additional ca-mercial operation of the Grand Gulf Unit pacity from the Grand Gulf Station over I and Waterford 3 nuclear generating and above that which MP&L would re-stations, it is critical that the mechanisms ceive under the original certification or-to recover the capital and operating costs der, and (2) that Grand Gulf Unit 2 is of these stations be put in place in 1984.

needed and economically justified in However, the February 20,1984 rate or-light of construction delays and increases ders by the LPSC rejected any allowance in the construction cost estimate. On in rates to recover costs associated with -

January 5,1984, the MPSC issued an the commercial operation of Grand Gulf Order Amending Citation to Show Unit I or Waterford 3. Future actions of Cause and Clarification of Issues, in the System's various regulatory conunis-sions and the courts on rate increase re-quests or appeals relating to Grand Gulf 21

,r I~

l Deloitte j

Haskins+ Sells 39th Floor One Shell Square l

f New Orleans. Louisiana 70139 Auditors' Opinion The Stockholders and the Board of Directors of Middle South Utilities,Inc.:

We have examined the consolidated balance sheets of Middle South Utilities, Inc. and its subsidiaries as of December 31,1983 and 1982 and the related consolidated statements ofincome, retained earnings, paid-in capital, and changes in financial position for each of the three years in the period ended December 31,1983. Our examina-tions were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the above-mentioned consolidated financial statements present fairly the financial position of the Company and its subsidiaries at December 31,1983 and 1982 and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31,1983, in conformity with generally accepted accounting principles applied on a consistent basis.

I February 20,1984 22 I

Aiiddle South Utilities, lac. & Subsidiaries Statements of Consolidated Income For the lears Endal December 31,19W,1932, and 1981 1983 1982 1981 (In lhousands)

Operating Revenues:

Electric.....

$ 2,716,329

$ 2.673,572

$ 2,582,778 Natural gas.........

_ 193,328 172,692 139,242 Total..............

_ 2,909,657 2,846,2M 2,722,020 Operating Expenses:

Operation:

Fuel for electric generation...........

942,219 1,066,325 1,083,0M Purchased power.

373,712 345,076 263,559 Gas purchased for resale..............

158,186 138,890 107,768 Deferred fuel and other.......

363,509 288,283 307,218 M a i n t ena nce..................................................

149,453 132,031 127,067 Depreciation...

183,171 167,725 158,2M Taxes other than income taxes...............

104,493 101,381 93,058 Income taxes (Notes 3 and 12)......

190,589 171,741 175,142 Total................................................

2,465,332 2.411.452 2,315,140 Operating income.....

444,325 434.812 406.880 Other Income:

Allowance for equity funds used during construction (Note 1)..........................

245,640 182,342 143,369 Miscellaneous income and deductions-net (Note 12).......

6,799 7,133 24,249 income taxes-credit (Notes 3 and 12)..

157,342 147.186 126.466 Total...............

409,781 336,661 294,084 Interest and Other Charges:

Interest on long-term debt.....

529,597 488,750 441,894 Other interest-net....................

47,251 74,130 74,507 Allowance for borrowed funds used during construction (Note 1).......

(180,858)

(170,438)

(157,511)

Preferred dividend requirements of subsidiaries...........

80,066 68,436 60,591 Total................................................

476,056 460,878 419,481 Ne t i nc o m e.......................................................

$ 378,050

$ 310,595

$ 281,483 Earnin gs Per Common Share................................

$2.46

$2.33

$2.44 Dividends Declared Per Common Share.....................

$1.71

$1.67

$1.63 Average Number of Common Shares Outstanding......................................................

153,383,044 133,193,296 115,175,550 See Notes o Gmsalidated Finamial statements.

23

Middle South Utilities, Inc. & Subsidianes Consolidated Balance Sheets December 31,198 and1982 Assets 1983 1982 (in 7housands)

Utility Plant (Notes 8,9, and 12):

Electric.....................................................................................

$ 5,688,426 $ 5,158,736 Naturalgas...............................................................................

117,848 113,7 19 15,920 Transit.....................................................................................

Construction work in progress..........................................................

5,923,619 5,022,635 N ucl ear fuel............................................................................... _ 212,524 153,178 Total................................................................................

11,942,417 10,4 64,188 Less-Accumulated depreciation.......................................................

1,694,475 1,551,700 U tility plan t -ne t.............................................

10,247,942 8,912,488 Other Property a nd Inves t men ts.........................................................

75,979 83,846 Current Assets:

C ash (Not e 4)..............................................................................

2,843 19,023 Spec ia l d eposi ts.............................................................................

12,507 11,198 Temporary investments-at cost, which appro ximates market (N ote 11 )......................................................

9,129 283,142 Notes receivable............................................................................

2,663 2,584 Accounts receivable:

Customer (less allowance for doubtful accounts of(in thousands)

$3,893 in 1983 and $2,602 in 1982)...............................................

174,936 147,241 Other......................................................................................

43,025 35,368 Receivable from gas supplier (Note i1)................................................

250,000 250,000 De fe rred fuel cos t..........................................................................

3,698 24,120 Fuel inventory-at average cost (Note 4).............................................

I10,076 146,592 Materials and supplies-at average cost................................................

61,845 63,602 Other.........................................................................................

26,177 27,425 Total...................................................................................

6 %,899 1,010,295 Deferred Debits:

250,000 Receivable from gas supplier (Note 11)................................................

Other.........................................................................................

79,847 108,024 Total....................................................................................

79,847 358,024 Total...................................................................................

$ 11,100,667 $ 10,364,653 See Notes to Consolidated Financial Statements.

24

r Capitalization and Liabilities 1983 1982 (In Thousands)

Capitalization:

Common stock, $5 par value, authorized 250,000,000 shares; issued and outstanding 166,082,128 shares in 1983 and 139,333,934 shares in 1982.......................................................... $

830,411 $

6 %,669 Paid-in capital.............................................................................

1,271,152 994,760 Retained earnings (Note 7).............................................................

899,979 790,487 Total co mmo n shareholde rs'equ ity................................................

3,001,542 2,481,916 Subsidiaries' preferred stock without sinking fund (Note 5)........................

330, % 7 330, % 7 Subsidiaries' preferred stock 'vith sinking fund (Note5)............................

429,601 354,957 Lon g-t erm debt ( Not es 6 and 8).........................................................

5,032,175 4,429,447 Total....................................................................................

8,794,285 7,597,287 Current Liabilities:

Notes payable (Notes 4 and 8):

Banks.....................................................................................

I14,573 159,565 Comme rcia l pape r.......................................................................

123,000 107,725 Other......................................................................................

50,471 72,885 Currently maturing long-term debt (Note 6)...........................................

228,009 73,102 Accou nts payable...........................................................................

264,892 316,8 %

Gas contract settlement-liability to customers (Note i1)...........................

58,884 882,535 Custome r d eposits..........................................................................

53,285 47,794 Tax es a ccrued...............................................................................

75,576 67,655 Accumulated deferred income taxes (Note 3).........................................

1,980 12,033 I n t e res t a cc rued.............................................................................

161, % 5 104,854 D iv ide nds declared.........................................................................

92,583 77,058 Other.........................................................................................

63,720 73,467 Total....................................................................................

1,288,938 1,995,479 Deferred Credits:

Accumulated deferred income taxes (Note 3).........................................

370,166 331,591 Accumulated deferred investment tax credits (Note 3)...............................

73,849 77,142 Gas contract settlement-liability to customers (Note 11)...........................

475,000 250,000 Other.........................................................................................

61,377 79,829 Total....................................................................................

980,392 738,562 Reserves........................................................................................

37,052 33,325 Commitments and Contingencies (Notes 2, 8, and 9)

Total..................................................................................

$ 11,100,667 $ 10,3M,653 25 1

AIiddle S>uth Utilitics, Inc. & Sdisidiaries Statements of Consolidated Retained Earnings and Paid-In Capital For the Mars &ded thrember 31,19M,1982, ami 1981 1983 1982 1981 Iln 7housands)

Retained Earnings Retained Earnings, Ja nuary 1............................................... $ 790,487 $ 705,776 $615.248 A dd - N e t i n c o m e..............................................................

37N,050 310,595 _281,483 Total........................................................................

I,168,537 1,016,37I 8 %,73i Deduct:

Dividends declared on common stock-$1.71, $1.67, and $1.63 per share for 1983,1982, and 1981, respectively....................

266,762 224.825 190,175 Capital stoc k e x penses, etc................................................

1,7%

l.059 780 Total........................................................................

26N,55N 225,884 190,955 Retained Earnings, December 31 (Note 7)................................. $_N99Jl9 $ 790,487 $705,7_76 Paid in Capital Paid in Capit al, J a nua ry I..................................................... $ 994,760 $ 860,833 $749,206 Add:

Excess of net proceeds over par value:

Public sales of common stock:

15,000,000 sha res i n 19 8 3............................................

156,531 89,800 10,000,000 sha re s i n 19 82............................................

88.378 13,000,000 sha res i n 19 81...........................................

Common stock issued in connection with the continuous offering program:

4,868,100 sha re s i n 19 8 3.............................................

52,388 Common stock issued in connection with dividend reinvestment and stock purchase plan:

6,475.894 sha res i n 19 8 3.............................................

62,577 39.871 5,126,169 s ha res i n 19 8 2.............................................

20.132 3,081,214 sha res in 19 81.............................................

Common stock issued in connection with employee savings plan:

404,200 sha res i n 19 8 3...............................................

4,308 3,732 423,424 shares in 19 8 2...............................................

2,617 356,184 sha re s i n 19 8 1................................................

Other.......................................................................

5NN 524 500 Pald in Capit al, Decem ber 31................................................. $1271 152 $ 994 760 $860 833, 11

_.. _ 3 m_--

n ---r L -

$re Notes sa Conwlidste.1 FinandalStatements.

26

blidelle Smlh Utililles, Inc. & Sulnidiaries Statements of Changes in Comolidated Financial Position ihr the )hars Ilrulest l>< t'eminw.fl.19&t,19M, etrul 1981 19N3 19M2 19MI Funds l'rm kini 14):

fin thosowrahl Operations:

N e t i no n ne.........................................,,.

% 37N,0$0

$ 110,$95

% 2Ml.4M3 Ikpreciation....

IN3.171 167.723 13M.2t 4

,lklerred income tases and insestment tas (rnht adjustments - net.,...

24,7N7 14.720 37,ti67 Alhiwa:Ae for funds uwd dunng construition (Note 1),

(426,4Wil (IS2.7 mop

_t 3410.MMO)

Tbtal funih prm idal by operatiota........

159,$10 140.2(dl 176,$M Other:

Allowance for funih used during corntrustion (Note 1)..............

426,49N 432,7MO 300,MMO h contract witlement (Note ll p....

1.132.333 I unds on haral or due l' rom gas suppher iNote 111.........

(7M2,197)

Iklerred cmts relating to $1 l** luel acqubition progrann......

2N,th 2.330 Ikcreaw in working capital *,....

120,945 143.207 M iwetla neous - net.........................

- _ _3.232

_ 24.447 l

Intallunsh providal ewhaling litiirwisig transations............

7.15,IIN9

_My t.9(di t.47 or>M I inancing and other transations:

Conunon sta k............

409.$45 211.133 193.114 Preferred sta L.............................,.................

N$,tMN) fdl.t N u t 20,8 x 0 1 i rs t mor t g ag e Is mth............................................

320.tNNI lMS.t E U 230,t X H Promiwof y notes and other long term debt....

6MI,222

$l$.$12 442.11$

Ik ok g alue of utiht y plant sotil.....,,,,,,.....,,.....,....... i.,

$.151 25lll 139.969

$hort terin w(unties - net....

-. 22.116 Sale a nd leawb.n k t ra nsa t ions............................,.............

-1,54N).91M

_Wh,73M

_ l.067,734 Tbtal lunik prmided by tirurwing and other transntiom..........

' lot al fu nds prm ideel..................................

,,..... %2.2%.IN17

% 1.n47.7IN

% 1.714.M02

~

l'unds Applied' lot Utihty plant askhtiom:

Comt ruct ion e s penditures for utihty plant...............................

%1,45.1,662

% l.394.399

% 1,174.4 04 N L A lca r fuel.,.....................

59,346

$1.304

$6.112

_ 1,04)

Other.......................,...........,....

Total grms aikhtiom tirwhalo allowafwe for

_1.,$ 13._ININ l.448.701

=1.2 4.12 _1 funds uwd during con trustion)..

g,g

-~

lhvislenih dalarnt on ounmon sta L...

266,762 224,H23 190,173 Inc rease in w or k ing capit al *..........................................

31.62M h contract wittement s Note l i t...............,...............

$9N.651 1:unih on fund or thie f rom gaoulyher i Note 11)........,................

($23,12N)

Ikferred ohls relatirig to $1 l'4 fuel acquisitiot) progr. inh..

7.9 14 Ne funil to rCtail L ustomers ( Note 2 ).........................,

74,64NI M i wella no nis - twt....................................

- - ~

9,996

~

Total ot her (Linds applidl...........,,,,...........................

l#irutking tran%htiolW

_424.$9ll 23h,431 19M i

Retirement of promiwry notes and other long term debt..

127.400 6H.320 itd1.266 Retirement o f first mortgage bonih......................................

110,297 4M.719 11061 Redempt ion of pre fer r ed sta k..................................................

7.173 2.979 2.483 Shor t ter m wt u r it iet - net....................................

$3.246 26,348

........4.

lbtal funds applied to fitufw ing t ran%h tions............................. _ 29N,llN 146 ${62 2M2.572

' int al fu nd s applied.................................................. % 2,2%.tN17

% l.447,71M

% 1.714.M02 mm -

m-,.

• -~

• m,raine vol.nelJ..re not im lude ahoro arrm sr< urrure, o urvenah nuanorne I.mq term J,ht, the q.o omtraoI ertalen.rnt. All*,$l \\ In t refumi k* to rad e u,s.mer,, or AlertrJ hore om tuded in oorrent Irabolaore the In r nenkt reaw on norLong e apr,J o pnmanh du kn Jee vrawe on Iwl tonenrors and dele vedfuel e on and om trawe on interest un re.lund Jnkh sh ska larrJ vif,rt hs un im reasr en an ounre res vorahk Ihe l'e9 ner om tra,e on nvoient r

nepral o p.romertis,la to tm renwt on JrlerreJfel e mt and e n,h mer nu ounta tre rouble an.1a dre reaw on un ounte pu,J Ir Ihe int nenke trate on uvra rne e aptal o pnnmord_s de he an tm reaer en an vunts isoalde and eke vraws on e ash und akte verdfurt e too

!re,%rrs ks Cone.do, Lard I onam kul Asare mente 27

Midlle Sruds Utilitics, hu. & Sdnidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies A. Principles of Cmmolidation The accompanying comolidated financial statements include the accounts of htiddle South Utilities, Inc. (the Company or htSU) and its direct and indirect subsidiaries. Arkamas Power & Light Company (AP&L), Louisiana Power & Light Company (l.P&L), Aliwiwippi Power & Light Company (htP&L), New Orleam Public Service Inc.

(NOPSI), Sliddle South Services, Inc. (htSS), Aliddle South linergy, Inc. (h1Sli), and System Fuch, Inc. (SFI) which are colletthcly referred to as the System Companies or the Sliddle South System. All significant intercompany tramactiom hase been climinated.

H. S)strem of Accounts The accounts of the Company and its service sub3idiary, AtSS, are maintained in accordance with the Public Utility llo! ding Company Act of 1935 (llolding Company Act), as administered by the Securities and !!xchange Commiwion (SEC), which has adopted a system of accounts comistent with the system of accounts prescribed by the Federal linergy Regulatory Commiwion (FliRC).

The accounts of the operating subsidiaries, AP&L LP&L, blP&L, and NOPSI, are nuintained in accord.mee c'O the sptems of accounts prewribed by the applicable regulatory bodies, which systems of accounts substantially conform to those prescribed by the FliRC. The accounts of the generating subsidiary, StS!!. are maintained in accordance with the system of accounts presenbed by the FliRC.

SFI capitali/cs all cmts related to its esploration activities. These cmts are reduced by profits realimi on sales to non-allihated companies and aie amortlied by the units of pnxluetion method in the period in which revenue is recogni/cd on oil and gas reserves prexlueed and sold.

C. Neseme und Fuel Cmts lhe operating sulwidiaries record c!cctric and gas resenues as billed to their omtomers on a cycle billing basis.

Resenue h not accrued for energy delbered but not billed at the end of the fiscal period. Substantially all of the rate whedules of the oltrating subsidiaries include adju tment clames under which the cmt of fuel med for generation and gas purdused for resale above or below specified Ane leveh h permitted to b: billed or required to be credited to customers.

One operating subsidiary has a fuel adjustment clau e which allows current recovery of fuel cmts. All the other operating subsidiaries utillie a deferral method of accounting for thme fuel costs recoverable under fuel adju iment clauses. Under this method, such costs are deferred until the related revenues are billed.

The fuct adjustment factor for AP&L contains an amount for a nuclear reserve estimated to cover the cost of replacement energy when the nuclear plant h down for scheduled maintenance and refueling. The reserve bears interest and is used to reduce fuel expense for fuel adjustment purposes during the shutdown period.

O, Utility Plam umi Depreciallem Utihty plant h stated at original emt.1he cmt of additlom to utility plant includes contracted work, direct latur and nuteriah, allocable overheads, and an allowance for the compmite cost of funds used during comtrue-tion. The cmts of units of pr >perty retired are removed from utility plant and such cmts, pim removal cmts, lew utvage, are durged to accumulated depreciation. Stainterunce and repairs of property and replacement ofitems determined to be lew than units of property are (harged to operating expemes.

Depreciation h computed on the straight line hnh at rates lused on the estimated service lives of the variom cl.nses of property. Depreciation rates for AP&l/n nuclear station, the System's only operating nuclear station, indude a provhion for nuclear plant decommiuloning cmts. Depreciation provhiom on average depreciable prop-criy approginuted 3.3% in 1983 und 1982, and 3.4% in 19M1.

Substantially all of the System *n utility plant h subject to the liem of the subsidiaries' first mortgage bond indentures.

E, Pemlem Plam The Company and its sulwidiaries have variou defined benefit pemion plam envering substantially all of their employees. The policy of the Comguny and its sulwidiaries k to fund pemion cmts accrued.

28

p F, Income Daen ne Company and its subsidiaries file a consolidated Federal income tax return. Income taxes are allocated to all subsidiaries based on their contributions to the consolidated taxable income. Deferred income taxes are provided for differences between book and taxable income to the extent permitted by the regulatory txxiics for ratemaking purpones. Investment tax credits utilized are deferred and anuwtired tused upon the average useful life of the related property.

G. Auswance for Fun 6 Used During Cometraction l

To the extent that the Company's operating subsidiaries are not permitted by their regulatory bodies to recover j

in current rates the carrying costs of funds used for construction, they capitalize, as an appropriate cost of utility plant, an alk>wance for funds used during construction (AFDC) that is calculated and recorded as provkled by the regulatory systems of accounts. Under this utility imiustry practice, construction work in progress on the tulance l

^

sheet is charged and the income statement is credited fw the approximate net composite interest cost of turrowed funds and for a reasonable return on the equity funds used f w construction. His procedure is intended to renmve from the income statement the effect of the cost of financing the construction program and results in treating the i

AFDC charges in the same manner as construction labor and noterial costs. As mm-cash items, these credits to the j

income statement have no effect on current cash earnings. After the property is placed in sen ice, the AFDC charged to construction costs is recoverable from customers through depreciation provisions included in rates for utility service.

During 1983, one of the operating subsidiaries used an accrual rate of 3% on $1.3 billion of construction costs in accordance with a May 1981 rate order from its regulatory commission. De effective composite rates of the operating subskliaries for the balance of AFDC were 9.2%,9.1 %, and 8.8% for 1983,1982, and 1981, respectively.

MSE used an accrual rate for AFDC based on a return on average comnum equity of 14 %, plus actual interest costs net of related income lases.

%c Company's subsidiaries continue to capitalire AFDC on projects during perials ofinterrupted construc-tion when such interruption is temporary and the continuation can bejustified as being reasonable under the circumstances.

H. Itenerm it is the policy of the Company's operating subsidiaries to provide reserves for uninsured property risks and I

fir claims for injuries and damages through charges to operating expenses on an accrual tusis. Accruals for these reserve:, have been allowed for ratemaking purpwes.

I. Reclandncat6nna "

l In 1983, the results of the discontinued transit operations, including the gain on sale, have been accounted for as miwellaneous income. Accordingly, the 1982 and 1981 MSU Comolidated income Statements have been re-classified to repwt the results of discontinued transit operations in miscellaneous income. Net income for 1982 and i

1981 was not affected by this reclassification. (See Note 12.)

in addition, certain other reclassifications of previously repwted amounts have been unde to conform with current classifications.

l l

Note 2. Rate Matters in August 1983, the Arkansas Public Service Commission (APSC) acted on AP&L's November 1982 $93.2 million retail rate request and approved a $39.8 million annual increase in Arkansas retail rates. De increase in rnten was effective in August 1983. In appeals still pending before the Circuit Court of Pulaski County, AP&L is asking for a review of the differences between the $101.4 million increase in rates sought in a May 1981 filing and the $29.0 million granted by the APSC in September 1982. AP&L has appealed the APSC's order to refund approxi-l' mately $19.3 million of revenues collected associated v.ith deferred tases.

i in November 1983, the Louisiana Public Service Commission (LPSC) approved $11.5 million of the $16.9 million annual increase in natural gas rates requested by NOPSI in July 1982. De new rates were implemented in December 1983. In February 1984, the LPSC granted a $69.0 million retail rate increase to LPAL in ruling on a January 1983 filing. %c I PSC aho approved a $24.0 million annual increase to NOPSI in ruling on its January 1983 l

filing. %c LPSC rejected any allowance in rates at that time to retIcet an in service status for either Unit I of MSE's Grand Gulf Steam Electric Generating Station (Grand Gulf) or Unit 3 at LP&L's Waterford Steam Electric Generat-ing Station (Waterford). A major pwtion of LP&L*n proposed rates was designed to cover the revenue require-ments associated with the commercial operation of tmth units, and a major pwtion of NOPSI's rates would have covered its requirements in connection with the MSE unit.

l In January 1983, the Mksissippi Public Service Commiwlon (MPSC) granted MP&L $47.5 million of the $93.9 million retail rate inercaw requested in July 1982. De MPSC, in April 1983, granted MP&L $39.8 million of the

$6H.H million retail rate increase requested in May 1980. As a result of this order, revenues collected subject to 29 L

refund since July 1980, plus interest accrued thereon, a total of $74.6 million, was refunded to the ratepaycrs. The refund did not have a material effect on MP&L's net income because MP&L had previously made accruals for the effect of a possible refund.

Note 3. Income Taxes Income tax expense (credit) consists of the following:

1900 1M2 IMI ths 11unnaruls)

Current:

Federal......................................................................

(972)

State.........................................................................

$ 8;460 9.835 II,931_

Total......................................................................

8.460 9.835 11,009 Deferred - net:

Liberalized depreciation..................................................

41,766 47,652 31,818 De fer red fuel cost..........................................................

(10.053) 15.652 (17.986)

Taxes capitalized in the financial statements............................

8.530 11,783 7.853 N uclear fuel d isposal costs................................................

17,729 (6,074)

(7,49I)

Revenues subject to re fund................................................

26.347 (9.567)

(9.224)

Other.........................................................................

(14.281)

(4.375) 15.277 Restoration (reduction) due to tax loss carryforwards.................

(41.514)

(36,902) 38.190 TotaI......................................................................

28,524 I8,169 58.437 bestment tax credit adjastments - net...................................

(3.737)

(3,449)

(20,770)

Recorded income tax expense.........................................

$ 33.247

$ 24.555 5 48,676 Charged t o opera t ions........................................................

$ 190,589

$ 171,741

$ 175.142 Credited to other income...................................................

(157,342)

(147.186)

(126,466)

Recorded income tax ex pense.........................................

33.247 24.555 48.676 locome taxes applied against the debt comixment of AFDC.............

157,520 145.514

_133.8 %

Total i nco me t a x es......................................................

$ 190,767

$ 170,069

$ 182.572 Total income taxes differ from the amounts computed by applying the statutory Federal income tax rate to income before taxes. The reasons for the differences are as follows (dollars in t/umsaruls):

1980 19tl2 1981

% of

% of

% of Pre-Tax Pre-Tax Pre Tax l

Amount income Amount income Amount income Computed at statutory rate...................

$226,027 46.0

$ 185,650 46.0

$ 179.745 46.0 increases (reductions)in tax resulting from:

Allowance for funds used during construction.....................

(l%,242)

(39.9)

(159,912)

(39.6)

(137.099)

(35.1)

State income taxes net of Federal income tax effect..............

9,9M 2.0 8,605 2.I I1,203 2.9 Ot he r - ne t.................................

(6,502)

(l.3)

(9,788)

(2.4)

.(5,173)

(l.3)

Recorded income tax e x pense................................

33,247 6.8 24,555 6.1 48,676 12.5 income taxes apolied against the debt component of AFDC.................

157,520 _ _22.6 145,514 24.9 133,8 %

22.3 Total income taxes......................

$ 190,767 29.4

$ 170,069 31.0

$ 182,572 34.8 The tax effects of the consolidated 1982 and 1983 Federal tax losses have been recorded as reductions of deferred income taxes. The tax effect of the utilization in 1981 of net operating losses has been recorded as a restoration of deferred income taxes. The remaining Federal tax loss carryforwards at December 31,1983 amounted r

to $365.6 million and are availabic to offwt taxable income in future years, if not used, they will expire in 1994 through 1998. Unused investment tax credits at December 31,1983 amounted to $580.8 million. These credits may i

be applied against Federal income tax liabilities in future years. If not used, they will expire in 1992 through 1998, 30

Note 4. Lines of Credit and Related Borroaings The Company has a revolving credit agreement with various banks providing for the issuance of unsecured promissory notes totaling $115 million. This agreement will terminate December 31.194. The Company pa)s a commitment fee on the unused portion of the credit line.

htSE has two revolving credit agreements with various banks providing tiir hurowings totaling $2.089 mil-tion. One agreement, for $' 7 t? miHion. is with a group of domestie banks; the other agreement, with foreign banks is for $378 million. Under both agreements, htSE pays a fee on the unused commitment. All hirrowings under these agreements are scheduled, subject to AISE's fulfilling or obtaining waivers of certain conditions, to convert to term huns on June 30.19M. The term huns with domestic banks have a naturity date of December 31, 1986, subject to mandatory prepayment requirements of $1(N) million plus interest in luth 1984 and 1985. The nuturity date for the term huns with foreign banks is February 5.1989, subject to nundatory prepayment require-ments of $84 million plus interest in 1985 through 1988.

htSE has entered into an " interest rate swap" agreement with a bank through February 1989 for $189 million of the $378 million outstanding under its revolving credit agreement with foreign banks htSE has agreed to make semiannual interest payments based upon an 11.5% fixed rate in exchange for semiannual interest pay-i ments by the bank based upon the London Interbank Offered Rate (1.lHOR). This agreement serses to offset Huetuations in variable rates to be paid under htSE's revolving credit agreement with foreign banks, it does not change htSE's obligations to the foreign banks for interest pay ments of Ll HOR plus 1 %.

l htSE aho has agreements for short term borrowings of $69.8 million that require compensating balances s

totaling approximately 2% of the commitment, which are not restricted us to withdrawal. At December 31.1983.

StSE had R2 million outstanding under these agreements and had other unsecured short term borrowings totaling

$32.5 millien with additional banks.

The operating subsidiaries have lines of credit, not requiring commitment fees, providing for short term bor-rowings through bank huns. Of the total lunk lines of credit at December 31.1983. $2tN) million was provided by banks kicated outside of the htiddle South System service area. Any of the four System operating companies nuy borrow any portion of these lines subject only to each comp my's nusimum authorized lesel ofImtrowings. Com-pensating balances (approximately 5% of the commitment amoun0 or equivalent fees are required by certain of these non service area lending banks. These compensating balances are not restricted as to withdraw al. Addition-ally, the four System operating companies, together with StSU. htSS, and SFl. are authorized to participate in the t

System money pool w hereby those companies in the System with available funds may im est in the pool w hile other companies in the Splem (except htSU) having short term needs may borrow from the pml. thereby reducing the System's dependence on external short term borrowings.

SFI has a fuel oil financing arrangement allowmg for Imrrt wings of up to $100 million subject to a limit equnalent to the som of certain accounts receivable arising from the sale of fuel oil inventory and the lower of the cost or the fair market value of SFI's fuel oil inventory, in addition. SFI nuy hirrow up to $135 million through the sale of commercial paper for use in financing its nuclear fuel in entory. Horrowings under these short term arrange-ments are restricted as to use and are secured by SFI's fuel oil imentory and a portion of its nuclear fuel inventory, respectisely, and certain accounts receivable arising from the sale of these inventories. SFI aho has a resolving bank credit agreement which allows for borrowings of up to $N) million through December 31.1984. A commitment fee is paid on the unused portion of this commitment.

The credit facilities at Deecmber 31.1983.1982, and 1981 and the borrowings thereunder of the Spiem comp;mies were as follows:

Ikcember 31,19N3

._ December 31,19N2 December 31 19NI t

Credit Credit Credit Facilities Ikrrowings Facilities mirrowings Facilities ikrrowings tin DwanandwfDollars)

Short term:

h1SE.........................

102.265 36,673 134.150 ll4.815 102,NN) 92.375 SFI..........................

235.0:N) 173,471 235.1N N) 180.610 IN)(NN) 15 6.115 50 (X X) 30.550 A1SS..........................

Operating subsidiaries.....

343.460 77.9tN) 237.535 44.750 367.585 93.238 Long-term:

Co m pa ny....................

Il5.(MN) 32.(NM) 172.5(N) 71 (NH 230.(M N) 51.650 51SE.........................

2.089.(NN) 1.831.(NM) 1.626.0f M) 1.379.(N N) 1.3 l l,(NN) 941.(NN)

SFl...........................

N).IN N) 3.(N M)

N).t WM) 17.600 H),(M N) 6,5(H hlSS..........................

75,(X M) 56.2(N) 75.IN N) 9.0tN) l 31

'Ihe short term terrowings and the interest rates (determined by Cviding applicable interest cxpense by the average anmunt terrowed) for the Middle South Sptem were as follows:

Year Ended I ocember 31, IR) 19082__

___19161___

(IMlars in 71unnamh)

Average ik>rrowing:

th nk Loa ns........................................ $ 178.172

$ 1H2.358

$ 236.317 Commercial pper................................. $ 102.960

$ 102,H50

$ 70.559 other................................................ $ I 17.5 82

$ 93.840

$ 95,603 Maximum ik>rrowing:

th n k k u ns.......................................... $275.022

$ 236.189

$27H.426 Commercial prer................................. $ 123.(XX)

$ 142.265

$ 130.305 Othe r................................................ $ 212.340

$ 152,930

$ 100.(XX)

Year-end ik>rrowing:

tk nk k u ns.......................................... $ I14.573

$ 159.565

$ 216,183 Commercial pper................................. $ 123.(XX)

$ 107.725

$ 79.115 Ot her................................................ $ 50.4 71

$ 72,HH5

$ 100,0(M)

Average Interest Rate:

During perial.

Ih nk ku ns.......................................

10.2 %

14.3 %

18.4 %

Commercial pper..............................

10.3 %

14.2 %

17.8%

Other.............................................

9.7%

l.1.0%

17.4 %

At end of perial.

ih nk k u ns.......................................

10.9 %

10.9 %

15.0 %

Commercial pper..............................

10.9 %

9.9%

13.8 %

Other.............................................

10.1%

10.1 %

12.8 %

Note 5. Preferred Stuk

'the number of stures of preferred stock of the operating subsidiaries as of the end of the last two fiwal years was as follows:

Sharen Shares Outstanding Authorised at at IMmher 31_,.

c,g3g, t

Ikember 31,1910 191 0 _ _

19062_

Per %re Cumulative $1(X) Par Wlue Without sinking fund:

4.16 5. 56 %.............................

1.070,774 1.070.106 1.070.106

$102.50 to $107.00 6.0H. 8.56 %.............................

l.lW).(XX) 1,1*),(N N)

I,IN),(N M)

$102.83 to $107.42 9.16. l l.4 8 %............................

795,(NM) 795,(N N) 795)NN)

$106.1510 $11.1.98 m w(M5 106 3.(MS 106 3

3.(MS,774 w

w With sinking fund:

10.60,12.00 %............................

554.829 554.829 503,(XP)

$109.39 to $I12.00 14.75 17.00 %............................

450/NN) 450,0011 450,0tN}

$113.11 to $l17.00 1(XM,829

.I (N_M,H29. _9 5 3,(N P.)

a.

un iwued.....................................

_6456,500 Toial...................................

,i ggjg L

32

hrn hrn (hetstanding Autimrised at at IMwmher 31 CallIWe u

IMvmher 38 l9N.1, _len L _lgN2 _

Per tihere t

Cumulative. $25 Par Value Without sinking fund:

H.84%...................................

MM),0tN) 401),000

• N),GM)

$27.66 10.40 %...................................

(dNJ,0IN)

(du),(XM)

(dN),0llt)

$28 fd) l 1.OR).(NM) 1,(M N),(M N)

.1(M N),(M N) mm With sinking fund:

9.92 12. M %............................

6,913.299 6.913.299 3.999.M0

$27.6M to $28. IN 13.12 15. 20 %............................

6.792,(W) 6,792,0fd1 6.H(M),(N W)

$2M.28 to $29.HM 13.705.359 13.705.159 10.799 M0

-a m-*

U n i u ued.....................................

7.2(N),(NM)

Tot a l...................................

23139 Changes in the number of shares of preferred stock of the operating nutwidiaries during the last three theal yearn were as follows:

Number of hrn

_191L) _

___19u2_

_19H1 Sales:

LPAL j

12.M %, $25 par, w ith nink ing fund..................................

3,ux) 0X)

)

14.72 %, $25 par, w ith sink ing fund..................................

2.010.000 MPAL 12.00%, $100 par, w ith sinking fund.................................

100,000 14.75%, $100 par, w ith sink ing fund.................................

100.000 200.0N) 17.00%, $100 par, w ith nink ing fund.................................

liedemptions:

APAL 9.92 %, $25 par, with $ ink ing fund..................................

(N6.34l}

ON))

10.N)%. $ la) par, w ith sink ing fund.................................

(15.445)

(9.550)

(7,172)

I l.04 %, $ 100 par, w ith nink ing fund.................................

(32,735)

(20,150)

(22,25.1) 13.28%, $25 pur, w ith sink ing fund..................................

(7,W()))

Toiai...................................................................

3917at9 yMws 2352 I

t i

l i

'the ann =nts of preferral skd of the operating mMiieries an of the end of the last two lheal years were

(

an Edksws:

l Ihremher 31.

i les

_te_s2_

i (in M unk)

Widuma ninking humi:

[

5tated at $ N10 a dure............................................................

$ NW.5Ii

$NW.5II i

Stated se $25 a diere..............................................................

25 (NM) 25.0 ul l

t rea niu m...........................................................................

1,436 13 3 Total w iduma ninking Ammi.................................................

$ 3M),967 M

Widininking Amul:

Stated at $ 100 a nhere.............................................................

$ NN).483

$ 95.3)1 Stated at $25 a nhere.............................................................. M2.634 269,991 pre.i 533 uS i

lanusase e aponw..................................................................

(14.(W9)

(lI,lisi )

j Tueal w ish nink ing humi.....................................................

$429301

$354,937 Canh ninking huid._ ;t-__a hw she enming five yearn kw preferred nkd mentanding at ihnwnher 31.

1983 are as hdiown (in ilmmaandn): 19M, $40,000; 19#5, $14,750; 1986, $15,750; 19n7, $12,250; and 19#N, $22,500.

I I

l 1

l t

t

!r e

r r

f

?

?

t I

i b

Note 6. Imsig-lleres Ikht 1he kmg term debt of the Company and ituulakliaries as of the emi of the 1.nl two liwal > cars was as follown:

Ih**"I" 31

. 5 191 0 191u2 fin Mwnh)

F i rst Mortgage ih nh............................................................................ $ 3 016,731 52,m17M)

Prtedwiry Ntwen:

Due:

19144 at Federal fumh rose plun H of I %................................................

3.014) 17,Nul 191W. at prime or negot intal rew mey merket rate........................................

56,3 4) 9,tuul 191H et 107 % o( prim 3 m % of 1 %....................................................

32.tuul 7 1.014) 19116. et i Hi% of the man of prime aml 1,3 %,...........................................

1,453,(uul 1,0M.tuul 19N9. at lemk m Interbank Offered itsee plus I %......................................

lil9.Olu) 313,(Eul 19W9. at I l.5 % plus I % (Note 4 ).........................................................,

Igtus)

Total Primdw wy N otes................................................................. _l,922,3u! _1,476,Nul Osher:

lengthem Obligsske - Department of Fnctgy (Noec 11)...............................

49.401)

Capitalliol I.eme - due wr6elly thrimph 199.1. 16 %......................................,

5.5%

5.119 0 Munkipal itevenue ihnh - due wrielly theough 2tuW.

I % N %......................................................................................

%,WH 39.154 j

Polluthm Controf Itoenue 16 min amt in4milment Purthoe Conteada:

Duc wrially thrimeth 2014. 6.4 1 I % %...............................................

63.91El M 0$0 l

Due 191W - 20 D. 6 % 1 i % %........................................................

190.125 05,623 1.e$n - Fumb on deposit w ich trunte................................................

(14111) _(2Mi])

1 Total Othe r.............................................................................111p4 22MlJ Unnnort Isal Pr emium aml Diwont - Net.................................................. _1Hh40l) __._65D)

Total l ong /k r m I h4it................................................................

5.2N).1M 4.302,549 l>cw - A rm ent due w 6eWn ime year............................................... _2[N/EN 73_,HQ teng/rctm ihhe I!adahng Ankwnt Due WhNn One br..................... $ S.012,175 $ 4,429.447 Maturkies arul

• inking fini rapdrenwnh for the enedng the yeatum kmg term defit istitamlitt at thwender 31.19N3 are at folksws:

% inking Fumi Madurkha

. _ ",f R A._.

ene och.e.

^

theikwwnho>fIloll,ml 19M.................................................................

226.f48 49.%3" 19.571 19NS.................................................................

203.062 Si.NuI 21.N31 19M...............................................................

l.4NS.W6 SS.NI!

21.531 19N7.................................................................

I14.IM 61 Nei 21.62l

!9NN,................................................................

27.1,630 61,333 20.9M)

' Sinking fund rapiirenwnh nwy Iw nwt by tertifkation of prqvity mkhtlom at the rate of 167% of the rapiltal anumnt.

"hkimics a vtN million MSl! boral ninking fun l inpiirenwns ilut li cilwini to lv refitw#wnl.

SS

'the outstarkimg first nortgage borah of the Com(uny'aulwisliaries as of I Avember 31.19M3 and 1982 wer2:

14 64 9%.

12 4 15 4 Weewill

_S En %_

16 % 4 11 % 4 14 % 4 17 % 4 Total (In kuumdwflMlan)

_191 0 31.MN) l'8N4.. c. n........ n..........

31.$N)

............n....

IN.0IN) 19NS..................................n..n......

IN(NIO 70.(M N) 143.(N4) f 73.(NNI 19:16.............................................

26 (NNI 19N7..n.................................o.......

26.0011 123.(N NI INS.4fd 4S.01NI 19MN..........n.........n.......................

13.4fd 19M9 l'NN.............................. n.......

307.330 N9.5N) 37N. NMO 100.(N E) 2H3.(N ul I.lN).7'Al 1.ONS (N N) 4N).(NN) $26.NN) 9N.MN) 194 20t lM.... n..... n...... n..... n...... n...

_)]dJN10 N1(NNI 303.(N NI 20t Pi 401 1 n n......................... n.......

g,016,753 l

Total First Mortgage lloixli...............

5 69.(N12 M1(N41 19N 3 n.... n... n.. n... n......... n... n.... n..

19.0112 1I.SXl 1984.............. n. o.. n. n. n......... n.. o n 11.$00 IN(NN) 19N3 o........... n... o n. n n o n.. n..... n. n.

IN.UIN) 70.0IN) 145.00tl 73.0lN) 19:46.no...n.....n..n.....n.o..unn.,n..,

26.000 19M 7. n. n.. n.. o.... o n... o..... n.. o n.....

26.OlN) 4 IO.tN N) 1 IN1.344 19NM 1997 n........ n. u. n. n.... n. n... n. n.

322,uSN 31.INI 419.230 9'A8,2011 S19.Out) 176.70LI 9N,500 phN 4007 o n.. n......... n.. n....... n n.....

jlWNN) 210.tN N)

IMljNN) 2tNM4'2012..nno...nnon.nonon.non..

Total First Mortgago Isorwis.o n.n.un..

2.Moh0Ni NWe 7.14etnined F.arning the Pubhe Unhiy Hohhng comluny Ati of 1933 proluba ihe comluny' sulwklanes from nuung hum or mbarse, to MSU. 'Ibc instenture prmislom relating to the operating udakharles' long term ild4 aral tramictw by unh udwkhariciitom retainni carnine to the statal gahee of 5onunon stak arul the prm hiom of the MM! bank hun agrectrwnts arkt irukriture reste ht the atriount of (onschil.u rst retalrini carnings as 461able for tash ths hit rkh on common stak of the suinkharict As of Desember 31.1981. 5149.4 railhon of 6onmiklatal ectalnni carnine were frce f tom ukh restilitiom. irnhating $111.7 nillkm of untestrtitol unihstributal rclainol carnine of the Com-juny's uibskliark. 'the uneestektol umlistobutal retainni carninp of any udwkhary of MSU are not awolabk for siistnbution to the wounon sta Lhohler5 of MSU unul unh carnings atc nuik asallable to the Comluny through the ileslaration ef div kktkl, by sin h intwLliary, Nde N. Omanlinwnts and Omtingendei 1he MkkIle somh syocm'.mmitus00n erouram wnicmplawieyvmblure, of alvrminuidy $1.231.2 md.

hon in 1944. $79N 6 nulkon in 19N3. amt SM2N.9 milhon in 19M6 (itslikhng Al DC of $436 3 inillion in 1944.1121.2 nulkon in psMi, drul 1167.9 milhon in 19M6). Of these c yvmhtures. UNI nulkon. U27 nullion, r.44 51MN nullion, li rcagesIhdv.(Irwhating AlI C of %:61 rollion in 19Al. SIM nullion in 19NS, utal $116 million in 19N6L ate alt a ble to M%lb 90 pertent ownership interest in the draml Oulf Nikicar Station, a two unit malcar generating station.

MM! cstinutc= the tortmwrdal operadon date of Oraral Gulf Unit I to lw in the thiril yo uter of 1958 at a total unt (cuhhhng om kat hwil of altiminukly $2.7 bilhon for itCAyvrtvnt ou nership intercit. A l.nulai nnumnt of wmtrintkm on Unit 2 wailetforrimiduring 19ML l'ull resumpion of wmtrin00n on Unit 2 arut the cmt to i

wnykte Unit 2 williv dqvnikot, among ottwr thine, upm wmpktion anst wouncttial:1eration of Umt 1.

Ihnmyh thunder ll,19M1, M%li tud imestol $1.)lN.6 milhon in the Ordral dulf Nik kar $1ation, MMI cstb nwice tvrwhng d firwl revkw of the unt alk(ation telwcen the two uniti upm the mmpktion of Unit 1. that of I

thh local.12.NH.N milhon wan tmentalin Unit I unil %706 N million in Unit 2.

In omnettion with Oratwi dulf M%U hai maketaken, ta the etical not i+tainol by M%It from other nourica.

to hanMi or (ame 1o le futnkhni ta MMl sulthient capital for wmlnntion an.1 opera 0on of the itation ansi idatal popwt 'thnmph i Aunkt 31.19M3, M%U lud imestal $6M9.9 inilhon in the umunon ths k of M%ll in nikit.

thm, at thumhrt 31.19M1, MM!'n outstamling iklM ltalmlal shott term lurrowine of %A7 milhon bmk tur-D

.~.

a

~.

-.. _ ~

i l

rowings of $1,453 million (which are due December 31,1986) undcr a $1,711 million revolving loan agreement with a group of domestic banks, bank borrowings of $378 million (which are due February 5,1989) under a $378 million revolving loan agreement with a group of foreign banks, $49.5 million of Claiborne County, Mississippi l

i Pollution Control Revenue Bonds due December 1,2013, and $328 million of First Mortgage Bonds,9.25 % Series

.due 1989 and $98.5 million of First Mortgage Bonds,12.50% Series due 2000.

MSE is obligated to make annual cash sinking fund payments with respect to its first mortgage bonds in i

varying amounts designed to retire $349.5 million of those bonds by maturity. In addition, MSE is obligated to make prepayments of $100 million at the end of both 1984 and 1985 under its $1,711 million revolving loan agreement. With respect to its $378 million loan agreement, MSE is obligatcd, commencing February 5,1985, to make semi-annual prepayments of one-ninth of the amount of borrowings outstanding on the date that these revolv-1 ing credit borrowings convert to a term loan. MSE has covenanted with the bondholders that it will complete Unit I no later than December 31,1984 and that Unit 2 will be completed no later than December 31,1988. In the event cither of these covenants is not fulfilled or MSE defaults in respect of either the bonds or the bank borrowings, the bonds and the bank borrowings will become due and payable unless extensions of time can be arranged. In this event, MSU would be required to provide MSE with sufficient funds, to the extent not obtained by MSE from other sources, to meet the payment obligations of MSE with respect to any of the bonds and bank borrowings under tne $1,711 million and $378 million revolving loan agreements then outstanding.

f MSE believes that its resources will be adequate in 1984 to enable it to finance its share of the cost of complet-ing Grand Gulf Unit I and to meet its sinking fund requirements on outstanding debt through a combination of the conversion of the foreign bank loan agreement and the domestic loan agreement to term loans on June 30,1984, and sales of additional common stock to MSU, together with the planned sale of additional pollution control revenue bonds, bank borrowings, or possible extensions of certain existing bank borrowing arrangements. In the event that capital requirements for completion of Grand Gulf Unit I are increased as a result of a further delay in commercial operation or for any other reason, MSE may require additional external financing, the source or availability of which cannot be predicted at this time.

MSE's foreign and domestic loan agreements were amended to extend the period during which revolving loans may be made from December 30,1983 to June 30,1984. MSE currently anticipates converting borrowings under these agreements to term loans as of June 30,1984. The conversions will be subject to MSE's fulfilling certain conditions and obtaining waivers of certain other conditions. If waivers cannot be obtained and the remaining I

conditions cannot be fulfilled, the bank loans will then be due and payable.

Following commencement of commercial operation of Grand Gulf Unit 1, MSE will require substantial funds t

to finance maturing indebtedness, including the December 31,1986 maturity of its $1,711 million domestic loan

- agreement, to meet sinking fund obligations, and to finance continuation of construction of Grand Gulf Unit 2.

MSE expects to obtain a significant posn of such lands through its receipt of payments from the sale of power to the System operating companies under the Unit Power Sales Agreement, approval of the terms of which is cur-rently pending in a proceeding before the FERC. The balance of amounts needed by MSE for refinancing and construction of Grand Gulf Unit 2 will be obtained from external sources. MSE's ability, generally, to obtain new l

funds externally will depend on a. number of factors, including the results of retail rate proceedings filed by the System operating companies for recovery of Grand Gulf Unit I costs, contractural restrictions contained in MSE's

[

first mortgage bond indenture and credit agreements, market conditions, the availability of financing sources, and the credit ratings of MSE's securities. MSE expects during the period from commercial operation through Decem-l ber 31,1986, to retire a significant portion of the indebtedness under the domestic loan agreement through use of l

internal funds and funds obtained through the issuance of first mortgage bonds and preferred stock. In addition, i

during such period, MSE would seek to extend, for a limited period, the maturity of a portion of the borrowings under the domestic loan agreement.

LP&L, MP&L, and NOPSI have requested or will request from their respective state public utility commis-p sions rate adjustments adequate to permit them to meet their obligations to MSE to purchase power under the Unit Power Sales Agreement. An Administrative Law Judge (ALJ) of the FERC has rendered his initial decision regard-ing such Agreement. The ALJ has deferred any decision on Grand Gulf Unit 2 and has recommended that capacity and energy from Grand Gulf Unit i be allocated to AP&L as well as the other operating companies. The ALI has ruled that Grand Gulf Unit i be allocated 36% to AP&L,14% to LP&L,33% to MP&L, and 17% to NOPSI,

~

compared to MSE's request that such costs be allocated 38.6% to LP&L,31.6% to MP&L, and 29.8% to NOPSI.

i This decision is subject to review of the FERC. ' P&L has filed an application with the APSC requesting, among A

other things, recovery through rates ofits revenue requirements resulting from any obligation to purchase power under the Unit Power Sah,s Agreement.

[

In connection with a Show Cause Order issued by the MPSC relative to the continued construction of Grand Gulf Unit 2, MSE has Gled testimony supporting the continued construction of Grand Gulf Unit 2 as an economical i

< ~

option for providing the Middle South System capacity needed to meet projected System loads. Current projected i

loads reflect a need for additional capacity of the size of Grand Gulf Unit 2 in 1990. Based on an economic and r

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feasibility study on the construction of Grand Gulf Unit 2 which assumed resumption of full construction in July 1984, the commercL:1 operation d.ne of ti.e unit would be April 1990 with a total construction cost for MSE's 90%

ownership interest c,f $3.44 billion. MSE has covenanted with bondholders that it will complete Grand Gulf Unit 2 no later than December 31,1988. MSE plans to seek from its creditors whatever waivers or amendments are necessary to change the stipulated completion date relative to Grand Gulf Unit 2.

On April 30,1982, Middle South Services, Inc. (MSS) on behalf of the Middle South System operating companies, filed for approval with the FERC a new agreement providing for the coordinated planning, construc-tion, and operation ofits generation and transmission facilites. Rates under the new agreement became effective on January 1,1983, subject to refund. Various parties have intervened in these proceedings. Some parties are con-testing the method by which the agreement equalizes capacity and energy among the System operating companies and certain proposals, if adopted, could cause material changes in the allocation of costs among the companies.

Testimony was concluded in December 1983. On February 2,1984, MSS notified the presiding ALI, designated by the FERC to hear this proceeding, that three of the MSU operating companies will support an alternate cost allocation method designed to bring about a form of equalization of production costs among the operating compa-nies and that the remaining operatirg company will continue to support the original proposal. Subsequently, the three operating companies filed Statements of Separate Positions pursuant to the notice filed by MSS. In addition, the inree companies supporting the equalization concept have filed a proposed Offer of Settlement. The matter is still pending before the ALI.

SFI has a number of contracts for the purchase of fuels for use at various generating stations within the Middle South System. Among the contracts is one for 100 million tons of coal for LP&L's Wilton Station, another for up to 185 million tons of coal for use at the Independence Station in Arkansas, and another for 33 million tons oflignite for AP&L's share of a future powe: station in Arkansas. In addition, SFI has a long-term oil supply agreement with a major oil company providing for the purchase of 25,000 barrels of oil per day through 1996 with an option to reduce, within certain limits, the contract quantity either temporarily or permanently. AP&L is currently purch,-

ing coal for the White Bluff Station under an agreement that will provide approximately 100 million tons of coal over a twenty-year period.

SFI has a long-term program for the acquisition, conversion, and enrichment of nuclear materials required for the fabrication of nuclear fuel that may be utilized in any of the present or proposed Middle South System nuclear

(

generating stations. SFI has firm purchase commitments for the acquisition in 1984 of 500,000 pounds of uranium l

in various stages of processing.

The Price-Anderson Act limits the public liability of a licensee of a nuclear power plant to $580 million for a I

single nuclear incident. Insurance for this exposure is provided by private insurance and an indemnity agreement with the Nuclear Regulatory Commission (NRC). Every licensee of a nuclear power plant is obligated, in the event of a nuclear incident involving any commercial nuclear facility in the United States that results in damages in excess of the private insurance, to pay retrospective assessments of up to $5 million per incident for each licensed reactor it operates or up to a maximum per reactor owned of $10 million in any calendar year. At December 31,1983, the Middle South System had three licensed reactors.

AP&L is a member-insured of Nuclear Electric Inwance Limited (NEIL), a mutual insurer that provides its members with insurance coverage for certain costs of replacement power incurred due to certain prolonged outages of nuclear units (NEIL I) and for $425 million of coverage for property damage sustained by the insured in excess l

of $500 million caused by radioactive contamination or other specified damage (NEIL II). MSE is a member-insured under the NEIL II excess property insurance program and MSE and LP&L are member-insureds under a primary property damage insurance program provided by Nuclear Mutual Limited (NML), another mutual insurer.

As member-insureds with these mutuals, AP&L, LP&L, and MSE are subject to assessments iflosses exceed the accumulated funds available to the insurer. The present maximum assessment for incidents occurring during a policy year is approximately $21 million, $20 million, and $54 million for AP&L, LP&L, and MSE, respectively.

Under the terms of their nuclear fuel leases, three subsidiaries are responsible for the disposal of spent nuclear fuel. These companies consider all costs incurred or to be incurred in the use and disposal of nuclear fuel to be proper components of nuclear fuel expense and provisions to recover such costs have been or will be made in applications to regulatory commissions. The affected Middle South System companies have obtained commitments l

from the Department of Energy (DOE) whereby the DOE will furnish service for the companies' spent nuclear fuel l

at a cost of one mill per kilowatt-hour of gross generation on or after April 7,1983, plus one-time fees for dis-l charged fuel and in-core burned fuel. AP&L, through rates and a settlement of a past disposal contract, has re-corded the approximately $49.4 million necessary for payment to the DOE for the disposal of all spent nuclear fuel on hand. In addition to the recovery of costs associated with the disposal of spent nuclear fuel, AP&L is recovering a total of approximately $160 million for decommissioning costs for its two nuclear units.

'Ihe Federal income tax returns for the years 1971-1976 have been examined by the Internal Revenue Service (IRS) and adjustments have been proposed. Formal written protests have been filed and conferences have been hcid with Appeals Officers of the IRS. All issues, other than an issue involving the taxability of customer de-posits, have been settled with the Appeals Officers. Such settlement is subject to review and final approval, which 38

is expected to be received in 1984. He Company believes that adequate provisions have been recorded on the books.

Any final liability that n.ay result from resolution of 6e customer deposits issue would not have a material effect on net income, because income taxes on customer deposits would be normalized.

In the interest ofincreased economic efficiency, LP&L and NOPSI are continuing the development of a plan to consolidate the two companies and their operations. Under the proposed arrangement, subject to the receipt of necessary regulatory and other approvals, the two companies will be consolidated into a new company to be called Louisiana Power & Light Company. MSU, which currently owns all the outstanding common stock of LP&L and NOPSI, would own all the common stock of the new company.

Note 9. Leases The Company's operating subsidiaries accounted for leases at December 31,1983 on the same basis as that used by their respective regulatory authorities in the ratemaking process that determines the revenues utilized to recover the lease costs.

Application of criteria used to define a capital lease (excluding nuclear fuel leases), absent the treatment as an operating lease in the ratemaking process, would require recording the following assets and liabilities on the balance sheet:

1983 1982 1981 II"

"#d* #I Assets:

$ 139,204

$ 135,676

$ 129,308 Utility plant....

Accumulated amortization.........

(26,367)

(22,225)

(20,890)

$ 112,837

$ 113.451

$ 108,418 Net..

Other property and investments-net.....

$ 40,585

$ 47,406

$ 50,702 Liabilities:

$ 155.869

$ 162.388

$ 160,697 Non-current obligations under capital leases.....

$ 13.420

$ 13.919

$ 10.804 Current obligations under capital leases...

The recording of such leases would not materially affect the amounts reported as either expenses or net income.

At December 31,1983, the System companies had noncancellable capital and operating leases (excluding nu-clear fuel leases) with minimum rental commitments as follows:

(In kusamis) 1984.......

$ 56,262 1985........

53,906 1986..........................................

52,651 1987...

44,297 1988.........,.....................................

42,530 For years thereafter....

437,821 Total..

$687,467 Rental expense for capital and operating leases (excluding nuclear fuel leases) amounted to approximately $58.3 million, $53.8 million, and $45.9 million in 1983,1982, and 1981, respectively.

Bree subsidiaries have entered into nuclear fuel leases aggregating $455.0 million. The leases, unless termi-nated sooner by one of the parties, will continue through 20!8,2028, and 2029. Lease payments, which are not included in the tabulations above, are based on nuclear fuel use. Nuclear fuel lease expense of $49.7 million, $40.1 million, and $51.5 million was charged to operations in 1983,1982, and 1981, respectively. The unrecovered cost base of the leases was $431.4 million, $361.4 million, and $309.2 million at December 31,1983,1982, and 1981, respectively.

39

Nots 10. Pensjon Plans The companies of the Middle South System have various pension plans covering substantially all of their employees. Rese plans are administered by a trustee who is responsible for pension payments to retirees. Various investment managers have responsibility for management of the plans' assets. In addition, an independent actuary performs the necessary actuarial valuations for the individual company plans.

Effective January 1,1982, the companies modified the method of amortizing prior service costs by changing from fixed amortization periods of from ten to thirty years to varying amortization periods no: to exceed thirty years. He effect of this change on 1982 pension expense was not significant. Total pension expense of the Company and its subsidiaries for 1983,1982, and 1981 was $26.6 million, $24.5 million, and $26.4 million, respectively. Of the total pension expense, NOPSI's transit-related pension expense for 1983,1982, and 1981 was $1.4 million, $2.4 million, and $2.1 million, respectively.

The comparison of the actuarial present values of accumulated plan benefits and plan net assets for the defined benefit plans is presented below. His comparison was determined in accordance with the provisions of Statement of Financial Accounting Standards No. 36 which requires the use of certain assumptions that are different from those used by the Company's actuary in determining an appropriate level of funding for the Company.

l January 1, 1983 1982 Actuanal present value of accumulated plan benefits:

Vest ed.......................................

$232,339

$209,812 N onvested.............................................

13.539 14,167 Total..............

$245,878

$223.979 Net assets available for benefits......

$_398.413

$331,771 I

The assumed rate of return used in determining the actuarial present value of accumulated plan benefits was 9%.

A portion of the plan assets will be transferred in mid-1984 to Transit Management of Southeast Louisiana, Inc.

as part of NOPSI's divestiture of its transit operations. (See Note 12.) This transaction is pending the acceptance by the Regional Transit Authority of an actuarial study that will determine the transit-related present value of accumu-lated plan benefits and net assets available for benefits as of June 30,1983 which will be transferred.

Note 11. Settlement Agreement with Gas Supplier A dispute between a gas supplier and LP&L arising from the gas supplier's claimed inability to deliver full quantities of fuel gas due LP&L under several natural gas contracts was settled by the execution of a settlement agreement on June 4,1982. He settlement agreement provides for the payment of $1.087 billion in cash (of which

$587 million, $250 million,and $250 million were received by LP&L in June 1982 January 1983,and January 1984, respectively) plus a guaranty of savings of at least $585 million in certain gas acquisition costs between 1982 and 1996. On March 21,1983, the LPSC amended its order of January 17,1983 (which required, among other things, that LP&L refund in two installments the funds received in 1982 and 1983, plus interest earned on these funds) to provide,in general, that the refunds be made as follows: the $587 million received by LP&L on June 4,1982, plus interest, or a total of $637 million, shall be refunded in 1983 ($621 million had been refunded through December 31, 1983); the $250 million received in January 1983 shall be refunded in ten equal annual installments beginning in 1984; and the $250 million received in January 1984 shall be refunded in nine equal installments beginning in 1985.

He effect of the LPSC order is to permit LP&L to use, pending refunds to customers, a portion of the proceeds in financing its continuing construction program.

Pending the decision by the LPSC, in 1982 LP&L had used appmximately $329 million of the settlement funds to repay its short-term borrowings incurred to finance its construction program and for other corporate purposes.

As a result of the LPSC order, LP&L accrued in 1983 and 1982 interest expense in the amounts of $11.1 million and

$19.2 million, respectively, relating to the funds used by LP&L.

40 b

Note 12 Wansit Div'estiture On June 30,1983, NOPSI sold and transferred to the Regional Transit Authority (RTA), a political subdivision of the State of Louisiana, various properties and assets related to NOPSI's operation of the transit system in the City of New Orleans for a purchase price of $21.0 million. Under the sale agreement, NOPSI agreed to pay $7.3 million in cash to RTA and to reimburse RTA or Transit Management of Southeast Louisiana, Inc. $13.0 million, plus a 9% up-ward adjustment factor per annum, for future disability insumnce premiums or welfare benefit payments for all retired and disabled transit and transit-related employees of NOPSI and their respective dependents and survivors.

As a consequence of this transaction, NOPSI disposed of its entire interest in the transit business. The results of the discontinued transit operations in the 1983 consolidated income statement have been accounted for as miscellaneous income. 'Ihis amount includes revenues from transit operations for the six months ended June 30,1983 of $30.5 million and a gain from the sale of transit operations, before income taxes, of $2.2 million. Accordi, gly, the 1982 and 1981 results of transit operations have been reclassified similarly. Revenues from transit opemtions for 1982 and 1981 amounted to $55.5 million and $49.8 million, respectively. Income taxes related to transit operations for all three years have been accounted for, on a consolidated basis, as income taxes on other income.

Note 13. Quarterly Results (Unaudited)

Consolidated operating results for the four quarters of 1983 and 1982 were as follows:

Quarter Operating Operating Net Earnings Ended Revenues Income Income Per Share N"

" "## " O ""#

1983:

March........

651,166 85,330 62,407

$0.43 June.

636,791 100,051 84,049

$0.55 September.

918,404 164,204 150,656

$0.97 December.......

703,2 %

94,740 80,938

$0.51 1982:

March......

629, % 7 105,890 70,191

$0.56 June...............

644,290 92,794 59,795

$0.46 September.

874,432 151,707 130,803

$0.95 December *.......

697,575 84,421 49,806

$0.36 Operating revenues and operating income have been restated to exclude results of discontinued transa cperations.

• In the month of December 1982, net income was decreased $9.9 million for interest expense accrued on the settlement agreement funds used by LP&L. (See Note 11.)

The business of the Middle South System is subject to seasonal fluctuations with the peak period occurring during the summer months. Accordingly, earnings information for any three-month period should not be considered as a basis for estimating results of operations for a full year.

o 41

Note 14. Effect cfInflation on Operations (Unaudited)

The following supplementary information about the effect of changing prices on the Company is provided in accordance with the requirements of Statement of Financial Accounting Standards No. 33, " Financial Reporting and Changing Prices". It should be viewed as an estimate of the effect of changing prices rather than as a precise measure.

Statement of Income from Operations and Other Financial Data Adjusted for Effects of Changing Prices for the Year Ended December 31,1983 (In 7housarufs)

Adjusted for Adjusted for Changes in As Reported in General Specific Prices the Financial Inflation (Current Statements (Constant Dollars)

Costs)

$ 2,909,657

$2,909,657

$ 2,909,657 Revenues *...........

Operating expenses (excluding depreciation)*.....

2,282,161 2,282,161 2,282,161 Depreciation...

183,171 398,127 429,708 Total operating expenses.

2,465,332 2,680,288 2,711,869 Operating income.............

444,325 229,369 197,788 Other income *..............

409,781 409,781 409,781 Interest and other charges *......

476,056 476,056 476,056 Income from operations (excluding adjustment to net recoverable cost)**.

$ 378,050

$_ 163,0%

$ 131,513 Increase in specific prices (current costs) of property, plant, and equipment held during the year ***......

$ 683,W6 Adjustment to net recoverable cost....

$ (74,452)

(131,975)

Effect ofincrease in general price level....

(594,M2)

Excess (deficiency) of increase in specific prices, after adjustment to net recoverable cost, over increase in general price level..........

(42,871)

Gain from decline in purchasing power of net amounts owed.......

253,722 253,722 179,270

$ 210,851 Net........

• Assumed to be in " average}>r the yar"Jollars and thus are not restated.

• • Including the adjustment to net recowrable cost, incomefrom operations on a constant Jollar basis wuld have been $38.612f>r 19M.

• • • At December 31.1983, current cost ofprmerty, plant, and equipment. net ofaccumulated depreciation, as $17,023,8tM. while historical cost or net cost recowrable through Jerreciation mn $10,247,942.

42

Five-Year Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices (in Thousands ofAverage 1983 Dollars) 1983 1982 1981 1980 1979 Operating Revenues..............

$ 2,909,657

$ 2,995,075

$3,036,349

$2,828,526

$2,505,988 Historical Cost Information Adjusted for General Inflation:

Income from operations (excluding adjustment to net recoverable cost)..................................

$ 163,094 118,073

$ 127,522 63,M8 89,531 Income per common share (afler dividend requirements on pre-ferred stock and excluding adjust-ment to net recoverable cost)....

1.06 0.89 l.11 0.65 1.M Net assets at year-end at net recoverable c ost...................

$ 2,951,1N

$ 2,532,845

$ 2,316,756

$ 2,195,508

$ 2,154,2M Current Cost Information:

Income from operations (excluding adjustment to net recoverable cost).....

$ 131,513 82,666 83,955 21,520 50,180 Income per conunon share (after dividend requirements on pre-ferred stock and excluding adjust-ment to net recoverable cost)....

0.86 0.62 0.73 0.22 0.59 Excess (deficiency) ofincrease in specific prices after adjustment to net recoverable cost over increase in general price level...

$ (42,871) $ (44,839) $ (417,209) $ (565,311) $ (714,535)

Net assets at year-end at net recoverable cost....................

$ 2,951,1N

$ 2,532,845

$ 2,316,756 3 2,195,508

$ 2,154,264 GeneralInformation:

Gain from decline in purchasing power of net amounts owed......

$ 253,722

$ 227,823

$ 192,977

$ 272,459

$ 373,996 Cash dividends declared per common share........

1.71 1.72 1.79 1.92 2.1I Market price per common share at year-end.......................

13 %

15%

13%

13 %

16 %

Average consumer price index.....

298.4 289.1 272.4 246.8 217.4 Constant dollar amounts represent historical costs adjusted for the effects of general inflation. The effects are determined by converting these costs into dollars of equal purchasing power using the Consumer Price Index for all Urban Consumers (CPI-U).

Current cost amounts reflect the changes in specific prices of property, plant, and equipment from the year of acquisition to the present. The current costs of property, plant, and equipment, which represent the estimated costs of replacing existing plant assets, are determined by applying the llandy-Whitman Index of Public Utility Construe-tion Costs (IIWI) to the cost of the surviving plant by year of acquisition. Land and certain other plant assets that are not included in the IIWI were converted using the CP!-U. The difference between current cost amounts and constant dollar amounts results from specific prices of property, plant, and equipment (as measured by the llWI) changing at a rate different than the rate of general inflation (as measured by the CPI-U).

The current year's depreciation expense on the constant dollar and current cost balances of property, plant, and equipment were determined by applying the Company's depreciation rates to the indexed amounts.

Fuel inventories, oil and gas reserves, the cost of fuel used in generation, and gas purchased for resale have not been restated from their historical cost in nominal dollars. Regulation limits the recovery of fuel and purchased gas costs through the operation of adjustment clauses or adjustments in basic rate schedules to actual costs. For this reason, fuel inventories and oil and gas reserves are effectively monetary assets.

As prescribed in Statement of Financial Accounting Standards No. 33, income taxes were not adjusted.

43

'Ihe regulatory conunissions to which the Company's subsidiaries are subject allow only the historical cost of

- plant to be recovered in revenues as depreciation. Therefore, the excess cost of plant stated in ternts of constant dollars or current cost over the historical cost of plant is not presently recoverable in rates. This excess (deficiency) is reflected as an adjustment to net recoverable cost. While the ratemaking process gives no recognition to the current cost of replacing property, plant, and equipment, the Company believes, based on past experiences, that it will be allowed to earn on the increased cost of its net investment when replacement of facilities actually occurs.

To properly reflect the economics of rate regulation in the Statement of Income from Operations presented above, the adjustment of net property, plant, and equipment to net recoverable cost is adjusted by the gain from the decline in purchasing power of net amounts o'ved. During a period ofinflation, holders of monetary assets suffer a loss of general purchasing power while holde. s of monetary liabilities experience a gain. The gain from the decline in purchasing power of net amounts owed is pnmarily attributable to the substantial amount of debt which has been used to finance property, plant, and equipment. Since the depreciation on this plant is limited to the recovery of historical costs, the Company does not have the opportunity to realize a holding gain on debt and is limited to recovery only of the embedded cost of debt capital.

Ccrporate Information Investor h. formation Dividend Reinvestment Form 10-K Available At the close of 1983, there were and Stock Purchase Plan The Middle South Utilities 217,654 shareholders of record The Company's Dividend System 1983 Annual Report to the of Middle South Utilities, Inc.,

Reinvestment and Stock Purchase Securities and Exchange an increase of approximately 9 Plan is open to holders of MSU Commission on Form 10-K percent from the same time a year common stock and preferred stock (including financial statement earlier. The number of shares of issued by the System operating schedules) is available to any common stock outstanding increased companies. The Plan provides for stockholder upon request. To receive from 139,333,934 to 166,082,128 stockholders to purchase additional a copy without charge, write to Dan during 1983.

shares of MSU common stock with E. Stapp, Secretary, at the address reinvested dividends at a 5 percent below. Additional statistical Dividends Declared discount without payment of any information is available in the 1983 The Board of Directors brokerage commission or service Financial and Statistical Report by authorized the increasing of the charge.

writing to Edwin Lupberger, Senior common stock quarterly dividend For Federalincome tax Vice President-Chief Financial payment by one cent per share, purposes, the difference between the Officer, at the address below.

effective with the January 3,1984 price paid and the fair n.arket value dividend. The new quarterly rate, on the investment date is considered Middle Si uth Utilities, Inc.

43-1/2 cents per share, is equivalent as an additional distribution and is Box 61005 to an annual rate of $1.74. This was treated the same as dividends paid.

New Orleans, Louisiana 70151 the 27th consecutive year that the Most MSU individual common (504)529-5262 Company increased its dividend rate.

stockholders may elect to exclude Of dividends paid in 1983, 98 from taxable income up to $750 hansfer Agent and percent is estimated to be a return of

($1,500 on ajoint return) of the capital to the stockholders for Federal taxable portion of 1983 MSU Registrar income tax purposes and is not dividends reinvested through the Morgan Guaranty Trust Company New York, New York 10015 taxable as dividend income. This MSU Dividend Reinvestment and occurs primarily because a large Stock Purchase Plan. Taxes on such Not. ice of Annual Meeting portion of net income resulting from reinvested dividends in a qualified capitalizing costs of capital invested program are deferred until the stock The Annual Meeting of Stockholders is scheduled to be held in projects still under construction is sold or otherwise disposed of.

does not constitute taxable income.

in New Orleans, Louisiana, at 10:00 a.m. (CDT), May 18,1984. The 1983 Annual Meeting was held in Little Rock, Arkansas, on May 20.

Of shares outstanding at that time, 79.1 percent were represented in person or by proxy.

Auditors Deloitte Haskins & Sells New Orleans, Louisiana 70139 Stock Exchange Listings The common stock of Middle South Utilities, Inc. is listed and traded on the New York, Midwest, and Pacific stock exchanges. The ticker symbol for the Company is MSU.

45

Middle South Utilities, Inc. & Subsidiaries 1973-1983 Financial Record gn nousanas)

Consolidated Summary of Operations 1983 1982 1981 Operating Revenues:

$ 2,716,329 $ 2,673,572 $ 2,582,778 Electric.

Natural gas.....

193,328 172,692 139,242 Total..

2,909,657 2.846,264 2,722,020 Operating Expenses:

Operation:

Fuel for electric generation...

942,219 1,066,325 1,083,0M Purchased power.....

373,712 345,076 263,559 Gas purchased for resale.....

158,186 138,890 107,768 Deferred fuel and other..........

363,509 288,283 307,218 149,453 132,031 127,067 Maintenance..

183,171 167,725 158,2M Depreciation..

104,493 101,381 93,058 Taxes other than income taxes.

190,589 171,741 175,142 Income taxes.

2,465,332 2,411,452 2,315,140 Total...

Operating Income..

444,325 434,812 406,880 Other Income:

Allowance for equity funds used during construction..

245,640 182,342 143,369 '

Miscellaneous income and deductions-net..

6,799 7,133 24,249 l

Income taxes-credit.

157,342 147,186 126,466 l

Total.......

409,781 336,661 294,084 Interest and Other Charges:

529,597 488,750 441,894 Interest on long-term debt.

Other interest-net.

47,251 74,130 74,507 l

Allowance for borrowed funds used during (180,858)

(170,438)

(157,511) construction...

Preferred dividend requirements of subsidiaries.

80,066 68,436 60,591 476,056 460,878 419,481 Total...

Net Income..

378,050 $

310,595 $

281,483 j

Earnings Per Common Share....

$2.46

$2.33

$2.44 Dividends Declared Per Common Share.

$1.71

$1.67

$1.63 l

Average Number of Common Shares Outstanding..

153,383,044 133,193,296 115,175,550 Utility Plarit and Capitalization:(at December 31)

Fixed Assets:

$ 11,942,417 $ 10,464,188 $ 9,080,436 l

Utility plant...

Less-Accumulated depreciation and amortization.

1,694,475 1.551,700 1,407.584 Utility plant-net.

$ 10,247,942 $ 8,912,488 $ 7,672,852 Capitalization:

$ 3,001,542 $ 2,481,916 $ 2,185,546 Common equity.

l Preferred stock (including premium and issuance expense):

Without sinking fund.

330,967 330.967 330,967 429,601 354,957 300,219 With sinking fund..

5,032,175 4,429,447 3.896.370 Long-term debt.

Total....

$ 8,794,285 $ 7,597,287 $ 6,713,102 Capitalization Ratios:

34.1 %

32.7 %

32.6 %

Common equity......

Preferred stock (including premium and issuance expense).

8.7 9.0 9.4 Long-term debt..

57.2 58.3 58.0 46

1980 1979 1978 1977 1976 1975 1974 1973

$ 2,179,232 $ 1,671,491 $ 1,485,901 $ 1,325,2M $ 1,064,116 $

867,641 $

768,433 $

609,082 116,067 117,256 95,284 83,040 63,852 48,928 38,373 38,362 2,295,299 1,788,747 1,581,185 1,408,304 1,127,968 916,569 806,806 647,444 946,145 697,606 623,402 568,990 422,204 294,482 259,435 149,882 281,951 258,377 133,929 86,087 61,439 35,075 43,880 22,458 88,8M 88,801 68,657 58,577 37,852 30,994 21,807 19,936 248,601 176,181 171,918 157,791 126,362 121,328 99,116 93,020 IN,333 IN,340 93,260 67,150 53,863 46,815 42,311 36,908 141,229 118,192 112,108 106,031 100,175 91,761 73,427 67,659 82,584 75,837 68,025 65,388 59,664 54,888 47,433 47,619 IN,463 51,395 83,290

%,388 72,873 61,222 38,669 58,456 1,998,170 1,570,729 1,354,589 1,206,402 934,432 736,565 626,078 495,938 297,129 218,018 226,5 %

201,902 193,536 I80,004 180,728 151.506 122,277 124,086 93,573 65,346 62,169 46,064 49,509 31,948 8,272 7,206 7,850 7,719 (1,953)

(6,279)

(10,747)

(7,997) 105,724 77,658 48,947 29,028 22,365 19,837 5,249 4,430 236,273 208,950 150,370 102,093 82,581 59,622 44,011 28,381 327,468 255,242 199,212 153,005 132,719 113,486 105,532 72,4M 72,666 43,990 23,161 18,323 15,571 19,177 8,094 3,723 (117,663)

(89,247)

(54,717)

(34,031) 55,024 36,264 25,477 23,109 21,780 16,660 15,N0 13,181 337,495 246,249 193,133 160,406 170,070 149,323 _ 128,666 89,368 195,907 $

180,719 $

183,833 $

143,589 $

106,N 7 $

90,303 $

96,073 $

90,519

$2.01

$2.12

$2.43

$2.16

$1.82

$1.78

$2.17

$2.09

$1.59

$1.535

$1.46

$1.395

$1.335

$1.275

$1.23

$1.15 97,469,169 85,444,691 75,522,179 66.598,876 58,395,628 50,733,782 44,279,481 43,376,255

$ 7,893,636 $ 7,002,052 $ 6,052,023 $ 5,183,284 $ 4,539,891 $ 3,953,814 $ 3,470,598 $ 3,054,867 1,2M,525 1,139,164 1,038,256 935,702 831,930 747,612 668,148 608,613

$ 6,629,111 $ 5,862,888 $ 5.013,767 $ 4,247,582 $ 3,707,961 $ 3.206,202 $ 2,802,450 $ 2,446,254

$ 1,901,2N $ 1,659,736 $ 1,412,254 $ 1,1%,427 $ 1,010,278 $

864,035 $

746,628 $

705,212 i

330, % 7 330, % 7 280,712 280,712 250,679 240,627 240,627 230,611 283,165 193,507 60,% 3 60,063 60,063 60,063 3,392,309 3,017,816 2,629,711 2,175,471 1, % 5,985 1,751,328 1,529,958 1,341,637

$ 5,907,645 $ 5,202,026 $ 4,382,740 $ 3,712,673 $ 3,287,005 $ 2,916,053 $ 2,517,213 $ 2,277,460 32.2 %

31.9 %

32.2 %

32.2 %

30.7 %

29.6 %

29.7 %

31.0 %

10.4 10.I 7.8 9.2 9.5 10.3 9.5 10.1 57.4 58.0 60.0 58.6 59.8 60.1 60.8 58.9 47

Middle South Utilities System Companies Operating Companies Other System Companies Arkansas Power & Light hlississippi Power & Light Electec, Inc.

Company Company Electec, Inc., a wholly-owned Arkansas Power & L.ight Com-hiississippi Power & Light subsidiary of hiiddle South Utilities, pany serves some 545,000 customers Con pany serves about 317,000 cus-Inc., was chartered in 1983 to de-in an area of approximately 18,900 tomers in Western hiississippi. The velop diversified business opportuni-square miles, having an estimated company operates in an area com-ties and to nurket at a profit the population of 1.3 million. It owns prising 25,900 square miles in 45 of capabilities, expertise, and resources electric facilities in 65 of Arkansas' the state's 82 counties with an esti-of the System companies. Provisions 75 counties and in 13 hiissouri coun-mated population of 1.3 million. As of the Public Utility Holding Com-ties. AP&L's service area encom-of December 31,1983, the company pany Act of 1935 restrict Electec's passes most of the state of Arkansas provided electric service in 140 mu-activities to those that are reasonably and includes Southeastern hiissouri.

nicipalities. h1P&L also provided incidental or appropriate to the oper-At December 31,1983, tne company transmission service to one associa-ations and needs of an integrated furnished retail electric service in tion of rural electric cooperatives, electric public utility system.

319 Arkansas and hiissouri incorpo-and three municipally owned rated municipalities. AP&L also pro-utilities.

Niiddle South Energy, Inc.

vides power at wholesale to nine hiiddle South Energy, Inc., a Arkansas and two hiissouri munici-New Orleans Public Service Inc.

wholly-owned subsidiary of hiiddle palities and to two rural electric co-New Orleans Public Service South Utilities, Inc., was formed in operatives and one association of Inc. serves approximately 199,000 1974 for the purpose of financing rural electric cooperatives.

electric and 173,000 gas customers in large power plants that might not be Associated Natural Gas, a the City of New Orleans, a land area feasible for a single operating com-wholly-owned subsidiary of AP&L, of approximately 200 square miles pany to finance.

provides retail gas service to 66,000 with an estimated population of customers in Arkansas and hiissouri.

558,000. Natural gas is provided for Sliddle South Services, Inc.

the entire city, while electricity is hiiddle South Services, Inc., a Louisiana Power & Light supplied for all areas except the 15th wholly-owned subsidiary of hiiddle Company Ward, an 18 square-mile section on South Utilities, Inc., was organized Louisiana Power & Light Com-the west bank of the hiississippi in 1963 to make the hiiddle South pany operates in 46 of the 64 par-River.

Utilities System as self-sufficient as ishes of Louisiana, a 19,500 square-possible by providing centralized ex-mile area which has an estimated pert consultation and other essential population of 1.6 million. At year-end staff services more economically and 1983, LP&L was serving approxi-effectively than would otherwise be mately 552,000 customers. The area poss ole. h1SS provides its services r

served by LP&L includes most of to System companies at cost as re-Northern Louisiana, a small portion quired by the Securities and Ex-of East Central Louisiana, and most change Commission.

of Southeastern Louisiana, including the metropolitan area around the System Fuels, Inc.

City of New Orleans and the 15th System Fuels, Inc., a wholly-Ward in New Orleans.

owned subsidiary of the four h1SU operating companies, was organized in 1972 to obtain needed generating fuels at the best price and to deliver those fuels efficiently to the operat-ing companies' facilities.

48

I Directors and Officers MSU Directors MSU Officers GEORGE F. BENNETT GEORGE K. REEVES FLOYD W. LEWIS Pr:sident and Chief Executive Officer Partner of Ward and Reeves, Chairman and President of c' ate Street Investment Corporation, Attorneys, Age 58.

Federal Street Fund, Inc., and of State Carutheraville, Missouri.

Joined MSU System in 1949.

Strect Research and Man::gement Compensation (Chairman) and Company, Boston, hiassachusetts.

Nominating Committees.

EDWIN A. LUPBERGER Compensation and Nominating Senior Vice President and Committees.

H. DUKE SHACKELFORD Chief Financial Officer President of Shackelford Co., Inc.;

Age 47.

JAMES M. CAIN Shackelford Gin, Inc., and Louisiana Joined MSU System in 1979.

President and Chief Executive Officer Cotton Warehouse Company, Inc.;

Sixteen years prior utility of New Orleans Public Service Inc.,

Chairman of Union Oil Mill, Inc.

industry service.

President and Chief Executive Officer (Agricultural and Agri-Businesses);

of Louisiana Power & Light Company, Bonita, Louisiana.

DAN E. STAPP New Orleans, Louisiana.

Audit and Nominating Committees.

Secretary Age 49.

BROOKE H. DUNCAN FRANK G. SMITH, JR.

Joined MSU System in 1958.

Prcsident of Foster Company, Inc.,

President and Chief Executive Officer New Orleans, Louisiana.

of Middle South Services, Inc.,

RODNEY J. ESTRADA Audit and Nominating Committees.

New Orleans, Louisiana.

Treasurer Executive Committee.

Age 46.

FLOYD W. LEMS Joined MSU System in 1965.

Chairman and President of the WM. CLIFFORD SMITH Company, New Orleans, Louisiana.

President of T. Baker Smith & Son, E. EUGENE BROWN Executive (Chairman) and Nominating Inc., Houma, Louisiana.

Assistant Treasurer Committees.

Nominating Committee.

Age 50.

Joined MSU System in 1956.

DONALD C. LUTKEN DR. WALTER WASHINGTON President and Chief Executive Officer President of Alcorn State University.

DOROTHY M. ANTOINE of Mississippi Power & Light Lorman, Mississippi.

Assistant Secretary Company, Jackson, Mississippi.

Compensation and Nominating Age 51.

Executive Committee.

Committees.

Joined MSU System in 1952.

JERRY L. MAULDEN President and Chief Executive Officer Directors Retired of Arkansas Power & Light Company, During 1983 Little Rock, Arkansas.

We wish to acknowledge the dedication LeROY P. PERCY and support of the following Directors Cotton Farmer; Chairman of the who retired from the Middle South Boards of Mississippi Chemical Utilities, Inc. Board of Directors Company and First Mississippi during 1983:

Corporation; President of Greenville Compress Company, Greenville, RICHARD W. FREEMAN Mississippi.

Vice-Chairman of the Louisiana Coca-Executive, Audit and Nominating Cola Bottling Company, Ltd.; Chairman (Chairman) Committees.

of the Finance Committee of Delta Airlines, Inc.,

ROBERT D. PUGH New Orleans, Louisiana.

Chairman of the Board of Portland Gin Company (Agricultural and JACK M. WYATT Agri-Business) and Chairman of Formerly Chairman and Chicf Portland Bank, Portland, Arkansas.

Executive Officer of Louisiana Power Executive, Audit (Chairman)and

& Light Company, Nominating Committees.

New Orleans, Louisiana.

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