RBG-23496, Gulf State Util Co 1985 Annual Rept

Gulf State Util Co 1985 Annual Rept

ML20202F454
Person / Time
Site:	River Bend
Issue date:	12/31/1985
From:	Booker J, Draper E, Lee N GULF STATES UTILITIES CO.
To:	Harold Denton Office of Nuclear Reactor Regulation
References
RBG-23496, NUDOCS 8604140158
Download: ML20202F454 (33)

Text

GULF STATES UTILITIES CO. -

1985 ANNUAL REPORT

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a Financial Highlights 1985 1984 Change Total Operating Revenue (000) $ I.858.436 $l .547.041 20.I Operating Expenses and Taxes (000) $ 1,514.571 $ 1.203.357 25.9 Net income (000) $ 265.499 S 258.171 28 income Applicable to Common Stock (000) $ 205.362 $ 202.5 I I l.4 Earriings per Average Share of Common Stock Outstanding $2.10 $2.30 (8.7)

Dividends per Share $ 1.64 $ 1.64 -

Average Common Shares Outstanding (000) 97.970 88.164 11.1 Number of Electric Customers (end of Year) 556.456 555.49I .2 Total Kilowatt-Hour Sales (000) 29.005.259 31.693.898 (8.5)

System Peak Load - Kilowatts 5.139.000 5.475.000 (6.11 Descriptionof Business About the cover:

Gulf States Utilities was incor- As a member of the Southwest The successfulconstruction of porated in 1925 and is primarily in Power Pool. the company has the River Bend nuclear generating sta-the business of generating, ability to interchange electricity tion (shown here) earned high transmitting and distributing elec- between the 38 members serving praise from the Nuclear Regulatory tricity to 556.000 customers in eight states in the South and Commission which unanimously southeast Texas and south Loul- Southwest.The company had a granted the operatinglicense to slana. The service area extends peak load of 5.139 megawatts in Gulf States. Despite the obvious 350 miles westward from Baton 1985. while it had installed capaci- feeling of celebration.1986 will not Rouge. La.. to a point about 50 ty and firm power purchase be a time for business as usual.

miles east of Austin. Tx. The ser- agreements totaling 6.610 Budget constraints and cost con-vice area encompasses the nor- megawatts. scious management. a longtime thern suburbs of Houston and The company has a wholly- way of life ct GSU. have received maior cities such as Conroe. owned subsidiary. Prudential Oil renewed emphasis as we tackle Huntsville. Port Arthur. Orange and Gas. Inc., engaged primarily in tough financial problems ahead.

and Beaumont. Tx.: Lake Charles the development and operation of Our 1985 Annual Report is an ex-and Baton Rouge La. gas and oil properties. ample of frugal restraint. Total GSU also sells electricity to pages have been reduced by municipalities and rural electrical almost 20 percent to cut back on cooperatives in both Texas and expenses and still do the best job Louisiana. In Baton Rouge. GSU possible.

supplies steam and electricity to industrial customers through a cogeneration facility and the com-pany owns and operates a natural gas retail distribution system serv-ing 85.000 customers.

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Report to Shareholders

Dear Fellow Shareholdere:

has touched every employee with cverything from ieducing the use of photocopies to not replacing com-For Gulf States Utilities.1985 was a year that pany vehides. This annual report. simple, direct and l utilitarian. is an example of how GSU is cutting costs blended significant achievement and progress with a measure of disappointment. On balance however, it and still doing what needs to be done. To date, cash was a year in which we can take pride in the savings of approximately $69 million have been iden-accomplishments of the men and women at Gulf tified through Project Save Cash.

States. Now that the decade of heavy construction activities Earnings for the year ended December 31.1985. - especially River Bend - is at an end. GSU is in the were $2.10 per average share of common stock com- position of having more employees than are pared to S2.30 per share in 1984 when there were 10 necessary. An early retirement option has been of- ,

percent fewer average shares outstanding. Our an- fered to some 500 employees as part of the com- I nual dividend of $1.64 per share of common stock pany's effort to reduce operating costs. Some 177 lob was continued in 1985. Return on average common openings have been permanently dosed. Altogether, equity was 13.05 percent. compared to 14.42 percent 20 percent of the Texas workforce. Induding contract one year carlier, work crews. has been phased out during the last two Last year was not an easy year for your company. years.

Sales and earnings figures reflect that fact. But there Merely reducing our costs will not solve all the were positive accomplishments made in 1985. problems we face however. Aggressive sales of The most outstanding achievement was the suc- products and services must be intensified. An in-cessful construction of River Bend. GSU's nudear telligent. well thought out marketing program is in the generating station near St. Francisville. Louisiana. In best interest of shareholders, customers and the early morning hours of December 3.1985. River employees alike. Customers are shopping for their Bend produced electrical power that was put into the best energy buy today, and competition is stiff. Ma}or GSU trans nission and distribution system for the marketing goals for the year ahead are to retain exist-first time. ing customers and attract new ones. If people are Construction of the plant was a success story that going to buy energy in our area, we want them to buy earned high praise from the Nudear Regulatory it from Gulf States.

Commission. They used such words about CSU and in early 1986, a new president took over the com-River Bend as "very responsible management / pany's operating responsibilities. Dr. E. Linn Draper l

" effective quality program / " solid performer.' "high succeeds Norman Lee, who joined the company 37 lesel of performance."and "a new generation of utility years ago as an engineer and has served the last ,

management." This recognition - unusual in the twelve and one-half years as president. Last year, in nudear utility industry - was generated primarily by recognition of his record of distinguished service. the the achievements of the men and women who built board of directors elected Mr. Lee vice chairman of River Bend in near record time - 72 months as op. the board, and he will now devote his full energies to posed to the typical construction period of I I I that position. Prior to his election to the presidency, months. This aggressive construction schedule was Dr. Draper was also a vice chairman of the board and maintained without swerving from the commitment to executive vice president. I safety. Practically every department in the company Gulf States Utilities is its people. Only people can contributed to this outstanding achievement. solve the pressing problems ahead and provide the Despite the success of building and licensing River reliable service to which this company is committed.

Bend. two of the greatest challenges still facing GSU We can take pride in the hardware and technologies involve River Bend. We must actively pursue fair on hand - the poles, the wires, the power plants. the regulatory treatment that allows the company to computer systems - but only people produce.1986 recover and earn a return on this costly investment will be another year of testing for CSU and its people.

and we must face tough financial challenges in 1986. It is no understatement to say that 1986 will be the During 1986. your company will pursue rate in- most difficult year in the modern history of the com- .

creases in each of its jurisdictions. In Texas, there has pany. But Gulf States is fortunate to number among its l not been a rate case dominated by a nudear plant. so many assets the intelligence. the capability and, there is no precedent for the River Bend involvement. above all, the people to do the job. Not only will we in the Texas case originally filed last October. four survive. we will prevail.

million sheets of paper which weighed 16 tons and stood some 130 stories tall were submitted to the Public Utility Commission of Texas and the cities. In addition. 2.500 data requests added another 15 tons b.

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I to the mountain of paper. The pressure is expected t [r n of Board. Cha n of the Board contm, ue without let up this year. President and A tough financial challenge remains in the year Chief operaung officer ahead. Our earnings will be under severe pressure from a number of different areas. Gulf States is no stranger to cost consciousness and belt tightening. but Dd h- ,3 k belts are being further tightened in order to meet the Paul W. Murrill l challenge. Last fall GSU instituted an aggressive cost- chairrnan of the Board cutting program called Project Save Cash. This effort and Chief Execudve officer 3

1985 In Review Sales and Earnings Overall electric sales for 1985 were 8 percent operating revenues.

below levels in 1984. While residential and com- Through effective cost containment, other l mercial sales were up for the year. Industrial sales operation and maintenance expenses were reduc- l produced disappointing results, primarily due to ed almost $1 I million below budgeted amounts.

the continued economic downturn in the area -

especially in oil and gas and petrochemical-related River Bend Construction and Licensing i activities and an increase in co-generation by The single largest construction project in the severallarge customers. company's history - River Bend nuclear Kilowatt-hour sales for the year ended generating station - was basically completed dur-December 31.1985, were 29.01 billion kwh. con- ing 1985. On August 29. 72 months after the first trasted with 31.69 billion kwh during 1984. re-inforcement bars were laid in place. the Growth in the commercial sector continued to Nuclear Regulatory Commission (NRC) issued Gulf follow an upward trend set last year and ac- States an operating license for River Bend. The counted for a 5 percent increase in sales for 1985. license gave the company the go-ahead to load While kwh sales to the residential class increased fuel and begin operational testing of the unit up to slightly last year, growth in numbers of customers 5 percent of full power.

remained flat. Fuel loading of the facility began two days later Industrial sales. which accounted for 47 percent and was completed on September 2 ! . Fuel load of GSU's annual electric sales in 1985 (down from brought to a close the construction phase of River 50 percent recorded a year earlier). showed a Bend -in six years. almost four years ahead of the 2.34 billion kwh decline for the year. average nuclear plant construction time in this The principal reason for the decline in industrial country.

sales is that a number of large customers who On September 16. the Advisory Committee on took power from GSU in 1984 due to the low fuel Reactor Safeguards (ACRS) advised the NRC that prices opted to generate their own electricity in River Bend could be operated at full power 1985. When the low fixed-prlce contract expired without undue risk to the health and safety of the in lanuary 1985 and GSU gas costs rose to market public. ACRS notification cleared the way for the levels. these industrial customers returned to NRC to grant final licensing approval to allow GSU self-generation. to operate River Bend at full power.

Gulf States ended 1985 with earnings of $2.10 River Bend received its full-power cperating l per average share of common stock compared to license in mid-November, following the unanimous

$2.30 per share in 1984. when there were 10 per- vote of approval by the five members of the NRC cent fewer average shares outstanding. The com- on November 15. NRC commissioners in their en-mon stock dividend paid in 1985 was $ 1.64 per dorsement of River Bend praised GSU as having share. Operating revenues were $ 1.86 billion in ..very responsive management.. ." citing the 1985 compared to $1.55 billion during the same company for ' ..a very effective and quite strong period a year earlier. Expiration of cheap fuel con- quality (control) program thrcughout the period of tracts is the primary reason for the increase in construction."

Electric Sales Total Eamings Per Share Dividends Per Share l Billions KWH Douars Douars 2 E 2 2 9 2 0 2 2 2 s 2 S E 4

• s Electric Department Average Flesidential Construction Customers Electnc Use (Per Customer) Expenditures i

Thousands KWH Millions 12000 600 500

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10000 500 8000 400 300 l 6000 300 200 4000 200 0 100 2000 -

E aaa a E aaaa E aaaa S S S S 9 $ $ 0 2 $ $ $ 0 l

Financing pollution control facilities, as well as solid waste The company made frequent journeys to the disposal facilities.

financial markets during 1985 to pay for its con-

• In August. the company issued four million struction program. During the year, we raised ap- shares of common stock, priced at $14 per proximately $631 million dollars through the sales share. Additionally, five million shares were of first mortgage bonds. European debentures, issued through dividend reinvestment and low-interest rate tax-exempt pollution control other company plans.

j revenue bonds. preferred and common stock and

• In September. Gulf States sold $100 million the use of the revolving credit facility. GSU's goal of 12 % percent first mortgage bonds due in continues to be to finance River Bend and the 2015 at 99.875 percent of the principal amount l company's other expenses on a pay-as-you-go to yield i 2.39 percent. The company used the basis. In 1985 the company sold $329 million in proceeds from this sale to redeem. at par, its long term debt. $60 million in preferred stock and outstanding I 4% percent series first mortgage

$122 million in common stock and borrowed $120 bonds due in 1987. Because of the lower in-million through the existing $800 million revolving terest rate. this transaction will save the com-line of credit. pany and its customers more than $2.2 million In September Moody's upgraded GSU's first per year.

mortgage bonds to BAA2 from BAA3. The

• GSU began 1986 by making two public i upgrading was tied to receipt of the operating offerings of securities. A $100 million principal license for River Bend. However, the rating amount 30-year first mortgage bond sale was agency warned of the need for supportive completed lanuary 30. with an interest rate of regulatory treatment. 1 I % percent which sold at a price of 99.5 per-In summary. the 1985 financing program was as cent of the principal amount to yield i 1.432 follows: percent. On February 5. 750.000 shares of

• In March the company completed the sale of $ 11.50 dividend preferred stock - $ 100 par

$75 million in unsecured Euro Debentures with value were offered and sold to the public.

a i 3 percent interest rate at 99.5 percent of the Rates and Regulation principal amount to yield i 3.065 percent at Most of the rates and regulatory activities maturity in 1992. during 1985 centered on GSU's actions to include

• in April. GSU offered 600.000 shares of the cost of River Bend in the rate base. Rate in-preferred stock - $ 100 par value with an an- crease requests were filed in both Texas and Loul-nual dividend rate of $12.92 per share. siana in the fall. but the first major rate increase

• During 1985, the company guaranteed the request of the year was filed with the Federal issuance by the Parish of West Feliciana. Energy Regulatorv Commission (FERC).

i ouisiana, of four series totalling $154 million of in May. GSU filed a $16.4 million rate increase tax-exempt variable rate demand pollution con- request for transmission service with the FERC to trol revenue bonds to provide money for cover power which GSU sends over its transmis-equipping River Bend with certain air and water sion lines for other utilities. The rate increase was 5

needed primarily because of the company's addi- the date that new rates could be put in effect. The tional investment in transmission facilities in the earliest that a decision can be expected is lune 10.

past three years. The case did not affect residen- The company received its last electric base rate in-tial. commercial or industiial customers. crease in Texas in 1984, when it was granted a GSU requested that the new rates become ef- $27.5 million increase.

fective July 24. and the FERC granted the com- Included in the rate requests are economic pany a S I 5.7 million rate increase on July 25 sub- development rates designed to attract new lect to hearings and refund. business to the GSU service area by providing There was good news and bad news on two electric rate incentives to industries that create rate cases in March. In a disappointing move. a full-time jobs on a permanent basis.

district court in Louisiana ruled in favor of the Several Texas cities have held hearings and Louisiana Public Service Commission (LPSC) In the adopted ordinances to roll back Gulf States company's appeal of the LPSC 1983 rate case rates charged within their jurisdictions to lower order. In that case. GSU had requested a $119.4 levels charged GSU customers in Louisiana.

million electric rate increase and the LPSC GSU appealed these decisions to the PUCT, and ordered a $1.1 million rate decrease. The court on January 28.1986. all parties involved agreed ruled that the Louisiana Commission had not that GSU's present rates would stay in effect acted in an arbitrary, capricious or unreasonable until the appeal is decided by the Commission.

manner in ordering a 14.5 percent return on com- The Commission has under consideration GSU's mon equity and in not allowing any Construction request that the appeals be consolidated with the Work in Progress (CWIP) to be included in the rate company's pending rate increase request case.

base. On March 3.1986. the PUCT staff and certain of On a brighter note, also in March. GSU reached the intervenors in the company's Texas rate case a settlement with 14 Texas and Louisiana filed testimony recommending changes in GSU's municipalities and electric cooperatives in an ap- base rates ranrng from an increase of proximate $29 million rate request before the approximately $12 million to a reduction of FERC. The settlement calls for an $18.55 million approximately $138 million. The Commission is increase (63 percent of the request) and included expected to render its decision on the case in a 16.5 percent return on common equity. The set- June, following hearings beginning in mid-March.

tiement also calls for a 10-year amortization of River Bend 2 (which was canceled in January General Operations 1984) and the inclusion of 50 percent of CWIP in Despite the emphasis placed on regulatory and the rate base as allowed by the FERC rules. financial matters. Gulf States' primary business re-In anticipation of the commercial operation of mains the generating and selling of electricity.

the River Bend unit Gulf States filed rate increase Operating efficiency and availability of requests in Louisiana on September 30 and in generating units showed marked inprovements.

Texas on October 1. The company submitted rate During 1985. the system average heat rate was moderation plans in both states to phase in the 10.510 btulkwh.

River Bend costs over seven years with rate in- A measure of performance of generating units.

creases in the first two years only. This was done called equivalent availability, was 80.5 percent in to avoid a one-time rate shock effect on 1985 - an improvement of one percent over customers. 1984 and i1.3 percent over 1983.

In Louisiana the company requested an in- One of the cornerstones of GSU's marketing crease in retail electric rates of about $242 million program in 1985 was economic development. In-(28 percent) in 1986 and approximately SI 18 creasing the number of new jobs within the GSU million (I I percent) in 1987. The last rate increase service area offers an opportunity to expand elec-GSU received in Louisiana came in 1982. when tric sales and revenues. A recent study found that the company was granted a $97 million increase. for each employee added in a manufacturing job.

The LPSC has one year from the September 30. about 30 megawatt-hours are added to the GSU 1985 filing date to consider the case system, and about six megawatt-hours are added in Texas. GSU filed two rate increase requests at for each employee in a non-manufacturing job. Ex-the same time, one case which treats River Bend pressed another way. each new manufacturing as a plant in service and an alternative rate pro- lob brings in $1.500 per year in revenue, and each posal that considers the plant to be still under new non-manufacturing job adds approximately construction. The PUCT chose to consider the $450 per year to company revenues.

alternate rate increase request for $133 million During 1985. GSU's economic development ac-(16.5 percent). GSU has agreed to an extension of tivities were increased and a number of positive signs were seen:

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• A defense contractor has located near Conroe, tions were implemented at a one-time cost of Texas, to build marine elevators for the Navy $700.000. Audits to evaluate the operations, and will hire as many as 60 people initially and business practices and administration of major 100 within the year. utilities in the state are required under Texas law

• Some 1.500 construction jobs will be created every 10 years. The report added that the com-in New Iberia. Louisiana. to build facilities to pany "has trany accomplishments in responding manufacture oil-related equipment. to its difficult business environment."

• A pipe fabricator for the petrochemical and Because of the success of the company's ag-paper industries announced the construction of gressive fuel-buying program. GSU has been able an expanded manufacturing facility in Uvingston, to riegotiate natural gas contracts at a lower price Louisiana, that will result in approximately 300 than was projected in the fixed fuel factor permanent jobs. established by the PUCT. The savings, amounting

• Between 300 and 400 military and civilian jobs to $20 million in Texas, were returned to will come to southwestern Louisiana as a result customers in the form of a credit on their of the Navy's decision to locate three ships in September bills. In Louisiana, savings were the home port of Lake Charles. passed on to customers through the fuel adjust-

• Plans were announced for the 1986 opening of ment clause. An additional refund of more than an ammonia plant that will employ 100 people $1 I million in the fuel cost portion of the Texas in the Beaumont area. rates was approved in late October by the PUCT.

• A paperboard manufacturer has announced it will locate a new plant in Kountze. Texas. and expects to employ some 25 people initially and as many as 140 jobs within a year. g, Averkgo Capitalization Other items of Interest Percent GSU's whollyewned and shareholder-financed subsidiary formerly known as Prudential Drilling to Co. has undergone a slight name change. The firm's board of directors has changed the name to a Prudential Oil & Cas Inc.. which is more indicative of the company's business - oil and gas explora- a tion and development.

During 1985. Prudential Oil & Cas spent $7.9 4 million for exploration, completion and develop-ment of oil and gas reserves in the Texas and a Louisiana Gulf Coast region. This included $ 1 million in joint ventures with independent -a operators. At year's end Prudential's proved reserves were estimated by the company to be in 33!!.I the range of 24.9 million mcf of gas and 1.5 million TotalUtility Plant barrels of oil or condensate. wiens Project CARE (Community Assistance Relating to 5,000 Energy). GSU's program to aid elderly customers in meeting energy emergencies. has provided assistance to more than i 1.000 households since 4,000 it began in 1983. More than $760.000 in aid -

contributed by shareholders. employees and customers - has been distributed during the same 3,000 period. Money for Project CARE is administered 2,m by the American Red Cross in Texas and by various social service agencies in Louisiana. 2m A six-month long management audit of GSU. 3,5o0 conducted last year by the Lexington, Massachusetts. consulting firm of Temple. Barker '#

and Sloane resulted in 123 recommendations, but soo only 17 of these have quantifiable cost savings.

The auditors said GSU could save between $13.8 - n ,

million and $17.6 million if the 17 recommenda- E3E!.3 7

e FinancialInformation FINANCIAL SECTION Contents Management Responsibility ior Financial Statements .8 Selected Financial Data .9 Common Stock Prices and Cash Dividends Per Share .9 Management s Discussion and Analysis of Results of Operations and Financial Condition . .10 Statement of Income .I3 Statement of Sources of Funds Invested in Utility and Other Plant . .14 Balance Sheet .I5 Statement of Capitalization . .16 Statement of Changes in Capital Stock and Retained Earnings .18 Notes to the Financial Statements .19 Auditors' Report .28 Statistical Summary .29 Management Responsibility for Financial Statements Management is responsible for the preparation. The Board of Directors. through its Audit Commit-integrity, and objectivity of the financial statements of tee, has general oversight of management's prepara-Gulf States Utilities Company. The statements have tion of the financial statements and is responsible for been prepared in conformity with generally accepted engaging. subject to shareholder approval. the in-accounting principles applied on a consistent basis, dependent accountants. The Audit Committee, com-and. in some cases, reflect amounts based on prised entirely of outside directors. reviews with the estimates and judgment of management, giving due independent accountants the scope of their audits consideration to material ty. and the accounting principles applied in financial The Company maintains a system of internal con- reporting. The Audit Committee meets regularly, both trols designed to help give reasonable assurance that separately and jointly, with the independent accoun-the books and records properly reflect the transac- tants, representatives of management. and the inter-tions of the Cornpany and that established policies nal auditors, to review activities in connection with and procedures are followed. Internal control systems financial reporting. The independent accountants are subject to inherent limits in recognition of the have full and free access to meet with the Audit Com-need to balance their costs with the benefits they mittee. without management representatives present.

produce. The Company's management strives to to discuss the results of their examination and their maintain this balance. opinion on the adequacy of internal accounting con-Coopers & Lybrand. independent certified public trols and the quality of financial reporting.

accountants. are engaged to examine in accordance with generally accepted auditing standards. the finan-cial statemer ts of the Company and issue a report thereon. which appears on page 28. Such auditing standards include a review of internal accounting con-trols, tests of transactions, and other procedures suffi-cient to provide reasonable assurance that the finan-cial statements are neither materially misleading nor contain material errors.

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Selected Financial Data (in thousands except per share amounts and ratios)

For the Years Ended December 31 1985 .___ 1984 19s3 19s2 1981 Operating Revenue $l.858.436 SI.547.041 $1.436.188 S1.307.259 $1.221.714 Net income 265.499 258.171 229.799 165.979 150.931 income Applicable to Common Stock 205.362 202.511 180.747 127.030 120.550 Earnings Per Average Common Share Outstanding 2.10 2.30 2.31 I.95 2.24 Dividends Per Share of Common Stock I.64 1.64 1.62 1.56 1.48 Return on Average Common Equity 13.05 % 14.4 2 % 14.78 % 12.32 % 14.21 %

Ratio of Earnings to Fixed Charges 2.08 2.35 2.43 2.10 2.10 As of December 31 Total Assets $5.556.245 S4.886.844 S4.349.524 $3.806.111 $3.343.419 Long-Term Debt and Preferred Stock Subject to Mandatory Redemption 2,782.112 2.347.648 2.040.295 1.771.078 1.642.894 Book Value Per Share 16.02 15.74 15.73 15.25 15.4i Capitalization Ratios:

Common Shareholders' Equity 35.4 % 36.6 % 36.6 % 36.0 % 34.4 %

Preferred and Preference Stock 11.4 11.8 12.3 13.1 11.5 Long-Term Debt 53.2 51.6 51.1 50.9 54.1 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Common Stock Prices and Cash Dividends Per Share For the years ended December 31 Cash Cash DMdends Dividends Paid Paid l985 High I.nw Per Share 1984 High Low Per Share First Quarter $14% S12 % S.41 First Quarter $13% SI1% S.4 i Second Quarter 16 13% .41 Second Quarter 12 10 % .41 Third Quarter 16 % iI% .41 Third Quarter II% 10 .4 i Fourth Quarter 13 % 12 % .41 Fourth Ouarter 13 % 1I .41 The Common Stock of the Company is listed on the New York. Midwest and Pacific Stock Exchanges. The approx-imate number of common shareholders on December 31.1985, was i 15.000.

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Financiallnformation Management's Discussion and Analysis of Results of Operations and Financial Condition Results Of Operations Net income increased 3 percent and income ap- the Federal Energy Regulatory Commission IFERC) for plicable to common stock increased by I percent dur- a $16.4 million rate increase in transmission rates. In ing 1985, as compared to 1984. These modest in- July, the FERC granted the Company a $15.7 million creases were primarily the result of increased rate increase placed in effect subject to hearing and amounts of allowance for funds used during construc- refund. During September.1984, the Company im-tion (AFUDCh offset by increased interest costs and piemented a $29.3 million wholesale rate increase increased losses experienced in nonutility subsidiary subject to hearing and refund as authorized by the operations. Earnings per share of common stock FERC. During March,1985, a settlement agreement dedined by 9 percent during 1985, to $2.10 per share was reached between the Company and the as compared to $2.30 per share in 1984. due to the wholesale customers calling for an $18.55 million in-continuing dilution experienced as a result of addi- crease in wholesale rates.

tional common stock sales. Average common shares outstanding increased i I percent during 1985. Inade- In July,1984 the Public Utility Commission of Texas quate rate relief during the period from 1983 through (PUCT) approved $27.5 million of a requested S161.2 1985 combined with increases in the Company's cost million electric retail rate increase. The PUCT failed to of service and embedded cost of capital has resulted indude the Company's 42 percent share of Big Cajun in an overall dedine in the Company's finandal 2 Unit 3. a 540 MW coal-fired generating unit. as condition. plant-in-service because the unit had been declared During 1986 River Bend Unit 1, a 940 MW nudear-fueled generating unit. is scheduled to begin commer- During December,1983, the Louisiana Public Ser-cial operation. When the unit is dedared commercial, vice Commission ILPSC) denied the Company's re-several major financial changes will occur. The AFUDC quest for a $119.4 million electric retail rate increase (amounting to approximately $209 million on the and ordered a $1.1 million decrease in rates. Concur-River Bend Unit in 1985) will cease to be accrued and rently, the LPSC granted the Company $1.5 million of will not thereafter be reflected as income and as a a requested $2.2 million gas rate increase. The Com-reduction of interest expense. Costs chargeable to in- pany filed an unsuccessful appeal of the rate order come will be increased to reflect the costs of operating and maintaining the unit and to reflect For information concerning rate increase requests depreciation thereon. and the Company will incur the currently pending before the LPSC and the PUCT in cost of buying back power from the 30 percent por- connection with the antidpated commercial operation tion of the unit owned by Cajun Electric Power of River Bend Unit 1. see Notes 10 and 12 to the Cooperative, Inc. ICEPCO). These additional costs ex-Financial Statements. The Company anticipates filing dusive of related tax effects are expected to exceed an additional rate increase request with the PUCT

$100 million in the aggregate per quarter. Without during 1986, after River Bend is placed in commercial adequate and timely rate relief and/or appropriate ac- operation. Additionally, the Company will file with the counting orders frcm the Company's regulators, the FERC for an increase in its wholesale rates. The Com-Company would be forced into a significant loss posi- pany has no assurances as to the type, timing. or tion for 1986.

amount of any rate treatment which may be granted in the cases currently pending or those anticipated to The discussion below provides information on the be filed.

significant items which affected the Company's opera-tions during the period from 1983 through 1985. Kilowatt 4wur Sales. Total sales dedined by 8 percent during 1985, after increases of 9 percent during 1984 Operating Revenue and less than I percent during 1983. Sales to in-Operating revenue increased 20 percent during dustrial customers dedined by 15 percent and ac-1985, as compared to increases of 8 percent and 10 counted for most of the overall sales dedine during percent, respectively, during 1984 and 1983. The 1985. The dedine in the Company's industrial load is primary causes of these increases are detailed below: primarily attributable to the effects of increased fuel prices and the depressed condition of the petroleum 1985 1984 1981 based industries in the Company's service area. This on n,ousand , dedine was accompanied by a 14 percent dedine in Rate increases $ 34.388 $ 17.993 $127.915 wholesale sales primarily caused by the transfer of Fuel cost recovery 289.677 46.856 17.4 I Il sales volurne and other 1 2.67oi 46.004 certain wholesale customers to a transmission service a 425 sll I .395 rate schedule. These dedines were offset in part by a

$1Io 851 si28 929 5 percent increase in commercial sales caused primarily by customer growth. The 1984 sales in-Rates. In May 1985 the Company filed a request with crease was primarily the result of a 12 percent in-10 1

_ ___________j

crease in industrial sales along with a 9 percent in- gas purchased for resale caused by decreased gas crease in both residential and commercial sales. The sales, along with a decrease in the amount of industrial and commercial sales increases were a maintenance performed on Company generating reflection of improving economic conditions in the facilities. These decreases were offset by higher labor Company's service area as compared to those ex- and material costs and increased administrative and perienced during the recessionary period of 1982 and general expenses. A cash conservation program. in-early 1983. The residential sales increase was primari- stituted during the latter part of 1985, also con-ly attributable to the colder than normal weather ex- tributed in holding down other operating expenses.

perienced in the Company's service area during the Total other operations and maintenance expenses in-early part of 1984. creased during 1984 and 1983, as a result of higher labor and material costs, increases in the cost of gas Operating Expenses and Taxes purchased for resale, and increased administrative Fueland Purchased Powr. On January I.1985, the and general expenses. Costs assodated with the Company's long-term contract for the purchase of peration of new generating units. as well as the per-low-cost natural gas expired. Under the contract, the f rmance of scheduled and unscheduled Company purchased the maior portion of the fuel us- maintenance, contributed to the overall increases ex-ed in its Texas generating stations. The expiration of perienced during 1984 and 1983.

this contract. and the resultant need to replace a por- .

tion of the gas supplied under the contract with higher a Depren. tion Expense. Depreciation expense has in ,

priced gas, was the primary reason for the 36 percent creased primarily as a result of routine plant additions increace in fuel expense during 1985. The average nd placing the Company's portion of Big Cajun 2 Unit cost per kilowatt-hour of natural gas increased to 3.11 3 into commercial operation. The increases have been cents in 1985, as compared to 1.50 cents in 1984, and offset by slight reductions in the Company's com-1.60 cents in 1983. The effect of the contract expira- posite depreciation rates during 1985 and 1984.

tion on fuei expense v'as mitigated by reduced generation requirements caused by decreased sales. Tates. Income taxes decreased 48 percent during increased purchases of power under long-term pur. 1985, compared to increases of 3 percent during chased power contracts, and the increased utilization 1984 and 33 percent during 1983.The 1985 decline of less expensive Company-owned coal-fired genera- was attributable to lower amounts of taxable income tion. Decrea3es in fuel expense of 5 percent and 2 while the 1984 and 1983 increases reflect increased percent during 1984 and 1983 respectively, were pre-tax income. Other taxes continue to increase primarily the result of reductions in the unit price paid primarily as a result of higher franchise and revenue-for fuel. These reductions reflect a greater availability related taxes.

of lower priced natural gas and the increased utiliza-tion of coal-fired generation in the Company's fuel Nonoperating items mix. AFUDC During 1985. AFUDC increased by 34 per-cent as compared to 25 percent during 1984, and 42 Purchased power expense increased by 67 percent percent during 1983. As a percentage of net income, during 1985 following increases of 33 percent during AFUDC increased from 62 percent in 1984, to 80 per-1984, and i I percent during 1983. cent in 1985. These increases are primarily the result The increase in ourchased power expense during of increases in the amount of Construction Work in 1985. was the result of additional kilowatt-hour pur- Progress ICWIP) qualifying for AFUDC caused by the chases made to displace the higher cost of fuel for Company's construction program, along with reduc-Company-owned generation. The increase in purchas- tions in the amount of CWIP induded in the Com-ed power expense during 1984. resulted from in- pany's rate base by the LPSC and the PUCT.

creased purchases of energy made as a result of higher load requirements, offset in part by a redrtion Nonutility Subsidiary Operations. The decline in nonutili-in the unit cost of kilowatt-hours purchased. The 1983 ty subsidiary operations during 1985, was caused by a increase is attributable to increased unit prices charge to operations as a result of the evaluation of resulting from the Company's buyback of the partici- exploration costs recorded by the company's wholly pant's share of capacity of Nelson Unit 6. The increas- owned subsidiary. Prudential Oil and Gas. Inc. This ed unit pri< es were offset in part by decreased energy charge was necessitated by the recent decline in oil purchase prices experienced through the end of 1985.

Other Operations and Maintenance Expense. Total other Intercs! Charges. Increased interest on long-term debt opera %ons and maintenance expense remained vir- resulted from interest requirements on new borrow-tually anchanged during 1985 as compared to 1984. ings made to refund short and intermediate term debt prirr 2rily as a result of a reduction in the amount of incurred in connaction with the Company's construc-1I

l Financial Information t -

l tion program. These increases have been offset in affected. the extent of which is dependent on when part by lower interest rates on short and intermediate the relief is granted, when River Bend is placed in term debt. commercial operation. and w hat, if any, deferrals of cost are permitted under applicable accounting stan-Financings and Capital Resources dards. This in turn could limit the Company's access to During 1985, the Company invested $662 million the capital markets by rendering it unable to meet (induding $214 million of AFUDC) in utility and other c verage requirements necessary for the issuance of plant. It is currently estimated that the Company's first mortgage bonds and preferred stock and to the 1986 construction expenditures will total $220 million extent finanang is available, higher costs of funds may (including $63 million of AFUDC). The Company cur, be experienced.

rently anticipates that 1987 construction expenditures will total $123 million. induding $2 million of AFUDC. The Company's Mortgage Indenture places limita-A total of $610 million of the Company's 1985 invest. tions on the amount of first mortgage bonds w hich the ment in utility and other plant was attributable to the Company is allowed to issue. The most restrictive of Company's investment in River Bend. In addition to these is presently that based on the ratio of pre-tax funding the construction program, the Company must earnings to interest on such bonds. Based on the periodica'ly redeem preferred stock in accordance results of operations for the year ended December with sinking fund provisions, retire long-term debt. 31.1985, the Company would have been able to issue and pay dividends to the holdcrs of its preferred and at year end. $354 million in additional first mortgage preference stock. For information on preferred stock bonds (assuming an interest rate of 12 percent for sinking fund requirements and long-term debt such bonds). For information concerning funcls maturities. see Notes 7 and 8 to the Financial available to the Company under a revohing credit Statements. agreement. bank lines of credit. and short-term bor-rowings, see Notes 8 and 9 to the Financial The Company's construction program is funded Statements.

primarily through the use of short and intermediate-term borrowings which are subsequently refinanced Limitations based on the ratio of after-tax earnings using proceeds from long-term debt and equity to fixed charges and preferred dividends are imposed issues. External financings totaled approximately $1.3 by the Company's Restated Articles of incorporation billion dunng the three year period from 1983 upon the issuance of additional preferred stock. Bas-through 1985. For information on financings com. ed on the results of operations for the year ended pleted subsequent to December ll,1985. see Note December 31.1985. the Company would have been i 2 to the Financial Statements. Details on the amount ble to issue at year end. S216 million in additional of securities sold and t-tired. as well as other informa. preferred stock (assuming an I l-% percent dividend tion on sources and uses of funds during 1983 r te for such stock).

through 1985, are provided in the Statement of Sources of Funds invested in Utility and Other Plant.

Approximately 66 percent of the Company's con-strucuon expenditures were funded from external sources compared with 6I percent during 1984. and 66 percent during 1983. Internally generated funds and AFUDC accounted for the balance of the con-struction expenditures. Internally generated funds and AFUDC declined during 1985, r" sting erosion in the Company's financial conditi. .o during that year.

Improved internal cash generation will be directly related to adequate and timely rate relief which recognizes increases in the Company's embedded cost of capital and cost of service and allows the Com-pany to recover and earn a return on its investment in River Bend Unit 1. once it is placed in commercial operation.

As more fully discussed above and in Note 10 to the Financial Statements, the Company's financial condi-tion and results of operations will be under pressure during 1986, due to the pending commercial opera-tion of River Bend Unit 1. Even if the total rate relief requested for 1986, were granted, the results of '

operations of the Company for 1986 will be negatively 12 1

Statement of income For the years ended December 31 Gn thousands except per share amounts) 1985 19N 1983 Operating Revenue Electric . $1.714.405 S1.410.701 SI.305.449 Steam 102.576 83.165 83.646 Gas 41.455 53.175 47.093 1,858.436 1.547.041 1.436.188 Operating Expenses and Taxes Fuel 569.182 417.506 438.154 Purchased power 449.554 268.525 201.325 Other operations 185. % 9 180.489 173,151 Maintenance 79.834 85.055 78.971 Depreciation and amortization I12.789 112.29l 103.25I Income Taxes Federal 45.435 72.259 70.538 State (5.6331 4.824 4.236 Other taxes 77.441 62.408 53.269 I,514,571 1.203.357 1.122.895 Operating Income . 343.865 343.684 313.293 Other income and Deductions Allowance for equity funds used during construction 145.257 108.029 88.172 Nonutihty subsidia~ operations (14.572) (4.3291 (2.228)

Other-net (3,705) 1.588 (1.1721 income Before Interest Charges 470.845 448.972 _ 398.065 Interest Charges Long-term debt 263.022 231.070 196.502 Short-term debt and other 10.679 10.569 10.577 Allowance for borrowed funds used during construction (68.355) (50.8381 (38.8131 205,346 190.801 168.266 Net income 265.499 258.171 229.799 Dividends on Preferred and Preference Stock 60,137 _ 55.660 49.052 income Applicable to Common Stock $ 205,362 S 202.511 S 180.747 Average Shares of Common Stock Outstanding 97,970 88.164 78.233 Earnings Per Average Share of Common Stock Outstanding $ 2.10 S 2.30 $ 2.31 Dividends Per Share of Common Stock S I.64 S 1.64 S 1.62 The accompanying notes are an integral part of the financial statements.

13

Financial Information Statement of Sources of Funds Invested in Utility and Other Plant For the years ended December 31 (in thousands) 1985 1984 1983 Provided From Operations Net income S 265.499 S 258.171 S 229.799 Principal income items not requiring current funds Depreciation and amortization i12.789 i12.291 103.25I Deferred income taxes- net . 108.889 77.214 37.246 Investment tax credits-net (54.489) (8.91 Il 24.670 Equity component of allowance for funds used during construction (145.257) (108.029) (88.172)

Nonutility subsidiary operations . 14.572 4.329 2.228 Total provided from operations 302.003 335.065 309.022 Dividends Preferred and preference (60.137) (55.660) (49.052)

Common (161.605) (145.663) (127.263)

Reinvested funds provided from operations 80,261 133.742 132.707 Provided From Financing Sales of securities Common stock 122.180 121.147 136.481 l Preferred stock subject to mandatory redemption 60.000 45.000 30.000 First mortgage bonds (principal amount) 100.000 100.000 200.000 Euro-debentures (principal amount) 75.000 - -

Pc Ution control bonds (principal amount) 154.000 196.000 17.450 Change in escrow deposit-pollution control bonds 36,253 (64.399) -

I Change in escrow deposit-guaranteed debentures . 14.481 (3.433) (I l .048)

Net change in short-term borrowings (52.000) (38.000) 3.093 Retirement of first mortgage bonds and convertible debentures (100.564) (345) (l I .049)

Retirement of preferred stock subject to mandatory redemption (5.306) 16.786) -

Net change in revolving credit agreement 120,000 40.000 40.000 Total provided from financing 524.044 389.184 404.927 Other Sources and Uses Investments in and advances to subsidiar y companies . (13.663) (14.353) Il 3.973)

Temporary cash investments (60.596) (3.351) 3.219 Other-net (including changes in working capital) (13,24I) I1.573 28.034 Total other sources and uses (87,500) (6.I3I) 17.280 Expenditures For Utility and Other Plant . 516.805 516.795 554.914 Equity component of allowance for funds used during construction 145.257 108.029 88.172 Invested in Utility and Other Plant S 662,062 $ 624.824 5 643.086 The accompanying notes are an integral part of the financial statements.

14

Balance Sheet December 31 Gn thousands) 1985 1984 Assets Utility and Other Plant, at original cost Plant in service . . . .....

S3.364,687 $3.267,055 Less: Accumulated provision for depreciation . 1,081,524 994.600 2,283,163 2.272,455 Construction work in progress . 2,728.700 2,187,287 5,011.863 4.459.742 Other Property and Investments Nonutility subsidiary companies 64,710 65.619

, Other 3,229 2.853 67,939 68.472 Current Assets Cash and temporary cash investments 67,098 6,547 Receivables Customers 13I,075 102.655 Other 22,868 17,360 Fuelinventories . . . . 40.678 53,331 Materials and supplies 9,118 12,109 Prepayments and other 8,504 7,462 279,341 199.464 Deferred Charges Unamortized debt expense . . 23,973 20.981 Unamortized project cancellation costs 129.996 I I 3,768 i Accumulated deferred income taxes 35,667 15,892  :

Other 7,466 8.525 197,102 159.166 1

$5.556.245 $4.886.844 Capitalization and Liabilities Capitalization ISee Statement of Capitalizationi Common shareholders' equity . S I,656.592 $1,491,798 Preference stock 100.000 100.000 Preferred stou Not subject to mandatory redemption 136,444 136,444 Subject to mandatory redemption 294,416 243,767 Long-term debt 2,487,6 % 2.103.881 4.675,148 4,075.890 Current Liabilities Long-term debt due within one year 15.000 -

Preferred stock sinking fund requirements 4,045 -

Bank notes payable - 52,000 Accounts payable l Trade - 95,644 105.268 Subsidiaries 2.274 3.591 Customer deposits 15,930 14,396 Taxes accrued . 21,914 14,349 Interest accrued 80,819 70.558 Other , 35,301 41.608 270,927 301.770 Deferred Credits and Other Liabilities investment tax credits . 121,339 167,636 Accumulated deferred income taxes 438,727 319.805 Other 50,104 21.743 610,170 SU9.184 Commitments and Contingencies

$515556,245 S4.886 844 The accompanying notes are an integral part of the financial statements.

15

FinancialInformation Statement of Capitalization December 31 (in thousands) 1985 1984 Common Shareholders' Equity Common stock Authorized 200.000.000 shares without par value Outstanding 103.412.325 and 94.465.634 shares, respectively $1.146.933 $1.024.753 Premium and expense on capital stock 13.512) (1.64i Other paid-in capital 28.370 27.642 Retained earnings 484,801 44I.044 1.656.592 1.491.798 Preference Stock Authorized 20.000.000 shares without par value, cumulative Outstanding 4.000.000 shares Dividend siares R e ption series outstvnding Price S4.40. 2.000.000 $ 31.90 50.000 50.000 3.85 2.000.000 31.35 50.000 50.000 100.000 100.000 Preferred Stock Authorized 6.000.000 shares. S100 par value, cumulative Outstanding 4.349.044 and 3.802.1 I I shares, respectively shares outstanding at Current Dividei.d December ll. Redemption senes 1985 Price Not subject to mandatory redemption

$4.40 . 51.173 S108.00 5.117 5.117 4.50 . 5.830 105.00 583 583 4.40-1949. 1.655 103.00 166 166 4.20 . 9.745 102.82 975 975 4.44 . 14.804 103.75 1.480 1.480 5.00 . 10.993 104.25 1.099 1.099 5.08 . 26.845 104.63 2.685 2.685 4.52 . 10.564 103.57 1.056 1.056 6.08 . 32.829 103.34 3.283 3.283 7.56 . 350.000 103.80 35.000 35.000 8.52 . 500.000 106.43 50.000 50.000 9.96. 350.000 106.64 35,000 35.000 136,444 136.444 Subject to mandatory redemption 8.80 . 301.029 105.00 30.103 33.503 9.75 . 31.I12 105.00 3.111 3.154 8.64 . 302.465 105.00 30.247 32.110 11.48 . 500.000 105.00 50.000 50.000 13.64 . 500.000 105.00 50.000 50.000 12.92 . 600.000 112.92 60.000 -

Adjustable Rate-Series A 300.000 108.10 30.000 30.0(X)

Adjustable Rate-Series B . 450.000 110 60 45.000 45.000 298.461 243.767 Preferred stock sinking fund requirements (4.045) -

294,4I6 243.767 (Statement contsnued on followmg paget 16

1985 1984 Long Term Debt ,

I First mortgage bonds Maturing 1986 through 1990-4-%% due September I,1986

- 15,000 14-%% due March 1,1987 .

100.000 4 7k% due October I,1987 17,000 17,000 4% due May 1,1988 20,000 20,000 4-%% due January 1,1989 10,000 10,000 5-%% due December 1,1989 16,000 16,000 4 7k% due July I,1990. 17,000 17,000 Maturing 1991 through 1995-4-%% through 17-M% 352,000 352,000 Maturing 1996 through 2000-5% through 8-%% 230,000 230,000 Maturing 2001 through 2005-7-%% through 10.15% 185,000 185,000  ;

Maturing 2006 through 2010-8-%% through 12.3% 345,000 345,000 Maturing 201 I through 2015-12-%% through I 5% 400,000 300.000 1,592,000 1,607.000 Pollution control and industrial development bonds 7% due 2006 25,000 25,000 5.9% due 2007 23,000 23.000 10-%% due 2012 48,285 48,285 9%% due 2013 17,450 17.450 10-%% due 2014 50,000 50,000 4 12% due 2014 52,000 52,000 l i

Variable rates (9.25% at December 31,1985) due 2014 94.000 94,000 Variable rates 19.125% at December 31,1985) due 2015. 86.600 -

Variable rates 19.125% at December 31,1985) due 2015. 39,000 -

Variable rates (9.125% at December 31,1985) due 2015. 28,400 -

)

Pollution control funds held by trustee (32,020) (68,273)  ;

Debentures Guaranteed debentures I 7-%% due October I, I988 60,000 60,000 16% due April 15,1990 60,000 60.000 Escrow deposit , (24,000) (38.481)

Euro debentures-13% due 1992 75,000 -

Convertible debentures-7-%% due 1992 2,018 2.582 Term loan agreement l Variable rates 19.0625% at December 3 I .1985) due July 21,1987 24,000 24,000 Revolving credit agreement 270,000 150.0(X) 2.490.733 2,106,563 Unamortized premium and discount on debt-net (3,037) ' (2.682) 2,487,6 % 2,103,881

$4,675,148 S4,075.890 The accompanying notes are an integral part of the financial statements.

1 17

Finandal Information Statement of Changes in Capital Stock and Retained Earnings For the years ended December 31 (in thousands)

Preferred Stock Subject to Premium Other Mandatory Common ILess Paid-in Retained Redemption Stock Expensel Capital Earnings Balance: January 1,1983 Sl75.553 $ 767,125 S 4.501 S 25.876 $331.48" Net income-1983 . 229.799 Preferred stock sold (300.000 shares) 30.000 Preferred stock sinking fund requirements . (1.217)

Common stock sold:

Public offerings (6.000.000 shares) 85,500 Conversion of debentures (79,14I shares) 1.036 Dividend reinvestment and stock purchase plan (2.534.689 shares) . 35,025 Employee benefit plans (1.023.893 shares) 14.920 Dividends declared:

Preferred and preference (49.052)

Common (i27.263)

Capital stock expense (900) (1.457)

Balance: December 31,1983 204.336 903.606 3.601 25.876 383.516 Net income-1984. . ..

258,I71 '

Preferred stock sold (450.000 shares) 45.000 Retirement of preferred stock (5,569) 1.766 Common stock sold:

Public offerings (6.000.000 shares) . . 66.000 Conversion of debentures (26.026 shares) 340 Dividend reinvestment and stock purchase plan (3.662.855 shares) . . . 42,130 Employee benefit plans (1089.109 shares) . I2.677 Dividends declared:

Preferred and preference (55.660)

Common (145.663)

Capital stock expense (5.242) 680 Balance: December 31,1984 243.767 1.024.753 (1.641) 27.642 441.044 Net income-1985 . ._

265.499 Preferred stock sold (600.000 shares) 60.000 Preferred stock sinking fund requirements (4.045)

Retirement of preferred stock (5.306) 728 Common stock sold:

Public offerings (4.000.000 shares) . . . 56.000 Conversion of debentures (42.550 shares) 555 Dividend reinvestment and stock purchase plan (4.352.640 shares) 58,237 Employee benefit plans (551.501 sharesi 7,388 Dividends declared:

Preferred and preference (60.137)

Common (161.605)

Capital stock expense (1.871) -

Balance: December 31,1985 S 294.416 S t.146.933 S (3.512) S 28.370 S 484.801 The accompanying notes are an integral part of the financial statements.

18

Rerrnue. Fuel, and Purdiased Power. The Company Notes to the Financial records revenue as billed to its customers on a cyde staternents biiiingbesis.Reveneeisnet,ecerdedfe,eee,gy delivered and unbilled at the end of each fiscal

1. Summary of Significant period. The Company's wholesale and Louisiana retail Accounting Policies rate schedules provide for adjustments to substantial-ly all rates for increases or decreases in the costs of System of Accounts. The accounting records of the fuel for generation, purchased power and gas Company are maintained in accordance with the distributed. The Company's Texas retail rate Uniform System of Accounts as prescribed by the schedules indude a fixed fuel factor approved by the Federal Energy Regulatory Commission (FERC) and adopted by the Louisiana Public Service Commission PUCT. Such factor remains the same until the Com-(LPSC) and the Public Utility Commission of Texas pany files for a general rate increase or until the PUCT orders a reconciliation for any over or under collec-(PUCT).

tions of fuel cost. Fuel and purchased power costs in Utility Plant and Depreciation. Utility and other plant is excess of those induded in base rates or recovered through fue! adjustment dauses are deferred (or ac-stated at original cost when first dedicated to public service. Costs of repairs and minor replacements are crued) until such costs are billed (or credited) to charged to expense as incurred. The original cost of customers.

depreciable utility plant retired and cost of removal, Imentories. The Company's fuel inventories are com-less salvage. are charged to accumulated provision for depreciation. The provision for depreciation is com- prised of fuel oil valued at weighted average cost.

and coal. valued at last-in, first-out (LIFO) cost.

puted using the straight-line method at rates which will amortize the unrecovered cost of depreciable Materials and supplies are valued at weighted plant over the estimated remaining service life. average cost.

Composite depreciation rates were as follows: Income Taxes. The Company and its subsidiaries file a consolidated federal income tax return. Incorne taxes 1985 1984 1983 are allocated to the individual companies based on Electric 3.43% 3.52 % 3.60 % their respective taxable income or loss and invest-Steam 2.34 2.38 2.34 ment tax credits.

Gas . . . 3.53 3.53 3.52 TotalCompany 3.41 3.50 3.58 The Company follows a policy of comprehensive in- .

Allowance kr Funds Used during Constrmtion (AFUDC) and terperiod income tax allocation where such treatment Capitali:ation of Interest. AFUDC is a utility accounting is permitted for ratemaking purposes by regulatory l practice calculated under guidelines prescribed by the bodies. Deferred income taxes result from timing dif- l FERC and capitalized as part of the cost of utility plant ferences in the recognition of revenue and expenses representing the cost of servicing the capital invested for tax and accounting purposes. Such deferred in-in construction work in progress. Such AFUDC has come taxes are charged or credited to incorne and been segregated into two component parts- recorded as deferred debits or credits.

borrowed and equity funds. That portion allocated to borrowed funds is reflected as an adjustment to in- Investment tax credits have been deferred and are terest charges. w hile that portion applicable to equity being amortized ratably over the usefullives of the funds is shown cs a source of other income. Both the related property.

equity and the borrowed portions of AFUDC are non-cash items which have the effect of increasing the Nonutility Subsidiary Companies. The Company has Company's reported net income by their full amounts. made investments in and advances to its wholly-When the related utility plant is placed in cervice a owned nonutility subsidiary companies. Prudential Oil return on and recovery of these costs may be permit- 6 Gas Company. Inc. IPrudential) and Varibus Cor-ted by the regulators in determining the rates charged poration (Varibusp. and accounts for its investments

for utility service. The Company computed AFL'DC at on the equity basis. Prudential is engaged primarily in ,

the following net of tax rates compounded the exploration for, development. production and I semiannually: marketing of oil and gas properties. Varibus operates pipelines and owns rights to lignite reserves for possi- l ble use by the Company or sale to others. l January 1,1983 - Decernber 31.1983 1025'E lanuary 1,1984 - Decernber 31. i985 to on l

l l

l 19

Financial Information Retirement Plan and Other Post Employment Benclits. The The components of federal income taxes are as Company has a noncontributory pension plan. which follows:

covers all employees meeting certain age and service 1985 1984 1983 requirements. The Company's policy is to fund the ac* lin thousands) crued pension cost annually Past and prior sersice charged to operating costs are being funded and amortized by the Com- expen e pany over periods of up to forty years. r " "*

C{rentf p,9 gn S (8 r 91 S 8N2 S 9E6 in addition to the pension plan, the Company pro-vides retired employees with life and health care in-

$'(([*' '"' "*

Tax depreaation . 103.067 34.933 30 477 surance benefits. Allof the Company's employees capitalized may become eligible for benefits upon reaching nor. construction costs . 8.819 9.120 8.686 mal retirement age. The cost of such benefits, w hich is ^*

c "g""Cyd' unit ,.

currently not material. is recognized as claims are ac- Nuclear unit tually paid. Effective December 1.1985. the Company cancellation costs . 5.i39 30.958 -

instituted a deferred compensation plan for certain of Fuel and purchased its management employees.

[] sts deferred Book expenses

2. Federal Income Taxes deferred for tax 23 0 The provisions for federal income taxes were less than the amounts computed by applying the statutory o%t P "'

federal income tax rate to net income before federal Totaldeferred income taxes. The reasons for these d fferences are as federalincome follows: taxes - net 108 til 72.648 36.592 investment tax 1985 1984 1983 credits - net 154 489) i8.911) 24.670 inn thousands encept percentagest Total federalincome federal income taxes $321066 5333.305 $304 330 o a ng e pe ses 45.435 72 259 70.538 Charged to other Federal income taxes at income - net . 10.132 2.875 3.993 statutory tax rate. $ 14 7.690 $l53 320 SI 19 992 Reductions in federal income Total federal taxes resulting from: income taxes S 55.567 S 75.134 S 74.531 Exdusion from taxable income of AFUDC . i98.262: 173.0791 iS8.413) ltems caprtalized for book Currently. timing differences exist for w hich defer-purposes but expensed red taxes have not been provided and, therefore, for tax purposes . i9 68:i is 865i iu"' have not been recovered through rates. The dYtYfe$c"es 54:3 5 502 5 236 cumulative amount of timing differences for which no Adiustment for pnor deferred taxes have been provided was approximate-years taxes and other ly $120 million at December 31.1985.

regulatory adiustments . 492 12.366> 14 056' The 1985 current federalincome tax benefit was or ti ty es 6.703 1.991 1025 generated by a net operating loss for tax reporting Amortizauon of investment purposes. At December 31.1985, the Company had tax credit o 872 e5103: i4.708i accumulated carryforwards of investment tax credits Foreign tax credit reversal 3 976 - -

of $258 million and tax loss carryforwards for tax other items 3.108 3 734 3 523 reporting purposes of $10 million. The carryforwards Total federal expire through 2000, and will be used to reduce in-income taxes S 55.567 5 75 134 s 74 511 come taxes in future years.

Effective federal income . e@ement Man tax rate 17.3% 22 5 % 24 5 %

The total costs of the Company's pension plan for the years ended December 31.1985.1984.and 1983, were approxirnately $7.9941XX). $8.721.000, and $8.213.000. respectively.

Of such amounts, approximately $4.912.000.

$5.703.000, and $5.34 3 JX)0. respectisely. were charged to income with the balance of such costs for each period charged to construction and other accounts.

g

1 The valuation date of the latest pension information 1986 S 46.196 is January I of the subsequent year for each plan year 1987 46.245 ended December 31. The information for the plan 1988 58.162 years 1984 and 1983, is shown below. Such valuation 1989 . 42.099 information is not yet available with respect to plan 1990 41.846 year 1985. Remaining years . 208.780

$443,328 1984 1983 on thousandsexcept percentages)

The Company has a nudear fuel financing agree-Actuarial present value of accumulated plan benehts: ment with a non-affiliated third party fuel corporation (the Lessor). The agreement provides for the Lessor ested . s $ to finance up to $300 million of nuclear fuel for future use at River Bend Unit 1. a 940 MW nudear-fueled Present value of accumulated plan benefits s 77.698 s o8.077 generating unit. Once River Bend Unit I is placed into commercial operation, the Company will make Net assets available quarterly payments to the Lessor for the cost (in-for benents . snuoo sns.s78 cluding capitalized interest) of fuel consumed during the previous quarter. The nuclear fuellease payments Assumed rate of return in determining actuarial present induded in the tab c above represent only principal values or pian benents 9s 9s repayments estimat-d to be made through 1990.

ddW W Wm W w kn b

4. kases cluded as they are currently indeterminable. The Lessor's investment in nudear fuel was approximately The Company has existing agreements for the leas- S198 million and $174 million linduding accumulated ing of certain vehicles. coal rail cars and other equip- carrying charges) at December 31,1985 and 1984, ment. and buildings. Lease rental payments were respectively.

S I 6.632.000, S I 6.404.000, and S I 3.867.000 during 1985,1984, and 1983. respectively. Of such amounts. Under the provisions of Statement of Financial Ac-

$14.041.000 $12.912.000, and $12.064.000, respec- counting Standards (SFAS) No. 71, beginning in 1987, tively, were charged to income, with the remainder the Company will be required to record all of its charged to construction and other accounts. capital leases as assets and related liabilities. Had such leases currently been accounted for as capital Future minimum lease payments under non-leases. the balance sheet would have induded leased cancellable capital and operating leases linduding assets and related liabilities of approximately $223.7 amounts due under a nudear fuel lease as discussed million and $198.3 million at December 31,1985 and below) for each of the next five years and in the ag- 1984 respectively.

gregate at December 31.1985, are estimated to be (in thousands):

5. Jointly Owned Facilities As of December 31,1985, the Company owned undivided interests in three jointly-owned electric generating facilities as detailed below (dollars in thousandsl:

River Bend Roy S. Nelson Big Cajun #2 Unit i Unit 6 Unit 3 Plant in service . S -

$4 I 2.308 $215.444 Accumulated depreciatic,n -

47,566 16.165 Construction work in progress 2.778.065 - -

Plant capacity. 940 MW 540 MW 540 MW Fuel source .. Nudear Coal Coal Ownership share 70% 70 % 42%

The Company's share of operations and See Note ll for information relating to buyback maintenance expense related to the jointly-owned agreements between the Company and the par-units in-service is induded in operating expenses. ticipants in River Bend Unit I and Nelson Uni: 6.

21

Financial Information

6. Capital Stock and Retained Earnings plicable U.S. Treasury rates. In no event will the divi-dend rate be less than 7 percent nor greater than 13 percent for Series A and less than 7 percent nor The Company offers its common. preference. and greater than 13-% percent for Series B. At December preferred shareholders the opportunity to reinvest 31.1985, the dividend rates on the ARPS Series A their dividends and to make additional cash payments and ARPS Series B were 10.80 percent per annum to acquire shares of the Company's common stock and 10.85 percent per annum, respectively.

through its Dividend Reinvestment and Stock Pur-chase Plan IDRIP). The Company also offers all The preferred stock subject to mandatory redemp-employees meeting designated service requirements tion is entitled to a sinking fund which provides for the the option to participate in benefit plans which pro- annual redemption of shares at S 100 per share com-vide an opportunity to obtain common shares of the mencing on the dates indicated:

Company. At December 31.1985. the Company had reserved 4.204.112 shares of common stock to be issued in connection with its DRIP and employee Number of benefit plans. Sharts to be Date of Initial Sinking Series Redeemed Fund Requirement At the Company's option. all or part of its preferred 8 8j 3 l9y and preference stock may be redeemed at stated s 8.64 14.000 september 15.1985 prices. Certain issues are subject to restrictions which si t .48 20.000 December is.1986 prohibit redemption for a period of time. directly or sl3.64 20.000 November is.1986 Indirectly out of the proceeds of or in anticipation of borrowings or issuance of additional stock of equal or M$$sl 2.92 og 30.000

$Y lune 15.1991 8'

prior rank having a lower interest cost or dividend rate.~

During 1985. the Co any purchased in the open At December 31.1985 the Company had authoriz- market, shares of the agplicable series of preferred ed 10.000.000 shares of preferred stock without par stock in excess of the amount needed to satisfy the value (none issued). Limitations based on the ratio of 1985 sinking fund requirement. At December 31.

after-tax earnings to fixed charges and preferred 1985, assuming that the additional shares purchased dividends are imposed by the Company's Restated during 1985 are used to satisfy future sinking fur'd re-Artides of incorporation upon the issuance of addi- quirements, minimum re<femption requirements tional preferred stock. For information with respect to amount to $4.045.000 $4.101.000. $4.948.000, the additional amount of preferred stock which the $6.701.000, and $9.680.000 during the years 1986 Company would have been able to issue at year end. through 1990 respectively. Preferred stock sinking see " Management's Discussion and Analysis of fund provisions restrict the payment of dividends on Results of Operations and Financial Condition / common and preference stock and the purchase of such stock by the Company unless the sinking fund re-Certain limitations on the payment of cash quirements are met.

dividends on common stock are contained in the Company's Restated Artides of Incorporation. as 8. Long-Term Debt amended (Artides) and indentures. The most restric~ The Company's Mortgage Indenture contains sink-tive limitation at December 31.1985, was contained ing fund provisions which require, generally that the in the Artides. Based on such limitations. the retained Company make annual cash deposits equal to 1.2 per-earnings available for payment of dividends as of l cent of the (,reatest aggregate principal amount of first l December 31.1985, amounted to approximately mortgage bonds outstanding or, in lieu thereof, to

$378 million. Preferred and preference dividend re- apply property additions or reacquired first mortgage quirements as well as preferred stock sinking fund bonds for that purpose. The Company has satisfied requirements have priority over the payment of cash the mortgage requirements in past years and plans to dividends on common stock. meet currcnt and future requirements by certifying "available net additions" to the trustee. Those series Payment of dividends on preference stock is subor- of the Company's first mortgage bonds which were dinate to payment of dividends on preferred stock privately placed require cash sinking funds beginning and preferred stock sinking fund obligations. There in 1987. First mortgage bond sinking fund re-are no limitations in the Artides on the issuance of quirements. along with long-term debt maturities (ex-preference stock. duding those amounts to be due under the Revolving

7. Preferred Stock Subject to Credit Facility as discussed below). for each of the Mandatory Redemption next five ye rs are detailed below (in thousandsl:

1 The dividend rate on the Adjustable Rate Cumulative Preferred Stock (ARPS) Series A and l Series B is adjusted quarterly based upon certain ap- 22

J 1

i Sinking Fund Requirements Long Term Information regarding short-term debt outstanding Qrope",

, is detailed below:

1986 S -

$16.284 S15.000 i 1987. 8.570 16.080 41.000 1985 1984 1983 1988. 27.320 15.840 80.000 (inthousandsencept percentages) 1989. 27.320 15.528 26.000 Maximum amount 1990. 67.320 15,324 77.000 outstandmg during year Bank notes . S157.000 S145.000 $146.000 The Company's Mortgage Indenture contains an in- commercial paper 5.000 53.000 120.000 terest coverage covenant which limits the amount of first mortgage bonds which the Company may issue.

^5nEntQtanding For information with respect to the additional amount sank notes . 40 619 72.710 56.265 of first mortgage bonds which the Company is cur- commercial paper. 14 11.764 39.470 rently able to issue under this limitation. see

" Management's Discussion and Analysis of Results of Weighted average interest Operations and Financial ConditionJ' ""

, ticar end Bank notes . -

8.9 f % 10.01 %

Borrowings under the Company's $800 million commercial paper. - - -

revolving credit agreement are available until September 12,1988. with the amount outstanding at ge Wejh j that date being repayable over a three-year period g,ng not,, . g ggg 30,75 9.56 with the first payment due on September i 2.1989. commercial paper . 8.75 10.30 9.32 Borrowings made until September i 2.1986. bear in-(a) calculated by dividing the sum of the effecthe interest for the terest based on the Prime Rate as determined by Irv- year by the average daily shortierm debt outstanding.

Ing Trust Company, the London Interbank Offering Rate (LIBOR) plus % of I percent or the Certificate of 10. Commitments and Contingencies Deposit rate plus % of I percent. Thereafter, borrow- Construction. The 1986 construction program is cur-ings will bear interest at Prime plus % of 1 percent as rently estimated to be $220 million, including approx-determined by Irving Trust Company. LIBOR plus % of imately $63 million of AFUDC. Construction of River I percent. or the Certificate of Deposit rate plus % of I Bend Unit I is basically complete. and prescribed percent. At December 31.1985, the amount outstan-regulatory preoperational testing of the unit began in ding under the revolving credit agreement consisted October.1985. The Company currently estimates that

' l of $170 million bearing an interest rate of 9& per- the unit will be placed into commercial operation dur-cent and $100 million at 8-% percent. l Ing 1986. During 1985, the Company experienced ad-ditional construction costs resulting from delays in fuel load and a larger scope of work than anticipated.

9. Notes Payable These factors increased the total unit cost to $2.86 billion (excluding AFUDC and post <ompletion costs As of December 31.1985, the Company had estimated to be in excess of S 160 million). The Com-agreements with banks and banking institutions which l pany has an agreement with the contractor of the )

provided for short-term lines of credit totaling approx- River Bend unit which provides for deferred incentive '

i imately $212 million. Interest rates associated with payments of $2 million per month through 1990.

these lines are based on the LIBOR, prime or cer-tificate of deposit rate or other mutually agreeable Rates and Auoun:ing. In anticipation of completion of rate to be determined at the time of borrowing. Com- the plant. the Company filed applications with the

mitment fees range from 5/I6 of I percent to I/2 of I LPSC on September 30.1985, and with the PUCT on percent of amount of available credit. In lieu of com- October I,1985, for increases in retail rates. The ma-mitment fees. certain banks require a nonrestricted lor component of these applications is recognition in l cash balance be maintained equal to 5 percent to 10 rates of the Company's investment in River Bend. The

! percentof thecommitment. Company has proposed rate moderation plans to ob-

} tain full recognition of the unit in rates over a period of seven years. Such plans reduce the amount of in-itial rate increases which would be required under conventional ratemaking. Under the Company's plans, about $542 million of retail revenues that would have otherwise been included in a traditional one-time rate increase request would be deferred during the first three years and then recovered over the last four years. The application with the LPSC re-quests increases of $242.2 million in 1986 and $118 million in 1987. On November 26.1985. the PUCT re-iected the fihng seeking recognition of River Bend 23

Financial Information utilizing a rate moderation plan. An alternative ap- return. Additionally, the Exposure Draft would require plication was filed in Texas requesting an increase of the Company to reduce its investment in the aban-approximately $133 million in 1986,in which River doned River Bend Unit 2, a proposed 940 MW Bend Unit I would be treated as construction work in nudear-fueled generating unit, to an amount equal to progress. the present value of the probable future revenues ex-pected to be provided over the amortization period T 4 application has been accepted by the PUCT authorized by regulators.

arr s progressing through hearings with a decision sckduled by mid-1986. The Company's retail rate fil- The Nudear Waste Policy Act of 1982 requires the ings contain provisions seeking recovery of the costs United States Department of Energy IDOE) to assess to be incurred in connection with the bu> backs of utilities one mill for each kilowatt-hour of electricity CEPCO's share of the capacity of River Bend Unit I as generated by a nudear-fueled generating station for .

well as other purchase power costs (see Note II h The the shipment and permanent disposal of fuel current regulatory dimate in Louisiana and Texas and discharged. The Company has induded an amount for public resistance to rate increases mdicate that it may this cost in its Texas and Louisiana retail rate requests.

be difficult to obtain the requested rate relief. No prediction can be made as to the timing and extent of Insurance. Public liability in case of a nudear incident

' any rate relief which may be granted by the commis- at any licensed nudear facility in the United States is sions (See Note 12L Unfavorable determinations by currently limited to $620 million under the provisions either or both commissions would, however. have a of the Price-Anderson Act. The Company has insured negative impact on the financial position and/or River Bend for this exposure through a combination of results of operations of the Company.

private insurance and indemnity agreements with the Nudear Regulatory Commission. In the event of such I Pending the timely outcome of these proceedings

' a nudear ,mcident, the Company could be assessed up the Company plans to pursue certain other financial to $5 million per incident with a maximum amount of alternatives. In addition to the completion of public

'. $ 10 mimon payable in any one year. Should more offerings of first mortgage bonds and preferred stock than two incidents occur in a single year, any liability

' in the first quarter of 1986. the Company plans to 4 in excess of the $10 million will be payable in the suc-utilize its revolving credit facility, available lines of

~

ceeding year (sh credit and other financial alternatives, as necessary. to i obtain additional cash which inay be needed. Whil The Company has acquired an additional $525 there can be no assurances that these alternatives will million of excess insurance coverage through par-be successful. the Company believes they will enable ticipation in the Nudear Electric insurance Umited it to meet its operating requirements and financial (NEILL Under NEIL. the Company is subject to a max-4 obligations during the interim.

imum assessment of up to $6.8 million in any one The LPSC has begun a series of hearings on policy year.

the prudency of the Company in constructing the River Bend Unit. Under current accounting principles Cancelled Nudcar Unit. The Company previous!y the Company would not charge to operations any reported the cancellation of River Bend Unit 2. The costs deemed imprudent unless such costs could not Company has begun amortizing that portion of the be recovered within the return allowed on the cost of the unit applicable to its wholesale and Texas balance of the plant costs. The Company believes that retail operations over 10 and 15 year periods, respec-all construction costs incurred are reasonable and tively. In its rate increase application filed in Louisiana, prudent. However. no assurances can currently be the Company requested authorization to recover and given that such commission will allow the Company to earn a return on that portion of the cost of the unit j earn a return on or recover fully its investment in applicable to its Louisiana retail operations (approx-River Bend. imately $51.5 million) over a 10-year period. The 1

Company cannot predict the amount of such costs. if During December,1985, the Financial Accounting any. which the LPSC will allow to be recovered. At Standards Board (FASB) released an exposure draft December 31,1985, the unamortized balance of the

of a Proposed Statement of Financial Accounting Company's investment in River Bend Unit 2 totaled Standards (Exposure Draft) which would modify cur- approximately $125 million.

1 rent accounting standards for rate regulated enter-prises. Such standards specify the accounting for the 11. Purchase Power Agreements financial effect of phase-in plans, disallowances of The Company has agreements with the participants costs of newly completed plants. and plant aban-donments. The Exposure Draft. if adopted in its pre- in Nelson Unit 6 and River Bend Unit I (see Note 5) to 4

buyback dedining amounts of their share of the sent form. would require an immediate charge t capacity of those units for periods ranging from seven operations for any portion of the cost of River Bend to fourteen years in the case of Nelson Unit 6 and.

Unit I not included in rate base. as well as a portion of three years in the case of River Bend Unit 1. The i

the costs deferred under a phasein plan upon which variable costs associated with such buybacks are com-regulators failed to allow the Company to earn a l 21

posed of fuel costs and operations and mcintenance maintenance expense. For the years ended expenses, while the fixed costs are based upon gross December 31.1985 and 1984, such costs totaled $125 plant investment and other factors. For the years million and $109 million. respectively.

ended December 31.1985,1984, and 1983. Variable costs applkable to the Nelson Unit 6 buybacks were As part of its rate increase applications currently

$25.2 million. S24.1 million, and $25.9 million. respec- pending before the PUCT and LPSC. the Company is tively, while the fixed costs associated with such seeking recovery of allits purchased power costs. The buybacks were $26.9 million. S32.9 million, and $37.3 Company has heretofore been allowed to pass the million. respectively. Based upon current information. costs incurred under its purchase power contracts the Company estimates that the fixed costs incurred through to its customers. However, the Company can-in connection with the Nelson Unit 6 bu> backs will not be assured that such authorizations will be range in declining amounts from $18 million in 1986, to continued or that recovery of the additional costs to

$9 million in 1990. From 1991 through 1996. be incurred in connection with the River Bend Unit I aggregate payments for the buybacks of power are buybacks will be allowed.

estimated to be approximately S30 million.

River Bend Unit i is jointly owned by the Company and Cajun Electric Power Cooperative. Inc. (CEPCO). 12. Subsequent Events (Unaudited)

After River Bend Unit I goes into commercial opera-tion. the Company will be obligated to purchase 100 percent of CEPCO's share of the unit's capacity for During January,1986. the Company sold $100 one year. Thereafter. the Company is obligated to pur. million principal amount of First Mortgage Bonds chase declining amounts for two years. Based upon I l-%% Series Due 2016. priced to the public at current information. the Company estimates that the 99-% percent. The proceeds from the sale were ex-fixed costs incurred in connection with the buybacks pended for general corporate purposes. Also during of power will approximate $186 million during 1986 January.1986, the Company retired the Term (based upon an in-service date of March 31.19861. Loan Agreement, due 1987. upon payment of $24 and will thereafter decline from S184 million in 1987. million.

to $20 million in 1989.

On February 5.1986, the Company completed the The Company has contracts with the Southern Com- sale of 750.000 shares of $100 par value $11.50 Divi-panies providing for purchases by the Company of dend Series Preferred Stock. The proceeds from the capacity and energy from coal-fired units. These pur. s le will be used to refund the Company's $13.64 chases include unit power purchases phasing from Dividend Series Preferred Stock and to the extent not 400 MW in 1985 to 700 MW from 1988 through May, so used, will be expended for general corporate 1992, and purchases of long-term power expected to purposes be lower in cost than the unit power phasing down from 600 MW in 1985, to 300 MW from 1988 through On March 3.1986, the PUCT staff, along with cer-

' May.1992. Due to reduced needs. the Company has tain of the intervenors in the Company's Texas rate given notice to the Southern Comunies of its intent case (see Note 10), filed testimony recommending to reopen negotiations of the unit power sales agree. that the Company's base rates be affected in amounts ment to eliminate or suspend the capacity purchases. ranging from an increase of approximately $12 million The notice was given pursuant to a provision in the to a reduction of approximately $138 million. The contract requiring good faith negotiations to evaluate PUCT is expected to render a decision in the rate case alternatives which may reasonably provide for during June.1986: such decision must be based upon desired changes in capacity purchases to be made by c nsideration of the facts in the record. The hearing mutual agreement. At this time. the Company cannot before the PUCT is scheduled to begin on March 17, predict the outcome of such negotiations. 1986. At such hearing. the Company has the right to challenge the recommendations of the staff and in-The fixed costs applicable to the power purchases tervenors and present additional evidence in support from the Southern Companies are based on costs of of its rate request. The Company cannot currently existing and future generating units and other factors. determine the outcome of such hearings.

For the years ended December 31.1985 and 1984.

the fixed costs associated with the power purchases totaled approximately $132 million and $51 million.

respectively. Under the terms of the contract the Company is required to make. on a takemr-pay basis.

minimum payments currently estimated to range in in-creasing amounts from SI 32 million to $235 million during the period from 1986 through 1990. The variable costs associated with such purchases are composed of fuel costs and operations and 25

Financial Information

13. Quarterly Financial Information (Uncudited)

(in thousands except per share amounts)

Earnings Per Average Operating Operating Net Common Share 1985 Revenue Income income Outstanding

• First Quarter $440.035 $ 72.833 $53,525 S.42 Second Quarter 484.649 85.813 66.356 .53 Third Quarter . 537.636 I i 1.903 97.402 .83 Fourth Quarter . 396,I16 73.316 48.216 .32 1984 First Quarter $372.474 S 76.884 $53.986 S.48 Second Quarter . 364.658 81.355 57.561 .51 Third Quarter 452.119 I I l.396 90.457 .85 Fourth Quarter 357.790 74.049 56.I67 .45

• The individu al quarters may not add to the yearly totals since the per share amounts are based upon the average number of shares outstanding during each quarter.

14. SupplementalInformation on Changing Prices (Unaudited)

An estimate of the effects of inflation as set forth (I) Depreciation was computed by applying below, was prepared under the mandate of SFAS No. the Company's depreciation rates to the

33. subsequently amended by SFAS No. 82. Issued by indexed plant amounts. Under the the Financial Accounting Standards Board. The ratemaking prescribed by the regulatory statements require adjustments to historical costs to commissions to which the Company is sub-estimate the effects et changes in specific prices (Cur- ject, only the historical cost of plant is rent Cost Method) on the Company's operations. The recoverable as depreciation.

Current Cost Method, as applied by the Company, utilizes the Har.dy-Whitman index of Public Utility (2) Taxes-SFAS No. 33 as amended, does Construction Costs to measure the specific inflationary not provide for the adjustment of income effect on utility plant such effect being greater or less taxes.

than the general rate of inflation.

(3) Gain from Decline in Purchasing Power of The Company believes that this information is not Net Amounts Owed-in periods of infla-meaningful when applied to the Utility Industry and tion. holders of monetary assets suffer a therefore. the amounts presented should not be con- dedine in purchasing power. while holders strued as anything but an estimate of the effects of of monetary liabilities experience a gain.

changing prices on the Company. The application of The large amount of long-term debt of the this method requires subjective assumptions which Company, used to invest in plant and i have affected the statements presented. equipment, the cost of which is recovered through depreciation. has resulted in an unrealized holding gain because future payment of the debt will be made with in-flated dollars. Because present ratemaking limits the recovery of depreciation to historical cost. this gain will not be realized.

26

Statement of Income Adjusted for Changing Prices (Unaudited)

For the year ended December 31,1985 Conventional Current Cost Historical Aver Cost 1985 On thousands)

Operating revenue $1.858.436 $1.858.436 Operations and maintenance expense . 1.284.539 1.284.539 Depreciation and amortization i12.789 225.995 Taxes 117.243 117.243 Other - net (126.980) (126.980)

Interest charges 205.346 205.346 1.592.937 1.706.I43 Net income (ex'auding adjustment to net recoverable cost) $ 265.499 $ 152.293 Increase in specific prices (current cost) of utility and other plant held during the year

• S 299,794 Adjustment to net recoverable cost 66.701 Effect of increase in general price level (262.129)

Excess of increase in specific prices after adjustment to net recoverable cost over increase in general price level . 104.366 Gain from dedine in purchasing power of net amounts owed 115.165 Net .

_S219.531

'At December 31.1985, current cost of utility and other plant, net of accumulated depreciation was $7.087.880 while historical cost or net cost recoverable through depreciation was $5.011.863.

27

Financial Information Five Year Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices (Unaudited)

Years Ended December 31, 1985 1984 1983 1982 1981 (in thousands of average 1985 dollars)

Operating revenue $ 1.858.436 $1.602.239 $1.550.737 $1.456.931 $1.445.%6 Current Cost Information:

Net income (exduding adjustment to net recoverable cost) 152.293 137.489 106.613 38.693 52.594 income (Loss) per common share after dividend requirements on preferred and preference stock and excluding adjustment to net recoverable cost .94 .91 .69 (.07) .31 Excess of increase in specific prices after adjustment to net recoverable cost over increase in general price level 104.366 75.021 21.910 (17.152) (167.070)

Net assets at year-end at net recoverable cost . l.842.082 I.767.184 1.648.733 1.468.487 I.217. I85 GeneralInformation:

Gain from decline in purchasing power of net amounts owed 115.163 101.450 77.459 104.490 194.765 Cash dividends dedared per common share 1.64 1.70 1.75 1.74 1.75 Market price per common share at year-end 12.78 13.29 83.54 14.64 13.60 Average consumer price index 322.2 311.1 298.4 289.1 272.4 Auditors

• Report To the Shareholders of Gulf States Utilities Company:

i We have examined the balance sheet and statement of capitalization of GULF STATES UTILITIES COMPANY as of December 3 I.1985 and 1984, and the related statements of income, sources of funds invested in utility and other plant. and changes in capital stock and retained earnings for each of the three years in the period ended December 31.1985. Our examinations 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.

The Company's River Bend Unit i Nudear Generating Plant is scheduled to begin commercial operation during 1986. In connection therewith, the Company has filed applications with the regulatory commissions in Texas and Louisiana for increases in its rates. No assurances can currently be given that such commissions will allow the Com-pany to earn an adequate return on or fully recover its investment in the River Bend Unit. For additional informa-tion regarding the rate proceedings. see Note 10 to the financial statements.

in our opinion, the financial statements referred to above present fairly the financial position of GULF STATES UTILITIES COMPANY as of December 31.1985 and 1984. and the results of its operations and sources of its funds invested in utility and other plant for each of the three years in the period ended December 31.1985, in conformity with generally accepted accounting principles applied on a consistent basis.

COOPERS & LYBRAND Houston. Texas February 14.1986 28

Statistical Summary For the years ended December 3I 1985 1984 1983 1982 1981 ELECTRIC DEPARTMENT Number of customers at year end.

Residential . 485.825 485.711 475.782 465.162 455.160 Commercial 61,712 60.372 57.446 55.265 52.955 Industrial . 4.398 4.302 4.146 4.165 3.852 Temporary construction 2.188 2.924 3.624 3.132 2.871 Other . 2.333 2.182 2 101 8.985 1.974 Total Customers . 556.456 555.491 543.099 529.709 516.812 Sales-Kilowatt-hours 4thousandsl:

Residential . 6.224.555 6.209.347 5.686.436 5.991.578 5.717.715 Commercial 4. % 4.416 4.745.055 1.141.093 4.359.739 4.178.126 Industrial . 13.590.004 15.924.402 14.257.141 13.728.469 15 066.330 Temporary construction 47,475 57.354 55.927 48.170 50.306 Other . I.890.700 2.152.052 2.109.974 2.261.350 2.797.761 TotalSales . 26.717.150 29 088 210 26 450.571 26.389.306 27.810.238 Revenue-(thousandsl:

Residential . $ $28,593 $ 434.946 $ 396 026 $ 362.223 $ 315.625 Commercial 358.882 278.155 255.147 226.104 198.676 Industrial 680.755 573.839 534.066 495.461 494.388 Temporary construction 3.666 3.702 3.699 2.786 2.723 Other. 142,509 120 059 116 511 102.370 95 110 Total Revenue $ 1.714.405 $1410.701 $1.305 449 $1.188 9 44 $1.106.522 Average Annual KWH Use Per Customer Residential . 12.806 12.901 12.097 13.015 12.786 Commercial 80.951 30.264 77.138 80 314 79.558 Industrial 3.110.553 3.725.006 3.431.322 3.451.098 4.095.224 Revenue Per KWH-icents):

Residential - 8.49 7.01 6.96 6 05 5.52 Comrr.ercial 7.23 5.86 5.88 5.19 4.76 Industrial 5.01 3.60 3.75 3 61 3.28 Electric Energy Output-Thousands of KWH Net Generated . 19.286.014 26.218.067 25.846 238 25.523.512 28.115.700 Net Purchased and Interchanged 11.340.923 6 953.777 4.987.292 5.160 731 4 4Il.795 30 626.937 33.171 844 30 833 530 10.684 243 12.527.495 System Peak Load-Including interruptible load-Megawatts . 5.139 5.475 5.348 5.164 5.542 Total Capabihty. Induding Contract Purchases at Time of System Peak load tMW) 6.610 6,780 7.152 7.208 6.745 Load Factor 68.0% 69 0 % 65 8 % 67.8 % 670%

STEAM PRODUCTS DEPARTMENT Steam Revenue lthousands) $ 102.576 $ 83.165 $ 83.646 $ 75 213 $ 77.624 Steam Sales-KWH imilhons) 2.288 2 600 2.555 2.579 2 887 Steam sales-milhons of pounds 7.695 8.466 8.559 9.447 12.209 GAS DEPARTMENT Gas Revenue lthousandst 5 41.455 $ 53.175 $ 47.093 $ 43.102 $ 37.568 Number of Customers . 85.039 85.665 85,737 85.194 85.664 Output-MM cu ft. of natural gas purchased . 8.454 8.252 9.I49 8 229 8.738 Sales-MM cu. ft. 7.946 9.140 8 498 8 535 8.599 WEATHER DATA:

Cooling degree days tNormal 2.7321 2.947 2.665 2 418 2,901 2.775 Percentage change from normal 7.9 1t 31 111.51 62 16 Heating degree days (Normal I.570) 1.415 1 860 1.647 1.587 1 620 Percentage change from normal 19 91 18 5 49 11 3.2 29

m Offi rs Chairman Paul W. Murrill(3) 5 I Albert H. Newton, til(2) 49 Chairman of the Board Vice President and Chief Executive Officer lack L Schenck (4)47 Vice Chairman-President Vice President 6 Treasurer E. Linn Draper, fr.(6) 43 Edward I. Serwan (7) 64 Vice Chairman of the Board. President Vice President-Production and Chief Operating Officer Aubrey D. Sprawls (36) 57 Vice Chairman Vice President 41arketing and Consumer Services nnan . 6)61 Summa L Stelly (37) 59 Vice Chairman of the Board Vice President-touisiana Operations Executive Vice Presidents Bobby I. Willis(23) 49 Edward M. Loggins(27) 55 Vice President 6 Controller lasper F. Worthy (29) 57 ati n Vice President <,eneral Services loseph E. Bondurant (28) 56 Executive Vice President-Administrative Division Vice Presidents and Technical Services lohn W. Conley (27) 54 loseph L Donnelly(6) 56 Division Vice President-Western Executive Vice President-Finance Arden D. Loughmiller (24) 47 Senior Vke Presidents Division Vice President-Beaumont Ronald M. McKenzie(18145 William J. Cahill. fr.(5) 62 Senior Vice President Division Vice President-Port Arthur River Bend Nuclear Group

1. Ted Melnscher (35) 53 Division Vice President-Lake Charles Calvin 1. Hebert (23) 5 I Senior Vice President-Operations lames E. Moss (27) 49 Division Vice President-Baton Rouge Vice Presidents lames R. Aldridge (5) 55 Other Officers Vice President-Human Resources Leslie D. Cobb (30) 50 Secretary William E. Barksdale (28) 54 Vice President-Engineering Clyde W. McBride (8) 33 and Technical Services Assistant Treasurer

'ygc" , ,3 Timothy L Morris (6) 34 Assstant Secretary River Bend Nuclear Group Anthony F.Gabrielle (5) 58 I""

Assistant Controun Vice President-Computer Applications Charles D. Glass (36) 57 Vice President-Texas Operations I i Yrdr5 d 5"W' Aps and years of servkr William J. lefferson (5) 56 as # December 31. I985 Vice President-Rates and Regulatory Affairs George T. McCollough Ir.(5) 61 Vice President Fuels. Materials and Corporate Planning 30

Directors Directors Stockholder information

• Robert H. Barrow James E. Taussig ll Stock Listing General. Retired Cc . mandant President-Taussig Corporation Gulf States Utilities Company's United States Marine Corps take Charles. LA i1975) common stock is traded under the St. Francisville. LA (19841 symbol GSU on the New York.

• Executive Committee Midwest and Pacific Stock Exchanges.

• *lohn W. Barton *

• Chairman. Executive Committee Vice President-Baton Rouge ( ) Year Elected Stock Transfer Agents Aircraft. Inc. Gulf States Utilities Company Baton Rouge. LA (1970) Beaumont. Texas E. Linn Draper. Ir. Morgan Guaranty Trust Company Vice Chairman of the Board, New York. New York President and Chief Operating Officer Beaumont.TX t 1985) Principal Offices Registrars First City National Bank of Beaumont Martin Goland 350 Pine Street Beaumont. Texas President-Southwest Research Institute Beaumont. Texas San Antonio.TX(19831 77701 Morgan Guaranty Trust Company New York. New York Edwin W. Hiam Divisions Vice President Tucker Anthony Dividend Reinvestment Plan Agent Management Corp. 285 Liberty Avenue Gulf States Utilities Company Boston, Mass (1959) Beaumont. Texas P.O. Box 1671 7770! Beaumont. Texas William H. LeBlanc. fr. 77704 Chairman of the Board of Baton Rouge 1540 Ninth Avenue Supply Co.. Inc. Port Arthur. Texas Form 10-K Baton Rouge. LA (1974) 77640 The Form IOK Annual Report to the

' Norman R. Lee Highway 75 North Securities and Exchange Commission Vice Chairman of the Board Conroe. Texas and GSU's 1985 Financial and Beaumont. TX (1967) 7730! Statistical Report can be obtained Charles W. McCoy 446 North Boulevard without charge from Leslie D. Cobb.

Baton Rouge. Louisiana Secretary. P. O. Box 2951, Beaumont.

President and Chief Executive Officer 70802 Texas 77704.

Louisiana Bancshares. Inc.

Baton Rouge. LA (1985)

BdSW Notice of Annual Meeting

• Paul W. Murrill Lake Charles. Louisiana 70601 The 1986 AnnualMeeting of Chairman of the Board and shareholders will be held at 2 p m..

Chief Executive Officer Thur@y. May 1.1986. In the company's Beaumont. TX (1978) headquarters. 350 Pine Alvin T. Raetzsch. Sr. Street. Beaumont. Texas. Formal Retired Assistant to the notices of the meeting. proxy statements and proxies will be Vice President and General Manager-U.S. Chemical Division mailed to the common shareholders of PPG Industries. inc. on or about March 27.1986.

Lake Charles. LA (1975) Shareboklers are invited to attend.

but if they cannot. they are urged to Monroe 1. Rathbone. fr.

Medical doctor and partner The SurgicalClinic Baton Rouge. LA 119751

• Nat S. Rogers Director & Consultant-First City Bancorporation of Texas. Inc.

Houston. TX 189781

• Bismark A.Steinhagen Partner-Steinhagen investment Co Beaumont. TX (1974) 31

+

1 Gulf States UtiBties Co. Bulk Rate j P. O. Box 2951 U. S. POSTAGE Beaumont, Texas 77704 PAID l.

Houston, Texas

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1 Permit Number 8048 1

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• BEAUMONT, TEXAS 77704 AREA CODE 713 838 3843 April 7, 1986 RBG- 23496 File No. G9.5 Mr. Harold Denton Director, Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D. C. 20555

Dear Mr. Denton:

River Bend Station Unit 1 Docket No. 50-458

, Annual Financial Report l

j Enclosed are ten (10) copies of the Gulf States Utilities Company's 1985 Annual Report. This report is being submitted in accordance with Section 50.71 of Title 10 of the Code of Federal Regulations and U. S.

Nuclear Regulatory Commission Regulatory Guide 10.1. Cajun Electric Fower Cooperative, incorporated's Annual Report will be submitted when it becomes available.

Sincerely, l

1 o f.

J. E. Booker Manager-Engineering, Nuclear Fuels & Licensing i River Bend Nuclear Group

/lp Enclosures I

Mooy

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