ML20206D772

South Mississippi Electric Power Association 1998 Annual Rept

ML20206D772
Person / Time
Site:	Grand Gulf
Issue date:	12/31/1998
From:	Mckamy W, Thomas H SOUTH MISSISSIPPI ELECTRIC POWER ASSOCIATION
To:
Shared Package
ML20206D734	List: ML20206D728 ML20206D772
References
NUDOCS 9905040236
Download: ML20206D772 (37)

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d oh 1998 ANNUAL REPORT Dg 'n , ee FINANCIAL TT~ % 4 ($ In Thousands) 1998 1997 Increase  % Increase -Decrease JM (Decrease) 3 1 Total Revenue $313,425 $302,459 ,. "x .,. $10,966 3.6 % Current Net hiargins $2,038 ] $2,230 ($192) -8.6 % x .,q Total Assets $712,925 $732,762 ($19,837) -2.7% <64f~ Toal Equity $81,767 $78,860 N Equity as % of Assets 11.5 % 10.8 % $2,907 3.7 % , 9nb[ m a.s@ - TIER 1.05 1.06 DSC 1.06 1.11 Average Cost of Debt q .g4 6.27 % 6.23 % " -n i I OPERATIONAL ? si ' .., /;  ; Wholesale Rate to hiernbers O ' I' hiills/KWII 40.75 40.99 (0.24) -0.6 % "- ( I - Energy Sales (h1WH) hiembers 7,503,403 6,867,497 !""'W w; j ' @4 635,906 9.3 % ~[ Non-hiembers 280.252 673.562 (393.310) -58.4 % I '- Total 7,783,655 7,541,059 242,596 3.2 % 2 g ~a. Net Generation (htWII) 4,000,428 3,703,426 297,002 8.0 % jA hiember Demand (htW) 1,762 1,647 115 7.0 % M. A a. g O - TABLE OF CONTENTS / .. uli Executive hiessage., .2 General Information . .7 . . ,7 hiember Systems . .3 Departments . .8 [I y Ik>ard of Directors.. .4 Operating Report.. .9 , q Financial Report . .15  ; + na i, , c. 1 \ < s y K 1 %.o 3 l% 2 l~ h j r pr@j$ l:,^ yM.  % g[ .gyntWfb .jdnd[ n 'a ' &9s ~ n$c% 3",; Q "  : , .. = f y fq. w ' , #,f Y^ -' 4 l (hlJbY U% pmgl k % *aSQ, Rw .~n,_T ' m%

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~ 0.. b %;$u . _ :JW gic ' y a. 46 W" h .yA % t.. $ S ys m m)];"i%4, t.9 i h .[ 1998 could be tagged as one of the most unusualin our industry. $ Restructuring of the electric industry moved to the forefront in Mississippi with at, many hearings and correspondence with the Public Service Commission. While 3 time consuming, the efforts have been beneficial to the Commission, to the industry, and to the public. SMEPA employees are committed to providing factual jg and technical information that addresses the concerns of our members and this

j. i information has been beneficial and well received during an ongoing process.

-p Another faster and more moving target has been the requirements and challenges of meeting the electroG equirements presented by the year 2000. Employees have met this challenge and tesu.'aave been conducted to insure that ' :Me ~ l j reliability of service will not be interrupted. j ON SMEPA employees have met and continue to meet the challenge of change in a ('d positive, dedicated and unified manner insuring SMEPA's future success. They have Y([ - been and will continue to be a powerful force in meeting the needs of a changing industry. This report illustrates their commitment and success.

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+ y % & M 9n ~, %[/- 'ph IIenry Thomas General Manager W.C. McKamy,Jr. hrsident 4n ,. .h r a-e$, g' O l. .rs' j~, d{ - s, a e n ,[, '

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Sammy Williams, hianager is

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Date energized 9/19/39 j$ 4,924 miles ofline gl < 24,905 meters Q g- g Pearl River Valley EPA g

.g Columbia ' V%g W. T. Shows, C. neral hianager Qt  ?

, g" Date energized 5/19/39 5,386 miles ofline ' f(p - JWP ,  ; 34,187 meters q g[ s$n gg' 7 Singing River EPA e q 9 N ifw: ] g y. y h [,.- m ,8[N 1; Lucedalc 5bd T h, " p' ' Lee IIedegaard, General hianager w R N My,g Date energized 12/5/39 P{ ' 5,510 miles ofline ,g d }g; sh -g-55,566 meters ,))g , m 3;g Coahoma EPA 3 2 34 g " Lyon ** g kSouthern Pine EPA pM mud Taylorsville ' ' ' 'a are r e gized 1/ Donald Jordan, General hianager 1,467 miles ofline Date energized 5/13/39 y@ 6,545 meters 9,173 miles ofl,me 94g ' >>a 63,980 meters 2 Coast EPA ll Bay St. Louis 9 Southwest Mississippi EPA Lorman - *. ,? 14 Robert Occhi, General hianager Date energized 5/20/38 Percy hicCaa, hianager L 4,574 miles ofline Date energized 3/27/38 M 59,143 meters 4,071 miles ofline G - i 22,934 meters d Delta EPA Twin County EPA Greenwood Ilarry H,11onner, General hlanager IIollandale Vesper llagley, hianager []i: A Date energized 1/30/39 Date energized 12/24/38 ' 5,349 miles ofline 2,200 miles ofline 22,433 meters 12,657 meters AJ - I T ("en]g Dixie EPA ]4 it t Yazoo Valley EPA %j.y = Laurel ,mA Yazoo City ' James T. Dudley,Jr., General hianager }, Charles H. Shelton, General hianager a ses Date energized 7/28/39 Date energized 3/23/38 4,241 miles ofline 2,683 miles of line ). g 31,602 meters 9,319 meters ) l O , . . . ['h 6 - b /a 1 'h < _ _ _ _ _ . MJi OTG + , ,.,J J 1 ,4 s , , i - Jgo f ' ' >s . . yd f f a Coahoma .. b J, , ,1 Electric - -J 1* Power ~ ji, u $/ Association ~ . ' 6. E s '- [ James llumber Giles Bounds hianager [f&p {.j -d'g_. [ ' 'gb Coast 4M

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W~ 6k'  ?' Association Gordon R. Lee s- - T1 / Robert J. Occhi $;f% General hie:. aper a ~. , , Ybll Delta 4 4., h dbM s Electric 4 " - @g Power 4 ,' .M Association - a ?? l- IIenry Waterer,Jr. Ilarry II. Bonner ' WS General Manager f$ M) - j'y . i 4- Dixie  : '[. Qld Electric , ~ EL Power m; d ~~

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Association EDM 6 - "~ L.G. l'ierce James T. Dudley,Jr. I p General blanager $Yl y;, blN& -- - - - a + . M.M ws ".i , , F ll;; I X ;k u) +r J u .:, f u:p Magnolia , I ,: - TT - Electric  ? n aNd - i Power 4 Association *Nlgg > M 5I l Ilollis Alford Sammy Williams Secretary-Treasurer General blanager 3

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. .*L,; - Valley , a]d, [, .3 Electric ^% mg \ ~ Power + ., 4- e Association . . i ~ $g W. A. Kendrick W.T. Shows General blanager and 33 Acting Secretarp-Treasurer &QQ ,? , - Wi " w2ed g. Singing River 3 [1 il r;r Electric ,p u Power FM+ <,c g XB . Association m.P Roy Grafe Lee IIedegaard General blunaper . n.r .en.n; , W. f; 7 i '~ a u- , J7 V' Southern a ' Pine h - as 4 A i

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• SMEPA IIEADQUARTERS Iecation: Hattiesburg, Forrest County , ,.

'3y V Employees: 103 ,4 SMEPA is fortunate to have its Morrow l , ll% Y$ r and Moselle generating stations each ,) f I' ha . A $% #g ,,y, . located approximately fifteen miles from ' i, 'pM IIcadquarters. Energy from both stations is dispatched from SMEPA's Control . 2 . .~ y, My@ s A WS 7 L M : C ' 4f ./k/

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~ Center in Hattiesburg. Q, R.D. MORROW, SR., nk[f ih GENERATING STATION Commercial Operation: 1978 id Jacation: Lamar County ! ,l + Capacity: 400 MW &g,Q [ . Fuel: Bituminous Coal Employees: 95 { > ( qp x g ,4 MOSELLE GENERATING STATION . umo. . i us= g. 1 => >i' Commercial Operation: 1970 Iscation: Moselle, Jones County L, w + _ l @ ;y 7{ ' - '. ; ' Capacity: 260 MW

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• NUCLEAR STATION ^

! j (10% Undivided Interest) Commercial Operation: 1985 PAULDING UNIT Iecation: Port Gibson, Claiborne County Commercial Operation: 1972 /9"5 ~i,E Capacity: 1250 MW Location: Jasper County (g:..ay: Fuel: Nuclear Capacity: 20.6 MW > - Employees: 1 Fuel: Diesel Fuel H SMEPA counts one employee among Entergy's 800 + who work at the nuclear 1998 Production: 496 MWH site. Joe Czaika is the Association's SMEPA's two combustion tu bines, Benndale and Paulding, are uomanned ON nuclear specialist. Grand Gulf Nuclear . . Station is located approximately 145 miles stations remotely operated fro t the Control A'  ; from SMEPA's headquarters. Cente located at SMEPA's heae iuarters ,+1 facility. Personnel from Plant Mo. "lle M Y2 C" maintain the two units, f^ s'h.3 BENNDALE UNIT  % Commercial Operation: 1969 During 1998, the units were operated Location: George County on occasion to support load demand. The h Capacity: 16.2 MW units were also placed in service from time "a Fuel: Natural Gas s O to time for test purposes to assure continued ' 1998 Production: 4,191 MWH availability and reliability. ;b; < >.gg > , Q

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John Carley llenny hiurray Q[ s j ,. } p. The employees of South dl ~ ' hiississippi Electric lbwer ,. h . Association continued to set Finance Transmission Department Department ".7:4 new standards and break prior a.,. ~ - g. , records during 1998. ShiElWs . tnanagement team provided . the leadership and employees 2' . ,Yi $. - i,. . , ,, c ., , responded achieving unparalleled *;~ n . s '~' ph., results throughout each business * ' - s . h >- h segment. . Jack liarpole Jerry Pierce E y i /. i g ' Engineering Production - Department Department A 1 4 N [I . l[y .g ] . . 3 W y, pl3 Terry 1,ee hiarcus Ware

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q a PLANT MOSELLE ' The Moselle Station was again operated in an intermediate and peaking mode for the entire year. Availability of the N Moselle units remained especially good fbr the year, and y > operating efliciency remained consistent. Following the M \ installation and initial startup inJune 1997, the 83.5 MW simple 4,,, A , i j) $ cycle combustion turbine has been utilized in peaking service as f needed. Unit operability, availability, and reliability have met the high expectations which were established for the unit. Units were cycled into i{ 4 ] -- {.f[%g }-Q< ll service as needed to meet system generation demand. The higher than normal d# f summer load demand and the availability of natural gas at favorable market prices, M l led to a substantial increase in operating time at the facility during 1998, resulting in ' M*8'N# #"WI 81W 4 the highest annual usage of natural gas in the life of the station. The net generation ahde n A W % during 1998 amounted to 731,640 MWil. This includes 87,815 MWil of production Bear's scheduled j i fro.n the new combustion turbine. This is 63 % greater than the 1997 production. The increase in output can be attributed to the extremely high summer demand and M V the improvement in natural gas cost as compared to 1997. The average heat rate for the year was the second best annual pedormance since 1978. .My ] The plant maintenance stafTcompleted the Spr inspection of the Unit #2 yh turbine-generator with technical assistance pmvided by General Electric. Some of the jy major repair activity included the installation of a new nozzle bhack,17th stage  ;,jy erosion shields, and three rows of shaft packing. Numerous steam path components ' JJ were also repaired or replaced as part of the mutine inspection press. No significant findings associated with the generator we;e noted. The inspection was completed as .Wh scheduled and the required expenditures were within budgeted amounts. , $:y J Natural gas purchases were scheduled on a monthly basis to meet projected ^ ~U ' generation requirements. Usage amounted to 8,819,000 MMBru for the year, which is about 67% more than the volume used during 1997 and established a new record Dd si7 j - gas usage for an annual period. The change is attributed to a moderation in market i prices for the fuel and to the fuel needs associated with the operation of the fbur . 4, == Moselle units during the demanding summer load season. ~ y ". Fuel oil usage for 1998 amounted to only 1,039 gallons. All of the fuel oil was ' l s used in the steam units as part of an operator refresher training program. . "?  ! PLANT MORROW Plant Mormw was primarily operated in an intermediate and base kaad male during M  %% the year. Simultaneous operation of the two Morrow units occurred as load demand permitted, primarily during the winter and summer load seasorts. Coal usage amounted to "3 L h 1,011,474 tons, establishing a new anmnl burn record. 'Ihe annual net generation fmm -~ the facility established a new mcord at 2,344,525 MWIf ffhe pnxluction was ahnost 8 % ]n %lE above 1997 pnxluction and the output was 24 % mon' than the average annual generation ' LL9 i which was provided by the facility during the 10 year perial 1988-1997. Extensive man. hours were devoted to Y2K compliance issues. All microprocessor-based equipment was inventoried and evaluated for year 2000 # 6 problems. With vendor support, approximately 70% of the critical systems were 6 compliant by the end of 1998. The remaining equipment will be compliant by mid- N j summer 1999, based upon current plans.  ; >< t &lg, 3 o g W r 4 As part of plarmed maintenance activities, equipment reliability was addressed with preventative maintenance inspections on several major plant components and scheduled repairs were completed on the scrubber and coal conveying system. In order to increase reliability and aid plant personnel in operations and maintenarce, several operational and mechanical upgrades were implemented. Major improvements were made in the waste handling area. Items of greatest importance dealt with improving M[4 ..$mi 2]pb% limestone utilization, decreasing operation and maintenance cost, eliminating water discharges and increasing scrubber performance. NN GRAND GULF F Grand Gulf had a very successful year by many indications despite a scheduled refueling outage. The plant capacity factor for 1998 was 87.3 %. The capacity factor over the past three years was 93.2 %, the highest ever for the plant. The plant

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availability factor was 87.2 %. In January 1998, the plant completed its longest b continuous nm at 422 days, surpassing the 1993 record of 403 days. %@

• The net generation at the end of the year was 9,190,911 MWII, the second best g ,, for an outage year. The average net thermal etliciency for the year was 10,561 y; ,

Bru/KWH, the best for a year with a refueling outage. With the high pressure and hy two of the three low-pressure turbines upgraded plus a cold month, plant net p4N efficiency was at an all time record at 10,280 Bru/KWH during December. For the fjg first time in the history of the plant, the gross heat rate dipped below 10,000 7 y Bru/KWH. Also, the turbine upgrades previously completed have contributed 74 MW to additional plant output. Another 15 MW are expected when the finallow-if, , 9/ pressure turbine is upgraded during the tenth refueling outage in October 1999. The plant posted its highest ever net power output (1292 MW), and highest 24 hour2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> QQ ' production (30,916 MWH) on Christmas Day.

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Grand Gulf began the ninth refueling outage, designated RFO9, in April 1998. RFO9 was the safest, shortest, and least expensive outage in plant history. The staff made many improvements in the plant and in plant operations during gu_ 1998. Based upon an internal grading system, the plant staff improved the material condition of the facility by 13 % in 1998. 13's[("_ t4 f S "" The budget performance for 1998 was $2.6 million under the original projection. The production cost was the best ever for an outage year, an accomplishment which ][N J~ required considerable management attention. Another important milestone was achieved in 1998. The Institute of Nuclear [( f r Power Operations (INPO), a nuclear industry sponsored watch-dog organization, periodically examines plant performance by conducting on-site evaluations f . approximately every 18 months. In 1998 Grand Gulf regained an INPO "1" rating, ,N4 the highest possible score. P -' SMEPA received a total of 919,579 MWH of energy from Grand Gulf during 1998, h which is about 17% less than 1997 deliveries as a result of the planned refueling outage. Operation continued to be characterized by relatively high availability. The l hemma overall production reflected the positive benefits which have been realized from recent [@@_ g high pressure and low pressure turbine upgrades. A finallow pressure turbine

1. pummm)- upgrade is planned for the 1999 refueling outage, as stated above.

kip y > Qi; ' Il ? , ~[Ny( &3 h tag &%}y;  %; 1 c r KENTUCKY COAL PROPERTY ACTIVITY ^ 5 Ikerd Ikmdy, a coal mining firm, continued to develop the coal reserves on SMEPA's property in eastern Kentucky under the provisions qg u-of a property lease arrangement. Clean coal production during 1998 g reflected an increase of 19% over 1997 production, representing the I highest annual production from the property since 1984, and the most s!!C coal mined since Ikerd-Bandy assumed control of the SMEPA reserves. g Royalty payments were received for coal produced from certain isolated E-tracts of SMEPA's property. k_F SMEPA also received royalty payments as a result of oil and gas productior .J E from the Oil & Gas Lease Agreement with Miller Petroleum. A relatively small but steady volume of gas flowed from a total of twenty wells throughout year. Revenue ' 3 { was also provided from a limited amount of oil production each month. %. y_ Plant Merrw ^ E SMEPA successfully continued efforts, which began in 1989, to market additional replace the comysgar R-timber from the Kentucky property. With the timber sales during 1998, the total on the coal comysgen M income to SMEPA from this source has amounted to $1,025,340 since 1989. , Jg W:h. ENGINEERING SERVICES j% - Much of 1998 was spent installing and checking out the new control system Js computer. At the same time coordination was necessary to smoothly move from the Q@ _ old system to the new. The old Harris 9000 system was retired when the new system gMp came on line. Several other related projects were completed during the year, including real-time and historical data transferral from the control system computer to the Wh. .~ SMEPA network, and the establishment of a data transfer link with Southern jQ 44 Company to exchange real-time data with the Southern System Security Coordinator. . Mi MT-A new Power Requirements Study (load forecast) was completed forecasting future loading fbr member cooperatives. During 1998 SMEPA began transferryg D li billing data via e-mail to two of the member cooperatives. Expansion of this system

g. <y to all members will be developed during 1999.  !

MARKETING Q wg - L_;- DiEN' In 1998 SMEPA's marketing activities were focused on member training, r specifically strengthening customer relationships in a changing environment. SMEPA . ~ W@IG;- worked in conjunction with Southeastern Power Administration to sponsor member marketing seminars on the economics of business, meeting customers needs, " 4 ' *g-negotiating with key customers, and key account management. -A SMEPA also provided technical software training on commercial heating and - T ( , cooling load calculations in an effort to ofter additional information and to allow the i , _ opportunity for members to provide an added-value service to the consumer. " D -- " E f"9- - ENVIRONMENTAL AFFAIRS N _. == Environmental efforts during 1998 focused on continued compliance with $, Er existing regulations as well as developing systems to comply with new regulations. 1998 marked the fburth year of successful participation of SMEPA's R.D. Morrow,  ; j[@- Sr. Generating Plant in Phase 1 of the Acid Rain Program. SMEPA's election to - ( voluntarily substitute these units into the program resulted in reduced emission rates j J ; of acid rain pollutants as well as the " banking" of emission credits for use in meeting 7y. " 0h&#]g--g s j N-y 44,- . l$ N - Q-A.,' future generation requirements. Conanuous Emission Monitors (CEMS), used to quantify and account for unit emissions, were successfully recertified at all SMEPA generating plants. EPA finalized regulations in 1998 that added utilities to the list of industries that have to report Toxic Release Inventory (TRI) information. Reporting for 1998 was set to occur inJuly 1999. Due to the magnitude of chemicals which have to be evaluated, an effort began early in the year to determine which facilities would be required to report as well as which chemicals would have to be reported. A system of calculating releases was established so that accurate and timely reporting will occur. Borrower's Environmental Reports or Assessments were submitted to and 4 approved by RUS for approximately 28 miles of SMEPA transmission line and five M r member cooperative substations. disor*#Ied ' ~88 8"Prlsed ELECTRONICS MAINTENANCE

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Communications personnel spent much of 1998 installing various components throughout SMEPA's communications network. A 56 kilobyte digital phone circuit to tie Plant Moselle's pc network into IIeadquarter's pc network was installed, along {Q{ y? ' , with fiber optic communications on Plant Morrow's pc network. Spread spectrum point-to-point radio communications to four substations were installed and $ +' < assistance by communications personnel was also given on the installation of k9 radios / darts for the on-system GOAB automation project, the installation of l @*

• phone / data circuits at four new substations, the installation of Headquarters Control

(' Center's new GE Harris control system and the installation of tower / substation ] identifier tags on the entire SMEPA system. 4 OPERATIONS CONTROL CENTER I l The new EMS computer system was installed during the summer of 1998 with j,. the support of the Engineering Systems and Electronics groups. The new system QV incorporates an open architecture which will aid future upgrades. % The summer of 1998 brought a heat wave afTecting large regions of the nation. q%. . Outages to transmission lines and generating units caused power prices in some regions % i to soar to historical levels. SMEPA's Control Center operators were able to " tap" reliable ,y and relatively inexpensive resources during these extmme days of summer 1998. md In an effort to provide more reliable interconnected operations, and as a result, a 1 . more reliable electric grid nationwide, the North American Electric Reliability & Council ("NERC") issued additional rules which required operator training and 4 certification. SMEE% Control Center personnel participated in operator training both % "' in the spring and fall of 1998 in preparation for certification testing. All of SMEPA's gh p operating personnel who have taken the test passed with high scores. MW Y4""" TRANSMISSION UPGRADES 9M M mum 5 p AND CONSTRUCTION SMEPA crews spent much of 1998 upgrading and completing construction of i yQ' various lines. Line adjustments were completed on several SMEl% transmission lines I Y  : due to highway construction. SMEPA completed construction on three 115 kv Ipuums - transmission lines to serve Singing River EPA's Hamill Farm Road, Monaco and . p: . g ' [ s k(l' %M=__-__ ___ _ _ _ _ . _. . _ __ . _ _ _ _ _ _ _ . _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ l M% s @lh - 1 we . p m, .i , ' .. <er .: : ( -, Martin Bluff substations, a 69 kv tap to serve Dixie EPNs Shelton substation, and a 115 kv tap to serve Pearl River Valley EPNs Dixie Pipeline substation. The Transmission department continues to coordinate the surveying and construction management of ongoing projects. This

• includes two 115 kv lines for Southwest EPA, one 115 kv line for Coast EPA, one 69 kv line for Pearl River Valley EPA, one 69 kv line for Southern Pine EPA and ten line adjustments for highway construction.

1 TRANSMISSION SYSTEM MAINTENANCE "",,,e An integral part of SMEPA's commitment to providing reliable power is the maintenance of 1,543 miles of transmission lines, right of way, and numerous switches. 6MEPA were commsended enspissue[h SMEPNs line crews performed climbing inspections on 3,438 structures and the Missisedypi Ag4 completed 326 line maintenance work orders. Legislature med The annual reclearing of right of way was performed over 4,011 acres. Pole EPA for tiseirltiset, groundline inspections and treatments were performed on 2,002 poles and a number efforts darig fisend of danger trees were removed from critical lines. Seasonal vegetation control was holldq fee jy performed at 119 switch k> cations and stations, and aerial patrol inspections of the system were performed seven times during 1997. jg qi DESIGN ENGINEERING AND SUBSTATION MAINTENANCE .d SMEPA's engineering stafT continued to implement a recommendation from the by i d current long Range Transmission Planning Study. This recommendation requires SMEPA to operate the 69 kV transmission system looped under normal conditions. j Phase 1 of this process began in 1997. Phase 11 was completed in 1998 following  : . psyg installation of 69 kv Oil Circuit Breakers (OCB's) at the Prentiss Substation. f Metering technicians checked calibration of 202 wholesale revenue meters at 171 - mg different sites in the SMEPA system. They also installed new meter packages at f9 seven new sites. Relay technicians calibrated 1703 relays at 24 ditrerent sites and installed new relay equipment at two substations. ' my ( f Approximately 23 miles of transmission lines required for new member delivery 9 ' points and a remote control switch project for ten sites were designed by SMEPNs engineering staff d< l Major substation maintenance activities were performed. Some of these activities ma M , included preventative maintenance on sixteen 161 kV OCB's, four GE load Tap a9g Changers and 30 motor-operated switches, infrared surveys for all SMEPA facilities g j and seven SMEPA member systems, and dissolved gas analysis (DGA) samples on 40 power transformers. ~~ w~ /"""9 .d h Anr;f : TRANSMISSION SYSTEM PLANNING O SMEPA prepared an update to the Construction Work Plan for September,1998, through August,2003. This update addresses two new switching stations for new tap ?{ SM lines required to serve five new delivery points, four miles of transmission line to  ; ,' serve these new delivery points, and the addition of thirteen 69 kV circuit breakers at # four transmission substations to improve system reliability. 1 ? 9 ? - y-C [! , gg NW l ?& ~ l 4 y j ,%Q Q" p. e

means that "following the complete loss of system generation (blackout), it will be necessary to establish initial generation that can supply a source of { electric power to other system generation and begin system mstoration." This new procedure was developed and tested, as mquired, in 1998. NERC requires that Blackstart test must be perfonned at least every five years. l COMPUTER INFORMATION SYSTEMS g The Year 2000 compliance efforts have been a major accomplishment in j 1998. Digital processing equipment continues to be evaluated for Y2K compliance. $4 The assessment of hardware and software applications requires extensive Q] communication with SMEPA Y2K contacts as well as vendors and manufacturers. Coordination ofimplementation and testing as upgrades are provided is scheduled into mid , - J$ps askrwahsatfcts 1999. The number of inquiries has increased significantly and mandatory reporting includes M ParticlpatfmB monthly NERC assessments. Contingency plans and test drills are scheduled for 1999. ' scheduled Developments in project areas to share information have advanced significantiv. Computer users now have management capability to share e-mail messages and organize business pg ? associates from their desktop. Plans for 1999 include incorporating business applications into ( gg < the desktop environment. Other plans for 1999 include moving in the direction of eliminating hy' the need for special fonns. The components necessary to accomplish this goal include scanner j;I software that includes object character recognition (OCR) and magnetic ink character D  : recognition (MICR) printing. OR$ Administration functions continue to support computer users with updated features. [ Virus protection is provided for servers and clients with on-line and supply recovery options in the event of hardware failure. The support phone line or help desk remains active with [C/ @ "how to" questions and trouble shooting efforts. p <, ,f PERSONNEL ' Benefit costs were controlled again in 1998 as the Association recorded nine years without an increase in funding requirements of the self-insured medical insurance plan. Employee support 3,' a and utilization of managed care agreements continues to be the key to effective cost contml. 'L SAFETY ]dq=== $[ Employees continued to break all safety records in 1998 as the fifth consecutive year was O -- completed without a lost time accident. This outstanding record is a direct result of continued ' employee involvement and commitment to the Association's Safety Program. Congratulations [##""P-- S are again in order to all SMEPA employees. g [# - i 1- t ASSOCIATION RELATIONS SMEPA continued its commitment to supporting the community through numerous j""" volunteer projects. Public relations efforts increased through additional civic presentations /^ h youm and tours. Employee support was evident through participation once again in such community events as the United Way campaign, Adopt-A-Family, the EPA's Youth Leadership b@%F Tour, MathCounts and the Adopt-A-School Partnerships. Member relations remained a priority for SMEPA with continued publication, printing 4puman . snd sacuice support for a number of our member systems. p @g , ' jjf ' , gy;$( < g .h q. ~% W _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _ _ _ q s M, ,s;~k[., 3 I$,.a "M a! i) yyN.

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,s e/ Ih s m sw . aQ e s The year 1998 was another year of solid financial results for SMEPA. ' % gag As the electric utility industry moved toward a new regulatory structure relying ,c'W more on competition to determine prices and services, ShtEPA focused renewed efforts on keeping the wholesale rate as low as possible so that its members could . Ojf (( be more competitive. For the year the wholesale power rate to SMEPA's eleven member cooperatives averaged slightly less than 41 mills per kilowatt hour, down ' gg 'J 0.5 % from last year. The 1998 rate was the lowest since 1980. J@gp Revenues from members amounted to $306 million for 1998, up 9 % or $24 million from the previous year. Energy sales to hiembers were up 9.3% to 7.5 -f( million megawatt hours - the highest ever. Generation by SMEPA owned plants M, in 1998 set a new all-time record at 4.0 million megawatt hours. Demand billings , to members were up more than 6% with a monthly average of 1,429 megawatts an increase of 83 megawatts. All of the eleven member cooperatives had increased ]4< individual purchases of energy from SMEI%. Overall, the member cooperatives '-pg? are growing at a strong five-year compounded rate of 5.2 %. SMEPA's total revenues from all sources exceeded $300 million for the third consecutive year.

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The $2.0 million margin for 1998 was close to budget and down slightly from the $2.2 million earned last year. SMEPA's equity increased to $81.8 million and is now f }y{L 11.5 % of total assets, the highest ever. A ,jg y$$ Total debt outstanding at year end 1998 was $597 million, down $21 million pM ' ! ME from the previous year and the lowest debt balance since 1981. In recent years, SMEPA has repriced or refinanced over one half of debt outstanding, reducing the L 8"[ .. mm average interest rate on all debt to 6.3 % from 8.4 % and saving about $15 million 2.li; sw per year in interest costs. SMEPA's margin and cash flow for the year were f"gf . 'La sufficient to exceed all covenants related to outstanding debt. == SMEla invested $12 million during the year for capital improvements and { additions, down from the $19 million invested last year. New loan funds financed St.( alx)ut $3.4 million of the capital additions and internal funds of about $8 million ._(' ~ /% f' provided the difference. ! u < g. Discretionary investments amounted to $32 million at year-end 1998 compared - f to $29 million at the start. Approximately $2.3 million of secured loan funds were available for draw down at year-end. b '~~2V l 3 g %m . $k .s gj 1- _ .- _ _ ___ - YbM > 03.: w ,< . - . ..w . .v .> A ' l l 81.8 78.9 75.6 67.4 ~~ ~-~ -~~~ ~ ~ ~ ~ ~ Equities and lb l Patronage Capital ._ _ _ _ _ _ ' 1 (millions of dollars) e + '98 '97 '96 '95 '94 4'O . - . . - - - - - .

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(millions of MWH) p KEEEE_ 171_;;;{ . _. _E .E. _ . . . _ , . . ,-. z.=:g-' ~~ -- ' l '98 '97 '96 '95 '94 l l 4 4[3g _El[45.il ZZZ ' Wholesale Rate ~ to Members 40.75 .__. _40.9 9 __ _ , . _ _ _ _ . - ; (mills per KWH) .IWWW M ' '98 '97 '96 '95 '94 @fq?FNM T4ff9RF95[!

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N} F $ 9 l' _ __ x _ __ v__ = _ _ _s_ Comparative Halance Sheets and Selected Financial Ratios ($ in Thousands) ASSETS M M M M M ELECTRIC UTILITY PLANT in Service at cost $ 815,305 $ 809.115 $ 770,186 762,221 $ $ 751,518 Construction work m process 20,861 17,326 37,525 13,161 13.3 % 836,166 826,441 807,711 775,382 7M,914 Less accumulated depreciation 330.062 308,328 284,463 261,583 240.410 Net Utility Plant $ 506,104 $ 518,113 523,248 $ $ 513,799 $ $24,504 INVESTMENTS Investments in associated organizations 7,905 10,481 10,569 10M6 10,714 Debt service reserve investments 5,488 5,554 9,694 4,473 8,502 Decommissionmg trust investments 9,665 7,981 6,')87 4.311 3,474 Other investments - 3.000 1,500 15.444 Total Investments 23,058 24,016 29,350 20,930 38,134 CURRENT ASSETS Cash - general funds and cash equivalent investments 16,941 3,793 14.275 31,522 27.591 Other invested funds 11,727 13.577 20,001 32,433 11,002 Accounts Receivable - Members 24,091 23,714 24,577 23,589 20.366 Accounts Receivable - Others 1,088 4,017 1,709 1,424 1,814 Coal and other fuel inventones 11,022 14,313 10,785 11,347 10,989 Matenals arx! supphes inventories 15.h36 15,735 15,272 13,822 13,770 Other 3.603 989 1.310 1,739 1,595 Total Current Assets 84,308 86,620 77,447  !!5,876 87,127 DEFERRED CilARGES 99,455 104,013 110,812 108,438 113,268 TOTAL ASSETS $ 712,925 $ 732,762 5 740,857 759,M 3 $ $ 763,033 EQLITIES AND 1 IAftlf ITIEN EQUITIES Patronage capital $ 78,337 76,299 5 $ 74,069 $ 66,868 $ 56,686 Memberships and donated capital 535 535 535 535 535 Accumulated other comprehensive income Unrealized gain on decommissiorung trust investments 2.895 2,026 974 - 81,767 78,860 75,578 67,403 57,221 Long Term Debt (excluding current maturities) 571,672 594,152 606,840 626,735 651,518 Acerued Decommissioning Obligation 6,771 5,955 5,113 4,311 3,474 Deferred Credits and other Long-Term Liabihties 3,%2 3,991 3,879 3,714 3,473 CURRENT LIABILITIES Accounts payable 20,326 22,969 24,610 19,197 14,703 Accrued mterest 804 642 666 10.018 10,555 Other accrued expenses 1,983 1,795 1,568 1,988 1,795 Current maturities of long-term debt 25,640 24,398 22,603 25,677 20.294 48,753 49,8N 49,447 56,880 47,347 TOTAL EQUITIFS AND LIABILITIES $ 712,925 5 732,762 $ 740,857 $ 759,043 $ 763,033 RATIOS TIER 1.05 1.06 1.17 1.23 1.31 DSC 1.06 1.11 1.19 1.22 1.27 Equity as % of Assets 11.5 % 10.8 % 10.2 % 8.9% 7.5 % DEBT Long-Term Debt $ 571,672 594,152 $ 5 606,840 $ 626,735 $ 651,518 Current Maturities 25.640 24,398 22,603 25,677 20,294 TOTAL DEBT $ 597,312 $ 618,550 629,443 652,412 $ $ $ 671,812 Average Interest Rate 6 27 % 6.23 % 6 35 % 6 66 % 6.64 % 9 [ w ~ , h .. Nh  ; Y 6 -- -- r ~ f Comparative Operating Statements ($ in Thousands) 1928 1222 1926 1925 1924 OPERATING REVENUES Electric energy revenue from members 5 305,751 5 281,472 $ 291,060 $ 278,359 $ 266,971 Other electric energy revenue 7,301 19,632 13,667 14,401 16,374 Other - net 373 1,355 1,328 1,460 1,580 $ 313,425 $ 302,459 $ 306,055 $ 294,220 $ 284,925 OPERATING EXPENSES Fuel 74,885 M,940 62,809 59,770 59,904 Production 12,970 13,192 14.056 15,661 12,034 Purchased Power 132,977 132,714 131,697 119,143 106,704 Transmission 11.424 10,361 9,766 9,306 9,391 Administrative and General 3,424 3,467 5,123 5,396 4,744 Maintenance expenses: Production 9,789 7,508 5,404 5,145 7,238 Transmission 1,810 2,215 1,911 2.060 1,880 General Plant 609 656 601 581 584 Depreciation and amortization 26,449 27,720 27,188 24.803 24,293 Taxes - . 1,037 1,064 1,039 274,337 262,773 259,592 242,929 227,811 f OPERATING MARGIN BEI' ORE INTEREST AND OTilER l>EDi'CTIONS 39,088 39,686 46,463 51,291 57,114 l INTEREST AND OTilER DEDUCTIONS j Interest 40,594 41,705 44,215 45,665 46,778 l Other Deductions 54 61 85 75 69 40,648 41,766 44,300 45,740 46,847 OPERATING MARGIN (1,560) (2,080) 2,163 5,551 10.267 NONOPERATING MARGIN: Interest income 3,263 3,131 4,354 4,327 3,142 l Allowance for funds used during construction 258 1,119 619 236 224 Other 77 60 65 68 191 Total Nonoperating Margin 3,598 4,310 5,038 4,631 3,557 NET MARGIN $ 2,038 $ 2,230 $ 7,201 $ 10,182 $ 13,824 l i \j ggp @m3  %$ e< s - s - m , ' ' - -.F 1 3 .i ){ - -- . - --~ a - - Selected Financial Data a e m 1995 m Milit per KM Wholesale Rate to Members 40.75 40.99 43.36 43.71 44 M Wholesale Rate to Non-Members 26.05 29.15 30.41 27.68 25.13 Average Cost of Purchased Power 27.63 27.58 26.97 26.33 25.78 Average Cost of Fuel (per net generation) 18.72 17.54 18.38 17.85 17.66 Comparative Summary / Energy Sources and Sales 1998 1922 1996 1295 m ENERGY SOURCFS - MWil Generaml 4,000,428 3,703,426 3,417,432 3,347,874 3,391,859 Purchased 3,938,824 3,964.582 3,8M,325 3.645.356 3.355,673 TOTAL ENERGY AVAILABLE FOR SALE - MWII 7,939,252 7,668,008 7,281,757 6,993,230 6,747,532 ENERGY SALES - MWil Members Coahoma EPA 128,MS 113,455 111,778 101,366 107.630 Coast EPA 1,186,129 1,082,399 1,045,075 998,341 923,389 Delta EPA 521,834 448,519 448,928 428,443 399,291 Dixie EPA 669,078 611,153 638,819 554,745 505,377 Magnolia EPA 514,763 488.867 463,651 442,355 428,158 Prarl River EPA 717.346 631,588 603,743 571,759 503,356 Singing River EPA 1,143,285 1,067,486 1,036,248 985,226 911,066 Stuhern Pine EPA 1,584,680 1,491,970 1,474,607 1,413,464 1,389,295 Southwest Mississippi EPA 445,689 412,882 403,979 389,941 372,818 Twin County EPA 294,815 267,243 252,552 247,178 229,376 Yazoo Valley EPA 296,939 251,935 233.540 229.062 216,382 TOTAL SALES TO MEMBERS 7,503,403 6,867,497 6,712,920 6,368,144 5,979,874 Non-Members 280.252 673.562 449,450 $20.262 651,485 TOTAL SALES 7,783,655 7,541,059 7.162,370 6,888,406 6,631,359 MEMBER DEMAND - KW 1,762,216 1,646,802 1,695,672 1,553,633 1,394 243 (Non-Concurrent Peak) \

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?N U;,,, w; ,, ; - . R9. . . ' ^', y p n To the lioard of Directors of kv. South Mississippi Electric Power Association l }@[( ,  ! 1 u o - . @.g We have audited the accompanying balance sheets of South Mississippi Electric l ~ ' Power Association ("SMEPA") as of December 31,1998 and 1997, and the related [ p.q ' % ;-]C statements of revenues, expenses and comprehensive income, changes in equities .. I i 0 -. and cash flows for the years then ended. These financial statements are the $s3 } responsibility of SMEPA's management. Our responsibility is to express an opinion _3 $ q g n-y, A gf -3 on these financial statements based on our audits. , MP {Qf f We conducted our audits in accordance with generally accepted auditing standards. "' a , Those standards require that we plan and perform the audit to obtain reasonable f rid W }' T a . assurance about whether the financial statements are free of material misstatement. j Dj An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the i P N] *"

ww w Y' accounting principles used and significant estimates made by management, as well g

f as evaluating the overall financial statement presentation. We believe that our QD -- P audi:s provide a reasonable basis for our opinion. { /A - ' f3 In our opinion, such financial statements present fairly, in all material respects, the i 9 J financial position of SMEPA as of December 31,1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with Q_ % r%jM generauy accepted accounting principles. p g Mo,cett + Touche. LLP ( ngW . m1 - Eearuary s.1999 (p' O .. g gm ]et. ya l j - pi me 4 gg , , - kW %u; _ . ;a:i J ~F Fj ' r *. . . . ~ _

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South Mississippi Electric Power Association Balance Sheets (In Thousands) December 31 1228 1222 ASSETS ELECTRIC UTILITY PLANT in service - at cost S 815,305 $ 809,115 Construction work in process 20,861 17,326 836,166 826,441 Less accumulated depreciation 330,062 308,328 Net utility plant 506,104 518,113 INVESTMENTS Investments in associated organizations 7,905 10,481 Debt service reserve investments 5,488 5,554 Decommissioning trust investments 9,666 7,981 Total Investments 23,059 24,016 CURRENT ASSETS Cash - general funds and cash equivalent investments 16,941 14,275 Other invested funds 11,727 13,577 Accounts receivable: Members 24,091 23,714 Others 1,088 4,017 inventories (at average cost): Coal and other fuel 11,022 14,313 Materials and supplies 15,836 15,735 Other 3,602 989 Total Current Assets 84,307 86,620 DEFERRED CIIARGES 99,455 104,013 TOTAL ASSETS $ 712,925 $ 732,762 See " Notes to Financial Statements" (continued) gp 4Mx m y yp ;w; SrW l 'M+ j <mem N m,;ph + [  : w v hi s h,- 4 5 - - - --- a a ,- South Mississippi Electric Power Association Balance Sheets I (In Thousands) (continued) EQUITIES AND LIABILITIES I)ecember 31 1928 1222 i EQUITIES l Patronsge capital $78,337 $76,299 Memberships and donated capital 535 535 Accumulated other comprehensive income - Unrealized gain on decommissioning trust investments 2,895 2,026 81,767 78,860 LONG-TERM DEBT (excluding current maturities) 571,672 594,152 l ACCRUED DECOMMISSIONING OBLIG ATION 6,771 5,955 DEFERRED CREDITS AND OTIIER LONG-TERM LIABILITIES 3,%2 3,991 l I CURRENT LIABILITIES Accounts payable 20,326 22,969 Accrued interest 804 642 Other accrued expenses 1,983 1,795 Current maturities oflong-term debt 25,640 24,398 48,753 49,804 l \ l l COMMITMENTS AND CONTINGENCIES (Notes 4 and 14) l l I l l TOTAL EQUITIES AND LIABILITIES $712,925 $732,762 1 rs,, \ L-- -- -- - --- - - - - - - - - - - - - - - - - - - - - - - - - - - _ - _ o beyMf??$$G5W Y Y IY N v, ' """ Q - r _ q'. < '^ - -- r--a--=, u , South Mississippi Electric Power Association Statements of Revenues, Expenses and Comprehensive Income (In Thousands) Years Ended December 31 1228 122I ~ OPERATING REVENUES Electric energy revenue from members $ 305,751 $ 281,472 Other electric energy revenue 7,301 19,632 Other - net 373 1,355 313,425 302,459 OPERATING EXPENSES Fuel 74,885 64,940 Production 12,970 13,192 Purchased Power 132,977 132,714 Transmission i1,424 10,36i Administrative and general 3,424 3,467 Maintenance expenses: Production 9,789 7,508 Transmission 1,810 2,215 General 609 656 Depreciation and amortization 26,449 27,720 274,337 262,773 OPERATING hlARGIN HEFORE INTEREST AND OTIIER DEDUCTIONS 39,088 39,686 INTEREST AND OTilER DEDUCTIONS Interest 40,594 41,705 Other deductions 54 61 40,648 41,766 OPERATING h!ARGIN (1,560) (2,080) NONOPERATING AIARGIN: Interest income 3,263 3,131 Allowance for funds used during construction 258 1,119 Other 77 60 Total Nonoperating Atargin 3,598 4,310 t NET 51ARGIN 2,038 2,230 l Other comprehensive income- Change in unrealized gain on decommissioning trust investments 869 1,052 COhtPREIIENSIVE INCON1E $ 2,907 3,282 i See " Notes to Financial Statements" 9 jf h'lhAq? 7 . g-. ~ , . - -- < m :; f ' - . 4.. , - - 4 -i . oe -, ,,).. -. -- .---. f v .f -= u- I -- South Mississippi Electric Power Association Statements of Changes in Equities Years Ended December 31,1998 and 1997 (In Thousands) Memberships Comprehensise Patronage and Accumulated Other Income Capital Donated Capital Comprehensive Income Total BALANCE AT JANUARY 1,1997 $74,069 $535 $974 $75,578 COhlPREllENSIVE INC05tE Net Margin $2.230 2,230 2,230 Change in unrealized rain on decommissioning trust investments 1.052 1.052 1.052 Conprehensive income $3,282 BALANCE AT DECEhlBER 31,1997 76,299 535 2,026 78,860 COhlPREIIENSIVE INCO%tE Net Margin $2,038 2,038 2.038 Change in unrealized gain on , 869 869 l decommissionmg trust investments 869 Comprehensive income $2,907 BALANCE AT DECEhlBER 31,1998 $78,337 $535 $2,895 $81,767 i See " Notes to Financial Statements" I l r - v hh N f  :-  ; kff ' .. -~ ~ . .. . . .. .. . _. _ _ , ___~__- n _w_ ___ South Mississippi Electric Power Association Statements of Cash Flows (In Thousands) Years Ended Dectmber 31 12211 1221 CASII FLOWS FROM OPERATING ACTIVITIES Net Margin 2,038 $ $ 2,230 Adjustments necessary to reconcile net margin to net cash provided by operating activities: Depreciation, amortization, and depletion 30,613 31,977 Allowance for funds used during construction (258) (1,119) Decrease (increase) in accounts receivable 2,552 (1,445) Decrease (increase) in inventories 3,190 (3,991) (Increase) decrease in other assets (125) 321 Decrease in accounts payable and other liabilities (2,484) (1,302) Increase (decrease) in accrued interest payable 162 (24) Nuclear outage maintenance costs (2,273) (72) Increase in accrued decommissioning payable 816 842 Net Cash Provided by Operating Activities 34,231 27,417 CASII FLOWS FROM INVESTING ACTIVITIES Construction and acquisitions of electric utility plant (11,681) (18,596) Proceeds (cost) of retirements of electric utility plant (net) 159 (263) Purchase of available for sale recurities (1,869) (1,429) Sale of available for sale securities 1,053 587 Investment in associated organizations 86 88 Maturities of held to maturity securities 14,652 24,291 Purchase of held to maturity securities (12,734) (10,727) Net Cash Used in Investing Activities (10,334) (6,049) CASil FLOWS litOM FINANCING ACTIVITIES Principal payments on long-term debt (24,634) (23,098) Proceeds from long-term borrowings 3,403 12,212 Net Cash Used in Financing Activities (21.231) (10,886) NET INCREASE IN CASII AND CASil EQUIVALENTS 2,666 10,482 CASil AND CASil EQUIVALENTS AT BEGINNING OF YEAR 14,275 3,793 CASil AND CASII EQUIVALENTS AT END OF YEAR $ 16,941 $ 14,275 See " Notes to Financial Statements" 9 ff?$$??[hN???

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l South Mississippi Electric Power Association Notes to Financial Statements Years Ended December 31,1998 and 1997 NOTE 1 -

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES South Mississippi Electric Power Association ("SMEPA") is a member-owned, not-for profit electric generation and transmission cooperative supplying wholesale electricity and other services to eleven member systems which, in turn, provide retail electric service to approximately 300,000 consumers in certain areas of Mississippi. Financing assistance is provided by the United States Department of Agriculture, Rural Utilities Service ("RUS"). In addition to being subject to regulation by its own governing board of directors, SMEPA is subject to certain rules and regulations promulgated for rural electric borrowers by RUS. SMEPA maintains its accounting records in accordance with the Federal Energy Regulatory Commission's ("FERC") Chart of Accounts as modi 6ed and adopted by RUS. The preparation of fmancial statements in conformity with generally accepted accounting principles requires i

management to make estimates and assumptions that affect the reported amounts of assets and liabilities I

and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As a regulated utility, the methods of allocating costs and revenue to time periods may differ from those principles generally applied to nonregulated companies.

SMEPA owns a 10% undivided interest in a nuclear generating plant known as Grand Gulf Unit I (" Grand Gulf"). System Energy Resources, Inc. (" System Energy"), a subsidiary of Entergy Corporation

("Entergy") owns the remaining 90% either outright or through leasehold interests. Entergy Operations, also a subsidiary of Entergy, operates the plant along with other nuclear plants ow ned by Entergy ,.'bject to owner oversight. Grand Gulf commenced commercial operation on July 1,1985.

The more signi6 cant accounting policies are generally described as follows:

a. Electric Utility Plant and Depreciation Electric utility plant is stated at cost, which includes contract work, materials and direct labor, allowance for funds used during construction, and allocable overhead costs. The cost of electric generating stations and related facilities also includes costs of training and production incurred, less revenue carned, prior to the date of commercial operation.

Depreciation is provided by the straight-line method for utility plant at the following annual composite rates:

Nuclear generation plant 2.8m l

l Non-nuclear generation plant 3.00% to 3.10%

Transmission plant 2.75 %

General plant and transportation equipment 2.00% to 25.00%

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At the time units of electric utility plant are retired, their original cost and cost of removal, less l

net salvage value, are charged to accumulated depreciation. Replacements of electric utility plant involving less than a designated unit value of property are charged to maintenance expense. At each balance sheet date SMEPA evaluates the recoverabi'lity of long lived assets based upon expectations of nondiscounted cash flows and operating income.

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b. Cost of Decommissioning Nuclear Plant )

SMEPA's portion of the estimated decommissioning cost of Grand Gulf is charged to operating i expenses over the service life of approximately 35 years.

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c. Allowance for Funds Used During Construction i

Allowance for funds used during construction represents an allowance based on the average cost of appropriate borrowings when general funds are used to fund construction. The allowance is capitalized as a component of the cost of electric plants and related facilities while it is under construction.

d. Investment Securities Debt service investments, other investments and other invested funds are categorized as held to maturity and are carried on the balance sheet at amortized cost. SMEPA has the intent and ability to hold these securities until their estimated maturities, but may sell them under certain circumstances.

Decommissioning trust investments are categorized as available for sale and are carried on the balance sheet at fair value with changes in the unrealized fair value of such securities being accounted for as changes in other comprehensive income.

Premiums and discounts are amortized and accreted to operations using the level yield method, adjusted for prepayments as applicable.

e. Deferred Charges SMEPA was a 10% owner in a second unit at the Grand Gulf site when construction was terminated in 1989. With the approval of the RUS, SMEPA is amortizing its remaining investment over a 27-year period ending in 2016.

As a condition of repricing transactions for outstanding debt in recent years so as to significantly reduce annual interest expenses SMEPA paid penalties of varying amounts which are accounted for as deferred charges to be amortized over the remaining life of the debt.

Bond issue costs are being amortized by the straight-line method, which does not differ materially from the interest method, over the term of the related debt. The amortization during the period of construction is capitalized.

Nuclear outage maintenance costs represent SMEPA's ten percent share of Grand Gulf's incremental maintenance costs associated with refueling outages. These costs are recorded as deferred charges when incurred and are amortized by the straight-line method over the eighteen months between outages.

f. Patronage Capital The bylaws of SMEPA provide that any excess of revenue over expenses and accumulated prior year deficits shall be treated as advances of capital by the member patrons and credited to them on the basis of their patronage.

g. Income Taxes SMEPA is exempt from United States income taxes pursuant to Section 501(c)(12) of the Internal Revenue Code, which requires that at least 85% of SMEPA's gross income be derived from its members.

h. Cash and Cash Equivalents For purposes of reporting cash flows, all temporary investments with original maturities of three months or less are deemed to be cash equivalents.

i. Reclassifications Certain reclassifications have been made to the 1997 financial statements to conform to the 1998 method of presentation.

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NOTE 2 - ACCOUNTING CilANGES Depreciation Rate for Grand Gulf Eifective January 1,1998 CMEPt. reverted to a 2.85% depreciation rate for Grand Gulf. For 1996 and 1997, SMEPA used a proposed 3.33% rate which was subject to final approval actions by regulators including FERC for System Energy and RUS for SMEPA. FERC approval for System Energy is still pending and recent federal court action may cause continued uncertainty about the rate to be used for .tecounting and rate purposes. RUS regulations generally require SMEPA to use the same rate as System Energy, the majority co-owner, unless RUS has approved differently. RUS has been advised by SMEPA that the previously approved 2.85% tate will be used until these uncertainties have been cleared up. The effect of this change in estimate was an increase in net margin of $1,932,000 for 1998.

Comprehensive income Effective January 1,1998, SMEPA adopted the provisions of Statement of Financial Accounting Standards ("SFAS 130"), " Reporting Comprehensive income" As a result, amounts previously included in equity for unrealized gains on decommissioning trust investments have been reclassified for 1997 and 1998 as other comprehensive income in the accompanying financial statements.

Pensions and Other Postretirement Benefits On January 1,1998, SMEPA also adopted SFAS 132 " Employers' Disclosures about Pensions and Other Postretirement Benefits" SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits and permits reduced disclosures for non-public entities. As a non-public entity, the adoption of SFAS 132 resulted in certain additional disclosures (nee note 13) but had no effect on the financial position, results or operations or liquidity of SMEPA.

Accounting Standard To Be Adopted in The Future SMEPA has not completed the process of evaluating the impact that will result from adopting SFAS No.133 " Accounting for Derivative Instruments and liedging Activities". SMEPA is therefore unable to disclose the impact that adopting SFAS 133 will have on its financial position and results of operatior;s w hen such statement is adopted in the year ended December 31,2000.

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

Cost Accumulated Depreciation 1998 1997 1998 1997 Grand Gulf $402,395 $402,395 $136,039 $124,602 Morrow Steam 189,789 189,344 109,038 104,337 Moselle Steam 23,903 23,861 18,870 18,137 Moselle Gas Turbine 21,659 21,659 997 348 Benndale/Paulding Gas Turbines 3.844 3.844 3.122 3.007 Total Generating Plant 641,590 641,103 268,066 250,431 Transmission Plant 131,619 126.223 38,242 35,236 l General Plant and Equipment 16,941 16,634 10,797 10,425 Electric Plant Leased to Others 25.155 25.155 12.885 12.208 l

173,715 168,012 61,924 57,869 Electric Plant in Service 815,305 809,115 329,990 303,300 Construction Work in Process 20.861 17.326 72 28 Total Utility Plant $836.166 $826.441 $330.062 $308.328 I

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NOTE 4 - COMMITMENTS REG ARDING GRAND GULF SMEPA and System Entergy are parties to a joint ownership contract that sets forth the rights and obligations of the Grand Gulf owners and SMEPA is generally obligated to pay 10% of all operating and capital costs and is entitled to receive 10% of the electricity generated by the plant. SMEPA paid

$19,046,000 and $18,490,000 under the contract in 1998 and 1997, respectively. Ownership of nuclear capacity entails risks and uncertainties somewhat more complex than those for non-nuclear capacity and these are discussed below.

Nuclear Insurance and Assessments As the 90% majority co-owner of Grand Gulf, System Energy is responsible for arranging appropriate insurance and industry assessment programs for itself and SMEPA. SMEPA is obligated to pay 10% of all appropriate costs and assessments, if any. Under the incident assessment program, SMEPA could be assessed up to approximately $8 million for each nuclear incident involving licensed reactors payable at a rate of $1 million per reactor per incident per year.

The property insurance presently arranged by System Energy exceeds the NRC's minimum requirement for nuclear power plant licensees of $ 1.06 billion per site. NRC regulations provide that the proceeds of this insurance must be used, first, to place and maintain the reactor in a safe and stable condition and, second, to complete decontamination operations. Only after proceeds are dedicated for such use and regt.latory approval is secured would any remaining proceeds be made available for the benefit of plant owners or their creditors. Under a member assessment program, SMEPA could be assessed approximately $2 million for property damage, decontamination or premature decommissioning expense involving other members' nuclear generation plants.

Nuclear Fuel System Energy contracts with System Fuels Inc., another Entergy subsidiary company, for nuclear fuel for Grand Gulf, including maintaining inventories. System Energy has a nuclear fuel lease arrangement for up to $80 million with respect to Grand Gulf. SMEPA pays for nuclear fuel as it is consumed and such payments include appropriate charges for processing, fabrication, storage, inventory, shipment and handling.

Spent Nuclear Fuel System Energy and SMEPA provide for estimated future disposal costs for spent nuclear fuel in accordance with the Nuclear Waste Policy Act of 1982. System Energy entered into contracts with the Department of Energy (" DOE"), whereby the DOE will furnish disposal service at a cost of one mill per net KWh generated and sold. The fees payable to the DOE may be adjusted in the future to assure full recovery. Delays have occurred in the DOE's program for the acceptance and disposal of spent nuclear fuel at a permanent repository. The DOE has asserted that it does not have a legal obligation to accept spent nuclear fuel without an operational repository for which it has not yet arranged. Current on-site spent fuel storage capacity at Grand Gulfis estimated to be sufficient until 2004. The iuitial cost of providing any additional on-site spent fuel storage capability required at Grand Gulf is expected to be approximately $5 million to $10 million. In addition, about $3 million to $5 million will be required every four to five years subsequent to 2004 until the DOE's repository begins accepting spent fuel. SMEPA will be responsible for paying 10% of whatever costs are necessary.

Decommissioning Costs The total cost to decommission Grand Gulf has been estimated to be approximately $407 million (based on a 1994 cost study using 1993 dollars.) SMEPA is responsible for 10% of the estimated cost and has submitted a formal plan to the NRC that demonstrated assurance that sufficient financial resources would be available at the time it becomes necessary to decommission. In addition, SMEPA received approval from the Internal Revenue Service to l

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SMEPA estimates, based on a revised calculation, that the funding requirement will approximate

$571,000 annually through 2022. The estimated funding requirement will continue to be recalculated and adjusted periodically. In the current year funding was limited to $143,000, due to above average market returns.

The amounts recovered in rates are deposited in trust funds and reported at market value as quoted on nationally traded markets. Trust fund earnings remain in the trust and are recorded by SMEPA as income with a corresponding decommissioning expense. The amortized cost of these trust fund assets, which are carried at fair value, offset the accumulated decommissioning liability as set forth separately on the Balance Sheet. Unrealized gains or losses on trust fund investments are reported as a separate equity item.

The Energy Policy Act of 1992 has a provision that assesses nuclear utilities with fees for the decontamination and decommissioning of the DOE's past uranium enrichment operations. The decontamination and decommissioning assessments will last for fifteen years and will be used to set up a fund into which contributions from utilities and the federal government will be placed.

SMEPA's aggregate liability is estimated at $2,000,000 and is being paid over the fifteen year term.

Depreciation Rate The depreciation rate for Grand Gulf was tentatively increased to 3.33% for 1996 and 1997 pending action by regulators for the co-owners, System Energy and SMEPA. Prior to 1996 and after 1997, SMEPA recorded depreciation charges using a previously approved 2.85% straight-line rate. Because SMEPA is a minority co-owner in Grand Gulf, RUS regulations generally require it to use the same rate as that used by the majority co-owner unless RUS has approved a different rate. At this time, however, the proposed rate being used by System Energy has not received final regulatory approval and SMEPA is using the previously approved 2.85% rate which had been used by both co-owners since commercial operation of the plant in 1986 except for the changes noted herein. As of the end of 1997 and 1998 the accumulated depreciation account includes $3,966,000 in depreciation charges related to the Ngher rate. Management believes that the impact, if any, of final action by regulators on this matter will be accounted for prospectively and will not have a material effect on the financial statements.

NOTE 5 -INVESTMENTS IN ASSOCIATED ORG ANIZATIONS Investment in associeted organizations are stated at cost and consisted of the following (in thousands): l l

1998 1997 National Rural Utilities Cooperative Finance Corporation ("CFC") Certificates: ,

Membership subscription $6,223 $6,223 l Loan and guarantee 1,350 3,913  !

Other 332 345

$7.905 $ 10.48 i

! CFC membership subscription certificates bear interest at a 5.0% rate and mature in 2070 through 2080. The loan and guarantee certificates bear interest at rates of 3.0% and 5.8% and mature in 2007.

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

Gross Gross '

December 31,1998 Amortized Unrealized Unrealized Fair Cost Gains Losses Value Decommissioning Trust:

Equity mutual funds $2,126 $2,702 $0 $4,828 Fixed income mutual funds 4.645 193 4.838

$6.771 $2.895 $0 $9.666 Securities to be lleld to Maturity:

CFC and CoBank obligations $7,750 $74 $0 $7,824 U.S. Government securities 1,975 89 2,064 U.S. Government agencies 2,002 41 2,043 Obligations of states and political subdivisions 4,481 302 4,783 Unapplied debt prepayments 1.007 1.007

$l_7.2L$ $506 $0 $ 17.721 December 31,1997 Decommissioning Trust:

Equity mutual funds $2,180 $ 1,950 $0 $4,130 Fixed income mutual funds 3.775 76 3.851 15.955 $2.026 $0 $7.981 Securities to be Held to Maturity:

CFC and CoBank obligations $8,600 $113 $0 $8,713 U.S. Government securities 3,000 141 3,141 U.S. Government agencies 1,977 4 1,981 Obligations of states and political subdivisions 4,478 362 4,840 Unapplied debt prepayments 1.076 1.076

$ 19.131 $620 $0 $ 19.751 The amortized cost and approximate fair value of investment securities to be held to maturity at December 31,1998, by contractual maturity, were as follows (in thousands):

Amortized Fair Cost Value Due in one year or less $ 11,727 $11,931 Due in one to five years 2,996 3,251 Due after five years through ten years 190 190 Due after ten years 1,295 1,342 Unapplied debt prepayments 1.007 LOR

$J 7.215 $ 17.721 Actual maturities may differ from contractual maturities because of the borrowers' right to call or prepay obligations.

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NOTE 7 - DEFERRED CllARG ES I The following is a summary of amounts recorded as deferred charges (in thousands):

1998 1997 l Unamortized cost of abandoned plant $66,297 $69,345 l Unamortized penalties on repriced debt 29,204 31,078 Unamortized debt discount and issuance cost 966 1,044 Past service retirement benefit cost 140 210 Nuclear outage maintenance cost 1,405 791 l l Deferred decontamination and decommissioning of past uranium enrichment operations 1.443 1.545

$99.455 $104.013 Plans for constructing a second unit at the Grand Gulf site were terminated in 1989. SMEPA was to have been a 10% owner in the second unit and had invested approximately $104 million, net of I recoveries and transfers. With the approval of the RUS, SMEPA is amortizing its remaining investment over a 27 year period ending in 2016, and amortization was $3,048.000 and $2,971,000 in 1998 and 1997, respectively.

SMEPA has' repriced or refinanced over one-half of outstanding debt in recent years so as to significantly reduce annual interest expenses. As a condition of the transactions, SMEPA paid penalties of varying amounts which are treated as deferred charges to be amortized over the remaining life of the debt. Amortization of all such penalties was $1.875,000 in 1998 and $1,879,000 in 1997.

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

1998 1997 Cumulative margins $84,191 $82,153 Less: Retirements to date 5.854 5.854

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$7_6.299 Under the provisions of debt covenants, until the patronage capital equals or exceeds forty percent of l

the total assets of SMEPA, the return to patrons of contributed capital is generally limited to twenty.

l five percent of the patronage capital or margins received by SMEPA in the prior calendar year. The patronage capital of SMEPA represents 11.1% and 10.8% of the total assets at December 31,1998 and j 1997, respectively.

1 NOTE 9-SIIORT-TERM BORROWINGS SMEPA has a $25,000,000 short-term line of credit available with CFC which expires in September, 1999 and a $5,000,000 short-term line of credit with a bank which expires in July,1999. At December 31,1998 and 1997, SMEPA had no borrowings against these lines of credit.

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NOTE 10- LONG-TERM DEBT Long-term debt consisted of the following (in thousands): 1998 1997 Mortgage notes payable to Federal Financing Bank ("FFB")

at interest rates varying from 4.935% to 10.705%, due in quarterly installments through 2020 $481,678 $498,197 2% RUS mortgage notes payable, due in quarterly installments through 2009 13,295 15,332 5% RUS mortpge notes payable, due in quarterly installments tl rough 2015 14,842 15,694 5%,5.375%,5.125s' and 5.75% RUS mortgage notes payable, due in monthly installments through 2020 16,540 15,289 Mortgage notes payable to National Bank for Cooperatives at 6.49% interest rate due il quarterly installments through 2019 2,352 2,467 Mortgage notes payable to CFC bearing interest at variable rates (6.00% at December 31,1998) due in quarterly installments through 2022 4,723 4,808 Lamar County, Mississippi, Pollution Control Bonds:

1978 A Series,6.125%, due semi-annually through 2008 1,475 1,585 1978 A-1 Series,6.25%, due semi annually through 2008 535 575 1993 S Series,4.15% to 4.95%, due annually through 2007 19,472 2l,203 Claiborne County, Mississippi, Pollution Control Bonds:

1985 G Series, variable interest rates (3.00% to 3.60%

at December 31,1998) due annually through 2015 42.400 43.400

$597,312 $618,550 Less current maturities 25.640 24.398

$571.672 $594,I 52 Substantially all assets of SMEPA are pledged as collateral on long-term debt.

Approximate annual maturities (scheduled periodic principal payments) of long-tenn debt for the next five years are as follows (in thousands):

1999 $25,640 2000 $27,065 2001 $28,638 2002 $30,067 2003 $31,535 l SMEPA paid approximately $38,557,000 and $39,802,000 in 1998 and 1997, respectively, in interest l on long-term debt.

SMEPA is required by mortgage covenants to maintain certain financial ratios ofinterest coverage and annual debt service coverage. SMEPA was in compliance with such requirements at December 31, 1998 and 1997.

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1998 1997 l Postretirement benefit obligation (other than pensions) $2,863 $2,755 Deferred decontamination and decommissioning of past uranium enrichment operations 1.099 1.236 j

$3.962 $ 3.991 l

NOTE 12 - FAIR VALUES OF FIN ANCI AL INSTRUMENTS The following methods and assumptions were used by SMEPA in estimating its fair salue disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reponed in the balance sheets for cash and cash equivalents approximates fair value.

Other invested funds: The carrying amount reported in the balance sheets for other invested funds approximates fair value.

Investment securities: The fair values for debt and equity securities are based on quoted market prices when available and the present value of future cash flows discounted at a commensurate market rate.

Medium-term CFC obligations have been estimated based upon published terms of recent issues of comparable instruments since quoted market prices are not available. See Note 6 for additional information.

Investments in associated organizations: He fair value of investments in associated organizations is not estimable since these instruments must be held by SMEPA and can only be returned to CFC. CFC requires SMEPA to hold these investments as a condition of CFC financing.

Long-term debt: The fair values of SMEPA's long-term debt are estimated using discounted cash flow analyses based on SMEPA's current incremental borrowing rates for similar types of borrowing arrangements and rates which would be charged by the applicable issuer where appropriate.

The carrying amounts and approximate fair values oflong-term debt are as follows (in thousands):

1998 1997 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Long-term debt, ir.cluding current maturities:

FFB $481,678 $550,564 $498,197 $547,786 RUS 44,677 44,001 46,315 44,317 Pollution Control Bonds 63,882 64,637 66,763 67,407 Other 7.075 7.075 7.275 7.275

$597.312 $666.277 L618.550 $666.785 There was no material difference between the contract or notional amount and the estimated fair value of loan commitments.

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NOTE 13 - EMPLOYEE BENEFITS SMEPA sponsors a defined benefit plan that provides certain health insurance benefits to retired employees and their eligible dependents and also provides life insurance benefits to a closed group of seven employees who retired prior to January 1,1990. The estimated costs of these benefits are accrued over the years that the employees render service. The approximate periodic expense fer postretirement benefits other than pensions included the following components (in thousands):

1998 1997 Service cost of benefits earned $ 75 $ 174 Interest cost on accumulated benefit obligation 124 114 Amonization of actuarial gain (36) (36)

Total current year expense $163 $252 Payments relating to postretirement benefits other than pensions were $55,000 in 1998. No payments were made in 1997 The Accumulated Postretirement Benefit Obligation ("APBO") is accrued as an unfunded long-term liability and is comprised of the following (in thousands):

1998 1997 Retirees and dependents $636 5657 Fully eligible active plan participants 32 29 Active participants not yet eligible 1,418 1,256 Unrecognized gain 777 813

$2.863 $2.755 The weighted average discount rate used in determining the APBO was 7.0 percent. The assumed health care cost trend rate of increase used in measuring the APBO was 9.0 and 9.5 percent in 1998 and 1997, respectively, declining to five percent by the year 2005. For measurement purposes an 8.5% annual rate ofincrease in cost of covered health care benefits was assumed for 1999.

The health care cost trend rate of increase assumption has a significant effect on the APRO and periodic expense. A one percent increase in the trend rate for health care costs would have increased the APBO by approximately 9.3% and service and interest costs by approximately 10%.

Substantially all of SMEPA's employees participate in the National Rural Electric Cooperative Association ("NRECA") retirement programs, w hich include both a defined benefit pension plan and a defined contribution pension plan. Both plans are qualified under Section 401 and are tax-exempt under Section 501(a) of the Internal Revenue Code. In this multiemployer plan, which is available to all member cooperatives of NRECA, the accumulated benefits and plan assets are not determined or allocated separately by individual employer. SMEPA paid $701,030 in pension expense for the defined benefit pension plan in 1998 and $527,200 in 1997. SMEPA makes monthly payments to NRECA for the benefit of those employees who voluntarily participate in the defined contribution pension plan. SMEPA expenses the payments as they are accrued and such expense amounted to

$342,840 and $337,400 for 1998 and 1997. respectively.

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NOTE 14 - COMMITMENTS AND CONTINGENCIES Contract commitments for coal and coal transportation and for gas and purchased power are as follows (in thousands):

Coal and Coal Transportation Gas and Purchased Power 1999 $37,380 $41,631 2000 28,749 39,517 2001 27,023 41,218 2002 27,023 24,593 2003 4,504 24,918 2004 and thereafter 224.440

$124.679 $396.317 Contract cost estimates are based on current or contractual prices which include infiation and escalation clauses.

SMEPA has construction commitments totaling approximately $2,306,000.

SMEPA is a defendant in certain litigation incurred in the normal course of business. Management, based on advice oflegal counsel, is of the opinion that the ultimate resolution of the litigation will not have a material adverse effect on SMEPA's financial statements.

Competition In July 1997 the Mississippi Public Service Commission ("MPSC") issued an order directing the Mississippi Public Utilities Staff to submit a report outlining a plan for restructuring the electric utility industry in Mississippi. On November 3,1997, the Mississippi Public Utilities Staff submitted to the MPSC a proposed transition plan for retail competition in the electric industry in Mississippi. On June 17,1998, the MPSC issued a revision of the proposed transition plan. The plan includes an implementation schedule in which retail competition would begin on January 1, 2001. The plan assumes the passage of necessary enabling legislation in 2000. The plan also provides for a transition period, from January 1, 2001, through December 31, 2004, for the recovery of any allowed stranded costs through a non-bypassable charge or other appropriate alternative. l SMEPA is not currently subject to rate regulation by the MPSC and may not be involved in implementing the transition plan for retail competition. The same is true for SMEPA's members.

The proposed plan provides that electric power associations have the choice of participating in retail competition; therefore, SMEPA and its members are monitoring and participating in the hearings so as to protect the long-term interests of retail customers. Management is unable to determine what effect, if any, changes related to retail competition in Mississippi will have on SMEPA's financial statements.

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