ML20206S115
| ML20206S115 | |
| Person / Time | |
|---|---|
| Site: | Grand Gulf, Arkansas Nuclear, Waterford, 05000000 |
| Issue date: | 12/31/1986 |
| From: | Lupberger D MIDDLE SOUTH UTILITIES, INC. |
| To: | |
| Shared Package | |
| ML20206R980 | List: |
| References | |
| NUDOCS 8704220337 | |
| Download: ML20206S115 (52) | |
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1 Chairman's Letter L ~) takes precedence over state jurisdiction beginning on page 27, and to Note 8, esternal financing remains a factor to in this issue. We are seeking a rehearing Commitments and Contingencies, be reckoned with, our requirements and stay by the hiissinippi Supreme beginning on page Jo. have become much more manageabic. Court. Should this prove unsuccessful, The renewed confidence in the htSU we will immediately seek review by the Other obstacles resolved System was due in large measure to the U.S. Supreme Court and request a stay hiany of the other financial and regula. impicmentation of phase in rate plans (which cannot be assured) to keep the tory dilemmas that threatened the during late 1985 and early 1986 for rates now in effect in place. Company as we began 1986 were the recovery of costs associated with in the long run, seeking review by the resolved or their magnitude lessened, thc commercial operation of Grand U.S. Supreme Court may be the best In my 1985 Letter to Stockholders Gulf 1 and Waterford 3. way to decisively resolve the jurisdic- I listed the major obstacles to bliddle With the new rates in effect, the tional question and the prudence issue, South's return to financial stability: Company's total operating revenues for once and for all. approval of rates sufficient for NOPSI 1986 increased by 8 percent, to 53.5 Prudence investigations, reviews to meet its Grand Gulf 1 power costs billion. Our earnings per share of focusing on a utility's decision to build had yet to be granted; the esternal $2.21,20 cents higher than 1985's 52.01, a new plant or buy power from one, financings needed to gradually phase resulted from 1986 consolidated net have occupied two of our other operating in the rates related to new generating income of $151 million, compared with companies: Louisiana i ower & Light units had yet to be arranged, as had 1985's 5101 million. (LP&L)and New Orleans Pubhc Service the refinancing of Middle South While having the rate plans in place Inc. (NOPSI). The review of NOPSI, Energy's (now System Energy has given us a sturdier foundation from being directed by the New Orleans City Resources, Inc.-SERI) slicable bank which to launch our recovery, these Council, is continuing. loans; the future status and regulatory plans also produced a financial recovery Findings were favorable to LP&L in treatment of Grand Gulf 2 was race considerably slower than we the investigation ordered by the Louisiana unknown; and a proposed change in would like, htoreover, the rate structures Public Service Commiuion (LPSC), accounting standards threatened the provided by cert,Cn of the operating Theodore ILitry & Anociates, a national equity and earnings positions of certain subsidiaries' rate ps n,in addition to that consulting firm employed by the LPSC, of our companies. Now, a year later, of A1P&L, are the suticct of continuing roncluded in an October 1986 report I can report that all of these obstacles regulatory proceedings and challenges that: LP&L's decision to build are being addrened, and some have (see Mi DA, pages 14 and 15). Waterford 3 was reasonable and the been resolved to our satisfaction. On another front, two potentially nuclear option justified; no more than Certain of these issues remain as disruptive inues mentioned in my letter 1113 million of the total Waterford 3 obstacles, but we believe none pose last year, the change in accounting construction cost could be clawified as as algnificant a threat. standards for financial reporting by imprudently incurred; and Grand Gulf For instance,in the case of SERI's regulated companics and provisions of was a reasonable alternative to meet bank loans, we successfully completed the new federal las law, have turned projected LP&L system demand, the largest single first mortgage bond out to be manageable, While we disagree with the study's financing in electric utility history- Two judicial decisions in early 1987 conclusion ihat $1-13 million was $750 milhon-and reduced our esposure reflected f urther positive developments. Imprudently spent, this amount is len to floating interest rates by replacing A federal appeals court on January 6 than the $284 million permanent di$. much of the bank debt with first af firmed the FLRC's juriuliction in the allowance agreed to by LP&L in its mortgage bonds. In fact, our financing allocation of Grand Gulf I costs among November 1985 rate settlement agnement and refinancing efforts in 1986, driven the System operating companics. On with the ! PSC, meaning that we by the opportunity to participate in a January 12, a U.S. District Court in New anticipate no additional dnallowance. more f avorable capital market, generated Oricans inued a judgment thsmining a Iintend to give you an updated report more money-over $2 billion-Ihan in civil suit alleging, among other things, on this entire jurinhctional and any year in our history. And, signif t- that certain parties including Middle prudente luue by the time of the cantly, almost all of the capital was South Utilities violated Securities and Company's Annual htecting in Atay. used to refinance culsting indebtednen, Exchange Commlulon disclosure for a more detailed report of financial meaning that current capital needs were requirements. , and regulatory developments, you may for the most part funded by internal Although both decisions are being want to refer to the Management's sources rather than through reliance appealed, we are encouraged that our Financial Discuulon and Analysis on external borrowing. position was supported by the courts. (MI DAl section beginning on page 14, The cf fcct of 1986's financing More recently, the ! PSC granted to Note 2, Rate and i egulatory Matters, program is that, while our need for LP&L a rate order entitling it to a 2 l
- $76 million rate increase and the right of our total fuel requirements. This fuel industry wide standards and the
! to retain $386 million received in an fle,6ibility enhances our competitive competitive forces that continue to earlier setelement of a contract dispute position, particularly in fluctuating fuel develop and influence our business plan. with a gas supplier. The phaw in plan price and supply situations. In conclusion, I want to emphasize l l for Waterford 3 costs previously that bliddle South's lloard of Directors l contemplated by the LPSC's November rocus turned on region is steadfast in its commitment to rein-1985 interim rate order was replaced Early in 1986 we also began imple, state a common stock dividend. This l with a permanent rate structure that menting a comprehensive program to remains the lloard's number one priority. l permits current cash receipt of Water- increase the economic and educational Uncertainties, such as the decision by l ford 3 costs, although the net offcct may opportunities in the Aliddle South the hiississippi Supreme Court, make mean lower returns on investment than region. We looked hard at our region- the lloard's deliberations most dif ficult. were earlier granted to Li%L. Its problems, benefits, and potential- in view of this and other obstacles that Additionally, intervenors in the pro- and began working in coordmation with remain, we cannot now realistically set credings have filed a motion for rehearinH our operating companies, civic organi, a target date for reinstatement, with the LPSC and asked for a stay of zations, government agencies, and We are striving to remove more of the order pendmg an LPSC decision to community leaders toward a common the uncertainties that confront us. At grant or deny the motion. We are goal of making the region a better place the same time, the Company's recovery working toward a final resolution in must continue until a position of in which to work and live. (See the this matter that wdl be acceptable to Economic Development section financial health is reached where a all parties, beg nning on page S.) What we're setback can be handled without placing trying to achieve is a better educated a dividend, however small, in jeopardy ! Options preserved workforce, a more diversified economy, I cagerly look forward to the day I can l{cgarding another matter discuwed last and a skilled entrepreneurial clan that announce that we have arrived at this year, we decided in 1980 that the can make a lasting, meaningful contri. point. wisest thing we could do regarding the bution to the Aliddle South's economic Sincerely, partiallycompleteGrandGulf 2 nuclear and cultural baw. We believe our unit was to preserve our options fer the efforts, and thow of others who share future. Following a year's review, we a similar commitment, will succeed and ^7 --' determined in December that a decision the wide spectrum of programs begun Edwin Lupberger to abandon or resume construction of will stimulate businen and economic Chairman and I resident the unit would be premature. Con- activity in the region, with an ultimate h1 arch 16,1987 sidering the uncertaintics of the energy benefit to our Company and our marketplace, we resolved to continue stockholders, suspension of Grand Gulf 2 construction As we work to t timulate change for for up to three years. 'The continued the better esternally, we are doing the suspension of Ctand Gulf 2 affords us same internally. We are acutely aware the opportuni y to make a more informed that our mar ket place is being reordered. decision at a later date, and is, in our Competition is becoming a force view. the option that best serves both affecting our marketing program, and bliddle South's stockholders and we are respo iding. customers. On a broader base, we have developed long term programs began to pay ofI a management structure that positions in 1986, as well. With Grand Gull 1 us to respond cf fcc tively and uniformly and Waterford 3 tn commercial operation, on high impact twucs af fccting System-our fuel diversification efforts, which wide policy. Al ile same time, we are began in the late 140s, proved instilling a new spirit of Systemwide i benclkial in 1986, our nuclear- teamwork, i generated power increawd by almost I ooking ahead in 1987 and longer 2 8 percent, resuhing in a substantial term, we we Systemwide tramwork as decreaw in the amount of power a key ingredient in our plan for purchased f rom companies outside the meeting new performance targets. The Syttem. Ily year's end eath of our three Systemwide identity we are forging will primary f uel sources-nuclear, gas, and enable hiiddle South to achieve and coal-was (ontributing roughly a third maintain an cifective responw to the 3 ____--___.___-\
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R gional Economic Development
- c. . . _ - - - - - ._ -a Stimulating Business Growth in the Middle South C:mpany-wide commitment tioning the Company and formulating number of new jobs created, and a to regional development goals new programs designed to achieve variety of other, often innovative, During 1986 Middle South Utilities, economic development." methods of generating capitalincluding Now that the initial staffing has revenue bonds. low-cost loans, and other Inc. renewed and reinforced its com.
mitment to regional economic devel, been accomplished, more emphasis avenues to achieve access to reservoirs opment. The Company viewed an will be placed on meeting specific of venture capital. States, municipali-improving economy in Arkansas, goals. "For hiiddle South," Lupberger ties, and the bliddle South System Imuisiana, hiississippi, and sot titcast, said," economic development efforts operating companies themselves par-crn hiissouri as more than a timely will entall local and national projects, ticipate in these marketing efforts. objective. Economic development and we will look to generate inter. In an 18-month period AP&L for bec me a business necessity, national recognition for the region." example, offered industrial incentive Decause Middle South Utilities,Inc. As an example of involvement in contracts to 82 companies that had is unable to relocate as business con. national projects, Lupberger cited the increased their electricity demands by ditions change, the Company acceler. Middle South System's assistance to a minimum of 500 kilowatts a month. ated its efforts to improve condition, hlart.n Marietta,Inc.-helping that The contracts allow rate discounts at home by nurturing growth withia company in its efforts to secure the based on the demand increases, which its rervice area. NASA space station contract. lie also usually correspond to increased oper-A utilitys decision to pursue eco. commented on a recent series of ations and more jobs. In one instance, nomic development in its service area Western European business confer- an El Dorado-based outdoor lighting is simply smart business. Clearly it i, ences attended by Middle South rep. manufacturer's demand for more elec-a worthwhile goal, but selecting the resentatives as an example of efforts tricity was matched by the hiring of goal of economic development doesn't to develop interest among foreign 90 additional workers. In a second gurrantee success. Accordingly, Mid. businessmen. Instance, a Batesville poultry firm die South did more than simply decide The national and international eligible for the rate discount added to pursue economic development. efforts are simply larger examples of 20 employees. They went at it with commitment, similar activities pursued by each of Prior to 1986, the operating com. enthusiasm, and imagination, an ap. the Middle South System's operating panies in the Middle South System pro:ch that has helped make this companies. Expanding and creating approached the business of economic 37 year old organization the nation', industry throughout the Middle South development individually. Mississippi fourth largest electric and gas utility, region represents the common ground Power & Light Companys (MP&L) Edwin Lupberger has demonstrated for all of the companies' marketing "liciping Build Mississippi" program his own commitment to this economic efforts. serves that company's region, as does development cffort since assuming The industrial sector is a key to the its" Energy Plus" program, a five year the Company's chairmanship and System's marketing efforts, said Arkan- effort begun in 1985 and designed to presidency in December 1985. "We sas Power & Light Company's (AP&L) create 14,000 job opportunities for didn't embark on this without a great Kenneth 11reeden, vice president of the state's workforce by the end of de:I of preparation," said the 50 year. marketing. "New industry-and new 1990. Similarly, Loulslana Power & old Lupberger. "During this first year industrial electric demands-invariably Light Company (LP&L) and New we've spent considerable time posi. translate into increases in employment Orleans Public Service Inc. (NOPSI) which also translate into added rest- encourage economic development by dential electric load as new employees offering their own rate incentive pack-find homes," he explained. "In addi- ages and by participating in a statewide tion, higher commercial loads are pro- program known as " Ready Cities" that The Company's System Eiccatien act duced as those employees support trains and certifies communities in ! on Systenneide lunes and vital corporate expanded services where they live, the increasingly sophisticated task of matters. Mcmbers of this principal It's the old multiplier effect." attracting new businesses. management adeisory group are: from The economic development pre. AP&L produces similar successen Ic/t, sitting, Chairman Edwin lorbcrger, scription can be a complex formula. by involving its marketing depart- l R Drake Keith, system accntiec-fitumcc, its combination of ingredients can ment in the economic development and Wdliam Cavanaugh, system accatire vary greatly among such economic effort. At AP&L the marketing
- nncIcar; standing, lack L King, system inducements as discounts for services department's account executives offer necutiev-orcrations, and ferry and other pricing incentives, offers of full service assistance to businesses, lackson, system accative-Icgaland government backed job training and combine with an in house Com- l nternal affairs. programs, tax credits based on the munity Development Program to blend l l
5
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the development effort with the needs New Opportunifics programs adel of businesses and the general public. to cronornic drerlopment efforts In 1986, the Company began a more ambitious effort, one that relied on a Uw Nat' Opportunifics pmgrarns coalition among the operating com. appmach noninnic Javlornunt from an panies. The economic development 'd"#dh""dl d' "YN d' d h"d"* F*P'* work, while still reflecting a service inv. The goalis to ensure continued area priority, has taken on a regional noninnic Javl4>pnwnt ihmugh unana perspective. The programs, called "" d" 'd"(dd "'" Al"'" 8"d d '""U"dd New Opportunities, have been struc- b" 'i" * '"""" " " d V-tured by htiddle South Utilities,Inc. I"'"TN"#"'Idi "'"'W"'T A """'" d' to expand and intensify economic Ornahon Opponundy, uy# uny as development ef forts across a broad range 7unodo-Jo.#" clasm fa du small busi-of businenes, industries, and trades. "**d"- Liunched in the summer of last I"/"' li'"d'y n'i# addros the JJcmma year, New Opportunities is the htiddle of adult innaacy and mdl un rJucational South operating companies working Inhnology to irnpmtv adult tra.hng slius, in concert to promote the untapped Sl YdA '"X "I OTP""""#F' d I"'"" 8"i"> potential of the entire region. wiH lulp mourate and sustam the growth The effort makes good business 'Y'I' "I b"'i"* U" l^ '""8 "id l'd'" sense, Lupberger pointed out. "The """'""I( '!*I"I'"'"' "P"'8 8P'd Ai"X role of promoting economic develop- b'/"" h" ""* '""/"'"'"' 'I"i(* d "d ment in a region is a need that we T'"l*i""dI X*"f* (Ntiddle South Utilities, Inc.) are Pm/nt Suond Chana is doigncJ to uniquely qualified to fill. We're the '""'dX' N"'" "d"' I""Y d'"TP#d ""' "I major private enterprise sen ing thi, schoolto pursur a CID (high sc hool region. If we develop the territory we Fdd"d l"i"dI'"'V) T"W'd*- serve, that's good businen and we Ambanadon of Econondc Daylopment shouldn't be ashamed of promoting "# I"dW M"* d"d '""""""NV good businen." l'dd"8 8"VI"X d' promoters of the hfiddle Lupberger added,"We've got ade. Sonde ugion to audunas outsid< the quate kilowatt hours avaklable which ngion, ins ludmg international audienas allow us to encourage new and U" UTP"d""dV espanded busincues in turn, the "'N "'"X"I ' d"d "'"" '/"
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(*"N("" P"N'd* greater site and number of busincues d'"""X "d'" d"d i'd' hn, in the region's enable energy users to share the high sein>olt energy's cost by spreading it over a broader customer base." Dlunt, straight. J. Ilugh Nkhols was chown to head forward interpretations of the htiddle the economic development efforts South region's economic realities are which include the New Opportunities reflected in the New Opportunities programt A former htaryland county programt the programs are compre- ewcutive, Nkhok mandate at htiddle nensive, well organtied, and thorough. South is to generate momentum in the areas of education and the general _ economy."1he resourecs are there," Nkhols said, citing census figures that Commacial Jcerlopment, and de posihty show the South is the only region of nonomic impac t, conhnuts to occur the country to record net in migration throughout the region. One of the mo<t from other areas of the nation, notaNe, the Riernoalk Javlopment in Keeping that trend intact and shap. Nno Or/ cans, lygins at the cuy's Spanish ing it into business development is Pla:a and ntends along the rityrfront. the goal, he said. "We want the bust. The collec tion of storn and rotaurants new commun ty to know more about attracts visitors and natien alite, the htiddle South region. We want 7
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l P l Regional Economic Development ! [- ) i i this region to be a businewman's first energy. We are abo a source of per-
! choice when it comes to espansion or sonal energy, the kind that comes relocation." The economic develop. with the total commitment to 'llelping ment program will be comprehensive -
t Build hthsinippi!" ; and include businen development ) Through the years the company ' rograms targeted to industries with a has been recognized by the commun- j igh probabihty of succen in the - ities of western hiiwiwippi for this l hiiddle South region. 's effort. l Lupberger said the New Opportun. A recent iditorialin the Tylertown, ities elforts also benefit from the full hii"I"ippi, " Times" began with the
! support of the htiddle South Board of headline, "Thanks, h1P& L" The edi.
I Directors, and descnbed the program, torial followed an announcement that l as "well received by educators and American Fabrics of New York would i businewmen. After'a year," he said, .q' hire 150 people to manufacture lace !
"we might look at our effort as a large in a vacant facility in that town. In wheel that% taken a while to get rolling, researching for an article on the !
but now we're developing momentum." Y .s' . y location, the editor of the "Tylertown Times" dbeovered that the building Shaping a competitive edge, matheting a regionalimage F'g'- ]s . 1a ,* was first constructed in 1946 to accommodate another company that That momentum will inevitably \ was aho introduced to the city by leait to accomphshments that will one h ,3 f htP& L industrial t erresentatives. day match the succcues recorded ( , q "llelping fluild hhwiwippi" has been individually by AP&L LP&L/NOPSI, w the theme for htP&L's economic and htP&L Lach operating company GIf 9ates Canncrs coercratice in Chnton, development program for many years. j has achieved succenes in the form of AUWuippi, scrres wft dro:A distributors it h a program that has operated in
, espanding esktmg industries and one form or another in hiiniwippi since attractin,; new ones in 18 months from northctn florida to ca tcrn Taa5.
i 192M and has succeeded in attracting AP&L% efforts have contnbuted new companies and convincing eskt-roughly 3,300 new jobs to the com- ing companies to remain, often with l pany's Arkansas and southeast
- improve educational achievement. espanded operationt Niinourt service terntory Li'&l./ Special emphasis has been placed on htP&L's efforts succeed because the NOPSl% efforts, meanwhile, have Operation Ntainstream, a program that area development representatives are accounted for more than 1,200 new combats adult illiteracy. As Cain eu " full service" profeutonah The jobs, even though louisiana has been plained,"There b a high degree of department's economic development, l burdened by an unemployment rate public awarenew in our area of the community development, and a that led the nation dunng 1986, link between the quality of education economic research staffers are trained i
peaking above 13 percent. and the area's economic development to awkt in negotiating the mate of Jim Caln, l.P& L/NOPSI president, potential." The result k success on regulations and f nancial programs met the I ouniana challenge by over- two fronts and the momentum to of federal, state, county, and municipal seeing development of a strategy achieve more. governmentt
" based " he said,"on rate structures hteanwhile, htP&L has been cred. The results achieved by h1P&L and contracts that allowed our induo ited with creating more than 3,000 representatives are measured in terms trial (ustomers to remain competitive manufacturing jobs in its service area of dollars and centt flygiene, Inc., for j and maintain employment in our ared." and has taken aim at a 14,000dob goal instance, a Sardk, htksinippi, maker LI &l,/ NOPSI k ako actively imple- for its service area by 1990 through of vinyl and fabric household produ(ts, menting and espanthng programs that its Energy Plus program. was looking at alternative sites outside
---.__ _ - "Our first responubility h to pro. h1P&L% service area prior to contact ProccucJ honber, stadcd high at thi, take that responsibihty seriously," After learning of the incentives avall-Caernhant Territ Industrice faohty in said Donald Lutken, h1P&L chairman able from a variety of scorces,Ilygiene Aficomb, Afsuinippi, and a rarictv of and president. "llut I would aho like decided not only to remain in Sardk, teood and parcr produi t, have Ioni been to think we are providing hiiwiwippi but espand its operations into a major fairt ef the rc. vion's economy something more than just electric 100,0004quare foot addition. The 9
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i Regional Economic Development j E ___ ___ __ _ ___ _ _ _ _ _ _ _ - _ _ .___.__ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ -__.J i ! capital investment totaled $3 million f
; continued," improves a company's and resulted in 75 new jobs. r ..
chances for success and, ultimately, A similar development took place 3~ . produces a profitable development
; at Gulf States Canners in Clinton. A g for AP&L" Tools used to foster economic
~
! more than 30-member cooperative that cans and distributes soft drinks g - development vary from company to from northern Florida to eastern Texas, Gulf States completed a g 1 company within the hiiddle South
__ % System, but all are dependent upon c ? meeting the customers' electrical 59.5 million expansion. The project accounted for an additional 50 ]--ggd~~ g Ig; ~ b . *O -, , y y needs reliably, efficiently, and i employees and an increase in the qt. economically. AP&L's account executives system load totaling 1,400 kilowatts. introduce customers to alternatives h1P&L's efforts have attracted new - such as: Demand Discounts, Interrup-companies as well, including UNR- tible Service, Rate Guarantee on leavitt's tubular steel facility in . Demand Charges, Prepayment of , htadison County, the Groen Division Demand Charges, Formula Rates, and j of Dover Corporation's commercial Start-up Rates. , cookware plant in Jackson, and Hunter The programs are innovative, tail-i Engineering's automotive diagnostic ored to specific industries, and they
! equipment plant in Raymond. encourage a partnership between AP&L h1P&L's incentive pricing for new and industrial customers. The goals of i
and expanding industrial customers the programs are: additional industrial also proved successful in 1986. With production, rate stability and predict-discounts based on added kilowatts, at ility, and active involvement in
- the company contracted for major emergmg energy technologies.
The Sport of A,ings draws crowds to Hot l expansions in 28 industries in nine LP&UNOPSI representatives pur-months. The contracts guaranteed S I I"X5' Add"$d8 OdUd#" Edd l"*' sue the same goals for the service-creation of over 1,000 new jobs and , uant to in Aptd oriented, commercial businesses of l j added more than $70 million in new New Orleans, and for the burgeoning industrial investment. seafood processing industry springing "We see hiississippi building on the AP&L's marketing efforts target the up along the broad expanses of the traditional manufacturing operations top 150 industrial accounts. Account state's coastline and on through its
- to the new, upscale, capital intensive, executives are assigned to " industrial northern plains. Area Development i technological industries which will segments such as oils and chemicals, Engineers keep businessmen and power the American economy for metals and mining, paper mills, food entrepreneurs informed about the years to come," said Lutken. "And processing, and manufacturing," benefits LP&L/NOPSI can offer, i h1P&L will remain in the forefront." AP&L President and CEO Jerry There is room for generosity in i At the operating companies, market- Afaulden said. "We chose those seg- business. In most cases, thoughtfully ing has become a discipline, a science ments because they represent our exercised generosity is good business.
fueled by equal parts of data and en- major customer mix and are tradition- In Louisiana, Jim Cain organized a couragement. The idea is to give cus- ally the major sources of industrial response to the downturn in the tomers-in this case electricity users- jobs in AP&L's service area." state's economy that resulted in an as much data as they want and as The relationship between the almost complete retention of the I much encouragement as they need. company's account executive and company's industrial base. j' the industry is designed to enhance "Although the strategy called for the industrial customer's ability giving up valuable revenue for the to compete. short term-at a time when every ChicAen farrning is big business in the hiaulden said the " hand picked penny was needed to complete our region. This 360 foot long coop on account executives are expected to learn nuclear program-the effort kept the Atcredith Afsllcr's farm in Boone County, as much as possible about their assigned loss of load and plant closings to a Atlansas, houscs 13,000 chic Arns that field in order to assist their customers' minimum," Cain said. While other consmne a ton of chicken /ced crcry day management as much as possible. utilities in the region lost as much as
- until the birds arc sold to poultry proces- Anything we can do to enhance a 1,100 megawatts of load, LP&UNOPSI t
sors and distributors. customer's competitive position," he maintained its industrial base. 11
Regional Economic Development i I Benefits for the region and Once in place, the " Ready Cities" for Middle South Utilities program relies on that cadre of Seafood processing is a major target business and civic leaders as of the LP&UNOPSI effort which con- economie development spokesmen for centrates on the processing operations the community. that flourish along waterways like The thrust of this region-wide Petit Caillou and Bayou !.aFourche, economic development effort has been and in communities like Cocodrie, one of commitment and cooperation Pointe au Chien, and Chauvin. among Middle South Utilities, the The industry has grown as the oil System's operating companies, and and gas exploration and production the states they serve. Working in segment has declined. It will continue concert, the effort is improving the to grow. U.S. Department of Agricul- region economically and socially by ture estimates show consumer prices means of the educational advance-for fish and other seafood rising ments that are part of the programs. 9 percent in 1987, duplicating the 9 "We felt that in order to realize the percent price rise recorded in 1986. successes we envisioned, we first had Moreover, more than 60 percent of to get the region thinking positively p --m-m -~m the seafood consumed in the United about itself. We had to develop a posi- [ t 1 States is imported, a figure that tive attitude about ourselves and about ( underscores the potential a domestic our ability to do business on a par hm , seafood industry offers for the U.S. with any other region of this country,"
>r >
and for Louisiana, in particular. In Lupberger said. The stance Middle
.g addition to flexible incentive packages, South Utilities has taken through its which can be expanded with the programs, both regionally and in the y".. ; a
, approval of the governor's office, individual service arcas, is one of a i: .
Louisiana's naturally superior ports sincere, committed corporate citizen. b ' ' and waterways systems are further "Sure it benefits us, but that's to inducements to economic develop- everyone's advantage" Lupberger ex-x #, , 4~- ment, as is the state's highly produc- plained. "Our goals stand for positive iO ef 'Mn tive workforce. changes in a region that must improve R i
"'M LP&UNOPSI also participates in in order to provide the kind of future b
b 9 the " Ready Cities" program as a means the people of the Middle South region of attracting business and keeping it. and the investors in Middle South
! The program encourages a group of Utilities, Inc. expect and deserve.
y , business and civic leaders in any com-gw j 4,i munity of 1,500 to 25,000 to perform a sort of self-analysis that measures y% : , . yc _7 4Q - - Wm,a A y --
,p.r their community's ability to promote economic development. The analysis At Foret's dock in Cocodrie, deep in the Louisiana bayou country, shrimp are un.
YnxQ*g,_ h va
%yv gy provides a means to inventory com-
. .w munity assets, develop and train a loaded from the holds of net-laden fishing boats, boiled, and carted, still steaming, Fishermen harvest the Gulf of Mexico's community sales team, and help into a processing shed. There the shrimp seafood, while offshore rigs mine the formulate a strategy to generate lobs are dried and packaged for distribution to hydrocarbons beneath the sea floor. in the community. markets throughout the world.
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Management's Financial Discussion and Analysis i I External Financing Activity Financial Condition of Directors (with the MSU Board of unwu q oonys The year 1986 was important in the Directors concurring) to continue the financial recovery of the Middle South suspension of construction activities 2500 System. Due to rate relief received by on Grand Gulf 2 and to make a decision the System operating companies in the by 1990 on the future status of Grand 2000 - latter part of 1985 and in the first quarter Gulf 2.This decision allows the System of 1986, the System recovered from to maintain flexibility in meeting the 1500 - the low point reached during the fall of energy needs of its service area. (See 1985. Such recovery was evidenced by Note 8 to the Consolidated Financial the upgrading of debt issues during 1986 Statements " Commitments and
** ~ ~ -
Contingencies-Grand Gulf 2") by certain investment rating agencies sm - - - - and by increased investors' confidence in . In December 1986, the Financial the System as more than 52.2 billion Accounting Standards Board (FASB) in financings were completed durin8 issued SFAS No. 90 which amended 0~ ~ - - the last nine months of 1986 primarily 198i 1982 1983 1984 1985 1986 SFAS No. 71 with respect to the in connection with the refunding and accounting for plant abandonments
" T g
- ded redemption of outstanding indebtedness. and cost disallowances. This standard au gag However, while the System's financial will require LP&L to write off the condition has improved, the final and 5284 million disallowance (less related favorable resolution of disputes over tax benefits)it agreed to absorb with Total Long-Term Debt Outstanding adequate retail rate relief for certain of respect to Waterford 3. This write-off anme y cons, the System operating companies has will be accomplished either by restating yet to be achieved, as certam regulatory the appropriate prior years' financial 7 authorities continue to examine prudence statements or by charging it against issues in conjunction with Unit 1 of net income in the year of such write-6 - - -
the Grand Gulf Nuclear Station (Grand off. The new standard provides a
~
Gulf 1) and Unit 3 of the Waterford transition period which should allow 5 Steam Electric Generating Station time to minimize'the effects of this (Waterford 3). Further, as discussed write-off. (See Note 8 to the Con-below, MSU has been unable to reinstate solidated Fincncial Statements-its common stock dividend. " Commitments and Contingencies-As a result of uncertainties facing New Accounting Standard" fo- further 2 - - the System, MSU has been unable to discussion of this matter and of the declare its common stock dividend since FASB's decision to further consider i_ _ _ the second quarter of 1985. Resumption possible changes regarding rate of MSU's common stock dividend phase-in plans.) 0- depends, among other things, upon the 1981 1982 ~1983 1984' 1985 1986 resolution or further modification of . In October 1986 the consultants lEM Other Ibese uncertainties as discussed below retained by the Louisiana Public r m and continued improvement in the Service Commission (LPSC) for the financial condition of the System. prudence investigation of LP&L made Several uncertainties faced the System public their report in which they during 1986 which had, and in certain concluded that no more than $143 cases continue to have, the potential to million in expenditures were impru-impede its financial recovery. These dently incurred on Waterford 3 and uncertainties, which contributed to that the decisions to build Waterford 3 the System operating companies not and Grand Gulf 1 were reasonable. declaring common stock dividends, A permanent Waterford 3 rate order, included: the (1) uncertain status of issued in late January 1987 by the LPSC, Unit 2of theGrandGulf Station (Grand allowed LP&L a rate increase of Gulf 2), (2) the potential effect of pro- approximately 576 million. While the posed revisions to Statement of Financial LPSC order embodied no further dis-Accounting Standards (SFAS) No. 71, allowance of Waterford 3 costs beyond (3) ongoing prudence investigations, and the previously agreed 5284 million, . (4) challenges to certain rate orders. the LPSC stated its view that prudence Specific developments in respect to these issues remain unresolved. For a more uncertainties that have occurred in late detailed discussion of this complicated 1986 and early 1987 are listed below, order, see Note 2 to the Consolidated
. On December 5,1986, the recommen- Financial Statements " Rate and dation was adopted by SERI's Board Regulatory Matters"
I I
. The June 13,1985 decision of the materially and adversely affected. CapitalRequirements Related to Federal Energy Regulatory Commission Construction Expenditures and (June 13 Decision), which allocated Liquidity and Capital Resources Rate Deferrals the capacity and energy of Grand The Middle South System's construc- mog %,,
Gulf I among the operating companies, tion expenditures for the years 1984, 1985, and 1986 were 51,299 million, $876 15 was affirmed by the United States Court of Appeals for the District of million, and $335 million, respectively. 1250 Columbia Circuit. (See Note 2 to the The System's construction expenditures Consolidated Financial Statements- have been dramatically reduced due to
* -~ ~
" Rate and Regulatory Matters'/) the completion of Grand Gulf I and e On February 25,1987, the Mississippi Waterford 3 during 1985. In addition, 73o _ _ _
Supreme Court reversed and remanded the full suspension of construction of the September 1985 order of the Grand Gulf 2 is continuing. Reflecting 500 - -- Mississippi Public Service Commission these events, the total System construc-(MPSC) granting permanent rate tion expenditures, including Allowance 250 - - - relief to MP&L with respect to its for Funds Used During Construction recovery of Grand Gulf I costs pur- (AFUDC), for 1987,1988, and 1989 are o - estimated to be 5465.0 million, $418.2 1977 78 n 8 81 82 83 84 85 86 suant to a multi-year phase-in plan. The Supreme Court found reversible million, and 5457.9 million, respectively. M C nMructi n Expenditures error in the MPSC's prior rate order Significant additional capital require- E $o* **,"f, runa. usea Dun isc onaructmn based, in part, on the assertion that ments, estimated to aggregate $1,030.8 the MPSC failed to consider prudence million during the period 1987-1989, will issues. MP&L is continuing to bill result from the need to finance Grand Electricity Generation by Fuel Type
~
rates subject to refund. However, in Gulf I rate moderation plans for AP&L, (Megawatt-hours) the absence of a stay pending further MP&L, and NOPSI and an assumed rate appeal, which MP&L is pursuing, but moderation plan in connection with * * * * * ** which cannot be assured, MP&L could Waterford 3-related costs for that portion 3936 be required to reduce its rates, refund of LP&L's service territory under previously billed Grand Gulf 1 jurisdiction of the New Orleans City 1985 amounts, and/or write-off certain Council (Council). The System operating Grand Gulf I expenses deferred for companies' levels of internally generated 1984 later recovery. (See Note 2 to the funds available for capital requirements -
,933 Consolidated Fmancial Statements- were improved to a degree during 1986 "la <e and Regulatory Matters") due to their not paying common stock 1982 .
ihe System, as a result of the rate dividends to MSU. structures established in 1985 and 1986, In addition, during the period 1987- 1981 was able to achieve a modest level of 1989, the Middle South System will fmancial recovery. However, additional mo require capital funds of approximately ' -- - -- uncertainties remain such as continuing 51,079.7 million from internal and court challenges of the ruling affirming external sources to retire or to refinance O Gas EM od M Nuclear E coat the June 13 Decision, continuing maturing debt and to meet long-term -- ~ %e-d challenge to MP&L's Grand Gulf 1 rate debt and preferred stock sinking fund NIIAw--
~~"
order, continuing challenges to other requirements. Also, credit lines in the rate orders and settlements, ongoing amount of $461 million are currently prudence investigations, and various scheduled to terminate in 1987-1989 in takeover threats which may impact its connection with nuclear fuel leases. I future financial condition. If, as a result Unless the present credit lines are of one or more of these proceedings, extended or new lines are arranged, the the existing retail rate structures of any Middle South System will require of the System operating companies additional capital funds in order to were to be revised in a manner that would finance the nuclear fuel as the leases will cause such operating company to absorb terminate concurrent with termination (and not recover from customers) of the credit lines. (See Note 9 to the j substantial Grand Gulf I costs, the Consolidated Financial Statements- I earnings, liquidity, and financial condi. " Leases:') Finally, unless certain financing tion of such operating company and its arrangements of SFlin connection ability to meet its continuing obligations with its nuclear fuel procurement and could be severely impaired. Such com- services program for the Middle South pany could be rendered insolvent and System scheduled to terminate during ! the Middle South System could be the period 1987-1989 are extended or l 15
Management's Financial Discussion and Analysis 1 I l l Operating Revenues and Expenses alternative financing arranged, addi- other capital requirements. Based on
&n- g ognar, tional capital requirements of up to these ratios at December 31,1986, the
$115 million could result. System operating companies could have :
48 The capital requirements of the System issued an aggregate of approximately 3.s - Operating companies noted above may 52,114 million of additional first vary in the event of modification of mortgage bonds (plus any bonds issued 3.0 - - - (1) the rcte structures implemented by for refunding purposes), subject to the the System operating companies as a availability of bondable property and 23 - - - - -- result of prudence investigations or assuming an annualinterest rate of 10 - - - otherwise, (2) the FERC's allocation of 10 percent. However, the System Grand Gulf I capacity and energy in the operating companies only had sufficient 1.5 - - - - June 13 Decision, or (3) its allocation unfunded bondable property available of other energy costs under the System at December 31,1986, to issue an aggre-10- - - ~ ~ - Agreement in the June 13 Decision. The gate of approximately 51,076 million in g3_ _ _ _ June 13 Decision is the subject of judicial first mortgage bonds. SERI could have review and the ultimate outcome issued approximately 52,937 million of 0- - . - - - - cannot be predicted. (See Note 2 to the additional first mortgage bonds (plus 1981 1982 1983 1984 1985 1986 Consolidated Financial Statements- any bonds issued for refunding purposes), ME hioperatmg Revenues " Rate and Regulatory hiatters'.') subject to the availability of bondable 7'{g[$"y,,c, The System operating companies property, and assuming an annual expect to raise capital funds from external mterest rate of 10 percent. However, sources through the sale of additional SERI's unfunded Grand Gulf I bondable first mortgage bonds, shares of preferred property at December 31,1986, would and common stock, and borrowings or have permitted the issuance of only such other methods of financing as approximately 5463 million of first may be appropriate. NOPSI's ability to mortgage bonds. engage in traditional first mortgage The charter coverage ratios of the bond financing is constrained by its System operating companies limit the limited amount of property additions. amounts of additional preferred stock As such, it intends to meet its capital that may be issued. At December 31, requirements during the period 1987-1989 1986, LP&I's earnings coverage was through the use of internally generated such that it was precluded from issuing funds, short-term borrowings, and additional preferred stock while AP&L, other such methods of financing as may h1P&L, and NOPSI could have issued be appropriate. In this connection, preferred stock aggregating approxi-NOPSI has filed applications with mately $500 million, assuming a regulatory authorities for approval of a preferred dividend rate of 10 percent. new general and refunding mortgage The amounts of additional preferred under which all future long-term stock and first mortgage bonds which debt financing of NOPSI would be can be issued by SERI and the System accomphshed. Under the proposed new operating companies in the future are mortgage, additional debt could be contingent upon earnings and the issued (up to an aggregate of 5280 amount of unfunded bondable property million) by NOPSI to finance deferred available to support the issuance of Grand Gulf I costs without having to additional first mortgage bonds. satisfy a separate property additions During 1986 certain of the System issuance test. NOPSI has filed for companies obtained funds externally approval of a plan to issue up to 575 through sales of 51,750 million of first million of an initial series of debt mortgage bonds,585 million of preferred thereunder. Further, h1P&L's ability to stock,5225 million of intermediate-issue additional first mortgage bonds term secured notes, and s195 million of is limited by the amount of its amilable pollution control revenue bonds. As property additions. Consequently, mentioned earlier, most of these hfP&L is studying plans for alternate financings were in connection with forms of future debt financing. the refunding and redemption of The mortgage coverage ratios of the outstanding indebtedness. The System System operating companies and SERI companies have been able to take limit the amounts of additional first advantage of the improving credit market mortgage bonds that they may issue to to significantly reduce interest and g finance their construction programs and dividend requirements on certain out-
standing first mortgage bonds and line of credit under a bank credit System Retail Customer Electricity preferred stock issues, agreement expiring December 31,1989. Usage The System operating companies are in connection with the Grand Gulf ugmy n,gy,,,4,m currently authorized by the Securities Nuclear Station, the Company has and Exchange Commission (SEC) to undertaken to provide or cause to be 52 effect short-term borrowings in an provided to SERI sufficient capital si - -- aggregate amount outrtanding at any (1) to maintain SERI's equity capital 30 - - - - one time of up to 10 percent of their at an amount at least equal to 35 percent 49 _ _ _ _ i respective capitalization, subject to the of total capitalization (excluding 43 _ _ _ _ _ _ _ availability of funds through bank lines short-term debt), (2) to construct and
# -- - ~ ~ ~ ~ ~
and other credit sources. At December 31, place in operation the two units of the Grand Gulf Station, (3) to provide for 46 - - - 1986, the System operating companies had no existing short-term borrowings pre-operating expenses and interest 45 - - - - - - - outstanding under territorial bank lines charges of SERI, (4) to permit the of credit aggregating approximately continuation of commercial operation 2- - - - - - -
$130 million. Further, LP&L had non- after commencement thereof, and (5) to i_ _ _ _ _ _ _
territorial bank lines of credit of $110 pay in full all indebtedness for borrowed g_ _ _ _ _ million, none of which were utilized at money of SERI when due. (See Note 8 to 1981 1982 1983 1984 1985 1986 December 31,1986. In comparison, at the Consolidated Financial Statements-December 31,1985, only AP&L and " Commitments and Contingencies-LP&L had territorial bank lines of credit Potential Debt Acceleration and Wholesale Electricity Sales to approximating 577.7 million of which Related hiatters'/) Adjoining Utility Systems
$18.7 million was outstanding to LP&L. SERI estimates that it will require , , , , , ,
Additionally, LP&L had non-territorial approximately 5942.7 million from bank lines or credit of approximately internal and external sources for the sooo 580.5 million, all of which were fully period 1987-1989 to refinance maturing coo _ utilized at year-end 1985. At December 3L indebtedness, to meet sinking fund 4* 1984, the System operating companies obligations, and to finance its other had no existing short-term borrowings capital requirements. SERI expects to 3500 - - - outstanding under unused bank lines of obtain a significant portion of such 300o . _ _ __ l credit of $322 million. Additional funds through its receipt of payments ", " - -- ! authorized borrowings of each System from the allocation of costs associated operating company can be effected with Grand Gulf 1 to the System 20m - through the hiiddle South System operating companies under the Unit isoo - - hioney Pool (hloney Pool), subject to Power Sales Agreement. The balance of 300o _ _ the availability of funds which at any amounts needed by SERI will be obtained particular time may be limited. The from external sources, including, but 5" - -- hioney Pool provides the means whereby not limited to, additional issuances o- = "L - - psi n82 ns3 mmm companies in the System with amilable of first mortgage bonds, additional j funds can lend such funds to other preferred and/or preference stock and participating System companies (other such other sources as may be appropriate. than h1SU). At December 31,1986, the On October 22,1986, the President j funds available in the hioney Pool for signed into law the Tax Reform Act of j borrowing aggregated $220.9 million of 1986 which will have a significant impact which 526.2 million was borrowed by on the utility industry. Provisions certain System companies. SERI has contained in this law will, among other SEC authorization to borrow up to the things, diminish the value of investment lesser of $200 million or 5 percent of tax credit carryforwards, lengthen the capitalization (approximately $226 period over which utility property can million at December 31,1986) from the be depreciated for tax purposes, impose hioney Pool. (See Note 4 to the Consoli- a new alternative minimum tax, and i dated Financial Statements " Lines of reduce the marginal corporate income Credit and Related Borrowings'!) tax rate. The Company continued the sus- For the hiiddle South System the pension of all further sales of common above provisions of the Act will have stock during 1986. Further, in October varying consequences. As a result of 1986, the Company terminated its significant amounts of net operating loss dividend reinvestment and stock and investment tax credit carryforwards, < purchase plan. The Company presently these provisions are not expected to has available and unused a 560 million have a substantial effect on the System's
1 Management's Financial Discussion and Analysis I results of operation or financial provisions for estimated losses as of by 7.6 percent. Despite this record peak condition through 1989. However, the December 1985 associated with indefi- demand, energy sales to retail customers future cash flow of the System will be nitely delayed future fossil generating in 1986 decreased 2.1 percent from impacted as the lower corporate income facilities and with certain investments 1985. The 1985 increase over 1984 was tax rates will result in reduced charges in the System's fuel procurement pro- minimal. Residential sales increased to customers. While these reduced gram (See Note 12 to the Consolidated 2.2 percent and 4.2 percent, respectively, collections will lower internal cash Financial Statements " Quarterly in 1986 and 1985. Sales to commercial generation, cash flow is not expected to Results"), and (4) the effect of increasing customers continued its increasing trend be so severely impacted as to substantially 1984 net income by $17.6 million as a as reflected by increases of 2.7 percent increase external financings. resultof thecumulativeeffectof achange and 6.8 percent in 1986 and 1985, in accounting method by LP&L to respectively. Industrial sales decreased 8.2 Results of Operations recognize unbilled revenues. percent in 1986 and 5.7 percent in 1985 The Middle South System's net income AFUDC for 1986 was approximately reflecting a reduced level of aluminum for 1986 was $451 million, an increase 58 million, a decrease of 5356 million, processing by a major industrial of approximately 550 million, or 12.5 or 97.7 percent, from 1985 and a decrease customer during both 1986 and 1985 percent, over 1985. This increase was due of $529 million, or 98.5 percent, from and a slowdown in the oil drilling and primarily to (1) the effect of Grand 1984. AFUDC currently represents exploration industry during 1986. Gulf I and Waterford 3 rate increases slightly under 2 percent of net income. Energy sales to wholesale customers implemented during the latter part of The dramatic reduction in AFUDC increased 2,643 million kwh, or 52.5 1985 and first quarter of 1986, including occurred because the System is no longer percent, in 1986 compared with an the ratedeferral of 5786 million recorded investing large sums in construction increase of 3,178 million kwh, or 171.5 in 1986 as compared with 5237 million now that Grand Gulf I and Waterford 3 percent, in 1985. The 1986 increase reflects in 1985 and (2) the recording of provisions are in service and because of the an increase in sales to municipalities for estimated losses as of December suspension of construction on Grand and cooperatives along with the 1985 whereby the System operating Gulf 2 in September 1985. continuation of an increase in sales to companies expensed selected engineering Earnings per share on MSU common non-associated utilities which began and design costs and estimated liabilities stock increased to 52.21, up from the in 1985. associated with indefinitely delayed 52.01 recorded in 1985 but down from Gas operating revenues decreased future fossil generating facilities and with the 1984 amount of 52.86. The 1986 57.0 million, or 4.4 percent, in 1986 certain investments in the System's fuel increase reflects the previously mentioned compared with a decrease of $33 million, procurement program. The recording increases in net income and only a slight or 17.6 percent, in 1985. Decreases for of such provisions had the net effect of increase of 2.5 percent in the average both years were due primarily to reducing 1985 net income by approxi- number of shares outstanding in 1986 recovery of lower gas costs through the mately 566 million. Partially offsetting over 1985. fuel adjustment clause and decreases these factors were (1) the substantial Electric operating revenues increased in MCF sales of 2.2 percent and 16.4 reduction in the amount of AFUDC by $254 million, or 8.2 percent, in 1986 percent, respectively, in 1986 and 1985. As accrued in 1986 when compared with compared with an increase of $125 a result of lower wholesale gas prices, 1985 (see below), (2) the increased million, or 4.2 percent, in 1985. The 1986 gas purchased for resale declined 18.4 amounts of depreciation expense in 1986 increase was due primarily to rate relief percent and 10.3 percent, respectively, associated with Grand Gulf I and obtained by the System operating in 1986 and 1985. Waterford 3, and (3) the recording of companies for their Grand Gulf 1-related Fuel for electric generation declined additional write-offs in 1986 related to costs, and in LP&I's case, its Waterford 3 $117 million, or 11.7 percent, from 1985. the System's indefinitely delayed future related costs. In addition, an increase This decrease was due primarily to fossil generating fac;lities (approximately in energy sales to wholesale customers increased nuclear generation which is
$39.6 million) and SFTs uranium contributed to the increase in electric at a lower average unit price than other exploration program (approximately operating revenues. Partially offsetting types of generation, and to a general $19.2 million). the effects of rate relief were lower decline in unit prices for other fuel types.
The System's net income for 1985 was revenues resulting from recovery of Purchased power expenses in 1986 5401 million, a decrease of approximately lower fuel costs. The 1985 increase was declined $102 million, or 44.3 percent,
$107 million, or 21.1 percent, from due primarily to sales to non-associated compared with a decrease of $61 million, 1984. This decrease resulted primarily utilities resulting from an off-peak or 20.9 percent, in 1985. Such decreases from (1) the effect of Grand Gulf I and contract for the sale of electricity were due primarily to the use of nuclear Waterford 3 having entered commercial between certain of the System operating generating capacity provided by Grand operation without retail rates in place companies and Gulf States Utilities. Gulf I and Waterford 3 (which began on a timely basis to recover costs As a result of a severe heat wave commercial operation in July 1985 and associated with these units, (2) the throughout the region in July 1986, the September 1985, respectively), rather cessation of accruing AFUDC on both System experienced a record peak in than the buying of power from companies units upon commercial operation, (3) the demand for electricity of 11,697 mega. outside the Middle South System.
previously mentioned recording of watts, exceeding last year's peak demand in connection with their respective 18
I rate moderation plans, the System by LP&L and SERI as a result of the Summary operating companies deferred for future commercial operation of Waterford 3 The Middle South System experienced recovery through rates certain operating and Grand Gulf 1, respectively. The 1985 a modest improvement in its financial expenses totaling $786 million and increase was the result of SERI recording condition during 1986. Several uncer-s237 million, respectively, in 1986 and additional income tax expense and tainties, which had the potential to 1985. By deferring these costs associated reducing income tax credits in connection impede the System's financial recovery, with the rate moderation plans to the with the commercial operation of were moderated during late 1986 and future when revenues are scheduled to Grand Gulf 1. early 1987. However, other significant be collected through increased rates Miscellaneous income and deductions- uncertainties continue to face the System. billed to customers, the impact of the net decreased 54 million, or 4.6 percent, These include: (1) challenges to and/or deferral aspect of these plans on the in 1986, compared with an increase of potential reversals of rate orders and income statement has been removed. $62 million, or 342.9 percent, in 1985. settlements,(2) appeals of the ruling , Because the actual collection of revenues The 1985 increase was due primarily to affirming the June 13 decision, (3) to recover the deferred costs will not (1) an increase in interest income on ongoing prudence investigations, occur until the future, the rate moderation temporary cash investments, (2) income (4) ongoing deliberations with respect plans result in additional capital associated with the capitalization of a to the accounting for phase-in plans, mquirements, as discussed earlier under deferred return on excess capacity and (5) various takeover threats. Liquidity and Capital Resources. In provided by AP&Us Grand Gulf 1 settle. The ability of the Middle South raost cases, costs associated with ment, (3) interest income associated with System to continue its financial recovery financing such operating expenses the settlement of AP&Us 1981 retail rate depends primarily upon the continuing during the period of such deferrals are case, and (4) the gain recognized on the effectiveness of the retail rate structures recovertd currently from customers. sale of a gas pipeline system by MP&L. implemented in 1985 and 1986 for the Other operating expenses (exclusive Interest on long-term debt showed a recovery of costs associated with of deferred fuel) increased s123 million, slight decrease of 55 million, or 0.7 Grand Gulf I and Waterford 3. Certain or 20.6 percent, in 1986 and 5175 million, percent, in 1986 compared with an of the retail rate structures are the subject or 41.5 percent, in 1985. The 1986 increase of 561 million, or 9.7 percent, of challenge and one has been reversed increase was due primarily to additional in 1985. The change in long-term debt by the Mississippi Supreme Court nuclear production expenses, exclusive of during 1986 was minimal as most of the subject to appeal to the United States nuclear fuel expenses, associated with financings effected were in connection Supreme Court. Should one or more of the commercial operation of Grand with the refunding and redemption of these rate structures cease to be in effect, Gulf l and Waterford 3. The 1985 increase outstanding indebtedness. The 1985 the Middle South System would be was due primarily to the previously increase was due to increasing amounts materially and adversely affected. (See mentioned recording of provisions for of long-term debt outstanding. Note 2 to the Consolidated Financial estimated losses as of December 1985 Other interest-net decreased s19 Statements " Rate and Regulatory associated with indefinitely delayed million, or 35.1 percent, in 1986 compared Matters" and Note 8 to the Consolidated future fossil generating facilities and with with a decrease of 54 million, or 7.1 Financial Statements " Commitments certain investments in the System's fuel percent, in 1985. The 1986 decrease and Contingencies") procurement program. reflects a reduction in the amount of Maintenance expense increased 566 short-term borrowings and in interest million, or 37.4 percent, in 1986 compared rates on such borrowings. The 1985 with an increase of $15 million, or 9.2 decrease was due primarily to lower percent, in 1985. The 1986 increase was interest rates. due primarily to the impact of a full Effect of Inflation year of maintenance expense associated In December 1986, the FASB issued with Grand Gulf I and Waterford 3. SFAS No. 89 which rescinded the Depreciation expense increased 581 requirement to provide certain supple-million, or 30.5 percent, in 1986 compared mentary information concerning the with an increase of 573 million, or 38.0 effect of changing prices on the System. percent, in 1985. These increases were This information, which was presented due primarily to the recording of addi- in previous years as a note to the tional depreciation expense in connection consolidated financial statements, has with the commercial operation of Grand been deleted from this year's report. Gulf I and Waterford 3. The System's operations were not Total income tax expense increased significantly affected by inflation during
$366 million, or 234.1 percent, in 1986 the period 1984-1986. In the future, compared with an increase of $84 should high levels of inflation occur, million, or 115.8 percent, in 1985. The the System's operations could be 1986 increase was due primarily to an adversely affected if timely and adequate increase in pre-tax book income recorded rate relief is not received.
19
Consolidated Balance Sheets Middle South Utilities, Inc. & Subsidiaries December 31 1986 1985 I I (in thousands) Utility Plant (Notes 1,8, and 9):
- Electric . . . . . . . $12,814,990 512,580,087 Natural gas . . . . . . . 130,488 125,189 Construction work in progress . . . . 282,747 1,127,370 Nuclear fuel . . . . ... 241,812 311,092 Total. . . 13,470,037 14,143,738 Less- Accumulated depreciation and amortization . . 2,395,523 2,080,838 Utility plant-net . . . . . 11,074,514 12,062,900 Other Property and Investments . . .
74,095 57,964 Current Assets: Cash and special deposits (Note 4) . . 34,972 26,419 Temporary investments-at cost, which approximates market (Note 11) . . 542,427 526,293 Notes receivable 1,669 2,585 Accounts receivable: Customer (less allowance for doubtful accounts of (in thousands] $7,825 in 1986 and 54,976 in 1985) . 174,209 191,837 Other . 26,384 34,583 Accrued unbilled revenues (Note 1) . 54,973 54,218 State income taxes receivable (Note 3) 20,750 8,586 Accumulated deferred income taxes (Note 3) - 67,982 Fuel inventory (Notes 1 and 4) . 93,366 119,543 Materials and supplies-at average cost . 90,459 79,105 Rate deferrals (Notes 1,2, and 8) .. 24,398 23,936 Prepayments and other. . 66,999 41,682 Total . .. 1,130,606 1,176,769 Defstred Debits: Rate deferrals (Notes 1,2, and 8) . 998,909 218,808 Suspended construction project (Notes 1 and 8) . . . 908,572 - Other. . . . .. 171,835 148,596 Total . . 2,079,316 __ 367,404 Total . . 514,358,531 513,665,037 See bees to Consolidated Financial Statements. 20 f
1986 1985 U" *"""d') Crpitalization and Liabilities Cspitalization: ' Common stock,55 par value, authorized 250,000,000 shares; issued and outstanding 204,581,092 shares . 5 1,022,905 5 1,022,905 Paid-in capital . . 1,565,889 1,567,866
^ Retained earnings (Note 7) . 1,765,632 1,316,388 Total common shareholders' equity . . 4,354,426 3,907,159 l
Subsidiaries' preferred stock (Note 5): Without sinking fund . . . 330,967 330,967 With sinking fund . 508,165 467,293 Long-term debt (Notes 6 and 8) . 5,983,029 5,680,590 Total 11,176,587 10,386,009 Other Noncurrent Liabilities (Note 1) 60,146 53,820 l Current Liabilities: Notes payable (Notes 4 and 8): Banks .
- 124,160 Commercial paper 105,000 125,000 Other 31,000 49,135 l
Currently maturing long-term debt (Notes 4 and 6) 318,854 609,380 l Accounts payable . 280,191 362,498 Gas contract settlements-liability to customers (Note 11) 254,446 224,728 l Deferred fuel cost . 26,314 39,045 Customer deposits 64,934 62,295 Taxes accrued . . 66,363 82,746 Accumulated deferred income taxes (Note 3) . 21,073 - Interest accrued 170,542 164,737 Preferred dividends . 22,220 35,961 ! Other . 89,604 72,895 Total 1,450,541 1,952,580 Deferred Credits: Accumulated deferred income taxes (Note 3) 1,121,277 648,918 l Accumulated deferred investment tax credits (Note 3) 60,577 65,740 Gas contract settlement-liability to customers (Note 11) .
. 338,076 412,323 Other . . 151,327 145,647 :
Total . 1,671,257 1,272,628 Commitments and Contingencies (Notes 1,2,8, and 9) Total s14,358,531 513,665,037 ) 21
Statements Of Consolidated Income Middle South Utilities, Inc. & Subsidiaries For the years ended December 31 1986 1985 1984-U" " *" Operating Revenues: Electric. . . .. .. . 53,339,132 53,084,877 52,959,570 Natural gas . .. .. . . . 146,780 153,582 186,465 Total. . .. 3,485.912 3,238,459 3,146,035 Operating Expenses: Operation: Fuel for electric generation . . . .. 884,560 1,001,373 1,020,280 Purchased power . . . 128,405 230,399 291,129 Cas purchased for resale ... .. 98,337 120,542 134,420 Deferred fuel and other .. .. . . 703,153 593,571 465,713 Maintenance . . . . 242,261 176,293 161,433 Depreciation . . 346,361 265,500 192,452 Taxes other than income taxes . . . . . 161,042 132,759 110,799 Income taxes (Note 3) . . .. 162,265 121,402 216,395 Rate deferrals: Rote deferrals (Notes 1,2, and 8) . (785,897) (236,676) - Income taxes (Note 3). .. . 383,180 117,245 - Total 2,323,667 2,522,408 2,592,621 Operating Income . 1,162,245 716,051 553,414 Other Income: Allowance for equity funds used during construction (Note 1) . 8,830 217,734 301,123 Miscellaneous income and deductions-net . 76,403 80,120 18,090 Income taxes-credit (Note 3) 22,645 82,166 160,442 Total 107,878 380,020 479,655 Interest and Other Charges: Interest on long-term debt . 692,980 697,853 636,390 Other interest-net 34,608 53,306 57,388 Allowance for borrowed funds used during construction (Note 1) . . 590 (146,680) (235,873) Preferred dividend requirements of subsidiaries 90,643 90,601 84,353 Total , .. 818,821 695,080 542,258 Income Before Cumulative Effect of a Change in Accounting Method. . 451,302 400,991 490,811 Cumulative Effect to January 1,1984, of Accruing Unbilled Revenues (nct of income taxes of $16,548 thousand)(Note 1) . . .
- - 17,626 Net Income . . . .. 5 451,302 s 400,991 s 508,437 Earnings Per Average Common Share:
Before cumulative effect of a change in accounting method. . $2.21 $2.01 52.76 Cumulative effect to January 1,1984, of accruing unbilled revenues-net . . 0.10 Total, 52.21 52.01 52.86 Dividends Declared Per Common Share - 50.89 $1.75 Average Number of Common Shares Outstanding . 204,581,092 199,496,115 178,083,867 See Notes to Consohdated Financial Staternents. 22
Statements of Consolidated Retained Earnings and Paid-in Capital Middle South Utilities, Inc & Subsidiaries For the years ended December 31 1986 1965 1984 i
, , (In thousands)
Retained Earnings Retained Earnings, January 1. . . . . . . . . $1,316,388 $1,090,839 5 899,979 Add-Net income . . .. . .. .. . 451,302 400,991 508,437 Total . . . . . 1,767,690 1,491,830 1,408,416 Deduct: Dividends declared on common stock-50.89 and $1.75 per share for 1985 and 1984, respectively (Notes 7 and 8) .
- 175,128 315,811 Capital stock and other expenses . . . 2,058 314 1,766 Total. .. . . . 2,058 175,442 317,577 R;tained Earnings, December 31 (Note 7) . $1,765,632 51,316,388 51,090,839 Pzid-in Capital Ptid-in Capital, January 1. $1,567,866 51,435,570 $1,271,152 Add:
Excess of net proceeds over par value: Public sales of common stock: 4,000,000 shares in 1985. - 36,404 - 9,200,000 shares in 1984. - - 66,148 Common stock issued in connection with: Continuous offering program: 3,452,000 shares in 1985. . - 30,044 - 2,931,900 shares in 1984. .
- - 23,361 Dividend reinvestment and stock purchase plan:
7,642,772 shares in 1985. - 62,280 - 10,253,270 shares in 1984. . . .
- - 67,751 Employee savings plan:
318,992 shares in 1985. - 2,742 - 539,229 shares in 1984. . - - 4,146 Employee stock ownership plan: 160,801 shares in 1984. . .. .
- - 1,246 Other . . . . (1,977) 826 1,766 Pcid-in Capital, December 31 . .. . 51,565,889 51,567,866 51,435,570 See Notes to Consolidated Financial Statements.
23 l l
Statements of Changes in Consolidated Financial Position Middle South Utilitics, irre, & Subsidiaries For the years ended December 31 1986 1985 1984 i I 1 Funds Provided By: (In thousands) Operations: Net income (1984 includes 517.6 million special item (Note 1D 5 451,302 5 400,991 s 508,437 Depreciation ... .. ... 346,361 265,500 192,452 Deferred income taxes and investment tax credit adjustments-net . . 556,223 150,223 50,867 Write-off of deferred costs relating to standard coal plant design and equipment 31,657 16,790 - Wnte-off of deferred costs relating to SFI's fuel acquisition program . 19,151 - - Allowance for equity funds u ed during construction (Note 1) (8,830) (217,734) (301,123) Provision for losses . 13,978 52,707 - Total funds provided by operations . 1,400,842 6o8,477 450,633 Other: Allowance for equity funds used during construction (Note 1) 8,830 217,734 301,123 11,846 186,151 247,526 Gas contract settlements (Note 11) . Decrease in working capital * - - 25,581 Miscellaneous-net . - 20.827 16.220 Total funds provided excluding financing transactions . 1,430,518 1,093,180 1,041,083 Financing and other transactions: Common stock - 208,539 278,079 Preferred stock. . . . . 85,000 - 65,000 First mortgage bonds . . .,... 1,750,000 130,000 625,000 Bank notes and other long-term debt . 427,846 446,684 399,094 Sale and leaseback of nuclear feet . . . .. 143,998 54,045 36,157 Obligations under capital leases and an inventory supply agreement. 29,233 3,023 4,164 Short. term secunties-net . - 156,348 - Total funds provided by financing and other transactions 2,436,077 908,639 1,407,494 Total funds provided 53,866,505 52,091,828 s2,448,577 Funds Applied Toi Utility plant additions: Construction expenditures for utihty plant S 335,289 $ 876,473 51,298,858 Nuclear fuci . 74,718 64,225 124,545 Capital leases . 1,773 4,021 5.000 Total grnss additions (includes allowance for funds used during construction) . 411,780 944,719 1,428,403 Rate deferrals (Notes 1,2, and 8). 780,563 242,744 - Other: Dividends declared on cornmon stock (Notes 7 and 8) . - 175,128 315,811 Increase in working capital
- 105,232 38,213 -
Gas contract settlements (Note 11) . ... ... 68,221 249,117 20,018 - Deferred costs relating to standard coal plant design . 10,743 60,389 - Mkcellaneous-net . 49,800 - - Total other funds apphed . 234,086 522,847 335,829 Financing transactions: Retirement of bank notes and other long-term debt . 1,352,912 298,070 95,149 Retirement of first mortgage bonds - 825,630 73,600 80,865 Redemption of preferred stock . . . . . . 40,961 9,848 16,195 Unamortized premium on reacquired debt . 34,918 - - Funds held in escrow . 19,162 - - Short. term secunties-net . 166,583 - 492,136 Total funds applied to fmancing transactions . 2,440,166 381,518 684,345 Total funds applied . 53,866,595 52,001,828 s2,448,577
' Increase (Decrease)in Working Capitah Cash and special deposits S 8,553 s (3,461) s 8,031 Receivables (13,824) 65,862 5,323 Fuel inventory . . . (26,177) (33,237) 42,704 Accounts payable . 82,307 (119,006) 28,799 Deferred fuel cost . .
12,731 4,266 (47,009) Interest and taxes accrued . 10,578 41,861 (51,803) Dividends dalared . . . . . . . . 13,741 68,532 (11,910) Other current assets and habilities 17,323 14,206 284 Total. 5 105,232 s 38,213 5 (25,581)
- Working capital excludes the following current awets and liabihties: temporary investments, rate deferrais, deferred income taxes, notes payable, currently maturing long-term debt, and the gas contract settlements.
See Notes to Consohdated Financial Statements. 24
Notes to Consolidated Financial Statements Middle South Utilities, Inc. & Subsidiaries N:te 1. MP&L has a fuel adjustment clause which allows current Summary of Significant Accounting Policies m my f fuelc sts.Thethreeotheroperatingsubsidiaries utilize a deferral method of accounting for those fuel costs A. Principles of Consolidation recoserable under fuel adjustment clauses. Under this The accompanying consolidated financial statements method, such costs are deferred until the related revenues include the accounts of Middle South Utilities, Inc. (the are billed. Company or MSU) and its direct and indirect subsidiaries, The fuel adjustment factor for AP&L contains an amount Arkansas Power & Light Company (AP&L), Louisiana Power for a nuclear reserve estimated to cover the cost of & Light Company (LP&L), Mississippi Power & Light replacement energy when the nuclear plant is down for Company (MP&L), New Orleans Public Service Inc. (NOPSI), scheduled maintenance and refueling.The reserve bears MSU System Services, Inc. (SSI) (formerly Middle South interest and is used to reduce fuel expense for fuel adjustment Services, Inc.), System Energy Resources, Inc. (SERI) purposes during the shutdown period. (formerly Middle South Energy, Inc.), System Fuels, Inc. . (SFI), and Electec, Inc. The above companies, excluding D. Utility Plant and Depreciation Electec, Inc., are collectively referred to as the System Utility plant is stated at ongmal cost. The cost of companies or the Middle South System. All significant additions to utility plant mcludes contracted work, direct I bor and materials, allocable overheads, and an allowance intercompany transactions have been eliminated except as allowed by Statement of Financial Accounting Standards f r the composite cost of funds used during construction. The cost of units of property retired are removed from (SFAS) No. 71. utility plant and such costs, plus removal costs, less salvage, B. Systems of Accounts are charged to accumulated depreciation. Maintenance The accounts of the Company and its service subsidiary, and repairs of property and replacement of items determined SSI, are maintained in accordance with the Public Utility t be less than umts of property are charged to operating Holding Company Act of 1935 (Holding Company Act), as administered by the Securities and Exchange Commission 'y,"p're iation is computed on the straight-line basis at (SEC), which has adopted a system of accounts consistent rates based on the estimated service lives of the various with the system of accounts prescribed by the Federal classes of property. However, depreciation on Unit 1 of Energy Regulatory Commission (FERC). the Grand Gulf Station (Grand Gulf 1) was computed on the The accounts of the System operating companies (AP&L, LP&L, MP&L, and NOPSI) are maintamed m accordance units of production method for the initial twelve months of commercial operation (which began July 1,1985) and, with the systems of accounts prescribed by the applicable with FERC approval, for an additional six months thereafter. regulatory bodies, which systems of accounts substantially Subsequent to December 31,1986, depreciation will be conform to those prescribed by the FERC. The accounts of computed on a straight-Hae basis. SERI has filed an the generating subsidiary, SERI, are maintamed in application with the FERC to determine the appropriate accordance with the system of accounts prescribed by the depreciation rate for Grand Gulf 1. Depreciation rates for FERC. The accounts of the non-utility subsidiary, Electec, Inc., are maintamed m accordance with the system of LP&Us Waterford 3 Nacicar Station (Waterford 3) and for AP&Us nuclear station include a provision for nuclear accounts prescribed by the SEC. plant decommissioning costs. Depreciation provisions on C. Revenues and Fuel Costs average depreciable property approximated 2.7% 2.9%, and Three of the operating subsidianes record electric and gas 3.3% in 1986,1985, and 1984, respectively. revenues as billed to their customers on a cycle billing Substantially all of the System's utility plant is subject basis. Revenues are not accrued for energy delivered but to the liens of the subsidiaries' first mortgage bond indentures. not yet billed by the end of the fiscal period. Substantially all of the rate schedules of the operating subsidiaries include E. Rate Deferrals adjustment clauses under which the cost of fuel used for The System operating companies had in effect in 1985 generation and gas purchased for resale above or below and/or 1986 various rate moderation or phase-in plans in specified base levels is permitted to be billed or required order to reduce the immediate effect on ratepayers of to be credited to customers, the inclusion of Grand Gulf I and Waterford 3 costs in rates. Prior to January 1,1984, LP&L recognized revenue when Under these plans, certain costs are either permanently billed. To provide a better matching of LP&Us revenues retained (and not recovered from ratepayers), deferred in the and expenses, effective January 1,1984, LP&L adopted, early years of commercial operation and collected in the later in March 1984, a change in accounting method to provide years, or recovered currently from customers.These plans vary for accrual of the non-fuel portion of estimated unbilled both in the proportions of costs that each company retains, revenues. Unbilled revenues result from energy delivered since defers, or recovers and in the length of the deferral / recovery the period covered by the latest billings to customers. The periods. By deferring costs associated with the rate cumulative effect of this accounting change as of January 1, moderation plans to the future when they will be collected 1984, was recorded in March 1984 and increased 1984 net through increased rates billed to customers, the impact income approximately $17.6 million (net of related income of the deferral aspect of these plans on the income statement taxes of $16.5 million). has been removed. Only those costs nermanently retained 25
Notes to Consolidated Financial Statements h1iddle South Utilities, Inc. & Subsidiaries I and not recovered through rates or through sales to third Effective h1 arch 2,1984, this accrual rate was changed by parties result in a reduction of net income. Because the actual that commission to 3.5% on LP&L's investment in Waterford 3 collection of revenues to recover the deferred costs will up to an investment of 51.7 billion. The effective composite not occur until the future, each company records a deferred rates of the operating subsidiaries for the balance of AFUDC asset representing the amount of the deferrals and, at the were 9.2%,9.7%, and 9.5% for 1986,1985, and 1984, same time, incurs additional capital requirements to fina .ce respectively. Through June 30,1985, SERI used an accrual these deferrals. The recording of these deferred costs as rate for AFUDC based on a return on average common equit y assets is based on the probability of the regulator allowing of 14% plus actual interest costs net of related income the recovery of these costs in future rates. In most cases, taxes. As a result of the FERC's June 13.1985 decision, SI , s the carrying charges associated with the financing of the 14% accrual rate for the equity component of AFUDC was deferrals are recovered currently from customers. increased to 16%, effective July 1,1985. SERI's effective F. Postretirement Benefits composite AFUDC rate was 10% for 1986. The Company and its subsidiaries have various defined The Company's subsidiaries continue to capitalize AFUDC postretirement benefit plans covering substantially all of on projects during periods of interrupted construction when their employees.The policy of the Company and its such interruption is temporary and the continuation can subsidiaries has been to fund pension costs accrued, but be justified as being reasonable under the circumstances. in certain cases in order to conserve cash, pension costs On September 18,1985, the Mississippi Public Service have been funded in accordance with contribution guidelines Commission (h1PSC) ordered SERI and h1P&L to suspend established by the Employee Retirement Income Security construction of Grand Gulf 2 as of that date. Concurrent Act of 1974. Other postretirement plan costs are funded with the suspension of construction, SERI ceased accruing as incurred. AFUDC on the unit effective September 18,1985. (See G. Income Taxes Note 8 " Commitments and Contingencies-Grand Gulf 2" The Company and its subsidiaries file a consolidated f r further information.) Federal income tax return. Income taxes are allocated to all I. Other Noncurrent Liabilities subsidiaries based on their contributions to the consolidated It is the policy of AP&L, LP&L, and NOPSI to provide taxable income. Deferred income taxes are provided for provisions for uninsured property risks and for claims differences between book and taxable income to the extent for injuries and damages through charges to operating permitted by the regulatory bodies for ratemaking purposes. expenses on an accrual basis. Accruals for these provisions, Investment tax credits utilized are deferred and amortized classified as other noncurreat liabilities, have been allowed based upon the average useful life of the related property. for ratemaking purposes. Prior to January 1,1985, MP&L
- 11. Allowance for Funds Used During Construction had a similar policy regarding such provisions. However, to To the extent that the Company's operating subsidiaries c mply with a regulatory agreement, MP&L, effective are not permitted by their regulatory bodies to recover in J nuary 1,1985, suspended provisions for its uninsured current rates the carrying costs of funds used for construction, property risks and claims for injuries and damages.
they capitalize, as an appropriate cost of utility plant, Effective July 1,1985, MP&L implemented a procedure an allowance for funds used during construction (AFUDC) to amortize, over a three-year period, the accumulated that is calculated and recorded as provided by the balances of such provisions as of June 30,1985. regulatory systems of accounts. Under this utility in<lustry J. Inventories practice, construction work in progress on the balance sheet Prior to January 1,1986, all fuelinventories of the System is charged and the income statement is credited for the were valued at average cost. In July 1986 SFI adopted, approximate net composite interest cost of borrowed funds retroactive to January 1,1986, the last-in, first-out (LIFO) and for a reasonable return on the equity funds used for valuation method for its fuel oil inventory in order to achieve construction. This procedure is intended to remove from a better matching of current market conditions with the the income statement the effect of the cost of financing the cost of fuel oil it charges the System operating companies. construction program, it effectively results in treating the This change in valuation method did not have a material AFUDC charges in the same manner as construction labor effect on the amounts charged to such companies. and material costs in that each is capitalized rather than K. Reclassifications expensed. As non-cash items, these credits to the income Certain reclassifications of previously reported amounts statement have no effect on current cash earnings. After have been made to conform with current classifications. the property is placed in service, the AFUDC charged to Due to the continued suspension of construction on Grand construction costs is recoverable from customers through Gulf 2 through 1989 or beyond, the total costs to date depreciation provisions included in rates for utility service- of construction on the unit were reclassified in December For the period January 1,1984, through March 1,1984, 1986 from utility plant-construction work in progress LP&L used an accrual rate for AFUDC of 3% on $1.3 billion to deferred debits-suspended construction project. (See of construction costs in accordance with a May 1981 rate Note 8 " Commitments and Contingencies-Grand Gulf 2:') order from the Louisiana Public Service Commission (LPSC). These reclassifications had no effect on net income. 26
i Note 2. Decisions Pending Rate and Regulatory Matters On July 11,1986, LP&L filed with the Council, with respect to the 15th Ward of the City of New Orleans, a general Decisions Rendered retail rate increase application to reflect costs associated On January 30,1987, the LPSC issued a permanent rate with Grand Gulf 1, to reflect the in-service status of order granting LP&L a rate increase of 576.2 million annually Waterford 3, and to produce a just and reasonable rate of with respect to Waterford 3. This amount was in addition return. The application is pending. On February 19,1987, to the rate increases resulting from the LPSC's November 1985 the Council adopted a resolution ordering an investigation emergency interim rate order.The LPSC also ordered LP&L of LP&L's prudence in connection with construction of to raake no further refunds to its jurisdictional customers Waterford 3. of theproceedsof agascontractsettlementof approximately Other Rate Matters 5386 million and to use these funds to offset tne accumulated On August 28,1986, the Arkansas Public Service Waterford 3 revenue deferral of approximately 5247 million Commission (APSC) approved a revised rate rider filed by as of January 31,1987. The remainder of the proceeds will AP&L with respect to the Grand Gulf Settlement Agreement be used as a rate base reduction.This permanent rate order and also approved, with certain modifications, a new tax further stated that there would be no need for a mult'- adjustment rate rider filed by AP&L to reflect the reduction year phase-in plan for Waterford 3 as originally proposed in the corporate income tax rate as provided by the Tax in the interim order. Moreover, the LPSC stated that Reform Act of 1986. The concurrent implementation of prudence issues associated with Grand Gulf 1, Waterford 3, these riders results in a net decrease in revenues of approxi-and LP&L's management would not be resolved in this mately 521.3 million, which is applicable to the period order. LP&L has not decided whether to appeal the order. September 1,1986, to August 31,1987. Several intervenors have filed with the LPSC motions for rehearing and for stay of the January 30,1987 order. The On September 16,1985 the MPSC issued an order matter is pending. establishing a multi-year phase-in plan allowing recovery As part of the November 1985 interim rate order, LP&L by MP&L of its payments to SERI in respect of costs agreed to permanently absorb 5284 million of Waterford 3 associated with Grand Gulf 1. This order was appealed to costs. It was also decided at that time that any disallowance the Mississippi Supreme Court by the Mississippi Attorney resulting from a prudence investigation would be limited to General and the Mississippi Legal Services Coalition. On the amount by which the imprudent investment exceeds $284 February 25,1987, the Mississippi Supreme Court rendered million . On October 22,1986, the consultants retained a decision reversing and remanding the rate case to the by the LPSC to investigate the prudence issues made public MPSC for further proceedings not inconsistent with the their report in which they concluded that a total of 5143 Court's opinion. The Supreme Court found reversible error million in expenditures were imprudently incurred on in the MPSC's September 16,1985 order on the grounds that Waterford 3. It is the position of LP&L that none of the costs the MPSC (1) adopted retail rates to pay Grand Gulf 1 were imprudently incurred. The report also concluded that expenses without first determining that the expenses were the decisions to build Waterford 3 and Grand Gulf I were prudently incurred, (2) failed to join MSU and SERI as reasonable. parties to the rate proceeding, and (3) should not have allowed On March 25,1986, NOPSI accepted an offer of settlement intervention in the proceeding by security holders of MSU. from the New Orleans City Council (Council) with respect MSU and SERI have intervened in the Mississippi Supreme to permanent rate relief for Grand Gulf 1.The settlement Court appeal. MP&L continues to collect the rates approved provides, among other things, for NOPSI to currently by the MPSC in its September 16,1985 order, which rates recover certain portions of its non-fuel Grand Gulf 1-related are subject to refund to the extent that a final judicial costs; to defer a portion of such costs for future recovery determination may result in a schedule of rates less than through a phase-in plan; and to permanently absorb a total what the MPSC allowed. MP&L has requested a stay from of 551.2 million in previously unrecovered Grand Gulf 1 the Mississippi Supreme Court decision pending appeal to non-fuel related costs. Other terms and conditions of the the U.S. Supreme Court. MP&L may be required to post settiement include NOPSPs agreement not to request any a bond in connection with the continuation of the appellate non-Grand Gulf electric rate increase to take effect prior process which could be significant and may not be able to January 1,1988, and the agreement between NOPSI and to be obtained. If a stay is not granted and the September 16, the Council to allow the Council to continue with its inquiry 1985 order is determined to not be in effect, or if the stay into the prudence of NOPSPs involvement in the Grand is granted and a final judicial determination is materia'ly Gulf Station. In conjunction with the prudence inquiry, adverse to MP&l's interest, MP&L's earnings, liquidity, and the Council may attempt to take action to force NOPSI to financial condition and its ability to meet its ongoing absorb additional costs associated with Grand Gulf 1. obligations would be severely impaired, and MP&L could be NOPSI would vigorously oppose any such action by the rendered insolvent. Through February 28,1987, MP&L had Council through the courts. collected approximately $160 million under the September 16, 1985 order and had deferred approximately 5395 million 27
Notes to Consolidated Financial Statements l l Middle South Utilities, Inc. & Subsidiaries of its allocable share of Grand Gulf I expenses, based On September 16,1986, the MPSC issued an order upon provisions in the plan allowing for future recovery establishing a docket for the stated purposes, among other of such amounts. things, of examining the prudence of actions of h1P&L On September 16,1986, the MPSC issued an order that and/or SERI relatmg to the construction and operation of would have blocked an increase in MP&Us rates scheduled the Grand Gulf Station and the appropriate regulatory to go into effect in the second year of MP&Us phase-in treatment of associated costs; obtaining FERC review of plan associated with Grand Gulf 1. On September 19,1986, the SERI's rate of return on common equity; obtaining FERC MPSC withdrew the September 16 order and allowed the revision and/or modification of various aspects of MP&Us Grand Gulf I second year phase-in rate to go into effect. Grand Gulf I expenses established by the FERC, including Concurrently, MP&L filed a temporary rate reduction rider the allocation of Grand Gulf I costs; inquiring generally which reduced revenue requirements in other areas by an into the appropriateness of MP&Us general rate structure; amount equivalent to the additional Grand Gulf revenue, and performing a detailed audit of the books and records totaling about $41 million annually. MP&L expects, however, of SERL Motions filed by MP&L and SERI to dismiss this that this temporary reduction in base rates will be partially docket were denied by the MPSC on January 28,1987. On otfset by a reduction in certain of its expenses. February 3,1987, the MPSC issued an order in this docket Regulatory Matters directing SERI and MP&L to show cause why their Certificate On June 13,1985, the FERC issued a decision in the Unit of Public Convenience and Necessity relating to the Grand Power Sales Agreement and System Agreement proceedings Gulf Station should not be cancelled for the failure of (June 13 Decision). The June 13 Decision, among other SERI and MP&L to allow the MPSC to audit the books and things, allocated the capacity and energy of SERI's 90% records of SERI. SERI had objected to the MPSC auditing share of Grand Gulf 1 to the System operating companies, its books and records on jurisdictional and other grounds. granted SERI a 16% rate of return on common equity, and On February 23,1987, South Mississippi Electric Power adopted a 16% rate of return on common equity under the Association (SMEPA), owner of 10 percent of the Grand System Agreement.Various parties, including AP&L and Gulf Station, filed a motion to intervene in the proceedings. MP&L, filed appeals of the FERC rulings and some parties On March 3,1987, SMEPA's motion to intervene was filed motions for a stay with the United States Court of granted. A hearing on the show cause order is scheduled for Appeals for the District of Columbia Circuit. On January 6, April 7,1987. The ultimate outcome of these proceedings, 1987, the Court of Appeals affirmed the June 13 Decision. including the show cause order, cannot be predicted. In its opinion, the Court of Appeals held, among other Takeover Investigations things, that the allocation of Grand Gulf 1 capacity and costs In connection with controversies surrounding the cost was within the FERC's jurisdiction; that state commissions and allocation of capacity and energy from the Grand Gulf may not interfere with the FERC's plenary power to allocate Station, various governmental bodies and officials have been Grand Gulf I capacity and costs; and that the FERC's June 13 investigating tl c possibility of condemning, expropriating, Decision "was both rational and within the Commission's or otherwise acquirir.g electric utility properties of range of discretion to remedy unduly discriminatory rates'.' certain of the System operating companies. The Council Various parties have filed requests for rehearing with the is considering the acquisition by the City of New Orleans Court of Appeals and petitions for certiorari to the United of the electric utility properties of NOPSI and those of States Supreme Court. LP&L in the 15th Ward of the City.The ordinances under On September 17,1986, the LPSC sent to the FERC for which NOPSI operates state, among other things, that the filing a complaint against SERI alleging that the 16% rate of City has a continuing option to purchase NOPSI's properties. return on common equity under the Unit Power Sales On March 7.1985, the Council established a public power Agreement authorized by the June 13 Decision has become authority for the purposes, among others, of acquiring and an unjust and unreasonable rate. The complaint is seeking operating electric power utilities in the City of New the reduction of such rate "to a just and reasonable level Orleans. In addition, the governing body of the Parish based on current conditions" Various parties have of Jefferson, Louisiana has been studying the possible intervened in this proceeding. On January 27,1987, the acquisition of LP&L's properties within that Parish. FERC denied SERI's motion to dismiss the complaint and in certain cases, government officials have expressed the ordered that hearings be held on the justness and reasonable- view, with which the affected System operating companies ness of such rate. Any change ordered by the FERC would be do not agree, that a condemnation, expropriation or other prospective only. The matter is pending. acquisition of properties could be accomplished without On September 25,1986, the LPSC sent to the FERC for the acquiring entity assuming responsibility for the related filing a complaint against SSI, similar to the complaint obligations of the particular System operating company, discussed above, seeking a reduction in the FERC approved especially those relating to the purchase of capacity and 16% rate of return on common equity under the System energy from the Grand Gulf Station. NOPSI and LP&L Agreement. Various parties have intervened in this believe that any such takeovers would not be in the best proceeding. On January 27,1987, the FERC consolidated interests of their respective customers and investors, or the this proceeding with that of the above mentioned proceeding companies themselves, and would vigorously oppose any investigating SERI's return on equity. The matter is pending. actual takeover attempts. 28
I I Note 3. Income Taxes Income tax expense (credit) consists of the following: 1986 1985 1984 (In thousands) Current: State.. . . s(33,423) 5 6,258 s 21,634 Deferred-Net: Liberalized depreciation . . 271,674 139,421 73,394 Unbilled revenue . . 730 7,598 18,985 Rate deferrals . 383,180 117,245 - Deferred fuel cost . . 8,082 1,378 (22,775) Other deferred nuclear power costs . . 11,091- 11,238 - Revenues subject to refund . (1,623) 2,594 (1,711) l Gas contract settlement. . . . 81,096 (82,133) - Loss on sale of fuel oil and nuclear fuel to third parties . 3,171 17,779 - Adjustment of prior years' tax provisions . . (1,022) (19,410) - Provision for estimated losses . . 1,040 (43,415) - Other . .. 13,622 4,088 1,757 l Reduction due to tax loss carryforwards . . (209,799) (1,4(1.) (15,277) 1 Total. 561,242 154,c2_2 54,373 Investment tax credit adjustments-net (5,019) (',699) (3,506) Recorded income tax expense . 5522,800 5156,481 $ 72,501 Charged to operations . 5545,445 5238,647- 5216,395 l Credited to other income (22,645) (82,166) (160,442) Charged to cumulative effect of change in accounting method . - - 16,548 Recorded income tax expense 522,800 156,481 72,501 Income taxes applied against the debt component of AFUDC (3,157) 133,478 202,626 Total income taxes. . . 5519,643 5289,959 5275,127 Total income taxes differ from the amounts computed by applying the statutory Federal income tax rate to income before taxes. The reasons for the differences are as follows (dollars in thousands): 1986 1985 1984
% of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount income Amount Income Computed at statutory rate. . 5489,783 46.0 $298,114 46.0 5306,034 46.0 Increases (reductions) in tax resulting from:
AFUDC . . (2,142) (.2) (164,999) (25.5) (245,742) (36.9) State income taxes net of Federal income tax effect 28,185 2.6 18,687 2.9 11,659 1.8 Depreciation . 21,536 2.0 3,970 .6 805 .1 Other-net (14,562) (1.3) 709 .1 (255) (.1) Recorded income tax expense 522,800 49.1 156,481 24.1 72,501 10.9 Income taxes applied against the debt component of AFUDC (3,157) (.3) 133,478 13.0 202,626 20.8 Total income taxes . 5519,643 y 4 $289,959 37.1 5275,127 31.7 29
Notes to Consolidated Financial Statements Middle South Utilities, Inc. & Subsidiaries L _i The tax effects of the consolidated 1984,1985, and 1986 In March 1986, the Foreign Bank Loan Agreement was Fed al tax losses have been recorded as reductions of amended to (1) increase the interest rate on borrowings deferred income taxes.The remaining Federal tax loss thereunder by 1% effective from February 5,1986, and carryforwards at December 31,1986, amounted to 5895.5 (2) change certain provisions of the Foreign Bank Loan million and are available to offset taxable income in future Agreement relating to Grand Gulf 2 such that prepayment years. If not used, they will expire ir 1994 through 2000. of outstanding borrowings under this a;;reement would Unused investment tax credits at December 31,1986 not be required for condemnation, abandonment or amounted to 5732.6 million before any reductions resulting noncompletion of Grand Gulf 2. These amendments relating from the Tax Reform Act of 1986. These credits may be to Grand Gulf 2 became effective in June 1986 when SERI applied against Federal income tax liabilities in future years. paid to the Foreign Banks the deferred payments discussed If not used, they will expire in 1992 through 2001. below as well as the 547.25 million payment due to the Cumulative income tax timing differences for which Foreign Banks on August 5,1986. deferred income tax expenses have not been provided are In March 1986, the U.S. and Foreign Banks allowed SERI
$480.7 million, 5467.4 million, and 5382.5 million in 1986, to defer to June 1986, 5268.1 million of scheduled payments 1985, and 1984, respectively. due in February and March 1986. On June 5,1986, SERI See Management's Financial Discussion and Analysis for paid the 5215.8 million remaining principal balance due a discussion of the Tax Reform Act of 1986 and its impact on of these deferred amounts. In addition, on June 30,1986, the System. SERI prepaid the 547.25 million semiannual payment due August 5,1986 under the Foreign Bank Loan Agreement and the 5125 million semiannual payment due September 1,1986 Note 4. under the U.S. Bank Loan Agreement. In September 1986, l.ines of Credit and Related Borrowings SERI prepaid 5628.2 million of bank notes outstanding The Company had, during 1986, a revolving credit under the U.S. Bank Loan Agreement.
agreement with various banks providing for the issuance of In January 1987, SERI prepaid $52.82 million of bank unsecured bank notes totaling 525 million. On December 31, notes under the U.S. Bank Loan Agreement and $15 million 1986, the Company entered into a new bank revolving under the Foreign Bank Loan Agreement. In addition, credit agreement which provides for borrowings of up to SERI paid in February 1987 the 547.25 million semiannual 560 million and will terminate December 31,1989. The payment due under the Foreign Bank Loan Agreement. On Company pays a commitment fee on the unused portion of March 1,1987, SERI paid the scheduled semiannual install-the credit line. ment due under the U.S. Bank Loan Agreement. Prior to June 28,1985, SERI had two revolving credit SERI has separate " interest rate swap" agreements, each agreements with various banks providing for borrowings with a bank, through February 1989 for $105.0 million totaling $2,089 million. One agreement, for $1,711 million, and $131.3 million, respectively, (as of December 31,1986) was with U.S. Banks; the other agreement, with Foreign of the amounts outstanding under the Foreign Bank Loan Banks, was for $378 million. On August 2,1985, and Agreement. SERI has agreed to make semiannual interest August 9,1985, respectively, the Foreign and U.S. Bank payments based upon an 11.5% and an 11.16% fixed rate, Loan Agreements were amended, effective as of June 28,1985, respectively, in exchange for semiannual interest payments to convert the borrowings thereunder to term loans. At by the banks based upon the London Interbank Offered December 31,1986, SERI had outstanding borrowings of Rate (LIBOR). These agreements serve to offset fluctuations
$473.2 million and s236.2 million, respectively, under the U.S. in wriable rates to be paid under SERI's Foreign Bank Loan and Foreign Bank Loan Agreements. The loans with U.S. Agreement. They do not change SERI's obligations to the Banks have a maturity date of February 5,1989, subject to Foreign Banks for interest payments of LIBOR plus 2%.
mandatory semiannual payments of $125 million due on The System operating companies are currently authorized the first day of each March and September, with the unpaid by the SEC to effect short-term borrowings in an aggregate balance due on the maturity date. A portion of these amount outstanding at any one time of up to 10% of their semiannual payments will be applied to an escrow account respective capitalizations. The operating subsidiaries have for the benefit of certain banks participating in the U.S. Bank lines of credit, not requiring commitment fees, providing Loan Agreement that provided a letter of credit in connection for short-term borrowings through loans from banks within with SERI's Series C Pollution Control Revenue Bonds. The their service territory. At December 31,1986, LP&L had uncollateralized amount needed to fund the escrow account available and unused bank lines of credit of $110.0 million was approximately $215.4 million at December 31,1986. with banks located outside of the Middle South System The maturity date for the loans with Foreign Banks is service area. Compensating balances (approximately 5% of February 5,1989, subject to mandatory semiannual payments the commitment amount) or equivalent fees are required of $47.25 million to be made on February 5 and August 5 by certain of these non-service area lending banks. These of each year. compensating balances are not restricted as to withdrawal. In addition, NOPSI has a $30 million revolving credit agreement with an institutionallender under which borrow-ings are to be secured by a security interest in or lien upon 30
i ! accounts receimble of NOFSI. SERI is subject to limitations The short-term borrowings (excluding money pool ! on the maximum amount of short-term borrowings borrowings) and the interest rates (determined by dividing outstanding under both the Holding Company Act and appPeable interest expense by the average amount borrowed) the terms of its credit arrangements. At December 31,1986, for the Middle South System were as follows: 1 the maximum permitted was the lesser of 5% of capitalization or $200 million. However, at December 31,1986, SERI had Year Ended December 31, no sources of short-term borrow:ngs. 1986 1985 1984 Additionally, the four System operating companies, together with MSU, SERI, SSI, and SFI, are authorized (Dollars in thousands) to participate in a System money pool, whereby those Average Borrowing: companies in the System with amilable funds can invest in Bank loans. . 5 96,270 s118,095 s131,275 the pool while other companies in the System (except MSU) Commercial paper . 5121,603 5131,978 5116,558 having short-term needs can borrow from the pool, thereby Other. s 32,542 s 51,702 5 50,592 reducing the System's dependence on external short-term Maximum Borrowing: borrowings. Prior to 1987, SERI participated only as a Bank loans. . $125,160 5199,695 $219,362 lender / investor in the money pool. Effective January 1,1987, Commercial paper . $125,000 $135,000 $135,000 SERI received authorization from the SEC to borrow from Other. . 5 49,135 5 54,600 5 68,625 the money pool subject to its maximum authorized level of Year-end Borrowing: short-term borrowings. The maximum borrowing and Bank loans. . - 5124,160 s 10,000 average borrowing by participants from the System money Commercial paper . 5105,000 5125,000 $135,000 pool during 1986 were 5105.8 million and $40.6 million, Other. . $ 31,000 5 49,135 5 68,625 respectively. At December 31,1986, System money pool Average Interest Rate: borrowings were s26.2 million. In addition, SSI has a line of During period-credit with MSU for 530 million through December 31,1987. Bank loans . 8.9% 9.7% 11.9% At December 31,1986, SFI had a fuel oil financing Commercial paper. 8.1% 9.4% 11.8 % arrangement allowing for borrowings of up to $50 million Other . . 9.2% 9.6% 11.6% subject to a limit equimlent to the lower of the cost or the fair At end of period-l market wlue of SFI's fuel oil inventory and certain related Bank loans . - 10.1% 9.6% receivables. On January 1,1987, this arrangement was Commercial paper . 7.4% 9.5% 9.6%
, reduced to 540 million. SFI's borrowings under this fuel oil Other . 8.6% 10.7% 9.0%
financing arrangement were $26.0 million at year end. In addition, at December 31,1986, SFI had two arrangements to borrow up to $105 million in the aggregate through the sale of commercial paper for use in financing its nuclear fuel imfentory. On February 1,1987, after one of these arrange-ments was reduced, this amount totaled $85 million. The reduced arrangement, which totaled $20 million at February 1, 1987, will be allowed to terminate in April 1987. Borrowings under these short-term arrangements are restricted as to use and are secured by SFI's fuel oil inventory and a portion of its nuclear fuel inventory, respectively, and certain accounts receimble arising from the sale of these inventories. SFI also has a revolving bank credit agreement which allows for borrowings of up to $15 million through December 31, 1987 and is secured by its oil and gas properties. A commit-ment fee is paid on the unused portion of this commitment. Further, SFl has a secured revolving credit agreement to finance, in part, its nuclear fuel inventory, which allows for borrowings of up to $50 million through April 10,1989. It is currently contemplated that the above financing arrangements, which are scheduled to terminate during the period 1987-1989, will, with the exception of the arrangement terminating in April 1987, be extended if necessary or alternative financing arrangements will be secured. 31
Notes to Consolidated Financial Statements Middle South Utilities, Inc. & Subsidiaries L ~~l Credit facilities at December 31,1986,1985, and 1984 and borrowings thereunder of the System companies were as follows: December 31,1986 December 31,1985 December 31,1984 Credit Credit Credit Facilities Borrowings Facilities Borrowings Facilities Borrowings (In thousands) Short-term: Company .. .. - - 5 71,500 5 25,000 5 71,500 - SERI - - - - 5 24,680 5 10,000 SFI. . . 5170,000 $131,000 5 195,000 5 174,135 5 210,000 5 203,625 Operating subsidiaries . . 5270,485 5 5,000 5 158,160 5 99,160 5 322,360 - Long-term: Company 5 60,000 - - - - - SERI 5709,450 5709,450 51,807,167 51,807,167 52,089,000 52,074,000 SFl . . 5 50,000 5 18,000 5 65,000 5 42,800 s 15,000 - Note 5. Preferred Stock The number of shares of preferred stock of the operating subsidiaries as of the end of the last two fiscal years was as follows: Shares Shares Outstanding Authorized at at December 31, Call Price December 31,1986 1986 1985 Per Share Cumulative,5100 Par Value Without sinking fund: 4.16% - 5.56% 1,070,774 1,070,106 1,070,106 5102.50 to $107.00 6.08% - 8.56% 1,180,000 1,180,000 1,180,000 5102.83 to $105.28 9.16% - 11.48% 795,000 795,000 795,000 $104.06 to $111.11 3,045,774 3,045,106 3,045,106 With sinking fund: 8.52% - 9.00% 850,000 850,000 - 5108.52 to $109.00 10.60 % - 12.00% 469,892 469,892 507,464 5106.74 to 5112.00 14.75 % - 17.00% . 284,995 284,995 585,095 5111.58 to $116.16 1,604,887 1,604,887 1,092,559 Unissued . 5,656,500 Total 10,307,161 Cumulative, 525 Par Value Without sinking fund: 8.84% 400,000 400,000 400,000 527.11 10.40% 600,000 600,000 600,000 527.95 1,000,000 1,000,000 1,000,000 With sinking fund: 9.92% - 12.64% 6,397,371 6,397,371 6,535,121 527.01 to 528.16 13.12% - 15.20% 6,227,626 6,227,626 6,377,626 527.46 to $29.05 19.20% 2,000,000 2,000,000 2,000,000 528.73 14,624,997 14,624,997 14,912,747 Unissued . 15,200,000 Total. . 30,824,997 32
i __ i Changes in the number of shares of preferred stock of the The amounts of preferred stock of the operating operating subsidiaries, all of which were with sinking fund, subsidiaries as of the end of the last two fiscal years were during the last three fiscal years were as follows: as follows: Number of Shares December 31, 1986 1985 1984 1986 1985 Sales: (In thousands) AP&L Without sinking fund: 8.52%, $100 par 500,000 - - Stated at $100 a share . 5304,511 5304,511 LP&L Stated at $25 a share . 25,000 25,000 19.20%, $25 par . - - 2,000,000 Premium . . 1,456 1,456 MP&L Total without 9.00%, 5100 par 350,000 - - sinking fund . , $330,967 5330,967
.16.16%, $100 par - - 150,000 Redemptions: With sm. km.g fund:
AP&L St ted t $100 a share . 5160,488 $109,255 Stated at $25 a share . 365,625 372,819 9.92%,525 par . (18,000) (58,100) (79,678) 10.60%, $100 par - (6,105) (13,970) Premium . . 728 737 11.04%, 5100 par (37,572) (9,245) (18,045) Issuance and discount expense (18,676) (15,518) l 13.28%, $25 par . - (14,000) (180,434)
- LP&L Total with sinking fund . 5508,165 5467,293 10.72%, $25 par . (119,750) (120,400) (120,000) 13.12%, $25 par (85,000) (80,000) (80,000) 15.20%,525 par . (65,000) (60,000) - Cash sinking fund requirements for the ensuing five years sp&L for preferred stock outstanding at December 31,1986, are l 14.75%, $100 par (100,000) - - as follows (in thousands)
- 1987, 514,850; 1988, 521,500;
! 17.00%, 5100 par (200,000) - - 1989, 522,250; 1990, 532,250; and 1991, 541,750. These NOPSI amounts reflect earlier redemptions of shares of preferred 15.44%, 5100 par (100) - (14,905) stock which may be applied against future cash sinking fund Total. 224,578 (347,850) 1,642,968 requirements. At December 31,1985, LP&L and NOPSI had an aggregate amount of cumulative preferred stock dividends in arrears of $26.7 million and 5.8 million, respectively. In addition, NOPSI had been precluded from making in full its March 1,1986, preferred stock sinking fund payment. During 1986 all arrearages with respect to the preferred stock dividends of LP&L and NOPSI and the preferred stock sinking fund payment of NOPSI were paid and eliminated. Subsequent to December 3L 1986, MP&L sold 350,000 shares of its 9.76% Preferred Stock, cumulative, $100 par value. 33
Notes to Consolidated Financial Statements Middle South Utilities, Inc. & Subsidiaries r I Note 6. Long-Term Debt The long-term debt of the Company and its subsidiaries as of the end of the last two fiscal years was as follows: December 31, 1986 1985 (In thousands) First Mortgage Bonds . . . . 54,541,658 53,617,288 Bank Notes: Due: 1987, at federal funds rate plus % of 1% . . . .. . . .. .
-- 15,000 1988, at negotiated money market rate . .. 18,000 27,800 1989, at 110% of the sum of prime and 1.3% . , , . . 473,200 1,476,417 1989, at 11.16% plus 2% (Note 4) . . . 131,250 183,750 1989, at 11.5% plus 2% (Note 4) . .. 105,000 147,000 Total Bank Notes . . . . .
727,450 1,849,967 Other: Long-Term Obligation-Department of Energy (Note 8) . 66,729 62,681 Municipal Revenue Bonds-due serially through 2004,1%%-8% . 29,118 31,793 Pollution Control Revenue Bonds and Installment Purchase Contracts: Due serially tbrough 2014,4.7%-11%% . . . 61,805 62,630 Due 1987-2016, 6%%-12%% 896,225 806,226 Less-Funds on deposit with trustees * - (106,904) Purchase Obligations Under Inventory Supply Agreement . 28,058 - Total Other . . 1,081,935 856,426 Unamortized Premium and Discount-Net (49,160) (33,711) Total Long-Term Debt . . . 6,301,883 6,289,970 Less- Amount Due Within One Year . . 318,854 609,380 Long-Term Debt Excluding Amcunt Due Within One Year . 55,983,029 $5,680,590
- Includes $105 mi!! ion of proceeds from the sale of Pollution Control Revenue Bonds for LP&L held in 1985 by the issuer of the letter of credit pending the participation by other banks in the letter of credit which occurred in December 1986.
Maturities and sinking fund requirements for the ensuing five years on long-term debt outstanding at December 31,1986, are as follows: Sinking Fund Matunties Requirements Cash Other** (In thousands) 1987 . 5317,489* $ 1,365 $20,341 1988 . $352,307* $ 1,320 $22,920 1989. . . $221,342* $54,820 $22,920 1990 . . 5 54,777 $54,890 $22,638 1991 . . S410,822 569,790 $21,368
- Excludes requirements of $215.4 million for escrow payments by 3ERI for the benefit of the U.S. Banks.
** Sinking fund requirements may be met by certification of property additions at the rate of 167% of the required amount.
34
I _ __ i The outstanding first mortgage bonds of the Company's subsidiaries as of December 31,1986 and 1985, were: 4%%- 6%- 9%- 12%- 15%- Maturity 5%% 8%% 11 % % 14M% 17%% Total (In thousands) 1986 1987 . . . $ 26,000 - - - - $ 26,000 1988. . . . $ 15,328 - 3 45,000 - - 60,328 1989. - - 5 45,000 - - 45,000 1990 . . . 5 20,800 - - - 5 30,000 50,800 1991 . .. . $ 27,000 - $300,000 - $ 80,000 407,000 1992-2001.. 5259,250 $172,760 $915,520 $205,000 $500,000 2,052,530 2002-2011 . . . - $375,000 $450,000 - - 825,000 2012-2016. - - $600,000 $440,000 $ 35,000 1,075,000 Total First Mortgage Bonds. $4,541,658 1985 1986 . .
- - $ 75,000 - 5 70,000 5 145,000 1987 . . 5 26,000 - - - - 26,000 1988 . . 5 15,373 - $ 45,000 - $125,000 185,373 1989 . - - $277,000 - - 277,000 1990. 5 20,900 - - - $ 30,000 50,900 1991-2000, 5286,250 $151,960 $137,540 $222,265 $755,000 1,553,015 2001-2010. - $400,000 $450,000 $ 55,000 - 905,000 2011-2014 - - - $440,000 $ 35,000 475,000 Total First Mortgage Bonds. 53,617,288 Subsequent to December 31,1986, AP&L redeemed its $80 million,16%% Series First Mortgage Bonds due February 1,1991.
Note 7. retained earnings of any subsidiary of MSU are not available Retained Earnings f r distribution to the common stockholders of MSU until such earnings are made available to the Company through The Holding Company Act of 1935 prohibits the the declaration of dividends by such subsidiary. (See Company's subsidiaries from making loans or advances to Management's Financial Discussion and Analysis and MSU. The indenture and charter provisions relating to Note 8 " Commitments and Contingencies-Dividend the operating subsidiaries'long-term debt and preferred Suspension" and "New Accounting Standard" for further
- stock, respectively, and the provisions of certain of SERI's information.)
financing agreements and indenture restrict the amount of Prior to January 1987, all of SERI's retained earnings consolidated retained earnings available for cash dividends on were restricted as to the payment of cash dividends on common stock of the subsidiaries. In addition, transfers by common stock due to provisions of certain of SERI's the operating subsidiaries from retained earnings to the stated financing agreements and its first mortgage bond indentures. value of common stock impose similar restrictions on the The provisions of SERI's Bank Loan Agreements allow amount of consolidated retained earnings available for cash SERI the right to pay cash dividends on common stock dividends on common stock of the subsidiaries. At upon SERI making sufficient prepayments to the U.S. Banks December 31,19%, the restricted retained earnings of to reduce the amount owing under the U.S. Bank Loan the Company's consolidated subsidiaries aggregated $1,379.3 Agreement at maturity to $125 million orless. On January 5, million. Accordingly,as of December 31,1986,5386.4 million 1987, SERI made a payment under the U.S. Bank Loan of consolidated retained earnings were free from such Agreement in the amount of $65 million, which was sufficient restrictions, including $375.9 million of unrestricted, to reduce the obligations outstanding thereunder to an undistributed retained earnings of the Company's amount which, among other things, cancelled the suspension subsidiaries. However, the 5375.9 million of undistributed pursuant to the Bank Loan Agreements of SERI's right to subsidiary retained earnings does not reflect the ultimate pay common stock dividends. Consequently, SERI would reduction in LP&L's retained earnings which will be be permitted to pay common dividends to its parent, occcsioned by the LPSC's November 1985 interim rate order MSU, within the limits prescribed in the Foreign Bank Loan permanently disallowing a portion of LP&L's investment Agreement and the Reimbursement Agreements for its in Waterford 3. Further, the unrestricted, undistributed Series A and B Pollution Control Revenue Bonds, as described 35
Notes to Consolidated Financial Statements Middie South Utilities, irsc. & Subsidiaries below.The declaration and payment of dividends by Note 8. SERI is dependent upon appropriate action by SERrs Board Commitments and Contingencies of Directors. Overview As mentioned above, SERI continues to be limited in the At December 31,1986, the Middle South System's most payment of cash dividends on common stock by pro- significant commitments and contingencies related to (1) visions of the Foreign Bank Loan Agreement and the challenges to and/or potential reversals of certain of the Reimbursement Agreements for its Series A and B Pollution System operating companies' retail rate orders (see below), Control Revenue Bonds. Under these agreements, SERI is (2) ongoing prudence investigations being conducted by presently limited in the amount of dividends it may pay on its various regulatory authorities,(3) appeals of various aspects capital stock (other than dividends payable solely in shares of the FERC's June 13 Decision relating to the Unit Power of common stock and dividends payable in cash where, Sales Agreement and the System Agreement (see Note 2-concurrently, SERI receives a capital contribution or sells " Rate and Regulatory Matters"), (4) the continuing needs shares of its common stock) in an amount equal to its of MP&L and NOPSI to access the capital markets for accumulated net income for the period July 1,1985, to the external financing, and (5) the ultimate resolution of the date of the payment Such amount was approximately 5299.6 status of Grand Gulf 2 (see " Grand Gulf 2" below). million as of December 31,1986. SERI has paid no As mentioned in (1) above, certain of the System operating dividends on its capital stock to date. In the event SERI companies' authorizations are being challenged and the experienced a loss that exceeded such accumulated net existing rate structures could change, depending upon further income, less the sum of certain dividends paid since July 1, actions of regulatory bodies or the courts. In this connection, 1985, dividends could not be paid until such a deficit was on February 25,1987, the Mississippi Supreme Court restored by subsequently earned net income, except where reversed and remanded the September 1985 order of the concurrently SERI receives a capital contribution or sells MPSC granting permanent rate relief to MP&L with respect shares of its common stock. to its recovery of Grand Gulf I costs. The Supreme Court found reversible error in the MPSC's prior rate order based, in part, on the assertion that the MPSC failed to consider prudence issues. Moreover, separate prudence investigations are also being conducted by the MPSC and the Council relative to MP&L's and NOPSI's respective Grand Gulf I cost recoveries. In addition, the prudence issue involving LP&L's expenditures on Waterford 3 remains unresolved. For further information regarding these rate issues and/or the financial implications that could result if MP&L or NOPSI were rendered unable to meet their respective Grand Gulf 1 obligations to SERI, see Note 2 " Rate and Regulatory Matters'/Note 7 " Retained Earnings" and " Potential Debt Acceleration and Related Matters" discussed below. Capital Requirements and Financing Cortstruction Requiremersts. The Middle South System's construction program contemplates the following estimated expenditures (including AFUDC): 1087 1988 1080 (In Millions) Construction expenditures. 5465.0 5418.2 4457.9 AFUDC (included above) . 5 19.9 5 17.0 5 14.6 Construction expenditures include significant amounts for transmission facilities, distribution facilities, and miscellaneous utility plant, Costs for post-commercial operation work on Grand Gulf I and Waterford 3 are also included. No significant costs in connection with new generating facilities are expected to be incurred. The above construction expenditures assume virtually no construction activities at Grand Gulf 2 except for demobilization and suspension. Effective September 18,1985, SERI suspended construction activities on Grand Gulf 2 following an order 36
of the MPSC (See " Grand Gulf 2" below for information its various borrowing arrangements. Maturing long-term regarding the future status of this unit.) Through December debt and preferred stock sinking fund requirements are 31,1986, SERI had invested 54,266 million (excluding expected to be refinanced through a combination of nuclear fuel) in connection with its 90% ownership interest internally and externally generated funds. Also, unless in the Grand Gulf Station. SERI estimates, pending a final extended, the expiration of certain fuel inventory financing review of the cost allocation between the two units, that arrangements of SFl and nuclear fuelleasing arrangements of this total, 53,358 million was invested by SERI in Grand of the System operating companies and SERI during 1987-Gulf I and 5908 million in Grand Gulf 2. 1989 could result in additional capital requirements. Rate Deferrals and Associated Capital Requirements. At The capital requirements of the System operating December 31,1986, all of the System operating companies companies noted above may vary in the event of modification had received authorization from their respective state or of (1) the rate structures implemented by the System local regulatory authorities for cost recoveries from operating companies as a result of prudence investigations ratepayers which they believed would be sufficient to meet or otherwise, (2) the FERC's allocation of Grand Gulf 1 their respective purchased power expenses for Grand capacity and energy in the June 13 Decision, or (3)its Gulf 1. These purchased power expenses arise under the allocation of other energy costs under the System Agreement Unit Power Sales Agreement which, as approved in the in the June 13 Decision. The June 13 Decision is the FERC's June 13 Decision, obligates the System operating subject of judicial review and the ultimate outcome cannot companies to purchase all of SERI's share of the capacity be predicted. (See Note 2 " Rate and Regulatory Matters.") and energy from Grand Gulf 1. (See Note 2 " Rate and Potential Debt Acceleration and Related Matters Regulatory Matters") As noted above, the Mississippi Supreme Court has in accordance with the rate moderation plans implemented reversed and remanded the prior MPSC rate order granting for AP&L, MP&L, and NOPSI and an assumed rate MP&L permanent rate relief with respect to its recovery moderation plan to be implemented for LP&L's service of Grand Gulf 1 costs, and MP&L's rate structure established territory in the 15th Ward of the City of New Orleans, these by that rate order is under further review by the MPSC. companies would require additional capital of approximately Further, the Councilis continuing to conduct a prudence
$1,030.8 million through 1989 in connection with Grand inquiry into NOPSl's involvement in Grand Gulf 1. In this Gulf 1-related costs for AP&L, MP&L, and NOPSI and connection, the Council's consultants have recommended, Waterford 3 costs for LP&L. See Note 2 " Rate and notwithstanding the March 1986 rate settlement between Regulatory Matters" for information with respect to such NOPSI and the Council, that NOPSI could economically rate moderation plans including continuing regulatory sustain substantial additional disallowances with respect proceedings and litigation with respect thereto. In addition, to its allocable share of Grand Gulf I costs. The Company see Note 1 " Summary of Significant Accounting Policies- cannot predict the outcome of these matters or whether the Rate Deferrals" for a discussion of the accounting policies current rate structures of these two operating companies related to rate deferrals. will remain in effect. Without adequate rates to recover The System operating companies estimate that Grand Gulf I charges, MP&L and NOPSI could suffer such approximately 5208.2 million will be externally financed liquidity constraints that they would, in a short period in the period of 1987-1989 in connection with the of time, be unable to meet their contractual obligations above-mentioned rate moderation plans and contemplated to SERI in respect to the Grand Gulf Station.
construction expenditures. This estimate excludes external Unless (1) waivers were obtained, (2) the debt was financing requirements for the refunding of maturing long- restructured or (3) other arrangements could be negotiated, term debt and sinking fund requirements on preferred the failure of either MP&L or NOPSI to make the required stock, the refinancing of nuclear fuelleases and the payments to SERI or to maintain their current rate structures repayment of short-term debt. In the event that any of the might, under certain agreements related to SERI's indebted-enisting rate phase-in plans were abrogated or rescinded, or ness (but only upon further action by the requisite percentage the future recovery by any System operating company under of SERI's creditors), lead to acceleration of such indebtedness. its phase-in plan of deferred costs were disallowed in any In the absence of such waivers, debt restructuring or other material respect, the earnings, liquidity, and financial negotiated arrangements, acceleration of such indebtedness condition of the particular System operating company, and could also occur (1) if either operating company were its ability to effect external financing to meet its continuing rendered insolvent as a result of a substantial reduction in obligations (including those with respect to Grand Gulf 1) retail rates, or (2) if an MPSC proceeding relating to the could be severely impaired. certificate of convenience and necessity for the Grand Gulf Capital Requiremed with Respect to Refinancing. The Station were to make the continued operation of Grand Gulf 1 Middle South System will require approximately s1,079.7 impractical. (See Note 2 " Rate and Regulatory Matters" million through 1989 to refinance maturing long-term debt for a discussion of this MPSC proceeding.) and to meet cash sinking fund requirements with respect to Given the substantial amount of SERI's debt,it would not first mortgage bonds and preferred stock. Of this amount, be able to meet its obligations, if accelerated. Under SERI's
$763.0 million represents SERI's payment obligations under financing agreements, MSU, and not the System operating companies, would be responsible to pay SERl's accelerated I obligations if SERI could not. MSU, with its financial 37
Notes to Consolidated Financial Statements Middle South Utilities, Inc. & Subsidiaries I _J resources currently limited, would not at this time be in a and Power Purchase Advance Payment Agreement with position to fully satisfy SERI's obligations, if accelerated. AP&L relinquishing its rights to capacity and energy from In addition, the ability of various Middle South System the Grand Gulf Station. Each of the System operating companies to obtain financing in the capital markets could companies, including AP&L, however, would have remained be impaired and, in the event of insolvency of a System primarily liable to SERI and its assignees for payments or operating company, certain of the financing arrangements advances under these agreements. AP&L was obligated to and leases of the Middle South System's fuel subsidiary, SFI, make its share of the payments or advances only if the could require payments by the System operating companies, other System operating companies were unable to meet MSU, or SERI. their contractual obligations. However, the FERC's Dividend Suspension June 13 Decision allocating a portion of Grand Gulf 1 In light of the uncertainties continuing to face the Middle capacity and energy to AP&L supercedes the Reallocation South System as well as the need to conserve cash resources Agreement insofar as it relates to Grand Gulf 1. (See Note 2-in view of these uncertainties, the System operating " Rate and Regulatory Matters" for further information.) companies have not declared dividends on their common Grand Gulf 2 stock since the second quarter of 1985. SERI likewise As of December 31,1986, SERI had invested approximately did not declare a common dividend because of, among other 5908 million in Grand Gulf 2 (including approximately 5390 things, limitations under its bank loan agreements. (See million of AFUDC) which was approximately 34% complete Note 7 " Retained Earnings" for information regarding based on the estimated man-hours needed to complete the SERI's satisfaction of requirements for termination of certain unit. From late 1979 until September 1985, only a limited restrictions on the payment of common stock dividends.) amount of construction was performed on Grand Gulf 2. MSU has been unable to declare its own common stock SERI had been accruing and capitalizing AFUDC on its dividend since that time. MSU's ability to declare dividends investment in Grand Gulf 2 at the rate of approximately in excess of dividends received from its subsidiaries is 58 million per month. Effective September 18,1985, SERI limited by the amount of MSU's unrestricted corporate suspended construction activities and ceased accruing retained earnings available for that purpose. Resumption of AFUDC on Grand Gulf 2 following an order of the MPSC. MSU's common stock dividends may depend, among other Since September 1985 SERI has continued suspension of things, upon the further resolution or moderation of the construction on Grand Gulf 2 and has limited expenditures uncertainties and continued improvement in the financial to only those activities which are absolutely necessary condition of the Middle South System. for demobilization and suspension of the unit in November 1986 a special group (Study Team) formed by management, Cepital Funds, Availability and Reallocation Agreements which mcluded Middle South System officials and outside Under the Cap.tali Funds Agreement, as supplemented, consultants, completed a comprehensive year-long study the Company has agreed to supply or cause to be supplied that analyzed in-depth the varicus alternatives regarding to SERI (1) such amounts of capital as may be required in Grand Gulf 2 and the complex issues concerning its future order to mamtam equity capital at an amount equal to at status. After considering the various alternatives, SERI's least 35% of SERI s total capitalization (excluding short-term debt) and (2) such amounts of capital as shall be required Board of Directors (with the MSU Board of Directors concurring), in December 1986, adopted the recommendation m order (a) for SERI to construct, own and place in commer- of the Study Team that suspension of construction be CIal peration the Grand Gulf Station,(b) to provide for continued and that a further decision be made by 1990 on pre-operating expenses and interest charges of SERI, (c) t the future status of Grand Gulf 2,in light of alternatives permit the contmuation of such commercial operation after available at that time. commencement thereof and (d) to pay m full all indebtedness During the period of continuation of suspension, SERI's for borrowed money whether at maturity, on prepayment, expenditures on Grand Gulf 2 will be limited, and it will on a celeration or otherwise. In addition, the Company has continue not to accrue and capitalize AFUDC on its agreed to make cash capital contributions to enable SERI investment in the unit. Consequently, during the suspension to make payments when due on its long-term debt. period, the increase in SERI's investment in Grand Gulf 2 The System operating companies are severally obligated will be limited and SERI will forego any return on this under the Availability Agreement m accordance with stated investment. Further, SERI does not intend to make an percentages (AP&L 17.1%, LP&L 26.9%, MP&L 31.3%, NOPSI application to the FERC during the period of suspension 24.7%) to make payments or subordinated advances adequate with respect to recovery through rates of its investment in to cover all of the operating expenses, including depreciation, Grand Gulf 2. SERI will continue during the suspension of SERI. In November 1981 the System operating companies period to evaluate various alternatives for the future of entered into a Reallocation Agreement which would have Grand Gulf 2 and will also continue to assess whether allocated the capacity and energy available to SERI from certain equipment or facilities should continue to be the Grand Gulf Station and the related costs to LP&L, MP&L, carried at their full cost. Any determination that the value and NOPSI. These companies thus agreed to assume all the of SERI's investment should be reduced and the amount of responsibilities and obligations of AP&L with respect t any such reduction written off could adversely affect the Grand Gulf Station under the Availability Agreement various companies in the Middle South System. Certain issues relating to the value of SERI's investment in Grand 38
L y Gulf 2 also exist in connection with an audit by the FERC material and adverse effect upon the financial condition of discussed below in "FERC Audit of SERI." SERI, MSU, and possibly the Middle South System operating Under the Foreign Bank Loan Agreement, SERI has companies, depending upon, among other things, the covenanted to limit capital expenditures (other than those timing of the reahzation of any such loss. required by regulation) to not in excess of 580 million per FERC Audit of SERI annum in the aggregate. Unless waived, this covenant The FERC has performed an audit of SERI and the Grand would preclude resumption of full construction of Grand Gulf Station as part of its regulatory function in auditing Gulf 2 prior to 1989. (See Note 4 " Lines of Credit utilities subject to its jurisdiction, and, on May 8,1986, and Related Borrowings" for further information.) the FERC Staff sent to SERI for review and comment a draft While SERI believes that all of its investment to date audit report outlining the Staff's tentative findings and in Grand Gulf 2 has been prudent, in connection with any recommendations. The draf t report included preliminary subsequent decision as to the value of Grand Gulf 2 or the findings which (1) questioned SERI's accrual of AFUDC on ultimate decision with respect to the future of Grand Grand Gulf 2 as a construction cost during the period of Gulf 2, SERI will, at an appropriate time, make a 1979-1985 during which time construction work on the determination as to the appropriate recovery of its unit was limited and (2) questioned SERI's accounting for investment. In making such determination, SERI would its unrealized tax benefits in relation to the computation of consider, among other things, the regulatory environment, AFUDC on the Grand Gulf Station. On June 13,1986, SERI generally, and legal standards then applicable. Any action submitted a response to the FERC Staff's draft report to seek recovery of Grand Gulf 2 costs would likely involve disagreeing with most of the Staff's preliminary findings. a filing by SERI with the FERC requesting such recovery, The FERC Staff held a meeting with SERI on September 10, over a period of years, through charges to the System 1986, to discuss the issues raised in the draft report and operating companies, and related filings by the System has indicated that it would require additional information operating companies before state or local regulatory and time to consider certain issues. If the FERC Staff's authorities to recognize the FERC-allowed charges in preliminary findings are adopted and sustained, the retail rates. There can be no assurance that SERI would be resolution of certain of these issues could have a significant permitted by the FERC to recover the full amount of its adverse impact on SERI. SERI cannot predict the ultimate investment in Grand Gulf 2. Proceedings before the FERC outcome of this examination. and, with respect to recognition in retail rates of FERC New Accounting Standard approved rates, before state or local regulatory authorities, The accounting standards related specifically to public could be protracted and strongly contested on various utilities and certain other regulated enterprises are set grounds, including imprudence. If costs associated with forth in SFAS Nos. 71 and 90. SFAS No. 90, Regulated Grand Gulf 2 were allocated to the System operating Enterprises- Accounting for Abandonments and companies and they were unable to recover these costs from Disallowances of Plant Costs, was issued by the FASB in their customers, the System operating companies' financial December 1986 as an amendment of SFAS No. 71. It provides condition could be materially and adversely affected. Any that, when an abandonment of a plant or a disallowance of non-recovery of SERI's investment in Grand Gulf 2 would costs with respect to a newly completed plant becomes result in a charge against earnings or restatement of prior probable, the following amounts, net of related tax benefits, years' financial statements for any unrecoverable investment would be reported either by restating the appropriate prior when that event becomes probable. In the event such a charge years' financial statements or by charging it against current were substantial, the financial condition of SERI could be income:(1) the cost of an abandoned plant in excess of the l materially and adversely affected (although its cash position present value of estimated recoveries, or (2) the amount would not be adversely affected), and SERl's ability to pay of a partial disallowance by regulators of a recently ! dividends on its capital stock could be impaired. Reference completed plant for ratemaking purposes. The new j is made to "New Accounting Standard" below for infor- statement is effective for fiscal years beginning after ! mation concerning an accounting standard which addresses December 15,1987, with retroactive application for the accounting treatment of the issues discussed herein. prior transactions. SFAS No. 90 will not have any current in view of the controversies over the Grand Gulf Station, effect upon SERI in light of the decision to continue including the adverse reaction of various rate regulatory suspension of Grand Gulf 2 (see above). The provisions of bodies to allocation of costs, and regulatory uncertainties, SFAS No. 90 would apply should SERI decide to abandon including ratemaking, attendant to a delay in the decision Grand Gulf 2. However, SFAS No. 90 will have an impact as to the future of Grand Gulf 2, there can be no assurance on LP&L's retained earnings due to the revisions made in that the full cost of Grand Gulf 2 will be recovered or the accounting treatment of cost disallowances of newly as to the timing of any recovery. In addition, during the completed plants related to (2) above. Sp-cifically, LP&l's period to 1990, certain issues, as described above, could November 1985 retail rate order includes the disallowance cause a decrease in the valuation of the investment in of $284 million (less related tax benefits) of LP&L's investment Grand Gulf 2. Failure to obtain rate relief for all or a in Waterford 3 which, under the new standard, is to be substantial portion of the cost of Grand Gulf 2 could have a recognized as a loss in the manner stated above. LP&L presently plans to record this adjustment in early 1988 which will reduce its retained earnings. However, because of the 39
Notes to Consolidated Financial Statements Midle 30uth Utihties, hic. & Subsidiaries I I related complex income tax implications, LP&L has not Fuel Contracts finally determined whether the adjustment will be reported SFI has a number of contracts for the purchase of fuels by restating the appropriate prior years' financial statements for use at various generating stations within the Middle or by charging it against current income in 1988. South System. Among the contracts is one for an estimated The FASB had previously indicated that the new standard 100 million tons of coal for LP&L's proposed Wilton would also include revisions in accounting for the phase-in Station (discussed below), another expected to provide for of rates associated with the costs of new generating plants. t least thirty years of the projected coal requirements of However, SFAS No. 90 did not address this topic. The the Independence Station in Arkansas and another for 33 existing rate structures of AP&L, MP&L, and NOPSI include million tons of lignite for AP&Us share of a future power phase-in plans for recovery of costs related to Grand Gulf I station in Arkansas (also discussed below). In addition, SFI which meet the current requirements of SFAS No. 71. has a long-term oil supply agreement with a major oil (As noted above, however, the Mississippi Supreme Court in c mpany providing for the purchase of 25,000 barrels of oil February 1987 reversed and remanded MP&Us rate phase _ per day through 1996 with an option to reduce, within in plan to the MPSC for further consideration.) In light of . certain limits, the contract quantity either temporarily or the many complex issues raised as to the accounting for permanently. An agreement was reached, effective June 1, rate phase-in plans, the FASB has resumed deliberations to 1985, temporarily reducing SFI's obligation to purchase fuel consider this subject further. It cannot be predicted what oil t 200,000 barrels per month through November 1987. action, if any, the FASB will ultimately take regarding this AP&L is currently purchasing coal for the White Bluff matter. St tion under an agreement that will provide approximately 100 million tons of coal over a 20-year period. Sh:reholder Litigation LP&L, by separate agreement, guaranteed SFI,s in 1985, MSU, certain other Middle South System perf rmance under the coal contract for the Wilton Station companies, and individuals became defendants in a purported nd agreed to purchase the coal from SFl. SFI, after having class action suit. The initial complaint was filed in August kept the coal suppher advised of possible delays, advised the 1985 by an MSU shareholder (purporting to represent a class Supplier, in August 1985, that, based on its latest appraisal, that purchased MSU common stock) followed by four similar complaints filed by MSU shareholders in August f r pl nning purp ses, the System s requirement for additional coal capacity is now forecast to be m a time frame and September 1985. The five actions were consolidated which makes the existing contract in fact non-viable. The in the U.S. District Court for the Eastern District of Louisiana. The consolidated, amended, and supplemental Supplier has refused to agree that regulatory constraints or ny ther difficulties have constituted events of force complaint alleged violations of the disclosure requirements of the Securities Exchange Act of 1934 and the Securities majeure under the coal supply agreement. Upon receipt of Act of 1933, common law fraud and common law negligent the August 1985 notification the supplier filed a Demand misrepresentation in connection with the financial condition For Arbitration under the coal supply agreement to establish that the agreement remains in full force and of MSU and prayed for compensatory and punitive damages, effect and that SFI is ncJ. . xcused from performmg its legal costs and fees and other proper relief against MSU, bligations and alternatively, that SFI,s actions wrious other Eystem companies and certain officers ,f (and former officers) and directors of MSU, the Company's c nstitute anticipatory repudiation of the coal supply greement. The parties have agreed to a postponement of outside auditors and certain underwriters of MSU common stock. In April 1986, MSU and the other defendants filed the arbitration on the basis that it can be restarted by , a motion to dismiss or, in the alternative, a motion for either party on 10-days notice. LP&L has filed an application w th the LPSC for a certificate authorizing the construction summary judgment. On January 12,1987, the District Court entered a judgment granting defendants' motions for f the Wilton plant within a time frame of 1995 or earher. summary judgment and dismissed the suit. On February 6, I". view f the reduction in projected load requirements w thin LP&L's service area since the time the coal supply 1987, the plaintiffs in the consolidated action filed greement w s entered into and m view of other factors a Notice of Appealin the U.S. Court of Appeals for the Fifth relating to LP&L, there is a strong likelihood that the LPSC Circuit. The defendants intend to vigorously oppose the wiH n t grant such a certificate. It is the opinion of SFI s appeal of the District Court's decision. In the event the c unsel that a refusal by the LPSC to grant a certificate on dismissal is reversed on appeal, the eventual outcome and a re s nable basis will constitute the existence of a force impact on the Middle South System's financial condition majeure which would relieve LP&L and SFI of a substantial cannot be predicted. part, if not all, of their obligation under the coal supply agreement. SFI, LP&L, and the coal supplier have entered into discussions concerning, among other things, a possible new arrangement. Resolution of this matter could possibly expose SFI and LP&L to claims for significant damages in the event SFI does not ultimately prevail in asserting that events of force majeure have excused performance or in the event efforts to mitigate any possible damages are unsuccessful. 40 l
I ] SFI executed a contract, as emended in November 1982, insurance program provided by Nuclear Mutual Limited, for the purchase cf lignite to be used at a future lignite- another mutual insurer. AP&L's primary propeity and fueled power plarit in Arkansas. Arkansas Electric decontamination damage insurance is provided by ANI. Cooperative Corporation (AECC) has agreed to become As member-insureds with these mutuals, the System an owner of 50% of the proposed plant and assume 50% of operating companies and SERI are subject to assessments if SFI's obligation to purchase lignite. Delivery of lignite is losses exceed the accumulated funds available to the insurer. tied to the commercial operation of the plant, which may be The present proposed maximum assessment for incidents dilayed at the owner's option until June 1995. AP&L has occurring during a policy year is approximately s19 guaranteed SFI's performance and agreed to purchase SFI's million, 535 million, 50.43 million, 50.41 million, and share of the lignite, which assuming half ownership of the 540 million for AP&L, LP&L, MP&L, NOPSI, and SERI, plant is approximately 33 million tons, over a 30-year period. respectively. - The contract, including the guaranty, is conditional upon Spent Nuclear Fuel and Decommir, stoning Costs the receipt of regtlatory approvals for the construction of the Under the terms of their nuclear fuelleases, AP&L, plant. Based on the System's latest appraisal, for planning LP&L, and SERI are responsible for the disposal of spent purposes, the requirementt for additional coal capacity is nuclear fuel These companies consider all costs incurred now forecast to be in a time frame which makes this contract or to be incurred in the use and disposal of nuclear fuel to be non-viable. AP&L, AECC. and the coal supplier have proper components of nuclear fuel expense and provisions entered into discussions wMh respect to terms of a new or to recover such costs have been or will be made in restructured agreement. applications to regulatory commissions. The affected Nuclear Liability Insurance - Middle South System companies have executed contracts As of Deceml er 31,1986, the Price-Anderson Act (Act) with the Department of Energy (DOE) whereby the DOE limited the pubhc liability of a licensee of a nuclear power will furnish disposal service for the companies' spent plant to 5695 million for a single nuclear incident. This . nuclear fuel at a cost of one mill per kilowatt-hour of limit will increase by 35,million for each additional operating gross generation on or after April 7,1983, plus (in AP&L's license issued by the NuclearRegulatory Commission (NRC). case) one-time fees for previously discharged fuel and in-core Insurance for this exposure is'provided by private burned fuel prior to that date. AP&L has selected an option insurance and an ir demnity agreement with the NRC. Every made available by the DOE to pay the one-time fee, plus licensee of a nuclear power plant is obligated,in the event interest accrued untildate of payment, no earlier than of a nuclear incidem involving any commercial nuclear 1998. AP&L has recorded the approximately 566.7 million facility in the United States that results in damages in necessary for payment to the DOE for the disposal of all excess of the p-ivate insurance, to pay retrospective spent nuclear fuel on hand at April 6,1983, including accrued assessments of up to 55 million per incident for each licensed interest. In addition to the recovery of costs associated reactor it operates or up to a maximum per reactor owned with the disposal of spent nuclear fuel, AP&L is recovering of $10 million in any calendar year. The Middle South a total of approximately $160 million for decommissioning System has four licensed reactors. This Act is scheduled to costs for its two nuclear units. Based upon a study per-expire in August 1987, and the U.S. Congress is formed by AP&L, nuclear plant decommissioning costs are considering several proposals to amend it. The Middle projected to be in excess of this amount. AP&L will request South System is unable to predict what action Congress recovery of estimated increased costs in applications to its might ultimately take regarding the Act and what effect regulatory commissions. LP&L and SERI are presently such action might have on the System's potential liability. recovering annually a total of approximately s2.1 million The System operating companies are each member- and $1.1 million, respectively, for decommissioning costs insureds of Nuclear Electric Insurance Limited (NEIL), for their respective nuclear units. a mutual insurer that provides its members with insurance coverage for certain costs of replacement power incurred due LP&L and NOPSI Consolidation to certain prolonged outages of nuclear units (NEIL 1). In the interest of increased economic efficiency, LP&L and In addition, AP&L, LP&L, and SERI are member-insureds NOPSI have developed a long-tenn plan to consolidate the under NEIL II, an excess property insurance program, two companies and their operations. Under the proposed which provided 5610 million (as of January 15,1987) of arrangement, subject to the receipt of necessary regulatory and coverage for property damage sustained by the insured in ther approvals, the two companies would be consolidated excess of sf 00 million caused by radioactive contamination into a new company to be called Louisiana Power & Light or other specified damage. AP&L has an additional Company. MSU, which currently owns all the outstanding 5120 millien of excess property and decontamination c mmon stock of LP&L and NOPSI, would own all the insurance with American Nuclear Insurers (ANI), a pool c mmon stock of the new company. of private msurance carriers, thus giving AP&L a total of * $730 milli an excess property and decontamination insurance above the s500 million primary amount. LP&L and SERI are member-insureds under a primary property damage f 41 k
Notes to Consolidated Financial Statements l Middle South Utilities, Inc. & Subsidiaries i I Note 9. Three subsidiaries have entered into nuclear fuel leases g ggg aggregating $465 million. The leases, unless terminated sooner by one of the parties, will continue through 2018, The Company's operating subsidiaries account for leases 2028, and 2029. Credit lines supporting these nuclear fuel entered into prior to 1983 on the same basis as that used leases have not been extended and are currently scheduled to by their respective regulatory authorities in the ratemaking terminate in 1987 unless present credit lines are extended process that determines the revenues utilized to recover or new lines are secured. It is currently assumed that such the lease costs.The Company's operating subsidiaries account credit lines will either be extended pursuant to agreements for capital leases entered into subsequent to 1982 in subsequently negotiated or that alternative new lines accordance with SFAS No.13 and SFAS No. 71. will be secured. Lease payments, which are not included in Beginning in 1987, compliance with SFAS No. 71 for the tabulations above, are based on nuclear fuel use. capital leases entered into prior to 1983 will require recording Nuclear fuel lease expense of 5161.4 million,5111.8 million, the following assets and liabilities on the balance sheet: and 572.7 million was charged to cperations in 1986,1985, and 1984, respectively. The unrecovered cost base of the 1986 1985 1984 leases was $410.8 million,5400.1 million, and 5433.1 million (In thousands) at December 31,1986,1985, and 1984, respectively. A u ets: Utility plant . $142,911 5136,076 5136,245 Note 10. Accumulated postretirement Benefits amortitation (40,012) (32,522) (29,188) Net . 5102,899 s103,554 5107,057 The companies of the Middle South System have various postretirement benefit plans covering substantially all Other property of their employees. and mvestments Pension plans are administered by a trustee who is
-net $ 47,151 5 48,700 $ 50,264 responsible for pension payments to retirees. Various Liabilities: investment managers have responsibility for management Non-current of the plans' assets. In addition, an independent actuary obligations under performs the necessary actuarial valuation for the individual capital leases $141,224 5144,472 $149,060 company plans.
Current obligations Total pension cost of the Company and its subsidiaries under capital f r 1986,1985, and 1984 was $13.4 million,517.1 million, leases. 5 13,702 5 12,923 5 13,279 and 528.4 million, respectively.The decrease in 1985 pension cost compared with 1984 results primarily from changes in actuarial assumptions and in actuarial cost methods by The above amounts exclude nuclear fuel leases which will certain of the System companies. The principal elements also be recorded on the balance sheet in 1987.The recording included in the assumption changes were an increase in the of these capitalleases would not affect the amounts reported assumed rate of return used in determining the actuarial as either expenses or net income. present value of projected plan benefits frorr 7% or 8% to 9% At December 31,1986, the System companies had and an equivalent increase at each age in e> pected salary noncancellable leases (excluding nuclear fuel leases), increases for active plan participants, in addition, certain presently accounted for as operating leases, with minimum of the System companies changed the actuarial cost method rental commitments as follows: and the amortization method for recognizing the difference between assets and past service liabilities. These changes (In thousands) had the net effect of reducing 1985 pension cost by 1987 . 5 78,136 520.1 million. These decreases werc partially offset by 1988 . 75,717 increases in pension cost of approximately $7.9 million due 1989 . 70,793 to amendments effective January 1,1985, to comply with 1990- 59,945 the Retirement Equity Act and a special early retirement 1991. 56,185 program, which was offered for a limited period in 1985 to For years thereafter 411,540 certain employees of certain System companies. Total . 5752,316 The comparison of the actuarial present values of accumulated pension plan benefits and plan net assets for the defined benefit plans is presented below.This comparison Rental expense for capital and operating leases (excluding was determined in accordance with the provisions of nuclear fuel leases) amounted to approximately $76.6 SFAS No. 36 which require the use of certain assumptions million, 570.5 million, and 568.2 million in 1986,1985, and that are different from those used by the System companies' 1984, respectively. actuary in determining an appropriate level of funding for the System companies. 42
I I lanuary 1. Note 11. 1986 1985 settlement Agreements with Gas Suppliers (In thousands) A dispute between a gas supplier and LP&L arising from Actuarial present value of the gas supplier's claimed inability to deliver full quantities of accumulated pension planbenefits: fuel gas due LP&L under several natural gas contracts was Vested . 5305,000 5261,781 settled by the execution of a settlement agreement on Nonvested 17,465 15,481 June 4,1982. The settlement agreement provides for the Total. . 5322,465 5277,262 payment of $1.087 billion in cash plus a guaranty of savings Net assets available for of at least 5585 million in certain gas acquisition costs pension benefits. 5534,207 5446,757 between 1982 and 1996. In March 1983, the LPSC ordered in general that the refunds be made as follows: the $587 million received by LP&L on June 4,1982, plus interest, or a total The assumed rate of return used in determining the actuarial of 5637 million, shall be refunded in 1983; the 5250 million present value of accumulated pension plan benefits was 9%. received in January 1983 shall be refunded in ten equal annual As part of the sale of the transit operation on June 30,1983, installments beginning in 1984; and the 5250 million NOPSI agreed to transfer the pension plan assets and liabilities received in January 1984 shall be refunded in nine equal of the transit related participants to a separate plan to be annual installments beginning in 1985. In addition, in maintained by the successor employer. The 1986 and 1985 February 1984 the LPSC ordered LP&L to refund $32.6 present value of accumulated benefits and the value of assets million, representing interest not already covered in its do not include amounts attributable to former transit related March 1983 refund order, to customers in equal annual participants.While such transfer was effective as of the date installmente over a nine-year period beginning with the of the sale, the transfer was not completed until October 1986. 1985 refund. As a result of the LPSC orders, LP&L accrued During 1985, new standards for employers' accounting for in 1985 and 1984 net interest expense in the amounts of pensions were issued (SFAS No. 87). The System companies s.2 million and 59.2 million, respectively. There was no will adopt the new pension accounting and disclosure accrual for 1986. Through December 31,1986, LP&L had standards in 1987. However, it is not expected that the refunded a total of approximately 5770 million to its new standards will have a material adverse impact on the customers. On January 30,1987, the LPSC issued a rate System companies' financial position or results of operations, order which, among other things, ordered LP&L to make no The System companies also provide certain health care further refunds to its customers of the proceeds of the and life insurance benefits for retired employees. aforementioned settlement. As of January 30,1987, the Substantially all employees may become eligible for these amount subject to refund to these customers was approxi-benefits if they reach retirement age while still working mately 5386 million. However, the amount applicable to for the System companies.These benefits and similar benefits LP&Us service territory in the 15th Ward of the City of for active employees are provided through various means New Orleans will continue to be refunded. (See Note 2-including payments of premiums to insurance companies " Rate and Regulatory Matters".) and/or accruals for self insurance policies managed by A settlement has been negotiated between NOPSI and a insurance companies. The System companies recognize the gas supplier in long-standing litigation stemming from the cost of providing these benefits by expensing the payments gas supolier's failure to deliver obligated quantities of made to the insurance companies or accruing the cost as natural gas for power plant use during the period 1973-1975. recommended by the managing insurance company. The If approved by the parties to the suit and the courts, the cost of providing these benefits for retirees is not separable settlement would result in the refund of approximately 570 from the cost of providing benefits for active employees. million to electric customers served by NOPSIin that The total cost of providing these benefits and the time frame. Announcement of the settlement was made in number of active employees and retirees for the last three February 1987. fiscal years were as follows: Two lawsuits between MP&L and a gas supplier arising from MP&Us claim that the gas supplier breached 1986 1985 1984 the terms of a Gas Sales Agreement were settled by the Total cost of health care and execution of a settlement agreement between the parties life insurance on September 25,1985. The settlement required that s25,718 s19,771 s20,869 the gas supplier pay MP&L s165 million on Septem-(in thousands) . Number of active ber 25,1985, and an additional $17.5 million by employees . . 13,307 13,214 12,955 September 25,1987. On August 1,1986, MP&L made a Number of retirees 2,983 2,577 2,430 filing with the MPSC proposing a plan for the distribution of these funds. On October 6,1986, the MPSC entered an order which established a plan of distribution (Distribution Plan) for the funds to MP&Us customers. Under the 43
Notes to Consolidated Financial Statements Middle South Utilities, Inc. & Subsidiaries Distribution Plan, the settlement proceeds will be allocated the second af ter the $17.5 million payment is received from between MP&Us wholesale and retail customers and the gas supplier in September 1987. On January 16,1987, refunded to MP&Us retail customers in two distributions, in accordance with the Distribution Plan discussed above, with the first distribution, which represents a substantial MP&L refunded approximately s18 million to 12 former portion of these funds, to be completed by April 1,1987, and wholesale customers. Note 12. *I"cludes ehe net effect af certain write-offs recorded in the 9uarter
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Quarterl YResults (Unaudited) $0.10 per share. (See ' Management's Fmancsal Discussion and Consolidated operating results for the four quarters of A""'#5'54'S"Its of Opnation.") 1986 and 1985 were as follows: ** Includes the net effect of certain provisions for estimated losses recorded in December 1985 of approximately $66.1 million or $0.33 Net Earnm, gs pg,pa,,, The decrease in the quarter ended December 1985 resulted Quarter Operating Operating income (Loss) primarily from (1) the effect of Grand Gulf 1 having entered Ended Revenues Income (Loss) Per Share commercial operation teithout retail rates in place to recover On thousands. euert per share amountsn NOPSI's costs associated with this unit, (2) the absence of an 1986: AFUDCaccrualon the Grand Gulf Station and Waterford3 during March .$ 804,809 $296,699 5114,587 s 0.56 the fourth quarter of 1985, and (3) the recording of certain lune .5 810,795 5282.663 5103,393 $ 0.51 provisions for estimated iosses as noted above t See " Management's September. $1,073,400 5349,943 $171,495 s 0.84 Financial Discussion and Analysis-Results of Operation.") December . $ 706,908 5232,940* $ 61,827* 5 0.30* 1985: The business of the Middle South System is subject to March .5 754,147 $147,587 $135,466 5 0.71 seasonal fluctuations with the peak period occurring during June . s 749,937 $139,286 5125,147 s 0.63 the summer months. Accordingly, earnings information for September. 5 948,513 $288,108 $149,357 5 0.73 any three-month period should not be considered as a basis December . s 785,832 5141,070** $ (8,979)** 5(0.04)** for estimating results of operations for a full year. Selected Financial Data-Five-Year Comparison (In thousands, except per share amounts) 1986 1985 1984 1983 1982 Net operating revenues. . s 3,485,912 5 3,238,459 5 3,146,035 s 2,909,657 s 2,846,264 Net income. .s 451,302 s 400,991 5 508,437 5 378,050 5 310,595 Earnings per share .5 2.21 s 2.01 s 2.86 s 2.46 5 2.33 Dividends declared per share . - 5 0.89 5 1.75 s 1.71 5 1.67 Total assets . . $14,358,531 513,665,037 512,565,546 511,107,166 510,364,653 Long-term debt (excluding current maturities) . . s 5,983,029 5 5,680,590 5 5,865,304 5 5,032,175 s 4,429,447 Preferred stock with sinking fund . .s 508,165 5 467,293 5 476,928 5 429,601 5 354,957 Composite Common Stock Prices and Dividends by Quarter 1986 First Second Third Fourth Price Range High-Low $13M-10% $14%-12% 515-12 514 %-12 % Dividend Declared - - - - 1985 Price Range High-Low 514%-12M 515 %-12 % 515 %-8 % $10k8% Dividend Declared s.44 % 5.44 % - - 44 1-________--____---_________-______________________
f Five-Year Consolidated Summary of Financial Information Middle South Utilities, Inc. & Subsidiaries Consolidated Summary of Operations 1986 1985 1984 1983 1982 I I (Dollars in thousands, except per share amounts) Electric . s 3,339,132 5 3,084,877 5 2,959,570 $ 2,716,329 5 2,673,572 Natural gas . 146,780 153,582 186,465 193,328 172,692 Total 3,485,912 3,238,450 3,146,035 2,009,657 2,846,264 Operating Expensem Operation: Fuel for electric generation 884,560 1,001,373 1,020,280 942,219 1,066,325 Purchased power. ... . 128,405 230,399 291,129 373,712 345,076 Gas purchased for resale . 98,337 120,542 134,420 158,186 138,890 Deferred fuel and other . 703,153 593,571 465,713 363,509 288,283 Maintenance . 242,261 176,293 161,433 149,453 132,031 Depreciation . , 346,361 265,500 192,452 183,171 167,725 Taxes other than income taxes 161,042 132,759 110,799 104,493 101,381 income taxes . 162,265 121,402 216,395 164,570 157,514 Rate deferrals: Rate deferrals (785,897) (236,676) - - - Income taxes . 383,180 117,245 - - - Total 2,323,667 2.522,408 2,592,621 2,430,313 2,307,225 Operating income. 1,162,245 716,051 553,414 470,344 449.039 Other Income: Allowance for equity funds used during construction . 8,830 217,734 301,123 245,640 182,342 Miscellaneous income and deductions-net 76,403 80,120 18,090 6,799 7,133 Income taxes-credit. 22,645 82,166 160,442 131,323 132,959 Total 107,878 380,020 479,655 383,762 322,434 Interest and Other Charges: Interest on iong-term debt . 692,980 697,853 636,300 529,597 488,750 Other interest-net . . ......... . 34,608 53,306 57,388 47,251 74,130 Allowance for borrowed funds used during construction . 590 (146,680) (235,873) (180,858) (170,438) Preferred dividend requirements of subsidiaries . 90,643 90,601 84,353 80,066 68,436 Tota! 818,821 695,080 542,258 476,056 460,878 Income Before Cumulative Effect of a Change in Accounting Method . . 451,302 400,991 490,811 378,050 310,595 Cumulative Effect to January 1,1984, of Accruing Unbilled Revenues (net of income taxes of $16,548 thousand). - - 17,626 - - Net income . s 451,302 5 400,091 5 508,437 5 378,050 s 310,505 Earnings Per Average Common Share: Before cumulative effect of a change in accounting method S 2.21 5 2.01 5 2.76 5 2.46 s 2.33 Cumulative effect to January 1,1984, of accruing unbilled revenues-net - - 0.10 - - Total 5 2.21 5 2.01 s 2 86 s 2.46 s 2.33 Dividends Declared Per Common Share . .... . - S 0.89 5 1.75 5 1.71 5 1.67 Average Number of Common Shares Outstanding . 204,581,092 199,496,115 178,083,867 153,393,044 133,193,290 l I Utility Plant and Capitalization (at December 31) l Fixed Assets: I Utility plant .. .. $13,470,037 $14,143,738 513,294,825 511,942,417 $10,464,188 l Less- Accumulated depreciation and amortitation. 2,305.523 2,080,R38 1,856,279 1.604,475 1,551,700 l Utility plant-net . s11,074,514 512.062,000 $11,438,546 510,247,042 5 8,012,488 l CcpMisation Common equity . . s 4,354,426 5 3,007,159 5 3,472,246 5 3,001,542 5 2,481,916 Preferred sto(L (including premium and issuance expense): Without sinking fund 330,967 330,067 330.967 330,967 330.967 With sinking fund . . .. 508,165 467,203 476,928 429,(41 354,957 Long-term debt (excluding currently maturing debt) . 5,083,029 5.630,500 5,865,304 5,032,175 4,420,447 Total 511,176,587 510,386,000 510,145,415 5 8,704,285 5 7,507,287 Capit:lization Ratios: Common equity . .._ 39.0% 37.6% 34.2% 34.1 % 32.7% Preferred stock (includmg premium and issuance expense) . 7.5 77 8.0 8.7 9.0 Long-term debt (excluding currently maturing debt). 53.5 54.7 57.8 57.2 58.3 45
l l Middle South Utilities, Inc. , L_ l Report of Management The management of Middle South Utilities, Inc. has prepared and is responsible for the financial statements and related financial information included in this annual report. The financial statements are based on generally accepted accounting principles. Financial information included elsewhere in this report is consistent with the financial statements. To meet its responsibilities with respect to financial information, management maintains and enforces a system of internal accounting controls which is designed to provide reasonable assurance, on a cost-effective basis, as to the integrity, objectivity, and reliability of the financial records and as to the protection of assets. This system includes communication through written policies and procedures, and an organizational structure that provides for appropriate division of responsibility and the training of personnel. This system is also tested by a comprehensive internal audit program. The Board of Directors pursues its responsibility for reported financial information through its audit committee, composed of outside directors. The audit committee meets periodically with management, the internal auditors, and the independent public accountants to discuss auditing, internal control, and financial reporting matters. The independent public accountants and the internal auditors have free access to the audit committee at any time. The independent public accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements. Management believes that these policies and procedures provide reasonable assurance that its operations are carried out with a high standard of business conduct. The Stockholders and the Board of Directors Auditors' Opinion of Middle South Utilities, Inc.: We have examined the consolidated balance sheets of Middle South Utilities, Inc. as of December 31,1986 and 1985, and the related consolidated statements of income, retained earnings, paid-in capital and changes in financial position for each of the three years in the period ended December 31,1986. Our examinations were made in accordance with generally accepted accounting standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. As discussed in Notes 2 and 8 of Notes to Consolidated Financial Statements, Louisiana Power & Light Company (LP&L) agreed to permanently absorb 5284 million of the cost of Waterford 3 as part of an interim rate order issued by the Louisiana Public Service Commission in November 1985. A new accounting standard will require that this $284 million disallowance, less related tax benefits, be recognized as a loss by LP&L by 1988, the year in which the new standard becomes effective. In our report dated March 14,1986, except for Note 15 as to which the date was March 25,1986, our opinion on the 1984 and 1985 consolidated financial statements was qualified as being subject to the effects on those financial statements of such adjustments, if any, as might have been required had the outcome of uncertainties concerning, among other matters, the receipt of adequate rate relief by LP&L been known. As discussed in Note 2 of the Notes to Consolidated Financial Statements, this uncertainty was resolved as LP&L received a rate order in January 1987 which will provide adequate rate relief. Accordingly, our opinion on the 1984 and 1985 consolidated financial statements, as expressed herein with respect to this matter, is different from that expressed in our previous report. The accompanying consolidated financial statements include substantial investments in Grand Gulf 2, a suspended construction project, and in revenues deferred for future recovery. As discussed in Notes 2 and 8 of Notes to Consolidated Financial Statements, there are uncertainties regarding the recoverability of these investments in that the construction activities of Grand Gulf 2 are continuing to be suspended and there are challenges and/or potential reversals of certain of the System operating companies' retail rate orders which provide the basis for deferring revenue for future recovery. Also, a potential for debt acceleration exists under certain loan agreements if the rate structures providing for the recovery of Grand Gulf I costs are not adequately maintained. In our opinion, subject to the effects on the above-mentioned consolidated financial statements of such adjustments,if any, as might have been required had the outcome of the uncertainties referred to in the preceding paragraph been known, such financial statements present fairly the financial position of the Company and its subsidiaries at December 31,1986 and 1985, and the results of their operations and changes in their financial position for each of the three years in the period ended December 31,1986, in conformity with generally accepted accounting principles consistently applied during the period subsequent to the change, with which we concur, made as of January 1,1984, in the method of recording revenues by one of the subsidiaries as described in Note 1 of Notes to Consolidated Financial Statements.
' l '
- New Orleans, Louisiana I February 27,1987 46
Investor Information Annual Meeting Transfer Agent and Registrar Investor Relations The 1987 Annual Meeting of Morgan Shareholder Services Trust MSU conducts an active investor Stockholders will be held at 10 a.m. Company is the MSU transfer agent relations program to communicate the (CDT) on May 15,1987, at the Excelsior and registrar. All correspondence Company's performance to Hotel, Little Rock, Arkansas. A notice concerning the issuance or transfer of institutional investors, security of the meeting and proxy material will common stock certificates should be analysts, registered representatives, be mailed on or ebout April 10,1987, to directed to: and individual investors. Investor stockholders of record on April 6,1987. Morgan Shareholder Services Relations may be contacted by writing Stockholders of record may obtain a Trust Company r calling: badge for admission to the meeting at Stock Transfer Middle South Utilities, Inc. th e registration desk. Stockholders 30 West Broadway Investor Relations l whose shares are held in street name, New York, New YorL10007-2192 P.O. Box 61005 i.e.,in the name of their broker, New Orleans, Louisiana 70161 must present a letter from their broker Form 10-K Available (504) 529-5262 l indicating ownership of MSU common The Middle South Utilities System l stock as of April 6,1987. 1986 Annual Report to the Securities Exchange Listings and Exchange Commission on Form The common stock of Middle South Stockholders of Record 10-K (including financial statement Utilities, Inc. is listed and traded on the At the close of 1986, there were 131,905 New York, Midwest, and Pacific stock schedules) is available to stockholders l common stockholders of record of exchanges. The ticker symbol for the upon request. To receive a copy Middle South Utilities, Inc. A total of Company is MSU. Newspaper stock l without charge, call or write to: 204,581,092 shares were outstanding. table listing is MidSUt. Dan E. Stapp, Secretary Dividends and Reinvestment Middle South Utilities, Inc. l The Board of Directors omitted P.O. Box 61005 Abbreviations: declaring common stock dividends in New Orleans, Louisiana 70161 l In this report, references to companies in the the third quarter of 1985. The (504) 529-5262 Middle south Utihties system are as follows: Directors and management of Middle usuecomyny . .u aat, south usihii, inc. South Utilities are committed to Financial and Statistical Review sy .
. Th co-c. oe the uiaai, s-ih reinstating a quarterly dividend as Historical statistics and financial v E'l',','",s o-n. mioans soon as prudently possible, as stated in information suppl (mental to the 1986 3,,t, ,3,t,,,,, ,,,,, ,t,,s,c ,,,,,,
the Chairman's Letter of this report. Annual Report and Form 10-K are ,,,,,,,,a, , ,, m ,g g,,,,,,c,,c ,,,,,, The Dividend Reinvestment and Stock available in the Company's 1986 n. ,g,,,, Purchase Plan was terminated effective Financial and Statistical Review, which 1,,t, y ,,,,,, ,,,,, ,t,,s,c ,,,,,, October 24,1986, by action of the will be available for distribution in up,t, , , y_,,,, n r a ti h. come.ny Board of Directors. June. Copies of the Review may be so,s, , ,y,,o,,,,,,,,s,,,s,,,,,,,,,, obtained by contacting Investor s, ,, , ,sy,,,,,,,,,,,,,,,,,,,,,,, Stockholder Inquiries Relations at the address given in the gonna vu aai.sourh r.n-sv. ino All correspondence concerning following section. sn . .syue. r i tar. stockholder records should be ssi . .usu s r s.rv,<o. inc. directed to: S'"" inc *) " "'dd S""' h Middle South Utilities, Inc. Stockholder Services P.O. Box 61236 New Orleans, Louisiana 70161 I 47
Directors and Officers MSU DIRECTORS MSU OFFICERS William C. Battle James R. Nichols Edwin Lupberger Retired President and Chief Executive Partner of Nichols and Pratt Chairman and President. Age 50. Officer of Fieldcrest Mills, Inc., Ivy, (Family Trustees) and attorney, Joined the MSU System in 1979. Virginia Chairman of the Board of Boston, Massachusetts. Audit, Sixteen years prior utility industry W. Alton Jones Cell Science Center. Finance, Nominating, and Nuclear service. Audit, Nominating, Personnel, and Committees. William Cavanaugh Ill Public Affairs Committees. LeRoy P. Percy Senior Vice President, System Jtmes M. Cain Cotton farmer; Chairman of the Executive-Nuclear. Age 48. Joined President of Louisiana Power & Light Boards of Mississippi Chemical the MSU System in 1969. Company and of New Orleans Public Company and First Mississippi Jerry D. Jackson Service Inc., New Orleans, Louisiana. Corporation; President of Greenville Senior Vice President, System J:hn A. Cooper Jr. Compress Company, Greenville, Executive-Legal and External Affairs. President of Cooper Communities, Mississippi. Executive, Nominating Age 42. First joined the MSU System Inc., Bentonville, Arkansas. (Chairman) and Nuclear (Chairman) in 1979. Executive, Finance (Chairman), and Committees. R. Drake Keith Nominating Committees. Robert D. Pugh Senior Vice President, System Brooke H. Duncan Chairman of the Board of Portland Executive-Finance, and Treasurer. President of Foster Company, Inc., Gin Company (agricultural and Age 51. Joined the MSU System in New Orleans, Louisiana. Executive, agribusiness); Chairman of Portland 1983. Fifteen years prior utility Finance, Nominating, and Public Bank, Portland, Arkansas. Executive, industry service. (On March 1, Affairs (Chairman) Committees. Nominating, and Personnel 1987, Keith became an Executive K:neaster Hodges Jr. (Chairman) Committees. Vice President for LP&L and NOPSI, Attorney, Newport, Arkansas. H. Duke Shackelford and H. Stuart Ball was elected MSU Audit, Nominating, Nuclear, and President of Shackelford Company, Treasurer. A successor will be named Public Affairs Committees. Inc., Shackelford Gin, Inc., and to fill the MSU System Executive-Louisiana Cotton Warehouse Finance post.) Edwin Lupberger Chairman and President of Middle Company, Inc.; Chairman of Union Jack L. King South Utilities, Inc., New Orleans, Oil Mill, Inc. (agricultural and Senior Vice President, System Louisiana. Executive (Chairman), agribusiness), Bonita, Louisiana. Executive-Operations. Age 47. Nominating, and Nuclear Committees. Audit (Chairman), Nominating, and Joined the MSU System in 1966. Pers nnel Committees. H. Stuart Ball Donald C. Lutken Chairman and President of Mississippi Frank G. Smith Treasurer. Age 43. Joined the MSU Power & Light Company, Jackson, Vice Chairman of the Board of MSU System in 1985. Mississippi. System Services, Inc.; President and Dan E. Stapp Chief Operating Officer of Electec, Secretary. Age 52. Joined the MSU J:rry L. Maulden Inc, ew Orleans, Louisiana. President of Arkansas Power & Light System in 1958. Company, Little Rock, Arkansas. Wm. Clifford Smith Dorothy M. Antoine President of T. Baker Smith & Son, Assistant Secretary. Age 54. Joined Inc., Houma, Louisiana. Finance, the MSU System in 1952. Nominating, and Nuclear Committen. Dr. Walter Washington President of Alcorn State University, Lorman, Mississippi. Audit, Nominating, Personnel, and Public Affairs Committees. I 48
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