Text

Louisiana Power & Light Co Annual Rept 1988
	ML20245E126
Person / Time
Site:	Waterford, 05000000
Issue date:	12/31/1988
From:	Cain J, Hunter D; LOUISIANA POWER & LIGHT CO.
To:	;
Shared Package
ML20245E111	List: ML20245E117; ML20245E119; ML20245E126; W3P89-1102, Forwards 1988 Annual Repts for Louisiana Power & Light Co, Middle South Utils,Inc & New Orleans Public Svc,Inc;
References
	NUDOCS 8905020039
	Download: ML20245E126 (52)
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g - r " PERFORMANCE HIGHLIGHTS : ,M 4 <y i.es %, a n s, c.,,r, l e ,j. - p s

], '

1988' -1987 2. $4,' 95,545 J Plant. investment (thousands)" $4,452,092 3 ! $1,377,108i ' $1,346,632 : ? Revenue (thousands).. ' Net income (thousands).

$ ~ 113,826 -

- $ 115,649 ' - Peak load (occurred 8/15/88 and 8/21/87) (megawatts)

4,536

4,552-

) 5,647

5,665(

Degenerating capability (megawatts)) 1

Customers 2 L'

'570,945 J 569,663 ' 0 Average annual kilowatt-hours used per residential customer l 13,436 : 13,4771 Average annual revenue per residential kilowatt-hour - 7.17v1

7.04c. M i:

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I Louisiana The red Power & Light Company's Systemark willidentify all new logo, shown emerging thecompaniesof theMiddle on the cover of this report, South Electric System. symbolizes a fresh start and a Reminiscent of sunlight new performance-driven reflected in the water, the outlook for our company. Its Systemark stands for energy red "Systemark" identifies us -the business we arein; the as a member of the Middle Mississippi River-an i South Electric System, one of historic, cultural,and I the nation's largest investor-economiclink for the Middle owned electric utilities. Its South region;and teamwork clean lines telegraph a clean - historically and economi-break from the cluttered callylinked,our companies image of our past and the work together to provide lean, modern, customer-electricity to the Middle oriented organization we are South. today. We hope that, Louisiana over time,our new logo will Power & Light Company's symbolize for you, too, a parent company, Middle well-run organization South Utilities,is proposing committed to providing to change its name to efficient, economical electric "Entergy Corporation"- service. a name derived from the words " energy," " enter-prise," and " synergy."These are qualities that describe our response to the competitive marketplace the electric utility industry is entering. The name change is contin-gent upon stockholder approval at the annual meeting, May 19. _= % = % l i 1

f. Operation Bootstrap can Financially, provide Louisiana with new 1988 saw the Company's net jobs and revenue, and that it income decrease from $115.6 will signal to other compa-million in 1987 to $113.8 L, nies throughout Louisiana million. LP&I's financing U, 0 ~ that a new public-private activities in 1988 revolved bi partnership is needed if the around five major transac-y state is to continue an tions. In February, the y economic recovery. Company borrowed $50.3 The year also million from banksin the saw LP&L clect a new Company's service territory president. In December, to meet short term seasonal Donald Hunter was named cash requirements. LP&L t Company President, also entered into a sale ofits succeedingJames M. Cain, retail accounts receivable in 1. and Chief Operating Officer, April,the initial amount of both positions effective which was $109 million.In January 1,1989. Mr. Cain September, the Company O i assumed the position of terminated its accounts Chairman of the Board and receivable financing and also Mr James M. Cain Chairtnan of the Board and Chief Executive Officer (left). Chief Executive Officer, and paid off the $30 million of and Mr Donald Hunter, President and Chief Operating Othcer (right). was named Senior Vice the then outstanding bank President and System loans. As part of a 1986 Executive-Louisiana iriventory supply agreement, The Com-In 1988 Divisi n f MSU.JohnJ. $5.7 million of nuclear spare pany is awaiting a ruling LP&L moved forward with Cordaro,formerly 5emor parts were sold inJune. from the Council on its an exciting new program m request for a rate increase for help Louisiana with the C'. President-External Fmally,the Company AUain, was e ted to the remarketed $220 milhon of customers in the City's 15th development of small nmly-created position of St. Charles Parish Pollution Ward (Algiers). As part of businesses. On February 12, Gmup \\ ice President-Control Revenue Bonds and that case, the Council Louisiana Governor-elect h**""^I Affairs.other sold $75 million of brst ordered a prudence investi-Buddy Roemer joined with changes m. the officers and Mortgage Bonds due m gation into the need for, and us in announcing Operation directors f theCompany 1995.(Comprehensive construction of, the Water-Bootstrap, a program are noted later in the Report. mformation about the ford 3 nuclear power plant at whereby the Company is Taft,La Councilhearings prosiding financia! support Company's financial are complete and a ruling on for the start-up of promising c nditionm0y befoundin the hnancial Stctements of both of these matters is new businesses. Working expected shortly. with area state universities, this annual report.) Small Business Development Centers and the Technology Transfer Center at the University of New Orleans, l LP&L has seen more than 1 3,000 ideas submitted. From those, the Company pro-vided three $5,000 develop-mental grants to Louisiana l entrepreneurs in 1988 and one in 1989. We believe l l l l l 1 L-- l

Louisiana The red Power & Light Company's Systemark willidentify all new logo, shown emerging the companies of the Middle on the cover of this report, South Electric System. symbolizes a fresh start and a Reminiscent of sunlight new performance-driven reflected in the water, the outlook for our company. Its Systemark stands for energy red "Systemark" identifies us -the business we are in; the as a member of the Middle Mississippi River-an South Electric System, one of historic, cultural,and the nation's largest investor-economiclink fortheMiddle owned electric utilities. Its South region; and teamwork clean lines telegraph a clean - historically and economi-break from the cluttered cally linked,our companies image of our past, and the work together to provide lean, modern, customer-electricity to the Middle oriented organization we are South. today. We hope that, Louisiana over time, our new logo will Power & Light Company's symbolize for you, too, a parent company, Middle well-run organization South Utilities,is proposing committed to providing to change its name to efficient, economical electric

Entergy Corporation"-

service. a name derived from the words " energy," " enter-prise," and " synergy." These are qualities that describe our response to the competitive marketplace the electric utility industry is entering. The name change is contin-gent upon stockholder approval at the annual meeting, May 19. LPtsL -===- 1 J

l-CHAIRMAN'S/ PRESIDENT'S LETTER Lomana Pour & bght Campany Dear Fellow Stockholders allocated costs associated triggering a severe financial and Employees: with the Grand Gulf 1 strain on that company as Never before nuclear unit in Port Gibson, well as the entire MSU has a year brought about so Mississippi.The Supreme system. Arguments on the many changes as did 1988. Court's ruling broke a abstention issue are expected We believe that Louisiana financiallogjam that had before the Supreme Court in Power & Light Companyis placed the entire MSU late spring with a ruling now poised to enter the next System in jeopardy.The expected byJune 30.We are decade as a Company based decision also paved the way confident NOPSI will on a solid foundation of for another sister company, ultimately prevailin obtain-planning,with a road map of New Orleans Public Service ing judicialrelief from this goals and objectives that we Inc.(NOPSI), to takeits prudence disallowance. will not only meet, but also dispute with the Councilof The Supreme exceed.The LP&L we now the City of New Orleans Court also let stand a ruling have in place came about (Council) to the Supreme by the Fourth Circuit Court through the hard work and Court.OnJanuary 9,1989, of AppealfortheStateof sacrifices of our employees, the high Court agreed to Louisiana (Fourth Circuit) officers and directors. For hear NOPSI's claim that the awarding damages totalling the Company and the issue of prudence regarding $90 million($193.7 million, Middle South Utilities the Grand Gulf plant is a inclusive oflegalinterest and System (MSU System)to federalissue, and that it was court costs) to LP&L from survive the many changes not appropriate for the United Gas Pipe Line facing the entire electric United States District Coun Company (United), arising utility industry, reorganiza-to abstain from deciding from United's failure to tion and strengthening had NOPSI's case.This case delivercontracted-for to occur.This letter is,in stems from the CounciPs supplies of natural gas for effect, the story of how-we February 4,1988, resolution Company powerplants are working together to ordering a $135 million from December 1971 make a great Company even prudence disallowance of through December 1981. greater. NOPSI's previously On March 1, Allow us to deferred Grand Gulf I costs, 1r,89, the Louisiana Public share with you some of the Service Commission (LPSC) highlights of what we issued an order allowingthe consider to have been a most Company to retain the chahenging,yet gratifying, United monies in return,

year, among other things,for the Company's agreement to The Yearin ReAew freeze base rates at the The major current level for a period of financial story of 1988 was five years.The LPSC's order the victory achieved by our allows for rateincrease sistercompany Mississippi applications during that Power & Light Company period under certain condi-(MP&L), when the U.S.

tions, such as catastrophic Supreme Court ruled on events or tax rate changes. June 24 that MP&L could fully recoverits federally-2

i l Operation Bootstrap can Financially, provide Louisiana with new 1988 saw the Company's net jobs and revenue,and that it income decrease from $115.6 s, 9.- ~; will signal to other compa-million in 1987 to $113.8 I 1 nies throughout Louisiana million. LP&L's financing . 1 that a new public-private activities in 1988 revolved p -p partnerships neededif the around five major transac-state is to continue an tions. In February, the economic recovery. Company borrowed $50.3 The year also million from banksin the o' saw LP&L elect a new Company's service territory president. In December, to meet short term seasonal Donald Hunter was named cash requirements. LP&L Company President, also entered into a sale ofits l succeedingJames M. Cain, retailaccounts receivable in and Chief Operating Officer, April, theinitial amount of both positions effective which was $109 million. In January 1,1989. Mr. Cain September,the Company assumed the position of terminated its accounts Chairman of the board and receivable financing and also l Mr., lames M. Cain. Chairman of the Board and Chief Executwe Otticer (left). Chief Executive Officer,and paid off the $30 million of and Mr. Donald Hunter. Preside tf ard Chief Operating Otticer(right)- was named Senior Vice the then outstanding bank President and System loans. As part of a 1986 U""'I"-l "ISI^"" I"""' 'Y 8"PP Y ^8'" "C"I' I The Com-In 1988' Division of MSU. John $5.7 million of nuclear spare Cordaro, formerly Sem,J. pany is awaiting a ruling LP&L moved forward with parts were sold inJune. or from the Council on its an exciting new program to Vice President-External Finally, the Company request for a rateincrease for help Louisiana with the Affairs,was clwred to the remarketed $220 million of customers in the City's 15th development of small new'ly-created position of St. Charles Parish Pollution Ward (Algiers). As part of businesses. On February 12, Group Vice President-Control Revenue Bonds and that case, the Council Louisiana Governor-elect External Affairs.Other sold $75 million of First ordered a prudence investi-Buddy Roemer joined with changes, theotficers and Mortgagt Bonds due in m gation into the need for, and usin announcing operation direct rs f the Company 1995.(Comprehensive construction of, the Water-Bootstrap, a program aie n ted later m the Report. , formation about the m ford 3 nuclear power plant at whereby the Company is Taft, La. Council hearings providing financial support Company's fmancial cond non may be found m, are comp.lete and a ruling on for the start-up of promising the Fmancial Statemems of both of these matters is new businesses. Working expected shortly, with area state universities, this annual report.) Small Business Development Centers and theTechnology Transfer Center at the University of New Orleans, LP&L has seen more than 3,000 ideas submitted. From those, the Company pro-vided three $5,000 develop-mental grants to Louisiana entrepreneurs in 1988 and one in 1989.We believe I 1 l l l 3 i

l CHAIRMAN'S/ PRESIDENT'S LETTER Iamu hawer & bxin cmpay As mentioned These ex-Sharing our ExceHence earlier,the major event of , craordinary steps have Probably no 1988 was the most thorough prepared us for change. divisionof theCompany reorganization LP&L has Early ptirement, outplace-faced a potentially more ever experienced.The basis ment and attrition add up to thorough reorganization in for this effort revolved a painful process for us all. 1988 than did Nuclear around the one word that has But this streamlining will Operations.On May 9,the pointed the entire electric ' enable us to use our skills announcement was made utility industry toward the and equipment to maintain that our sister company, 21st Century: change. our productivity and keep System Energy Resources, customer service at a high Inc. (System Energy), would Whatis Chan0e7

level, assume the operational l

The American We are moni. responsibility for LP&L's Heritage Dictionary defines tocing, challenging and Waterford 3 nuclear generat-change as,"to cause to be changing the way we do ing plant,as well as for different; alter."The utility things.We are meeting and, Arkansas Power & Light industry,and the economic in some cases, surpassing the Company's Arkansas climatein whichit operates, targets of excellence we've Nuclear One Units 1 and 2 changed course in 1988. created.Last year we in Russellville, Arkansas. l LP&L kept pace with that highlighted our"60 Years of System Energy already change. Service & Pride."We are, operates the Grand Gulf As a result of indeed, building upon that nuclear plant. If approved by an extensive review process, rich history through the the state regulatory agencies our organizational structure solid foundation of Change of Arkansas and Louisiana, was overhauled, eliminating Through Teamwork,which along with appropriate approximately 700 positions is the theme of this year's federal agencies,the new in our consolidated opera-Report. operationalconcept would tions with NOPSI.Most of transfer nearly 950 LP&L l these came about by not employees to System filling vacancies and through Energy.These professionals early retirements. Unfortu-repres.ent a tremendously nately,though,70 of our successful group. employeeswere outplaced. Although these were d.:!ficult decisions, moves were necessary in order to position LP&L to be more efficient and cost-competi-tive. 4

In 1988, The MSUTeam A FinalNote Waterferd 3 received a very It is a well-Reorganiza-high rating from the Institute worn phrase, but one that tion, legal and regulatory of Nuclear Power Opera-bears repeating: we are not proceedings and our work as tions; was admitted into the an island unto ourselves. If part of a systemwide family National Academy of we are to survive as a were the major stories of NuclearTraining for Company and system, we 1988..As tough and challeng-excellence in its training must believe in that philoso-ing as 1988 was, all of us will programs; received a good phy. look back on the year as a Systematic Assessment of We at LP&L high-water mark at LP&L, Licensee Performance report have our roots in Louisiana, the year in which the from the Nuclear Regulatory and for that we are proud. Company met the future Commission; and was But our branches extend head-on.To make it all named the nation's top through the entire Delta happen, we had to remember nuclear electric generating region of Mississippi, that change alone is not plant for the calendar years Arkansas and Missouri as a enough. Change Through 1986-87 by World Nuclear partof theMiddleSouth Teamwork provides the best Performance Reports. Electric System team. We can method of preparing for a Beyond this, though, was the assure you that the team is future filled with industry successfuluseof theWater growing and becoming uncertainty. ford 3 Emergency Plan stronger! Working together, For that during a refinery explosion thepeople of MSU can reason we chose our work-and fire in St. Charles Parish accomplish objectives for the ing philosophy as our theme in May. For the third time in betterment of our customers, for this Report. In the the six-year history of the stockholders and employees followingsectionof this plan,St. Charles officials - objectives of which we Report,please join us in were able to evacuate 17,000 could only have dreamed a reviewing how we at LP&L people by followingthe few short years ago. accomplished so much in so plan's approved guidelines. We're little time to ensure that in We are proud rightfully proud of our role the future, as in the past, of, and look forward to, the in the MSU ream. /.s you'll LP&L willcontinue to chance of sharing our see in the following pages, reinforce its position as one nuclear program's excellence we're happy to share the of the nation's most innova-with the rest of the Middle story of how we at LP&L are tive and efficient electric South Electric System working not only to ensure utilities. through the consolidation the growth of MSU, but also with System Energy.We are of the entire region. confident that our manage-ment team will join with System Energy to improve FORTHEBOARD: upon the proud record of Sincerely, [ / ~ performance we've estab-7b lished at Waterford 3 and March 1,1989 James M.Cain Donald Hunter I I spread it systemwide. Chairman of the Board President Chief Executive Officer Chief Operating Officer l l l 5 1

INTRODUCTION wuwu me c, imin ca. ,n.,, organization is an anxious time for any company, especially one in the electric utility industry which is historically tied to a stable, successful past. It leaves many feeling tense, unsettled. and concerned. Their business world is being turned inside out. At LP&L, the effects of reorganization were lessened tremendously by the employees' willingness to become a part of Change Through Teamwork.Their open-mindedness and desire to adopt a " teamwork" concept aided greatly to our success as they contributed their creative thinking and s t w, g,gyg[ innovation. {w$9 This, then, is the employees' look at 1988, a year 7 g:q that Change Through Teamwork became not only [G.,;, a program to position LP&L for the future, but ' **Agg also a workable philosophy for the present. .g. T* .,y b?.,- ?f ~~~ .)&

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4-Long before Its emphasis in 1988, Teamwork played a vitalrolein the success of LP&L overcoming obstacles like the need for transmission lines over marshes or sclerways like lake Pontchartrain, north of New Orleans. 6 l

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CUSTOMER SERVICE I.onwu 1%rr & I.sght Compny A Division n Operations group / Central Operations was created to provide central management of distribution and customer sen ice-related responsibil-For the ity.TheTransforner Shop, Customer Service group, Meter Shop, and Customer 1988 saw significant changes Service Center are part of designed to ensure thac,as ' 4 this group, along with the our name implies, the recently-created Transporta-customer comes first. tion Shop, which provides Faced with a repairs and quality control corporate-wide reorganiza-for the Company's hydraulic o tion effort, our staff stream-transportation equipment. lining plan resulted in an 11 1988 did not percent reduction in em-mark the end of the organ-playees which enabled Cus-izational changes. Effective tomer Service to reduce January 1,1989, the General verticallevels of manage-h' Office Marketing group { ment; set horizontal spans of became part of the Customer control at the highest practicallevel; and provide Service organization.The change places Marketing operations that are centrally Planning and Program designed and guided with Development in the same decentralized implementa- .h i organization with program tion and control. Ohn implementation.Through Forinstance, 0: $.4 these changes, Customer the management of Line 5 Construction and Mainte-

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Service is now positioned to become more closelv attuned nance and Service work was to its business environment moved from the Districts and customers' needs. and assigned to each Divi-Customer Senice is now sion, reporting to an Engi-postured to respond rapidly neering and Operating as changes occurin that Manager.This change alone emironment for those needs. afforded the opportunity to selectively reorganize and consolidate certain Districts. Substation Central LetThe egandedNorthern Control It has also allowed District Desi*n and Construction, Services, a Division Services centerin n'esmonroe enables LP&L Managers to refocus the'r whose activities sometimes-group, was created to t 'o P'0*d' 0"'"h biht!'"d serwce throughout the Northern efforts on marketing, cross Division boundaries, centrali7e certain staff Diwsion. customer service and local were centralized and functions that were formerly political and community combined into the Central performed separately by relations. Engineering organization, each Division. Central relieving Divisions of those Services coordinates distri-responsibilities. Substation bution systems and customer operation and maintenance senice functions, ensuring remain in the Divisions. quality and consistency in activities such as right-of-reay maintenance and acquisition, inventory control, equipment, I distribution design and maintenance, and erew productivity. 8

MARKETING Iemuwu 1%er & Imht Compny g %: - m ~ 7,e l Emphasizing qua!hy service at competitive w prices, providingincentives s n for large-load industrial M g customers to remain and 3 4 m" expand with LP&l. and developing and nurturing innovative small business,all point to the Marketing group's theme in 1988: +Q FOCUS ON THE CUS-TOMER.The key to the success of the effort was aggressive marketing. Significant threats to our industrial sector revenue, created by majoriontract expirations and the potential for the installation of cogeneration Customers with shared modern cooking equipment Our basic facilities continued to receive characteristics have been and waste heat recovery marketing strategy will Marketing's attention. We grouped together with water heating systems. continue to be to create successfully renewed long-segment coordinators Focusing on satisfied customers by term contracts for several assigned to each group. " Key economic development, prmiding quality service at majorload customers, Account" systems will Governor-elect Buddy competitive prices.We resulting in more than 1,400 develop specific marketing Roemer joined with the increasingly recognize that . megawatts of industrialload plans for major customers Company in announcing our customers have varied committed to LP&L while " Account Teams" will " Operation Bootstrap,"a wants and needs, and through the early 1990s,a target decision makers program to support entre-Marketing will provide our success story unmatched in within the customer's preneurs with an idea for a customer with a range of theindustry. Additionally, organization. Special small business. Working options so he or she may incentive rates and pr aduct positions have also been with area state universities, choose the products, services demand have led to an-created in areas such a3 more than 3,000 inquiries and pricing that meet his or nouncements of plant international recruiting, were received. So far, four her desires. expansions in both the market research and product $5,000 grants have been refining and chemical development. awarded to individuals segments, leading to a much-In the whose business ideas merited Atrove-High pressure sodium hghts needed boost to the state's residential market,the heat additional development.

[re n a d]n e d secunty for economy.

pump and other energy More grants wdl be awarded customers as LP&Ps Marketing Our strategic efficient products will be in 1989. Working closely activities expandedin 1988. program, FOCUS ON TlIE emphasized as well as the with External Affairs-Public CUSTOMER, established total electric living concept. Relations, the program the skills, systems and Stronger relationships have gained visibility through strategies to build an been developed with our more than 100 articles in aggressive overall program. trade allies,1;ke builders, local newspapers, adding to contractors and dealers, who the generation of new help influence customer business ideas. buying decisions. And in the Commercial Sector, we are marketing new options,like 9

ACCOUNTING & FINANCE 1 -- w e i+ c.,,,, q 1988 was a s }, pivota! year for the Account- '~ ing & Finance group at LP&l when viewed in terms of the nature of the projects undertaken. Being a service-9 oriented section that perfor ms the financial management function and provides the information necessary for internal operations and external ~ requirements, Accounting & Finance accepted the / 'g challenges of new and r different nceds for financial ~ g information and procedures. 74 Changes g, began early in the year with the AccountingSystems and Procedures project. Team-work was personified as a major project team was Other Budget Procedures organized to eliminate informational needs were preparations have been also receiveo close scrutiny duplicate accounting addressed wben a multi-enhanced as three separate in 1988. New cash manage-software source systems. disciplinary project team personal computer-based ment procedures were Five accounting systems developed Phase 1 of the systems were developed, introduced to maximize the were selected for modifica-Cost Center Accounting allowing various Company use of available funds, tions that would lead to System.The System assists locations to submit their improve operational streamlined accounting selected service areas of the operating and capital efficiency and provide better procedures,imnroved Company in preparing cost-budgets via computer service to internal depart-efficiency and lower costs. competitive estimates and diskette. Teamwork played a ments. New methods were All employees are now paid determining whether I.P&L major role again as the effort used by local offices to through the single bi-weekly should hire an outside firm was accomplished with the generate bank deposits, payroll system that was to perform certain functions, cooperation of budgets enabling each office to developed. Time reporting is or establish in-house personnel and preparers consolidate many ofits improved,and nearly half of resources and personnel to Company-wide. Data receipts into a single deposit the estimated savings of 514 provide the same service. It transmittal, verification and and helping to reduce bank manhours per month have also provides the ability to manipulation have been charges in the process.These been realized, with more track job costs and enables a significantly improved by and other changes are the changes on the way in 1989. profit and loss analysis by these new systems. foundation for even more job. It is currently being improvements in 1989 piloted in the Central Change Above-LP&Cs Central Maintenance Maintenance Services unit of Through Teamwork: for the Services. housed at the Paterson g p; plant in New Orleans. now has a Cost group,it ceased to be simpiy Center Accounting System that gives LP&L another toolin holding down a motto as nt became reahty costs through ettacrent planning. through the development of workable systems for the Company in 1988. 10

EXTERNAL AFFAIRS Lounwns Power & bght Company on matters affecting the In addition to The Environ-Company.On a City and informing its customers of mental groupled the Parish basis, LP& L serves as Company performancein Company through removal a vital bridge fostering inter-the " Customer Annual - of all polychlorinated-governmentalcooperation Report,"Public Relations biphenyl(PCB) capacitors and facilitating needed teamed with the Marketing from the distribution Comprised of community projects. group to publicize the system. It also revised spill Public Affairs,Public Employees of before-mentioned " Opera-prevention and cleanup Relations and Environ-both LP&L and Middle tion Bootstrap" effort. More procedures for transmission mental Affairs,the External South's New Orleans-based than 40 state newspapers and distribution groups,and Affairs group of LP&L operations joined hands to carried three major stories on developed detailed proce-approached 1988 as a year to form EMPOWER,a broad-the program throughout the dures for hauling hazardous use its internal strengths to based legislative and public year. Also, nearly 20 radio chemicals. It has provided address numerous external policy issues education stations carried news stories guidance as the Company 1 challenges facing the organization. EMPOWER's on the small business responded to the new l Company. It was a tall order, purpose is to help employees development effort Add to emphasis in personal indeed, although the results learn more about the this the more than 60,000 protection and community were most satisfying. politicalprocess so they can Lifesaver ID Tags distributed right-to-know regulations The Public become more involved to children in Louisiana and on hazardous chemicals. Affairs group worked with participants and better the more than 6,000 man. Finally,it worked to help l System counterparts on the informed voters. More than hours of community service close many of the Com. Federallevel to coordinate 800 EMPOWER members provided by the Family of pany's non-critical under-activities dealing with many showed their enthusiasm by Community and Utility ground storage tanks. pieces oflegislation on attending a Louisiana Public Supporters (FOCUS) group, CapitolIlillaffecting the Service Commission and it's easy to see why the entire utility industry.This candidates' forum held prior Company's Public Relations l was particularly effective in to a special election. effort won more than 30 lobbying the Rostenkowski Public local and national awards in amendment to the Budget Relations saw 1988 as a year 1988. l Reconciliation Act,resulting to reinforce the company's The Environ-in severe limitations being dedication to education by mental Affairs group put on the use of tax-exempt sponsoring such literacy answered the teamwork j bonds for the purpose of programs as the PALS challenge by offering ) government takeover of (Principles of Aduh Literacy specialized guidance in j private utilities.On State Systems) computer assisted responding to a myriad of { isst:es, Company employees literacy laboratory in both new operations-oriented j helped in contacting their Monroe and New Orleans; regulations. legislators so they might the Multiple Sclerosis receive the LP&L viewpoint READ-a-thon; and the GEDonTVprogramof the j Louisiana Public Broadcast-ing System. In addition, Mr. Cain serves on the 1.ouisiana Literacy Task Force which is developing recommenda-tions for establishing a state plan to address adult l illiteracy. l l 11 ) O

NUCLEAR OPERATIONS I nurmm.s 1%w l Imin Lumtwrv Louisiana's thoegh, came other perform-ment regarding plans for the first nuclear plant completed ance highlights. Nuclear LP&L nuclear group to its third year of commercial Operations personnel consolidate with System operation by garnering the completed more than six Energy Resources Inc. honor of being the nation's million manhours without a (System Energy).The plan is top electricity-producing lost-time accident. Water-designed to strengthen 1988 willlong nuclear unit in the nation, ford 3 achieved a three-year MSU's nuclear management be remembered in Nuclear World Nuclear Performance capacity factorof 75.22 capabilities, aid in reducing Operations as a year when Report noted that Waterford percent, a System best operating costs, further records were set, Teamwork 3 generated 15.5 million among MSU nuclear units. enhance safety and help and reorganization became megawatt-hours of electric-The plant exceeded the stabilize electric rates for the foundation for future ity in the calendar years Institute of Nuclear Power customers. Numerous teams progress and Waterford 3 1986-87, far outproducing its Operations (INPO) best and project groups were came into its own as a leader nearest rival. quartile values for radiation formed Systemwide to aid in among the nation's nuclear Beyond that exposure and three-year the consolidation.These generating plants. outstanding achievement, average equivalent availabil-groups are scheduled to ity factor. Finally, Waterford become operationalin 1989. 3 set an MSU record for the Internally, the Nuclear Op-shortest refueling outage, crations engineering and with a total outye duration construction group was i of less than 60 days at reorganized to reduce costs Waterford 3. associated with design ~ s e In other changes by performing most g/ Y operations areas,INPO of the relevant activities in- ',s g conducted an evaluation of house. the performance of Water-Toppingoffa ford 3 in several operation-most successful year, LP&L management related areas, reaffirmed its commitment giving LP&l, a high overall to excellence in nuclear rating. Waterford 3 took operations by initiating a another step toward becom-Nuclear Excellence (NU-o ing the leader in the nuclear CLEX) project to assist in i energy industry by obtaining establishing a program for 8 full accreditation ofits continued excellence, nuclear training progiam excellence that willlong be through INPO,thus earning associated with the year the coveted status of full 1988. g, membership in the National [ Academy of Nuclear g Training. In addition, Waterford 3's " Management Observation" and " Area Above-The mstalla!>on of a computer-Walkdown" programs tied control room simulator at the 7ecciyed 1Npo's recognition Waterford 3 nuclear plant paved the og goog p7,c7;ce way for an increased hands on ,I,he tougilest operator training while lowenng overall trairung costs challenge { acing Nuclear Operations, though, came with a mid-year announce-i 12

ENERGY SUPPLY-FOSSIL Iunw Pau n & bg n Comp.eny i barges were docked at pm'm ~ '-'mm" wppm Ninemile Point and Mi-choud in case they were needed. All storage tanks were filled, as well. Demin-Engineering eralizing equipment,already challenges, Mother Nature's installed at L.ittle Gypsy, was p C, " fickle changes,and reorgani-also brought to Ninemile s zation all played a major role Point. By earlyJuly, the {- A in the success of the Energy wedge of saltwater pushed n Supply-Fossil department in by the intakes of Ninemile %v w 1988. Point and Michoud. By later W The year that month, though, the began with Senior Vice intrusion began moving President-Energy Supply-back to the Gulf.The $N Fossil Don Aswell outlining Teamwork concept empha-Y%m m the" winds of change" sized by Aswell had passed a ,{ { 4 M blowing through the utility major test. g i gg gdkidhMOkif a industry and how Energy Also during id Supply must adapt or be left the year, task forces and behind. Aswell's effort in special teams were formed to posturing his group for the develop a Low Load Sliding In addition to Teamwork future earned him the Pressure Cyclic Conversion working with special teams, was also vitalin placing Middle South Utilities for some fossil-fired plants. operations personnel studied seven units into Extended Chairman's Award for his In simple terms, this enables with an equipment manufac-Reserve Shutdown, meaning achievements, achievements generation units to adjust turer on the actual system plans were implemented to that prepared the Fossil from periods of low electric before it reached the plant. keep the units in a state of section for a challenging demand, such as late nights, They,in turn, taught others readiness in case they are year. to the times when they are about the process. Final called upon to be placed in Generation required to adjust to larger performance testine,is now operation in a reasonable and engineering planning daytime loads. Little underway on the system. amount of time. took a back seat, though, to Gypsy's Unit 2 was chosen In terms of

Planning, the greatest hurdle the for the projects.

money-saving efforts, teamwork and reaching goals department faced in 1988: Central Maintenance through the development of saltwater intrusion that Services (CMS)of the easily-tracked objectives slowly crept up the Missis-department was chartered as were more than buzzwords sippi River in late spring and LP&L's first Cost Center. for future progress in Energy early summer.Thelow level People with backgrounds as Supply-Fossil for 1988. of the River allowed saltwa-diverse as nuclear, account-They were an in-place and ter to work its way from the US:# ing and special projects working plan for success that Gulf of Mexico to points

Y f.. m joined together to devise a will carry overinto 1989 and above New Orleans,

% N system that offers services to beyond.

threatening to shut down both fossil and nuclear plants fossil-fired plants,like with prices competitive with

f7,$y*',f[c[,#'#$g),'he M s-d Ninemile Point and Little those in outside markets.

g ,pj l Gypsy. Quick work by This wdl hopefully become S,ssippi nuer gave the Energy supply teams throughout the the model for similar fossil aroup first hand experience in department as well as Middle systemsinotherparts of the using teamwork to Imd solutions to South's System Services, inc., / Company. complicated gmuems anectmo ~

1. 1. "#8 ### ###*### #### "#""

Prepared for the saltwater __ y tram Nw Orleans. wedge by contracting for I three 20-million barrel WS88-#I8""i"0 i" *8885^- n development and construction played barges to be filled with fresh d' water from upriver at major roles in new technologylike the sliding pressure control system at Waterford 1 and 2.The LP&Cs Little Gypsy plant in St Charles Pansh. j l /g 13 o i t

CENTRAL ENGINEERING Loumu now & l. win Compny For instance, reliability and,in effect, Also, all Central Engineering is now improvements in perform-substation design, engineer-comprised of the Bulk ing and construction are ance. Power System Planning and A major under one manager as Operations; Substation project is the combination of opposed to each Division as Engineering and Construc-the LP&L Southern Control in the past; the process Consolida-tion; Process Applications; Center and the Market Street through which substation tion and centralization. and Project Management Control Center, which will standards are approved has Never before have two and Information Systems provide greater coordination been simplified; and Central words had such an enormous groups. Before 1988, many of transmissionoperations Engineering Substation impact on the LP&L Central of these groups' functions through the south Louisiana Construction crews are Engineering section. In were distributed throughout area. Additionally, over the being used in all Divisions twelve short months, the the Company in different next three years state-of-the-regardless of their home group synergized its techni-departments, and in some art equipment will be base. Due to this improve-cal expertise, improved cases,different Districts. As installed in Orleans Division ment, approval for crews to lateral and vertical commu-one integrated group, we substations that will tieinto a cross Division boundaries is nications, improved the now see better communica-modernized computer no longer a problem. effective utilization of t;on, a new awareness of control system currently In the more technology and improved system operations, the servin;; other Company general areas of decision proficiency through climi-potential for increased cost Divisions. making and communica-nating redundancies and savings, improved system tions, Engineering Supervi-streamlining processes. Even sors are now responsib'r for though it sounds compli-getting the job done, ~' cated, the bottom line is the preparing the entire budget emergence of a new organi-to ensure that the job is done ~~ zation providing a more both on time and within the proficient system with fewer approved budget. A Project Management & Information layers of management. 2 Systems group was formed, / assigning Project Managers 3 Ryht-Innovative engineenng designs and construction techniques lead to with full authority and responsiNlity for selected improved performance at facilities like this gas insulated substation at major projects. Not onty the Sterltngton Punt in north e does this enhance improved Louisiana. management methodologies, but it also spreads these g. improvements Company-wide. g- ~ Combining -/ ' the new technologies and l management techniques l with an enhanced computer B center computer and data processing system, Central __] f /( l Engineering has become a powerful and efficient m A memberof the LP&L ~ '"""S"'""""'""**" 5_ g program. 4 .E gMMW1A e 9 14 s' 1 ,I m r0 a

REPORT OF MANAGEMENT 1-~,w w c14,cmm To meet its The inde-responsi!-ilities with respect pendent public accountants to financiat information, provide an objective assess-management maintains and mentof thedegreetowhich enforces a system ofinternal management meets its accounting controls that is responsibility for fairness of The manage-designed to provide reason-financial reporting.They ment of Louisiana Power & able assurance, on a cost regularly evaluate the system Light Company has pre-effective basis, as to the of internal accounting pared and is responsible for integrity, objectivity, and controls and perform such the financial statements and reliability of the financial tests and other procedures as related financialinformation records and as to the protec-they deem necessary to reach included in this annual tion of assets.This syste n and express an opinion on 1 report.The financial includes communication the fairness of the financial statements are based on through written pohcies and statements. generally accepted account-procedures, as well as an Management ing principles, applied on a organizational structure that believes that these policies consistent basis. Financial provides for appropriate and procedures provide information included division of responsibility and reasonable assurance that its elsewhere in this report is the training of personnel. operations are carried out consistent with the financial This system is also tested by with a high standard of statements. a comprehensive internal business conduct. audit program. The Board of Directors pursues its responsibility of reported financialinformation throughits Audi Commit-t tee, composed of outside directors.The Audit Committee meets periodi-cally with management, the internal auditors,and the J independent public account-ants to discuss auditing, internalcontrol,and financial reporting matters. The independent public accountants and the internal auditors have free access to the Audit Committee at any l time. ~ l 15 I

AUDIT COMMITTEE CHAIRMAN'S LETTER INDEPENDENT AUDITORS' REPORT Lonenssarna Powsr & lsght Gmpany. The Audit in our Committee discussed with opir. ion, the above-men-the Company's internal tioned financial statements auditors and the independent present fairly,in all material public accountants (Deloitte respects, the financial Haskins & Sells) the overall positionof theCompanyat The Louisiana scope and specific plans for To the Stockholders and the December 31,1988 and 1987, i Power & Light Company their respective audits.The Board of Directors of and the results ofits opera-I AuditCommitteeof the committee also discussed the Louisiana Power & tions and its cash flows for Board of Directors is Company's financial Light Company: each of the three years in the I comprised of four Directors statements and the adequacy We have period ended December 31, who are not officers of the of theCompany'sinternal audited the balance sheets of 1988 in conformity with Company: Tex R. Kilpatrick controls.The committee met Louisiana Power & Light generally accepted (Chairman),JosephJ. Krebs, with the Company's internal Company as of December accounting principles. Jr., H. Duke Shackelford, auditors and independent 31,1988 and 1987, and the and Wm.Clifford Smith. public accountants without related statements ofincome, The committee held three management present to of retained earnings and of g 4gp meetings during 1988. discuss the results of their cash flows for each of the The Audit audits, their evaluations of three years in the period Committtee oversees the the Company's internal ended December 31,1988. New Orleans, Louisiana Company's financial controls and the overall These financial statements March 1,1989 reporting process on behalf quality of the Company's are the responsibility of the of the Board of Directors financial reporting.The Company's management. and provides reasonable meetings also were designed Our responsibility is to assurance to the Board that to facilitate any private express an opinion on these sufficient operating, communication with the financial statements based on accounting, and financial committee desired by the our audits. controls are in existence and internal auditors or inde-We conducted are adequately reviewed by pendent public accountants. our audits in accordance programs ofinternal and with generally accepted external audits. auditing standards. Those standards require that we .[ b plan and perform the audit to M obtain reasonable assurance about whether the financial Tex R. Kilpatrick statements are free of

Chairman, materialmisstatement. An Audit Committee audit includes examining.on a test basis, evidence sup-porting the amounts and disclosures in the financial statements. An audit slso includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presenta-tion. We believe that our audits provide a reasonable 1

basis for our opinion. l 16

STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT) t lunwea hst er & lsght comjuny For the Years Ended December 31. 1988 1987 1986 STATEMENTS OF ANCOME (/n Thousands) Operating Revenues (Note IB) $1,377,108 $1,346,632 $1,344,790 Operating Expenses: Fuel and fuel related expenses (Note 1B) 216,598 235,427 288,334 Purchased power (Note 8D) 317,946 319,977 290.973 Other operation expenses 224,049 226,057 20,443 Maintenance 73,559 88,611 88,198 - Depreciation 122,339 118,769 116,125 i Taxes other than income taxes 48,323 46,106 42,393 Income taxes (Note 3) 53,225 26,707 41,432 Rate deferrals (Notes 1G and 2): Waterford 3 expenses recovered (deferred) - net 22,635 (21,080) (206,000) Income taxes (Note 3) (12,267) 9,434 103,659 Total 1,066,407 1,050,008 1,005,557 Operating income 310,701 296,624 339,233 Other income: Allowance for equity funds used during construction (Note IF) (574) 1,945 1,880 Miscellaneous income and deductions - net 581 7,192 8,717 Income taxes (Note 3) 2,665 (2,044) (4,457) Total 2,672 7,093 6,140 Interest Charges: Taterest on long-term debt 179,532 181,766 187,516 Other interest - net (Note 4) 20,421 7,444 14,857 Allowance for borrowed funds used during construction (Note 1 F) (406) (1,142) (767) l Total 199,547 188,068 201,606 Net Income $ 113,826 $ 115,649 $ 143,767 1-l STATEMENTS OF RETAINED EARNINGS (DEFICIT) Retained Earnings (Deficit), January 1, $ 16,076 $(40,201) $(130,893) Add: Net income 113,826 115,649 143,767 i Total 129,902 75,448 12,874 Deduct: i Dividends: Preferred stock 47,516 50,724 53,068 Common stock 33,169 8,315 j Capital stock expenses (48) 333 7 l Total 80,637 59,372 53,075 Retained Earnings (Deficit), December 31 (Note 7) $ 49,265 $ 16,076 $ (40,201) See Notes to FinancialStatements. 17 w ______ ________- _____

BALANCE SHEEYS towuu b,w s t.m r cmp,,y s Decemher 31, 1988 1987 (in Thousands) ASSETS Utility Plant (Note 1C): Electric $ 4,399,656 $ 4,269,083 Property under capital leases (Note 11) 12,665 13,180 Construction work in progress (Note 12) 39,771 113,282 Nuclear fuel under capital lease (Note 11) 51,676 .88,723 Nuclear fuel 40,313 26,600 Total 4,544,081 4,510,868 Less - Accumulated depreciation and amortization 934,795 824,465 Utility plant - net 3409,286 3,686,403 Other Property and Investments: Investment in subsidiary company-at equity (Note 8H) 14,230 49,524 Other 717 662 Total 14,947 50,186 Current Assets: Cash equivalents: Temporary investments - at cost, which approximates market: Associated companies (Note 4) 1,100 6,040 Other (Note 2) 277,476 56,660 Total cash equivalents 278,576 62,700 Special deposits 9,717 11,803 Notes receivable 303 310 Accounts receivable: Customer and other (less allowance for doubtful accounts of $1,956,000 in 1988 and $1,900,000 in 1987) 61,762 47,942 Associated companies 2,250 1,534 Accrued unbilled revenues (Note 1B) 54,726 50,936 Income taxes receivable (Note 3) 2,859 5,933 Deferred fuel costs (Note 1B) 2,053 Accumulated deferred income taxes (Note 3) 57,197 Materials and supplies - at average cost (Note 12) 69,949 10,320 Deferred Waterford 3 expenses (Notes 1G and 2) 28,422 Prepayments 5,565 6,658 Other 21,058 12,518 l Total 594.437 210,654 Deferred Debits: Deferred Waterford 3 expenses (Notes 1G and 2) 196,143 247,200 Unamortized debt expense 25,581 27,094 Pension obligation due from associated company (Note 9) 10,659 Other 7,356 12,812 Total 239,739 287,106 TOTAL $ 4,458,409 $ 4,234,349 18 See Notes to FinancialStatements. ._______________-________O

Decemher 31, i988 1987 (In Thousands) CAPITALIZATION AND LIABILITIES Capitalization: Common stock, no par value, authorized 150,000,000 shares; issued and outstanding 137,110,900 shares (Note 5) $ 903,900 $ 903,900 Retained earnings (Note 7) 49,265 16,076 l Total cor mon shareholder's equity 953,165 919,976 Preferred stock without sinking fund (Note 5) 145,882 145,882 Preferred stock with sinking fund (Note 5) 224,165 241,361 Long-term debt (Note 6) 1,582,541 1,772,264 Total 2,905,753 3,079,483 Other Nonacrrent Liabilities: Obligations under capitalleases (Note 11) 18,396 56,363 Accumulated provision for property insurance 7,629 7,912 Accumulated provision for injuries and damages 6,153 5,326 Total 32,178 69,601 Current Liabilities: Currently maturing long-term debt (Note 6) 223,016 2,832 l Accounts payable: Associated companies 28,468 59,409 Other 69,795 67,592 Customer deposits 35,785 31,168 Taxes accrued 11,671 16,597 Accumulated deferred income taxes (Note 3) 3,936 Interest accrued 51,268 44,505 Dividends declared 11,691 12,055 Gas contract settlements - liability to customers (Notes 2 and SK) 253,238 56,403 Deferred fuel costs (Note 1B) 21,314 j Obligations under capital leases (Note 11) 45,944 45,540 Other 4,763 4,002 Total 735,639 365,393 l Deferr-d Credits: j Accumulated deferred income taxes (Note 3) 375,478 251,426 Accumulated deferred investment tax credits (Note 3) 154,240 168,574 Gas contract settlement - liability to customers (Note 8K) 225,329 281,611 Accrued pension cost (Note 9) 16,992 2,250 Other 12,800 16,011 l Total 784,839 719,872 1 l Commitments and Contmgenaes (Notes 2 and 8) l TOTAL $ 4,458,409 $ 4,234,349 19 See Kores to Financial Statements. _____________________j

i, i STATEMENTS OF CASH FLOWS 1 Ionmana Pooe & lsght Comp.ory for the Years Ended December 31, 1988 1987 1986 (In Thousands) Operating Activities: Net income $ 113,826 $ 115,649 $ 143,767 Noncash items included in net income: Depreciation 122.339 118,769 116,125 Amortization of capitalleases 40,433 39,738 ) Amortization of nuclear fuel assemblies 6,458 Deferred income taxes 62,919 29,550 156,827 Investment tax credits - ner (14,334) (1,203) (1,254) Taterford 3 expenses recovered (deferred)- net 22,635 (21,080) (206,000) Allowance for equity funds used during construction 574 (1,945) (1,880) Provisions for estimated losses 4,293 8,432 7,999 Changes in working capital: Receivables (19 994) 19,836 (1,986) Accounts payable (? 38) 17,681 (35,890) Deferred fuel costs (23,367) 4,938 (13,993) Taxes and interest accrued 1,837 (1,199) 56 Gas contract judgment proceeds - liability to customers 196,835 (47) 373 Other current assets and liabilities (24,501) 4,237 (8,098) Power purchase advance repayments 11,434 Refunds to customers - gas contract settlement (56,004) (56,512) (56,374) Other 17,177 (27,981) (18,985) Net cash provided by operating activities 423,388 248,s63 92,121 Investing Activities: Reduction of investment in subsidiary 35.294 Construction expenditures (117,497) (126,792) (115,121) Nuclear fuel expenditures (8,861) (28,663) (56,424) Proceeds from sale and leaseback of nuclear fuel 21,205 48,405 Allowance for equity funds used during construction (574) 1,945 1,880 Net cash used in investing activities (91,638) (132,305) (121,260) Financing Activities: Proceeds from sale of first mortgage bonds 75,000 555,000 Proceeds from sale of other long-term debt 5,741 134,952 Retirement of first mortgage bonds (45,000) (20,000) (355,000) j Retirement of other long-term debt (5,886) (5,722) (4,569) l Redemption of preferred stock (16,773) (32,591) (6,744) Changes in short-term borrowings (133,859) ) Principal payments under capital leases (47,867) (29,646) Dividends paid on common stock (33,169) (8,315) Dividends paid on preferred stock (47,920) (51,770) (66,632) ) Net cash provided by (used in) financing activities (115,874) (148,044) 123,148 Net increase (decrease)in cash and cash equivalents 215,876 (31,486) 94,009 Cash and cash equivalents at beginning of period 62,700 94,186 177 Cash and cash equivalents at end of period $ 278,576 $ 62,700 $ 94,186 l Supplemental Disclosures of Cash Flow Information: Cash paid (received) during the year for: Interest (net of amount capitalized) $ 203,500 $ 199,706 $ 207,382 l l Income taxes 5 (6,880) $ (4,630) $ (4,704) Supplemental Schedule ofNuncash investing and Financing Activities: l Capital lease obligations incurred 7,278 6,239 2,189 20 See Notes to financialStatements. \\

i 1 ABBREVIATIONS AND DEFINED TERMS AFDC Allowance for Funds Used During Construction l ' Algiers 15th Ward of the City of New Orleans, Louisiana AP&L Arkansas Power & Light Company April 1988 Decision Louisiana Supreme Court's April 11,1988 decision April 1988 Order LPSC rate orderissued on April 27,1988 Council Council of the City of New Orleans, Louisiana Company Louisiana Power & Light Company D.C. Circuit United States Court of Appeals for the District of { Columbia Circuit J District Court NineteenthJudicial District Court for the Parish of East l Baton Rouge, Louisiana DOE United States Department of Energy FASB Financial AccountingStandards Board FERC Federal Energy Regulatory Commission Federal Court United States District Court for the Eastern District of Louisiana Fifth Circuit United States Court of Appeals for the Fifth Circuit Fourth Circuit Fourth Circuit Court of Appeal for the State of Louisiana Grand Gulf Station Grand Gulf Steam Electric Generating Station (nuclear) Grand Gulf 1 Unit No.1 of the Grand Gulf Station j Grand Gulf 2 Unit No.2 of the Grand Gulf Station j June 13 Decision The FERC's June 13,1985 decision allocating G rand Gulf 1 costs among the System operating companies LPSC Louisiana Public Service Commission March 1989 Order LPSC order issued March I,1989 Middle South System or System MSU and its various direct and indirect subsidiaries, also known as the Middle South Electric System MPRL Mississippi Power & Light Company MSU Middle South Utilities,Inc. NEIL Nudear Electric Insurance Limited NOPSI New Orleans Public Service Inc. November 1985 Order LPSC order issued on November 14,1985 November 1987 Judgment Judgment issued on November 10,1987 by the District Court NRC Nuclear Regulatory Commission SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards SFl System Fuels, Inc. System Energy System Energy Resources,Inc. System operating l companies AP& L, LP& L, M P&L, and NOPSI, collectively l UPSA Unit Power Sales Agreement j Waterford 3 The Company's Waterford Steam Electric Generating l Station - Unit No. 3 (nuclear) l 21

NOTES TO FINANCIAL STATEMENTS for the years ended Deumber 31,19st 19s7, and 19u i .m tw s ogk compm D. Postretirement Benefits The Company has postretirement plans covering substantially all employees. The Company's policy is to fund pension costs in accordance with guidelines estab- } lished by the Employee Retirement Income Security Act of 1974, as amended.The costs of postretirement health care and

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POUCIES life insurance benefit plans are recorded on the cash basis. A.Systemof Accounts E. In:ctne Taxes The accounts of the Company are maintained The Company joins its parent and affiliates in in accordance with the system of accounts prescribed by the filing a consolidated federal income tax return. Pursuant to an LPSC, which conforms to the Uniform System of Accounts intra-System income tax allocation agreement, income taxes as prescribed by the FERC. are allocated to the Company in proportion to its contribution to the consolidated taxable income. In accordance with SEC B. Revenues and Deferred Fuel Costs regulations, no System company is required to pay more The Company recognizes revenues as billed to income taxes than would have been paid had a separate income customers on a cycle billing basis in addition to an accrual for tax ruurn been filed. estimated unbilled revenues. Unbilled revenues result from Deferred income taxes are provided for differ-energy delivered since the period covered by the latest billings ences between book and taxable income to the extent permit-to customers. ted by the Company's regulatory bodies for ratemaking Therateschedules of theCompanyinclude purposes. Investment tax credits allocated to the Company are fuel adjustment clauses under which fuel costs are billed to cus-deferred and amortized based upon the average useful life of tomers.The Company defers under/over recoveries of fuel the related property in a manner consistent with ratemaking cosa that occur through operation of the fuel adjustment treatment. clauses until these costs / credits are reflected in billings to customers. F. Allowance for Funds Used During Construchon To the extent that the Company is not permit-C.Utimy Plant and Depreciation ted by its regulatory body to recover in current rates the Utility plant is recorded at original cost. Partial carry'ing costs of funds used for construction, the Company disallowances of plant cost ordered by the regulator have been capitalizes, as an appropriate cost of utility plant, AFDC, rece,rded as an adjustment to utility plant.The cost of addi-which is calculated and recorded as provided by the regulatory tions to utility plant includes contracted work, direct labor, system of accounts. Under this utility industry practice, materials, allocable overheads, and AFDC. The costs of units c'onstruct on work in progress on the balance sheet is charged of property retired are removed from utility plant, and such with, and the income statement is credited for, the approxi-costs plus removal costs less salvage are charged to accumu-mate net composite interest cost of borrowed funds and a lated depreciation. Maintenance and repairs of property and reasonable return on the equity funds used for construction. replacement of items determined to be less than units of This procedure is intende 3 to remove from the income property are charged to operating expenses. Principally all of statement the effect of the cost of financing the construction the utilityplant is subject to the lien of the Company's first program and results in treating the AFDC charges in the same mortgage indenture. In addition, certain assets of the Com-manner as construction labor and material costs in that each is pany are subject to the liens of second mortgages. capitalized rather than expensed. As noncash items, these Depreciation is computed on the straight-line credits to the income statement have no effect on current cash basis at rates based on the estimated service lives of the various earnings. After the property is placed in service, the AFDC classes of property. Depreciation rates for Waterford 3 include charged to construction costs is recoverable from customers a provision for nuclear plant decommissioning costs. Depre-through depreciation provisions included in rates charged for ciation provisions on average depreciable property amounted utility service.The composite AFDC rates for the Company to approximately 2.8% in 1988,1987, and 1986. were 6.6% in 1988,8.73% in 1987, and 9.79% in 1986. The Company's policy is to continue to capitalize AFDC on projects during periods ofinterrupted construction when such interruption is temporary, the continuation can be justified as being reasonable under the circumstances, and it is probable such costs will be recovered through rates. 1 ' 22

G. Rate Deterrals

2. RATE MATTERS in order to mitigate the immediate effect on In May and September 1985, the Company filed ratepayers of the inclusion of Waterford 3 costs in retail rates, general retail rate increase applications with the LPSC to the Company has deferred for future recovery a portion of the reflect, among other things, costs associated with Grand Gulf I costs associated with Waterford 3.The costs that were deferred and the expected commercial operation of Waterford 3. In a in the early years of commercial operation will be collected in series of LPSC orders, court decisions, and agreements, the later years through incteased rates to customers. Because the Company was granted Grand Gulf I and Waterford 3 rate actual collection of revenues to recover the deferred amounts relief on specified terms and conditions, was not to occur until the future, the Company recorded a With respect to Waterford 3,in November deferred asset representing the amount of the deferral and, at 1985, the Company agreed to permanently absorb and not the same time, incurred additional capital requirements to recover from its retail customers the LPSC jurisdictional finance this deferral.The deferred amounts are currently being portion of $284 million ofits investment in Waterford 3. In recovered over a period of approximately 8.6 years pursuant to December 1987, the Company implemented a new accounting a recovery schedule established in the April 1988 Order.This standard resulting in a restatement of its financial statements recovery schedule satisfies the requirements of SFAS No.92, for 1985 and 1986 to reflect, as a loss in 1985, the write-off of

" Regulated Enterprises - Accounting for Phase-in Plans". See these costs.The Company was granted, pursuant to certain Note 2," Rate Matters,"for further discussion of the Com-judicial decisions and LPSC rate orders, net annual base rate pany's phase-in plan. increases of $106.7 million in November 1985, $48 million in July 1987,and $40 million(of which the LPSC,in April 1988, H. Other Noncurrent 1. labilities directed the Company to apply $23.8 million to the recovery The Company provides for uninsured property of previously deferred Waterford 3 costs)in February 1988. In risks and for claims for injuries and damages through charges addition, the Company, in accordance with certain judicial to operating expenses on an accrual basis. Such expenses have decisions and LPSC rate orders, deferred a net amount of $266 been allowed for ratemaking purposes. million of itsYaterford 3 costs, related to the period Novem-ber 14,1985 throughJanuary 31,1988.Of this amount, $18.1 million was amortized in 1988 as a result of the amortization of

1. Staternents of Cash Flows For purposes of the Statements of Cash Flows, certain investment tax credits and the remainder of $247.9 the Company considers all highly liquid debt instruments million is to be recovered over approximately 8.6 years at the purchased with a maturity of three months orless to be cash annual rate of $23.8 million, net of deferred taxes,beginning equivalents, in addition, the change in other current assets and April 1988.

liabilities excludes deferred Waterford 3 expenses and deferred With respect to Grand Gulf 1,in November income taxes included in current assets and currently maturing 1985 the Company agreed to permanently absorb and not long-term debt, deferred income taxes, dividends declared, and recover from its retail customers 18% of its FERC-allocated obligations under capital leases included in current liabilities. share of the costs of capacity and energy of Grand Gulf 1. However, the Company is allowed to recover 4.6 cents per l J. Reclassifications kilowatt-hour for the energy related to the permanently Certain reclassifications of previously absorbed percentage through the fuel adjustment clause, with reported amounts have been made to conform with current the Company's portion of the permanently retained percent-classifications. age to be available for sale to non-affiliated parties, subject to LPSC approval. In connection with these rate proceedings, the LPSC conducte! prudence investigations of the construction of Waterford 3. On October 22,1986, the consultants retained by the LPSC to investigate the prudence issues made public their report,in which they concluded that $143 million in expenditures were imprudently incurred on Waterford 3.The consultants' report also conclud ed that the decision to build Waterford 3 was reasonable. It is the position of the Company that none of the costs were imprudently incurred. Moreover, the Company believes that no additional disallowance would be justified in view of the previous disallowance established by the LPSC of $284 million of the Company's investment in Waterford 3. l 23

1 i i NOTES TO FINANCIAL STATEMENTS Iwuna l%se er & bght Gmtwy } jurisdictional customers. In this connection, the Company agreed to a five-year base rate freeze, at the current level, subject ro certain conditions. These conditions include, among others, a provision that would allow the Company to apply for rate relief during the five-year period to reflect a change in the federal tax law or any net increase in its costs associated with In a separate proceeding, the Company filed a Grand Gulf I resulting from proceedings commenced at the retail rate application with the LPSC on February 19,1988, and FERC by the LPSC. In addition, the Company couki request a updated the (Ing in July 1988, requesting an increase in annual waiver of the five-year freeze if a catastrophic event causes a base rates with respect to LPSC jurisdictional customers of drastic change in costs. Further, the five-year freeze would not $107.4 million. Subsequently, consultants for the LPSC recom-serve as a bar to flowing through to retail ratepayers any net mended adjustments that,if adopted,would produce a $45.9 decrease in the Company's costs resulting from proceedings at million annual rate increase based upon a 12.76% return on the FERC relating to the Grand Gulf Station or any decrease l common equity. related to changes in the federal tax law. In a related development, a judgment was ob-While the LPSC's March 1989 Order purported l tained in a suit between the Company and a gas supplier in to address virtually all the issues presented in the Company's j long-standing litigation stemming from, among other things, rate application, the LPSC determined that severalissues the gas supplier's failure to deliver contracted-for quantities of warranted further investigation. Specifically, the LPSC natural gas for power plant use during the period 1971-1981, established subdockets in the proceeding to consider, among and on October 24,1988, the Company received from the gas other issues,the propriety of the use by the Company of an supplier $193.7 million as judgment proceeds.The LPSC has automatic adjustment clause for recovery of its Grand Gulf I-i asserted jurisdiction overapproximately.97.4% of these related costs and the level and appropriateness of the Grand proceeds in terms of the treatment thereof for the benefit of Gulf I-related costs being charged by System Energy to the LPSC jurisdictional ratepayers. At December 31,1988, the Company. proceeds were included in temporary cash investments The LPSC's March 1989 Order is subject to pending an LPSC decision. requests for rehearing and to appeal. One of the interveners in On March 1,1989, the LPSC issued an order these proceedings has indicated that it intends to appeal the that addressed both the Company's February 1988 retail rate order, and has filed a motion with the LPSC asking, among application and the distribution of the gas supplier judgment other things, that the LPSC prohibit the Company from using proceeds.The LPSC found in its order that the Company was and expending the LPSC jurisdictional portion of the judg-entitled to an annualincrease in retail rates of approximately ment proceeds pending further order of the LPSC or a court. $45.9 million, based upon a return on equity of 12.76% and an At this time, the Company has not determined whether it will overall rate of return of i 1.07%. The March 1989 Order ruled, appeal the order, but intends to vigorously defend against such however, that in lieu of a rate increase, the Company retain the intervenor's motion and any appeal adverse to the Company. LPSC jurisdictional portion of the $193.7 million judgment OnJuly 11,1986, the Company filed with the proceeds (stated to approximate $188.6 million) and flow back Council, with respect to Algiers, a general retail rate increase to ratepayers, beginning immediately, through a rate amortiza-application to reflect costs associated with Grand Gulf 1, to tion schedule that currently extends over a 53 year period, reflect the in-service status of Waterford 3, and to produce a such jurisdictional proceeds plus interest thereon accrued just and reasonable rate of return. On February 19,1987, the through February 28,1989.This amortization schedule Council, by resolution, initiated a prudence investigation in provides for a reduction in the Company's rate base by the connection with the construction of Waterford 3. Hearings on amount of the unamortized balance of such proceeds through these matters were held in April 1988.The deadline for the completion of the amortization.The Company believes that Council's decision in both the prudence and non-prudence the March 1989 Order should have the effect of providing phases is now extended to May 4,1989. approximately the same amount of additional net income The Company is party to certain agreements available for common stock as would an increase in the and proceedings concerning System Energy and the Company's revenues of $45.7 million annually (approximately Grand Gulf Station. (See Note 8," Commitments and the amount of the Company's revenue deficiency as deter-Contingencies.") mined by the LPSC) over the next 53 years, without requiring any increase in the Company's retail rates collected from LPSC 24 l

3

3. lNCOME TAXES Income tax expense (benefit) consists of the following:

1988 1987 1986 (ln Thousands) Current: Federal $ (13,156) $ 9,838 $ 4,658 I State 2,864 (10,683) Total (10,292) 9,838 (6,025) Deferred net: ' Liberalized depreciation 65,918 62,064 135,959 Deferred fuelcosts 11,318 (1,299) 7,041 Unbilled revenue (12,252) (7,054) 1,112 Deferred Waterford 3 expenses (12,267) 9,434 103,659 Adjustment of prior years' tax provisions: Accrued research expenses 2,493 (2,493) Bond reacquisition costs 9,080 Customerdeposits 13,976 Provision for estimated losses (8,113) Loss carryforward utilization (reduction) 61,912 (31,568) (94,019) Nuclear fuel 6,646 (4,630) 10,506 Gas contract settlement - liability to customers (76,734) Accrued interest expense (2,890) Maintenance and r" fueling expenses 3,368 1,485 Materials and supplies inventory adjustments 7,654 Pension expense (1,604) 486 (700) Alternative minimum tax (2,938) (3,248) Other (1,681) (2,707) 1,382 Total 62,919 29,550 156,827 Investment tax credit adjustments - net (14,334) (1,203) (1,254) Recorded income tax expense $ 38,293 $ 38,185 $ 149,548 Charged to operations $ 40,958 $ 36,141 $ 145,091 Charged to otherincome (2,665) 2,044 4,457 Recorded income tax expense 38,293 38,185 149,548 Income taxes applied against the debt component of AFDC 263 925 777 Totalincome taxes $ 38,556 $ 39,110 $ 150,325 Totalincome taxes differ from the amount computed by applying the statutory federalincome tax rate to income before taxes. The reasons for the differences are as follows (dollars in thousands): l~ 1988 1987 1986 l %g %g %g Pre-Tax Pre-Tax Pre-Tax i Amount Income Amount income Amount income Computed at statutory rate $ 51,721 34.0 % $ 61,534 40.0 % $134,924 46.0 % Increases (reductions)in tax resulting from: Allowance for funds used during construction 195 0.1 (777) (0.5) (865) (0.3) State income taxes net of federal income tax effect (1,142) (0.7) (430) (0.3) 13,539 4.6 Write-off of state deferred taxes related to depreciation timing differences * (23,828) (15.5) Depreciation 5,697 3.7 6,951 4.5 7,530 2.6 Impact of change in tax rate (1,601) (1.1) (3,127) (2.0) Investment tax credit adjustments - net (14,334) (9.4) (1,203) (0.8) (1,254) (0.4) Other - net (2,243) (1.5) (935) (0.6) (4,326) (1.5) Recorded income tax expense 38,293 25.1 38,185 24.8 149,548 51.0 Income taxes applied against debt component ofAFDC 263 0.2. 925 0.6 777 0.3 Totalincome taxes $ 38,556 25.3 % $ 39,110 25.4 % $150,325 51.3 %

Resultsfrom an LPSC order to wnte off allpreviouslyprondeJ Jeferred state income taxes related ao deprecation timing differences.

NOTES TO FINANCIAL STATEMENTS Immu swer & l.mht Compay issued December 30,1988, the Company is currently author-ized, through 1990, to effect short-term borrowings in an aggregate amount outstanding at any one time of up to $125 million, subject to increase to a maximum of 10% of capitaliza-tion with further SEC approval. Further, the SEC order mandated that, through 1990, the Company is prohibited from The tax effect of the portion of the 1986 and effecting short-term borrowings without specific authoriza-1987 federal tax losses that are carried forward has been tion from the SEC if the Company's common stock equity recorded as a reduction of deferred income taxes.These losses (including retained earnings)is less than 30% of the Com-totalling $129.7 million are available to offset taxable income in pany's total capitalization plus short-term indebtedness or if future years and, if not utilized, will expire in the years 2001 such borrowings would result in the Company's common and 2002. Unused investment tax credits at December 31,1988 stock equity (including retained earnings) being below 30% of amounted to $57.5 million after the 35% reduction required by the Company's total capitalization plus short-term indebted-the Tax Reform Act of 1986.These credits may be applied ness. At December ~.,1988, the Company had short-term against federal income tax liabilities in future years. If not used, borrowing capacity of up to approximately $48 million as a they will expire in the years 1992 through 2003. result of the 30% common equity restriction. Cumulative income tax timing differences for At December 31,1988, the Company had $67.3 which deferred income taxes have not been provided are $97.7 million in available lines of credit with Louisiana banks that are million, $86A million, and $73.2 million as of the end of 1988, scheduled to expire on September 30,1989. The Company had 1987, and 1986, respectively.The alternative minimum tax no outstanding borrowings under these lines of credit at credit at December 31,1988 is $6 million.The alternative December 31,1988. minimum tax credit can be carried forward indefinitely and The Company also participates with certain will reduce the Company's income tax liability in the future. other companies of the Middle South System in a money pool In December 1987, the FASB issued SFAS No. arrangement (Money Pool) whereby those companies with 96," Accounting for Income Taxes" which was effective for available funds make short-term loans to other companies in fiscal years beginning after December 15,1988. The FASB, in the System (other than MSU) having short-term borrowing December 1988, issued SFAS No.100, " Accounting for requirements, thereby reducing the System's dependence upon income Taxes - Deferral of the Effective Date of FASB external 3hort-term borrowings. The Company may borrow Statement No. 96", an amendment of SFAS No. 96. SFAS No. from the Money Pool and other available sources subject only 100 extends the effective date for adopting the provisions of to its maximum authorized level of short-term bor owings and SFAS No. 96 to fiscal ytars beginning after December 15,1989. the availability of funds. At December 31,1988, the Company SFAS No. 96 expands the requirements to record deferred had no outstanding short-term Money Pool borrowings. income taxes for all temporary differences that are reported in in order to provide the Company with funds in one year for financial reporting purposes and a different year addition to amounts borrowed under its territorial bank lines for tax purposes.This will require the recognition of deferred of credit during 1988, the Company entered into an agreement tax balances for certain items not previously reflected in the with a non-affiliated company to sellits billed and unbilled financial statements, such as a deferred tax liability relating to retail customer accounts receivable.The terms of this agree-AFDC. Under the liability method adopted by SFAS No. 96, ment provided for the sale and assignment by the Company, deferred tax balances will be based on enacted tax laws at tax on a daily basis, of its outstanding retail customer accounts rates that are expected to be in effect when the temporary receivable, including all collections relating thereto.The differences reverse. Company terminated this agreement on September 30,1988. j lt is expected that reductions in deferred taxes The short-term borrowings and applicable resulting from the lower corporate federal tax rates will be interest rates (determined by dividing applicable interest reflected as liabilities to customers since the Company's expense by the average amount borrowed) for the Company regulators may require any such savings to be passcd on to the were as follows: ratepayers. Based on a preliminary study,it is expected that the 19ss 19s7 19 4 adoption of SFAS No. 96 will result in a net increase in un hmds) accumulated deferred income taxes with a corresponding Maximum borrowing $50,300 $20,000 $168,360 ' increase in assets. Results of operations for the Company are Average borrowing: not expected to be significantly impacted by the adoption of Bank loans $20,909 $ 2,615 5 77,656 SFAS No. 96. Associated companies $ 9,195 $ 15,787 Average interest rate during

4. LINES OF CWii AND RELATED BORROWINGs the period:

The Company was authorized through 1988 t" Bankhians 9.2 % 8.2% 8.6 % effect short-term borrowings up to 10% of the Company's Associated companies 6.6% 7.6 % total capitalization, as defined. Pursuant to an SEC order 26

5. PREFERRED AND COMMON STOCK

' Preferred stock at December 31,1988 and 1987 consisted of the following: Shares Authorizedat share, outstandmg CallPrice December 31, at Desember 31 PerShareat 1988 1988 1987 December 31,1988 Cumulative, $100 Par Value Cithout sinking fund: 4.96% Series 60,000 60,000 60,000 $104.25 4.16% Series 70,000 70,000 70,000 104.21 4.44% Series 70,000 70,000 70,000 104.06 5.16% Series 75,000 75,000 75,000 104.18 5.40% Series 80,000 80,000 80,000 103.00 6.44% Series 80,000 80,000 80,000 102.92 9.52% Series 70,000 70,000 70,000 104.20 7.84% Series 100,000 100,000 100,000 103.78 7.36% Series 100,000 100,000 100,000 103.36 8.56% Series 100,000 100,000 100,000 105.28 9.44% Series 300,000 300,000 300,000 106.72 11.48% Series 350,000 350,000 350,000 111.11 Total 1,455,000 1,455,000 1,455,000 Unissued 3,045,000 Total 4,500,000 1,455,000 1,455,000 Cumulative. $25 Par Value Cith sinking fund: 10.72% Series 1,466,215 1,466,215 1,559,850 $ 27.01 13.12% Series 861,121 861,121 1,152,511 27.46 15.20% Series 835,160 835,160 955,040 27.85 14.72% Series 1,632,416 1,632,416 1,633,316 27.76 12.64% Series 2,700,370 2,700,370 2,865,500 27.37 19.20% Series 2,000,000 2,000,000 2,000,000 27.67 Total 9,495,282 9,495,282 10,166,217 Unissued 9,800,000 Total 19,295,282 9,495,282 10,166,217 l 27 J

NOTES TO FINANCIAL STATEMENTS Imwu Power & l.ngk Company

6. LONG TERM DERT Long-term debt at December 31,1988 and 1987 consisted of the following:

1988 1987 (In Thousands) First MortDage Bonds: j933 f,g7 10.875% Series due 1989 $ 45,000 (In Thousands; 5.000% Series due 1990 20,000 20,000 Without sinking fund: 14.000% Series due 1992 60,000 60,000 Stated at $100 a share $145,500 $145,500 10.500% Series due 1993 200,000 200,000 Premium - 382 382 12.000% Series due 1993 100,000 100,000 Totalpreferred stock and 4.625% Series due 1994 25,000 25,000 premium,without 16.000% Series due 1994 100,000 100,000 sinkingfund $145,882 $145,882 14.250% Series due 1995 15,000 15,000 With sinkingfund: 10.360% Series due 1995 75,000 o a e 35,000 M,000 Stated at $25 a share $237,382 $254,156 e 6,000 16,000 Issuance cxpense (13,217) (12,795) ujes Totalpreferred stock and 6.500% Scrics due 1997 18,000 18,000 7J 2W, Su es due 1998 35,000 35,000 is.,uance expense' 9'#d"!"due 2000 20,'000 20,000 D* D'* with sinking fun t $224,165 $241,361 9.375% Senes 7.875% Series doe 2001 25,000 25,000 Cash sinking fund requirements for preferred E'E o Sen ue 2%2 3,2 3,000 stock outstanding at December 31,1988 for the years 1989 through 1993 are as follows (in thousands): $10,409 in 1989 "S"jes n e ,0 ,000 2003 0,000 0,000 and $22,750in each of the years 1990 through 1993.The 1989 8.750% Sen!es es due 2004 45,000 45,000 amount reflects earlier retirements of shares of preferred 8 750% Ser,es due 2006 40,000 40,000 stock that will be applied against 1989 cash sinking fund re-i 10.000% Senes duc 2008 60,000 60,000 quirements. In add..inon, with respect to series of preferred stock havmg smkmg fund requirements in effect, the Com-13.250% Series due 2013 100,000 100,000 13.000% Series duc 2013 50,000 50,000 pany has the non-cumulative option to redeem addinonal. 14.750% Series due 2014 55,000 55,000 amounts of preferred stock outstanding in accordance with its articles of corporation. 15.250% Series due 2014 35,000 35,000 10.375% Series due 2016 280,000 280,000 The number of shares of $25 preferred stock retired dun,ng the years 1988,1987, and 1986 was 670,935, Total First Mortgage Bonds 1,529,000 1,499,000 1,303,633, and 269,750, respectively. There were no changes in the number of shares of common stock outstanding during the period 1986-1988. The Company has received regulatory approval allowing the issuance of up to $100 million of additional preferred stock. The Company has also obtained necessary regulatory approval in order to proceed with arrangements for the possible redemption, purchase, or other acquisition of all or a portion of certain outstanding series of the Company's high dividend rate preferred stock.The series of the Com-pany's preferred stock being considered for acquisition include, but may not be limited to, the 19.20%,15.20%, 14.72%,13.12%, and 12.64% Series Preferred Stock. 28

ms m7 Sinking fund requirements on first mortgage 1 (In Euunds) bonds and maturities under long-term debt instruments in Other: effect at December 31,1988 for the years 1989 through 1993 St, Charles Parish Pollution are as follows: i Control Revenue Bonds, sinhnx und* niunrics r Series 1984,5.5% due 2014 115,000 115,000 mr un muund3) 1 . St. Charles Parish Pollution 1989 $ 11,790 3,016** Control Revenue Bonds, 1990 11,790 23,202 Second Series 1984,6.75% 1991 11,590 2,687 due2014 105,000 105,000 1992 11,590 62,333 Other pollution control and 1993 11,590 302,255 industrial revenue

sinking fund requirements may be satisfied by certification of pmpeny bondobli ations,
1. '""h"atc om>m ohuch requirements.

E

- The Company expects to remarket $220 milhon pn,nc, pal amount of u, s i

6.40 8% due 1989-2009 16,215 16,300 rollution control revenue bonds in 1989. To the extent such remarketing is Principal amount of municipal not successful, the Company may be required to reacquire such bonds. revenue bond obligations, 3.25W8% due serially The Company has received regulatory approval 1989-2004 and other future allowing the sale of up to $275 million additional first mort-l obligations under gage bonds.The Company has also received regulatory operating agreements 23,397 26,344 approval to proceed with arrangements for the possible re-Purchase obhgauons under an demption, purchase, or ot her acquisition of all or a portion of inventory supply agreement 27,997 25,110 certain outstanding series of the Company's high interest rate TotalOther 287,609 287,754 first mortgage bonds up to an aggregate principal amount of Unamortized premium and $340 million.The series of the Company's first mortgage discount on long-term bonds being considered for acquisition ' include, but may not be debt - net (11,052) (i1,658) limited to, the 14.75% Series duc November 1,2014, the Total Long-Term Debt T315537 1,775,096 15.25% Series due December 1,2014, the 16% Series due Less: Amount due within August 1,1994, the 13% Series due September 1,2013, and the one year 223.016 2,832 13.25% Series due h1 arch 1, 2013. Long-Term Debt Excluding Amount Due

7. RETAINED EARNINGS Within One Year

$ 1,582,541 $1,772,264 The Company's Restated Articles of Incorpora-In December 1988, the Company sold $75 tion, as amended, and certain of its indentures contain provi-million aggregate principal amount of First Mortgage Bonds, sions restricting the payment of dividends or other distribu-10.36% Series due December 1,1995. A portion of the pr - tions to common stockholders. At December 31,1988, all } ceeds received was irrevocably placed with the trustee on retained earnings were free from such restrictions. December 20,1988 for the redemption, at par, on January 23, 1989 of $45 million aggregate principal amount of First Mortgage Bonds,10.875% Series due May 1,1989.

8. COMMITMENTS AND CONTINGENCIES The St. Charles Parish Pollution Control Revenue lionds, Series 1984 and Second Series 1984, which are

g. g,,,g secured by letters of credit, currently bear interest at 5.5% and The Companv's most significant contingencies 6.75%, respectively, and are adjusted annually not to exceed an relate to (1) the outcome of challenges to the FERC allocation t

interest rate of 15% per annum. of capacity and energy from Grand Gulf 1;(2)the Council's decision regarding a retail rate increase with respect to Algiers customers including a resolution of the CounciPs prudence investigation of Waterford 3: and (3) the ultimate resolution of the status of Grand Gulf 2 and the possible allocation to the j Company of costs associated with that unit. For additionalin-formation with respect to these matters and other commit-ments and contingencies, see Note 2," Rate Matters" and the sections below. J b 29 l t 1

NOTES TO FINANCIAL STATEMENTS Lowm.n hw & [nght Compouy D. Unit Power Sales A0reement and Grand Gulf 1 Prudence Pursuant to the allocation specified in the UPSA among System Energy and the System operating companies as ordered by the FERC in its June 13 Decision, System Energy sells to the System operating companies all ofits 90% share of the capacity and energy from Grand Gulf 1 in accordance with B. Capital Requirements and Financing specified percentages (the Company,14%; AP&L,36%; The Company's capital requirements include MP& L,33%; and NOPS1,17%). Charges under the UPSA construction expenditures (including AFDC but excluding are based on System Energy's total cost of service, including nuclear fuel) of approximately $436.7 million during the System Energy's operating expenses, depreciation, and capital period 1989-1991.The Company plans to meet a significant costs attributable to the unit for the month. The Company's portion of its capital requirements with internally generated monthly obligation for payments to System Energy for Grand funds in the years 1989 through 1991. In addition to its capital Gulf I capacity and energy is approximately $11 million. requirements, the Company will require funds of approxi-On November 30,1987, the FERC issued an mately $94.3 million during the period 1989-1991 to refinance order maintaining the pr ~ious allocation of Grand Gulf 1 maturing long-term debt and to meet sinking fund require-capacity and energy among the System operating companies as ments. Also,the Company expects to remarket $220 million of mandated by theJune 13 Decision. In issuing the November pollution control revenue bonds in 1989. To the extent such 30,1987 order, the FERC found that the allocation in theJune remarketing is not successful, the Company may be required 13 Decision was not unduly discriminatory. Requests for re-i to reacquire such bonds resulting in additional financing hearing of the FERC's November 30,1987 order were filed by l requirements. various parties and by order dated January 29,1988, the FERC l Additionally, the Company may redeem, denied such requests. Petitions for review of the November 30, { purchase, or otherwise acquire certain outstanding series of 1987 and January 29,1988 orders were filed with the D.C. high yield debt and preferred stock in order to reduce its Circuit by various parties.The Arkansas Public Service overall cost of capital.The Company may also enterinto Commission and other Arkansas and Missouri parties are I arrangements for the sale and leaseback of property in which attempting to raise again the issue of FERC jurisdiction to the proceeds from such transactions could be used to retire allocate capacity and energy and related costs to AP&L A certain debt issues at par. motion for sununary affirmance as to its jurisdiction was filed by the FERC. The D.C. Circuit ordered that the jurisdictional C. NDPSI Prudence Disallowance issue be referred to the panel of judges which will decide this On February 4,1988, after a lengthy prudence appeal on the merits, and that the parties are not to further brief investigation, which was vigorously contested by NOPSI, the the jurisdictional issue. Oral argument is scheduled for May 8, Council adopted a resolution that required NOPSI to write 1989. off, and not recover from its retail electric customers, $ 135 It is not possible at this time to predict the million of its previously deferred Grand Gulf 1-related costs in ultimate outcome of this matter, including the possible addition to the $51.2 million of such costs that NOPSI reallocation,if any, of Grand Gulf 1-related costs or the effect absorbed as part of its 1986 rate settlement with the Council. thereof upon the Company, the other System operating The consequences of the resolution, so long as it remains in companies, and System Energy, including possible refunds,if effect, are that NOPSPs ability to effect long or short-term any. Any material modification of the allocation established by external borrowings or to satisfy potential obligations to theJune 13 Decision, as affirmed by the FERC's November 30, purchase all or a portion of its outstanding general and refund-1987 order, could give rise to additional litigation, disputes, and ing mortgage bonds will continue to be significandy and challenges in the affected jurisdictions. adversely affected and NOPSI could ultimately be rendered On June 24,1988, the United States Supreme insolvent. Court rendered a decision which affirmed MP&l's right to Insolvency of NOPSI, should it occur, could, recover through retail rates its FERC-allocated share of Grand under certain of SFPs financing agreements and leases, require Gulf 1-related costs. In so doing, the United States Supreme payments by the Company and the other System operating Court affirmed the principle that various matters regarding the companies or MSU in the event SFPs obligations under such prudence of Grand Gulf 1 are within the FERC's exclusive agreements are accelerated as a result of the insolvency of jurisdiction. In this connection, representatives of certain NOPSI, and in the event that SFI is unable to meet these governmentalbodies, including the Arkansas Attorney I obligations or to otherwise satisfy these obligations through General, the LPSC, the Mississippi Attorney General, the the sale of thecollateral securing such obligations. In addition, Mississippi Public Service Commission, and the Council, have insolvency of NOPSI could affect the terras of financing, publicly stated that they are considering whether to retain a including an increase in the cost of financing, or could preclude consulting firm that would develop information regarding the financing for other System companies. construction and operation of Grand Gulf I that may be used to approach the FERC with a request to open a prudence 30

proceeding.The System cannot predict whether any consult-costs to the Company, MP&L,and NOPSL These companies ing firm will be retained for this purpose, whether any pro-thus agreed to assume all the responsibilities and obligations of ceeding before the FERC regarding Grand Gulf 1 prudence AP&L with respect to the Grand Gulf Station under the issues will be initiated, or in what context any prudence issues Availability Agreement,with AP&L relinquishingits rights to might arise, l lowever, the System would vigorously defend the capacity and energy of the Grand Gulf Station. Each of the against any possible allegations of imprudence with respect to System operating companies, including AP&l., would have Grand Gulf 1 that might be made before the FERC and remained primarily liable to System Energy and its assignees believesthat its investment in Grand Gulf I was prudently for payments or advances under the Availability Agreement incurred. and assignments thereof. AP&L was obligated to make its share of the payments or advances only if the other System E. Availability and Reallocation Agreements operating companics were unable to meet their contractual The System operating companies are severally obligations. However, the FERC'sJune 13 Decision allocating obligated, under the Availability Agreement in accordance a portion of Grand Gulf I capacity and energy to AP&L with stated percentages (the Company,26.9%; AP&L,17.1%; supercedes the Reallocation Agreement insofar as it relates to MP&L,31.3%;and NOPSI,24.7%), to make payments or Grand Gulf 1. subordinated advances in amounts which, when added to any amounts received by System Energy under the UPS A or E Suspended Construction Project-Grand Gulf 2 otherwise, are adequate to cover all of the operating expenses, As recorded on its balance sheet as of December j including depreciation and interest charges, of System Energy. 31,1988, System Energy's totalinvestment in Grand Gulf 2 System Energy has, with the consent of the System operating was approximately $905 million (including approximately companies, assigned its rights to payments and advances from $401 million of AFDC). From late 1979 until September 1985, the System operating companies under the Availability only a limited amount of construction was performed on Agreement as security for certain of its indebtedness for Grand Gulf 2. Effective September 19,1985, System Energy borrowed money. Payments or advances under the Availabil-suspended construction activities on Grand Gulf 2 following ity Agreement are only required to be made to the extent an order of the Mississippi Public Service Commission. As of i System Energy's receipts from all sources, including the UPS A that date, Grand Gulf 2 was approximately 34% complete approved by the FERC (of which the Company's share is based on the man-hours estimated at that time to be needed to 14%), are less than the amount required under the Availability complete the unit. Agreement. Since commercial operation of Grand Gulf 1, Since September 1985, System Energy has payments under the UPSA (which include a return on equity) limited expenditures to only those activities which are neces-have exceeded the amounts payable under the Availability sary for demobilization and suspension of the unit. A special Agreement (which does not cover a return on equity). Accord-group of Middle South System officials and outside consult-ingly, no payments have ever been required under the Availa-ants completed in late November 1986 its evaluation and bility Agreement. review of Grand Gulf 2. Among the possibilities evaluated If a System operating company other than the were (1)immediate resumption of construction of the unit,(2) Company becomes unable in whole or in part to continue cancellation of the unit,(3) continued suspension of construc-I making payments to System Energy under the UPS A and tion of the unit through 1989 or beyond,and (4) conversion of System Energy were unable to procure funds from other the unit to an alternative fuel source. In December 1986, sources sufficient to cover any potential shortfall between the System Energy's Botrd of Directors (with the MSU Board of amount owing under the Availability Agreement and the Directors concurring) adopted the group's recommendation amount of continuing payments under the UPS A plus other that suspensien of construction be continued and that a further funds then available to System E,crgy, the Company could decision be made by 1990 on the future status of Grand Gulf 2 become subject to claims or demands by System Energy or its in light of alternatives available at that time, creditors for payments or advances under the Availability During the period of suspension, System Agreement or the assignments thereof.The amount,if any, that Energy's expenditurewn Grand Gulf 2 have continued to be the Company would become liable to pay or advance over and limited, and System Energy during this time has not accrued above amounts it currently pays under the UPSA for capacity AFDC on its invest ment in the unit. Consequently, during the and energy from Grand Gulf I would depend on a variety of suspension period, System Energy has foregone any return on factors (especially the degree of any such shortfall and System this investment. Further, System Energy has previously Energy's access to other funds).The Company cannot predict indicated that it has no intention, prior to a further decision on whether any such claims or demands,if made and upheld, the status of Grand Gulf 2,of seeking FERC approval for the could be satisfied. recovery through charges to the System operating companies in November 1981, the System operating of its investment in the unit. companies entered into a Reallocation Agreement, which System Energy is continuing to evaluate various would have allocated the capacity and energy available to alternatives for the future of Grand Gulf 2 and to assess System Energy from the Grand Guif Station and the related 31

NOTES TO FINANCIAL STATEMENTS Lowim Pow & bght Compay Energy's investment in Grand Gulf 2 would result in a charge against current income for any unrecoverable investment when that event becomes probable. In the event such a charge were substantial, the financial condition of System Energy could be materially and adversely affected and System Energy's ability to pay dividends on its common stock could be impaired. whether the equipment and facilities constructed and acquired Failure to obtain rate relief for all or a substan-to date should continue to be carried at their full cost. In this tial portion of the cost of Grand Gulf 2 could have a material connection,in 1989 System Er.ergy will analyze the future and adverse effect upon the financial condition of System status of Grand Gulf 2, including an evaluation of various Energy, MSU, and possibly the System operating companies, possibilities similar :0 those studied in 1986. Any determina-depending upon, among other things, the timing of the tion that the value of System Energy's investment should be realization of any such loss. reduced and the amount of any ruch reduction written off In January 1988, the FERC issued an order could adversely affect various companies in the Middle South which modified its policy regarding recovery of cancelled or System. Certain issues relating to the value of System Energy's abandoned plant costs by utilities subject to its jurisdiction. investment in Grand Gulf 2 also exist in connection with an The revised policy provides for a "50/50 sharing" of prudently audit by the FERC of System Energy and the Grand Gulf incurred costs of a cancelled plant between the owner and the Station. ratepayers, whereby 50 percent of the prudently incurred costs While System Energy believes that all ofits of the cancelled plant would be amortized and recovered from investment to datein Grand Gulf 2 has been prudent,in ratepayers over the expected life of the plant as if it had been j conrection with any further decision as to the value of Grand completed. The currently unamortized portion of such j Gulf 2 or the ultimate decision with respect to the future of amount would also be included in rate base, thereby allowing i Grand Gulf 2, System Energy will, at an appropriate time, for a return thereon. The remaining 50 percent of prudently make a determination as to the appropriate recovery of all or a incurred costs would be written off. In May 1988, the FERC portion ofits investment, including,in the event of cancellation denied requests for rehearing pertaining to that portion ofits of the unit, the possibilities of seeking recovery. In making January 1988 order which adopted the "50/50 sharing" such determination, System Energy will consider, among other methodology, and the FERC's order is now final. things, the regulatory environment generally, legal standards in December 1986, the FASB issued SFAS No. then applicable, and the anticipated financial, regulatory, and 90," Regulated Enterprises-Accounting for Abandonments political effects upon System Energy and the other Middle and Disallowances of Plant Costs", an amendment of SFAS South System companies of various alternatives. No. 71," Accounting for the Effects of Certain Types of in the event that System Energy were ultimately Regulation". SFAS No. 90 req uires, among other things, that, to seek recovery of Grand Gulf 2 costs, System Energy would when abandonment of a plant becomes probable, the cost of likely be required to make a filing with FERC requesting such such plant in excess of the present value of estimated recoveries recovery over a period of years through charges to the System through rates with respect thereto, net of related tax benefits, operating companies.The System operating companies would shall be reported by recording a charge against current income. in turn be required to file applications with state or local regu-The provisions of SFAS No. 90 would apply should System latory authorities to recognize the FERC-allocated Grand Energy decide to cancel Grand Gulf 2 cr should cancellation of ) Gulf 2 charges in retail rates. In view of the controversies over Grand Gulf 2 become probable. I the Grand Gulf Station, including the adverse reaction of various rate regulatory bodies to allocation of costs, regulatory G. MSU Shareholder Litigation uncertainties, including ratemaking, attendant to a delay in the MSU and certain other System companies decision as to the future of Grand Gulf 2 and imprudence (including the Company) and individuals are defendants in a 1 issues, there can be no assurance that the cost of Grand Gulf 2 purported consolidated class action suit.The initial complaint I will be recovered or as to the tim.ing of any recovery. As was was filed on August 19,1985 by an MSU shareholder (pur- ] the case with Grand Gulf 1, proceedings before the FERC and, porting to represent a class which purchased MSU common 1 with respect to recognition in retail rates of FERC-approved stock). Four similar complaints were filed on August 20,1985, l rates, before state or local regulatory authorities could be August 23,1985, September 6,1985, and September 19,1985, protracted and strongly contested on various grounds, respectively, by shareholders of MSU (purporting to represent includingimprudence. If costs associated with Grand Gulf 2 classes which purchased MSU common stock).The five j were allocated to the System operating cr mpanies and they actions were consolidated in the Federal Court. The consoli-were unable to recover these costs from their customers, the dated, amended, and supplemental complaint alleges violations System operating companies' financial condition could be ma-of the disclosure requirements of the Securities Exchange Act terially and adversely affected. Any nonrecovery of System of 1934 and the Securities Act of 1933, common law fraud, and 32

l \\ l j common law negligent mir, representation in connection with of fuel supplies for all of the System operating companies and the financial condition of MSU and prays for compensatory System Energy. Its costs are primarily recovered through and punitive damages, legal costs and fees, and other proper charges for fuel delivered. relief against MSU, various other System companies (including The parent companies of SFl agreed to make the Company),certain current members and former members loans to SFI to finance its fuel supply business under a loan of MSU's Board of Directors, certain current officers and agreement dated January 4,1978, as amended through Decem-former officers of MSU and various other System companies ber 31,1983. At this time, no future loans may be made to SFI (including the Company), the independent auditors of MSU, by the parent companies. During 1988, SF1 repaid $35.3 and certain underwriters of MSU common stock. On March niillion ofits long-term loans from the Company resultingin 14,1986, the plaintiffs in the consolidated action filed a motion remaining loans outstanding from SFI at December 31,1988 of for class action determination. On April 18,1986, MSU and $14.2 million.The loans mature in 2008. certain other System companies (including the Company) and in connection with certain of SFI's borrowing individual defendants (MSU System defendants) filed a motion arrangements, SFI's parent companies (including the Com-in the Federal Court to dismiss or,in the alternative, a motion pany) have covenanted and agreed, severally in accordance for summary judgment. OnJanuary 12,1987, the Federal with their respective shares of ownership of SFI's common Court entered a judgment granting defendants' motions for stock, that they will take any and all action necessary to keep summary judgment and dismissed the suit. O, February 6, SFI in a sound financial condition and to place SE1 in a position 1987, the plaintiffs in the consolidated action filed a Notice of to discharge, and to cause SFI to discharge its obligations I. Appeal with the Fifth Circuit. under these arrangements. At December 31,1988, the total OnJ une 7,1988, the Fifth Circuit rendered a loan commitment available to SFI under these arrangements decision vacating the judgment of the Federal Court, based,in amounted to $105 million, of which $43.5 million was out-part, on the conclusion that the Federal Court had not ade-standingat that date. Alsc SFI's parent companies (including s quately explained the bases for its decision. In remanding the the Company) have made similar covenants and agreements in case to the Federal Court for further proceedings, the Fifth connection with long-term leases by SFI of oil storage and Circuit suggested that the Federal Court could again consider handling facilities and coal hopper cars. At December 31,1988, the merits of the defendants' motion for summary judgment the aggregate discounted value of these lease arrangements was and determine, with the benefit of certain guidelines as to the $70.6 million. interpretation of governing law articulated by the Fifth in May 1988, the Company and a fuel supplier Circuit, whether the defendants are entitled to summary agreed to a 25-year natural gas supply contract.The Company, judgment as a matter of law.The Federal Court was directed,if SFI, and the fuel supplier also agreed to cancel a contract it makes such a determination,to provide a detailed analysis previously entered into by SFI and the fuel supplier, with SFI's supporting its conclusions that would facilitate judicial review. performance guaranteed by the Company, to provide coal for Alternatively, the Fifth Circuit noted, the Federal Court coula the proposed Wihon Station. As a result, the Company moved decline to rule on the defendants' motion for summary for dismissal of its application for a certificate, filed with the judgment until further development of the case has taken place LPSC, authorizing construction of the Wdton Station.The and the issues have been narrowed through the available pre-LPSC granted such dismissal on September 23,1988. In 1988, trial techniques. On September 6,1988, MSU and certain other the Company recorded adjustments decreasing construction System companies (including the Company) and individual work in progress and increasing expense by $8.4 million defendants filed a petition for a wnt of certiorari with the (before taxes) to write off Wdton Station costs, including United States Supreme Court. On October 31,1988, the related AFDC. l United States Supreme Court denied this petition. Based tg on the Fifth Circuit's decision, the Federal Court allowed the

1. Nuclear Insurance parties to rebrief the motion for summary judgment and, on The Price-Anderson Act was amended in 1988 I

january 17,1989, the MSU System defendants filed a renewed to extend its coverage to August 1,2002 and to limit the public motion for summary judgment and a verified answer to the liability for a single nuclear incident to approximately $7 consolidated, amended, and supplemental complaint. The billion.The Company is protected against this liability by a Federal Court has scheduled the trial to commence on March combination of private insurance (presently $160 million; j' 12,1990. The outcome of this matter and its impact on the expected to increase to $200 million by the end of 1989) and an System's financial condition cannot be predicted. The matter is industry assessment program. Under the assessment program, pending. for each nuclearincident at a licensed nuclear facility, each licensee will be responsible for up to $66 million per reactor H. System Fuels,Inc. (such amount to be indexed every five years for inflation), l The Company has a 33% interest in SFI, a payable at a rate of $10 million per year, including a 5% l jointly owned subsidiary of the Company, APRL,MP&L, surcharge in the event the total public liability approaches $7 and NOPSL SFI operates on a non-profit basis for the purpose billion.The Company has one licensed reactor. l of planning and implementing programs for the procurement 33 1 ?

i NOTES TO FINANCIAL STATEMENTS 1 unan e, + um, the DOE was to begin accepting spent fuelin 1998 and continue until the disposal of all fuel from reactor sites is l accomplished. However, the DOE's repository program has been delayed, with estimated initial operation of a permanent repository scheduled for 2003. In the meantime, the Company will be responsible for storage of spent fuel. The Company The Company is a member of certain insurance estimates that on-site spent fuel storage capacity at Waterford 3 programs that provide coverage for property damage,includ-will be sufficient to store fuel from normal operations until ing decontamination expense, to members' nuclear generating 2000. It is expected that any additional storage capacity plants.The Company is insured against such losses up to required due to, among other things, delay of the DOE $1.725 billion. In addition, the Company is a member of an repository program will be provided by the Company, insurance program that provides insurance coverage for certain The decommissioning costs for Waterford 3 are costs of replacement powerincurred due to :crtain prolonged currently estimated to be approximately $203 million based on outages of nuclear units.These coverages are subject to 1988 dollars. The Company is presently recovering annually assessment provisions. At December 31,1988, the maximum through rates a total of $2.1 million.The Company regularly amount of such assessment for the Company was $9.8 million. reviews and updates estimated decommissioning costs to The property insurance carried by the Com-reflect inflation and changes in regulatory requirements and pany exceeds that required by the amended regulations dated technology. In the event that decommissioning costs at October 5,1987 by $665 million.The NRC regulations further Waterford 3 exceed present estimates, the Company would provide that any proceeds of this insurance must be segregated attempt to recover such increased amounts through rates. in a trust and be used, first, to place and maintain the reactor in In order to provide reasonable assurance that a safe and stable condition and, second, to complete required funds will be available when needed to pay the costs of decontamination operations. decommissioning, the NRC amended its decommissioning The NRC has issued on behalf of all nuclear regulations to require companies to establish, by June 27,1990, licensees, including the Company, temporary exemptions from an external fund which can only be used for future decommis-the stabilization and decontamination priority and trusteeship sioning costs. The Company plans to establish an external fund provisions until completion of the pending rulemaking that satisfies the new NRC regulations by the date required. extending the implementation date of the regulations, but not later than April 1,1989. It is anticipated that the temporary K. settlement Agreement with a Gas supplier exemptions will be extended beyond that date. A dispute between a gas supplier and the Company arising from the gas supplier's claimed inability to J. Spent Nuclear Fuel and Decommissioning Costs deliver the full quantities of fuel gas due the Company under Under the Nuclear Waste Policy Act of 1982, several natural gas contracts was attled by the execution of a the DOE is required to construct storage facilities for and settlement agreement in 1982.The settlement agreement dispose of all spent nuclear fuel and other high-level radioac-provides for the payment of $1.087 billion in cash plus a tive waste generated by domestic nuclear power reactors for a guaranty of savings of at least $585 million in certain gas specified fee. The NRC, pursuant to this act, also requires acquisition costs between 1982 and 1996. In 1983, the LPSC operators of nuclear power reactors to enter into spent fuel ordered the Company to refund the settlement proceeds to disposal contracts with the DOE.The Company has emered customers over the period 1983-1993.Through December 31, into such a contract with the DOE whereby the DOE will 1988, the Company had refunded a total of approximately furnish disposal service at a cost of one mill per kilowatt-hour $882 million to its customers. of net generation.The fees payable to the DOE may be adjusted in the future to assure full cost recovery.The Com-pany considers all costs incurred or to be incurred in connec-tion with disposal of spi it nuclear fuel to be proper compo-nents of nuclear fuel expense and provisions to recover such costs have been accepted by the LPSC. Under the Nuclear Waste Policy Act of 1982, 34

i

9. POSTRETIREMENT BENEFITS The assets of the plan include an interest in the The companies of the Middle South System investment accounts of a master trust maintained by MSU and have various postrctirement benefit plans covering substan-a participation interest in an unallocated insurance contract.

tially all of their employees.The pension plans are noncon-The funded status of the Company's pension plan at December tributory and provide pension benefits that are based on the 31,1988 and 1987 is as follows: employees' credited service and average compensation, generally during the last five years before retirement. Effective 1988 19s7 October 1,1988, the Company amended a defined benefit plan (In 73ouwnd3) it sponsors to designate an associated company as a participat-Actuarial present value of ing employer. accumulated pension plan benefits: Pension plans are administered by a trustee who Vested $ 92,318 $ 83,283 is responsible for pension payments to retirees. Various Nonvested 8,621 7,315 investment managers have responsibility for management Accumulated benefitobligation $100,939 $ 90,598 cf the plans' assets. In addition, an independent actuary Projected benefit obligation $139,719* $114,968 performs the necessary actuarial valuations for the individual Plan assets at fair value 166,445 155,740 company plans-Plan assets in excess of projected Total pension expense (benefit) of the Company benefit obligation 26,726 40,772 for 1988,1987, and 1986 was $4.1 million, $(2.1) million, and Unrecognized prior service cost 3,225 970 $0.7 million, respectively. Pension expense for 1988 included Unrecognized transition asset (38,831) (39,305) $6.6 million for special termination benefits . red for a Unrecognized net gain (8,112) (4,687) limited period under an early retirement program. The Com-Accrued pension cost $(16,992) $ (2,250) pany adopted SFAS No. 87," Employers' Accounting for

""" I"" *" "'i'*"d '"*P""Y "

i ""d'PP Pensions" effectiveJanuary 1,1987. AdoEtion of SFAS No. 87 connection w ith the plan amendment un October 1,1988. reduced 1987 pension costs by approx.imate'y $2.5 m. h.d on. The Company's total 1988 and 1987 pension expense (benefit) The significant actuarial assumptions used for was compnsed of the following components: both 1988 and 1987 included a weighted average discount rate ms 19s7 of 9% and rate ofincrease in future compensation of S.6% for U" "'""""dd valuing the projected benefit obligation and an expected long-Service cost - benefits earned term rate of return on plan assets of 8.5% Transition assets are during the period $ 4,831 $ 4,500 being amortized over a 15 year period. Interest cost on projected benef,t obligation 10,272 9,289 Actual return on plan assets (19,329) (5,095) Net amortization and deferral 2,310 (10,794) 1988 carly retirement program 6,638 Pension expense allocation to associated company (639) Net pension expense (benefit) $_ 4,083 $ (2,100) 35

NOTES TO FINANCIAL STATEMENTS Luumana l'uw & bght Company

11. LEASES In 1987, the Company recorded on its books the assets and related obligations applicable to capitalleases as required by SFAS No. 71, in accordance with SFAS No.13,

" Accounting for Leases."The recording of capital leases does not affeet amounts reported as either expense or income. The The Company also provides certain health care assets and liabilities associated with these leases at December and life insurance benefits for retired employees. Substantially 31,1988 and 1987 are presented below: all employees may become eligible for these benefits if they 19ss 19s7 reach retirement age while still working for the Company.The un nousanJ5) cost of providing these benefits for retirees is not separable Assets: from the cost of providing benefits for active employees. The Utility plant $29,449 $26,578 total cost of providing these benefits and the number of active Accumulated amortization 16,784 13,398 employees and retirees for the last three fiscal years were as Net properties under capitallease $12,665 $13,180 follows: Liabilities: 1988 19#7 1986 Noncurrent obligations under Totalcost of health care and capitalleases $ 9,615 $10,005 life insurance (in thousands) $10,360 $10,454 $ 7,995 Current obligations under Numberof activeemployees 3,277 3,300 3,054 capitalleases 3,050 3,175 Number of retirees 808 650 638 Totalobligations under capitalleases $12,665 $13,180 - j

10. TRANSACTIONS WITH AFFILIATES The Company buys electricity from and/or sells Excluded from the above amounts at necember 31,1988 and 1987 are electricity to the other operating subsidiaries of MSU,includ-

"PP'"d"Y " 'ndhon and $88.7 nidhon, mpusely, w hich amounts 5 ing System Energy, under rate schedules filed with the FERC. have been recorded in connection with the nuclear fuel lease. In addition, the Company purchases fuel from SFI and receives technical and advisory services from MSU System Futwe minimum lease payments, by period and Services, Inc. During 1987 and 1986, the Company paid SFI in the aggregate, of the Company s capital leases (excluding the approximately $25 million and $47 milhoa, respectively, for ".uclear fuct lease) and noncancellable operating leases con-nuclear fuel processing services. Similar services were not sisted of the following at December 31,1988: provided in 1988. C"M"# @ ""U"g Operating revenues include revenues from sales to affiliates amounting to $6.8 million in 1988, $5.9 million in "" """" 'l 1987, and $18.5 million in 1986. Operating expenses include 1989 $ 4,523 $ 5,671 charges from affiliates for fuel cost, purchased power and 1990 4,059 5,254 related charges, and technical and advisory services totalling 1991 4,059 3,967 $350.1 million in 1988, $381.5 million in 1987, and $379.4 1992 3,670 3,802 million in 1986. 1993 804 3,777 For years thereafter 249 22,947 Minimum rentalcommitments 17,364 $45,418 j Less: Amount representinginterest 4,699 1 Present value of future minimum leasepayments $12,665 36

At December 31,1988, the Company had a in the materials and supplies inventory account. Such adjust-nuclear fuel lease under which $51.7 million of nuclear fuel was ments were recorded in 1988 and increased net income by f financed.The credit line associated with this nuclear fuel lease $3.8 million. terminated in 1987, thereby precluding the placement of Regarding materials and supplies inventory at l additional fuel under the lease. In February 1989, the Com-its fossil plants,in 1988, the Company changed its accounting i pany entered into a new nuclear fuel lease agreement pursuant policy from the expense as purchased method to the preferable j to which up to $ 125 million of nuclear fuel may be leased. The policy whereby mate-ials and supplies inventory purchases are new ! ease terminates upon the later of the final maturity date of recorded is an asset and eventually expensed or capitalized, as certain secured notes issued by the lessor (currently January appropriate, upon requisition and utilization.This change in 31,1999) orJanuary 31,1994, subject to annual extensions in policy resulted in the recording in 1988 of approximately the absence of contrary notice from the Company or the lessor. $13.3 million of materials and supplies inventory for its fossil The lease may not be extended past January 31,2039. Approxi-plants and a corresponding reduction of operation and mately $47.6 million of nuclear fuel remaining under the maintenance expense of approximately $8.1 million, net former lease and approximately $29.7 million of nuclear fuel oftaxes. owned by the Company were placed under the new lease agreement in February 1989, at which time the Company's

13. QUARTERLY RESULTS (Unaudited) former lease was terminated. Nuclear fuel lease expense Unaudited operating results for the four consists of amortization of the nuclear fuellease and interest quarters of 1988 and 1987 follow:

on the obligation. Amortization recorded in connection with Net l l the nuclear fuel lease for 1988,1987, and 1986 was $37.1 Quarter Operating operarmg Dcome million, $50 million, and $56.6 million, respectively. Interest Ended Revenues Income (Los:) expense related to the nuclear fuel lease for 1 L,1987, and (In Thomands) 1986 was $8.3 million, $7.9 million, and $6.7 million, respec-1988: tively. The unrecovered cost base of the lease was $51.7 million, March (1) $292,660 $ 71,069 $ 26,070 j $88.7 million, and $116.3 million at December 31,1988,1987, June (2) 334,384 82,361 32,306 and 1986, respectively. September (3) 422,479 102,596 47,481 In 1980, the Company entered into a sale and December (1) 327,585 54,675 7,969 leaseback of certain office buildings and related real properties. A gain of $13.4 million has been deferred and is now being 3g87 amortized over the life of the lease. The lease is for a primary March $298,107 $ 74,716 $ 28,761 term of 20 years. June 334,788 71,633 26,232 F ental expense for capital and operating leases September 417,333 108,625 64,042 (excluding the nuclear fuellease) amounted to approximately December 296,404 41,650 (3,386) $11.3 million, $8.3 million, and $6.7 million in 1988,1987, and 1986, respectively. (!)The quarters ended March 31,1988 and December 31,1988 include a net of tax increase in operating income and net income of $3.8 million and $8.1 million, respectively, due to the initial recording as an asset of materials and

12. MATERIALS AND SUPPLIES INVENTORY supplies inventories that had previously been expensed.

The Company,s policy for V,aterford 3 nuclear mhc sewnd quaner W 988 uflects'a decrease in net income d $5.1 materials and supplies inventory purchases is to record such rnillion, net of tax, resulting from the write-off of costs associated with the purchases as an asset in inventory unless immediately utilized. discontinued waton station. j Upon requisition and utilization of such inventory items, the p)The third quaner of 1988 reflects a decrease in net income of $6.5 million, cost of the items is removed from the asset account and "c":f tax, usulting froni a tentative tauculenient un the InternaWvenue semu nlating nahanconie tannatnient d a im seulenient agnenient charged to expense or capitalized to the plant account, as with a gas supplier. appropnate. 1Iowever, the Company could not determine The business of the Company is subject to the proper inventory value to record for materials and supplies seasonal fluctuations with the peak period occurring during mventory nor the proper allocanon between the expense and the summer months. Accordingly, earnings information for i plant accounts until the completion of the final cost report on any interim period should not be considered as a basis for Waterford 3 in 1988, the conversion to a computerized estimating the results of operations for a full year. materials and supplies inventory system, and the physical I inventory ofits materials artd supplies inventory on hand at Waterford 3. As a result of these events,it was determined that $35.1 million should be transferred from construction work in progress to the materials and supplies inventory account and $6.2 million of Waterford 3 inventory that had previously been charged to expense should be reversed and recorded as an asset 37

l MANAGEMENT'S FINANCIAL DISCUSNON AND ANALYSIS tumum n,w s task commry FINANCIAL CONDm0N However, the Rate Matters.LPSC Jurisdiction Company continues to face On April 11, General various uncertainties and 1988, the Louisiana Supreme The Com-challenges that, depending Court affirmed the District ] pany's financial condition upon their outcome,could Court's November 1987 i remained stablein 1988 as significantly impact the Judgment (that allowed, compared with 1987-Company's financial amoni;other things,the Financialcondition was condition.The Company's Company to implement a favorably impacted in 1988 most significant contingen- $40 million annual base rate by the final resolution of cies include the outcome of increase effective February 1, appeals to the Louisiana challenges to the FERC allo-1988) and remanded the case Supreme Court that resulted cation of costs of capacity to the LPSC for a determina-in,among other things,a $40 and energy from Grand Gulf tion of the appropriate level million annual base rate 1, the ultimate outcome of of rates for 1988.The effect increase; establishment by proceedings before the of the April 1988 Decision the LPSC and implementa-Council regarding the was to allow to remain in tion by the Company of a Company's retail rate effect the $40 million annual schedule for the recovery of increase request with respect base rate increase for LPSC previously deferred Water-to Algiers customers jurisdictional customers im- ) ford 3 costs that complies including a resolution of the plemented on February 1, with the provisions of SFAS Council's prudence investi-1988.The April 1988 Ro. 92," Regulated Enter-gation of Waterford 3,and Decision also established the prises-Accounting for the ultimate resolution of the deferralof approximately Phase-in Plans";and the status of Grand Gulf 2 and $18.8 million of previously resolution of disputes related the possible allocation to the expensed Waterford 3 costs to SFI's coal supply agree-Company of costs associated incurred from August 12, ment with a fuel supplier for with that unit.For additional 1987 throughJanuary 31, which the Company had information with respect to 1988,in addition to approxi-guaranteed SFI's perform-these matters and other com-mately $247 million of such ance. Additionally,on March mitments and contingencies, costs previously deferred, 1,1989 the LPSC issued an see Note 8, " Commitments and affirmed the LPSC's order allowing the Company and Contingencies". setting of a 12% return on to retain the LPSC jurisdic-common equity for the tionalportion of $193.7 Company for ratemaking million of gas contract purposes. InJune 1988, the judgment proceeds, to be Company and the LPSC amortized over a currently reached an agreement estimated period of 5.3 years, finalizing the Louisiana in lieu of a $45.7 million Supreme Court's April 1988 l increase in base rates.The Decision that included a Company,in return, agreed schedule for the recovery of to freeze its base rates at the previously deferred Water-current level for a period of ford 3 expenses (see Note 2, i five years, subject to adjust- " Rate Matters" for addi-ment for certain conditions. tional details). (See

Rate Matters - LPSC

~ Jurisdiction" below for additional details.) 38

In a separate On March 1, operation of waterford 3 proceeding, the Company 1989, the LPSC issued an In addition to I filed a retail rate application order that addressed both System Energy's manage-with the LPSC on February the Company's February ment, operating, and 19,1988, and updated the 1988 retail rate application maintenance responsibility filing in July 1988, requesting and the distribution of the for the Grand Gulf Station, an increase in annual base gas supplier judgment in May 1988, plans were rates with respect to LPSC proceeds.The March 1989 announced for System jurisdictional customers of Order ruled,among other Energy to assume operating $107.4 million.Subsc-things,that in lieu of a rate responsibility, subject to the quently, consultants for the increase,the Company Company' sand AP&L's LPSC recommended retain the LPSC juri.sdic-oversight, for Waterford 3 adjustments that,if adopted, tionalportion of the $193.7 and AP&L's Arkansas would produce a $45.9 million judgment proceeds Nuclear One Generating million annual rate increase (stated to approximate Station, respectively, Under based upon a 12.76% return $188.6 million) and flow the proposed arrangements, on common equity. back to ratepayers, begin-which must be approved by In a related ning immediately, through a various regulatory bodies, development,a judgment rate amortization schedule theCompanyand AP&L was obtained in a suit that currently extends over a would retain ownership of between the Company and a 5.3 year period, such their respective nuclear gas supplier in leng-standing jurisdictional proceeds plus generating units as well as litigation stemming from, interest thereon accrued the associated capacity and among other things,the gas through February 28,1989. energy entitlement and supplier's failure to deliver (See Note 2," Rate Matters" would pay or reimburse contracted-for quantities of for additionalin:ormation.) System Energy, on a naturalgas for power plant monthly basis, for the costs use during the period 1971-Rate Relief and Prudence - associated with operating 1981, and on October 24, CouncilJurisdiction these units in accordance 1988, the Company received onJuly 11, with applicable rules and from the gas supplier $193.7 1986, the Company filed regulations of the SEC, million as judgment pro-with the Council with which require that services $s"b ceeds,thereby concluding respect to Algiers, a general be rendered at cost. Applica-the litigation.The LPSC has retail rate increase applica-tions forapprovalof the m - as asserted jurisdiction over tion to reflect costs associ-proposed arrangements have 6x approximately 97.4% of ated with Grand Gulf 1,to been filed with appropriate these proceeds in terms of reflect the in-service status of regulatory authorities and a the treatment thereof for the Waterford 3, and to produce hearing before the LPSC is 5x l benefit of LPSC jurisdic-a just and reasonable rate of expected to be held during tional ratepayers. return. On February 19, the second quarter of 1989.

T 1987, the Council, by resolution, initiated an investigation with regard to the prudence of Waterford 3.

Hearings on these matters ( wereheldin April 1988.The deadline for the Council's decision in both the pru-dence and non-prudence fg phases is now extended to May 4,1989. C 78 79 80 HI H2 83 M R186 87 SR 39

i MANAGEMENT'S FINANCIAL D!SCUSSION AND ANALYSIS 1 iemwu (*vu er & *1ght Comp tny l Long-Term FuelContract New Accounting Standard (5)the retirement of $45 In May 1988, In December million of first mortgage the Company and a fuel 1987, the FASB issued SFAS bonds, and (6)the redemp-supplier agreed to a 25-year No. 96," Accounting for tion of $16.8 million of pre-natural gas supply contract. Income Taxes".This state-ferred stock.The Company's ] The Company,SFI, and the ment was effective for fiscal cash requirements during fuel supplier also agreed to years beginning after 1988 were satisfied primarily cancel a contract previously December 15,1988. In with internally generated entered into by SFI and the December 1988, the FASB funds, the proceeds from the fuel supplier,with SFI's issued SFAS No.100, issuance of $75 million of performance guaranteed by " Accounting forIncome first mortgage bonds,and the Company, to provide Taxes - Deferralof the repayments from SFl of j coal for the Company's Effective Date of FASB loeg-term loans from the q proposed Wilton Station. As Statement No. 96", an Companyof approximately a result, the Company amendment of SFAS No.96, $35.3 milhen. Interim cash moved for dismissai of its ap-which extends the effective requirements were met with plication for a certificate, date of SFAS No.96 to fiscal short-term borrowings and filed with the LPSC, author-years beginning after the sale of retail customer izingconstruction of the December 15,1989. Based accounts receivable (see Wilton Station. On Septem-upon a preliminary study,it Note 4," Lines of Credit and bu 23,1988,the LPSC is expected that tim adoption Related Borrowings.") l granted the Company's of SFAS No.96 will result in Estimated l motion for dismissal. In a net increasein accumulated capital and external financing 1988, the Company recorded deferred income taxes with a requirements for the adjustments decreasing con-correspondingincrease in Company for the period struction work in progress assets. Results of operations 1989-1991 are reflected in the and increasing expense by are not expected to be $8.4 million (before tax) to sis;nificantlyimpacted by the write off Wilton Station adoption of SFAS No.96. costs, including related (See Note 3," Income AFDC. Taxes".) { Operating Revenues From Retail Customers LIQUIDITY AND CAPITAL RESOURCES 1988 = $1,3201 The Com-pfd/mm ofDollars) pany's primary cash require-ments for 1988 included, among other things,(1) 12x construction expenditures (including AFDC but = excluding nuclear fuel)of $117.5 million,(2) the ex refunding of $56 million to customers in connecuon with a settlement agreement with a gas supplier,(3) dividends paid on preferred dx and common stock of $47.9 million and $33.2 million, respectively,(4) principal 2x payments under capitallease obligations of $47.9 million, ~ ~ o is n so el s2 83 si ss u er ss 40

table below. Such require-the outcome of regulatory 10% of capitalization with ments assume the continued and judicial proceedings, further SEC approval. allocation of Grand Gulf 1. financing plans, and access However, the SEC's order capacity and energy costs in to capital markets. Depend-prohibits the Company, accordance with theJune 13 ing upon the outcome of through 1990, from effecting decision and certain other such matters, material short-term borrowings assumptions and judgments changes :n capital and without specific authoriza-with respect to, among other financing requirements tion from the SEC if com-things, earnings, dividends, could result. mon stock equity (including retained earnings)is or would thereby become less 19#9 1990 199/ Lit.d than 30% of totalcapitaliza-(/n.tidhond tion plus short-term indebt-i Capital and edness. At December 31, Financing Requirements: 1988, the Company had Construction expenditures $ 139.9 $145.2 $151.6 5 436.7 short-term borrowing Less internally generated capacitv of up to approxi-funds and changes in cash matelv 548 million as a result ,and short-term debt 319.2 136.7 178.2 634.1 of the 30% common equity Net financing requirements (179.3) 8.5 (26.6) (197.4) restriction. In October 1988, Plus refinancing requirements: territorialbanks agreed to Long-term debt maturities (l) 6.3 26.0 6.0 38.3 provide the Company with Preferred stock sinking approximately $67 million in funds (2) 10.4 32.8 12.8 56.0 unsecured bank lines of Total external financing credit that are scheduled to requirements (3) $(162.6) $67.3 $ (7.8) $(103.1) expire on September 30, 1989. Short-term borrow-(1)The company expcas to rem.trLet $220 million principal amount of it? inEs can also be effected pollution control revenue bonds an 1989. To the extent such remarkenng n throug, a Middle South n not succruful, the Company may be required to reacquire such bonds, resulting in additional financing requirements. This potential reacquisition System money pool arrange-is not incluJed in the above table. ment, subject to the availa- /2)The requirements for 1990 refleet the optional redemption of $10 bility of funds,which at anY Energy Sales million of preferred stoik pursuant to sinking fund provisions.1991 icubim may be To Retail Cusiomers requirements have been reduced by a like amount. 1988 = 24.52.

h.. d (see Note 4, l.ines of mite p) Negative amounts under total external financing requirements indicate internal cash generation in excess of capital and refinancing requirements Credit and Related Borrow-f ###"'"'N#*" ~ N#""I inJuded in the table in the amounts and for the years indicated-ings"). At December 31, l

1988, the Company had no l outstanding short-term bor-The Com-Company may also enter rowings from the money = ~ 3 pany plans to meet a signifi-into arrangements for the pool or its territorialbanks. cant portion ofits capital re-sale and leaseback of l qui.rements with internally property in which the generated funds during the proceeds from such transac-period 1989-1991. Addition-tions could be used to retire ally, the Company may certain debt issues at par. determine, and has received Pursuant to to the necessary regulatory an SEC order issued Decem-approvals, to redeem, ber 30,1988, the Company is purchase,or otherwise currently authorized, acquire allor a portion of through 1990, to effect certain outstanding series of short-term borrowings in an high yield debt and preferred aggregate amount outstand-0 78 3 808182838485868788 stock in order to reduce its ing at any one time of up to overall cost of capital.The $125 million, subject to increase to a maximum of 41 l __]

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS Lomau Pow & lsght Compory The creditline contrary notice from the the 1988 earnings coverages associated with the Com-Company or thelessor.This were 2.13 times the annual pany's nuclear fuellease lease may not be extended . bond interest requirements terminated in 1987, thereby pastJanuary 31,2039. In and 1.26 times the annual precluding the placement of February 1989, nuclear fuel interest and prefecred additionalfuel thereunder, under the previous lease dividend requirements, As of December 31,1988, agreement and nuclear fuel respectively. Based upon approximately $51.7 million owned by the Company 1988 earnings coverages, the of nuclear fuel remained totalling approximately Companyis precluded from under this L ase. In February $77.3 million were placed raising capital through 1989, the Company termi-under the new lease. the sale of preferred stock. At nated its existing nuclear fuel The Com-December 31,1988, the lease and entered into a new pany's minimum earnings Company had sufficient nuclear fuellease arrange-coverage requirements for unfunded bondableproperty m;nt that provides for the issuing first mortgage bonds to support the issuance of placement of up to $125 (other than forrefunding approximately $538 million million of nuclear fuel purposes) and preferred of first mortgage bonds. thereunder.The new lease stock are 2.0 times annual However, the amount of terminates upon the later of bond interest requirements bonds issuable is limited to the final maturity date of and 1.5 times annualinterest $97 million based upon certain secured notes issued and preferred dividend re-earnings coverages for the by the lessor (currently. quirements,respectively,on twelve month period ended January 31,1999)orJanuary a pro forma basis. For the December 31,1988 and an 31,1994, subject to annual Company's first mortgage assumed annualinterest rate extensions in the absence of bonds and preferred stock, of 11% RESULTS OF OPERATIONS 1988 Compared to 1967 Twelve Months Ended increasa Percent Average KWH Use Per Residential Customer @ lld'8 i" El"*5) 1988 = 13,436 Net income $ 113.8 5 115.6 $ (1.8) (2) ] Operating rever.ues 1,377.1 1,346.6 30.5 2 ne0 Fuel and fuel related expenses 216.6 235.4 (18.8) (8) Purchased power 317.9 320.0 (2.1) (1) Other operation expenses 224.0 226.1 (2.1) (1) Roc Maintenance expense 73.6 88.6 (15.0) (17) Income taxes - operations 41.0 36.1 4.9 14 Waterford 3 expenses 45 recovered (deferred)- net 22.6 (21.1) 43.7 207 Other income - net 2.7 7.1 (4.4) (62) Other interest - net 20.4 7.4 13.0 176 12.0C0 Retail energy sales (Millions of KWH) 24,525 24,249 276 1 mmc ~ 0 78 79 80 SI 82 83 84 85 86 87 88 42

The small Beginning in The change decrease in net income is late 1987 and continuing in 1988 Waterford 3 l the result of various factors through 1988, the Com-expenses recovered (de-l as discussed below. pany implemented a . rred)- net is due to the Operating number of cost control implementation of the revenues increased slightly measures including, among April 1988 Decision for 1988 when compared to other things, a voluntary allowing the Company to 19d7 primarily as the result early retirement program defer approximately $18.8 of the rate increase imple-effectiveJune 30,1988 and million of Waterford 3 costs mented on February 1, various other staffing that had been expensed 1988, increased accrued reductions. The Company during the period August unbilled revenues, and has begun to realize the 12,1987 through January increases in sales volume savings associated with 31,1988. Such deferred for wholesale customers. these cost control measures Waterford 3 expenses were The 1988 and expects that the effects reduced by approximately decrease in fuel and fuel of its cost control programs $18.1 million to reflect the related expenses is the will continue to be reflected amortization of certain result of lower a,erage per-in future periods. However, previously unamortized unit fuel costs partially such savings related to investment tax credits. In offset by an increase in the other operation expenses addition,in April 1988 the volume of generation. were offset in 1988 by the Company began amortiz-Tl.e pur-one-time cost associated ing previously deferred chased power decrease in with the voluntary early Waterford 3 costs in 1988 is principally due to re irement program of $6.6 accordance with the the reduction, effective July rr dion. recovery schedule estab-1,1987, of System Energy's Maintenance lished in the April 1988 rate of return on common expenses decreased due to Order (see Note 2," Rate equity (which reduced the the initial recording as an Matters. ") non-fuel portion of the asset in 1988 of $18.7 Company's obligation to million of materials and System Energy for Grand supplies inventories that Construction Expenditures Gulf I capacity and energy) had previously been 1988 $11 u partially offset by an expensed. See Note 12, increase in the volume of " Materials and Supplies purchased power. Inventory. Income taxes included in 1988 operating expenses increased when ,g compared to 1987 primarily due to the fact that 1987 income taxes had been ,x l reduced by a write-off l ordered by the LPSC of E a 3x l previously deferred state depreciation-related timing differences. Offsetting this 2x increase is a decrease in 1988 income taxes due to the amortization in 1988 of investment tax credits and the reduction in the 1988 effective corporate federal '"""O"'"'"'**"'"'" "" income tax rate. 43

MANAGEMENT'S FINANCIAL DISCUSSION.;ND ANAL.YSIS q Iounww Vow & l.ight Company Other by incicased income from. that required the Company l income - net for 1988 tempora y cash invest-to record $10.7 million of l decreased principally as a

ments, interest expense relating to -

1 result of the write-off of The 1988 the income tax treatment of $5.1 million, net of tax, of ircrease in other interest - the proceeds from a 1982 - costs associated with the net is primarily due to a settlement agreement with a I Company's discontinued tentative agreement reached gas supplier. Wilton Station. This in August 1988 with the decrease was partially offset Internal Revenue Service 1 1987 Compared to 1936 l Twelve Months Ended incr ease / Percent Description 12/31/87 12/31/86 (Decrease) Change (Dollars m Mdhom) Net income $ 115.6 $ 143.8 $ (28.2) ' (20) Operating revenues 1,346.6 1,344.8 1.8 Fuel and fuel related expenses 235.4 288.3 (52.9) (18)- Purchased power 320.0 291.0 29.0 10 Other operation expenses 226.1 240.4 (14.3) (6) Maintenance expense 88.6 88.2 0.4 Income taxes - operations 36.1 145.1 (109.0) (75) Waterford 3 expenses recovered (deferred)- nct (21.1) (206.0) 184.9 (90) Other income - net 7.1 6.1 1.0 16 Other interest - net 7.4 14.9 (7.5) (50) Retail energy sales (Millions of KWH) 24,249 23,682 567 2 Total Utluty Plant (excluding nuclear fuel) 1988 = $4,452.1 . (Millions of Dollars) 3000 4000 3000 ~ = E O 78 79 80 8182 83 R4 8$ 86 87 88 44

) The decrease The increase

SUMMARY

in 1987 net income when in purchased power costs in In 1988, the compared to 1986 is 1987 is due to an increase in Company's financial principally due to, as the volume of kilowatt-condition remained stable required by the January 30, hours purchased. as compared with 1987. In 1987 rate order, the discon-Income taxes addition, the Company has tinuance on February 1, includal in operating continued to remain 1987 of additional Water-expenses decreased in 1987 current with respect to the ford 3 deferrals. Other due to a decrease in 1987 payment of preferred stock factors affecting net income deferred Waterford 3 dividends and paid approxi-are discussed below. expenses, the discontinu-mately $33.2 million in The increase ance on January 31,1987 of com non stock dividends in in operating revenues in normalizing state income 1988. The Company's 1987 is due to an increase in taxes related to depreciation future financial condition base rates as a result of the timing differences, the will be dependent upon the LPSC's January 30,1987 write-off of all such ultimate outcome of rate order (subsequently previously deferred challenges to the FERC reduced by an April 28, amounts, and a reduction in allocation of costs of 1987 rate order) primarily . the corporate federal capacity and energy from offset by rate concessions income tax rate effective Grand Gulf 1, the ultimate granted to industrial July 1,1987. Partially off-outcome of proceedings customers and a decrease in setting these decreases in before the Council regard-fuel adjustment revenues 1987 is an increase in pre-ing the Company's retail l due to lower fuel costs. tax book income. rate increase request with The decrease The decrease respect to Algiers custom-in fuel and fuel related in Waterford 3 expenses ers including a resolution of expenses is the result of ' recovered (deferred) - net the CounciPs prudence lower per-unit fuel costs in 1987 when compared to investigation of Waterford and the increased use of 1986 is due to the discon-3, and the ultimate resolu-nuclear generation at lower tinuance, pursuant to tion of the status of Grand average unit costs. orders of the 1.PSC, of Gulf 2 and the possible al-additional Waterford 3 location to the Compar.y of 2 deferrals on February 1, costs associated with that 1987. unit (see Note 2," Rate The decrease Matters".nd Note 8, j in 1987 other interest - net " Commitments and when compared to 1986 is Contingencies.") primarily the result of i lower levels of short-term borrowings. I 45

RECORD OF PROGRESS 1978-1988 f.omann Power & Lsght Company Selected financialData (Dollars in Millions) 1988 1987 1986 1985 Total utility plant (excluding nuclearfuel) $4,452.1 $4,395.5 $4,269.5 $4,162.6 Totalassets $4,458.4 $4,234.4 $4,150.4 $3,819.3 Capitalization: Long-term debt (excluding current maturities) 51,582.5 $1,772.3 $1,783.0 $1,470.1 Preferred stock with sinking fund 224.2 241.3 272.1 278.4 Preferred stock withou. sinking fund 145.9 145.9 145.9 145.9 Common equity 953.2 920.0 864.4 774.1 Total $2,905.8 $3,079.5 $3,065.4 $2,668.5 Totaloperating revenues $1,377.1 $ 1,346.6 $1,344.8 $1,259.8 Operating income $ 310.7 $ 296.6 $ 339.2 $ 186.1 Net income (loss)(1) $ 113.8 $ 115.6 $ 143.8 $ (53.8) Employees - year end 3,299 3,373 3,092 2,998 Electric Operations Operating revenues (dollars in millions): Residential $ 485.0 $ 476.0 $ 473.3 $ 411.7 Commercial 291.4 274.1 265.5 226.9 Industrial 511.3 525.8 512.9 528.4 Government and municipal 32.4 37.5 34.6 30.7 Other 57.0 33.2 58.5 62.1 Total $1,377.1 $1,346.6 $1,344.8 $ 1,259.8 Sales (millions ofKWH): Residential 6,762 6,757 6,975 6,981 Commercial 3,972 3,770 3,773 3,708 Industrial 13,383 13,102 12,341 12,468 Government and municipal 508 620 593 583 Other 949 582 1,459 746 Total 25,474 24,831 25,141 24,486 Customers - year end (thousands): Residential 503.3 502.3 501.6 499.8 Commercial 57.7 57.3 57.3 57.1 Industrial 5.9 6.1 6.4 7.1 Government and municipal 4.0 4.0 3.9 3.8 Total 570.9 569.7 569.2 567.8 Residential customer data: Average annual use (kilowatt-hours) 13,436 13,477 13,927 14,013 Average annual revenue per kilowatt-hour 7.17c 7.04c 6.79c 5.90c Company system input (millions ofIMH): Net generation 17,777 17,658 20,286 16,478 Purchased power and interchange-in 9,402 8,941 6,725 9,905 ~ Total 27,179 26,599 27,011 26,383 l Peak demand (MW) 4,536 4,552 4,603 4,355 Generating capability (MW)(2) 5,647 5,665 5,665 5,665 (1) Net income for 1984 includes the cumulative effect to,lanuary 1,1984 of accruing unbilled revenues in the amount of $17.6 million after income taxes. The net loss for 1985 reflects the write-off of the LPSC jurisdictional portion of disallowed Waterford 3 costs. (2) 1988 includes 381 MT placed on extended reserve shutdown. 46 l

1984 1983 1982 1981 1980 1979 1978 $4,116.8 $3,688.1 $3,131.5 $2,634.0 $2,319.2 $2,069.1 $ 1,793.0 $3,849.1 $3,565.3 $3,602.1 $2,330.2 $2,078.4 $ 1,842.4 $1,557.2 $1,471.8 $1,173.5 $ 947.6 $1,001.2 $ 829.0 $ 827.4 $ 728.7 ~ 284.5 240.9 169.1 121.4 121.4 93.0 145.9 145.9 145.9 145.9 145.9 145.9 110.8 855.9 778.8 649.9 615.9 564.1 487.4 417.2 $2,7511 $2,339.1 $1,912.5 $1,884.4 $ 1,660.4 $ 1,553.7 $ 1,256.7 $1,245.7 $1,144.7 $1,195.6 $1,117.8 .$ 853.5 $ 557.5 $. 456.4 $ ?O6.7 $ 172.5 $ 187.3 $ 167.2 $ 133.0 $ 88.1 $ 79.7 $ 201.0 $ 131.5 $ 117.5 - $ 124.5 $ 100.7 $ 65.1 5 53.7 2,973 2,756 2,721 2,499 2,342 2,329 2,216 $ 404.8 $ 358.8 $ 364.0 $ 341.6 $ 265.1 $ 180.4 $ 146.3 215.4 186.8 183.0 !64.7 123.6 f6.0 68.3 562.1 529.6 574.1 R5.3 358.2 212.8 141.8 30.2 27.2 26.2 22.8 17.2 11.7 8.5 33.2 42.3 48.3 63.4 89.4 66.6 91.5 $ 1,245.7 $ 1,144.7 $ 1,195.6 $ 1,117.8 $ 853.5 $ 557.5 $ 456.4 y 6,630 6,274 6,429 6,405 6,398 5,996 5,862 3,410 3,168 3,130 3,016 2,876 2,721 2,624 12,168 11,491 12,997 13,067 11,963 11,388 9,685 553 525 518 479 463 445 394 529 780 867 1,185 2,245 2,702 4,147 23,290 22,238 23,941 24,152 23,945 23,252 22.712 495.4 487.1 478.4 470.0 457.2 443.5 427.9 55.8 53.8 52.0 50.6 48.6 46.8 44.9 7.4 7.5 6.6 6.7 6.8 7.2 7.5 3.7 3.6 3.4 3.3 3.3 3.2 3.1 562.3 552.0 540.4 530.6 515.9 500.7 483.4 13,479 12,996 13,545 13,791 14,177 13,755 14,063 6.10e 5.72c 5.66e 5.33e 4.14e 3.Ol e 2.50c 14,100 12,922 14,540 15,471 16,440 18,429 21,251 10,931 11,484 11,138 10,369 9,424 6,837 3,813 25,031 24,406 25,678 25,840 25,864 25,266 25,064 4,200 4,20/ 4,259 4,256 4,078 4,091 3,852 4,605 4,618 4,625 4,625 4,625 4,612 4,603 i I 4/

D! RECTORS OFFICERS REGISTRAR AND TRANSFER AGFNT James M.Cain James M.Cain John D. Ervin FOR PREFERRED STOCK Chairman and Chairman ofthe Board and Vice Prc ident-Bank of Montreal ChiefExecutive Officer ofthe ChiefExecutive Officer Division,Alanager Trust Company Company 77 Water Street President Donald Ilunter Richard C. Guthrie New York, New York 10005 New Orleans Public Service Inc President and Vice President-ChiefOperating Officer PublicAffair' TRUSTEE FOR Donald Hunter FIRST MORTGAGE BONDS President and Chief Operating R. Drake Keith^ David C. Harlan Oficer of the Cornpany Executive Vice President Vice President. Bank of Montreal Executivc VicePresident Marheting 'lrust Company New Orleans PublicSenite Inc johnJ.Cordaro 77 Water Street Group Vice President-Thomas O. Lind New York, New York 10005 R. Drake Keith^ ExternalAffairs Vice President-Executive Vice President ofthe Regulatory Counsel Compar,y S. G. Cunningham,J r. andScortary This 1988 Executive Vice President Senior Vice President-Annual Report is prepared New Orleans Pubhc Service inc Rates & Regulatory Affairs George L. Monteverde for the information of Vice President-stockholders, emplovees, Tex R. Kilpatrick" Jerrold G. Dewcase Division Manager and other interested ' persons. l President Senior Vice Prendent-1 CentralAmerican Nuclear Operations T. W. Schnati The Com-Life Insurance Company Vice President-W.J. Lannes, HI CentralLngineermg -,,;9gg gg 1 to the S,ecur..ities and E.x-I JosephJ. Krebs,Jr." Senior Vice President-Chairman and Energy Supply-fossil Donald R. Wells' change Camniission on i ChicfExecutive Officer Vice President. Yarm lo-K(includ, g m J.J. Krebs & Sons,Inc M. H, h1cLetchie Human Resources 6 financial statement sched-Seniar dice President. Adminstration ules)is available ta any l Edwin Lupberger Acc<mnting & rinance, stockholder without charge. Chairman and President and Trcasurer R. N. Garret t,J r. Stockholders can obtain a Middle South Utituies,inc Controller cop'y by writing to: Thomasj. Wright H. Duke ShackelfordB Senior Vice President-N.J. Briley Investor Relations AgriculturalInterests Customer Senice Assistant %ecretary and d, 'P" Assistant Treasurer Wm.Clifford SmithB Ross P. Barkhurst L""^"3P""N President Vice President-Michael A.Caruso Light Company T Baker Smith & Son Nuclear Assistant 7rcasurerand Post Office Box 60340 .Assutant Secrciarr Mail Unit C-0760 Jack M.Wyatt William E.Colston New Orleans, Louisiana 70160 former Chairman o.fthe Board Vice President-CaryJ. Dudenhefer Telephone:(504) 587-5439 and ChiefExnutive officer of D&ision Manager Assutant Secretary the Company (Retired August 1.1983) l l A Resigned. clTective December Jt,14n, ta became heudeni and s gjagg 4 3.,,,,,,, y,ng, 1 Chief Operatmg Officer nf AP&L cffective January 1.1984 l n Member of Andet Comminec 48

COMPANY DESCRIPT10N t u-ww w s t+ ame,y LP&L*s More than LP&L, Mir,sissippi Power & ) system it pan of, and is 1.6 rnillion retailcustomers Light, and New Orleans intercortnected with, the in Arkansas, Louisiana, Public Se:rvice Inc.;and a other operating companies Mississippi, and Missouri are nuclear generating company, of the Middle South Electric provided electric services System Energy Resources, System.This arrangement through the System's vast Inc., which is responsible for ,i Louisiana provides more dependable network ofit.terconnected mznagement and operation Power & Light Company electric service for custom-transmission and distriba-of the Grand Gulf Nuclear (LP&L)operatesin46of the ers, and also results in the tion lines, and a balanced Station. System Energy is 64 parishes of Louisiana-a greatest economy in the grid of fossilfueland nuclear currently seeking regulatory f 19,500-squa re-mile area, generation of electric power, generating plants that are approval to assume operat-which, as of December 31, with resultant savings to controlled and operated as a ing responsibility, subject m i 1988, had an estimated customers. unit. AP&L and LP&L oversight, population of 1,673,000. At For hepast Headquar-of the System's other three yea r-end 1988, LP&L was 40 years, the Middle South tered in New Orleans,the nuclear units. serving approximately 37 Electric System has been the Middle South Electric In addition, a pesent of Louisiana's leading electric energy System includes four r etail subsidiary company, MSU population. supplier to the Middle operating companies: System Services, Inc., South, a 91,000-square-mile Arkansas Power & Light, provides various technical, regional area along tue lower administrative, and corpo-reaches of the Mississippi rate services to all of the River. Middle South Elemric System companies. . 9 J f I \\ CJDDLE SOUTH ELECTRIC SYSTEM fl3 RetailService Area Louisiana Power & Light 4 Companyprovides electric service within theportion of Louisiana shown in red

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