ML20247R672
| ML20247R672 | |
| Person / Time | |
|---|---|
| Site: | Grand Gulf  |
| Issue date: | 12/31/1988 |
| From: | Cavanaugh W SYSTEM ENERGY RESOURCES, INC. |
| To: | |
| Shared Package | |
| ML20247R669 | List: |
| References | |
| NUDOCS 8906070287 | |
| Download: ML20247R672 (43) | |
Text
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PERFORMANCE HIGHLIGHTS
. spa., t.are saw m 1.e
-1988 .1987 1986' 1985~ 1984-Operating revenues (thousands)- $ . 933,828 . $ 962,549. $ 959,737 $ '524,C12 ' .--
-~ Allowance for funds used during -
$ (13,772) $ _. (4,616) -$ (4,591) ' $ 224,360 - $ 376,477 -
construction (AFDC)(thousands) .
$ 180,314 $ 198,801' $ .189,135 ' $ 218,067. $ ' 188,425 Net income (thousands)
Constriction expenditures .
$ 36,571 $ 34,597 $ 40,782 ' $ 335,656 $ 581,iB4L (includes AFDC)(thousands)
$ 5,160,249. $ 5,422,329 $4,950,118 $-4,947,418 - $4,780,456 Total assets (thousands)
System The name changeis We hope that, Energy's new logo, shown contingent upon stockholder over time, our newlogo will emergingonthecoverof this approval at the annual symbolize for you,too,a report, symbolizes a fresh meeting, May 19. well-run organization start and a new performance- The red committed to providing driven outlook for our Systemarkwillidentify all efficient,economicalelectric company. Its red thecompaniesof the Middle service.
"Systemark" identifies us as South Electric System.
a memberof the Middle Reminiscent of sunlight South Electric System, one reflected in the water, the of thenation'slargest Systemark stands for energy investor-owned electric -the business we arein;the utilities. Its clean lines Mississippi River-an telegraph thelean, modern, historic, cultural,and customer-oriented economiclink forthe Middle l organization we are today. South region; and teamwork System Energy's parent -historically and company, Middle South economically linked,our Utilities,is proposing to companies work together to change its name to "Entergy provide electricity to the Corporation"-a name Middle South. derived from the words
" energy," " enterprise," and
" synergy." Theseare qualities that describe our response to thecompetitive marketplace the electric utility industry is entering.
System Energy 1 4
a [ l PRESIDENT'S CESSAGE sy,u , t .osm.nn, t w 1988 was We came a Grand Gulf I truly a year to be proud of at long way toward reaching exceeded its goals in seven of j
. System Energy Resources, that goalin 1988,and have the top to performance {
d Inc. set an even more ambitious factors, including a 91.1 It was a year agenda forthe coming year. percent plant equivalent , of world class performance System availability for the year,far a at Grand Gulf Nuclear Energy took to heart the above the projected 1988 Station;ofinnovation in System initiative of Meeting industry average of 66.4 Company human resources .the Challenge ofChangein percent,and achieved a policies and programs;ofim- the electric utility industry. capacityfactorof 95.5 provementsin the legal and Our 1988 highlights describe percent. regulatory environments in that commitment: The plant also which the Company oper- exceeded yearly goals in the ates;and ofimprovement in OPERAT10NAL PERFORMANCE important areas of radiation ' the financialstrength of the Grand Gulf exposure control, time Company. Unit 1 finished fourthin the worked without a lost-time In almost entire world in gross personnelaccident,and every way the Company was generation by producing radiological waste ship-evaluated, by regulatory 9,983,960 megawatt- ments. Reflecting our bodies or through self- hours - breakingthe continuing emphasis on cost evaluation,the results previous U.S. record for control, non-fuel operations confirmed an employee gross megawatt-hours and maintenance production attitude that can best be generated in a calendar costs were 17 percentlower characterized by one year - and generated more in 1988 than in 1987 word - resourcefulness. than any other boiling water This excep-That attitude reactorin the world,an tional plant performance reflects a commitment to the enviable record, allowed the Company to principles embodiedin the Only three record a cost-per-kilowatt-Company motto of Excel- other plants in the world hour below the 1988 goal. lencein Energy,and the produced more electricity in In the area of Company goalof being 1988,and only one other regulation, the plant received among the best in the nuclear plant in the United States has excellent ratings in compre-powerindustry, ever produced more electric- hensiveinspections by the ity in oneyear. Grand Gulf Nuclear Regulatory Com-also brokeits own single-day mission. In the Systematic world record this year by Assessment of Licensee generating 31,130 megawatt- Performance by theNRC, hours during a 24-hour Grand Gulf received a
- 1",
period. the highest rating,in five of the 12 areas evaluated. All other areas were rated in the second highest category, with two of them listed as improving. 2
w.'T'" ADMINISTRATIVE INNOVATION FINANCIAL IMPROVEMENT 1989 OllTLOOK
? 1 The Com- Favorable In May 1988, Q panyinitiatedinnovative resolution of the Mississippi plans were annu need for q performanceincentives Power & Light Co. rate case consolidationof nuclear i during 1988,the most before the U.S. Supreme operations within the Middle y notable being a progressive Court resulted in a more South Electric System.
j bargaining unit agreement favorable financial market Under the j between System Energy and for the Company's financing plans, System Energy would i the International Brother- activities, paving the way for become the System nuclear hood of ElectricalWorkers several measures which management company,and Local No. 605. improved the Company's would be responsible for The agree- financialposition. operation of all nuclear units ment tied achievement of the Two series of in the System, including plant equivalent availability pollution control revenue Grand Gulf 1; Units 1 and 2 goal to an across-the-board bonds were remarketed on a of Arkansas Nuclear One at increase of onepercent in long term, fixed rate, Russellville, Arkansas;and base pay for craft employees. unsecured basis;the Waterford 3 at Taft, Louisi-Non-bargaining-unit,non- Company's U S.and foreign ana; subject to oversight by exempt employees were bank loans were prepaid in Arkansas Power & Light given a one-time cash full;the Company used Co.and Louisiana Power & Reaching payment also based on proceeds of an economically Light Co.as regards ANO toward more efficient meeting the plant equivalent attractive sale and leaseback and Waterford 3. operation, innovative plans availability goal. of an approximate 11.5 When com-were formulated in 1988 to Adding to our percent ownership interest in pleted, consolidation will accomplish the 1989 refuel- existing corporate incentive Grand Gulf 1 to redeem ap- bring together the best ing outagein 45 days,a 25 policies, new programs were proximately $488 million of efforts of all System nuclear percent reduction over our developed that will provide first mortgage bonds in early employees, creating a nuclear second outage and far less recognition and reward for 1989;and the Company paid team second to none in the than theindustry average. employees who make its first ever dividend on industry. Observation ofinnovations significant contributions common stock. At System at West German and Swiss toward attainment of Energy,we have accepted I nuclear plants aided in these Company goals. These the challenges of today,and plans. programs will provide are preparing to meet I positive reinforcement of tomorrow's challenges our performance-oriented through aggressive and culture. innovative planning that will equip us to compete success-fully in the energy environ-mentof thefuture. Afa #- William Cavanaugh,III President and Chief Executive Officer l 3
REPCU Y MANAGEMENT Spir $ 1 wgy Rewnem, fu To meet its re- training of personnel. This Man 2gement l sponsibilities with respect to system is also tested by a believes that these policies financialinformation, comprehensiveinternalaudit and procedures provide rea- l management maintains and program. sonable assurance that its op- I enforces a system ofinternal Theinde- erations are carried out with accounting controls which is pendent public accountants a high standard of business The manage- designed to provide reason- provide an objective assess- conduct. ment of System Energy Re- able assurance,on a cost ment of the degree to which sources,Inc. has prepared effective basis,as to the management meets its / i and is responsible for the integrity, objectivity and responsibility for fairness of 4/ M m financial statements and reliability of the financial financial reporting. They related financialinformation records,and as to the regularly evaluate the system William Cavanaugh,III includedin this annual protection of assets. This ofinternal accounting President and report. The finsncial systemincludes communica- controls and perform such Chief Executive Officer statements are based on tion through written policies tests and otherprocedures as generally accepted account- and procedures,a recently they deem necessary to reach ingprinciples. Financial issued employee Code of and express an opinion on informationincluded Conduct,and an organiza- the fairness of the financial elsewherein this report is tional structure that provides statements. Glenn E. Harder consistent with the financial for appropriate division of Vice President, Accounting statements. responsibility and the and Treasurer AUDIT COMMITTEE CHAIRMAN'S 1.ETTER The Middle The Audit the consolidated financial of financial reporting. The South Utilities,Inc.(MSU) Committee oversees the statements and the adequacy meetings were designed to Board of Directors' Audit MSU consolidated financial of theCompany'sinternal facilitate and encourage any Committee functions as the reporting process,which controls. The committee private communications Audit Committee for the includes the Company,on also met separately with the between the committee and Company. The Audit Com- behalf of the MSU Board of Company's internal auditor the internal auditor orinde-mittee is comprised of five Directors. The Audit and the independent public pendent public accountant. directors, who are not Committee discussed with accountant, without man- o officers of the Company or the Company's internal agement present,to discuss p7 - MSU: Kaneaster Hodges,Jr. auditor and theindependent theresultsof theirexamina- h (Chairman),W. Frank public accountant the overall tions,their evaluations of the Company's internal con- Kancaster Hodges ,Jr. Blount, James B. Campbell, scope and plans for their trols,and the overall quality Chairman, Audit James R. Nichols, and Dr. respective audits,as well as Committee Walter Washington. The committee held four meetings during 1988. 4
M10EPENDENT AUDITORS' REPORT
' System Energy Resources, We con- statement presentation. We As discussed Inc.: ducted our audits in believe that our audits in Notes 7 and 8 of Notes We have accordance with generally provide a reasonable basis . to Financial Statements,
~ audited the balance sheets accepted auditing stan- for our opinion. there are uncertainties of System Energy Re- dards. Those standards In our confronting the Company.
. sources,Inc. as of Decem- . require that we plan and opinion, the above-men- These uncertainties include - !
ber 31,1988 and 1987, and perform the audit to obtain tioned financial statements , recovery of the Company's the related statements of . reasonable assurance about . present fairly,in all mate- investment in G and Gulf income, retained earnin3s whether the financial rial respects, the financial - 2, a suspended construction I and cash flows for each of statements are free of position of the Company at project, and the potential the three years in the period materialmisstatement. An December 31,1988 and - adverse impact on the ! ended December 31,1988. audit includes examining, 1987, and the results of its Company if certain find - ; These financial statements on a test basis, evidence ' operations and its cash ings stemming from a regu- i' are the responsibility of the supporting the amounts flows for each of the three - latory audit are ultimately ;
' Company's management. . and disclosures in the . years in the period ended sustained. The ultimate l i
Our responsibility is to financial statements. An December 31,1988 in outcome of these uncertain-express an opinion on these audit also includes assessing conformity with generally. ties cannot presently be
' financial statements based the accounting principles accepted accounting - determined. Accordingly, ;
on our audits. used and significant principles, no provision for any loss ; estimates made by manage- that may result upon i ment, as well as evaluating resolution of these matters i the overall financial ' has been made in the ac-companying financial q statements. ) f !h New Orleans, Louisiana February 16,1989 l l 5
ABBREVIATIONS AND TERMS: Syneu,[wgy Rewm, bu.
.AFDC Allowance forFunds used During November 30 Order An orderissued by the FERC on Construction November 30,1987 which reaf-Administrative LawJudge firmed and reinstated thejune13 ALJ AP&L Arkansas Power & Light Company Decision APSC Arkansas Public Service Commission NRC Nuclear Regulatory Commission ANO Station AP&L's Arkansas Nuclear One Owner Participant A corporation which,in connection Generating Station with the sale andleaseback transac-City City of New Orleans, Louisiana tion,has acquired a beneficial System Energy Resources,Inc.
interestin the owner trust, Company Council Council of the City of New Orleans, whichis the ownerand lessor of an Louisiana ownership interestin Grand D.C. Circuit . United States Court of Appeals for Gulf 1. theDistrict of Columbia Circuit OwnerTrustee Eachinstitutionand/orindividual FASB- Financial AccountingStandards acting as owner trustee undera Board trust agreement with an Owner February 4 Participant in connection with the Resolution The Resolution adopted by the sale andleaseback transaction. Council on February 4,1988 PCRBs Pollution ControlRevenue Bends disallowingthe recovery by SEC Securities and Exchange Commission NOPSIof $135 million of previ. Series A PCRBs $49,500,000 of Claiborne County, ously deferred Grand Gulf 1- Mississippi Adjustable / Fixed Rate related costs Pollution ControlRevenue Bonds FERC Federal Energy Regulatory Commis- (Middle South Energy,Inc. sion Project), Series A Series B PCRBs $27,100,000 of Claiborne County, Grand Gulf 1 Unit No.1 of the Grand Gulf Station Grand Gulf 2 Unit No.2 of the Grand Gulf Station Mississippi Adjustable / Fixed Rate Grand Gulf Station Grand Gulf Steam Electric Generat. Pollution Control Revenue Bonds ing Station (nuclear) (Middle South Energy,Inc. G & R Bonds Genera!and Refunding Mortgage Project), Series B Bonds,issvable by MP&L and Series C PCRBs $206,000,000 of Claiborne County, NOPSI Mississippi Adjustable / Fixed Rate The FERC's 1985 orderallocating Pollution ControlRevenue Bonds June 13 Decision Grand GulfI capacity and energy (Middle South Energy,Inc. to the System operating companies Project), Series C The United States Supreme Court's SFAS Statement of Financial Accounting June 24 Decision decision issued onJune 24,1988, Standards affirming MP&L's right to recover SFI System Fuels,Inc. its Grand Gulf 1-related costs SMEPA South MississippiElectric Power LP&L Louisiana Power & Light Company Association LPSC Louisiana Public Service Commis. System sion operating companies AP&L,LP&L,MP& Land NOPSI, Money Pool MSU SystemMoney Poolwhich collectively allows certain System companies to System or borrow from orlend to other Middle South System companies Electric System MSU and its various direct and MP&L MississippiPower & Light Company indirect subsidiaries MPSC Mississippi Public Service Commis- Waterford 3 LP&L's Waterford Steam Electric sion Generating Station - Unit No.3 MSU Middle South Utilities,Inc. (nuclear) NOPSI New Orleans Public Service Inc. 6
l l ! ' MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS FINANCIAL CONDm0N foreignbankloan agree- with SFAS No.98;however, affected by the outcome of The Com- ments. The termination of it is accounted for as a sale the Council's consideration pany's financialposition was these agreements resulted in and leaseback for regulatory of municipalization of favorably affected when,on the expiration of a number of and income tax purposes. NOPSI's electric and gas June 24,1988,the United financial covenants and Lowercost of capitaland utility properties. States Supreme Court restrictions binding upon the accelerated useof tax As discussed rendered a decision that is Company, including,in benefits as a result of the sale in Note 7, " Commitments fundamentally important to particular,an agreement by and leaschack transaction and Contingencies-FERC the continuing viability of the Company not to pay any will enable the Company to Audit," the FERC has the Company as a wholesale dividends on its common charge the System operating performed an audit of the seller of power to the System stock to MSU untilallloans companies lower than Company and the Grand operatingcompanies. As outstanding under these previously projected rates Gulf Station as part ofits discussed in Note 8, " Rate agreements were fully paid. for Grand Gulf 1 capacity regulatory function of and Regulatory Matters- In this connection, on De- and energy. See Note 9, auditing utilities subject to Rate Activity-System cember 16,1988 the Com- " Leases," for further its jurisdiction. If certain of Operating Companics," the pany paid a dividend on information. the FERC Staff's findings June 24 Decision affirmed common stock of $300 While the stemming from such audit MP&L's right to recover its million toits common June 24 Decision and the are ultimately sustained,the Grand Gulf 1-related costs stockholder,MSU. This other events stated above resulting charges against net and upheld theprinciple of dividend was the first ever represent and reflect very fa- income and refund require-federalpreemption which is paid by the Company. In vorable developments,a ments would have a materi-necessary to secure implem- addition,on February 21, number of significant ally adverse impact on the entation of the Company's 1989 the Company paid uncertainties continue to Company and the Com-federally mandated whole- another dividend on com- confront the Company, pany's prospective earnings, sale rates through the retail mon stock of $47.3 million eitherdirectly,orindirectly cash flow and financial ratestructuresof theSystem to MSU. through potentially adverse condition would be ad-operating companies. Funber,on effects upon the ability of the versely affected. In addition, December 28,1988, the System operating companies, As discussed several other des elopments, Company entered into ar- the Company's only in Note 7, " Commitments listed below, contributed in rangements for the sale and customers, to continue to and Contingencies-varying degrees to the leaseback of an approximate make monthly payments to Suspended Construction Company'simproved 11.5% ownership intcrest in the Company for Grand Project-Grand Gulf 2," i financial position. On De- Grand Gulf 1 for an aggre- Gulf I capacity and energy. construction on Grand Gulf ) cember 1,1988, the Com- gate cash consideration of These uncertainties relate to 2 has been suspended since pany consummated certain $500 million. The net (1)the potential adverse September 1985. As of remarketing arrangements proceeds received by the impact on the Company if December 31,1988, the ; relating to its Series A and Company were used on certain findings stemming Company had recorded j Series C PCRBs. In connec- January 22,1989 to redeem from a FERC audit of the approximately $905 million l tion with these remarketings, $300 million ofits First Company and the Grand on its balance sheet as an l approximately $193.6 Mongage Bonds,16% Series Gulf Station are ultimately investment in Grand Gulf 2. million of funds (including due 2000, $100 million ofits sustained,(2)the ultimate In December 1986, based on approximately 50.7 million First Mongage Bonds, resolutionof thestatusof therecommendationof a of interest) that had been 15 3/8% Series due 2000,and Grand Gulf 2, construction special group of Middle held on deposit in an escrow $87.697 million ofits First of which has been sus- South Electric System account for the benefit of the Mongage Bonds,113/8% pended, including related officials and outside consult- j banks providing the letter of Series due 2016,in each case accounting and rate issues, ants, the Company's Board credit for the Series C at the redemption price of and (3)the outcome of con- of Directors (with the MSU !
. PCRBs were released. The 100% of the principal tinuing conu oversies Board of Directors concur-Company applied a portion amount plus accrued interest concerning Grand Gulf 1, ring) decided that suspension of the escrow funds, together to the date of redemption. including a $135 million of construction should be with other available funds, to The sale and leaseback prudence disallowance with continued and that a further prepay in full the amounts transactions accounted for respect to NOPSI. In decision be made by 1990 on J remaining outstanding under in the Company's financial addition, the Company's the future status of Grand )
the Company's U.S.and statements as a financing financial position could be Gulf 2 in light of alternatives transaction in accordance available at that time. 7
t l l MANAGEMENT'S SNANCIAL DISCUSSION AND ANALYSIS, CONT. Syurm Lnergy Rewarm. Inc theretailratesof theSystem consequences of the Febru- established bytheJune 13 operatingcompanies. ary 4 Resolution,solong as it Decision could give rise to AP&L, LP&L and MP&L remains in effect,are that additionallitigation, disputes currently have retail rate NOPSI's ability to effect and challenges in the affected structures in effect that long- or short-term external jurisdictions. See Note 8, enable them to meet their borrowings or to satisfy " Rate and Regulatory The Company does not respective Grand Gulf 1 potential obligations to Matters-Rate Activity-intend, prior to a further obligations to the Company. purchase allor a portion of System Operating Compa-decision concerning the However, with respect to its outstanding G&R Bonds nies," forinformation status of Grand Gulf 2,to NOPSI,a disallowance by will continue to be signifi- relatingto theJune24 make an application to the the Councilof $135 million cantly and adversely af- Decision affirmingthe FERC with respect to the of NOPSI's Grand Gulf 1- fected,and NOPSI could principlethat FERC recovery through rates of the related costs is stillbeing ultimately be rendered allocations of Grand Gulf 1 Company's investmentin litigated by NOPSIin both insolvent. In this connec- capacity and energy costs Grand Gulf 2. During 1989, federal and state courts. In tion, NOPSI has continued amongthe System operating the Companywillanalyze this connection,the United to retain independent special companies are binding upon the future status of Grand States Supreme Court has counselexperienced in state and local regulatory Gulf 2. Referenceis hereby agreed to review the ques- bankruptcy matters to help authorities. made to Note 7, " Commit- tion of whether the federal evaluate the options available Further, toNOPSI. SeeNote7, various state andlocal ments and Contingencies- courts have discretion to Suspended Construction abstain from taking jurisdic- " Commitments and Contin- regulatory bodies have been Project-Grand Gulf 2," for tion over NOPSI's petition gencies-NOPSI Prudence consideringinitiating a further information con- seeking reversal of this Disallowance and Other proceeding before the FERC cerning Grand Gulf 2, disallowance based on Controversies Concerning regarding various Grand includingissues regarding principles of federalpreemp- Grand Gulf 1." Gulf 1 prudenceissues. See the appropriate recovery by tion. NOPSI believes that In addition to Note 8, " Rate and Regula-the Company ofits invest- the February 4 Resolution is the foregoing, theJune 13 tory Matters-Grand Gulf 1 mentin Grand Gulf 2 and in violation of the Federal Decision,whereby the Prudence " ! Power Act, applicable FERC FERC allocated the capacity Also,the thepossible materialadverse financial effect upon the orders and federallaw as and energy from the Com- Councilhas been consider-Company,MSU and interpreted by the United pany's share of Grand Gulf 1 ingthe municipalization by possibly the System operat- States Supreme Court and the costs associated the City of NOPSI's electric ing companies of nonre- (including, most recently,in therewith among the System and gas utility properties. theJune 24 Decision),and operating companies,waa See Note 7, " Commitments covery of a substantial portion of such investment. willultimately be so declared reaffirmed by the FERCin and Contingencies-NOPSI Also, see Note 7, " Commit- by the courts. See Note 8, its November 30 Order. Municipalization." ments and Contingencies- " Rate and Regulatory However,the November 30 Reference is SFAS Nos.71,90 and 101," Matters-Rate Activity- Order has been appealed by made to Note 2, " Income forinformation regarding System Operating Compa- various parties to the D.C. Taxes," forinformation the effect on the Company of nies." Circuit. See Note 8, " Rate concerning theissuance of certain accountingstandards in the and Regulatory Matters- SFAS No.96, Accounting meantime,the February 4 Unit Power Sales Agree- forIncomeTaxes,and SFAS should Grand Gulf 2 he Resolution willcontinue to ment." It is not possible at No.100, Accountingfor cancelled or should cancella-tion become probable. have a substantialand this time to predict the IncomeTaxes-Deferral of adverse effect upon NOPSI's ultimateoutcomeof this the EffectiveDate of FASB TheJune24 financial condition and to matter, including possible Statement No.96, and the Decision affirmed the principle that state and local constrain NOPSI's cash reallocation,if any,orthe potential effect on the Com-regulatory authorities must flow. In order to mitigate effect thereof upon the pany upon impicmentation. recognize Grand Gulf 1- the negative effects upon its Company and the System related costs as reasonable financialcondition and cash operating companies, operating expenses in setting flow,NOPSI has imple- including possible refunds,if mented cash conservation any. Any materialmodifica-and other measures. The tion of the allocation 8
.)
l ! l b UQUIDITY AND CAPITAL including the continued allo- construcuon actmt es at of regulatory and judicial RESOURCES cation of Grand Gulf 1 Grand Gulf 2 except for proceedings, financing plans The Com- capacity and energy in those activities which are and access to capital markets. pany's capital and external accordance with theJune 13 necessary for demobilization If future events vary signifi-financing requirements for Decision and the November and suspension;and certain cantly from these assump-the period 1989-1991 are 30 Order;the resolution in other assumptions and tions, material changes in estimated as shown below. the Company's favor of the judgments with respect to, capitaland externalfinancing Such requirements are based FERC auditissues;the among other things, earn a requirements could roult. l-on a number of assumptions continued suspension of ings, dividends,the outcome Capital and external financing requirements for the Company for the period 1989-1991 are estimated to be as follows: 1989 1990 1991 Total Capital Requirements: (In Millmns) Construction expenditures $ 41.0 $ 43.5 $ 39.5 $124.0 Nuclear fuel not financed under lease 26.1 0.0 0.0 26.1 Total capital requirements $ 67.1 $ 43.5 $ 39.5 $150.1 Financing Requirements: Totalcapital requirements $ 67.1 $ 43.5 5 39.5 $150.1 Less internally generated funds and changes in cash and short term debt 287.1 138.5 109.5 535.1 Net financing requirements (220.0) (95.0) (70.0) (385.0) Plus refinancing requirements: Long-term debt maturities and sinking funds (1) 0.0 0.0 330.0 330.0 Total external financing requirements $(220. ) $(95.0) $260.0 $(55.0) (1) The Company expects that its Series B PCRBs will be remarketed in June 1989. However,in the event that the remarketing is unsuccessful, the Company may require additional funds to reacquire up to $27.1 million princi-pal amount of such bonds. Such amount is not included in the above table. The Com- upon the Company,the In general,the Regulatory Matters"),the pany anticipates that its Company may be required Company's ability to access credit ratings of the Com-projected internally gener- to obtain funds from the capital markets and to pany's securities, market ated funds for the period external sources, raise funds from external conditions and contractual 1939-1991 will enable it to In addition to sources will be subject to and regulatory restrictions largely satisfy its cash the foregoing,the Company receipt of SEC approvaland limiting the amount of first requirements. However,a could possibly enterinto may be affected by a number mortgage bonds and other number of uncertainties further arrangements for the of factors,includinglegal securities that the Company continue to confront the sale and leaseback of and regulatory develop- may issue. Companyand the Middle property in which the ments affecting the Com-South Electric System and, proceeds from :uch transac- pany and the System depending upon the ultimate tions could be used to retire operating companies (as resolution of such uncertain- certain debt issues at par, discussed in Note 7, "Com-ties and the effects thereof mitments and Contingen-cies," and Note 8, " Rate and 9
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS, CONT. System t wgy Rewmrs. lm The Com- sufficient capital (1)to facilities and equipment pany is authorized by the maintain the Company's required in connection with' SEC through 1990 to effect equity capital at an amount at the operation of these plants, short-term borrowings in an least equalto 35 percent ofits in accordance with plans and aggregate amount outstand- total capitalization (exclud- budgets approved by AP&L ing at any one time of up to ing short-term debt),(2)to and LP&L,with the pay-Underthe $125 million. Additional construct,own and placein ment of the costs of such Company's mortgage, the borrowings by the Com- commercial operation the facilities and equipment to amount of additional first pany up to a maximum out- Grand Gulf Station,(3)to befunded directly by AP&L mortgage bonds that the standing at any one time of provide for pre-operating or LP&L,as the case may be. Company can issuein the 10 percent ofits capitaliza- expenses and interest charges In conjunction with this futureis contingent upon tion are subject to further of the Company,(4)to plan,those employees earnings and the amount of SEC approval. However, permit the continuation of (numbering approximately unfunded bondable propeny the Company is currently commercialoperation after 1,900 at December 31,1988) available to support the limited byits Series B PCRB commencement thereof,and - ofotherMiddleSouth issuance of additional first letter of credit arrangement (5)to pay in full allindebted- Electric System companies mortgagebonds. AtDecem- to short-term borrowings in ness for borrowed money of engaged in the operation of ber31,1988,the carnings an aggregate amount not the Company, whether at these units would be trans-coverage for the Company's exceeding 5 percent of capi- maturity, on prepayment, on ferred to and become first mortgage bonds,which talization(approximately acceleration or otherwise. employeesof theCompany. must be a minimum of 1.5 $234.8 million at December In May 1988, The Company expects that times the proforma annual 31,1988). At December 31, plans were announced for the proposed transactions bondinterest requirements 1988, the Company did not the Company to assume op- will not have any material forissuance of additional have any banklines of crating responsibility, effect upon its future earn-first mortgage bonds (subject credit. The Company is also subject to AP&L and LP&L ings, capital requirements or to increase to two times authorized by the SEC oversight,for the ANO cashflow. Applicationsfor coverage at the earlier of six through 1990 to effect short- Station and Waterford 3. approvalof theproposedar-months aftercommercial term borrowings through Under the proposed arrange- rangements have been filed operation of Grand Gulf 2 or the Money Pool, subject to ments,which must be with appropriate regulatory two years afterabandonment the above limitations. The approved by various regula- authorities,and hearings of the unit),was 2.70. At Company's ability to tory bodies, AP&L and before the APSC and the December 31,1988, based borrow from the Money LP&L would retain owner- LPSC on this matterare upon the more restrictive of Poolis subject to the availa- ship of their respective expected to be held during the earnings coverage and bility of funds,which at any nuclear generating units as the second quarter of 1989. bondable propeny tests particulartime may be well as the associated under the Company's limited. At December 31, capacity and energy entitle-mortgage,the Company 1988,the Company had no ments and would pay or could haveissued approxi- outstanding borrowings reimburse the Company,on mately $256million of from the Money Pool. amonthlybasis,forthe costs additional first mortgage In connection associated with operating bonds. In addition,the withthefinancingof the these units in accordance Company may, subject to Grand Gulf Station, MSU with applicable rules and meetingcertain conditions, has undertakenin the regulations of the SEC issue first mortgage bonds Capital Funds Agreement to (which require that services against the retirement of provide or cause to be be rendered at cost). In outstanding first mortgage provided to the Company addition,the Company bonds without meetingan would act as agent for AP&L earnings test and without and LP&L in the purchase reference to unfunded and acquisition of additional bondable propeny. 10
l RESULTS OF OPERATIONS capacity factor,which is a ity during a 24-hour period. Listed below j Grand Gulf 1 measureof theunit's In addition, Grand Gulf 1 are those factors affecting l
- was on-line for 344 of 366 performance (based on a generated a total of 9,983,960 results of operations for !
days in 1988 as compared to ratio of net electrical genera- megawatt-hours in 1988, which significant changes 296 of 365 days in 1987. tion to maximum depend- which exceeds the previous have occurred for the year Grand Gulf I returned to able capacity),was 95.5% for U.S. record of 9,347,386 1988 as compared to 1987 power from the second 1988 as compared to 77.2% megawatt-hours set by and for the year 1987 as refueling outage onJanuary for 1987. InJanuary 1988, another nuclear station in compared to 1986. The 6,1988. The outage b:gan Grand Gulf 1 set a world 1985. For 1988, Grand Gulf principal reasons for the November 7,1987 and record for boiling water 1 was ranked as the number significant changes from required 60 days to com- reactors by producing 31,130 four plant in the world in period to period are dis-plete. Grand Gulf l's megawatt-hours of electric- gross generation. cussed following the tables. 1988 Comparedto 1987 or Percent Description 1988 1987 (Decrease) Change (in Afillions) Netincome $ 180.3 $ 198.8 $ (18.5) (9.3) Fuelexpense 129.4 66.8 62.6 93.8 Maintenance expense 14.1 28.7 (14.6) (50.7) Depreciation expense 95.7 95.4 0.3 0.3 Income taxes-operations 152.0 201.2 (49.2) (24.5) Miscellaneous income and deductions-net 29.2 11.8 17.4 146.5 Totalinterest expense (excluding AFDC) 287.3 293.0 (5.7) (1.9) AFDC-equity and borrowed (13.8) (4.6) (9.2) (198.4) 1987 Compared to 1986 I"C[#** r Percent Description 1987 1986 (Decrease) Change (In Afillions) Net income $ 198.8 $ 189.1 $ 9.7 5.1 Fuelexpense 66.8 45.2 21.6 47.7 Maintenance expense 28.7 31.8 (3.1) (9.8) Depreciation expense 95.4 58.1 37.3 64.2 Ineome taxes-operations 201.2 233.9 (32.7) (14.0) Miscellaneous income and deductions-net 11.8 6.0 5.8 98.8 Totalinterest expense (excluding AFDC) 293.0 319.4 (26.4) (8.3) AFDC-equity and borrowed (4.6) (4.6) - - 11
i MANAGEMENT'S FINANCIAL Dt3CUS$10N AND ANALYSIS, CONT.
. Synem faregy Rewnoven. loc l The Com- were theprimary factors ward periods resukingfrom i pany's operating revenues resultingin the changein net the Company's federal tax 1 recover operating expenses, income during this period. lossesincludedin the MSU i depreciation and capital Fuelexpense consolidated income tax i costs attributable to Grand increased in 1988 as a result return. In the years 1988, Gulf 1. The capital costs are of an increasein net genera- 1987,and 1986, respectively, -
' Gross Generation computed byallowinga tion coupled with an increase the Companycharged j u,g,w.u4aan return (currently set ata rate in the cost of fuelthatwas approximately $152 million, ;
U"=#*ad of 14 percent)on the Com- placedin serviceduringthe $201 million,and $234 pany's common equity refuelingoutage completed million ofincome tax 10 funds allocable toits inJanuary 1988. The expense to operations due to l investment in the unit and increaseinfuelexpensein the recognition of taxable _ adding to such amount the 1987 was also due to an earnings related to the 8 Company's effective interest increase in net generation as commercial operation of cost forits long-term debt compared to 1986. Grand Gulf 1. The decrease __ allocable to itsinvestmentin Themajority inincome taxes on opera-6 the unit. of maintenance expenses tions in each comparable Thedecrease related to Grand Gulfl's period resulted primarily - _ ___ in the Company's 1988 net second refueling outage, from the enactment of the 4 income was primarily due to which ran from November Tax Reform Act of1986, a reduction in the Com- 1987 to earlyJanuary 1988, which effectively reduced __ _._ ____ ___ pany's rate of return on wereincurredin1987. Asa the maximum corporate 2 common equity from 16 result, maintenance expense income tax rate from 46% to percent to 14 percent, for1988 decreasedin 34% effectiveJuly 1,1987, _ . _ _ _ _ effectiveJuly 1,1987, applied comparison to 1987. The and theapplication of the 0 88 87 86 85 to alower net unitinvest- slight decreasein mainte- reduced rate to alower ment,and anincrease in nance expensein 1987 was operatingincome for each interest expense not recov- primarily due to a small year. cred through rates. The decreasein expenses related Miscellaneous decrease waspartially offset to Grand Gulf l's second income and deductions-net by anincreasein the propor- refueling outagein 1987 as increasedin1988 primarily tionate amount of common compared to the first as a result of anincrease in equity in the Company's refueling outagein 1986. interest income due to > Nel income capitalstructure and by an Effective interest earned on the I wan increasein interest income. January 1,1987, the Com- MP&L bonding arrange-na **"" The Com- pany's depreciation method ment,the Series C PCRB pany's 1987 netincome was changed from the units- letter of credit escrow,and 250 increased slightly over1986 of-production method to a the Company's temporary primarily due to a combina- straight-line basis. The use cash investments,allof _ tion of factors. The decrease of the straight-line methodin which maintained higher 200 in overallinterest expense,as 1987 resultedin anincrease average balances when discussed below,resultedin in depreciation expense over compared to the prioryear. _ _ _ __ a decrease ininterest expense theprior yearprimarily due Theincreasein miscellane- ) 150 not recovered through rates. to the fact that the units-of- ousincome and deductions-In addition,anincreasein production method was net in 1987 also resulted _ __ _._ __ __ interest income on tempo- appliedin ayearof signifi- from anincreaseininterest 100 raryinvestments,which also cantly lower generation. income as compared to 1986. is not reflected in rates, Incometaxes Totalinterest , i __ _ _ __ contributed to an increasein on the Company'sincome expense (excluding AFDC) i 50 netincome. These changes, statement prior to commer- declined slightlyin1988 due partially offsetby anincrease cialoperation of Grand Gulf to a decreasein amounts out-I in taxes on otherincome, 1 reflected the tax benefit standing under the Com-O 88 87 86 85 that had been or willbe pany's U.S.and foreign bank realized during the carryfor- loans and the repayment in January 1988 of $158 million 12
of short term notes issued in mandated wholesale rates condition would be ad-April 1987. These declines through the retailrate versely affected if certain were partially offset by an structures of the System findings stemming from a increasein interest expense operatingcompanies. Asa FERC audit of the Com-associated with the issuance result ofits improved pany and the Grand Gulf of additional first mortgage financialposition,the Station are ultimately bonds in late 1987. In Company successfully sustained. In addition,the operatina Revenues addition,the decrease in total completed severalfinancing Company's financial imuun arrangements during 1988. """'"'"'"' interest expensein 1987 as condition could be materi-compared to 1986 was The Company remarketed allyand adversely affected in primarily due to a decrease in its Series A and Series C the event a substantial 1,000 amounts outstanding under PCRBs,which were previ- portion ofits investment in the Company's U.S.and ously secured by letters of Grand Gulf 2 is ultimately _ _ foreign bank loans. This credit,on a fixed rate,long- not recovered. Finally,the 800 decline was partially offset term unsecured basis, outcome of continuing by increases in interest resultingin the release of controversies concerning __ - . . _ expense associated with the funds heldin escrowin Grand Gulf 1, including a 600 issuanceof additionalfirst connection with one of the $135 million prudence mortgage bonds in late 1986 associated letters of credit, disallowance with respect to _ -._ _ _ and 1987 and the issuance in which funds were used to NOPSI,and the outcome of 400 1987 of short term notes, as prepayin full all amounts the Council's consideration discussed above. remaining outstanding under of the municipalization of _ _ _ _ The net the Company's U.S. and NOPSI's electric and gas 200 AFDC charges for 1986 foreign bank loan agree- utility properties cannot be through 1988 resulted ments. Upon termination of predicted. _ _ _ -- primarily from the Com- these agreements, the See Notes 7,8 0 88 87 86 83 pany's utilization of state tax Company was permitted to and 9 fora further discussion loss carryforwards and the payits first common stock of these and other matters. recognitionof thesetax dividend,in the amount of benefits as a reduction of the $300 million. In addition, cost of plant investment. the Company successfully The net AFDC-equity and completed a transaction for borrowed chargeincreased the sale and leaseback of an in 1988 primarily as a result approximate 11.5% owner- Operatina Expenses of the greater utilization of ship interest in Grand Gulf twnan state tax loss carryforwards 1. The Company used the in connection with the tax net proceeds from this _ gain resulting from the sale transaction to redeemin 1,000 and leaseback transaction, early 1989 all or a portion of ! discussed in Note 9, certain series ofits outstand-
" Leases." ing first mortgage bonds. 800 While the
SUMMARY
June 24 Decision and the The Com- other events stated above 600 pany's financialposition has represent and reflect very fa-l been favorably affected by vorable developments, the _ _ theJune 24 Decision of the Company continues to face a 400 United States Supreme number of significant Court upholdingthe uncertainties. The Com- _ _ __ _ principle of federal preemp- pany's prospective earnings, 200 tion which is necessary to cash flow and financial secureimplementation of the _ __ _ l Company's federally 0 88 87 86 85 1 l l l l 13
.n
' BALANCE SHEETS Syarm forrgy Rewntces inc.
For Due Ymrs Erutal[kwnber31 1988 1987 g,g, fin ThousandsI t!!ilityl%ml(Notes 1,5and 71-Electric $3,411,308 53,359,430 Consta ction work in progress 36,955 24,662 Nuckar fuel (Note 9) 205,382 218,374 Total 3,653,645 3,602,466 Less - Accumulated depreciation 245,444 170,880 1 1 Utility plant- net 3,408,201 3,431,586 Otherburstments: Irtter of credit escrow (Note 5) - 108,562 Decommissioning trust fund (Note 1) 4,094 2,774 Total 4,094 111,336 Curwn!Aucts: Cash 349 254 Temporary investments - at cost, which approximates market (Note 9) 528.670 234,279 Total cash and cash equivalent.s (Note 11 529,019 234,533 llonding trust arnmgement (Note 8) - 101,202 Accounts receivable: Associated companies 83,035 90,745 Other 4,3 M 2fu9 Materials a nd . supplies - at average cost 42,315 37,796 Prepayments 2,602 2.742 Unamortized fuel expense 306 1,575 other 5,206 6,844 Total 666,867 478.286 Ikfem dih bits: Suspended construction project (Note 7) 904,984 889,700 Future ienefits related to AFL)C(Notes 1 and 2) 148,770 492,755 Unamonized premium on reacquired debt 10,598 13,424 Other 16,735 5,162 Total 1,081,087 1 A01,121 Total $5,160,249 55,422,329 kt* Notes to Financsal Statements. 14
R>r The hws EndedIkwnher31 1988 1987 Cafsitali:ation andliabilities un Thousando Capitali:ation: Co nmon stock, no par value, authorized 1,000,000 shares; $ 789,350 $ 789,350 issued and outstanding 789,350 shares (Note 4) Retained earnings (Note 6) 1,240,219 1,359,905 Total common shareholder's equity 2,029,569 2,149,255 long-tenn debt (Notes 3,5,7 and 9) 2.553,002 2,245,155 Total 4,582,571 4,394,410 Curwnt Liabihties: Currently maturing long-term debt (Notes 3,5 and 7) 80,600 260,177 Notes payable (Note 3) - 158,000 Obligations under capital leases (Note 9) 181,632 165,550 Accounts payable: Associated companies 718 1,919 Other 58,765 32,423 Taxes accrued 33,532 25,685 Interest accrued 46,090 54,327 Other \ 135 3,682
\
Total 401,472 701,763 IkfemsiCrrrlits: Accumulated deferred income taxes (Notes 1 and 2) 143,920 311,378 Accumulated deferred investmen: tax credits (Notes 1 and 2) 27,490 11,828 Other 4,796 2,950 Total 176,206 326,156 i l l Commitments andContinger: 'es(Notes 7and8) l Total $5,160,249 $5,422,329 t l 15
1 l l STATEMENTS OFINCOME l Synem I wo Rewmn,Iw. lkirThe )kurs EndalIkcern/w31 1988 1987 1986 (In %sando ' O/xmting Reirinus $933,828 5')62.549 5959,737 Ofcrating Eqx>nsts: Operation: 1:uel 129,423 66,75 45,199 Other 92,859- 95,888 98,172 Maintenance 14,139 28,675 31,801 Depreciation and decommissioning %,854 96,545 59,215 Taxes other than income taxes 27,571 27,198 23,688 Inmme taxes (Note 2) 151,997 201,195 233,881 Total 512,843 516,276 491,986 O/ crating /ncorne 420,985 446,273 467,751 OtherIncorne: Allowance for equity funds used during construction (Note 1 ) 1,112 225 972 Miscellaneous income and deductions - net 29,215 11,853 5,962 ( Income taxes- credit (Notes I and 2) 31,226 38,265 39,406 Total 61,553 50,343 46.340 Intertst Chargis: long-term debt 279,470 273,781 314.297 Power purchase advances
- - 802 Other - net 7,870 19.193 4,294 Allowance for borrowed funds uwd during construction (Note 1) 14,884 4.841 5,563 Total 302,224 297,815 324.956 -
NetIncorne $180,314 5198,801 5189,135 Sw Notes to FinancialStaternenn STATEMENTS OF RETAINED EARNINGS nr ne )kson EndalIkternins31 1988 1987 1986 (In nousands1
$1,359,905 51,161,104 5 971,969 Reteimlhmgs,Januarr 1 180,314 198,801 189,135 Add- M t income Total 1,540,219 1,359,905 1,161,104 Deduct - Cash dividends on common stock (Note 6) 300,000 - -
Retuimvlliantings, Ikcember31 (Note 6) $1,240,219 51,359,905 51,161,1N hw Notts to FtnancialStaternents. 16
~ STATEMENTS OF CASH FLOWS 1
For M* l' ears Endalikcember31 1988 1987 '1986-L OfN rating Actit*iths: Un Wwsands) l5 Netincome . $ 180,314 5198,801 5189,135 ~
=
Noncash items included in net income: Depreciation ' 95,741 - 95,432 58,132 Current incurne tax impact of future benefits related to AFDC(Notes 1 and 2) 258,513 82,909 (57,523) Deferredincome taxes (167.459) 64,992 87,729 " Irnestment tax credits- net 15,662 (277)- (243) Allowance for equity funds used during construdion (1,112) (225) (972)- Amortizatk>n of debt discount 6,643 5,556 2,624 i llurnup of nuclear fuel not under lease 2,250 - - l Changes in:- Accounts receivable 6,175 (l4,827) 1,484' Accounts payable 25,141 (14,105) 10,327 Unamortiaxi fuel expense 1,269 1,285 . (1,169) Taxes and interest accmed (390) (54,728) 61,015 Other current assets and liabilities (6,288) (33,560) 64,323 Ilonding trust arrangement (Note 8) 101.202 (101,202) - Decommissioning trust (1,320) (2,774) -- Other 10,565 18,194 (48,566) Net cash flow pmvided by operating activities 526,906 245,471 .369,296 Innsting Actit'iths. Construction expenditures (24,377) (24,194) (40,782) Alknvance for equity funds used during construction 1,112 225 972 Nuclear fuel expenditures (103,001) (119,27D (277) Expenditures on suspended construction project (Note 7) (12,194) (10,403) ' - Net cash flow used by investing activities (138,460) (153,6i3) (40,087) FinancingActit'itus: Pnuxxis from issuance of: First mortgage bonds - 300,000 1,050,0(10 i 11ank notes and other long-term debt (Notes 5 and 9) 500,000 - 90,000 l Pnuxxis from sale and leaseback of nuclear fuel 129,827 66,446 34,419 ) Retirement of first mortgage Ix>nds - - (324,265) Retirement of bank notes and other long-term debt (Note 5) (374,349) (335,101) (1,097,717) Pnu eds from letter of credit escrow (Notes 3 and 5) 192.885 - - letter of credit eserow payrnents (Note 3) (84,323) (89,400) (19,162) Change in short-term borrowings (Note 3) (158,000) 158,(KX) - Common stock dividend payments (Note 6) (300,000) - - Power purchase advance payments - - (51,152) i l- Net cash flow from financing activities (93,960) 99,945 (317,877) Net increase in cash and cash equivalents 294,486 191,773 11,332 Cash and cash equivalents at beginning of year 234,533 42,760 31,428 Cash and cash equivalents at end of year $ 529,019 5234,533 542,760 SupplementalDischsurts ofCash Flose infonnation: , Cash paid during the year fon J Interest $ 310,708 5302,321 5 307,244 i income taxes (net of refunds) $ 6,543 5 70,146 5 49,854 Nuncash innsting and Financing Actitstics: Ca pital lease obligations incurred (Note 9) $ 50,000 - -
$ 85,472 5 14,219
]
Plant impact of future benefits related to AFDC See h%s to Financkd Statements. y
.i l . _ _ . - _ . . _ _ _ _ _ - ____-. __ _ ____ _ _ _ _ _ ______ - Q
1 NOTES TO FINANCIAL STATEMENTS sparm rnergy Rewwm. Inc System of Accounts The accounts of the Company ' are maintained in accordance with the system of accounts prescribed by the FERC. In connection with the sale and leaseback transaction discussed in Note 9, " Leases," the I transaction is accounted for in the Company's financial stamments as a Gnandng transacdon in acodance wid W
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POUCIES . No. 98; however, it is accounted for as a sale and leaseback for Organization regulatory and income tax purposes. System Energy Resources, Inc., formerly Middle South Energy, Inc., is a wholly-owned Postretirement Benefits subsidiary of MSU. The Company was created in 1974 to The Company participates in finance and construct certain base-load generating units for the an MSU System postretirement plan covering substantially all Middle South Electric System. of its employees. The Company's policy is to fund pension The Company is a generating costs in accordance with contribution guidelines established company providing electricity to the System operating by the Employee Retirement income Security Act of 1974, as companies and is responsible for the management, operation amended, and to fund and record other postretirement plan and maintenance of the Grand Gulf Station, a two-unit nuclear costs on a cash basis, generating station located near Port Gibson, Mississippi . The Grand Gulf Station is designed as two 1250 megawatt nucleer income Taxes generating units. The Company sells capacity and energy from The Company joins its parent Grand Gulf I to the System operating companies. Grand Gulf and affiliates in the filing of a consolidated Federalincome tax 2 is partially complete and construction on the unit has been return. Pursuant to an intra-System tax allocation agreement, suspended since 1985. On July 28,1986, the name of Middle income taxes are allocated to the Company in proportion to its South Energy,Inc. was changed to System Energy Resources, contribution to consolidated taxable income. In accordance Inc. and, effective December 20,1986, the Company assumed with SEC regulations, no System company is required to pay the primary responsibilities, previously assigned to MP& L, for more income tax than it would have paid had it filed a separate the management, operation and maintenance of the Grand income tax return. Gulf Station. On October 28,1986, the Company changed the Deferred income taxes are locatica of its principal business offices from New Orleans, provided for differences between book and taxable income to Louisiana toJackson, Mississippi. the extent permitted by the Company's regulatory body for The Company has a combined ratemaking purposes. Investment tax credits allocated to the ownership and leasehold interest of 90% in the Grand Gulf Company are deferred and amortized based upon the average Station. SMEPA has an undivided ownership interest of 10% usefullife of the related property in a manner consistent with , in the Grand Gulf Station.The Company records its invest- ratemaking treatment. ! ment associated with the Grand Gulf Station to the extent to in addition,the Company files which it owns and maintains a leasehold interest in the generat- a consolidated Mississippi state income tax return with certain ing station. other System companies. The Company had no operat-ing revenues or expenses prior to July 1,1985. The NRC Allowance for Funds Used During Construction issued a full power operating license for Grand Gulf 1 on In accordance with the August 31,1984. The unit began commercial operation on regulatory system of accounts, the Company capitalizes July 1,1985. AFDC as an appropriate cost of utility plant. Under this utility industry practice, construction work in progress on the balance sheet is charged and the income statement is credited for the approximate net composite interest cost of borrowed funds and for a reasonable return on the equity funds used for construction. This procedure is intended to remove from the a i
I I 1 l l
' income statement the effect of the cost of financing the Depreciation on Grand Gulf 1 l construction program, and results in treating the AFDC was computed using the units-of-production method for the ,
charges in the same manner as construction labor and material initial twelve months of commercial operation (which began l costs. As non-cash items, thesc credits to the income statement July 1,1985) and, with FERC approval, for an additional six have no effect on current cash earnings. After the property is months thereafter. Subsequent to December 31,1986, depre-placed in service, the AFDC charged to construction costs is ciation has been computed on a straight-line basis. Deprecia-recoverable from customers through depreciation provisions tion provisions on average depreciable property approximated included in rates charged for utility service. During the first 2.85% in 1988,2.85% in 1987, and 1.8% in 1986. On October half of 1985, the Company used an accrual rate for AFDC 30,1986, the Company filed an application with the FERC based on a return on average common equity of 14% plus proposing a 3.1% straight-line depreciation rate, and the actualinterest cost net of related income taxes. As a result of FERC initiated a proceeding to determine the appropriate theJune 13 Decision, the 14% return on common equity rate straight-line depreciation rate for Grand Gulf 1. On April 28, was increased to 16% effectiveJuly 1,1985. See Note 8, " Rate 1987, a settlement in principle was achieved which, among and Regulatory Matters," for information with respect to a other things, decreased the depreciation rate in the Unit Power settlement which, among other things, reduced the 16% rate of Sales Agreement from 3.10% to 2.85%, retroactive toJanuary return on common equity to 14% retroactive toJuly 1,1987. 1,1987. Such settlement was approved by the FERC on The Company's effective composite AFDC rate was 10.4%, September 15,1987. 6.0% and 10.0% for 1988,1987 and 1986, respectively. The Company is recovering AFDC attributable to Grand approximately $1.1 million per year for nuclear plant decom-Gulf I ceased accruing as ofJuly 1,1985, the commercial missioning costs in connection with its combined ownership operation date of the unit. and leasehold interest of 90% in Grand Gulf 1 and is deposit-On September 18,1985,the ing these monies in a tax qualified external fund held by a MPSC issued an Order Directing Suspension of Construction trustee. The Company was permitted by the FERC to recover of Grand Gulf 2, which directed the Company and MP&L to titese amounts based on studies of the estimated costs of suspend construction of Grand Gulf 2 as of the date of the decommissioning Grand Gulf 1. Order. Following the issuance of the Order, the Company suspended construction of Grand Gulf 2 and ceased accruing Statements of Cash Flows i AFDC on the unit effective September 18,1985. See Note 7, For purposes of the statements
" Commitments and Contingencies-Suspended Construction of cash flows, the Company considers all unrestricted highly Project-Grand Gulf 2," and Note 8, " Rate and Regulatory liquid debt instruments, purchased with a maturity of three Matters-Rate Activity-System Operating Companies." months or less, to be cash equivalents.
Utility Plant, Depreciation and Decommissioning Utility plant is stated at original cost. The cost of additions to utility plant (including l leasehold improvements) includes contracted work, direct l labor and materials, allocable overheads and AFDC . The l costs of units of property retired are removed from utility plant and such costs plus removal costs,less salvage, are charged to accumulated depreciation. Maintenance and repairs of property, and the replacement of items determined to be less than units of property, are charged to operating expenses. Substantially all of the utility plant is subject to the lien of the i ! Company's first mortgage bond indenture. l l 19
NOTES TO FINANCIAL STATEMENTS, CONT. syna-r r,aw-a. ine
- 2. INCOME TAXES Income tax expense (credit) consists of the following:
For the Yee, EndedDecember 3I 1988 1987 1986 N" "*" Current: Federal $264,514 $ 98,215 $106,989 State ,8,,054 Total ,272,568 98,215 106,989 Ceferred - net-Liberalized depreciation 41,628 59,376 75,831 Nuclear fuel (9,491) 13,105 1,157 Capitalized interest (60,510) (617) - Taxes capitalized in the financial statements (2,043) (152) 1,546 Tax gain on sale and leaseback transaction (126,243) - -- Retirements 7,567 - - Amortization of bond reacquisition (1,376) (1,376) 7,913 Alternative minimum tax (4,513) (6,040) - Investment tax credit utilized (15,939) - - State net operating loss 4,239 452 405 Other (778) 244 877 Total (167,459) 64,992 87,729 Investment tax credit adjustments - net 15,662 (277) (243) Recorded income tax expense $ 162,930 $194,475
$12,0,77,1, .
Charged to operations $151,997 $201,195 $233,881 Credited to other income (31,226) (38,265) , (39,406) . Recorded income tax expense 120,771 162,930 194,475 income taxes applied against the ' debt component of AFDC , (8,855) (3,652) (5,281) Totalincome taxes $111,916 $159,278 $189,194 1 ! I f 3 1 1 Deferred income taxes are taxable income, future benefits related to AFDC will expire in provided for differences between book and taxable income to the years 1999 through 2000. To the extent that income tax the extent permitted by the FERC for ratemaking purposes. benefits previously recorded as reductions of plant investment AFDC is excluded for purposes of determining taxable expire or are otherwise reduced, plant investment is increased income. to reflect such reduction. The balance sheet account Investment tax credits allo-described as " future benefits related to AFDC" represents the cated to the Company have been deferred and those relating to tax benefits of the Company's portion of the consolidated Grand Gulf I are being amortized based upon the average Federal tax losses that are expected to be realized during the usefullife of the related property. Unused investment tax loss carryforward period. Such benefits are p aid to the credits at December 31,1988 amounted to $191.0 million after Company when realized in the consolidated retu n of MSU or the 35% reduction required by the Tax Reform Act of 1986. are realized as reductions of income tax liabilities arising from These credits may be applied against Federal income tax the commercial operation of Grand Gulf 1. The income tax liabilities in future years. If not used, they will expire in the benefits realized in 1988 and 1987 amounted to approximately years 1993 through 2002.
$260 million and $95 million, respectively. No benefits were realized in 1986. If not utilized to offset consolidated Federal 20
1 Totalincome taxes differ from the amounts computed by applying the statutory Federalincome g tax rate to income before taxes. The reasons for the differences are as follows: For ehe Years EndedDecem6er31 1988 1987 1986 (in Thousands)
% of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income Computed at statutory rate $102,369 34.0 $144,692 40.0 $176,461 46.0 Increases (reductions)in tax resulting from:
AFDC 4,682 1.5 1,846 0.5 2,111 0.5 Depreciation 14,193 4.7 16,484 4.6 11,337 3.0 State income taxes net of Federalincome tax expense (3,428) (1.1) 5,384 1.5 5,184 1.4 Ocher 2,955 1.0 (5,476) (1.5) (618) (0.2) Recorded income tax expense 120,771 40.1 162,930 45.1 194,475 50.7 Income taxes applied against the debt component of AFDC (8,855) (1.8) (3,652) (0.6) (5,281) (1.4) Totalincome taxes $111,916 38.3 $159,278 44.5 $189,194 49.3 3 I t 3 3 I I : 1 ; : The alternative minimum tax It is expected that reductions in credit at December 31,1988, was $25.6 million. The credit can deferred taxes resulting from the lower corporate federal tax be carried forward indefinitely and will reduce regular income rates will be reflected as liabilities to customers since the Com-tax in the future. pany's regulator may require any such savings to be passed on In December 1987,the FASB to its customers. Based on a preliminary study, the Company issued SFAS No. 96, Accounting for Income Taxes, which expects that the adoption of SFAS No. 96 will result in a net originally was effective for years beginning after December 15, incrcase in accumulated deferred income taxes with a corre - 1988. In December 1988, the FASB issued SFAS No.100, sponding increase in assets. Results of operations are not Accounting for Income Taxes-Deferral of the Effective Date expected to be significantly impacted by the adoption of SFAS of FASB Statement No. 96, which extended the effective date No. 96. of SFAS No. 96 to fiscal years beginning after December 15, The sale and leaseback transac-1989. SFAS No. 96 expands the requirement to record tion discussed in Note 9, " Leases," is ecounted for in the deferred income taxes for all temporary differences that are Company's financial statements as a financing transaction in reported in one year for financial reporting purposes and a accordance with SFAS No. 98. However, the transaction is ac-different year for tax purposes. This will require the recogni- counted for as a sale and leaseback for regulatory and income tion of deferred tax balances for certain items not previously tax purposes. Therefore, a substantial tax gain was recognized reflected in the financial statements, such as deferred tax in 1988, allowing the Company to utilize a portion ofits liability relating to AFDC. Under the liability method unused net operating loss and investment tax credit carryfor-adopted by SFAS No. 96, deferred tax balances will be based wards. on enacted tax laws at tax rates that are expected to be in effect when the temporary differences reverse. n
k NOTES TO FINANCIAL STATEMENTS, CONT. . 57urm rnergy humrers,inc. The Companyis authorized by the SEC through 1990 to effect short-term borrowings in an aggregate amount outstanding at any one time of up to $125 million. Additional borrowings by the Company up to a maximum outstanding at any one time of 10 percent of its capitalization are subject to further SEC approval. However,
- 3. UNES OF CREDIT AND RELATED BORROWINGS the Company is currently limited by its Series B PCRB letter Prior toJune 28,1985,the of credit arrangement to short-term borrowings in an aggre-Company had two revolving credit agreements with various gate amount not exceeding 5 percent of capitalization (ap-banks providing for borrowings totaling $2,089 million. One proximately $234.8 million at December 31,1988). At Decem-agreement, the U.S. bank loan agreement, was for $1,711 ber 31,1988, the Company did not have any bank lines of million. The other agreement, the foreign bank loan agree- credit. The Company is also authorized by the SEC through ment, was for $378 million. On August 2,1985,and August 9, 1990 to effect short-term borrowings through the Money -
1935, respectively, the foreign and U.S. bank loan agreements Pool, subject to the above limitations. The Company's ability were amended, effective as ofJune 28,1985, to canvert the to borrow from the Money Poolis subject to the availability of borrowings thereunder to term loans. The U.S. bank loan f unds, which at any particular time may be limited. At agreement had a scheduled maturity date of Februarv 5,1989, December 31,1988, the Company had no outstanding bor-subject to mandatory semi-annual payments of $12t million, rowings from the Money Pool. with the unpaid balance due on the maturity date. A portion of On April 30,1987, the Com-these semi-annual payments was applied to an escrow account pany issued and sold $158 million of unsecured promissory for the benefit of certain banks participating in the U.S. bank notes to a group of domestic and foreign institutional inves-loan agreement that provided a letter of credit in connection tors. Proceeds from these notes were used to repay outstand-with the Series C PCRBs. The scheduled maturity date for the ing borrowings from the Money Pool. Such notes, which foreign bank loan agreement was February 5,1989, subject to matured and were paid January 25,1988, bore interest at mandatory semi-annualpayments of $47.25 million. 91/2% per annum through October 27,1987, when the rate On December 1,1988,the was reset to 9.6875% per annum for the remainder of the term. Company consummated certain remarketing arrangements relating toits Series A and Series C PCRBs. In connection The short-term borrowings with these remarketings, the separate bank letters of credit that and the interest rates (determined by dividing applicable had been issued in support of each series were terminated, and interest expense by the average amount borrowed ) for the approximately $193.6 million of funds (including approxi- Company were as follows: mately $0.7 million of interest) that had been held on deposit in an escrow account for the benefit of the banks providing the f,,,3,y,,,g,g,s 3,,,,3,,,, 19gg 19g7 1986 letter of credit for the Series C PCRBs were released. The Company applied a portion of the escrow funds, together with Pdd"i" E "5'"4 other availab!e funds, to prepay in full the $81.92 million and Maximum borrowing - $188,100 -
$32.25 million of borrowings remaining outstanding under the y,,,.end borrowing - $158,000 -
U.S. and foreign bank loan agreements, respectively, thereby Aversee borrowing: terminating these agreements. The termination of these short-term notes $ 10,533 $106,488 - agreements resulted in the expiration of a number of financial Associated companies - $ 22,790 - covenants and restrictions binding upon the Company, Average interest rate: including an agreement by the Company not to pay any During period-dividends on its common stock to MSU until allloans out- Short-term notes 9.7 % 9.6% - standing under the U.S. and foreign bank loan agreements Associated companies - 6.3 % - were fully paid. At end of period-As of December 31,1988,the Short-term notes - 9.7% - Company had two separate " interest rate swap" agreements, Associated companies - - - each with a bar.k, through February 1989 for $26.25 million and $21 million. The Company agreed to make semi-annual interest payments based upon an 11.5% and 11.16% fixed rate, 4. COMMON STOCK respectively,in exchange for semi-annual interest payments by There were no changes in the the banks based upon LIBOR, the London Interbank Offered number of shares of the Company's common stock during the Rate. These agreements, which served to offset fluctuations in years 1988,1987 and 1986. variable rates paid under the foreign bank loan agreement, expiredin February 1989. 22
l I l S. LONG TERM DEBT The PCRBs due2015 at l Thelong-termdebt of the 12.50% and those due 2016 at 9.50% are collateralized by Corapany at December 31,1988 and 1987 was as follows: $47.2 million and $95.6 million, respectively, of non-interest
#* "E
- E* # #" '
1988 1987 currently at 5.5%, are secured by a letter of credit which , (In musands) terminates inJune 1989. See Note 7, " Commitments and ' First Mortgege Bonds: Contingencies-Capital Requirements and Financing." Due 2000,16% Geries $ 300,000 $ 300,000 On December 1,1988,the Due 2000,15 3/8% Series 100,000 100,000 Company consummated certain remarketing arrangements i l Due 2000,11% Series 300,000 300,000 relating to its Series A and Series C PCRBs. The Series A Due 1991,9 7/8% Series 300,000 300,000 PCRBs bear interest, from December 1,1988 until maturity l Due 1996,101/2% Series 250,000 250,000 (December 1,2013), at a fixed rate of 91/2% per annum, and l Due 2016,113/8% Series - 200,000 200,000 the Series C PCRBs bear interest, from December 1,1988 until Due 1994,14% Series 200,000 200,000 maturity (December 1,2014), at a fixed rate of 9 7/8% per Due 1992,14.34% Series 100,000 100,000 annum. In connection with these remarketings, the separate bank letters of credit that had been issued in support of each l Total 1,750,000 1,750,000 series were terminated, and approximately $193.6 milhon of Bad Notes (Note 3): funds (including approximately $0.7 million of interest) that Domestic bank line- had been held on deposit in an escrow account for the benefit Due 1988-1989, at of the banks providing the letter of credit for the Series C 110% of the sum of PCRBs were released. The Company applied a portion of the prime and 1.3% - 247,599 escrow funds, together with other tunds available to the Foreign bank line- Company, to prepay in full the $81.92 million and $32.25 Due 1988-1989, at million of borrowings remaining outstanding under the LIBOR plus 2% - 126,750 Company's U.S. and foreign bank loan agreements, respec-0*E' 0*'*E ****I"**I"E ' *E'#****' E* **""I"**I " Total - 374,34' of these agreements resulted in the expiration of a number of j Pollution Control Revenus Bonds: financial covenants and restrictions binding upon the Com-l Claiborne County, pany, including an agreement by the Company not to pay any Mississippi-- dividends on its common stock to MSU until allloans out-Due 2013, at 91/2% 49,500 49,500 standing under the U.S. and foreign bank loan agreements Due 2014, at 5.5% were fully paid. adjustable / fixed rate 27,100 27,100 On December 28,1988,the l Due 2014, at 9 7/8% 206,000 206,000 Company entered into arrangements for the sale and leaseback Due 2015, at 12.5% 44,000 44,000 of an approximate 11.5% ownership interest in Grand Gulf 1 Due 2016, at 9.5% 90,000 90,000 for an aggregate cash consideration of $500 million. The r.et
~ '
i16,'600 pr ceeds received by the Company were used onJanuary 22, Total 416,600 1989 to redeem $300 million ofits First Mortgage Bonds,16% Other Long-Term Deht, Series duc 2000, $100 million of its First Mortgage Bonds, at 9.8% (Note 9) 500,000 - 15 3/8% Series due 2000, and $87.697 million of its First Mortgage Bonds,113/8% Series due 2016,in each case at the Unamortized discount redemption price of 100% of the principal amount plus on debt (32,998) (35,617) accrued interest to the date of redemption. The sale and leaseback transaction is accounted for in the Company's Total long-term debt 2,633,602 2,505,332 financial statements as a financing transaction in accordance with SFAS No. 98; however,it is accounted for as a sale and Less-Amount due leaseback for regulatory and income tax purposes. See Note 9, within one year 80,600 260,177 " Leases," for furtherinformation. Long-term debt excluding amount due within one year $2,553,002 $2,245,155
- 1 ::i:i 23
NOTES TO FINANCIAL STATEMENTS, CONT. Synem Ewgy Remnes. inc Under the reimbursement agreement associated with its Series B PCRBs, which is ' scheduled to terminate inJune 1989, the Company is presently limited in the amount of dividends it may pay on its common stock (other than dividends payable solely in shares of com- i mon stock and dividends payable in cash where, concurrently, Sinking fund requirements and the Company receives a capital contribution or sells shares of maturities for the ensuing five years for the Company's long- its common stock)in an amount equal to its accumulated net term debt at December 31,1988 were as follows: income for the periodJuly 1,1985, to the date of the payment. Such amount of unrestricted retained earnings was approxi-Cash mately $378.7 million at December 31,1988, after payment of Sinking Fund (1) Matunties the $300 million dividend discusa! below. In the event the (In musand,) Company experienced a loss that exceeded such accumulated net income,less the sum of certain dividends paid sinceJuly 1, 1989 $ 53,500 $ 27,100 (2) 1985, dividends could not be paid until such a deficit was 1990 $ 53,500 - restored by subsequently earned net income, except where 1991 $ 68,500 $ 300,000 concurrently the Company receives a capital contribution or i 1992 $ 68,500 $ 100,000 sells shares ofits common stock. 1993 $ 57,250 - On December 16,1988,the (1) The following amounts of Company paid a dividend on common stock of $300 million sinking fund requirements included in the above table were to its common stockholder, MSU. This dividend was the first eliminated upon the redemption inJanuary 1989 of certain ever paid by the Company. In addition, on February 21,1989 series of outstanding first mortgage bonds, discussed above: the Company paid another dividend on common stock of 1989-$53.5 million;1990-$53.5 million; 1991 - $38.5 $47.3 million to MSU. The declaration and payment of future million; 1992 - $38.5 million; and 1993 - $27.25 million. dividends on the Company's common stock would be subject (2) The Series B PCRBs are to appropriate further action by the Company's Board of secured by a letter of credit that expires in June 1989, et which Director s. time the Company expects that the Series B PCRBs vill be re- 7. COMMITMENTS AND CONTINGENCIES marketed until maturity at a fixed rate without the additional security of a letter of credit. However,in the event that the re. Gmai marketing is unsuccessful, the Company may be required to OnJune 24,1988,the United reacquire up to $27.1 million principal amount of such bonds. States Supreme Court rendered a decision that is fundamen-tally important to the continuingviability of the Company as a Substantially all of the wholesale seller of power to the System operating companies. Company's utility plant is subject to the lien ofits first mort- In the J une 24 Decision, the United States Supreme Court gage bond indenture. reversed the February 25,1987 decision of the Mississippi Supreme Court, which had held that the MPSC had improp-
- 6. RETAINED EARNINGS erly granted MP&L retail rates to pay for its Grand Gulf 1-The provisions of one of the related expenses without first determining that such expenses Company's financing agreements and its first mortgage bond were prudently incurred. The United States Supreme Court indenture restrict the amount of retained earnings available for ruled that the MPSC is required by federallaw to recognize, cash dividends on common stock. Under its mortgage, the and to allow M P&L to recover from its retail customers as Company may not declare dividends, other than stock divi- reasonable operating expenses, the costs of Grand Gulf I dends, or make other distributions on or acquisitions ofits capacity and energy allocated to MP&L by the FERC.
stock (except where concurrently certain contributions or Accordingly, the principle of federal preemption which is stock proceeds are received) unless the Company is not in necessary to secure implementation of the Company's feder-default under certain of its financing agreements, and the sum ally mandated wholesale rates through the retail rate structures of certain indebtedness does not exceed 65% of adjusted capi- of the System operating companies has been upheld. For talization. further information regarding the June 24 Decision, see Note 8, " Rate and Regulatory Matters-Rate Activity-System Operating Companies." 24
l Notwithstanding the very The Company has strongly favorable development represented by theJune 24 Decision, a disagreed with the Staff's position, asserting that the Staff's nuraber of significant uncertainties continue to confront the position is in violation of the SEC's tax allocation regulations Company, either directly, or indirectly through potentially applicable to holding company systems and contrary to the adverse effects upon the ability of the System operating FERC's own accounting rules. This matter is being litigated in companies (the Company's only customers) to continue to an administrative proceeding at the FERC. Various parties,in-make monthly payments to the Company for Grand Gulf 1 cluding the APSC, the LPSC, the MPSC and the Council, capacity and energy. As of December 31,1988,the Com- have intervened in this proceeding. Hearings on this matter pany's most significant commitments and contingencies have concluded. Briefs have been scheduled for filing between related to (1) the potential adverse impact on the Company if February 7,1989 and April 18,1989. The Company filed its certain findings stemming from a FERC audit of the Company brief on February 7,1989. and the Grand Gulf Station are ultimately sustained,(2) the If certain of the Staff's findings ultimate resolution of the status of Grand Gulf 2, construction are ultimately sustained, the resulting charges against net of which has been suspended, including related accounting and income and refund requirements would have a material rate issues, and (3) the outcome of continuing controversies adverse impact on the Company. The Company estimates that concerning Grand Gulf 1, including a $135 million prudence as of December 31,1988, the impact on net income could be as disallowance with respect to NOPSI. In addition, the Com- high as approximately $300 million (net of tax effect), and the pany's financial position could be affected by the outcome of Company could be obligated to refand approximately $290 the Council's consideration of the municipalization of million, inclusive of interest, to its customers, the Sstem NOPSI's electric and gas utility properties. operating companies. In addition, the Staff's proposed adjustments would adversely impact the Company's prospec-FERC Audit tive earnings, cash flow and financial condition. The FERC has performed an The Company cannot predict audit of the Company and the Grand Gulf Station as part of its the ultimate outcome of the examination. regulatory function of auditing utilities subject toits jurisdic-tion. The audit report, which pertains to the period from the Suspended Construction Project--Grand Gulf 2 Company's inception through December 31,1985, was issued From late 1979 until Septem-onJune 18,1987. In the report (as updated by FERC Staff tes- ber 1985, only a limited amount cf construction was per-timony), the FERC Staff states, among other things, that the formed on Grand Gulf 2. Effective September 18,1985, the Grand Gulf Station's AFDC is overstated by $126.5 million Company suspended construction activities on Grand Gulf ($99.8 million relating to Grand Gulf I and $26.7 million 2 following an order of the MPSC. As of that date, Grand relating to Grand Gulf 2) because the "AFDC calculation Gulf 2 was approximately 34% complete based on the man-failed to take into account all cost-free capital generated by hours estimated at that time to be needed to complete the i (Company] expenditures and claimed on consolidated income unit. tax returns." The FERC Staff recommends that the Company Since September 1985, the change its income tax accounting procedures and record an Company has limited expenditures on Grand Gulf 2 to only accounting entry to charge the alleged AFDC overstatement those activities which are absolutely necessary for suspen-arising from the Company's alleged incorrect accounting sion and demobilization of the unit. A special group of against net income, recompute billings to customers sinceJuly Middle South Electric System officials and outside consult-1,1985 to reflect adjusted plant and equity balances, and ants completed in late November 1986 its evaluation and refund, with interest, the difference between the recomputed review of Grand Gulf 2. Among the possibilities evaluated billings and amounts previously charged customers. Further, were (1)immediate resumption of construction of the unit, the FERC Staff recommends that $327.2 million of " Recover- (2) cancellation of the unit, (3) continued suspension of able Taxes" (classified on the Company's records as " Future construction on the unit through 1989 or beyond , and (4) Benefits Related to AFDC"), representing a significant portion conversion of the unit to an alternative fuel source. In of the Company's unrealized recorded income tax benefits, December 1986, the Company's Board of Directors (with should be reclassified to " Accounts Receivable From Associ- the MSU Board of Directors concurring) adopted the ated Companies," the net effect of which would be r. 5258.1 group's recommendation that suspension of construction be million reduction of Grand Gulf 1's rate base on which the continued and that a further decision be made by 1990 on Company earns a return. The Staff recommends that the the future status of Grand Gulf 2 in light of alternatives Company refund, with interest, the change in billings since available at that time. July 1,1985 due to this rate base reduction. 25
NOTES TO FINANCIAL STATEMENTS, CONT. spurm Ewgy Rewunes, fu adverse reaction of various rate regulatory bodies to allocation of costs, regulatory uncertainties, including ratemaking, attendant to a delay in the decision as to the future of Grand Gulf 2 and imprudence issues, there can be no assurance that the cost of Grand Gulf 2 will be recovered or as to the timing of any recovery. As was the case with Grand Gulf 1, proceedings Duringthe period of suspen- br: fore the FERC and, with respect to recognition in retail rates sion,the Company's expenditures on Grand Gulf 2 have of FERC-approved rates, before state or local regulatory continued to be limited, and the Company during this time has authorities could be protracted and strongly contested on not accrued AFDC on its investment in the unit. Conse- various grounds,includingimprudence. If costs associated quently, during the suspension period, the Company has with Grand Gulf 2 were allocated to the System operating foregone any return on this investment. Further, the Com- companies and they were unable to recover these costs from pany has previously indicated that it has no intention, prior to their customers, the System operating companies' financial a further decision on the status of Grand Gulf 2, of seeking condition could be materially and adversely affected. Any FERC approval for the recovery through charges to the nonrecovery of the Company's investment in Grand Gulf 2 System operating companies of its investment in the unit. would result in a charge against current income for any unre-The Company is continuing to coverable investment when that event becomes probable. In evaluate various alternatives for the future of Grand Gulf 2 and the event such a charge were substantial, the financial condi-to assess whether the equipment and facilities constructed and tion of the Company could be materially and adversely acquired to date should continue to be carried at their full cost. affected and the Company's ability to pay dividends on its In this connection, in 1989 the Company will analyze the common stock could be impaired. See Note 6, " Retained future status of Grand Gulf 2, including an evaluation of Earnings," for further information regarding restrictions on various possibilities similar to those studied in 1986. Any de- dividends payable on common stock. termination that the value of the Company's investment Failure to obtain rate relief for should be reduced and the amount of any such reduction a substantial portion of the cost of Grand Gulf 2 could have a written off could adversely affect various companies in the material and adverse effect upon the financial condition of the Middle South Electric System. Certain issues relating to the Company, MSU and possibly the System operating compa-value of the Company's investment in Grand Gulf 2 also exist nies, depending upon, among other things, the timing of the in connection with an audit by the FERC of the Company and realization of any suchloss. the Grand Gulf Station discussed above. InJanuary 1988, the FERC While theCompany believes issued an order which modified its po! icy regarding recovery that all of its investment to date in Grand Gulf 2 has been of cancelled or abandoned plant costs by utilities subject to its prudent,in connection with any further decision as to the jurisdiction. The revised policy provides for a "50/50 sharing" value of Grand Gulf 2 or the ultimate decision with respect to of prudently incurred costs of a cancelled plant between the the future of Grand Gulf 2, the Company will, at an appropri- owner and the ratepayers,whereby 50 percent of the prudently ate time, make a determination as to the appropriate recovery incurred costs of the cancelled plant would be amortized and of all or a portion of its investment, including, in the event of recovered from ratepayers over the expected life of the plant as cancellation of the unit, the possibilities of seeking recovery. if it had been completed. The currently unamortized portion In making such determination, the Company will consider, of such amount would also be included in rate base thereby among other things, the regulatory environment generally, allowing for a return thereon. The remaining 50 percent of legal standards then applicable, and the anticipated financial, prudently incurred costs would be written off. In May 1988, regulatory and political effects upon the Company and the the FERC denied requests for rehearing pertaining to that other Middle South Electric System companies of various al- portion ofitsJanuary 1988 order which adopted the "50/50 ternatives. sharing" methodology, and the FERC's order is now final. In the event that the Company See "SFAS Nos. 71,90 and were ultimately to seek recovery of Grand Gulf 2 costs, the 101" below for information regarding the effect on the Company would likely be required to make a filing with the Company of certain accounting standards should Grand Gulf FERC requesting such recovery over a period of years through 2 he cancelled or should cancellation become probable. charges to the System operating companies. The System oper ating companies would in turn be required to file applications with state or local regulatory authorities to recognize the FERC-allocated Grand Gulf 2 charges in retailrates. In view of the controversies over the Grand Gulf Station, including the 26
In the third quarter of 1985, In order to mitigate the SMEPA,which has a 10% ownership interest in Grand Gulf 2, negative effects upon NOPSI's financial condition and cash ceased making payments for its proportionate share of Grand flow caused by the February 4 Resolution and thereby reduce Gulf 2 costs incurred subsequent toJuly 31,1985. Effective the risk of insolvency, NOPSI has implemented a series of cash February 7,1986,SMEPA and the Company adopted a conservation and other measures. In this connection, com-settlement agreement, pursuant to which SMEPA will pay its mencing in April 1988, NOPSI has deferred, from time to time l proportionate share of the Grand Gulf 2 costs incurred for limited periods (in each case less than 30 days),its monthly l subsequent toJuly 31,1985, and future costs for suspension payment to the Company under the Unit Power Sales Agree-l and demobilization of the unit up to a maximum of $4.951 ment covering NOPSI's monthly payment obligations for i million but will no longer be obligated to pay costs of con- capacity and energy from Grand Gulf 1. NOPSI may defer, as f struction on Grand Gulf 2 should construction of the unit needed from time to time in the future,its monthly payments resume. As of December 31,1988,SMEPA had invested to the Company for similar periods in order to conserve cash. approximately $4.3 million in Grand Gulf 2 and, accordingly, The failure of NOPSI to make any monthly payment to the its investment is expected to reach the maximum amount in Company under the Unit Power Sales Agreement within 30 1 1989. Any Grand Gulf 2 costs applicable to SMEPA's interest days after such payment is due could result in acceleration of in excess of this amount would be paid by the Company. the Company's obligations in respect of the Series B PCRBs Should the Company decide to resume full construction of (currently outstanding in the amount of $27.1 million), unless Grand Gulf 2, SMEPA will have the option of having refunded waivers were obtained or other arrangements were negotiated. to it all payments made under the settlement agreement for in view of the fact that NOPSI costs incurred subsequent toJuly 31,1985, which could result, was not able to obtain a timely court injunction staying en-if necessary, in the periodic adjustment of SMEPA's and the forcement of the February 4 Resolution, NOPSI was required, Company's ownership interests in proportion to their respec- by the terms ofits 1987 mortgage indenture, to cause an tiveinvestments in Grand Gulf 2. The settlement agreement independent arbiter to deliver to the trustee for the holders of relates solely to Grand Gulf 2 and does not apply to SMEPA's NOPSI's $115 million of outstanding G&R Bonds a certificate ownership interest or investment in Grand Gulf 1. as to whether,in the independent arbiter's opinion, the February 4 Resolution has materially impaired or will materi-NOPSI Prudence Disallowance and Other Controversies Concerning Grand Gulf 1 ally impair NOPSI's ability to perform its obligations in On February 4,1988,after a respect of the outstanding G&R Bonds. In a certificate dated lengthy prudence investigation, the Council adopted the June 24,1988 (Arbiter's Report), the independent arbiter February 4 Resolution that required h0 PSI to write off, and concluded, based upon the hypothetical assumption that the not recover from its retail electric customers, $ 135 million of its February 4 Resolution would not be reversed by the courts previously deferred Grand Gulf 1-related costs in addition to and upon certain related assumptions of NOPSI's manage-the $51.2 million of such costs that NOPSI absorbed as part of ment regarding future events, that NOPSI's projected cash its March 1986 rate settlement. NOPSI is seeking relief in flows during certain future periods " appear to be insufficient federal and state courts from the action by the Council. to cover projected regularly scheduled debt service require- 1 In the meantime,the February ments when required." Because the Arbiter's Repon indicated ! 4 Resolution will continue to have a substantial and adverse that the February 4 Resolution would materiallyimpair i effect upon NOPSI's financial condition and to constrain NOPSI's ability to perform its obligations in respect of the i NOPSI's cash flow. The consequences of the February 4 outstanding G&R Bonds, any holder thereof had the option, Resolution, so long as it remains in effect, are that NOPSI's through August 11,1988,to require NOPSI to redeem its ability to effect long- or short-term external borrowings or to G&R Bonds on August 26,1988 at a price of 100% of the , satisfy potential obligations to purchase all or a portion of its principal amount plus accrued interest to the date of redemp- ) outstanding G&R Bonds (as discussed below) will continue to tion. l be significantly and adversely affected, and NOPSI could ulti- However,NOPSI successfully
- mately be rendered insolvent. In this connection, NOPSI has negotiated with its G&R Bondholders (consisting of a limited 1 continued to retain independent special counsel experienced in number of institutional investors) two extensions of the right bankruptcy matters to help evaluate the options available to to tender their G&R Bonds to NOPSI such that the G&R l NOPSI. Bondholders now have the right to tender their G&R Bonds ;
between November 24 and December 13,1989 for purchase on ; February 9,1990. However.the G&R Bondholders would i not have the right to give notice between November 24 and 27 _j
NOTES TO FINANCIAL STATEMENTS, CONT. system I nergy Rwarm, Im. various regulatory authorities and the courts, all of which could take many years to resolve. Condemnation or other involuntary taking of substarstially all of NOPSPs property might cause acceleration of a substantial portion of the Cot,pany's indebtedness, unless waivers were obtained, the debt were restructured or other arrangements were made. December 13,1989, and NOPSI would not be required to pur- On March 29, lass, the chase any G&R Bonds on February 9,1990,if an independent Council proposed to MSU to discuss a " friendly buy-out* of arbiter has delivered to each G&R Bondholder on or prior to NOPSI by the City. MSU responded by indicating a willing-November 23,1989 a certificate stating that the impairment of ness to consider any alternatives that the Council might NOPSI's ability to perform its obligations in respect of the papase if they are in the best interests of its stockholders, G&R Bonds, described in the Arbiter's Report, has ceased customers and employees. Representatives of NOPSI ar:d because of judicial or regulatory action. MSU are continuing to meet with members of the Council and While NOPSIbelieves that the their consultants to discuss these matters. The ultimate June 24 Decision represents a very favorable development in outcome of these discussions cannot be predicted. terms of NOPSI's ability to obtain ultimate reversal of the capitainequirements and Financing February 4 Resolution, there is no assurance that the matter will be favorably resolved by November 1989 and that one or The Company's capitaland more G&R Bondholders will not demand purchase of their financing requirements noted below are based on certain G&R Bonds. If this were to occur and any significant amount assumptions and judgments with respect to, among other of G&R Bonds were tendered for purchase, there is no things, earnings, dividends, the outcome of pending regulatory assurance that NOPSI would have sufficient available cash and judicial proceedings, financing plans and access to capital resources or financing capabilities at that time to meet its markets. If future events vary significantly from these purchase obligations. As a result, NOPSI could be rendered assumptions, additional capital requirements could result. insolvent unless such obligations were deferred, restructured The Company estimates that it or otherarrangements negotiated. will require approximately $480.1 million during the period Insolvency of NOPSI,should 1989 through 1991 to refinance maturing indebtedness, to meet it occur, could result in the acceleration of the Company's sinking fund requirements and to satisfy its capital obligations in respect of the Series B PCRBs (currently out- requirements. Construction expenditures (excluding nuclear standingin the amount of 527.1 million), unless waivers were fuel) are estimated to be 541.0 million in 1989,543.5 million in obtained or other arrangements were negotiated. In addition, 1990 and $39.5 million in 1991. Grand Gulf 1 expenditures insolvency of NOPSI could affect the terms of financing,in- (including minimal amounts of AFDC) are estimated to be cluding an increase in the cost of financing, or could preclude $32.2 million in 1989,533.7 million in 1990 and $29.8 million in financing for other Middle South Electric System companies. 1991. The above construction expenditures assume no in addition to the foregoing, activities at Grand Gulf 2 except for demobilization and j theJune 13 Decision, whereby the FERC allocated the suspension. Through December 31,1988, the Company had capacity and energy from the Company's share of Grand Gulf invested 54,353 million (excluding nuclear fuel)in the Grand 1 and the costs associated therewith among the System operat- Gulf Station. Of this total,53,448 million was invested in ing companies, was reaffirmed by the FERC in the November Grand Gulf 1 and $905 million in Grand Gulf 2. It is also 30 Order. However,the November 30 Order has been estimated that the Company will require approximately $26.1 appealed by various panics to the D.C. Circuit. See Note 8, million during the period to acquire nuclear fuelin addition to
" Rate and Regulatory Matters-Unit Power Sales Agree- amounts financed under lease, In addition to the foregoing, ment.-
the Series B PCRBs are secured by a letter of credit which NDPSI Municipaltration expires in June 1989. The Company expects that the bonds The Council has been consid. will be remarketed until maturity (2014) without the additional cring the municipalization by the City of NOPSI's electric and security of a letter of credit. However,in the event that gas utility properties. NOPSI believes that any attempt by the remarketing is unsuccessful, the Company would be required City to municipalire NOPSI's electric utility facilities in order to repay amounts advanced by the letter of credit bank to to attempt to enable electric customers in the City to avoid reacquire bonds that are not retained by prior owners,and paying their federally allocated share of Grand Gulf 1-related additional funds of up to $27.1 million may be required. costs could result in extensive and complex proceedings before
)
l l 28 l 1 1
The Company anticipates that issued by the FASB in December 1986 as an amendment of its projected internally generated funds for the period 1989- SFAS No. 71. It requires, among other things, that when 1991 will enable it to largely satisfy its cash requirements. abandonment of a plant becomes probable, the cost of such However, a number of uncertainties continue to confront the plant in excess of the present value of estimated recoveries Company and the Middle South Electric System and, through rates with respect thereto, net of related tax benefits, depending upon the ultimate resolution of such uncertainties shall be reported by recording a charge against current income, and the effects thereof upon the Company, the Company may The provisions of SFAS No. 90 would apply should the Com-be required to obtain funds from external sources. pany decide to cancel Grand G ulf 2 or should cancellation of In general,the Company's Grand Gulf 2 become probable. ability to access the capital markets and to raise funds from SFAS No.101, Regulated external sources will be subject to receipt of SEC approval and Enterprises-Accounting for the Discontinuation of Applica-may be affected by a number of factors, including legal and l regulatory developments affecting the Company and the tion of SFAS No. 71,was issued by the FASB in December ) 1988. It specifies how an enterprise that ceases to meet the System operating companies (as discussed herein and in Note criteria for application of SFAS No. 71 to all or part of its j 8, " Rate and Regulatory Matters"), the credit ratings of the operations should repon that event in its financial statements. Company's securities, market conditions, and contractual and Specifically, a regulated enterprise would report such an event 4 I regulatory restrictions limiting the amount of first mortgage by eliminating from its balance sheet the effects of any actions I bonds and other securities that the Company may issue. of regulators that had been recognized as assets and liabilities In May 1988, plans were pursuant to SFAS No. 71 but would not have been recognized l announced for the Company to assume operating as such by other enterprises in general. However, the carrying responsibility, subject to AP&L and LP&L oversight, for the amounts of plant, equipment and inventory measured and ANO Station and Waterford 3. Under the proposed reported pursuant to SFAS No. 71 should not be adjusted arrangements, which must be approved by various regulatory unless those assets are impair ed. The net effect of the adjust-bodies, AP&L and LP&L would retain ownership of their ments should be included in income in the period of the change respective nuclear generating units as well as the associated and classified as an extraordinary item. This statement is capacity and energy entitlement and would pay or reimburse effective for discontinuations of application of SFAS No. 71 the Company,on a monthly basis, for the costs associated with occurring in fiscal years ending after December 15,1988. The operating these units in accordance with applicable rules and Company continues to meet the criteria for applying SFAS regulations of the SEC (which require that services be rendered No. 71; thus, SFAS No.101 currently will not have any effect l at cost). In addition, the Company would act as agent for upon the Company. AP&L and LP&L in the purchase and acquisition of additional facilities and equipment required in connection with the shareholderutigation I operation of these plants,in accordance with plans and budgets In 1985,MSU,certain other j approved by AP&L and LP&L, with the payment of the costs Middle South Electric System companies, including the Com-of such facilities and equipment to be funded directly by pany, and individuals became defendants in a purponed class AP&L or LP&L, as the case may be. In conjunction with this action suit. The initial complaint was filed in August 1985 by plan, those employees (numbering approximately 1,900 at an MSU shareholder (purporting to represent a class that December 31,1988) of other Middle South Electric System purchased MSU common stock) followed by four similar companies engaged in the operation of these units would be complaints filed by MSU shareholders in August and Septem-transferred to and become employees of the Company. The ber 1985. The five actions were consolidated in the United Company expects that the proposed transactions will not have States District Court for the Eastern District of Louisiana any material effect upon its future earnings, capital (District Court). The consolidated, amended and supplemen-requirements or cash flow. Applications for approval of the tal complaint alleges violations of the disclosure requirements l proposed arrangements have been filed with appropriate of the Securities Act of 1933 and the Securities Exchange Act of regulatory authorities,and hearings before the APSC and the 1934, common law fraud and common law negligent misrep-LPSC on this matter are expected to be held during the second presentation in connection with the financial condition of MSU quarter of 1989. and prays for compensatory and punitive damages, legal costs and fees and other proper relief against MSU, LP&L, MP&L, l SFAS Nos.71,90 and101 AP&L, NOPSI and the Company; certain current and former Certain accounting standards officers of these companies; certain current and former relating specifically to public utilities and certain other regu- members of MSU's Board of Directors;the independent lated enterprises are set forth in SFAS Nos. 71,90 and 101. ruditors of MSU and certain underwriters of MSU common SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, establishes certain reporting criteria for regulated , enterprises. SFAS No. 90, Regulated Enterprises-Account-l ing for Abandonments and Disallowances of Plant Costs, was l 29
NOTES TO FINANCIAL STATEMENTS, CONY. Spem i nery Rewnews Inc. Unit Power Sales Agreement OnJune 10,1982, the Com-pany and the System operating companies entered into a Unit Power Sales Agreement pursuant to which the Company agreed to sell all of the capacity and energy available to it from Grand Gulf I and Grand Gulf 2 to LP&L,MP&L and NOPSI stock. On March 14,1986, the plaintiffs in the consolidated in accordance with percentages specified therein, which action filed a Motion for Class Action Determination. On conformed with the percentages set forth in the Reallocation April 18,1986, MSU and certain other Middle South Electric Agreement described below. As discussed in Note 8, " Rate System companies,includirge Company, and individual and Regulatory Matters," the Unit Power Sales Agreement defendants (MSU System detendants) filed a Motion to was, with certain modifications (capacity and energy from Dismiss or,in the alternative, a Motion for SummaryJudg- Grand Gulf I was allocated in the following percentages: ment. OnJanuary 12,1987,the District Court entered a AP&L,36%; LP&L,14 %; MP&L,33%; and NOPSI,17%), judgment granting defendants' Motion for Summary Judg- approved by the FERC in itsJune 13 Decision and ordered to ment and dismissed the suit. On February 6,1987, the plain- become effective upon the iaitiation of service of Grand Gulf tiffs in the consolidated action filed a Notice of Appealin the 1, which occurred onJuly 1,1985. On remand from the D.C. United States Court of Appeals for the Fifth Circuit (Fifth Circuit, theJune 13 Decision was reaffirmed by the FERC in Circuit). its November 30 Order. In its June 13 Decision, the FERC did OnJune 7,1988,the Fifth not rule on the Grand Gulf 2 allocation and ordered the Circuit rendered a decision vacating the judgment of the Company to remove the proposed Grand Gulf 2 percentage District Court, based, in part, on the conclusion that the allocation from the Unit Power Sales Agreement. District Court had not adequately explained the bases fer its The Unit Power Sales Agree-decision. In remanding the case to the District Court for ment, as currently in effect, specifies the rates to be charged to further proceedings, the Fifth Circuit suggested that the the System operating companies for their respective entitle-District Court could again consider the merits of the defen- ments to receive capacity and energy from Grand Gulf 1. Such dants' Motion for Summary Judgment and determine, with the rates are computed monthly on the basis of the Company's benefit of certain guidelines as to the interpretation of govern- total cost of service, which is based on the Company's operat-ing law articulated by :he Fifth Circuit, whether the defendants ing expenses, depreciation and capital costs attributable to the are entitled to summary judgment as a matter of law. The unit for the month. 'I hese rates are paid in consideration for District Court was directed,if it makes such a determination, the respective entitlement of the System operating companies to provide a detailed analysis supporting its conclusions that to receive such capacity and energy, and are payable irrespec-would facilitate judicial review. Alternatively, the Fifth Circuit tive of the quantity of energy delivered so long as the unit noted, the District Court could decline to rule on the defen- remains in commercial operation. Generally, operating dants' Motion for SummaryJudgment until further develop- expenses are computed by reference to allocable amounts ment of the case has taken place and the issues have been chargeable to the Company's operating expense accounts, and narrowed through the available pre-trial techniques. On capital costs are computed by allowing a return (currently set ! September 6,1988, the MSU System defendants filed a petition at a rate of 14%) on the Company's common equity funds for a writ of ceniorari with the United States Supreme Court. allocabic to its investment in the unit and adding to such On October 31,1988, the United States Supreme Court denied amount the effective interest and dividend cost to the Com-this petition. Based upon the Fifth Circuit's decision,the pany during the billing period for its icspective long-term debt District Court allowed the parties to rebrief the Motion for and preferred stock,if any, allocable to its investment in the Summaryjudgment and, onJanuary 17,1989, the MSU unit. See Note 8," Rate and Regula-System defendants filed a Renewed Motion for Summary Judgment and a verified answer to the consolidated, amended tory Matters-Unit Power Sales Agreement," for further and supplemental complaint. The District Court has sched- information with respect to litigation and proceedings relating uled the trial to commence March 12,1990. The outcome of to the Unit Power Sales Agreement. this matter and its impact on the Company's financial condi-tion cannot be predicted. The matter is pending. capitalFunds. Availabliity and Reallocation Agreements Under the Capital Funds Agreement, as supplemented, MSU has agreed to supply or cause to be supplied to the Company (1) such amounts of capital as may be required in order to maintain the Company's equity capits at an amount equal to at least 35% of its total capitalization (excluding short-term debt) and (2) such 30
amounts of capital as shall be required in order (a) for the Reimbasement Apeement Company to construct, own and place in commercial opera- On December 28,1988,the tion the Grand Gulf Station,(b) to provide for pre-operating Company sold to the Owner Trustee and leased back, on a expenses and interest charges of the Company,(c) to permit long-term net lease basis, an approximate 11.5% ownership the continuation of such commercial operation after com- interest in Grand Gulf 1 (as discussed in Note 9, " Leases"). mencement thereof and (d) to pay in full all indebtedness for The Owner Trustee purchased this ownership interest from borrowed money of the Company whether at maturity, on the Company with the proceeds of equity investments made prepayment,on acceleration or otherwise. In addition, MSU by certain investors and with the proceeds of bank loans. In has agreed to make cash capital contributions to enable the connection with the equity funding of the sale and leaseback Company to make payments when due on its long-term debt. arrangement, letters of credit in the aggregate amount of $130 The Company has, with the consent of MSU, assigned its million have been provided by banks to secure the Owner rights under the Capital Funds Agreement to certain creditors. Participants for the payment of certain amounts payable by the The System operating compa- Company under the leases. The initial letters of credit are nies are severally obligated under the Availability Agreement scheduled to expire on December 28,1991, and it is expected in accordance with stated percentages ( AP&L,17.1 %; LP&L, that such letters of credit will either be renewed, cxtended or 26.9%; MP&L,31.3 %; NOPSI,24.7%) to make payments or replaced prior to expiration. subordinated advances in amounts which, when added to any Under the provisions of the amounts received by the Company under the Unit Power Sales reimbursement agreement, the Company has agreed to a Agreement or otherwise, are adequate to cover all of the number of covenants relating to, among other things: preser-operating expenses, including depreciation and interest vation of its corporate existence, properties, rights and fran-charges, of the Company. The Company has, with the consent chises; restrictions on sales or other dispositions of assets and of the System operating companies, assigned its rights to on mergers or consolidations; restrictions on the creation or payraents and advances from the System operating companies incurrence of certain liens upon the Company's assets; and the under the Availability Agreement to certain creditors. In No- maintenance of certain capitalization and fixed charge coverage vember 1981, the System operating companies entered into a ratios. In this latter connection, the Company has agreed, Reallocation Agreement which would have allocated the during the term of the reimbursement agreement, to maintain capacity and energy available to the Company fram the Grand its equity at not less than 35% ofits vljusted capitalization and Gulf Station and the related costs to LP&L, MP&L and to maintain its common equity at not less than 29% of such NOPSI. These companies thus agreed to assume all the re- amount. In addition, the Company has agreed to maintain, sponsibilities and obligations of AP&L with respect to the with respect to each fiscal quarter during the term of the Grand Gulf Station under the Availability Agreement,with reimbursement agreement, a ratio of adjusted net income to AP&L relinquishing its rights to capacity and energy from the interest expense (calculated,in each case, as specified in the Grand Gulf Station. Each of the System operating companies, reimbursement agreement) of at least 1.60. At December 31, including AP&L, would have remained primarily liable to the 1988, the Company's equity and common equity in each case Company and its assignees for payments or advances under approximated 41.3 % of its adjusted capitalization, and its fixed 3 this agreement. AP&L was obligated to make its share of the charge coverage ratio, calculated as provided in the reimburse- I payments or advances only if the other System operating ment agreement, was 1.89. The letters of credit may be termi- I companies were unable to meet their contractual obligations. naied by the banks under certain circumstances as a result of However, the FERC'sJune 13 Decision alk>cating a portion of any change in applicable law or governmental action which Grand Gulf 1 capacity and energy to AP&L supersedes the adroely affects the obligations or ability of the Company and Reallocation Agreement insofar as it relates to Grand Gulf 1. certain other participants in the sale and leaseback transaction Amounts received by the to make required payments or otherwise perform under the Company under the Unit Power Sales Apeement have transaction documents. exceeded the amounts payable under the Avai' ability Agree- Failure by the Company to ment and, consequently, no payments under the Availability perform its covenants under the reimbursement agreement Agreement have ever been required. Should there be a could give rise to a draw by the Owner Participants and/or an shcrtfallin any month as a result of the inability of any System early termination of the letters of credit, and,if such letters of operating company to make a payment under the Unit Power credit were not replaced in a timely manner, could result in a Sales Agreement, amounts received by the Company from any defauh under the Company's leases. Draws by the Owner
- other sources (including financings, sales of property and the Participants under the letters of credit must be repaid by the f like) and available at that time would be credited toward the Company within 5 days (and,in some cases,90 days) follow-obligations owing under the Availability Agreement. ing thedate of drawing.
l 31
4 NOTES TO FINANCIAL STATEMENTS, CONT.' Synens tnergp Remnes,Inc . Spent Nuclear Fuel and Decommissioning Cosis Under the terms ofits nuclear - fuel lease, the Company is responsible for the disposal of spent nuclear fuel. The Company has executed a contract with the U.S. Department of Energy (DOE) whereby the DOE will furnish disposal service for the Company's spent nuclear fuel at a cost of one mill per kilowatt-hour of net generation. The Company includes this one mill per kilowatt-hourcost as a component ofits nuclear fuel expense. Nuclearinsurance - Underthe NuclearWaste The Price-Anderson Act was Policy Act of 1982,the DOE was to begin accepting spent fuel - amended in 1988 to extend its coverage to August 1,2002 and in 1998 and continue until the disposal of al' fuel from reactor . to limit the public liability for a single nuclear incident to sites is accomplished. However, the DOE's repository approximately $7 billion. The Companyis protected against program has been delayed, with the estimated initial operation this liability by a combination of private insurance (presently of a permanent repository scheduled for 2003. In the mean-
$160 million; expected to increase to $200 million by the end time, the Company will be responsible for storage of spent of 1989) and an industry assessment program. _Under the fuel. The Company estimates that on-site spent fuel storage .
assessment program, the maximum amount the Company capacity will be sufficent to store fuel from normal operations would be required to pay in respect of each nuclear incident at until 2003. The Company expects to have to provide any a licensed nuclear facility would be approximately $66 million additional storage capacity required due to, among other per reactor (such amount to be indexed every five years for things, delay of the DOE repository program. inflation), payable at a rate of $10 million per year, including a In addition to the recovery of 5% surcharge in the event the total public liability approaches costs associated with the disposal of spent nuclear fuel, the
$7 billion. SMEPA would be responsible for its pro-rata share Company is recovering approximately $1.1 million per year -
of this obligation. The Company is an owner and the operator for nuclear plant decomminioning costs in connection with its of one licensed reactor and the Middle South Electric System combined ownership and leasehold interest of 90% of Grand has a total of four licensed reactors. Gulf 1. The Company has entered into an agreement with an TheCompanyprovides on outside engineering firm to conduct a new decommissioning behalf ofitself and other insured interests, including other co- cost study, which is anticipated to be completed in the second owners, the maximum amount of property and decontamina- quarter of 1989. tion expense insurance available to cover the Grand Gulf 8. RATE AND REGULATORY MATTERS facihty. At December 31,1988 this totaled $1.575 bilhon. Th.is Unit Power Sales Agreement
, coverage is subject to assessment provisions. At December 31, 1988 the Company's maximum assessment liability was $34.9 OnJune 18,1982, the Com-million. Under its agreement with the Ccmpany, SMEPA pany tendered for filing with the FERC, as an initial rate would sharein this obligat:on. schedule, the Unit Power Sales Agreement under which the The $1.575 billionproperty Company would sell all of the capacity and energy from its insurance coverage is $515 million in excess of that required by 90% share of Grand Gulf 1 and Grand Gulf 2 to LP&L, applicable NRC regulations. The NRC regulations further MP&L and NOPSI with rates and charges after commercial prm-ide that any proceeds of this insurmee must be segregated operation commenced to be based on the cost of service of each in a trust and be used, first, to place and maintain the reactor in unit. Various parties, including the APSC, the LPSC, the a safe and stable condition and, second, to complete required MPSC, the Missouri Public Service Commission and the decontamination operations. Council, intervened in the proceedings, and some of these The NRChasissued on behalf interveners proposed, among other things, revised allocations of allnuclearlicensees,includingtheCompany, temporary of capacity and energy to the System operating companies, exemptions from the stabilization and decontamination including an allocation of capacity and energy to AP&L.
priority and trusteeshipprovisions until completion of the pending rulemaking extending the implementation date of the regulations, but not later than April 1,1989. It is anticipated that the temporary exemptions will be extended beyond that date.
.n
J InitsJune13 Decision with decision upholding the KRC's authority to res iew and
. respect to the Unit Power Sales Agreement, the FERC, among modify the allocation of power from Grand Gulf 1. On ,
other things, approved the Company's request for the use of an November 30,1987, the FERC issued its November 30 Order i automatic cost of service adjustment clause for Grand Gulf 1 whereby the FERC reaffirmed and reinstated theJune 13 with certain modifications and adopted a proposal made by the Decision, thus maintaining the previous allocation of Grand LPSC, an intervenor in the proceeding, to allocate capacity and Gulf I capacity and energy among the System operating com- 3 energy from Grand Gulf I and the cost thereof as follows: panies. In issuing the November 30 Order, the FERC found AP&L,36%; LP&L,14 %; MP& L,33 %; and NOPSI,17%. that the allocation in theJune 13 Decision was not unduly , The FERC also held that the Company be granted a 16% discriminatory. Various parties filed requests for rehearing of return on common equity (later reduced to 14 % effectiveJuly the November 30 Order and by order dated January 29,1988, 1,1987), that the units-of production depreciation method be the FERC denied such requests. Petitions for review of the allowed for up to twelve months (later extended to eighteen FERC's November 30,1987 and January 29,1988 orders have ; months) with straight-line depreciation being required been filed with the D.C. Circuit by various paties. In this l thereafter, and that the annual amount of decommissioning connection, the APSC and other Arkansas and Missouri ; expense be set at $1,113,188 and be accumulated in an external parties are attempting to raise again the issue of FERC jurisdic- ! fund. The FERC did not rule on the allocation of Grand Gulf tion to allocate capacity and energy and related costs to AP&L. 2, and ordered the Company to remove the proposed Grand A motion for summary affirmance as to its jurisdiction was Gulf 2 percentage allocation from the Unit Power Sales Agree- filed by the FERC. The D.C. Circuit ordered that the jurisdic-ment. tional issue be referred to the panel of judges that will decide Various parties to these this appeal on the merits, and that the parties are not to further proceedings requested rehearings and a stay of implementation brief the jurisdictionalissue. Oral argument is scheduled for of theJune 13 Decision from the FERC. In a series of deci- May 8,1989. sions, the FERC denied all requests for rehearing. hious Itis not possible at this time to parties filed appeals of these orders and some parties filed predict the ultimate out;ome of this matter, including possible motions for a stay of these orders with the D.C. Circuit. On reallocation, if rny, or the effect thereof upon the Company January 6,1987, a three judge panel of the D.C. Circuit and the System operating companies, including possible affirmed the FERC's June 13 Decision, and held, among other refunds,if any. Any materialmodification of theallocation things, that the FERC had authority to review and modify the established by theJune 13 Decision could give rise to addi-allocation of power from Grand Gulf 1 and to establish an tionallitigation, disputes and challenges in the affected juris-allocation of such power which the FERC found to be just and dictions. reasonable under the Federal Power Act. Various parties filed An administrativeproceeding petitions for certiorari to the United States Supreme Court was initiated at the FERC in 1986 as a result of a complaint (which were denied on December 14,1987, thereby leaving in against the Company filed by the LPSC. In this proceeding place that part of theJanuary 6,1987 decision upholding the certain parties alleged arnong other things, that the Unit FERC's jurisdiction to allocate Grand Gulf I costs) and Power Sales Agreement should be modified to include a clause requests for rehearing with the D.C. Circuit. which would permit an annualinvestigation of the return on The D.C. Circuit granted equity in the Unit Power Sales Agreement with special refund l rehearing on two issues raised in theJanuary 6,198' decision procedures that are not currently provided for. This clause is i and, on June 24,1987, the D.C. Circuit reversed, in part, the referred to as the " equity reopener." The ALJ in the equity l June 13 Decision and remanded theJune 13 Decision to the reopener proceeding issued his decision in April 1988 recom-FERC for reconsideration of its decision to equalize the mending, among other things, that certain parties may file a i capacity costs of all Middle South Electric System nuclear motion with the FERC in August of each year, beginning in l plants and for an explanation of the criteria used to determine 1989, requesting that the FERC initiate proceedings investigat-what constitutes " undue discrimination" under the Federal ing the rate of return on common equity in the Unit Power Power Act and why theJune 13 Decision was not unduly Sales Agreement. On February 22,1989, the FERC issued an discriminatory. In reversing,in part, theJune 13 Decision, the order vacating the decision of the ALJ based on the belief that D.C. Circuit did not change that part of its January 6,1987 the ratepayers are provided ample protection under the Regulatory Fairness Act (enacted in October 1988)if rates are found to be unjust and unreasonable. Accordingly, the FERC 1 33
I I NOTES TO FINANCIAL STATEMENTS, CONT. byurm twgp hewmes,lu On February 25,1987,the MPSC's Final Order on Rehearing, which had established a phase-in plan granting annual rate relief to MP&L with respect to its FERC-ordered allocation of Grand Gulf 1-related costs, was reversed by the Mississippi Supreme Court and remanded to the MPSC for further proceedings on the grounds, among ruled that the equity reopener provision is unnecessary. Under others, that the MPSC's decision was in error because the the settlement of the original complaint filed by the LPSC MPSC did not first determine that MP&L's Grand Gulf 1-(which, among other things, reduced the Company's rate of related expenses were prudently incurred. Subsequently, return on common equity from 16% to 14%, effectiveJuly 1, MP&L filed an appeal of the February 25 decision with the 1987), there can be no change in the Company's rate of return United States Supreme Court and also filed an application on equity beforeJanuary 1,1990. However,the Company asking that Court to stay the mandate of the February 25 could be subject to potential refund obligations in the event decision pending final disposition of the appeal. that its rate of return on equity were lowered subsequent to OnJune 1,1987,the United that time. States Supreme Court granted MP&L's application for a stay conditioned upon the posting of a good and sufficient bond in a Grand Gulf 1 Prudence manner and amount which was to be determined by the Mis-As noted below, theJune 24 sissippi Supreme Court. OnJune 10,1987, the Mississippi Decision affirmed the principle that various matters regarding Supreme Court issued an order setting bond which provided the prudence of Grand Gulf 1 are within the FERC's exclusive that MP&L file an undertaking to refund past collections from jurisdiction. In this connection, representatives of certain September 20,1985 toJune 30,1987, such undertaking to be governmental bodies, including the Arkansas Attorney co-guaranteed by the Company and MSU. The order further General,theLPSC,theMississippi Attorney General,the provided that MP&L's future Grand Gulf 1-related collections MPSC and the Council, have publicly stated that they are were to be secured by the Company placing the amount of considering whether to retain a consulting firm that would such collections into escrow in a trust account on a monthly develop information regarding the construction and operation basis until final resolution of MP&L's appeal to the United of Grand Gulf 1 that may be used to approach the FERC with States Supreme Court. The bonding arrangements established a request to open a prudence proceeding. The Middle South by the Mississippi Supreme Court, including the Company's Electric System cannot predict whether any consulting firm corporate guaranty and the escrow arrangements, were will be retained for this purpose, whether any proceeding implemented in September 1987. During the period that the before the FERC regarding Grand Gulf 1 prudence issues will stay was in effect, MP& L collected the rates approved by the be initiated or in what context any prudence issues might arise. MPSC in the Final Order on Rehearing, subject to refund. However, the System would vigorously defend against any OnJune 24,1988,the United possible allegations of imprudence with respect to Grand Gulf States Supreme Court rendered a decision reversing the 1 that might be made before the FERC and believes that its February 25 decision of the Mississippi Supreme Court. The investment in Grand Gulf 1 was prudently incurred. In the United States Supreme Court held that states may not alter event that a portion of the Company's investment in Grand FERC-ordered allocations of wholesale power by substituting Gulf I were ultimately disa ilowed for ratemaking purposes, their own determination of what would be just and fair, and the Company's earnings, cash flow and financial condition that the MPSC must therefore recognize MP&L's Grand Gulf would be adversely affected. 1-related costs as reasonable operating expenses. The United States Supreme Court stated that
- FERC-mandated alloca-Rate ActMty-System Operating Companies tions of power are binding on the States, and States must treat OnJune 24,1988,the United those allocations as fair and reasonable when determining retail States Supreme Court rendered a decision that is fundamen- rates."
tally important to the Company's continuing viability as a wholesale seller of power to the System operating companies. TheJune 24 Decision affirmed MP&L's right to recover its Grand Gulf 1-related costs and upheld the principle of federal preemption which is necessary to secure implementation of the Company's federally mandated wholesale rates through the retail rate structures of the System operating companies. 34
1 In reachingits decision,the question of prudence was not discussed because no party United States Supreme Coun relied on its earlier decision in raised the issue, not because the matter was beyond the scope Nantahala Power & Light Co. v. Thornburg,476 U.S. 953 of FERC's jurisdiction, and that indeed the FERC had . < (1986). Interpreting its own decision in Nantahala, the United considered and rejected some aspects of the prudence review ;' States Supreme Coun held that (1) FERC has exclusive au- the Mississippi Supreme Court directed the MPSC to conduct. thority to determine the reasonableness of wholesale rates,(2) The United States Supreme Court also held that the MPSC ! FERC's exclusive jurisdiction applies not only to such rates, lacks jurisdiction to reevaluate the reasonableness of the but also to power allocations that affect wholesale rates, and (3) various agreements among the Company,MP&L and MSU states may not bar regulated utilities from passing through to relating to Grand Gulf 1. Furthermore, the United States retailconsumers FERC-mandated wholesale rates. Applying Supreme Coun stated that "the MPSC cannot evaluate either these principles to the facts in MP&L's case, the United States the prudence of MSUi decision to invest in Grand Gulf and , Supreme Court held " 'that a state utility commission setting bring it on line or the prudence of M P&L's decision to be a l retail prices must allow, as reasonable operating expenses, costs party to agreements to construct and operate Grand Gulf incurred as a result of paying a FERC-determined wholesale without traversing matters squarely within FERC's jurisdic-price....Once FERC sets such a rate, a state may not conclude tion." in setting retail rates that the FERC-approved wholesale rates On August 8,1988,the United are unreasonable. A state must rather give effect to Congress' States Supreme Court issued its mandate in the MP&L desire to give FERC plenary authority over interstate whole- proceeding. As a result, the judicial determination of the sale rates, and to ensure that the states do not interfere with this MPSC's Final Order on Rehearing became final, thereby authority.' Thus, we conclude that the Supremacy Clause allowing MP&L thereafter to collect rates approved in the compels the MPSC to permit MP&L to recover as a reasonable Final Order on Rehearing not subject to refund. Further, the operating expense costs incurred as the result of paying a Company, MP&L and MSU were released from their respec-FERC-determined wholesale rate for a FERC-mandated tive obligations under the various corporate undertakings filed allocation of power." with the Mississippi Supreme Court as part of the bonding In addressing the " prudence" arrangement set by that court at the direction of the United question relied upon in pan by the Mississippi Supreme Court States Supreme Court, and the Company obtained the release in reversing the Final Order on Rehearing, the United States and return to it on August 11,1988 of all escrow deposits Supreme Coun held that the Mississippi Supreme Court erred previously made by the Company equivalent to MP&L's cash in adopting the view that the preemptive effect of FERC collections for Grand Gulf 1-related expenses fromJune 1, jurisdiction turned on whether the issue of prudence was 1987 through August 1,1988 (amounting to approximately actually determined in the FERC proceedings, and that since, $224 million,includinginterest). in the Mississippi Supreme Court's view, prudence was not TheJune24 Decision affirmed addressed at the FERC proceedings, the MPSC could later the principle that state and local regulatory authorities must address the question. Rather, the United States Supreme recognize Grand Gulf 1-related costs as reasonable operating Court held that " States may not regulate in areas where FERC expenses in setting the retail rates of the System operating has properly exercised its jurisdiction to determine just and companies. AP&L, LP&L, and MP&L currently have retail reasonable wholesale rates or to insure that agreements rate structures in effect that enable them to meet their respec-affecting wholesale rates are reasonable." Therefore, the tive Grand Gulf 1 obligations to the Company. However, United States Supreme Court held that the MPSC may not, with respect to NOPSI, a disallowance by the Council of S135 consistent with the Supremacy Clause, conduct any proceed- million of NOPSI's Grand Gulf 1-related costs is still being ings that challenge the reasonableness of FERC's allocation. litigated. Instead, the proper forum for such a challenge is at the FERC. In connection with NOPSI's The United States Supreme request for permanent retail electric rate relief, the Council, on Court stated that the Mississippi Supreme Court,in its October 17,1985, initiated an investigation into all aspects of February 25,1987 decision, attached considerable significance NOPSI's prudence regarding its involvement with Grand Gulf to the fact that the prudence of investing in Grand Gulf 1 by 1. On February 4,1988, after a lengthy prudence investigation, MP&L was not discussed in the proceedings at FERC. the Council adopted a resolution requiring NOPSI to write off However, the United States Supreme Court noted that the and not to recover from its retail electric customers, $135 million ofits previously deferred Grand Gulf 1-related costs, in addition to $51.2 million of such costs that NOPSI had previously agreed to absorb in its March 1986 rate settlement. 35
NOTES TO FINANCIAL SVATEMENTS, CONT. l synem inergy Rewurm, Inc Furthermore,on February 3, 1987, the MPSC issued an order in this docket directing the Company to show cause why its Certificate of Public Conven-ience and Necessity relating to the construction and operation of the Grand Gulf Station should not be cancelled for the failure of the Company to allow the MPSC to audit its books NOPSI is seeking reliefin federal and state courts from the and records. The Company had objected to the MPSC February 4 Resolution. In this connection, onJanuary 9,1989 auditing its books and records on jurisdictional and other j the United States Supreme Court agreed to review the question grounds. On April 29,1987,the Company filed a Complaint l of whether the federal courts have discretion to abstain from for Declaratory and Injunctive Relief in a United States taking jurisdiction over NOPSI's petition seeking reversal of District Court seeking a temporary restraining order, a pre-the February 4 Resolution based upon principles of federal liminary injunction, and a permanent injunction enjoining the preemption. NOPSI believes that the February 4 Resolution is MPSC from all further proceedings in the docket with respect in violation of the Federal Power Act, applicable FERC orders to the Company. The District Court denied the Company's and federal law as interpreted by the United States Supreme motion for temporary restraining order and preliminary Coun (including, most recently, in theJune 24 Decision), and injunction. The Company,in light of the District Court's will ultimately be so declared by the courts. The United States decision and in order to avoid irreparable harm that could Supreme Court is expected to schedule oral arguments in the result from the threatened cancellation of the Grand Gulf Cer-case and to render a decision regarding the abstention issue by tificate, agreed to cooperate with the MPSC staff in an audit of mid-1989. In addition, NOPSI also filed suit in the state court. the books and records of the Company relating to FERC-However,in May 1988, the state court denied NOPSI's approved Grand Gulf 1 rates. The Company intends to pursue request for preliminary injunctive relief and, on appeal, the its request for declaratory and permanent injunctive reliefin state court's denial of preliminary injunctive relief was af- the federal court action. This matter is pending. firmed by the Fourth Circuit Court of Appeal of the State of The MPSCon September 26, Louisiana on February 16,1989. A hearing on the merits of the 1983, issued a Citation to Show Cause to MP&L and the case was held in the state court on November 30,1988. NOPSI Company to show why they should not be ordered to adhere has been advised by its counsel that a decision by the state to representations allegedly relied upon by the MPSC in court on the merits of the case is not expected before the third determining the need and economic justification for additional quarter of 1989. For further information regarding these issues generating capacity in the form of the Grand Gulf Station. On and the potential financial implications for the Company, see January 5,1984, the MPSC issued an order in which it (1) Note 7, " Commitments and Contingencies-NOPSI Pru- limited the proceeding to relate solely to Grand Gulf 2 and (2) denct Disallowance and Other Controversies Concerning ordered the Company and MP& L to show cause for the con-Grand Gulf 1." tinued construction and need for Grand Gulf 2. On Septem-In a separate proceeding, the ber 18,1985, the MPSC issued an Order Directing Suspension MPSC initiated, among other things, an investigation of the of Construction of Grand Gulf 2,which directed the Com-prudence of MP&L's involvement in the Grand Gulf Station. pany and MP&L to suspend construction of Grand Gulf 2 as On September 16,1986, the MPSC issued an initial order of the date of the order and to formally report to the MPSC establishing a docket for the stated purposes, among other before the end of the year regarding their future plans for the things,of examining the prudence of the actions of MP&L unit. As an addendum to the order, the MPSC advised MP&L and/or the Company relating to the construction and opera- and the Company that it was the MPSC's position at that time tion of the Grand Gulf Station and the appropriate regulatory that any potential plan for recovery by MP&L of " sunk costs" treatment of the associated costs; obtaining FERC review of in Grand Gulf 2 through retail rates was unjustifiable. Since the Company's rate of return on common equity; obtaining September 1985, the Company has continued suspension of FERC revision and/or modification of various aspects of construction on Grand Gulf 2 and has limited expenditures on MP&L's Grand Gulf 1 expenses established by the FERC, the unit to only those activities which are absolutely necessary including the allocation of Grand Gulf I costs; inquiring for demobilization and suspension. On December 5,1986, the generally into the appropriateness of MP&L's general rate Company's Board of Directors (with the MSU Board of structure; and performing a detailed audit of the books and Directors concurring) adopted the recommendation of a records of the Company On September 29,1988, the MPSC special group of Middle South Electric Systcm officials and entered an order dismissing MP&L as a party to all phases of outside consultants that suspension of construction activities this docket. The Company remains a party to this docket. be continued and that a further decision be made by 1990 on the future status of Grand Gulf 2,in light of ahernatives available at that time. > 33
i l
- 9. LEASES With regard to the funds I NuclearFuelleases provided by the Owner Participants, letters of credit in the At December 31,1988,the aggregate amount of $130 million have been provided by Company had two nuclear fuel leases, permitting the Com- banks for the benefit of the owner Participants to secure the pany to lease a maximum of $215 million in nuclen fuel. In payment of certain amounts payable by the Company under February 1989, the Company terminated these nuclear fuel the lease. Upon the occurrence of certain adverse events, the leases and entered into an arrangement whereby the Company Owner Participants would be entitled to draw on the letters of may lease up to $185 million of nuclear fuel. The lessor credit in amounts sufficient to enable the Owner Participants finances its acquisition and ownership of nuclear fuel under a to withdraw from the lease, but not in amounts sufficient to credit agreement and through the issuance of intermediate cover the debt of the OwnerTrustee. Under these circum-term notes. The credit agreement has a term of five years and stances, the Company would be obligated, pursuant to a reim-the intennediate term notes have varying maturities of 1 1/2 to bursement agreement between the Company and the letter of 10 years. It is contemplated that these credit arrangements will credit banks, to repay amounts drawn under the letters of !
be extended or alternative financing will be secured by the credit within a short period of time, and the Company may be lessor upon the maturity of the current arrangements, based on required to assume the debt of the OwnerTrustee. the Company's nuclear fuel requirements. If the lessor cannot In May 1988, the FASB issued arrange for alternative financing upon the regularly scheduled SFAS No. 98, Accounting for Leases. Under SFAS No. 98, the maturity of its borrowings, the Company must purchase letter of credit backing, described above, meets the criteria of a nuclear fuelin an amount equal to the amount required by the " continuing involvement" by the Company. As a result, the lessor to retire such boirowings. sale and leaseback transaction is accounted for as a financing Lease payments, based upon transaction in the Company's financial statements in accor-nuclear fuel use, are treated as a cost of fuel. Lease expense dance with the provisions of SFAS No. 98. However, the charged to operations for the years ended December 31,1988, transaction is accounted for as a sale and leaseback for regula-1937, and 1936 was $115.4 million, $58.8 million, and $41.0 tory and income tax purposes. million, respectively. The unrecovered cost base of the The net proceeds received by Company's leases at December 31,1988 and 1987 was $182 the Company were used onJanuary 22,1989 to redeem $300 million and $166 million, respectively. million of its First Mortgage Bonds,16% Series due 2000, $100 million ofits First Mortgage Bonds,15 3/8% Series due 2000, sale and LeasebackTransaction and $87.697 million of its First Mortgage Bonds,113/8% On December 28,1988,the Series due 2016,in each case at the redemption price of 100% Company entered into arrangements for the sale and leaseback of the principal amount plus accrued interest to the date of of an approximate 11.5% ownership interest in Grand Gulf I redemption. for an aggregate cash consideration of $500 million. The sale At December 31,1988,the was made to an Owner Trustee under two separate trust Company had future minimum lease payments (reflecting an agreements with two Owner Participants. The Company is overallimplicit rate of 9.8%) in connection with the sale and leasing the sold interest back from the Owner Participants on a leaseback transaction as follows (approximate amounts in net lease basis over a 261/2 year basic lease term. thousands): The OwnerTrustec acquired the interest with funds provided by the Owner Participants and with funds borrowed on an interim basis by the Owner Year Amount Trustee through the issuance of notes to interim lenders. It is l anticipated that the interim debt will be refunded in the second 1989 $ 27,254 quarter of 1989 with the proceeds from the issuance and sale of 1990 48,762 long-term bonds. The lease payments to be made by the 48,761 1991 Company will be sufficient to service the debt incurred by the 1992 48,761 Owner Trustee and to provide a return of and on investment 1993 48,761 to the Owner Participants. Years thereafter 1,257,566 Total $1,479,865 37
l NOTES TO FINANCIAL STATEMENTS, CONT. Synem 1:nergy Rewunes, Inc. December 31,1988. The cost of providing these benefits for f retirees is not separable from the cost of providing benefits for active employees. The cost of providing these benefits for 1988,1987, and 1986 was $1,658,000, $1,604,000, and $945,000 respectively.
- 10. POST-RETIREMENT BENEFITS The Company participates in The components of the an MSU System postretirement plan covering substantially all Company's total 1988 and 1987 pension cost (income),includ-ofits employees. The pension plan is noncontributory and ing amounts capitalized, were as follows:
provides pension benefits that are based on the employees' credited service and average compensation, generally during 1988 1987 the last five years before retirement. The Company's policy is to fund pension costs in accordance with contribution U" 5"$d"d') guidelines established by the Employee Retirement income Service cost-benefits $ 937 $ 994 Security Actof1974,asamended. earned during the period Thepension planis Interest cost on p.ojected 421 355 administered by a trustee who is responsible for pension benefit obligation payments to retirees. Various investment managers have Actual return on plan assets (1,883) 2,115 responsibility for management of the plan's assets. In addition, Net amortization and deferral (36) (4,045) an independent actuary performs the necessary actuarial valuations for the Company's plan. Net pension income $ (561) $ (581) Prior toJanuary 1,1987,the Company did not directly employ any personnel and substantially all of the Company's employees were covered The assets of the plan consist under a postretirement benefit plan administered by MP&L. primarily of common and preferred stocks, fixed i,come In return, the Company reimbursed MP&L for the cost of this securities and insurance contracts.
~
plan applicable toits employees. EffectiveJanuary 1,1987, approximately 950 MP&L employees were transferred to the Thefundedstatusof the Company. The related pension liabilities and assets of $4.4 Company's pension plan at December 31,1988 and 1987 was million and $19.1 million (including accrued earnings as follows: thereon), respectively, were transferred to a postretirement benefit plan administered by MSU. These liabilities and assets 1988 1987 will be transferred to a separate Company plan when established. . U" N"'d"d>> Actuanalpresent value of Totalpension cost (income)of accumulated pension the Company for 1988,1987,and 1986 was approximately $0.5 plan benefits: million,($1.8) million,and $1.7 nillion,respectively. Total pension cost for 1987 included a $1.2 million reimbursement Vested $ 737 $ 633 Nonvested 1,969 1,523 from MP&L for overfunding in 1986. Pension cost decreased in 1987 primarily as a result of the adoption,effectiveJanuary . ACC"*"I ed benefit 1,1987, of the provisions of SFAS No.87, Employers' ? 5 2,706 $ 2,156 bbgation Accounting for Pensions, used to determine net pension cost ' for the year. . Projected benefit obh.ganon $ 6,040 $ 4,788 The Company also provides Plan assets at fair value 18,872 13,585 certain health care and life insurance benefits. Substantially all employees may become eligible for these benefits if they reach . I,lan assets m excess of retirement age while still working for the Company. These , projected benefit obh,gation 12,832 8,797 benefits and similar benefits for active employees are provided Unrec gmzedtransitionasset (10,064) (10,660) through payments of premiums to insurance companies, and Unrecogmzed net gain (1,626) 2,444 the Company recognizes the cost of providing these benefits by expensing the amounts as incurred. The Company had no retirees as of December 31,1987, but had one retiree as of A CC'UCdPC"8I " *SSCI
$ I',142 $ 581 3B
i 1
)
Transition assets are being 12. QUARTERLY RESULTS (UNAUDITED) amortized over the average remaining service period of active Results for the four quarters P* ' P""**' f 1988 and 1987 were as follows: The measurement of theitems listed above is based on the following assumptions: Quarter Operating Operating Net Ended Revenues Income Income 1988 1987 (In Thousands) Weighted average discount rate 9.0% 9.0% 1988: Rate ofincrease in future March $ 230,842 $ 107,566 $ 40,010 compensation 5.6 % 5.6% june $ 232,927 $ 105,767 $ 46,008 Expected long-term rate of September $ 230,877 $ 104,303 $ 46,964 return on plan assets 8.5 % 8.5 % December $ 239,182 $ 103,349 $ 47,332 1987: March $ 242,564 $ 116,532 $ 52,526 June $ 248,537 $ 115,773 $ 52,881 i
- 11. TRANSACTIONS WITH AFFILLATES September $ 224,519 $ 105,910 $ 44,431 The Company sells allof the December $ 246,929 $ 108,058 $ 48,963 capacity and energy from its share of Grand Gulf 1 to the System operating companies under rate schedules approved by the FERC in itsJune 13 Decision regarding the Unit Power Sales Agreement. Accordingly,all of the Company's operat-ing revenues consist of billings to the System operating companies.
Pursuant to a service agree-ment, MP&L provided technical and advisory services to the l Company for the design, construction, maintenance and operation of the Grand Gulf Station. See Note 1, " Summary of Significant Accounting Policies." In return, the Company paid MP&L the actual cost of rendering these services and granted to MP&L the power and authority to act on the Company's behalf as agent, until December 20,1986,when the i Company assumed the responsibilities previously assigned to MP&L. In addition, pursuantto another service agreement, l- the Company receives technical and advisory services from MSU System Services, Inc. Operating expenses included charges from MP&L and MSU System Services,Inc. for l technical and advisory services totaling $12.1 million in 1988,
$11.1 million in 1987, and $45.8 million in 1986.
In addition,certain materials l and services required for hbrication of nuclear fuel are l acquired and financed by SFI and then sold to the Company, as needed. Charges for these materials and sen ices, which rep-resent additions to nuclear fuel, amounted to approximately
$93.7 million in 1988, $104.9 million in 1987, and $0.3 million in 1986.
l l l l 39 L______--___
o DIRECTORS AND EXECUTIVE OFFICERS Synem rnergy kesourm, Jnc DIRECTORS EXECllTIVE OFFICERS Edwin Lupberger Jerry L. Maulden Edwin Lupberger Chairman of the Board Chairman of the Board and Chairman of the Board of the Company .
. Chief Executive Officer
. Chairman of the Board and of Arkansas Power & William Cavanaugh,111 .(
President of Middle Light Company President and South Utilities,Inc. SeniorVice President, Chief Executive Officer System Executive-tTlHlam Cavanaugh,Ill Arkansas / Mississippi / Glenn E. Harder President and MissouriDivisionof Vice President, Accounting Chief Executive Officer Middle South Utilities, and Treasurer of theCompany Inc. SemorVice President, Vice President, System Executive- Joseph M.Hendrie NuclearEngineering Human Resources and NuclearofMiddleSouth . Utilities,Inc.and Consultant, Bellport,NY Ad"". .*S^" " MSU System Services, Senior Scientist-Research wilnamT.Come Inc. and Development, Vice President,
- Brookhaven National Nuclear Operations James M.Cain ' Laboratory Chairman of the Board and Ted H. Cloninger Chief Executive Officer Vice President, of LouisianaPower& NuclearEngineeringand Light Company Support President and.
ChiefExecutiveOfficer Joseph L. Blount of New Orleans Public Vice President, Service Inc. Legaland External Senior Vice President,' Affairs
- System Executive-Louisiana Division Dan E. Stapp of Middle South Utilities, Secretary Inc. The Company's 1988 AnnualReport to the Donald C.Lutken Securities and Exchange Chairman of the Board and Commission on Form 10-K Chief Executive Officer (including financial of MississippiPower& statement schedules)is Light Company available toanyinterested parties without charge.
Interested parties can obtain a copy by writing to: Glenn E. Harder Vice President, Accounting andTreasurer System Energy Resources,Inc. P. O. Box 31995 Jackson, MS 39286-1995
- Effective February 1,1989 Telephone (601)984-9000
' 40
'I COMPANY DESCRIPTION
' Syurm Ewgy Renunts lee As a subsidi- More than In addition,a
. ary of Middle South 1.6 million retail customers subsidiary company,MSU Utilities,Inc., System in Arkansas, Louisiana, System Services,Inc.,
Energyispart of one of the Mississippi, and Missouri are provides various technical, 4 largestinvestor-owned provided electric services administrative, and corpo-System Publicutilityholding through the System's vast rate services to all of the
- Energyis a nuclear generat- c mPaniesintheUnited network ofinterconnected Middle South Electric States, transmission and distribu- System companies.
ingcompany providing For the past tion lines, and a balanced System electricity to the Middle South Electric System.The 40 years,theMiddle South grid offossilfueland nuclear Energyis currently seeking Electric System has been the generating plants that are regulatory approval to , Company has90 percent leadmg electric energy controlled and operated as assume operatmg responsi-interestin andis responsible for themanagement and supplier to theMiddle a unit. bility, subject to AP&L and operation of Grand Gulf S uth,a91,000-square-mile Headquar- LP&L oversight, of the Sys-Nuclear Station, located regional area along thelower tered in New Orleans, the tem's other three nuclear southwest ofJackson, . aches of theMississippi Middle South Electric units. River. System alsoincludes four Mississippi, near Port Gibson. retad operatmg compames: Arkansas Power & Light, Louisiana Power & Light, i Mississippi Power & Light, and New Orleans Public Service Inc. e KDDLE SOUTH ELECTRIC SYSTEM i E RetailService Area l System Energy Resources, inc.provides electric energy to the operating companies for distribution within the Middle Soutb ElectricSystem servia area shown in red l l
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