RBG-26-087, Gulf States Utilities Co Annual Rept,1986
| ML20215C863 | |
| Person / Time | |
|---|---|
| Site: | River Bend  |
| Issue date: | 12/31/1986 |
| From: | Booker J, Draper E, Murrill P GULF STATES UTILITIES CO. |
| To: | NRC OFFICE OF ADMINISTRATION & RESOURCES MANAGEMENT (ARM) |
| References | |
| RBG-26-087, RBG-26-87, NUDOCS 8706180272 | |
| Download: ML20215C863 (37) | |
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f we designatedyears Iby their characteristics, after the Chinesefashion, 1986 would be known at GulfStates Utilities as "The Year of the Storms."
Storms of natural origin and the man-made variety buffeted GulfStates at vir-tually every turn lastyear.
And while we may have weathered them for the .
time being, they loom '
heavy on the horizon and will continue into 1987.
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4 Financial Highlights 1986 1985 Change Total Operating Revenue (000) $ 1,478,388 $1,858,436 (20.4)
Operating Expenses and Taxes (000) $ 1,164,582 $ 1,514,571 (23.1) fiet income (000) $ 244,981 $ 265,499 (7.7)
Income Applicable to Common Stock (000) $ 181,854 $ 205,362 (11.4)
Earnings per Average Share of Common Stock Outstanding $ 1.71 $2.10 (18.6)
Dividends per Share $ .67 $1.64 (59.1)
Average Common Shares Outstanding (000) 106,132 97,970 8.3 Number of Electric Customers (end of Year) 555,075 556,456 (.2)
Total Kilowatt tiour Sales (000) 26,949,012 29,005,259 (7.1)
System Peak Load - Kilowatts 5,089,000 5,139,000 (1.0)
Description of Business Oulf States Utilities was incor- As a member of the Southwest porated in 1925 and is primarily Power Pool, the company has in the business of genierating, the ability to Interchange elec-transmitting and distributing tricity between the 39 members electricity to 555,000 customers (29 members and 10 associated in southeast Texas and south members) serving eight states Loulslana. The service area ex- in the South and Southwest. The tends 350 miles westward from company had a peak load of Baton Rouge, La., to a pol.it 5,089 megawatts in 1986, while about 50 miles east of Austin, it had Installed capacity and Tx The service area encom- firm powerpurchase agreements passes the northern suburbs of totaling 7,548 megawatts at the tiouston and major cities such time of that peak load.
as Conroe, tiuntsville, Port The company has a wholly-Arthur, Orange and Beaumont, owned subsidiary, Prudential Oil Tx.: Lake Charles and Baton and Gas, Inc., engaged primarily Rouge, La. In the development and opera-OSU also sells electricity to tion of gas and oil properties.
municipalltles and rural elec-trical cooperatives in both Texas and Loulslana,in Baton Rouge, OSU supplies steam and elec-tricity to industrial customers .
through a cogeneration facility and the company owns and operates a natural gas retail distribution system serving 84,000 customers.
2
Report to Shareholders
We have and are continuing to take steps to cut if we designated years by their characteristics, costs and reduce our financial obligations.
after the Chinese fashion,1986 would be known in August, for the first time in nearly 40 years, at Gulf States Utilities as "The Year of the Storms.' Oulf States did not pay dividends to its common Storms of natural origin and the man-made vari- stock shareholders. This was a difficult decision ety buffeted Gulf States at virtually every turn for your board of directors to make, but one that last year. And while we may have weathered was made necessary by the high level of non-them for the time being, they loom heavy on the cash contributions to earnings, low energy sales horizon and will continue into 1987. caused by a continued recession in the service 1:arnings for the year ended December 31, area and the continued uncertainty of the 1986, were $1.71 per average share of common regulatory climate. We warned at the time that it stock compared to $2.10 per share in 1985. The was unlikely that common stock dividends quality of these earnings is poor, with 136 per would be resumed until the financial condition i cent of income applicable to common at. of the company improved. Common dividends tributable to non-cash sources. Overall sales were not resumed for the fourth quarter, and the were 7 percent below 1985 levels. The largest board of directors in early February 1987 reluc-declines came in the important industrial and tantly omitted quarterly dividends for preferred wholesale classes. These disappointing financial and preference stock, as well as common.
Indicators clearly show 1986 was not a good This action wasJust the latest in a number of year for Gulf States. steps taken during the past year to cut the com- i 1986 witnessed Gulf States' greatest engineer- pany's cash outflow. Additional savings were Ing and construction achievement with the com- achieved through construction reductions, mercial operation of the River Bend nuclear union and management wage freezes, climina-generating station. River Bend was the largest tion of management bonuses, the company's and most costly construction project ever under, directors cutting their annual retainer fees in taken by OSU. Its completion was a success story half, a freeze on hiring, Job eliminations, an early that earned the praise of the industry and na- retirement program and drastic reductions in tional regulators. equipment and material purchases. The com-for more than a decade, River Bend has p ny's ggressive c st-cutting program, called Pr Ject Save Cash, resulted in savings of some dominated the attention and activities of OSU. $70 million through last December. We continue Literally every department in the company has to look for and implement additional cost-been involved some way in making this a reality. cutting measures, tiowever, all these actions will Now that it is commercially producing electricity not be enough unless OSU can obtain perma- j for our customers, River Bend will become an nent and adequate rate relief from both the state f even more valuable and important asset. But the regulatory commissions.
focus of the company is shifting' The challenge of obtaining adequate rate relief i The immediate problems of trying to raise in Texas and loulslana remains a formidable !
enough cash to meet debt payments and other one. OSU has not been granted a permanent rate obilgations, customer unrest, a changing increase in Loulslana since 1982, and in Texas, regional energy market and regulatory hostility the state's Public Utility Commission rolled back are areas of increasing concern and attention. Texas base rates to 1982 levels. In 1986 we ap-Gulf States is going through a tumultuous piled in both Loulslana and Texas for a total of period in its history. The financial problems that $346.1 million in rate relief. This included a re-beset OSU during 1986 were reflective of the quest for an immediate $182 million in wider economic depression that has seized our emergency relief funds ($100 million in Loul-Texas and Louisiana Outf Coast service area. At stana and $82 million in Texas).
the core of most of the financial storms we now in early rebruary 1987, the Public Utility Com-face is an underlying depression in the mission of Texas (PUCT) granted OSU $39.9 petroleum-based economics of Loulslana and million in emergency rate relief. In order to Texas. These are hard economic times for both receive even this smaller amount, however, OSU the company and its customers. The ratepayer must demonstrate it has secured $250 million in revolt that led to a rate rollback in Texas last lines of credit. This is a difficult, if not impossi-year was created principally by the disparity in ble, task given the company's already precarious rates between Loulslana and Texas and was fuel- financial condition. On February 24, the Loul-ed by the poor economy. siana Public Service Commission (LPSC) voted to As early as October of last year, OSU informed grant OSU $57 million of its $100 million the Securities and I:xchange Commission in a fil- emergency rate increase request. As of March 1, Ing that without increased revenues, the com- the company had not yet been able to arrange pany would run out of cash in early 1987 and the credit needed to implement the Texas might be forced into bankruptcy proceedings. Increase.
3
Report to Shareholders -
In May, Alvin T. Kaetzsch Sr. of Lake Charles, OSU during a time of disaster. Hurricane Bonnie La., retired as a member of the board of direc- left more than 129,000 of the 177,000 tors, a position he had held since 1975. His customers we serve in and around Beaumont
- presence will be missed, and Port Arthur, Texas, without electricity and Norman R. Lee, who had served this company caused extensive damage to our system and as president for 12W years of his 37-year career communities. Crews from throughout the OSU at OSU, retired in November. During 1986 he area worked tirelessly with skill and dedication served as vice chairman of the board and he will to repair the damage left in the storm's wake.
continue to serve as a director until the annual Gulf States survived this storm.
meeting of shareholders in May, in the final analysis, this same kind of Also in November, E. Linn Draper, who as- employee dedication to doing thejob that needs sumed the role of president at the start of the to be done will see Gulf States through the year, was also named chief executive officer, damage inflicted by the other storms we face.
This realignment of executive responsibilities The course we follow is an arduous one and the will allow Paul W. Murrill to devote full-time going will be difficult. But our employees repre-attention to his duties as chairman of the board. sent a solid team, and it is largely through their Finally, there was a natural storm in 1986 that efforts and hard work that Gulf States Utilities brought its destructive force to the Gulf States will survive.
service area and served to rally the employees of Sincerely, N. NY k E. Linn Draper Paul W. Murrill Vice Chairman. President Chairman of the Board and Chief r.recutive officer March 2,1987 )
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1986 In Review Sales and Earnings Al'UDC is an accounting procedure used in the Overall electric sales for 1986 were 7 percent regulated utility industry, while the carrying below 1985 levels. Residential and commercial charges on River Send were recorded in accor-sales were down, approximately 1 percent in dance with accounting orders issued by the cach category, but the decline in industrial and regulatory bodies pending completion of wholesale sales accounted for about 89 percent the company's rate cases.
of the total sales decline. Operating revenues were $1.5 billion in 1986, Kilowatt hour sales for the year ended compared to $1.9 billion during the same period {
December 31,1986, were 26.9 billion, con- a year earlier. This decline resulted from a com-trasted with 29 billion during 1985. While sales bination of lower fuel recovery revenues caused in the residential and commercial sectors de- by lower fuel prices, reduced rates in Texas and cllned slightly, the number of customers in declining sales, those classes remained fairly constant for 1986.
Industrial sales, which accounted for 45 per- Financial Condition and Financing cent of OSU's annual electric sales in 1986 (down A combination of events placed severe finan-from 47 percent recorded the year before), show- clal strain on the company during 1986, and the ed a 1.43 billion kwh decline (11 percent) for the situation continued to deteriorate.
year. The downturn in industrial sales reflects OSU reported to the Securities and Exchange -
the continued depression of the service area's Commission in October that without rate relief petroleum-based economy, plus the loss of some or funds from external financing the company customers who converted to the cogeneration might need to seek protection from creditors process. under the bankruptcy code in 1987.
The primary reason for the 24 percent decline Developments cont.ributing to this in wholesale sales during the year was the deteriorating financial condition included the transfer of some wholesale customers to a negative regulatory and political climate and the transmission rate schedule during the last half company's inabillt) to get timely and adequate of 1985 and the first part of 1986. rate relief, reduced sales, limitations on outside Gulf States ended 1986 with earnings of $1.71 financings, current litigation and the down-per average share of common stock outstanding ratings of its securities. l compared to $2.10 per share in 1985, when Those down-ratings occurred throughout i there were 8 percent fewer average shares 1986 and into 1987. Major security rating agen-outstanding. The common stock dividend paid cles such as Standard & Poor's Corp. and in 1986 was $.67 per share. Moody's investors Service Inc. have downgraded it should be pointed out that the company's various Gulf States' bonds, as well as preferred 1986 reported net income was the result of two and preference stock, to the " speculative" grade, non-cash accounting entries - the Allowance citing the uncertain political ar.d regulatory for funds Used During Construction (AFUDC) climate in both Loulslana and Texas, plus the and a deferred carrying charge, on the com- possibility of a bankruptcy filing in the absence pany's investment in the River Bend nuclear of timely and significant rate relief, power plant not currently reficcted in rate base. Another indication of the company's severe Electric Department Average Residential Electric Sales Customers . Electric Use (Per Customer)
Billions KWH Thousands KWH 30 500 12000 a! :
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1986 In Review 1 financial problems came when the board of $100 par value. A portion of the proceeds directors voted to not declare the dividends on were used to redeem 460,000 shares of OSU's common stock for the third and fourth $13.64 dividend preferred stock.
quarters of 1986 and the first quarter of 1987. # in July, Oulf States offered $100 in February 1987, the board voted to omit the million in first mortgage bonds with an in-March 15,1987, dividend on OSU's preferred and terest rate of 12 % percent. The bonds sold preference stock. at a price of 99.8 percent of the principal Outside creditors of the company have amount to yield 12.15 percent, recognized this serious financial situation as In another financial matter, significant por-well. Seven of the banks participating in the tions of preferred, preference and common stock company's $800 million intermediate-term dividends will be treated as return of capital revolving credit agreement with OSU notified the distributions and, therefore, not taxable as divi-company in January 1987 that "In view of, dend Income. This is primarily due to having the among other things, the company's present River Bend plant in service but not yet included financial condition, projected liquidity crisis and in electric rates. The portion treated as return of failure to obtain adequate rate relief, an adverse capital reduces the tax cost basis of the shares l change of the type specified"(in the credit on which the dividends are paid. The proper in- {
agreement) " exists and, accordingly, the com- come tax forms have been mailed to all !
pany could not presently borrow" under the shareholders. The following summarizes the l credit facility. As of December 31,1986, $350 retum of capital percentages by quarter:
million of borrowings were outstanding under The company anticipates that all preferred this agreement. For more complete details of and preference stock dividends will be nontax-this matter, see the Notes to Financial able return of capital for the second, third and Statements section of this report. fourth quarters of 1986, while these dividends During 1986, OSU sold some $47 mililon in are 100 percent taxable for the first quarter of common stock, $75 million in preferred stock, the year.
$200 million in first mortgage bonds, $20 As for common stock dividends,80.53 percent million in pollution control bonds and borrowed in the first quarter and 100 percent in the sec-
$80 million through its revolving line of credit. ond quarter are estimated to be nontaxable A summary of the significant events in the return of capital. No common stock dividends 1986 financing program follows: were paid for the last two quarters of 1986.
- On January 30,1986, Oulf States completed a $100 million principal amount 30-year River Bend first mortgage bond sale. The interest rate On November 14,1986, the Public Utility Com-was 11 % percent, and the bonds sold at a mission of Texas (PUCT: declared the River Bend price of 99.5 percent of the principal nuclear power plant to be in commercial opera-amount to yleid 11.432 percent currently. tion as of June 16,1986. The Loulslana Public Also during January, the company retired a Service Commission (LPSC) followed the Texas
$24 million term loan agreement due in commission's lead by voting on December 2 to 1987. declare River Bend in commercial operation as e in February, the company sold 750,000 of June 16.
shares of $11.50 dividend preferred stock - December 1986 also marked the first anniver-Totatutmtyplant s ry of River Bend producing electricity for OSU customers.
From the June 16,1986, date through 5# January 30,1987, the capacity factor of the 4,soo River Bend unit was about 52 percent. This was higher than the national average capacity factor d# for nuclear power plants of comparable size.
3,500 Also during this same period, the River Bend unit had only one unscheduled outage, plus two 8#- -
scheduled outages.
2,500 _ .
On September 2,1986, OSU and the Cajun Electric Power Cooperative Inc. (CEPCO), which 2m -
owns 30 percent of River Bend, announced a 1.500 _ renegotiated buyback obligation which reduced OSU's cash outflow $100 million through 1987.
'# Under the original 1979 agreement, Oulf States 500 _ was to buy all of CEPCO's share of the power -
282 megawatts (mw)-during the first year of a g g g g three-year agreement, two-thirds during the second eeg ! 6
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year and one-third in the third year. proposal were not submitted within a week. The The new agreement spreads this arrangement amount of such a rollback would have been ,
over five years, beginning on the previously about $120 million, and it would have j mentioned River Bend commercial olyration eliminated recovery of the capacity costs of j date of June 16,1986, with OSU buying from power purchased from the Southern Company.
Ct:PCO amounts ranging from 197 mw (70 per- Shortly thereafter, the company agreed to a cent) in the first year to 54 mw (19 percent) in lesser reduction of $80 million.The agreement, the fifth year, which the PUCT approved, stipulated that the in another River Bend development, three of hearings would resume for the purpose of ex-OSU's training programs were accredited last amining the Southern Company contract. It fur-August by the National Institute of Nuclear ther specified that if OSU showed that it had Power Operations (INPO). This makes the plant a prudently entered into the contracts, OSU's rates branch of the National Academy for Nuclear would increase to cover such costs, which were Training, established by INPO to recognize ac- approximately $52 million.
complishments in the industry and to ensure On October 3, the PUCT found that OSU was safe operation of U. S. nuclear plants. Imprudent in entering into the Southern Com-On the subject of operations, in December pany contract, and therefore, would not be 1986 the Nuclear Regulatory Commission (NRC) allowed to recover the $52 million of capacity-voiced concern that " bankruptcy or the threat of related purchased power costs from Texas bankruptcy could affect the quality of opera- customers. OSU disagrees with this finding.
tions at R!ver Bend." Oulf States answered that it Included in the settlement, the company "will not compromise plant safety to control received an accounting order in connection with expenditures." the commercial operation of River Bend. The However,if the company's financial condition comm!ssion ordered Gulf States to defer recognl-(discussed in the previous section) continues to tion of costs associated with the plant's com-deteriorate, what action the NRC may take and mercial operation and to continue accruing a its financial impact on OSU cannot be predicted. return similar to APUDC pending the commis-Any action the NRC does take, including suspen- ston's final decision.
slon of River Bend's operating license, could be The Loulslana Rate Case. In Loulslana, the extremely adverse to Gulf States. commission simply rcJected all portions of the 1985 rate case relating to River Bend in May 1986, Rates and Regulation saying that the nuclear power plant was not in The year's activities in rates and regulation commercial operation at the time the rate re-centered on OSU's requests for timely and ade- quest was filed.
quate rate relief to ease the company's severely On June 6, Oulf States appealed the commis-strained financial condition and to have River slon's action to state district court in Baton Bend included in the rate base. in both states, Rouge. The company withdrew the remaining l the regulatory and political climates have been non-River Bend part of its case on August 12.
extremely adverse, and there is substantial in addition to the court action, OSU filed a new resistance by regulators and customers to the River Bend plant-in-service rate case in necessary rate increases. Loulslana on July 25, asking for a $202 million in anticipation of the River Bend unit's com- (26 percent) increase in electric retall rates, mercial operation, Outf States filed rate Increase reflecting the first step of a phase-in of the com-requests in both Loulslana and Texas in late 1985. pany's Loulslana portion of its investment in After OSU filed the rate increase request in River Bend.
Texas, several Texas cities adopted ordinances Subsequently, on September 8, OSU filed with to roll back GSU's rates charged within their the LPSC a request for $100 million of interim jurisdictions to the lower levels charged OSU rate rellet, to become effective November 1986.
customers in loulslana. OSU appealed these This amount covered the Loulslana portion of decisions to the PUCT All parties involved the company's 1987 projected cash operation agreed that OSU's then present rates would and maintenance expenses, including Interest, remain in effect until otherwise ordered by the but it would not cover other cash needs which commission. will have to be met otherwise.
On March 3,1986, the PUCT staff and certain On December 2, the LPSC rejected this of the intervenors in the company's Texas rate emergency rate request. Three days later, Oulf case filed testimony recommending changes in States appealed that decision in state district OSU's base rate ranging from an increase of court in Baton Rouge. On January 19 and 20, about $34 million to a reduction of approximate- 1987, thejudge heard testimony on the rate re-ly $138 million, quest and instructed all concemed parties to On April 30, the PUCT voted 3-0 to roll back submit summaries of their positions by OSU Texas rates to Loulslana levels if a superior January 27.
7
1986 In Review ,
When thejudge had not made a decision by begin phasing River Bend into customer rates l February 6, OSU asked the state Supreme Court are scheduled to start . March 23 in Austin. The i to order the district court to send the company's case will include investigations into the pruden- !
cmcrgency rate case back to the LPSC. At the cy of constructing River Bend and the current .
same time, Gulf States submitted another $100 need for such power and could, although OSU million emergency rate request to the commis- does not believe it would bejustifled, result in sion. In both actions, the company listed new adverse rate rulings.
developments that occurred after the LPSC's FederalRegulation. On the federal regulatory denial of emergency assistance. On February 13, front, the company filed a River Bend-related thejudge remanded the emergency rate request wholesale rate case on June 24,1986, with the ;
to the LPSC. FERC in Washington, D. C. The case included a 1 On February 24, the LPSC voted 3- 1, with one rate moderation plan providing for three years of abstention, to grant OSU $57 million of its $100 increases in rates charged rural electric million emergency rate request. cooperatives, towns and cities purchasing elec- ;
in another rate case, the LPSC approved on tricity from OSU for resale to their own - 1 i
March 18,1986, a $946,000 increase in natural customers. i l
gas rates for QSU's retail gas customers in Baton The proposal called for revenue increases of j Rouge. This amounted to a 2.1 percent increase $24.9 million (39.8 percent) the first year, $18.5 i and established a 13.5 percent return on equity. million (21.2 percent) the second year and $13.5 Outf States had originally requested a $L8 million (12.8 percent) the third year. The case in-million (4 percent) increase in natural gas rates. cluded all River Bend-related wholesale rate in-The Texas Rate Case. In Texas, the company creases and sought to recover deferred plant filed with the PUCT on November 18 for a $144.1 costs over eight years. The company asked that million rate increase, asking that $82 million of the new rates become effective August 24,1986, the request be granted under emergency rate On August 22, the FERC issued an order allow-relief rules by January 1987, further emphasiz- ing Outf States to increase rates to the com-Ing the company's immediate need for cash. pany's wholesale customers by $26 million, ef-On December 9, Oulf States asked the full fective August 25. The TERC also ordered the Texas commission to hear the emergency por- proposed second and third year rates to become tion of the rate case, bypassing the normal pro- effective (subject to refund) on July 1,1987, and cedure of PUCT hearing examiners listening to July 1,1988.
rate case testimony, then submitting recom- OSU negotiated a settlement agreement with mendations to the commission. The commission its wholesale customers. As of March 1987, all '
agreed to the expedited procedure, and on but one of the wholesale customers had, in prin- /
January 12,1987, the emergency rate request ciple, accepted the company's last proposal on hearings began in Austin. ThoSc hearings lasted these rates. While the settlement was based on through January 27. the phase-In rate plan, it contains provisions Then, on February 3, the PUCT granted Gulf which, for several years, will produce revenues States $39.9 million in emergency rate relief, lower than the original plan would have.
with a number of stipulations.lf the company In another rate development, a settlement was j can demonstrate it has secured $250 million in reached in the transmission service rate case l lines of credit, the higher rates may go into ef- that had been pending before the FERC since fect as soon as the commission approves the May 1985. Gulf States had requested an annual financing arrangement. (As of March L the lines increase of $16.5 million in the rates the com-of credit had not been arranged.) pany charges to deliver power for other com-Also, the Texas commission said that the panies through its system, higher rates would stay in effect only as long as The settlement provided that OSU would the company was not in bankruptcy. Additional- receive $14 million in additional revenues for the ly, the PUCT said it would ask the Federal Energy year ended July 24,1986, and $12 million the Regulatory Commission (I"ERC) to convene a following year.
Joint meeting of Texas ared Louisiana regulators The Southern Company Sult. The other mqjor to address the multiJurisdictional problems evi- regulatory matter of 1986 was the issue of OSU's dent in these rate cases. The PUCT also provided 1982 purchased power contracts with the that for each $1 of revenue OSU receives from Southern Company, a Georgia-based firm. This the interim rate increase, the company would be matter was also a part of the Texas rate case, required to reduce by $1.50 the Texas portion of and, as discussed above, on October 3, after the the River Bend carrying charges and deferred ex- hearings on the matter, the PUCT disallowed penses. This would permanently reduce the capacity costs associated with the contract.
amount to be considered In the pending rate Ear!!cr in the year, on July 2, OSU filed a case. lawsuit against the Southern Company, alleging Hearings on the permanent rate request to that it had failed and refused to negotiate 8
i
t g-changes in the purchased power agreements in 1986. In mid-february, the PUCT released the diligently and in good faith, as required by the results of a six month long management audit of contract's terms. OSU by the lexington, Massachusetts, con-Gulf States filed the suit in the U.S. District sulting firm of Temple, Barker and Sloane. This Court's Eastern District in Beaumont. The audit indicated that Gulf States has many ac-district court has denied the Southern Com- comp;* hments in responding to its difficult pany's request that it dismiss the suit on the business environment. Overall, the company grounds that the TERC hasjurisdiction over the believes the audit results reflect very favorably matter. The Southern Company has appealed on OSU and its employees. Under Texas state that denial to the U.S. Fifth Circuit Court of Ap- law, audits to evaluate the operations, business peals, which has scheduled oral arguments for practices and administration of major utilities in March 9,1987, the state are required every 10 years.
On August 28,1986, Oulf States filed a com-plaint with the FERC, asking it to declare the General Operations Southern Company contracts to be unlawful financial and regulatory matters remain vital under the federal Power Act and requesting the to the company, but it is also important to FERC to modify or set aside the contracts remember Gulf States' main business is still the because of changed circumstances. generating and selling of electric energy.
The Southern Company also filed a petition Because of reduced market prices for fuel and with the FERC to declare that it hadjurisdiction the company's aggressive fuel buying program, over the contracts, that the changes in cir- fuel expense declined by 21 percent in 1986.
cumstances alleged by OSU were irrelevant and Operating efficiency of the company's to order OSU to show why its actions, including generating units improved over 1985. During filing the lawsuit discussed above, do not con- 1986, the system average heat rate, a measure stltute an attempt to circumvent the FERC's of efficiency of generating units, was 10,407 jurisdiction. btu / kwh. Equivalent availability, a measure of On December 15,1986, the FERC issued an unit performance, remained good at above 78 order which consolidated OSU's complaint and percent.
the Southern Company's petition and set both Despite the financial strain on the company, for hearing on an expedited basis. Hearings economic development continues to be a major began february 24, and a united decision is ex- emphasis of OSU's overall marketing program.
pected by early April. As part of the 1986 rate case settlement in In its order, the FERC said that OSU's Texas, OSU's proposed economic development arguments regarding changed circumstances rate was implemented. This means new and ex-may be relevant. It also said that the FERC did isting manufacturing firms that expand opera-not have exclusivejurisdiction over OSU's claim tions and create new full-timejobs on a perma-that the Southern Company had failed to nent basis can qualify for discounts on their negotiate in good faith. The FERC said it would OSU bills.
not assertjurisdiction over that question, which Also, OSU is proud of its role in helping to is raised in OSU's lawsuit, since it appears to bring the Boeing Military Airplane Company's Air turn primarily upon the contract and subjective force plane maintenance facility to the former motives of the parties. Chennault Air force base in Lake Charles, Loul-The Loulslana commission, in its prudency slana. Oulf States' economic development per-hearings on the matter, voted on November 12 sonnel worked diligently to aid in getting Boeing that the power from the Southern Company was to locate within the service area, and OSU crews "not used and useful," and that OSU could not worked many hours to have the proper transmis-charge its Loulslana customers for the $82 slon and distribution equipment in place to meet million in capacity related purchased power the operational schedule of the facility, costs of the contract. On June 26,1986, Hurricane Bonnie came Gulf States disagreed with the decisions by the ashore, causing extensive damage throughout PUCT and LPSC, saying that when it negotiated the Beaumont and Port Arthur divisions in the initial contract, electric load and energy Texas. At various times, more than 129,0000f the costs in the company's service area were ex- approximately 177,000050 customers lost power.
pected to rise dramatically. OSU also believes the Working long hours and often under difficult state commissions do not have the authority to conditions, OSU crews from Loulslant and the rule on these types of contracts, as they are pro- Western Division (Conroc) helped Beaumont and perly under the control of the FERC. For these Port Arthur personnel with the massive repair reasons, OSU has appealed the commissions' Job needed in Bonnie's destructive wake. In addi-prudency decisions to the appropriate courts in tion, crews from Texas Power and Light Com-Texas and trulslana. pany (headquartered in Dallas) plus contract One positive regulatory development occurred crews and more than 100 contract tree trimming 9
1986 In Review .
crews aided in restoring powen Among the executive changes made during in another operations matter, Nelson Unit 1986, Joseph L. Donnelly was elected to the No. 7, the gas-fired 90 mw turbine originally board of directors and promoted to senior ex-used as a peaking unit at the company's Nelson ecutive vice president and chief financial officer; Generating Station in Westlake, Loulslana, was Ocorge T. McCollough, Jr., became senior vice moved to Louisiana Station in Baton Rouge to president - energy and planning; and Cecil L.
provide steam and electric service to Exxon's Johnson was named vice president - legal huge Baton Rouge refinery and chemical com- services.
plex. The relocated unit will be designated as Because of the continued success of the com-Loulslana Unit No. 4A. pany's fuel-buying policles, OSU has been able As a result, Oulf States keeps the Exxon com- throughout 1986 to negotiate natural gas con- I plex as an electricity and steam customer, with tracts at lower prices than the projected fixed an estimated increase in OSU revenues of about fuel factor established by the PUCT.
$5 million annually.This means the project's These fuel savings resulted in the following cost will be recovered in about two years. refunds in Texas, while in Louisiana savings OSU continued its cost-cutting efforts in 1986, were passed on to customers through the fuel achieving savings through union and manage- adjustment clause:
ment wage freezes, elimination of management
- Effective April 4, the PUCT gave Gulf States bonuses, a hiring freeze, job eliminations, con- permission to lower the fixed fuel factor rates by struction reductions and large reductions in 3.5 percent and to refund $18.7 million in over-equipment and material purchases. recovered fuel costs to Texas customers with Project Save Cash - the company's program April bills. This refund, on a typical residential to reduce expenses in as many areas of opera- customer's monthly bill for 1,000 kwh, tion as possible - had resulted in savings of amounted to about $25.
more than $70 million by Lecember 1986. This e Gulf States requested and received permis-cost-cutting program will be ongoing in 1987. slon from the PUCT to refund to its Texas customers as credits on their September bills Other Items of Interest some $15.7 million related to fuci cost savings.
050's wholly-owned subsidiaries are Varibus This covered the period from March I through Corporation and Prudential Oil & Gas Inc. June 30,1986, and represented a credit of about Varibus owns rights to an estimated 148 million $11.50 for each 1,000 kwh used by a residential -
tons of undeveloped lignite reserves in east customer.
Texas, and this subsidiary also operated in- After this last refund, Oulf States had returned trastate gas pipelines - used primarily to more than $66 million in fuel savings to its -
transport fuel to two of the company's customers since September 1985.
generating stations - in Loulslana.
During 1986, Prudential Oil & Gas spent $3 million to explore for oil and gas reserves, main-ly in the Texas and Loulslana Gulf Coast regions.
At the end of 1986, Prudential's proved reserves were estimated by the company to be about 19.2 The foregoing portion of this report is million mcf of gas and 1.2 million barrels of oil intended to present information about or condensate. which the company believes may be of in- )
Project CARE (Community Assistance Relating terest to the shareholders. Por purposes of to Energy), OSU's program to provide emergency making investment decisions the more assistance to elderly, needy customers, made complete information contained in the payments in Texas and Loulslana totaling company's Annual Report on Form 10-K almost $290,000 during 1986. That money and other current reports filed with the helped more than 4,500 households of persons Securities and Exchange Commission aged 60 or older, should be consulted.
Contributions in 1986 for Project CARE, from all sources, totaled more than $326,000. Project CARE is administered by the American Red Cross in Texas and by various social service agencies in Louisiana.
In more cost-cutting efforts, OSU announced in October 1986 that more than 300 employees left the company during the year as part of an early retirement program. On an annual basis, OSU will save about $11.6 million in annual payroll costs as a result of these retirements.
10
i Financial Information cuir states uuuues co.
FINANCIAL SECTION Contents Management Responsibility for financial Statements .....................................11 Common Stock Prices and Cash Dividends Per Share . . . . . . . .............................. 11 Selected Fina ncial Da ta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................. 12 Management's Discussion and Analysis of financial Condition and Results of Operations . . . . . . . . . . . 12 Sta te men t o f in come . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Statement of Sources of funds invested in Utility and Other Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Ba la n ce S h ee t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Statement of Changes in Capital Stock and Retained I:arnings . . . . .......................... 19 Statemen t of Ca pitalizatio n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Notes to the rin ancial Statemen ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 A u d i tors' Repo rt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... 32 Sta tistica l Su m m a ry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Management Responsibility for Financial Statements a review of internal accounting controls to the Management is responsible for the prepara- extent considered necessary, tests of transac-tion, Integrity, and objectivity of the financial tions, and other procedures sufficient to provide statements of Gulf States Utilities Company. The reasonable mairance that the financial -
statements have been prepared in conformity statements are neither materially mtWeaiing nu with generally accepted accounting principles contain material errors. i applied on a consistent basis, and, in some The Board of Directors, through its Audit Com-cases, reflect amounts based on estimates and mittee, has general oversight of management's judgment of management, giving due considera- preparation of the financial statements and is tion to materiality. responsible for engaging, subject to shareholder The Company maintains a system of Internal approval, the independent accountants. The controls designed to help give reasonable Audit Committee, comprised entirely of outside assurance that the books and records properly directors, reviews with the independent accoun-reflect the transactions of the Company and that tants the scope of their audits and the accoun-j established policies and procedures are follow- ting principles applied in financial reporting. The cd. Internal control systems are subject to In- Audit Committee meets regularly, both separate-herent limits in recognition of the need to ly andjointly, with the independent accountants,
. balance their costs with the benefits they representatives of management, and the inter-produce. The Company's management strives to nal auditors, to review activities in connection maintain this balance. with financial reporting. The independent ac-Coopers & Lybrand, Independent certified countants have full and free access to meet with public accountants, is engaged to examine, in the Audit Committee, without management i accordance with generally accepted auditing representatives present, to discuss the results of standards, the financial statements of the Com- their examination and their opinion on the ade-pany and issue a report thereon, which appears quacy of internal accounting controls and the on page 32. Such auditing standards include quality of financial reporting.
Common Stock Prices and Cash Dividends Per Share for the years ended December 31 Cash Cash Dividende Dividende rald Paid 1986 High 14w Per Share 1985 High Low Per Share first Quarter . . . . . . $15 $10% $.41 First Quarter . . . . . . $14% $12% $,41 Second Quarter . 13 7% .26 Second Quarter . . . 16 13 % .41 Third Quarter ,.. 9% 7% -
Third Quarter . . . . . 16% 11% .41 fourth Quarter 8% 7 -
Pourth Quarter . . . . 13 % 12 % .41 i
The Common Stock of the Company is listed on the New York, Midwest and Pacific Stock Exchanges. The approximate number of common shareholders on December 31,1986, was 99,500.
11 j
Financial Information -
Selected Finat Clal Data (in thousands except per share amounts and ratlos)
For the Years Ended December 31 1986 1985 1984 1983 1982 Operating Revenue . . . . . . ...... $1,478,388 $1,858,436 $1,547,041 $1,436,188 $1,307,259 j Net Income . . . . . . . . . . . . . . . ..... 244,981 265,499 258,171 229,799 165,979 I Income Appilcable to Common j Stock....... ................ 181,854 205,362 202,511 180,747 127,030 I Earnings Per Average Common Share Outstanding . . . . . . . . . . . . . 1.71 2.10 2.30 2.31 1.95 Dividends Per Share of Common j Stock .... . . ...... ....... .67 1.64 1.64 1.62 1.56 !
Return on Average Common Equity . 10.49 % 13.05 % 14.42 % 14.78 % 12.32 %
Ratio of Earnings to Fixed Charges . 1.79 2.08 2.35 2.45 2.10 As of December 31 Total Assets .... .. ..... $6,116,855 $5,556,245 $4,886,844 $4,349,524 $3,806,111 Ieng Term Debt and Preferred Stock Subject to Mandatory Redemption 3,128,650 2,782,112 2,347,648 2,040,295 1,771,078 Book Value Per Share . . . . .... .. 16.79 16.02 15.79 15.73 15.25 r ,pagesys e .3 pq .m Common Shareholders' Equity . . . 35.0% 35.4 % 36.6 % 36.6 % 3 6.0 %
Preferred and Preference Stock . . 10.8 11.4 11.8 12.3 '13.1 tong Term Debt . .... ..... .. 54.2 53.2 51.6 51.1 50.9 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
I l
Management's Discussion and Analysis of Financial Condition and i Results of Operations Financings and Capital Resources The Company's financial condition continued Commission (LPSC) during February,1987). Ad-to deteriorate during 1986. Reduced rates in ditionally, the rate cases filed during 1986, In ,
Texas and dismissal of the River Bend portion of Texas and Loulslana, are based upon rate the Loulslana rate case filed on September 30, moderation plans which, for ratemaking pur-1985 (see Note 10 to the financial Statements), poses, defer recognition and recovery of certain combined with declining sales have severely costs of River Bend until later years. Such plans restricted the Company's internal generation of will result in a continuing need for financings in cash. Operating costs of River Bend, buybacks of 1987 and beyond. l power from Cajun Electric Power Cooperative, inc.'s (CEPCO) 30 percent share of River Bend, The Company's ability to obtain financing continued payments and/or deposits for power through the issuance of debt securities and purchases from the Southern Company, preferred and preference stock is materially l Increased financing costs, and other pressures affected by the credit ratings assigned by rating have resulted in a need for cash which is ex- agencies. During 1986, rating agencies pected to exceed the presently estimated cash downgraded the Company's long-term debt and l resources of the Company. There can be no preferred and preference stock to " speculative" I assurance that such needs can be met. The grade. As a result, certain security markets are l Company presently estimates that it will run out currently unavailable.
I of cash during 1987, without additional revenues or financing, neither of which can be Due to the failure to declare dividends on com-assured (see Note 10 to the financial Statements mon, preferred, and preference stock during the for information on interim rate increases first quarter of 1987 and the omission of com-granted by the Public Utility Commission of mon dividends during the last two quarters of Texas (PUCT) and the Loulslana Public Service 1986, it is unlikely that additional shares of such 12
Gulf States Utilities Co.
stock could be marketed. At December 31,1986, Effect on Effect on based upon the enults of operations for the year Netincome EPs then ended, the Company was not able to meet 7,"j",**",d/ E"g coverage requirements necessary for the is- Deferred alver Bend suance of additional first mortgage bonds as operating Expenses $ 93,821 $.88 specified in the Company's Mortgage Indenture. Deferred nevenue However, it is unlikely that such bonds could be " "
De re nefdend marketed regardless of whether coverage re- carrying costs . 132.768 1.25 quirements were met. External intermediate or $233.853 $2.20 long-term financing may only be available through issuance of unsecured or subordinated Without the inclusion of the above items in the lien debt securities,if and to the extent they can Company's financial Statements, income ap-be marketed. As discussed in Note 8 to the plicable to common stock for the year 1986 Financial Statements, the Company's revolving would have been $(52) million or $(.49) per credit agreement, with an unused balance of share. These deferred items include substantial
$450 million, may not be available as an ad- cash expenditures which were not recovered in ditional source of financing due to notification 1986 and there can be no assurances they will by the major banks involved in the agreement be recovered. The discussion below provides in-that a " material adverse change" has occurred formation on significant items which affected and funds will no longer be advanced under the the Company's results of operations during the agreement. The Company has available short- period from 1984 through 1986.
term lines of bank credit (approximately $80 Operating Reverme million M necember 31,1986) and is exploring ~
other short-term sources of funds. r10 wever, Operaung revenue declined by 20 percent d'ur there can be no assurance that existing short. Ing 1986, as compared to 1985. This decline term lines of credit can be accessed or that they followed increases of 20 percent and 8 percent will remain available or that new sources may be during 1985 and 1984, respectively. The com-arranged. Based upon current projections, the ponents of the changes in operating revenue are Company may have to seek relief from its detailed below:
creditors under the Bankruptcy Code during r,g, n ,
1987, if it is unable to obtain adequate rate relief 1986 1985 1984 or other sources of funds or deferrals of cash ,,,,,,,,,,,,3 requirements.
Results Of Operations Change in base rates . $ (49,120) $ 34,388 $ 17,993 The Company's 1986 net income has been ruel cost recaery . 007,255) 289.677 4&8%
affected by the receipt of accounting orders salen turne and ther . (2W3) 02RQ 4W4 Issued by regulators in Texas and Loulslana pend- 80808482 $3 " 393 $ 3 #853 Ing completion of the Company's current retail rate cases. The accounting orders result in the Rates. The changes in base rates shown above Company deferring, for financial reporting pur, reflect rate orders and/or settlement poses, the retall portion of those expenses incur. agreements implemented during the period red in connection with the operation of River from 1984 through 1986.
Send and recording non-cash carrying costs on During 1986, the Company placed into effect the Company's investment in the unit not an $80 million rate decrease as part of a settle-already reflected in rate base. Such carrying ment agreement with its Texas retail customers, costs are computed using the same Additionally, in August,1986, the PERC granted methodology as that used in the computation of the Company a $26 million rate increase, sub-Allowance for runds Used During Construction Ject to hearing and refund, in connection with (ATUDC). Additionally, in accordance with the the commercial operation of River Bend, terms of a rate moderation plan tentatively ap- However, as more fully detailed in Note 10 to the proved by the rederal Energy Regulatory Com. Financial Statements, the Company subsequent-mission (FERC), the Company is recording in the ly reached a settlement agreement with most of Statement of income a deferred revenue require- its wholesale customers (subject to FERC ap-ment representing those River Bend costs which proval) and placed into effect rates which will are applicable to wholesale customers and result in revenues lower than those authorized which have been deferred for later recovery by the FERC.
under the provisions of the rate moderation During March,1985, the Company reached a plan. These items (net of the related tax effects) settlement agreement with its wholesale have increased the Company's 1986 net income customers which resulted in an $18.55 million and earnings per share as follows: Increase in wholesale rates. The Company had initiallyimplemented a $29.3 million rate increase 13
Financial Information as authorized by the FERC in September,1984 Operating Expenses and Taxes subject to hearing and refund. In July,1985, the 1"uel and Purchased Power. fuel expense PERC authorized the Company to place into ef- declined by 21 percent during 1966. after in-fcct a $15.7 million rate increase applicable to creasing 36 percent during 1985. The decline in transmission service customers. Additionally, fuel expense was the result of lower fuel prices during 1985, the Company placed into effect a offset by increased generation. During 1986, the
$1.1 million rate reduction previously ordered by Company's overall system fuel cost declined by the LPSC in December,1983. 34 percent, primarily as a result of the decline in the price of natural gas, the Company's primary The PUCT approved $27.5 million of a requested fuel source. Kilowatt-hour generation increased
$161.2 million electric retall rate increase during 19 percent during 1986, and reflected the in-July,1984. creased utilization of River Bend and the decreased utilization of purchased power to for information on rate increase requests cur. meet load requirements. The increase in fuel rently pending before the PUCT and LPSC, as well expense during 1985, as compared to 1984, was as information on interim rate relief granted by caused by increased fuel prices resulting from the PUCT and LPSC during February and March, the expiration of a low-cost natural gas contract.
1987, see Note 10 to the financial Statements. The average cost per kilowatt-hour of natural gas increased from 1.50 cents during 1984, to 3.11 cents during 1985. The effect of the in-Milowatt-Hour Sales. The Company's 1986 creased fuel prices was mitigated by reduced kilowatt-hour sales Scilnert by 7 percent as generation regulrements caused by decreased compared to the prior year. During 1985, sales, increased power purchases under long-kilowatt-hour sales declined by 8 percent after term contracts, and the increased utilization of !
Increasing by 9 percent during 1984. See the the Company's less expensive coal-fired genera-Statistical Summary on page 33 for information l tion. During 1984, fuel expense decreased by 5 on kilowatt-hour sales and related revenues by percent due to a reduction In the unit price paid customer class. Kilowatt-hour sales to industrial for fuel, and wholesale customers accounted for approx-Imately 89 percent of the total sales decline. The Purchased power expense declined by 23 decline in industrial sales reflects the continued percent during 1986, primarily as a result of depressed condition of the petroleum-based decreased kilowatt-hour purchases reflecting economy in the Company's service areas as well reduced load requirements, suspension of cer- i as the loss of certain customers who have con' tain payments to the Southern Company, the verted to cogeneration. The decline in wholesale availability of lower cost natural gas for use in sales has resulted primarily because of the Company-owned units, and the increased utiliza-transfer of certain wholesale customers to a tion of River Bend to meet load requirements.
transmission service rate schedule during the Purchased power expense increased by 67 per-second half of 1985. cent during 1985, as a result of additional kilowatt hour purchases made to displace the During 1985, the decline in sales to industrial higher cost of fuel for Company-owned genera-and wholesale customers accounted for most of tion. The 33 percent increase in purchased the overall sales decline. These declines again power expense during 1984, resulted from in-reflected the depressed economic conditions im- creased purchases of energy made as a result of pacting the Company's industrial customers and higher load requirements, offset in part by a the transfer of certain wholesale customers to a reduction in the unit cost of kilowatt-hours transmission service rate schedule. The sales purchased.
declines in 1985, were offset in part by increased commercial sales caused primarIly by customer Other Operations and Maintenance Dcpense, growth. The 1984 sales increase was primarily Other operations and maintenance expense, the result of increases in industrial, residential excluding those associated with River Bend, in-and commercial sales. The industrial and com- creased by approximately 1 percent, during mercial sales increases were a reflection of im- 1986, and 1985. The 1986 increase was proving economic conditions In the Company's primarily the result of an $8.9 million service area as compared to those experienced provision for pension benefits recorded in during 1982 and early 1983. The residential connection with the Company's early retirement sales increase was primarily attributable to the plan offered during 1986, offset by a reduction i colder than normal weather experienced in the in the amount and price of gas purchased for l Company's service area during the early part resale and the efforts of the Company to l of l984. save cash. I 14 i
Gulf States Utilities Co.
9 Depreciation Expense. Depreciation expense, This compares to increases of 34 percent during excluding depreciation and decommissioning 1985, and 25 percent during 1984. As a percen-expenses recorded on River Bend, decreased by tage of net income, AFUDC and deferred carrying 3 percent during 1986, as compared to 1985, costs increased from 80 percent in 1985, to 101 primarily as a result of the reversal of approx- percent in 1986. These Increases are primarily imately $7.0 million of depreciation expense trJe result of increases in the amount of con-previously recorded on Big Cajun 2 Unit 3, offset struction work in progress (CWIP) qualifying for by depreciation expense on routine plant addi- APUDC through the commercial operation date tions. Prior to the settlement of the Company's of River Bend and the subsequent recording of Texas rate case in June,1986, Big Cajun 2 Unit 3 deferred carrying costs on both the plant invest-was not considered as plant-in-service for ment in River Bend not currently allowed in the ratemaking purposes in Texas and, consequently, Company's rate base by the PUCT and LPSC and depreciatlan expense on the unit was not being the cash portion of deferred expenses.
recovered. As part of the settlement agreement, the Company was authorized to reverse previously Nonutility Subsidiary Operations. The declines recorded depreciation and now expects to be in nonutility subsidiary operations during 1986 allowed to recover such depreclation. and 1985, were primarily caused by losses of
$28.5 and $12.3 million, respectively, incurred Taxes. Income taxes decreased by 105 percent by Prudential Oil and Gas, Inc., a wholly-owned during 1986, after a decline of 48 percent during subsidiary of the Company. These losses 1985, and an increase of 3 percent during 1984. resulted from the write off of costs recorded in The decl!nes during 1986 and 1985, reflect lower the subsidiary's full cost pool. Such write-offs amounts of taxable income. Other taxes have were necessitated by declines in the price of oil increased as a result of higher franchise and experienced during 1985 and 1986.
revenue related taxes.
Other net. The increase in other-net during As discussed in Note 2 to the financial 1986 was the result of increased interest income Statements, the 1986 Tax Reform Act contains recorded on temporary cash investments.
several provisions which will im pact the Com pany.
Total Federal income tax expense is expected to Interest Charges. Increased interest on long-be less under the new law, as compared to the term debt resulted from Interest requirements old law, as the effect of the tax rate reduction is on new borrowings made to refund short and likely to exceed the increased tax charges from intermediate-term debt incurred in connection other provisions of the new law. However, the with the Company's construction program.
Company's cash payments for rederal income These increases have been offset !n part by lower taxes may be higher under the new law in the interest rates on short and intermediate-term near term, primarily due to the new form of the debt, alternative minimum tax. Additionally, internal cash generation is likely to decrease primarily as Effects of Inflation a result of reduced deferred tax charges due t the new law's lower tax rates. The effects of inflation upon the Company have been less in the period 1984 through 1986, than in the preceding three-year period because River Send Expenses. Approximately $195.4 million of operating expenses applicable to River the rate of inflation has declined. This decline is evidenced by the minimal growth in the Con-Bend are reflected in the Statement ofIncome for the year 1986. These expenses include $96.2 sumers Price Index over the period from 1984 to 1986. However, over the longer term, inflation million relating to the buybacks of power from CCPCO, $52.4 million of depreciation and has had serious effects on the Company's finan-decommissioning expenses, and $46.8 million of clat position. During periods of high inflation, other operations and maintenance expenses. For provisions for depreciation become inadequate Information on the deferral of operating ex- as construction costs increase. The rise in con-struction costs, in turn, results in the need for penses related to River Bend, and a discussion of the possible effects of Statement of Financial larger amounts of capital and increased external Accounting Standards No. 90, see Note 10 to the financing. The effects of Inflation have been financial Statements, further exacerbated by slower sales growth caused by conservation efforts on the part of Non Operating items
- AlvDC and Deferred River Bend Carrying Costs. The total of APUDC and deferred carrying costs on the River Bend investment increased by 16 percent during 1986, as compared to 1985.
15
I financial Information .
Statement of Income For the years ended December 31 (in thousands except per share amounts) 1986 __ 1985 1984 j Operating Revenue Electric . . . . . . .................. ................. $ 1.367,480 $1,714,405 $1,410,701 Steam . . . ..... ... ........ . ................ . 77,783 102,576 . 83,165 Gas....................... ...... ...... . .... 33,125 41,455 '53,175 1,478,388 1,858,436 1,547,041 Operating Expenses and Taxes fuel . . . ... . .. . .................. ....... 449,213 569,182 417,506 Purchased power . . . . . . ............ ... .. ..... 347,075 449,554 268,525 Other operations ... ......... ..... ... .... . .... 232,032 185,969 180,489 Malntenance . . . . . . . ........ ................. ... 83,684 79,834 85,055 Depreciation and amortization . . . . . . . . ..... ........... 162,272 112,789 112,291 Deferred River Bend expenses. . .. . .. . ... . ....... (188,638) - --
l Income Taxes federal . . . . . . . . . . . ............... .. ..... 5,473 45,435 72,259 State....... .... ....... ..... ............ . (7,496) (5,633) . 4,824 Other taxes . . ............. ....... ............. 81,017 77,441 62,408 1,164,582 1,514,571 1,203,357 Operating lucome . . . . . ....... . .. .. ............... 313,806 343,865 343,684 Other Income and Deductions Allowance for equity funds used during construction ........ 77,447 145,257 108,029 Deferred River Bend carrying costs . . . . . ..... ........,, 132,768 -
Nonutility subsidiary operations . .. .. . .. ... . . (30,148) (14,572) (4,329) i Other-net , . . ..... . .... .. . . ... . .. ... 10,232 (3,705) 1,588 Income Before Interest Charges. . . . . .. .. .. ... .. ... 504,105 470,845 448,972 Interest Charges Long-term debt .. ...... ..... . . . ....... ...... 285,946 263,022 231,070 Short-term debt and other . .. . .... .... . . ... 9,741 10,679 10,569 Allowance for borrowed funds used during construction . . .. . (36,563) (68,355) (50.838).
259,124 205,346 190,801 Net Income ....... .. ......... .... ,. . .. . 244,981 265,499 258,171 Dividends on Preferred and Preference Stock .... ... . ... . 63,127 60,137 55,660 Income Appilcable to Common Stock . . ................ . $ 181,854 $ 205,362 $_202,511 I
Average Shares of Common Stock Outstanding . . . ... .. ... .. 106,132 97,970 88,164 Earnings Per Average Share of Commop Stock Outstanding . . . $ 1.71 $ 2.10 $ 2.30 Dividends Per Share of Common Stock . .. ... .. . . . $ .67 $ 1.64 $ 1.64
~
The acIompanying notes are an integral part of the financial statements.
l 1
l p
f I
16
I 1
Gulf States Utliltles Co.
Statement of Sources of Funds Invested
-in Utility and Other Plant For the years ended December 31
-(in thousands)
'1986 1985 1984 Provided From Operations Net income . . . . . . . . . . . . . . .. ................ ... .... $ 244,981 $ 265,499 $ 258,171 Principal Income items not requiring current funds Depreciation and amortization . . . . . ........ ....... ... 162,272 112,789 112,291 Deferred income taxes - net . . . . . . . . . . . . . . . . . .. ....... 2,587 108,889 77,214 investment tax credits-net . . . . . . . . . . . . . . ............ . (3,621) (54,489) (8,911)
Equity component of allowance for funds used during construction . . .. . . . . . . . . ...... ..... ........ (77,447) (145,257) (108,029)
Nonutility subsidiary operations . . . . . .. ........ ........ 30,148 14,572 4,329 Early retirement pension benefits . . . . . ... ............... (8,938) - -
Deferred River Bend expenses and carrying costs . . ... ...... (321,456) - -
Total provided from operations . . . ........ ........... 28,526 302,003 335,065 Dividends
' Preferred and preference . . .. ... ., , .. ......... (63,127) (60,137) (55,660)
Common . . . . . . ..... ..... ...... .............. . (70,319) (161,605) (145,663)
Reinvested funds provided from (used in) operations ........ (104,920) 80,261 133,742-Provided From Financing Sales of securities Common stock ... ...... .... . .. ..... .. ...... 47,070 122,180 121,147 Preferred stock subject to mandatory redemption . . . . .. .. 75,000 60,000 45,000 first mortgage bonds (principal amount) . . . . . . ... 200,000 100,000 100,000 Euro debentures (principal amount) . .... .. . ...... - 75,000 -
Pollution control bonds (principal amount) . . . . .. ......... 20,000 154,000 196,000 Change in pollution control funds held by trustee . .. .......... 12,001 36,253- (64,399)
Change in escrow deposit-guaranteed debentures . ...... .. 24,000 14,481 (3,433)
Net change in short term borrowings . . ..... .. ...... -
(52,000) (38,000)
Retirement of long term debt . ........ .... (39,015) (100,564)
. .. . ... (345)
Retirement of preferred stock subject to mandatory redemption . ... ........,.. ......... (48,148) (5,306) (6,786)
Net change in revolving credit agreement ........ .. ... 80,000 120,000 ' 40,000 Construction commitment . ......... ..... .... .. 46,750 -- -
Total provided from financing . . . . . . .. ...... ....... 417,658 524,044 389,184 Other Sources and Uses investments in and advances to subsidiary companies . . . ...... (12,561) (13,663) (14,353)
Temporary cash investments . . . . . . .... ... ... .. .... (76,765) (60,596) (3,351)
Other-net (including changes in working capital) . . . . . .. . ... 26,649 (13,241) 11,573 Total other sources and uses . . . . . .... ......... ..... (62,677) (87.500) (6,131)
Expenditures For Utility and Other Plant . . . . . .... . .. ..... 250,061 526,803 516,795 Equity component of allowance for funds used during construction . . .... ............... .... 77,447 145,257 108,029 I Invested in Utility and Other Plant . . . . . . . . ......... . ...... $ 327,508 $ 662,062 $ 624,824 i The accompanying notes are an integral part of the financial statements.
i 17
Financial Information- -
Balance Sheet Decentber 31 (in thousands) 1986 1985 Assets Utility and Other Plant, at original cost Plan t in service . . . . . . . . . . . . . . . . . . . . . .... ........ .............. $6,370,545 $ 3,364,687 Less: Accumulated provision for depreciation . . . . . . . . . . . ............... 1,204,730 . 1.081,524 5,165,815 .2,283,163 Construction work in progress . . . . . . . . ......... ..... ...........,... 18,704 2,728,700 5,184,519 5,011,863 l I
Other Property and investments . .
Nonutility subsidiary companies . . . . . . . . . . . . . . . . . . . . . . . . . . .......... 47,123 64,710 Other ..... ... ..... .............. .......................... 3,641 '3,229 50,764 67,939 Current Assets Cash and temporary cash investments . . . . . . . . ........................ 143,880 67,098 Receivables Customers . . . . . . . . . . . . . .................................. 119,381 131,075 Other..... .... ........ ............ ......... ........... 24,878 22,868 l Puelinventories . . . . . . . . ... .. ................ ...... . .... 32,584 .40,678 Materials and supplies . . . . . . . . . . . . . . . . . . . . . . ... ... ........... 6,364 9,118 Prepayments and other . . . . . . . ...... .. . .... ......... ..... .. 23,279 8,504 350,366 279,341 ,)
Deferred Charges !
Unamortized debt expense . . . ... .. ........ . ..... .. ....... .. 25,565 23,973 Unamortized project cancellation costs . . . . . . . . .................,,.. 125,126 129,996 Accumulated deferred income taxes . . . . . . . .. . ................ .. 47,528- 35,667 Deferred River Bend costs . . . . . ..... . ... .............. .. 321,456 -
Other . ...................... ... . . ... .. . .. . , .. . 11,531 7,466 531,206 197,102
$ 6,116,855 $ 5,556,245 Capitalization and Liabilities Capitalization (See Statement of Capitalization)
Common shareholders' equity . . . .. ........ ............. .... .. $ 1,812,228 $ 1,656,592 Preference stock . .......... ...... ..... .. . ... . ............ 100,000 100,000 l Preferred stock Not subject to mandatory redemption . . . . . . . . .................. ,. 136,444 136,444 Subject to mandatory redemption . , , . . .. ... ......... ......... 323,313 294,416 Long-term debt . . . . ....... . ...... ... .. ..... ........... 2,805,337 2,487,696 ,
5,177,322 4.675,148 i Current Llabilities Long term debt due within one year . . . . ..... ........... ......,... 17,000 15,000 Preferred stock and long-term debt sinking fund requirements . . ..... .... 10,570 4,045 Construction commitments . . . . . . . . ...... ...... .................. 14,999 -
Accounts payable Trade ...... .. ........ .......... .. .. ................ 63,431 95,644 Subsidiaries . . . . . . ...... .................. ............... - 2,274 Customer deposits . . . . .......... .............. ........ ...... 15,149 15,930 Taxes accrued . . .. . . . . . ................ .. ....... ........ ..... 20,912 21,914
. interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . ..................... 92,082 80,819 Other . ............ .. .. . .. ... .... .... ............... 32,525 35,301 266,668 270,927 Deferred Credits and Other Liabilities investment tax credits . . . . .. . .... . . ........ ................ 117,728 121,339 Accumulated deferred income tares . .... ........................ 459,778 438,727 Over recovery of fuel costs . . . . . . . . . . ......... ............ .... ... 33,443 20,073 Other ...... ................ .............. .. ... .... .... 61,916 30.031 672,865 610,170 -
Commitments and Contingencies . . . . . . . . . . ......... .... .... ..... ...
$ 6,116,855 $ 5,556,245 I
The accompanying notes are an integral part of the financial statements.
18 i
Gulf States Utilities Co.
Statement of Changes in Capital Stock and Retained Earnings for the years ended Decernber 31 (in thousands) Preferred stock sub. ject to Premiu m Other Ma ndatory Common (Less Pald in Retained Redemption stock Expense) Capital Earnings Balance: January 1,1984 . . .. .. $ 204,336 $ 903,606 $ 3,601 $ 25,876 $ 383,516 Net income-1984 . . .... . 258,171 Preferred stock sold (450,000 shares) 45,000 Retirement of preferred stock . . . . ... (5,569) 1,766 Common stock sold:
Public offerings (6,000,000 shares) , .
66,000 Dividend reinvestment and stock purchase plan (3,662,855 shares) . . . 42,130 Employee benefit plans (1,089,109 shares) 12,677 Conversion of debentures (26,026 shares) 340 Dividends declared:
Preferred and preference ...... (55,660)
Common . . . .. . , . (145,663)
Capital stock cxpense , . .. ., , (5,242) 680 Balance: December 31,1984 . .
243,767 1,024.753 (1,641) 27,642 441,044 Net income-1985 . .. , .. . 265,499 Preferred stock sold (600,000 shares) 60,000 Preferred stock sinking fund requirements (4,045)
Retirement of preferred stock . . . (5,306) 728 Common stock sold:
Public offerings (4,000,000 shares) 56,000 Conversion of debentures (42,550 shares) 555 Dividend reinvestment and stock purchase plan (4,352,640 shares) . . 58,237 Employee benefit plans (551,501 shares) 7,388 Dividends declared:
Preferred and preference . (60,137)
Common . . .. .. . (161,605)
Capital stock expense . . (1,871)
Balance: December 31,1985 .
294,416 1,146,933 (3,512) 28,370 484,801 Net Income- 1986 . .. . . 244,981 Preferred stock sold (750,000 shares) 75,000 Preferred stock sinking fund requirements 2,045 Retirement of preferred stock . . . (48,148) (2,240)
Common stock sold:
Conversion of debentures (1,131 shares) 15 Dividend reinvestrnent and stock purchase plan (3,792,949 shares) . . 40,456 Employee benefit plans (699,295 shares) 6,599 Dividends declared:
Preferred and preference . ..... (63,127)
Common . . . .. ... (70,319)
Capital stock expense . . . .
(357) (372)
Balance: Decem ber 31,1986 . ,..... $ 323,313 $ 1,194,003 $ (3,869) $ 26,130 $ 595,964 The accompanying notes are an Integral part of the financial statements.
19 l
Financial Information .
Statement of Capitalization December 31
- (in thousands) 1986 1985 Common Shareholders' Equity Common stock Authorized 200,000,000 shares without par value Outstanding 107,905,700 and 103,412,325 shares, respectively . . . . . . . . . $1,194,003 ' $1,146,933 Premium and expense on capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . ..... (3,869) ' (3,512)
Other paid in capital . . . . . . ............................. . ....... 26,130' 28,370,-
Retained earnings . .. ................. .. ..... ..... ........ 595,964 484,801 j 1,812,228 1,656,592 Preference Stock Authorized 20,000,000 shares without par value, cumulative Outstanding 4,000,000 shares Current Dividend Shares Redemption Series Outstanding Price
$ 4. 40 . . . . . . . .. ... ........ .. 2,000,000 $ 31.90 50,000 50,000 3.85.......... ... .... .... .. . 2,000,000 31.35 50,000 50,000 Preferred Stock Authorized 6,000,000 shares $100 par value, cumulative Outstanding 4,617,568 and 4,349,044 shares, respectively shares Outstandingat Current j Dividend December 31, Redemption d series 1986 Price Not subject to mandatory redemption
$ 4,40 . . . . . . ... , .. ... . 51,173 $108.00 5,117 5,117 4.50 .......... ... .... .... 5,830 105.00 583 583 4.40 1949 . . . . . . . . . .... ... ...... 1,655 103.00 166 166 1 4.20 . . .. .. .. . . .. . .. 9,745 102.818 975 975 4.44 ..... . ... . ....... . 14,804 103.75 1,480 1,480 5.00 . . . . ..... ... ,. ... 10,993 104.25 1,099 1,099 5.08 . . . . . . . .. ...... .... .... 26,845 104.63 2,685 2,685 4.52 ........ . .... ... . ... 10,564 103.57 1,056 1,056 6.08 . . . . .... . . .... . ., ,. 32,829 103.34 3,283 3,283 7.56 . . . . . . . . .. ..... ..... 350,000 103.80 35,000 35,000 8.52 . . . . . . .... .... ... ... ... 500,000 106.43 50,000 50,000 9.96 . . . . .. . . ......... .. 350,000 106.64 35,000 35,000 136,444 136,444 Subject to mandatory redemption 8.80 . . . . ....... . ......... .. 301,029 105.00' 30,103 30,103 9.75 . ............, .. ....... ... 29,636 105.00 -2,963 3,111 3
8.64 . . . . . . ..... ... . .. . .. 302,465 105.00 30,247 30,247 11,48 . . . . ...,,. ,, .. .... . ..... 480,000 105.00 48,000 50,000.
13.64 . . . . . . . . . . . . . ... .......... . 40,000 105.00 4,000 50,000 1 12,92 .. ...................... 600,000 '112.92 60,000 60,000
... l 1 1.50 . . . . , . ..... ......... 750,000 111.50 75,000 I
A4Justable Rate . ..... .. .......... 300,000 106.40 30,000 30,000 I A4)ustable Rate . . . . . . . . . ..... . ... 450,000 108.70 -45,000 45,000 325,313 298,461 Preferred stock sinking fund requirements (2,000) (4,045) 323,313 - 294,416 (Statement continued on following page) 20
l Gulf States Utilities Co.
i 1986 1985 1mng Term Debt first mortgage bonds Maturing 1986 through 1990-4-%% due October 1,1987 .................... .. ......... -
17.000 4% due May l,1988 .. . ...................... .. ......... 20,000 20,000 4>A% due January l,1989 ...... ... ........................ 10,000 10,000 5-%% due December l,1989 .................. .............. 16,000 16,000 ;
4-%% due July 1,1990 . . ... ...... ......... .. ..... .... 17,000 17,000 14AA% due May'28,1991.................... ....... ........ 75,000 75,000 Maturing 1992 through 1996-44/s% through 17.W% . . . . . . . . .. .... 297,000 297,000 j
' Maturing 1997 through 2001-54/s % through 8-W% . . . ....... ... .. 245.000 245,000 i Maturing 2002 through 2006-8 W% through 10.15% ........... ... 210,000 210,000 Maturing 2007 through 2011-84ts% through 12.3% . .. ............ 285,000 285,000 Maturing 2012 through 2016-11 %% through 15% . . . . . . ......... . 600,000 400,000 first mortgage bonds sinking fund requirements . . . . . . . . . . . . . . .. .... (8,570) -
1,766,430 1,592,000 l Pollution control and Industrial development bonds 7% due 2006 . . . . . . .......... . . .. ... ..... .... ...... 25,000 25,000 5.9% due 2007 ... ..... ... ......... .... ..... ...... 23,000 23,000 10-%% due 2012 .............. ........... ... ...... 48,285 48,285 9%% due 2013 ......... .. ..... . .. . ... ... ...... 17,450 17,450 10 %% due 2014 . . . . . . ... ........ . . . ............ 50,000 50,000 12% due 2014 .... ....... ...... .. .. .. .. ........... 52,000 52,000 Variable rates due 2014 . . . . . . . .. ... . ., ,,.... 94,000 94,000 i Variable rates due 2015 . .. .... ..... . . . . .. ..... .. 154,000 154,000 Variable rates due 2016 . ... . .. . ..... .... .... .. . 20,000 -
Pollution control funds held by trustee , . . . ........ ....... (20,019) (32,020)
Debentures Quaranteed debentures 17.%% due October 1,1988 . .............. . .. . . ... 60,000 '60,000 .)
16% due April 15,1990 .... . ....... ...... .... . ........ 60,000 60,000 Escrow deposit .... .. ........ ..... .............. ... -
(24,000)
Euro debentures-13% duc 1992 ..... .. .... . ........... .. 75,000 75,000 Convertible debentures-7 %% due 1992 . .. . .. ... ........... 2,003 2,018 Term loan agreement . ........... . .. ...... .. ..... .... - 24,000 Revolving credit agreement .. ...... ... .......... .. .. ...... 350,000 270,000 River Bend construction commitment-Variable rate (4.%% at December 31,1986) due in monthly Installments of $1.4 million (including Interest) through 1989 . . .......................... 31,751 -
2,808,900 2,400,733 -
Unamortized premium arid discount on debt-net . . . . . . ...... .. ... (3,563) - (3,037) 2,805,337 ._2,487,696
$ 5,17 7,322 $4,675,148 The accompanying notes are an integral part of the financial statements.
21 i
i
Financial Information .
Revenue, hel, nd Purchased huser. M Notes to the Financial Company records revenue as billed to its statements customere en e cxcie biiiina besis. Reven#e is not recorded for energy delivered and unbilled at
- 1. Summary of Significant the end of each fiscal period. The Company's Accounting Policies wholesale and Loulslana retail rate schedules System of Accounts. The accounting records pr vide for adjustments to substantially all rates of the Company are maintained in accordance f r increases or decreases in the costs of fuel for with the Uniform System of Accounts as generation, purchased power, and gas prescribed by the federal Energy Regulatory distributed. The Company s Texas retail rate Commission (FERC) and adopted by the Loul- schedules include a fixed fuel factor approved by the PUCT, Such factor remains the same until slana Public Service Commission (LPSC) and the the Company files for a general rate increase or Public Utility Commission of Texas (PUCT),
until the PUCT orders a reconcillation for any Utility Plant and Depreciation. Utility and other ver or under collections of fuel cost. fuel and purchased power costs in excess of those includ-plant is stated at original cost when first ed in base rates or recovered through fuel ad-dedicated to public service. Costs of repairs and justment clauses are deferred (or accrued) until minor replacements are charged to expense as incurred. The original cost of depreciable utility such costs are billed (or credited) to customers. {
plant retired and cost of removal,less salvage, are charged to accumulated provision for Inventories. The Company's fuel inventories depreciation. The provision for depreciation is are comprised of fuel oil, valued at weighted computed using the straight-line method at average cost, and coal, valued at last in, first-out rates which will amortize the unrecovered cost of (LIFO) cost. Materials and suppIles are valued at depreciable plant over the estimated remaining weighted average cost.
service life.
Income Taxes. The Company and its sub-Composite depreciation rates were as follows: sidiaries file a consolidated federal income tax return income taxes are allocated to the in-1986 l985 1984 dividual Companies based on their respective riectric . 3.31% 3.43 % 3.52 % taxable income or loss and investment tax steam . 2.47 2.34 2.38 credits.
Oas . 3.52 3.53 3.53 Total Company , 3.30 3.41 3.50 The Company follows a policy of comprehen-Allowance for hnds Used During Construction sive interperiod income tax allocation where (AFUDC) and Capitalization of fnterest. The ac- such treatment is permitted for ratemaking pur-crual of AFUDC is a utility accounting practice poses by regulatory bodies. Deferred income calculated under guidelines prescribed by the taxes result from timing differences in the FERC and capitalized as part of the cost of utility recognition of revenue and expenses for tax and plant representing the cost of servicing the accounting purposes.
capital invested in construction work in progress (CWIP). Such AfUDC has been segregated into investment tax credits have been deferred and two component parts-borrowed and equity are being amortized ratably over the useful lives funds. That portion allocated to borrowed funds of the related property, is reflected as an adjustment to interest charges, while that portion applicable to equity funds is Nonutility Subsidiary Companies. The Company shown as a source of other income. Both the accounts for its investments in its wholly-owned equity and the borrowed portions of AFUDC are nonutility subsidiary companies, Prudential Oli non-cash items which have the effect of increas- & Gas, Inc. (Prudential) and Varibus Corporation ing the Company's reported net income by their (Varibus), on the equity basis. Prudential is full amounts. When the related utility plant is engaged primarily in the exploration for, placed in service, a return on and recovery of development, production, and marketing of oil these costs may be permitted by the regulators and gas properties. Varibus operates pipelines in determining the rates charged for utility ser- and owns rights to lignite reserves. See " Manage-Vice. The Company computed AFUDC at the ment's Discussion and Analysis of financial Con-following net of tax rates compounded dition and Results of Operations" for information semlannually: on losses incurred by Prudential during 1986 as a result of the write-off of costs recorded in January 1.1984+1 arch 31.1986 . 10.00 % Prudential's full cost pool.
April 1,1986 June 30,1986. . . 9.75 July 1,1986 December 31,1986 . 9.50 22
Oulf States Utilities Co.
Retirement Plan and Other Post Employment The components of federal income taxes are as Benefits. The Company has a noncontributory follows:
pension plan, which covers all employees 1986 1985 1984 meeting certain age and service requirements. <in inausane.)
The Company's policy is to fund the actuarially Charged to operating computed pension contribution annually. Past expenses:
Cur " "
and prior service costs are being funded and tax pr lo ." $ (1,120) $ (8,229)$ 8,522 amortized by the Company over periods of up t Deferred federat income forty years- taxes-net:
Tax depreciation . 159,111 103,067 34,933 in addition to the pension plan, the Company Capitalized C 4.634 8,819 9,120 provides retired employees with life and health 3 ,,"St j "c,Cy t*gg care insurance benefits. All of the Company's cancellation costs . (1,668) (1,497) (2,023) employees may become eligible for benefits upon Nuclear unit reaching normal retirement age. The annual cost cancellation costs . 100 5,139 30.958 of such benefits, which is currently not material, ruel and purchased is recognized as claims are actually paid. P ** 'eq)
<acc ' *** d'I*','*d (6,106) (8,412) 141 Book expenses
- 2. Federal Income Taxe5 deferred for tax purposes . . (1,257) 850 263 The provisions for federal income taxes were Net operating tax less than the amounts computed by applying loss carryforward the statutory federal income tax rate to net in. benent recognized
~
come before federal income taxes. The reasons ( }
C",','*"]Yd g Eper5g for these differences are as follows: expenses deferred for books, expensed 1986 1981_ 1984 for tax purposes . 68,777 - -
(in thousands except percentages) other . (697) 187 (744)
Netincome before federal income taxes . $257.262 $321,066 $333,305 Total deferred federalincome taxes-net . 10,214 J 08.153 72,648 rederalincome taxes at statutory tax rate . $118,341 $ 147,690 $153.320 investment tax
"* ~"*
Inco ela e resu ingfrom:
Exclusionof ArUCCand deferred River Bend Total federalincome carrying costs from taxes charged to perating expenses . 5,473 45,435 72,259 taxable income . . . (113,863) (98.262) (73,079)
Items capitalized for book Charged to other purposes but expensed inc me-net . 6.808 10,132 2.875 for tax purposes . . (14.5231 (9,681) (8,865)
Non deferred depredation Total federal differences . . . 6,066 5,413 5,502 income taxes . $ 12.281 $ 55.567 $ 75,134 Aqjustment for prior years taxes and other Currently, llming differences exist for which regulatory adjustments. (3.732) 492 (2,366) deferred taxes have not been provided and, noYuti$ty suYsfdiaries 13.868 6.703 1,991 Amortization of rates. The cumulative amount of timing dif-investment tax credit (3.530) (3.872) (5,103) ferences for which no deferred taxes have been roreign tax credit reversal -
3.976 -
provided was approximately $145 million at Deferral or nuclear December 31,1986.
fuelsavings 10.967 - -
otheritems . (1.313) 3.108 3.734 The tax effect of the Company's 1986 federal tax loss has been recorded as a reduction of Total federal deferred income taxes. At December 31,1986, income taxes . $ 12.281 $ 55.567 $ 75 134 for tax purposes, the Company had tax loss carryforwards of $477 million and Investment ttfective federalincome tax rate 4.8s tax credit carryforwards for book and tax pur-17.3% 22,js poses of approximately $251 million. These will be used to reduce income taxes in future years and, if not used, will expire through the year 2001.
The 1986 Tax Reform Act contains many provisions that will affect the Company. These 23
Financial Information provisions include a reduction in the corporate '"
tax rate, a reduction ofinvestment tax credit Actuartai rresent value of g,,enefit obilgations:
carryforwards, repeal of the investment tax Accumulated benefit obilgation, credit effective January 1,1986, inclusion of un- including vested benefits billed revenues and contributions in aid of con- of $129,655. . .,.. . . $140.869 struction in taxable income, required interest Projected benefit obligation . . . .. $178,212 and overhead capitalization for construction, rian assets, at fair market value. . 202,786 lengthened tax depreciation lives, and a new rian assets in excess of projected alternative minimum tax. For Information on how the Company expects its total tax liability to
[,"' n t n n ga n l l l ' ' NI unrecognized net assets, being be affected, as well as the impact the changes amortized over 15 years . . .. . 33,423 will have on the Company's internal cash unrecognized prior service generation, see " Management's Discussion and c st . .. .. . .. . .. (22,869)
" "ts Analysis of financial Condition and Results of 0[ger P n ec P
tan d!n Operations." computing the projected benefit obligation . ... ... . (3, t 14)
- 3. Retirernent Plan rension asset recognized in The Company's pension provision for the years ended December 31,1986,1985, and 1984, was The accumulated benefit obilgation is the pre-
) approximately $(614,000), $7,994,000, and sent value of future pension benefit payments
$8,721,000, respectively. Of such amounts, ap- and is based on the plan's benefit formulas proximately $(446,000), $4,912,000, and without considering expected future salary in- '
$5,703,000, respectively, were charged to in- creases. The projected benefit obligation con-come with the balance of such costs for each siders future salary increases. The assumed dis-period charged to construction and other count rate and long-term return on pension accounts, assets were 7.5 percent and 9 percent, respec- I tively. The expected rate of increase in future I During the third quarter of 1986, the Company salary levels averaged approximately 6.1 adopted the provisions of Statement of financial percent.
Accounting Standards (SFAS) No. 87, At December 31,1986,68.1 percent of plan
" Employers' Accounting for Pensions." The assets were Invested in equity securities,23.2 adoption of the new standard resulted in an in- percent in bonds, and 8.7 percent in cash or crease in net income of approximately cash equivalents. !
$922,000. The components of the 1986 pension During the first quarter of 1986, the Company provision are summarized as follows:
initiated an early retirement plan available to employees meeting certain qualifications and
'"*-a* making application therefor prior to April 15,
$t$r t t on projected benefit obligation . I 1986. A total of 317 of 488 cligible employees Actual return on plan assets . . (30,423) elected to take early retirement. The Company Unrecognized net gain . .
14,494 estimates that the cost of the early retirement Amortization of net asset at January 1,1986 (2.388) plan approximated $14.4 million, of which $8.9 rension provision . $ (614) million (exclusive of related tax effects) was charged to operating expense during the second quarter, The obilgations for plan benefits and the with the balance charged to construction.
amount recognized in the Company's balance sheet at December 31,1986, are reconciled as 4. Leases follows:
The Company has existing agreements for the leasing of certain vehicles, coal rail cars and other equipment, buildings, and nuclear fuel.
lease rental payments were $20,119,000,
$ 16,632,000, and $16,404,000 during 1986, 1985, and 1984, respectively. Of such amounts,
$17,466,000, $14,041,000, and $12,912,000, respectively, were charged to income.
Future minimum lease payments under non-cancellable capital and operating leases (in-ciuding amounts due under a nuclear fuel lease as discussed below) for each of the next five years and in the aggregate at December 31, 1986, are estimated to be (in thousands):
24 1
I _ _ _ _ _ l
Gulf States Utilities Co.
1987 . . . . . . . . . . . . . . . $ 56,098 quarterly payments to the lessor for the cost (In-1988'............... 58,720 cluding capitalized Interest) of fuel consumed 1989.............. 53,422 during the previous quarter. The irssor's invest-1990............... 53,081 ment in nuclear fuel was approximately $205 1991............... 55,382 million and $198 million (including accumulated Remaining years . . . . . . 237,461 carrying charges) at December 31,1986 and
$514,164 1985, respectively.
Under the provisions of SFAS No. 71, beginn-The Company has a nuclear fuel financing Ing in 1987, the Company will be required to agreement with a non-affiliated third party fuel record all of its capital leases in the financial corporation (the lessor), which provides for the Statements. Flad such leases currently been ac-Lessor to finance nuclear fuel for future use at counted for as capital leases, the balance sheet River Send Unit 1 (River Bend). During 1986, the would have included leased assets and related agreement was amended to lower the committed liab!!!tles of approximately $228.3 million and line of credit from $300 million to $250 million. $223.7 million at December 31,1986 and 1985, Under the agreement, the Company is making respectively.
- 5. Jointly Owned Facilities As of December 31,1986, the Company owned undivided interests in threejointly-owned electric generating facilities as detailed below (dollars in thousands):
River Bend Roy S. Nelson Big Cajun *2 Unit 1 Unit 6 Unit 3 l'lant in service , , , . . . . . ...... . $5,052,485 $413.464 $218,299 Accumulated depreciation . . . . . . . . . . 50.979 59,897 16,207 Pl a n t ca pacity . . . . . . . . . . . . . . . . . . . . 940 MW 540 MW 540 MW fuel source . . . . . . . . . . . . . . . . . . . . . . Nuclear Coal Coal Ownership share . . . . . . . . . . . . . . . . . . 70 % 70 % 42%
The Cornpany's share of operations and agreements between the Company and the par-maintenance expense related to the jointly-owned ticipants in River Bend and Nelson Unit 6. The units in service is included in operating expenses. See amounts above do not reflect costs previously Notes 11 and 12 for information relating to buyback recovered through CWIP included in rate base.
- 6. Capital Stock and Retained Earnings The Company offers its common, preference, At the Company's option, all or part of its and preferred shareholders the opportunity to preferred and preference stock may be redeem-reinvest their dividends and to make additional ed at stated prices. Certain issues are subject to cash payments to acquire shares of the Com- restrictions which prohibit redemption for a pany's common stock through its Dividend period c' time, directly or Indirectly out of the Reinvestment and Stock Purchase Plan (DRIP). proceeds of or in anticipation of borrowings or (tlowever, see Note 11 for information on the issuanceof additionalstockof equalorprior omission of common stock dividends during rank having a lower interest cost or dividend 1986 and 1987.) The Company also offers all rate.
employees meeting designated service re- At December 31,1986, the Company had quirements the option to participate in benefit authorized 10,000,000 shares of preferred stock plans which provide an opportunity to obtain without par value (none issued). Limitations bas-common shares of the Company. At December ed on the ratio of after-tax earnings to fixed 31,1986, the Company had reserved 5,711,868 charges and preferred dividends are imposed by shares of common stock to be issued in connec- the Company's Restated Articles ofincorpora-tion with its DRIP and employee benefit plans. tion, as amended (Articles) upon the issuance of flowever, the Company Intends that the DRIP additional preferred stock. Based upon the and cmployee benefit plans purchase shares of results of operations for the year ended common stock in the open market in order to December 31,1986, the Company would not meet the requirements of its DRIP and employee have been able to issue any additional prefe:Ted benefit plans, rather than offering unissued stock.
shares which would have a dilutive effect on Certain limitations on the payment of cash earnings per share and book value. dividends on common stock are contained in the 25
Financial Information ,
Articles and indentures. The most restrictive = Agament as discussed below), for each of the !
limitation at December 31,1986, was contained next five years are detailed below (in thousands):
In the Articles. Based on such limitations, the re-tained earnings available for payment of . sinking rund nequirement.
dividends as of December 31,1986, amounted seu.ned by una4erni to approximately $483 million. Preferred and rropeny w preference divideno iegulrements, as well as *" ^'d*"* ""d**
preferred stock sinking fund requirements, have $ ; '. . '227,s20
$o priority over the payment of cash dividends on 1989. .. 17,928 41,964 common stock. 1990 - - e7.s20 17,724 77,000 1991, ., 48,570 17.724 18,750 Payment of dividends on preference stock is The Company's Mortgage Indenture contains subordinate to payment of dividends on prefer- an Interest coverage covenant which limits the red stock and preferred stock sinking fund amount of first mortgage bonds which the Com-obligations. There are no limitations in the pany may issue. Based upon the results of .
Articles on the issuance of preference stock.
operations for the year ended December 31,
- 7. Preferred Stock Subject 1986, the Company would not have been able to issue any additional first mortgage bonds.
to Mandatory Redemption ~
The series of preferred stock subject to man- At December 31,1986, the amount outstan-datory redemption are entitled to r. inking funds ding under the Company's $800 million revolv-which provide for the annual redemption of Ing credit agreement consisted of $150 million shares (varying in amount from 3 percent to 5 bearing an interest rate of 6-5/8 percent, $150 percent of the numberofshares originally million at 6-7/8 percent, and $70 million at 7 issued) at $100 per share plus any dividends in percent. During January,1987, seven of the par-arrears on such stock. (See note 11.) ticipating banks (representing over 24 percent of the aggregate commitments under the credit During 1986, the Company purchased in the agreement) notified the Cempany that in view of open market, shares of the applicable series of the Company's present financial condition, pro-preferred stock in excess of the amount needed jected liquidity crisis, and failure to obtain ade-to satisfy the 1986 sinking fund requirement. At ' quate rate relief, a material adverse change of December 31,1986, assuming that the addl' the type specified in the credit agreement exists.
tional shares purchased during 1986 are used to !
Whatever the rights of the parties may be under !
satisfy future sinking fund requirementa the agreement, the Company has been notifled minimum redemption requ!rements amcunt to ty the banks that they will not make additional
$tOOO,000, $2,945,900, $4,701,100, loans under the agreement at this time.
M,079,700, and $11.06S,700, during the years Amounts outstanding under the agreement at 1987 through 199L respectively. Preferred stock September 12,1988, are repayable over a three-sinking fund provisions restrict the payment of year period with the first payment due on #
dividends on common and preference stock and March 12,1989.
the purchase of such stock by the Company unless the sinking fund requirements are met.
The Company has agreements with American ,
- 8. Long Term Debt Municipal Bond Assurance Corporation (AMDAC) !
which guarantee the payment of principal and The Company's Mortgage Indenture contains interest on $65,735,000 of pollution control sinking fund provisions which require, generally, revenue bonds. Such agreements require the e
that the Company make annuol cash deposks Company to make cash reserve deposits (or, equal to 1.2 percent of the greatest aggregate alternatively, sl 3n a promissory note for 200 per-principal amount of first mortgage bonds cent of the cash reserve deposit then payable) outstanding or, in lieu thereof, to apply property upon the occurrence of a Material Development additions or reacquired first mortgage bonds for as defined in the agreements. As of September that purpose. The Company has satisfied the 30,1986, a Material Development was deemed mortgage requirements in past years and plans to have occurred as a result of the Company's to meet current and future requ!rements by cer- fixed charge coverage ratio (calculated in accor-tifying "available net additions" to the trustee. dance with the agreements) being below the re-Those series of the Company's first mortgage ' quired level specified in the agreement, The cash bonds which were privately placed require cash reserve deposit required was approximately $55 sinking funds beginning in 1987. !"Irst mortgage million. In accordance with its cash conservation bond sinking fund regdrements, along with program, the Coropany executed a one-year note ' ;
long-term debt maturities (excluding those for approximately $110 million in lieu of making amounts to be due under the Revolving Credit !
the cash deposit. At maturity, the amount of the !
26 l
l
B Gulf States Utilities Co.
note in excess of the then required maximum be allowed to fully recover or earn an adequate cash reserve deposit will be returned to the return on its total investment in the unit.
Company. In no event will the cash reserve deposit exceed the principal amount of in September,1985, the Company filed a two-the bonds. step $360 million rate increase request with the LPSC. This request would have recognized the
- 9. Noles Payable Company's Loulslanajurisdictional investment As of December 31,1986, the Company had in River Bend. On May 27,1986, the LPSC agreernents with banks and banking institutions dismissed that part of the rate request that dealt which provided for short-term lines of credit with River Bend as a result of the unit not being totaling approximately $80 rnillion. There can be in service during the test year. In the past, filings no assurance that such existing sources of prior to commercial service had been standard short-term funds may be accessed at this time, procedure in Loulslana. The Company appealed or will remain availabic, or that new sources can the LPSC's dismissal action in a state district be arranged. Interest rates 1ssociated with these court and withdrew the balance of the case lines are based on the London interbank Offer. which was left pending by the LPSC. The Com-Ing Hate, prime or certificate of deposit rate, or pany cannot predict the outcome of the Court's other mutually agreeable rates to be determined decision or when such decision will be rendered, at the time of borrowing. Commitment fees On July 25,1986, the Company filed with the 5 range from SAs of 1 percent to % of 1 percent of LPSC a rate moderation plan which calls for an amount of available credit. In lieu of commit- eight year phase-in of River Bend and a rate in-ment fees, certain banks require a nonrestricted crease in the first year of approximately $202 cash balance be mainta!ned equal to 5 percent million. Increases beyond the first year will be re-to 10 percent of the corr.mitment. quested at a future date. On September 8,1986, Information regarding short-term debt the Company filed with the LPSC an emergency
< outstanding is detailed below: request for interim rate relief in the amount of
$100 million and asked that such relief become 1986 1985 1984 effective in November,1986.
Maximum amount On December 2,1986, the LPSC denied the outstanding during period Company's request for Interlm rate relief. The Bank notes . $ 9.000 $ 157,000 $ 145,000 commercial paper - 5,000 53.000 Company filed an appeal of the LPSC's decision in a state district court. Pending a ruling by such Average dally court, on I ebruary 6,1987, the Company filed amount outstanding with the Louisiana Supreme Court requesting Bank notes . 37 40.619 72,710 Commercial paper 11,764 that the Supreme Court direct the state district 14 court to remand the case back to the LPSC. Also, Weighted average Interest on that date, the Company filed a new emergen-rate for amountoutstanding cy interim request for $100 million with the at end of period LPSC. The new request was updated with respect Bank notes . - -
8.91%
commercial paper - - -
to Texas rate relief, suspension of preferred and preference stock dividends, downratings of the Welghted overage Company's securities, and other developments.
annualinterest rate (a) On Pcbruary 13,1987, the State district court Bank notes . 7.87% 8.81 % 10.75 Judge remanded the case back to the LPSC. On commercial paper -
8.75 1030 March 2,1987, the LPSC issued an order gran-(a) Calculated by dividing the sum of the effective Interest for ting the Company $57 million in annualized the year by the average daily short term debt outstanding.
emergency rate relief to be effective March 5.
.10. Rates and Accounting 1987 through July 25,1987, the expected date of action on the pending case. The LPSC stated Rate Matters. The construction of Klver Bend is that if bankruptcy proceedings should be filed, complete, and the unit was placed into commer-clal operation on June 16,1986. The Company the rate increase would no longer apply.
has filed rate increase requests in Texas and On November 18,1986, the Company filed a imulslana (the details of which are discussed $ 144 million (26 percent) rate increase request below) seeking to recover through rates its in- with the PUCT and applicable cities. The request vestment in River Bend. The c.irrent negative contemplates River Bend costs being phased in regulatory environment in which the Company is over eight years with rate increases in the first operating and public resistance to rate increases three years and recovery of deferred costs over the indicates that it will be extremely difficult to ob- remaining five years. The requested rate increase tain adequate and timely rate relief. No is for the first year of the rate moderation plan, assurances can be given that the Company will Rate increases in the second and third years will 27
Financial Information ===
be requested at a later date. As a part of the re- portion of the customer's load billed under the quest, the Company requested interim rate relief wholesale rates, for the years 1986 through of $82 million to become effective in December, 1989, will be 24 percent,14 percent,10 percent, 1986, and 7.4 percent, respectively. Even if all of the Company's wholesale customers agree to the Hearings on the interim request commenced settlement, the increases in revenues will be on January 12,1987, and concluded on January partially offset by reduced sales due to an agree-27,1987. On February 3,1987, the PUCT ment by the Company to allow the customers to granted the Company an annualized interim in. purchase more power from other sources for crease of $39.9 million, subject to refund, con- which the Company only receives transmission tingent upon the Company obtaining a new service charges. The Company believes that cur-
$250 million line of credit, or equivalent, to pay rently no write-off of the River Bend investment necessary operating expenses There can be no is required to reflect the reduction in revenues assurance that the new $250 million credit line described in the preceding sentence. However, can be obtained or when such credit line might there can be no assurances that, as a result of be established. The PUCT also provied that for the loss of wholesale customers, a write-off of l cach $1 of revenue from the interar rf te h- s me portion or all the remaining unrecovered crease, the Company would be requh.; L River Bend investment allocable to the wholesale reduce by $1.50 the Texas retall portion of the jurisdiction will not be required at a future date.
River Bend carrying charges and defern .d ex-penses currently being recorded. This would per. Accounting Deuelopment. During December, manently reduce the amount to be considered 1986, the financial Accounting Standards Board ,
by the PUCT for inclusion in rate base 'n the pen- (FASB) issued SPAS No. 90 (the Statement) which ding rate case. The PUCT stated that if bankrupt. amends certain accounting standards for rate cy proceedings should be filed, the rate increase regulated enterprises. The Statement specifies 1 would rio longer be effective. the accounting for the financial effect of disallowances of costs of newly completed The Company's previous rate increase request plants and plant abandonments. The Statement j in Texas resulted in a settlement agreement (ap- will require an immediate charge to operations l proved by the PUCT in June,1986) which re- f r any portion of the cost of River Bend Unit 1 i quired a reduction in base rates of $80 million. n t included in rate base, including a portion of The rate reduction in Texas, combined with the the costs of the unit upon which regulators fall disrnissal of the Company's rate increase ap- to allow the Company to earn a return. Addi- j plication in Loulslana, has had a significant tionally, the Statement will require the Company negative impact on the financial position of the to reduce its investment in the abandoned River "P""Y' Bend Unit 2 to an amount equal to the present value of the probable future revenues expected f to be provided over the amortization period On June 24,1986, the Company filed for a authorized by regulators. The Statement also three-step $57 million rate increase from its specifies that AFUDC should be capitalized only l FERC wholesale customers to reflect River Bend- if its subsequent inclusion in allowable costs for i related costs. The FERC issued an order permit- ratemaking purposes is probable. The Statement ting the Company to increase rates, subject to is generally effective beginning in fiscal year i hearing and refund, by $26.0 million (41.6 1988, but may in certain instances be delayed percent) effective August 25,1986, and an addi- until 1989.
tional $19.3 million (21.8 percent) and $14.1 million (13.1 percent) on July 1,1987 and 1988, If SFAS No. 90 were applied as of December 31, respectively. The order also granted accounting treatmerit under the approved rate moderation 1986, the Company would be required to write-plan which would allow the Company to credit off approximately $18 million (net of taxes) income for the FERC portion of deferred revenue related to the wholesale and Texas retail portion requirements of River Bend and to earn a current of the unamortized River Bend Unit 2 cancella-tion loss (see Note 11). In subsequent years the return on these deferrals.
Company would recognize interest income to the extent of the difference between amortization The Company has reached a sett!cment agree- allowed for regulatory purposes and reduced ment with most of its wholesale customers and amortization recorded for financial reporting !
Is seeking such settlement with its remaining purposes. Should Loulslana regulators com-wholesale customers. The settlement rates will pletely disallow the recovery of all of the River produce lower revenues than the rates previous- Bend Unit 2 cancellation cost, the Company ly approved by the FERC. Under the proposed would be required to record an additional $47 settlement, the rate increases for that million (net of tax) write-off.
28 I J
3
=.
. Oulf States Utilities Co. )
i l
River bend Cost Deferrals. Pursuant to accoun- The Company is hopeful that the decision in I ting orders received from the LPSC and the Loulslana will be viewed as a positive one by I'UCT, for financial reporting purposes the Com- potential lenders in order that the Company may pany is deferring recognition of the retall portion resume borrowirg on acceptable terms. If able of the operating costs associated with River to resume borrowing, the Company believes that Bend incurred subsequent to the unit's commer- It can continue to meet its financial obligations cial in-service date and is concurrently accruing until the permanent retall rate cases are decided carrying charges upon the retail portion of both later in the year. If the emergencyinterim Iate the cash portion of the deferrals and the invest- relief granted in Texas and Loulsl na is not suffi-ment in the unit not currently in,the Company's cient for the Company to arrange sdditional rate base. The carrying charges are computed credit, the Company may have *o file for re!!cf using the same methodology used in calculating from creditors under the Bankmotcy Code or at-ArUDC. The rate used in computing the carrying tempt to negotiate such rellaf, and there can be charges was 9.75 percent during the period from no assurance that any such negotiations would June 16 to June 30,1986 and 9.50 percent from be tirricly or successfully concluded. j July I to December 31,1986. The accruals and j deferrals will be continued until rate cases in- The Nuclear Regulatory Cormission (NRC),
ciuding River Bend as plant-in-service are decid- which regulates the operation nl River Bend, has ed. Additionally, in accordance with the terms of expressed to the Company its increasing con- ,
a phase-in plan approved by the ITRC the cern that the Company's financial concition j Company is recording a deferred revenue re- could negatively impact activities assc< lated quirement representing those River Bend costs with River Bend. The NRC requested that the '
applicable to wholesale customers which have Company evaluate its plans to assure thu been deferred for future recovery. The deferred continued safe operation and fulf!h aent of com-expenses and revenue requirements at mitments to the NRC will not be affected, report December 31,1986, totaled approximately $189 the results of the evaluation, and keep them million, while the carrying charges totaled ap- Informed of developments. If the Company's proximately $133 million. financial condition continues to deteriorate, what action the NRC may take and its financial in its current retail rate case filings the impact upon the Company cannot be predicted, 1 Cornpany has requested recovery of t.hese costs but such action could include suspension of I in rates. The Company cannot predict how much operation of River Bend. which could have a l
or over what period of time recovery of these material effect on the financial condition of the '
costs will be allowed or to what extent such Company.
costs will be permitted to be recovered.
Southern Company Litigation. The Cocnpany
- 11. Commitments and Contingencies has contracts with the Southern Company pro-Mnancial Condition. The Company's financial viding for purchases by the Company of capacity condition has significantly deteriorated, and the and energy from coal-fired units. These pur-Company is in critical need of timely and ade- chases include unit power purchases ranging quate rate relief in both Texas and Loulslana, from 400 MW in 1985, to 700 MW from 1988 There can be no assurance that the emergency through May,1992, and purchases of long-term interim rate relief granted in Texas and power expected to be lower in cost than the unit Loulslana will be adequate for the Company to power ranging down from 600 MW in 1985, to arTange a line of credit sufficient to meet the 300 MW from 1988 through May,1992. Due to condition imposed upon the interim relief in reduced needs, the Company gave notice to the Texas. The Company continues to receive in- Southern Company of its intent to reopen creasing pressures from its creditors, suppliers, negotiations of the unit power sales agreement and customers, including but not limited to to eliminate or suspend the capacity purchases, banks lending funds under the revolving loan The notice was given pursuant to a provision in facility and the nuclear fuel lease facility, sup- the contract requiring good faith negotiations to pliers of fuel and purchased power, and certain evaluate alternatives which may reasonably pro-customers seeking to withhold payments to the vide for desired changes in capacity purchases Company. If the emergency interim rate relief to be made by mutual agreement. On July 2, granted in Texas and loulslana is not sufficient 1986, the Company filed a federal lawsuit alleg-for the Company to arrange additional credit, ing that the Southern Company failed to the Company may have to file for relief from negotiate in good faith under the terms of the creditors under the Bankruptcy Code or attempt contract and requesting the Company be ex-to negotiate such relief, and there can be no cused from the contract and granted other relief, assurance that any such negotiations would be l'roceedings have also been filed in the IIRC timely or successfully concluded. relating to these contracts.
1 1
Financial Information .
During 1986, a rederal districtJudge issued an any licensed nuclear facility in the United States order allowing the Company to make capacity is currently limited to $700 million under the payments due under the contract into a court- provisions of the Price-Anderson Act. The Com-controlled escrow account. At December 31, pany insures River Bend for this exposure 1986, the Company had deposited a total of through a combination of private insurance and
$47.4 million into the account. During the fourth the industry- wide secondary financial program.
quarter of 1986, the PUCT and the LPSC issued Under th!s program the Company is subject to a orders prohibiting the Company from recovering retrospective assessment of $5 million per incl-that portion of the capacity costs applicable to dent with a maximum amount of $10 million the Company's Texas and Loulslana retall payable in any one year Should more than two Jurisdictions. As a result of these orders, the incidents occur in a single year, any liability in Company began withholding from payment into excess of the $10 million will be payable in the the escrow account, those capacity costs not in- succeeding year (s).
cluded in its retail rates. The Company cannot The Company maintains $500 million property predict the outcome of the lawsuit or proceedings. damage insurance and $120 million of such ex-Disposal ofSpent Nuclear fbcl and Nuclear cess insurance for River Bend from the private Decommissioning. As provided in the Nuclear insurance market. Additionally, the Company Waste Policy Act of 1982, the Company has has acquired $610 million of excess property entered into contracts with the United States insutance coverage on River Bend through par-Department of Energy (DOE) for disposal of ticipation in the Nuclear Electric Insurance spent nuclear fuel from River Bend. Under the Limited 11 (NEIL II) program. Under NEIL II, the terms of the contract, the Company is required Company is subject to a maximum assessment to pay a quarterly fee to the DOE of one mill per of approximately $8.5 million in any one policy kilowatt-hour generated by River Bend. The year. Although the Company has continued to Company has included an amount for this cost increase the limits of such Insurance as capacity in its Texas and Loulslana retail rate requests becomes available, no assurance can be given and pursuant to the accounting orders discuss- about the adequacy of such insurance limits in ed above is currently deferring recognition of the event of a major accident.
these costs pending the completion of its retail ra e cases. .I Company's extra expense for River Bend replacement power is insured through the A 1985 decommissioning study indicates that Nuclear Electric insurance Limited I (NEIL 1) pro-the total estimated cost to decommission River gram, following an insured property loss which Bend is $202 million in 1985 dollars. Decommis- results in the unit being unavailable for genera- $
sioning studies are reviewed and updated tion and a 26 week waiting period, the NEIL I periodically to reflect changes in decommission- program will pay the Company a specified week-ing requirements, technology, and inflation. As ly indemnity for 52 weeks followed by one-half part of the current rate applications, the Com- the specified weekly indemnity for an additional pany has requested authorization to recover 52 week period. Under the NEIL I program the through rates amounts required to fund the Company is subject to a maximum annual decommissioning costs over a period of 35 retrospective assessment of approximately years. $1 million.
NuclearInsurance. Ownership of an operating Stockholder Litigation. The Company, and with nuclear generating unit subjects a company to variations as between suits, its officers and additional risks. The Company is insured as to directors, River Bend contractor, and indepen-its Interest in River Bend for property damage dent accountants (who have subsequently been -
and decontamination, liability to employees and dismissed from the suit without prejudice) have third parties, and incremental replacement been named in seven class action complaints fil-power costs, as described below. However, some ed in 1986 and early 1987 in the U.S. District potential losses or liabilities, including liabilities Court for the Eastern District of Texas. The suits relating to the release or escape of hazardous allege violation of the securities laws and substances into the environment to which the wrongful conduct involving various disclosures Company may be subject, may not be insurable allegedly resulting in damage in unspecified or the amount of insurance carried may not be amounts to the plaintiffs and other purchasers sufficient to meet potential losses and liabilities. of the Company's common stock similarly There is also no assurance that the Company will situated. The Company denles, and is advised i be able to maintain insurance coverages at their that the other defendants deny, any such viola-present levels. Under those circumstances, such tions or wrongdoing and will vigorously defend losses or liabilities could have a material adverse such actions. Under its Restated Articles of effect on the financial condition of the Company. Incorporation, as amended, and Bylaws, the Public liability in case of a nuclear incident at Company is obligated to indemnify its officers 30
Gulf States Utilities Co.
and directors under conditions presently believ- share of the capacity of these units for periods ed to exist. The Company is unable to predict the ranging from seven to fourteen years in the case outcome of these suits, of Nelson Unit 6 and five years in the case of River Bend. The variable costs associated with Dividend Suspension. In view of the continued such buybacks are composed of fuel costs and deterioration of the Company's financial condi- peradons and maintenance expenses, wMe We tion, the Board of Directors voted to suspend the f xed costs are based upon gross plant invest-dividends on the Company's common stock for ment and other factors. For the years ended the third and fourth 9uarters of 1986, and the December 31,1986,1985, and 1984, variable first quarter of 1987. On February 5,1987, the costs applicable to the Nelson Unit 6 buybacks Board of Directors voted not to declare the were $16.4 million, $25.2 million, and $24.1 dividends on the preferred and preference stock million, respectively, while the fixed costs of the Company payable on March 15,1987. associated with such buybacks were $20.9 Unless the financial condition of the Company million, $26.9 million, and $32.9 million, respec-Improves, the Company will continue to be tively. Based upon current Information, the unable to pay dividends on such stock and may Company estimates that the fixed costs incurred be unable to meet preferred stock sinking fund in connectlan with the Nelson Unit 6 buybacks requirements. Dividends on all series of the w 11 range in declining amounts from $16 million Company's prefened and preference stock are in 1987, to $8 million in 1991. From 1992 cumulative. If the Company falls to pay the through 1996, aggregate payments for the dividends in arrears and all dividends which buybacks of power are estimated to be approx-have in the meantime become due and payable imately $22 million, on preferred stock on or before the fourth suc-River Bend isjointly owned by the Company ceeding quarterly dividend date after a failure to g, pay a quarterly dividend, the holders of such (CEPCO.) Previously, the Company was obligated stock would have the right to elect a majority of to purchase 100 percent of CEPCO's share of the the Board of Directors. Similar voting rights to elect two directors are provided for holders of unit's capacity for one year and thereafter preference stock, If the Company falls to pay the declining amounts for two years. However, on dividends in arrears and all dividends which September 2,1986, the letter of agreement be-have in the meantime become due and payable tween the Company and CEPCO was amended to on such stock on or before the sixth succeeding change the original three-year schedule to a five-quarterly dividend date after a failure to pay a year schedule beginning on June 16,1986, the l quarterly dividend. The Company may not pay commercial operation date of River Bend. The i any dividend or Wstribution on any of its com- fixed costs incurred in connection with the mon stock, or purchase or otherwise acquire buybacks of power under the new agreement common stock, unless all cumulative dividends were $92.5 million during 1986, and will range and sinking fund obligations have been paid on in declining amounts from $151 million in 1987, preferred and preference stock. to $20 million in 1991.
The Company is negotiating with CEPCO l Cancelled Nuclear Unit. The Company regarding certain long-standing disputes i previously reported the cancellation of River relating to transmission charges and has offset I Bend Unit 2. The Company has begun amortiz- January capacity payments against claims j ing that portion of the cost of the unit applicable asserted by the Company. The Company has i to its wholesale and Texas retail operations over also advised CEPCO that it may need to l 10 and 15 year periods, respectively, in its rate negotiate the buy back agreement if adequate '
increase application filed in Loulslana, the Com- and timely rate reliefis not received . I pany requested authorization to recover and As discussed in Note 11, the Company has !
earn a retum on that portion of the cost of the contracts from which it is seeking release, with I unit applicable to its laulslana retall operations the Southern Company providing for power pur- i (approximately $62.1 million on a pre-tax basis) chases by the Company. The fixed costs ap- !
over a 10-year period. The Company cannot plicable to the power purchases from the !
predict the amount of such costs,if any, which Southern Company are based on costs of ex- i the LPSC will allow to be recovered. At December isting and future generating units and other fac- l 31,1986, the unamortized balance of the Com- tors. For the years ended December 31,1986, i pany's investment in River Bend Unit 2 totaled 1985, and 1984, the fixed costs associated with
$121,498,000. the power purchases totaled approximately j
- 12. Purchase Power Agreements $113 million, $132 million, and $51 million, ;
respectively. Under the terms of the contract the 1 The Company has agreements with the par- Company is required to make, on a take-or pay j ticipants in Nelson Unit 6 and River Bend (see basis, minimum payments currently estimated .
Note 5) to buy back declining amounts of their to range in increasing amounts from $133 31
l 1
Financial Information -
1 1
million to $184 million during the period from pense. Por the years ended December 31,1986, 1987 through 1991, The variable costs 1985, and 1984, such costs totaled $59 million,-
associated with such purchases are composed of . .$125 milllon, and $109 million, respectively.
fuel costs and operation and maintenance ex-
- 13. Quarterly Financial Information (Unaudited)
'(in thousands except per share amounts)
Earnings Per Average operating operating Net Common share 1986 Revenue income income outstanding first Quarter . . . . . . . . .. . . ., ..... .. .. . . $375,171 $ 78,170 $66,117 $.48 Second Quarter . . . . . . . . . . . . .......... .. .. . ... '358,848 77,511 64,648 .46 Third Quarter , , , . . . . . . .. ,,,,.. ..,...,,.......... 405,915 99,909 90,081 .69 Fourth Quaster . . . . . ....... ,... .. . .. .. .. 338,454- 58,216 24,135 .08 1985 first Quarter . , ....... .. . . .. ,, ... .... , , $ 440,035 $ 72,833 $ 53,525 $.42 Second Quarter . . . . . . . . . ......, ........ ..... 484,649 85,813 66,356 .53 Third Quarter . , , . , . . . ., ,. ... ,,. .. . . 537,636 111,903 97,402 .83 fourthQuarter . ... . .. ..... ,, ,,. .. ,,,,.,,. . 396,116 73,316 48,216 .32 -
Auditors' Report To the Shareholders of Gulf States Utilities Company:
We have examined the balance sheet and statement of capitalization of GULF STATES UTILITIES COMPANY as of December 31,1986 and 1985, and the related statements ofincome, sources of funds invested in utility and other plant, and changes in capital stock and retained earnings for each of the three years in the period ended December 31,1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
As discussed in Notes 10 and 11 to the financial statements, the Company has capitalized approx-imately $3 billion of costs associated with the construction of its River Bend Unit 1 Nuclear Generating Plant and in 1986 has deferred, in accordance with regulatory orders, certain operating and carrying costs subsequent to the Unit's in service date. In connection therewith, the Company filed ap-plications in 1986 with regulatory commissions in Texas and Louisiana for increases in its rates. No assurances can currently be given that such commissions whl allow the Company to earn a return on or fully recover its investment in the Unit through rate increases. j 1
The Company has been unable to obtain sufficient rate relief which, among other things, may result in )
a need for funds in excess of the currently estimated resources of the Company. Without sufficient rate 1 increases or funds from other sources, the Company may be unable to maintain its financial viab!!!ty which is necessary to permit the realization of its assets and liquidation of its liabilities in the ordinary course of business Other uncertainties, as discussed in Note 11, also exist.
{
in our opinion, subject to the effects on the 1986 financial statements of such adjustments, if any, as -
might have been required had the outcome of the uncertainties referred to in the preceding paragraph been known, the financial staternents referred to above present fairly the financial position of GULF -,
STATES UTILITIES COMPANY at December 31,1986 and 1985, and the results ofits operations and the changes in its financial position for each of the three years in the period ended December 31,1986, in conformity with generally accepted accounting principles applied on a consistent basis.
Nouston, Texas A 9-March 2,1987 32
Oulf States Utilities Co.
1 Statistical Summary ;
For the years ended December 31 1986 1985 1984 1983 1982 ELECTRIC DEPARTMENT Number of customers at year end:
Residential . . . . . . .. . . 484,608 ' 485,825 485,711 475,782 465,162 Commercial , . ..... . . .. .. .. 62,059 61,712 60,372 57,446 55,265 Industrial . . ... . . . ,. 4,322 4.398 4,302' 4,I46 4,165 Temporary construction . . . . .. . . 1,656 2.188 2,924 3,624 5,132 Other .. .... .. .. ... ..... 2,430 2,333 2,182 2,101 1,985 Total Customers , , . . . . . . . . . . . .
555,075 556,456 555.491 543.099 529,709' Sales- Kilowatt-hours (thousands):
Residential . .... . .. . . ... 6,174,567 6,224,555 6,209,347 5,686,436 5991,578 Commercial . . ... . .. ........ 4,920,882 4.964,416 4,745,055 4,541D93 4.359,739 Industrial . . . . . . . . . 12,158,762* 13,590,004 15,924,402 14.257,141 13,728,469 Temporary construction . . . , , . . ...... 42,498 47,475 57,354 55,927 48,170 Other..... . . . . . .. . 1,508,245 1,890,700 2,152,052 2,109,974 2.261,350 Total Sales . . . . . . , . . 24,804,954 26,717,150 29,088,210 26,450,571 26,389,306 Revenue-(thousands):
Residential . . . . ,. . .... ........ ... $ 425,206 $ 528,593 $ 434,946 $ 396,026 $ 362,223 I Commercial . . , , . . . . 309,440 358,882 278,155 255,147 226.104 industrial . . . . . . . 500,026* 680,755 573,839 534,066 495,46i Temporary construction . . . . .. ... 3,066 3,666 3,702 3,699 2.786 Other.. . . . . . . . 120,690 142.509 120,059 116,511 102,370 Total Revenue . . . .. ... ... . .. $ 1,358,428 $ 1,714,405 $1.410,701 $ 1,305.449 $ 1,188.944 Average Annual KWH Use Per Customer Residential . . . . 12,731 12,806 12.901 12,097 13,015 Commercial . ... . .. . ... . 79,416 80.951 80,264 77,138 80,814 4 Industrial . . . .... .. . . 2,781,053 3,110,553 3,725,006 3,431,322 3,451,098 Revenue Per KWil-(cents): ]
6.96 6.05 Residential . . , , . , . 6.89 8.49 7.01 Commercial . . . . . 6.29 7.23 5.86 5.88 5.19 ]
Industrial . . .. 4.11 5.01 3.60 3.75 3.61
{
Electric Energy Output-Thousands of KWH !
Net Generated . . . . 23,009.283 19.286,014 26,218,067 25,846,238 25,523,512 Net Purchased and Interchanged ... . 5,281,404 11,340,923 6.953,777 4,987,292 5,160,731 28,290,687 30.626.937 33,171,844 30,833,550 30,684,243 System Peak Load-including interruptible load-Megawatts , . 5,089 5.139 5,475 5,348 5,164 Total Capability, including Contract Purchases at Time of System Peak Load (MW) . . 7,548 6,610 6,780 7,152 7,208 j Load Pactor . . . . . . 63.5% 68.0 % 69.0 % 65.8 % 67.8 %
STEAM PRODUCTS DEPARTMENT Steam Revenue (thousands) . . $ 77,783 $ 102,576 $ 83,165 $ 83,646 $ 75,213 Steam Sales-KWH (millions) . . . . . .
2,144 2,288 2,606 2,555 2,579 Steam $ ales-millions of pounds . . . 7,516 7,695 8,466 8.559 9,447 QAS DEPARTMENT Gas nevenue (thousands) . . $ 33,125 $ 41,455 $ 53,175 $ 47,093 $ 43,102 Number of Customers . . . . .. . .. . 83,994 85,039 85,665 85,737 85,394 Output-MM cu. ft. of natural gas purchased 7,086 8,454 8,252 9.149 8,229 Sales-MM cu. ft. . . . 7,065 'J ,946 9,140 8,498 8,535 WEATHER DATA:
Cooling degree days (Normal 2,732) . . . 2,962 2.947 2,615 2,418 2,901 Percentage change from normal . . .. 8.4 7.9 (4.3) (11.5) 6.2 Heating degree days (Normal l.570) . .. 1,405 1.415 1,860 1,647 1,587 Percentage change from normal . ... . (10.5) (9.9) 18.5 4.9 1.1
' Excludes 182,580 MWM and $9,052 applicable to prior periods.
33
Officers - -
Chairman C alrm n of e Boa d of Directors bJ
- p d t& no Vice Chairman-President Jasper P. Worthy (30) 58 E. Linn Draper, Jr. (7) 44 Vice President General Services Vice Chairman of the Board, President Division Vice Presidents and Chief Executive Officer Senior Executive Vice Presidents J " C" Y 8)55 D sc Joseph L Donnelly (7) 57 Arden D.14ughmiller (25) 48 Senior Executive Vice President Division Vice President Beaumont and Chief Financial Officer Ronald M. McKenzie (20) 46 s n cc WesMenRod Anur Execu ve i es ent Senior Vice Presidents J. Ted Meinscher (36) 54 Division Vice President-Lake Charles i i
William J. CahllI, Jr. (6) 63 James E. Moss (29) 50 Senior Vice President Special Projects Division Vice President-Baton Rouge ;
James C. Deddens (3) 58 Other Officers Senior Vice President-River Bend Nuclear Group IA:slie D. Cobb (31) 51 Calvin J. Hebert (24) 52 Senior Vice President External Affairs Clyde W. McBride (9) 34 George T. McCollough, Jr. (6) 64
^*'" "
Senior Vice President- Timothy L Morris (7) 35 Energy and Planning Assistant Secretary s
Vice Presidents
( ) Years of service Ages andyears ofservice James R. Aldridge (6) 56 as of December 31,1986 I
Vice President-Muman Resources William E. Barksdale (29) 55 Vice President Engineering and Technical Services Anthony F. Gabrielle (6) 59 )
Vice President Computer Applications )
Charles D. Glass (37) 58 Vice President Operations William J. Jefferson (6) 57 Vice President Kates and Regulatory Affairs Cecil L Johnson (10) 44 Vice President-legal Services Albert H. Newton,111 (3) 50 Vice President Jack L Schenck (5) 48 Vice President & Treasurer i
N 34 i
g>'
r t :i Directors l i
=
Directors ;
- Robert M. Barrow James E. Taussig II - Stockholder Information I General, Retired Commandant President-Taussig Corporation ' i United States Marine Corps Lake Charles, LA (1975) . Stock Listing . ]
St. Francisville, LA (1984) - Gulf States Utilities Company's . I
- Executive Committee . common stock is traded under the ' ,
- *J hn W. Barton . *
- Chairman, Executive Committee symbol OSU on the New York, l Vice President Loulslana '( ) Year Elected Midwest and Pacific Stock Exchanges.
Aircraft, Inc.
Biton Rouge, LA (1970) Stock Transfer Agents q Outf States Utilities Company .
J:seph L. Donnelly - Beaumont, Texas -
J 1
Senior Executive Vice President Knd Chief Pinancial Officer Morgan Shareholder Services Beaumont, TX (1986) Principal Offices Trust Company New York, New York
- E. IJnn Draper, Jr. ' 350 Pine Street Vice Chairman of the Board, Beaumont, Texas Registrars President and Chief Executive Officer 77701 Plrst City National Bank of Beaumont Bezumont, TX (1985) Beaumont, Texas Divisions .
M rtin Goland Morgan Shareholder Services 1
' President-Southwest 285 Liberty Avenue Trust Company -.
Research Institute Beaumont, Texas . New York, New York San Antonio,TX(1983) 77701 Dividend Reinvestment Plan Agent Edwin W. tilam 1540 Ninth Avenue Gulf States Utilities Company investment Consultant Port Arthur, Texas P. O. Box 1671' Boston, MA (1959) 77640 Beaumont, Texas 77704 Cllliam 11.14 Blanc, Jr. Highway 75 North Conroe, Texas Chairman of the Board Form 10 K' of Baton Rouge Supply Co., Inc. 77301 Baton Rouge, LA (1974) The Form IO K Annual Report to the 446 North Boulevard Securities and Exchange Commis- J Baton Rouge,imulslana Marman R.14e sion and GSU's 1986 Financial and 70802 Statistical Report can be obtained Retired Vice Chairman of the Board Beaumont, TX (1967) 314 Broad Street without charge from leslie D. Cobb, Lake Charles, laulslana ' Secretary, P. O. Box 2951, Charles W. McCoy . Beaumont, Texas 77704.
70601 President and Chief Executive Officer Loulslana Bancshares,Inc. Motice of Annual Meeting .
Baton Rouge, LA (1985)
The 1987 Annual Meeting of
- Paul W. Murrill shareholders will be held at 2 p.m.,
Chairman of the Board of Directors Thursday, May 7,1987, in the company's Beaumont, TX (1978) headquarters,350 Pine ;
Street, Beaumont, Texas. Formal Munroe J. Rathbone, Jr. notices of the meeting, proxy Medical doctor and partner- statements and proxles will be The Surgical Clinic . malled to the common shareholders Baton Rouge, LA (1975) on or about March 27,1987.
Shareholders are invited to attend,
'N t S. Rogers but if they cannot, they are urged to Director & Consultant-Pirst City fill out and return their proxles.
Brncorporation of Texas, Inc.
Houston,'TX(1978) ~
'Birmark A.Steinhagen Chairman of the Board . .
Steinhagen Oil Company, Inc.
Besumont, TX (1974) 35
Gulf States Utilities Co. Bulk flate P. O. Box 2951 - U' S. POSTAGE
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t3 Beaumont, Texas 77704 e> M, , ',' . ,A, ,y
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si GULF STATES UTILITIES COMPANY P o S T o F r I C E B o X 2 9 61 . B E A U M o N T ., T E X A S '7 7 7 0 4 AHEACoDE 409 838-6031 June,11, 1987 ,
RBG- 26,087 '
!- File No.~G9.5 f-U. S. Nuclear Regulatory Commission I.
Document Control Desk '
Washington, D. C. 20555 l
-Gentlemen:
I River Bend Station Unit 1, I Docket No. 50-458 l Annual Report ,
l Enclosed are ten,(10) copies of the Gulf States. Utilities Company '
1986 Annual Report. This report is being submitted in accordance with Section 50.71 of Title 10 of the Code of Federal Regulations.and U. S.
Nuclear Regulatory Commission Regulatory Guide 10.1. Copies of the .j Cajun Electric Power Cooperative, Inc. 1986 Annual Report will be ;
provided once it becomes available.
l Sincerely, ;
.E h J. E. Booker Manager - River Bend Oversight M Mk J /f%H/lp
'l' Enclosures cc: U. S. Nuclear Regulatory Commission 611 Ryan Plaza Drive. Suite 1000 Arlington, TX 76011 NRC Resident Inspector i P. O. Box 1051 St. Francisville, LA 70775
,1-0
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